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<TITLE>INTERNET INITIATIVE JAPAN INC.</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>As filed with the Securities and Exchange Commission on July&nbsp;11, 2006</B>
</DIV>


<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 1pt solid black; font-size: 1pt">&nbsp;</DIV>






<DIV align="center" style="font-size: 14pt; margin-top: 12pt"><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12pt"><B>WASHINGTON, DC 20549</B>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B>FORM 20-F</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>(Mark One)</B>

</DIV>
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    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
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    <TD width="7%">&nbsp;</TD>
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<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#254;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B><B>For the fiscal year ended March&nbsp;31, 2006</B>
</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
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    <TD width="7%">&nbsp;</TD>
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    <TD width="88%">&nbsp;</TD>
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<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B><B>For the transition period from </B><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U> <B>to </B><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
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<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
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<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B>Date of event requiring this shell company report </B><U>&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp; </U></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Commission file number:</B> <B>0-30204</B></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Kabushiki Kaisha Internet Initiative</B>
</DIV>

<DIV align="center" style="font-size: 10pt"><B>(Exact Name of Registrant as Specified in Its Charter)</B></DIV>


<DIV align="center" style="font-size: 24pt; margin-top: 12pt"><B>Internet Initiative Japan Inc.</B>
</DIV>

<DIV align="center" style="font-size: 10pt">(Translation of Registrant&#146;s Name Into English)</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Japan</B><BR>
(Jurisdiction of Incorporation or Organization)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Jinbocho Mitsui Bldg.<BR>
1-105 Kanda Jinbo-cho<BR>
Chiyoda-ku, Tokyo 101-0051, Japan</B><BR>
(Address of Principal Executive Offices)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Securities registered or to be registered pursuant to Section&nbsp;12(b) of the Act:</DIV>

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    <TD width="47%">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="center" valign="top">Title of Each Class
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Name of Each Exchange On Which Registered</TD>
</TR>
<TR style="font-size: 1px">
    <TD align="center" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="center" valign="top"><B>None</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>None</B></TD>
</TR>
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</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Securities registered or to be registered pursuant to Section&nbsp;12(g) of the Act:<BR>
<B>Common Stock, no par value</B><BR>
(Title of Class)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Securities for which there is a reporting obligation pursuant to Section&nbsp;15(d) of the Act:<BR>
<B>None</B><BR>
(Title of Class)</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate the number of outstanding shares of each of the issuer&#146;s classes of capital or common
stock as of the close of the period covered by the annual report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>As of March&nbsp;31, 2006, 204,300 shares of common stock were outstanding, including 40,786 shares
represented by an aggregate of 16,314,400 American Depositary Shares.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule&nbsp;405 of
the Securities Act.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#254;</FONT> No <FONT face="Wingdings">&#111;</FONT></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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&nbsp;13 or 15(d) of the Securities Exchange Act of 1934.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Note&#151;Checking the box above will not relieve any registrant required to file reports pursuant to
Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those
Sections.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark whether the registrant: (1)&nbsp;has filed all reports required to be filed by
Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12&nbsp;months (or for
such shorter period that the registrant was required to file such reports), and (2)&nbsp;has been
subject to such filing requirements for the past 90&nbsp;days.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#254;</FONT> No <FONT face="Wingdings">&#111;</FONT></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of &#147;accelerated filer and large accelerated filer&#148; in
Rule&nbsp;12b-2 of the Exchange Act. (Check one):
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Large Accelerated Filer <FONT face="Wingdings">&#254;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accelerated Filer <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Non-Accelerated Filer <FONT face="Wingdings">&#111;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark which financial statement item the registrant has elected to follow:
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Item&nbsp;17 <FONT face="Wingdings">&#111;</FONT> Item&nbsp;18 <FONT face="Wingdings">&#254;</FONT></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule&nbsp;12b-2 of the Exchange Act).
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV style="width: 100%; border-bottom: 1pt solid black; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>




<P align="center" style="font-size: 10pt">&nbsp;
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<A name="tocpage"></A>
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<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><U><B>TABLE OF CONTENTS</B></U>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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    <TD width="90%">&nbsp;</TD>
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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#101"><B>PART I</B>
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom"><B>2</B></TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#102">Item&nbsp;1. Identity of Directors, Senior Management and Advisers
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#103">Item&nbsp;2. Offer Statistics and Expected Timetable
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#104">Item&nbsp;3. Key Information
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#105">Item&nbsp;4. Information on the Company
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">13</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#106">Item&nbsp;4A. Unresolved Staff Comments
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">40</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#107">Item&nbsp;5. Operating and Financial Review and Prospects
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">40</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#108">Item&nbsp;6. Directors, Senior Management and Employees
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">66</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#109">Item&nbsp;7. Major Shareholders and Related Party Transactions
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">71</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#110">Item&nbsp;8. Financial Information
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">73</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#111">Item&nbsp;9. The Offer and Listing
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">74</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#112">Item&nbsp;10. Additional Information
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">75</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#113">Item&nbsp;11. Quantitative and Qualitative Disclosures about Market Risk
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">86</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#114">Item&nbsp;12. Description of Securities Other than Equity Securities
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">88</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#115"><B>PART II</B>
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom"><B>88</B></TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#116">Item&nbsp;13. Defaults, Dividend Arrearages and Delinquencies
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">88</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#117">Item&nbsp;14. Material Modifications to the Rights of Security Holders and Use of Proceeds
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">88</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#118">Item&nbsp;15. Controls and Procedures
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">88</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#119">Item&nbsp;16A. Audit Committee Financial Expert
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">89</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#120">Item&nbsp;16B. Code of Ethics
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">90</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#121">Item&nbsp;16C. Principal Accountant Fees and Services
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">90</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#122">Item&nbsp;16D. Exemptions from the Listing Standards for Audit Committees
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">91</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#123">Item&nbsp;16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">92</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#124"><B>PART III</B>
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom"><B>92</B></TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#125">Item&nbsp;17. Financial Statements
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">92</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#126">Item&nbsp;18. Financial Statements
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">92</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#127">Item&nbsp;19. Exhibits
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">92</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
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<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv1w1.txt">EX-1.1 ARTICLES OF INCORPORATION</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv1w2.txt">EX-1.2 SHARE HANDLING REGULATIONS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv4w7.txt">EX-4.7 JOINT VENTURE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv4w24.txt">EX-4.24 AGREEMENT ON LIMITED LIABILITY</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv11w1.txt">EX-11.1 INTERNET INITIATIVE JAPAN INC., CODE OF CONDUCT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv12w1.txt">EX-12.1 CERTIFICATIONS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv12w2.txt">EX-12.2 CERTIFICATIONS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv13w1.txt">EX-13.1 CERTIFICATIONS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="k01182exv13w2.txt">EX-13.2 CERTIFICATIONS</A></FONT></TD></TR>
</TABLE>
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<P align="center" style="font-size: 10pt">i
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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Cautionary Note Regarding Forward-Looking Statements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Important risks and factors that could cause our actual results to differ materially from our
forward-looking statements are generally provided in Item&nbsp;3.D. and elsewhere in this annual report
on Form 20-F and include, without limitation:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>that we may not be able to achieve or sustain profitability in the near future,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>that we may not be able to compete effectively against competitors which have
greater financial, marketing and other resources, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>that we may not be able to attract and retain qualified personnel.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt">1
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="101"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>PART I</B>
</DIV>

<DIV align="left">
<A name="102"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1. Identity of Directors, Senior Management and Advisers.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Not required.
</DIV>
<DIV align="left">
<A name="103"></A>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;2. Offer Statistics and Expected Timetable.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Not applicable.
</DIV>

<DIV align="left">
<A name="104"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Item&nbsp;3. Key Information.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>A. Selected Financial Data.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;You should read the selected consolidated financial data below together with Item&nbsp;5.
&#147;Operating and Financial Review and Prospects&#148;, of this annual report on Form 20-F and our
consolidated financial statements and the notes to the financial statements beginning on page F-1.
The consolidated statement of operations data and per share and American Depositary Shares (&#147;ADS&#148;)
data below for the fiscal years ended March&nbsp;31, 2002, 2003, 2004, 2005 and 2006, the consolidated
balance sheet data below as of March&nbsp;31, 2002, 2003, 2004, 2005 and 2006 and consolidated
statements of cash flows for the fiscal years ended March&nbsp;31, 2002, 2003, 2004, 2005 and 2006 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 (&#147;U.S. GAAP&#148;), and
audited by Deloitte Touche Tohmatsu, an independent registered public accounting firm.
</DIV>

<P align="center" style="font-size: 10pt">2
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>As of and for the fiscal year ended March 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>


<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 0px solid #000000"><B>(millions of yen, except per share and ADS data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(thousands of</B></TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>U.S. dollars,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>except per</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>share and ADS</B></TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="18" style="border-bottom: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>data </B><SUP style="font-size: 85%; vertical-align: text-top"><B>(1)</B></SUP><B> )</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Statement of Operations Data:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">REVENUES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Connectivity and value-added
services revenues:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Dedicated access</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">14,303</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,862</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,625</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">90,443</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Dial-up access</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,644</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,088</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,937</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,674</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,760</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Value-added</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53,200</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,668</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,726</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,118</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,169</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,674</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,272</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:90px; text-indent:-15px">Total connectivity and
value-added services
revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,715</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,299</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,223</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197,675</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Systems integration revenues,
including related equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,356</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,848</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,854</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">200,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,706</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,085</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,262</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:90px; text-indent:-15px">Total revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,905</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,703</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">424,009</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">COST AND EXPENSES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of connectivity and
value-added services revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,387</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,078</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">170,906</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of systems integration
revenues, including related
equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,314</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,090</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,120</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">154,243</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,540</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,417</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,111</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,818</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,987</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:90px; text-indent:-15px">Total cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,654</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,894</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,245</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">349,136</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,176</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,528</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,080</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,213</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and administrative
expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,840</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,098</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,790</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">319</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">414</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">358</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">199</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,346</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:90px; text-indent:-15px">Total cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,851</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,689</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,229</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,455</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">403,485</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OPERATING INCOME (LOSS)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">54</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,671</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,450</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,248</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,411</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,524</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OTHER INCOME (EXPENSES):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(659</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(733</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(702</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(437</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,723</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Other &#151; net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(406</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(603</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,646</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,573</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,392</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,871</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:90px; text-indent:-15px">Other income
(expenses) &#151; net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(943</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,269</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">982</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,968</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,259</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INCOME (LOSS)&nbsp;FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY
INTERESTS AND EQUITY IN NET LOSS OF
EQUITY METHOD INVESTEES</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(889</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,940</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(468</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,379</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,783</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INCOME TAX EXPENSE</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(109</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(354</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,012</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">3
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
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    <TD width="1%">&nbsp;</TD>
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    <TD width="1%">&nbsp;</TD>
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    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
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    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>As of and for the fiscal year ended March 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>



<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 0px solid #000000"><B>(millions of yen, except per share and ADS data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(thousands of</B></TD>
    <TD>&nbsp;</TD>
</TR>


<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>U.S. dollars,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>except per</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>share and ADS</B></TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="18" style="border-bottom: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>data </B><SUP style="font-size: 85%; vertical-align: text-top"><B>(1)</B></SUP><B> )</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Equity method net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(5,482</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(5,625</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(286</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(33</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(117</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Impairment loss on
investment, advance and
deposits for Crosswave</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,153</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,720</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:90px; text-indent:-15px">Total equity in net
loss of equity method
investees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,482</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,778</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,006</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(33</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(117</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NET INCOME (LOSS)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(6,365</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(15,588</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,271</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 6pt">
    <TD>&nbsp;</TD>
</TR>


<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Per Share and ADS Data</B><SUP style="font-size: 85%; vertical-align: text-top"> (3)</SUP><B>:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic net income (loss)&nbsp;per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(56,627</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(138,689</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">207</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted net income (loss)&nbsp;per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(56,627</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(138,689</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">206</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic net income (loss)&nbsp;per ADS
equivalent</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(141.57</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(346.72</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(35.80</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.52</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted net income (loss)&nbsp;per ADS
equivalent</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(141.57</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(346.72</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(35.80</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60.65</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.52</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic weighted average number of
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">195,613</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted weighted average number of
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">195,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic weighted average number of ADS
equivalents (thousands)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">63,422</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,624</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,245</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted weighted average number of
ADS equivalents (thousands)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">63,422</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,624</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,382</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="top"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance Sheet Data:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalent</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,046</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">116,846</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,263</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,064</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,737</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">431,605</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Short-term borrowings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,820</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,564</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,555</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,772</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current portion of long-term
borrowings, including capital lease
obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,374</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,936</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,511</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,994</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,508</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term borrowings, including
capital lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,262</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,092</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,188</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,865</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Convertible notes <SUP style="font-size: 85%; vertical-align: text-top">(4)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,832</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shareholders&#146; equity (capital
deficiency)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,004</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,214</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,615</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,222</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">172,131</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="top"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Operating Data:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital expenditures, including
capitalized leases <SUP style="font-size: 85%; vertical-align: text-top">(5)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,773</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,523</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,537</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="top"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating margin <SUP style="font-size: 85%; vertical-align: text-top">(6)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3.8</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3.7</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">3.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">4.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="top"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by (used in):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,238</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">55,830</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,457</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,878</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(852</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,974</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,805</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,363</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,462</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(872</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,669</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,213</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">331</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">4
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>The U.S. dollar amounts represent translations of yen amounts at the rate of &#165;117.48 which
was the noon buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York prevailing as of March
31, 2006.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Of total equity method net loss of &#165;5,625&nbsp;million for the fiscal year ended March&nbsp;31, 2003,
&#165;5,514&nbsp;million was based on unaudited financial information made publicly available by
Crosswave Communications Inc. (&#147;Crosswave&#148;) and the impairment loss on investment and deposits
for Crosswave was determined to be the amount required to reduce the carrying amount of
investment in and deposits for Crosswave at March&nbsp;31, 2003 to zero. The audit report of
Deloitte Touche Tohmatsu in respect of our financial statements as of and for the fiscal year
ended March&nbsp;31, 2003 was qualified as to the effects of such adjustments, if any, as might
have been determined to be necessary if sufficient evidence regarding the equity method loss,
the impairment loss on investment, advance to and deposits for Crosswave and the related
summary information of Crosswave for the year ended March&nbsp;31, 2003 was available. As described
elsewhere in this annual report, Crosswave filed a voluntary petition for corporate
reorganization proceedings in Japan in August&nbsp;2003 and has not prepared audited financial
statements for the year ended March&nbsp;31, 2003 or other sufficient evidence of its results of
operations to permit the independent registered public accounting firm to issue an audit
report on our financial statements as of and for the year ended March&nbsp;31, 2003 without such
qualification.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>We conducted a 1 to 5 stock split effective on October&nbsp;11, 2005. The per share data is
calculated based on the assumption that the stock split was made at the beginning of the
fiscal year ended March&nbsp;31, 2002.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>In April&nbsp;2000, we issued 1.75&nbsp;percent unsecured convertible yen notes due March&nbsp;2005 in the
aggregate principal amount of &#165;15,000&nbsp;million. In November&nbsp;2003 and June&nbsp;2004, we repurchased
and cancelled a portion of the aforementioned notes, in the aggregate principal amount of
&#165;3,168&nbsp;million and &#165;744&nbsp;million, respectively. We redeemed the remainder of the unsecured
convertible notes in March&nbsp;2005.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(5)</TD>
    <TD>&nbsp;</TD>
    <TD>Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure can be found below.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(6)</TD>
    <TD>&nbsp;</TD>
    <TD>Operating income (loss)&nbsp;as a percentage of total revenues.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly
Comparable GAAP Financial Measures</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Capital expenditures</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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 manages these expenditures and believes that it is useful to
investors to 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes the reconciliation of capital expenditures to purchase of
property and equipment as reported in our consolidated statements of cash flows prepared and
presented in accordance with U.S. GAAP.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>For the fiscal year ended March 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital expenditures:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of assets by entering into capital leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,536</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,578</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,434</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,843</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchases of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,237</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,315</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,657</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">577</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">919</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total capital expenditures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,773</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,523</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,762</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">5
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Exchange Rates</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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 &#165;117.48 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&nbsp;31, 2006, 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Low</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Average</B><SUP style="font-size: 85%; vertical-align: text-top"><B>(1)</B></SUP></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Period-end</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Fiscal year ended March&nbsp;31,</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">134.77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">115.89</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">125.64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">132.70</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">133.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.07</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120.55</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104.18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104.18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102.26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107.22</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104.41</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113.67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.48</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Calendar year 2006</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">January</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">117.55</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">113.96</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">115.48</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">116.88</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">February</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.82</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.82</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.89</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.48</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">April</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.66</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113.79</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113.79</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">May</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111.73</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112.26</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">June</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116.42</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111.66</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.51</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">July (through July&nbsp;7, 2006)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">115.65</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">113.98</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">114.93</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">113.98</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>For fiscal years, calculated from the average of the exchange rates on the last day of each
month during the period. For calendar year months, calculated based on the average of daily
exchange rates.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
noon buying rate on July&nbsp;7, 2006 was &#165;113.98 per $1.00.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Capitalization and Indebtedness.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not required.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Reasons for the Offer and Use of Proceeds.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Risk Factors.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>You should carefully consider the following information, together with the other information
contained in this annual report on </I><I>Form 20-F</I><I>, 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.</I>
</DIV>

<P align="center" style="font-size: 10pt">6
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>We may not maintain our current level of revenues or achieve our expected revenues and profits
in the future.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although we recorded operating income and net income in the fiscal years ended March&nbsp;31, 2005
and 2006, we incurred operating losses and net losses in each of the prior six fiscal years, with
the exception of positive operating income for the fiscal year ended March&nbsp;31, 2002, and our
accumulated deficit as of March&nbsp;31, 2006 amounted to &#165;29.7&nbsp;billion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As we primarily operate in the Japanese market, if the Japanese economy deteriorates or does
not improve, and it results in significantly lower levels of network-related investment or
corporate customers respond to conditions by putting a priority on low price rather than quality,
it may make it difficult to maintain our current level of revenues or achieve our expected revenues
and profits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a continuous decrease in revenues from our Internet connectivity services because
of lower unit prices per bandwidth and cancellation of large accounts especially due
to severe price competition,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an increase in backbone costs due to increased volume of Internet traffic and
demand for leasing backbone lines, or a decline in the profitability of connectivity
services if we contract for more capacity than we actually utilize to serve our
customers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an increase in outsourcing costs, especially in our systems integration, if we fail
to manage outsourcing projects effectively or fail to cover outsourcing costs by
raising enough revenues from outsourced projects,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an increase in SG&#038;A costs, such as personnel expenses, in conjunction with our
expected or planned or continued business expansion, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a decline in the value and trading volume of our holding of available-for-sale
securities from which we expect gains on sale.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Please see Item&nbsp;5, &#147;Operating and Financial Review and Prospects, &#148; for more detailed
information concerning our operations and other results.
</DIV>

<P align="center" style="font-size: 10pt">7
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>We may not be able to compete effectively, especially against competitors with greater
financial, marketing and other resources.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The major competitors of our connectivity and value-added services are major
telecommunications carriers like NTT Communications Corporation (&#147;NTT Communications&#148;), KDDI
Corporation (&#147;KDDI&#148;) and Japan Telecom Co., Ltd. (&#147;Japan Telecom&#148;). Especially for Internet
connectivity services, price competition is still severe and may increase. For value-added
services, price competition may also increase. This competition may adversely affect our revenues
and profitability and may make it difficult for us to retain existing customers or attract new
customers. The major competitors of our systems integration business are systems integrators like
IBM Japan, NEC Corporation, Fujitsu Limited, NTT Data Corporation and their affiliates. Our major
competitors have the financial resources to reduce prices in an effort to gain market share. There
is strong competition among systems integrators that may adversely affect our revenues and
profitability. Even though Nippon Telegraph and Telephone Corporation (&#147;NTT&#148;) and NTT
Communications purchased shares of our company in September&nbsp;2003, which resulted in the NTT Group
becoming our largest shareholder, we plan to continue to operate our company separately and
independently from the NTT Group, and will therefore continue to compete with the NTT Group.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our competitors have advantages over us, including, but not limited to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>substantially greater financial resources,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>more extensive and well-developed marketing and sales networks,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>higher brand recognition among consumers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>larger customer bases, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>more diversified operations which allow profits from some operations to support
operations with lower profitability, such as the network services, for which we are a
competitor.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With these advantages, our competitors may be better able to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>sustain downward pricing pressure, including pressure on low-price Internet
connectivity services offered to corporate customers, which are our target customers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>develop, market and sell their services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>adapt quickly to new and changing technologies,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>obtain new customers, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>aggressively pursue mergers and acquisitions to enlarge their customer base and
market share.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>We depend on our ability to attract and retain qualified personnel.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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 engineers, research and development and other
personnel. In particular, in order to continue to increase our revenues from value-added services
and systems integration, we require more sales and engineering personnel to achieve our
expectations. We are not sure that we will be able to keep or attract these human resources and
control human resources cost adequately. Competition for
</DIV>

<P align="center" style="font-size: 10pt">8
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 material
adverse effects on our business, financial condition and result of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Our business may be adversely affected if our network suffers interruptions, errors or delays.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>The confidential customer information that we keep and manage may be leaked.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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&nbsp;2005 and the requirements set by the Ministry of Internal Affairs and
Communications (&#147;MIC &#148;), 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Business growth and a rapidly changing operating environment may strain our limited resources.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have limited operational, administrative and financial resources, which could be inadequate
to sustain the growth we want to achieve. As the number of our customers and their Internet usage
increases, as traffic patterns change and as the volume of information transferred increases, we
will need to increase expenditures for our network and other facilities in order to adapt our
services and to maintain and improve the quality of our services. If we are unable to manage our
growth and expansion, the quality of our services could deteriorate and our business may suffer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>If we fail to keep up with the rapid technological changes in our industry, our services may
become obsolete and we may lose customers.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our markets are characterized by:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>rapid technological change,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>frequent new product and service introductions,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">9
</DIV>

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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>continually changing customer requirements, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>evolving industry standards.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>We depend on our executive officers, and if we lose the service of our executive officers,
particularly Mr.&nbsp;Koichi Suzuki, our business and our relationships with the customers, major
shareholders of IIJ and other IIJ Group companies and our employees could suffer.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future success depends on the continued service of our executive officers, particularly
Mr.&nbsp;Koichi Suzuki, who is our president, chief executive officer and representative director, as
well as the president and chief executive officer and representative director of most of other IIJ
Group companies. 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.&nbsp;Suzuki, is bound by an
employment or noncompetition agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Our investments in affiliated companies may not produce the returns we expect and may require
additional funding.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As part of our business strategy and for the purpose of maintaining various strategic business
relations, we have, in the past, invested in a number of companies. There can be no assurance that
we will be able to maintain or enhance the value or performance of such companies in which we have
invested or may invest in the future, or that we will achieve the returns or benefits sought from
these investments. Our substantial investment in Crosswave, our former equity method investee, for
example, became worthless due to Crosswave&#146;s commencement of corporate reorganization proceedings.
In August&nbsp;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&nbsp;31, 2003 was &#165;15.6&nbsp;billion, the highest net loss that we have ever experienced. We also
wrote off &#165;2.1&nbsp;billion of loans and accounts receivable outstanding from Crosswave for the fiscal
year ended March&nbsp;31, 2004. We also had an impairment loss relating to our investment in Asia
Internet Holding for the fiscal year ended March&nbsp;2004. To the extent that these investments are
accounted for by the equity-method and to the extent that the investee companies have net losses,
our financial results will be adversely affected to the extent of our pro rata portion of these
losses. Furthermore, we may lose all or part of our investment in these companies if their value
decreases as a result of their financial performance or if these companies go bankrupt. If our
interests differ from those of other investors in entities over which we do not exercise control,
we may not be able to enjoy synergies with the investees and it may adversely affect our financial
results or financial condition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have invested in affiliated companies, such as IIJ Technology Inc. (&#147;IIJ-Tech&#148;) and Net
Care, Inc. (&#147;Net Care&#148;), to expand the service offerings available to our customers. In February
2006, we invested &#165;750&nbsp;million in Internet Revolution Inc. (&#147;i-revo&#148;), a joint venture that we
established with Konami Corporation, and i-revo is our equity method investee. In the joint venture
agreement, we agreed that we will provide funding up to &#165;90&nbsp;million to i-revo between November&nbsp;2006
and the end of April&nbsp;2007 for its capital
</DIV>

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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">investments and working capital. We may provide additional financial support in the form of
loans to or additional equity investments in these affiliated companies to enhance or maintain our
business synergies with these affiliated companies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In October&nbsp;2005, IIJ Media Communications Inc. (&#147;IIJ-MC&#148;), our former subsidiary, was merged
into us after a portion of IIJ-MC&#146;s business was transferred to IIJ-Tech and we have acquired Asia
Internet Holding Co., Ltd. (&#147;AIH&#148;), our former equity method investee, after AIH became our wholly
owned consolidated subsidiary. We may consider reorganization of other IIJ Group companies in the
future which may require additional investments by cash, equity or others.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Fluctuations in the stock prices of companies in which we have invested may significantly
influence our financial condition.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have invested in non-affiliated companies in order to further our business relationships
with these companies. We recorded gross realized gains from the sale of available-for-sale
securities of &#165;3.2&nbsp;billion for the fiscal year ended March&nbsp;31, 2006 and the book value of our
remaining available-for-sale securities was &#165;6.8&nbsp;billion at March&nbsp;31, 2006, which is relatively
large in relation to other items on our balance sheet. 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 dispose of all or a portion of
these shares, it is not certain that we will be able to do so on favorable terms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>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.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NTT and its affiliates currently own 29.7% of our outstanding shares. In September&nbsp;2003, we
entered into a subscription agreement with NTT in which we granted to NTT pre-emptive rights to
subscribe to its pro rata portion of any future issuances of shares by us in order to maintain its
shareholding percentage; NTT did not exercise this pre-emptive right when we issued 12,500
additional shares in December&nbsp;2005. Under this subscription agreement, we have agreed to allow NTT
to nominate up to three persons as either directors or statutory auditors, subject to approval by
our shareholders at our first general shareholders&#146; meeting after NTT&#146;s investment. At our general
shareholders&#146; meeting on June&nbsp;24, 2004, two directors nominated from NTT Group were appointed, one
of whom was nominated as an executive vice president. At our general shareholders&#146; meeting on June
28, 2006, our executive vice president, Mr.&nbsp;Fukuzo Inoue, completed his term and retired, and an
other director, Mr.&nbsp;Takashi Hiroi was reapproved to be an outside director. As our largest
shareholder, NTT may be able to exercise substantial influence over us. In addition, as part of
this subscription agreement, we have agreed to collaborate with NTT in various businesses. While we
intend to conduct our day-to-day operations independently of NTT and its group companies and
believe that NTT also plans for us to operate independently, NTT may decide to exercise substantial
influence over us in a manner which could impair our ability to operate independently. Furthermore,
NTT may take actions that are in its best interests, which may not be in our interest or that of
other shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>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.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on telecommunications carriers such as NTT Communications, KDDI and Japan Telecom for
a significant portion of our network backbone and Nippon Telegraph and Telephone East Corporation
and Nippon Telegraph Telephone West Corporation and electric power companies and their affiliates
for local access lines for our customers. After the transfer of operating lease agreements from
Crosswave, our former equity method investee, following its filing for corporate reorganization, we
now procure significant portions
</DIV>

<P align="center" style="font-size: 10pt">11
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">of our network backbone and data center facilities pursuant to operating lease agreements with
NTT Communications, our largest provider of network infrastructure. 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also depend on third-party suppliers of hardware components like routers that are used in
our network. We acquire certain components from limited sources, typically from Cisco Systems, Inc.
A failure by one of our suppliers to deliver quality products on a timely basis, or the inability
to develop alternative sources if and as required, may delay our ability to expand the capacity and
scope of our network.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>There are risks associated with our international business.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;By operating our network internationally, we expose ourselves to the risks of international
markets and to other risks that do not exist or are less significant in Japan. One of the
components of our strategy is to continue to expand our network reach through our network between
the United States and Japan to maintain our network quality. In addition, we have invested in the
data center businesses in South Korea. Our international business operations continue to require
management attention and financial resources, both of which are in limited supply. We face
significant exposure to risks in connection with our international operations, including:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the impact of economic conditions outside Japan,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>unexpected changes in or delays resulting from regulatory requirements,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the rate of the development of the Internet industry in countries in Asia,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>political and economic instability, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>potential unsatisfactory financial returns from our investments in Asia, including
the data center businesses in which we have invested in South Korea.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These factors could adversely affect our future international expansion and, consequently, our
business, financial condition and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>If we fail to execute our systems integration projects in a timely or satisfactory manner or
if we fail to manage customer data in a professional manner, we could be sued and our reputation
could suffer.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A significant portion of our future revenue depends on systems integration projects which we,
in cooperation with IIJ-Tech and Net Care, have been contracted to perform. We may not be able to
perform our responsibilities under these contracts to the satisfaction of our customers, or at all,
if we lack a sufficient number of qualified engineers, lack sufficient task-management capabilities
for software-development vendors or fail to manage customer data adequately. If we do not execute
these services and projects as contracted or fail to manage customer data in a professional manner,
our receipt of revenues may be delayed or lost altogether and we could be sued by our
counterparties, which could in turn have an adverse impact on our reputation, results of operation
and financial condition.
</DIV>

<P align="center" style="font-size: 10pt">12
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Regulatory matters and new legislation could impact our ability to conduct our business.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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. We believe our licenses
and approvals are in good standing and we expect to be able to continue to fulfill the terms of our
licenses and approvals to the satisfaction of the MIC. However, there can be no assurance that we
will be able to do so.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Existing and future governmental regulation may substantially affect the way in which we
conduct business. These regulations may increase the cost of doing business or may restrict the way
in which we offer products and services. As a result of the amendment in April&nbsp;2004 of the
Telecommunication Business Law and deregulation including elimination of the regulatory distinction
between carriers providing telecommunications services through networks owned by other
telecommunication carriers and carriers which own or have long-term leases for the networks through
which they offer telecommunication services, competition may increase. Furthermore, we cannot
predict future regulatory changes which may affect our business. Any changes in laws, such as those
described above, or regulations or MIC policy affecting our business activities and those of our
competitors could adversely affect our financial condition or results of operations. For more
information, see Item&nbsp;4., &#147;Business Overview &#151; Regulation of the Telecommunications Industry in
Japan&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>We may be named as defendants in litigation, which could have an adverse impact on our
business, financial condition and results of operations.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>In the event we need to raise capital, we may sell additional shares of our common stock or
securities convertible into our common stock, which may cause shareholders to incur substantial
dilution.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We may raise additional funds in the future to raise additional working capital and for other
financial needs. We completed private placements in June and September&nbsp;2003 of an aggregate of
15,880 shares of our common stock to investors in Japan in order to raise funds for working capital
and repayment of convertible notes. We issued 12,500 new shares of our common stock along with our
listing on the Mothers market of the Tokyo Stock Exchange in December&nbsp;2005, after conducting a
1 to 5 split of our shares of common stock in October&nbsp;2005. 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.
</DIV>
<DIV align="left">
<A name="105"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4. Information on the Company.</B>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>A.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>History and Development of the Company.</B></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are incorporated in Japan as a joint stock corporation under the name Internet Initiative
Japan Inc. (&#147;IIJ&#148;). We were incorporated in December&nbsp;1992 and operate under the laws of Japan. We
began operations
</DIV>

<P align="center" style="font-size: 10pt">13
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">in July&nbsp;1993, making us one of the first commercial providers in Japan to offer Internet
connectivity services. In February&nbsp;1994, we acquired a Type II Telecommunications license, which
enables us to operate our own international backbone networks. We became a public company in August
1999 with our initial public offering of American Depositary Shares (&#147;ADSs&#148;) on the Nasdaq National
Market.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On August&nbsp;20, 2003, Crosswave Communications Inc. (&#147;Crosswave&#148;), our former equity method
investee and primary provider of data communication services, and two of its subsidiaries filed
voluntary petitions with the Tokyo District Court for the commencement of corporate reorganization
proceedings, which are proceedings to rehabilitate an insolvent company similar in some respects to
Chapter&nbsp;11 bankruptcy proceedings in the United States. As a result, we wrote-off our investment in
Crosswave and no longer consider Crosswave to be an IIJ Group company. On December&nbsp;15, 2003, the
business operations of Crosswave including its network on which we relied to provide services for
our network, were transferred to NTT Communications Corporation (&#147;NTT Communications&#148;). We have
contracted with NTT Communications for the continued use of the network services it acquired from
Crosswave.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On June&nbsp;26 and September&nbsp;16, 2003, we completed private placements of a total of 15,880 shares
of our common stock to investors in Japan for an aggregate amount of &#165;13.3&nbsp;billion for working
capital and repayment of our outstanding 1.75% convertible notes due on March&nbsp;31, 2005. As a result
of these transactions, the total number of our issued shares of common stock increased to 38,360
and shareholding of the Nippon Telegraph and Telephone Corporation (&#147;NTT&#148;) Group increased to
31.6%. We have also agreed with NTT that it has the right to nominate three persons to serve as
either our directors or statutory auditors, subject to shareholder approval of any nomination at
our first general shareholders&#146; meeting after NTT&#146;s investment. In addition, we and NTT agreed to
undertake efforts to jointly engage in the development of broadband and Information Technology and
other related business, to expand the business relationship between us and NTT in connection with
new business opportunities and to discuss secondment of employees to each other.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On October&nbsp;1, 2005, IIJ Media Communications Inc. (&#147;IIJ-MC&#148;), our former consolidated
subsidiary, was merged into us after a portion of IIJ-MC&#146;s business was transferred to IIJ
Technology Inc., our consolidated subsidiary. Asia Internet Holding Co., Ltd., our former equity
method investee, became our wholly owned consolidated subsidiary, and was merged into us on October
1, 2005. In each of the mergers, we became the surviving company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;2, 2005, we listed on the Mothers market of the Tokyo Stock Exchange. In
connection with the listing, we issued 12,500 new shares of common stock for an amount of &#165;6.0
billion. As we conducted a 1 to 5 split of our shares of common stock on October&nbsp;11, 2005, the
total number of our issued shares of common stock increased to 204,300.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;1, 2006, we established a joint venture company, Internet Revolution Inc.
(&#147;i-revo&#148;) with Konami Corporation, with the purpose of operating comprehensive portals sites. We
invested &#165;750&nbsp;million and hold 30.0% of the company. i-revo is our equity method investee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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)&nbsp;5259-6500. Our agent in the
United States is IIJ America Inc., 1211 Avenue of the Americas, Suite&nbsp;2900, New York, New York
10036 and the telephone number at that location is (212)&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For a discussion of capital expenditures and divestitures currently in progress and those for
the past three years, see &#147;Capital Expenditures&#148; in Item&nbsp;4.B.
</DIV>

<P align="center" style="font-size: 10pt">14
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>B.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Business Overview.</B></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer a comprehensive range of Internet connectivity services and network solutions to our
customers in Japan. We offer our services on one of the most advanced and reliable Internet
networks available in Japan. Our services are based upon high-quality networking technology
tailored to meet the specific needs and demands of our customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer, together with other companies or independently, a variety of services to our
customers as part of our total network solutions. Our primary services are our Internet
connectivity services, value-added services and systems integration. Our Internet connectivity
services range from low-cost dial-up access to high-speed access through dedicated lines for
individual and corporate customers. Our value-added services include security-related outsourcing
services that protect customers&#146; internal networks from unauthorized access and secure remote
connections to internal networks, network-related outsourcing services such as provision,
monitoring and maintenance of network equipment and Virtual Private Network (&#147;VPN&#148;), and
server-related outsourcing services such as provision of e-mail and web servers and operation and
management of e-mail systems, in addition to Internet data center services. Our systems integration
are tailored to our customers&#146; requirements, which include consulting, project planning, systems
design, construction of network systems and systems outsourcing. We also sell a significant amount
of network-related equipment to our systems integration customers as part of our provision of total
network solutions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>For the fiscal year ended March 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Connectivity services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">41.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">34.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">26.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Value-added services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">11.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">12.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">12.5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Systems integration</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">30.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">38.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">47.2</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have created an Internet network, that extends throughout Japan by leasing lines from
telecommunications carriers. Our backbone is one of the highest capacity Internet backbones in
Japan. As of July&nbsp;7, 2006, we operated 13 points of presence (&#147;POPs&#148;) for dedicated access, 17
POPs for dial-up access and 12 Internet data centers. POPs are the main points at which our
customers connect to our backbone, throughout Japan. Our policy on the management of our backbone
is that we upgrade the bandwidth depending on demand and with maximum cost effectiveness. Our
backbone network also extends to the United States, with a total capacity of 7.2 Gbps (3 STM-16
trunk lines), and to China, with a capacity of 600 Mbps (1 STM-4 trunk line) as of July&nbsp;7, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Total network solutions</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are a provider of total network solutions. We provide our customers with tailored,
end-to-end Internet and private network solutions. The diversity of services we offer permits each
customer to purchase individual services or a bundle of services that we believe provide the most
efficient, reliable and cost-effective solution for that customer&#146;s particular needs.
</DIV>


<P align="center" style="font-size: 10pt">15
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The primary resources that we use to provide total network solutions to our customers include:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our Internet connectivity services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our line-up of value-added services, including security, network and server-related
outsourcing,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our Internet data center services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our systems integration, including ongoing consulting, systems design,
construction, operation and management, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>other network and application services that our group companies provide.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Internet Connectivity Services</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer two categories of Internet connectivity services: dedicated access services and
dial-up access services. Dedicated access services are based mainly on dedicated local-line
connections provided by carriers between our backbone and customers. Dial-up access services mainly
require customers to connect to our POPs through the publicly-switched telephone network. The
Internet connectivity part of our total network solutions ranges from low-cost, entry-level dial-up
connections from home personal computers to customized wide-area network solutions deploying a
range of the dedicated and dial-up services listed below to connect headquarters, data centers,
branch offices and mobile personnel. Currently, large telecommunications carriers such as Nippon
Telegraph and Telephone East Corporation (&#147;NTT East&#148;) and Nippon Telegraph and Telephone West
Corporation (&#147;NTT West&#148;) and other providers are rapidly increasing the variety of last-mile access
with ADSL, fiber optic and Ethernet-based lines. Such new lines provide inexpensive high-speed,
high-capacity last mile access, and we continue to introduce new variations to our Internet
connectivity service to accommodate such developments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table shows the number of our Internet connectivity service subscribers as of
the dates indicated:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19" style="border-bottom: 1px solid #000000"><B>As of March 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2006</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dedicated access service contracts:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">IP service:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Low
Bandwidth (64 kbps &#151; 768 kbps)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">184</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Medium
Bandwidth (1 Mbps &#151; 99 Mbps)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">473</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">565</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">654</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">High
Bandwidth (100 Mbps &#151;)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total IP Service</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">610</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">663</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">738</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">896</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">IIJ T1 Standard and IIJ Economy</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,590</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">504</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">276</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">IIJ Data Center Connectivity Service</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">156</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">196</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">231</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">247</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,788</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,873</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,297</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total dedicated access service contracts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,226</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,243</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,549</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dial-up access service contracts:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Under IIJ Brand</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,169</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">86,183</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">68,068</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62,176</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">OEM</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">165,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">443,601</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">620,731</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">625,908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">568,307</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total dial-up access service contracts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260,576</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">529,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">695,867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">693,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">630,483</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">16
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of July&nbsp;7, 2006, we mainly offered the following Internet connectivity services.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Pricing</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Service Type</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Summary Description</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(excluding consumption tax)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B><I>Dedicated access services</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IP Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Full-scale
dedicated line
service with
high-speed access
for businesses and
other network
operators with
demanding bandwidth
requirements.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Setup and monthly fees
vary according to carrier,
line speed, line type and
distance involved.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ T1 Standard
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Packaged dedicated
line service
offering 1.5 Mbps
connection but not
including certain
features of
full-scale IP
Service such as
dynamic routing and
unlimited IP
addresses.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;50,000. Monthly access
fee of &#165;117,000 for up to
8 IP addresses and
&#165;167,000 for up to 16 IP
addresses.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ Economy
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
dedicated line
access to the
Internet with
inexpensive monthly
fees primarily for
small- and
medium-sized
businesses and
local and regional
offices of
corporate groups.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;40,000. Monthly access
fees of &#165;38,000 for 64
kbps service and &#165;45,000
for 128 kbps service.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ Data Center Connectivity Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Full-scale
dedicated line
service for
customers hosted in
IIJ Data Centers,
with asymmetrical
speeds of upstream
(from the Internet
to data center) and
downstream (from
the data center to
the Internet)
transmissions.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;100,000. Monthly fees
range from &#165;400,000 to
&#165;10,000,000, depending on
the speed of upstream
transmissions.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ FiberAccess/F
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
dedicated line
Internet-access
using optical lines
at speeds of up to
10 Mbps or 100
Mbps, targeted
primarily at small-
and medium-sized
enterprises
requiring
high-capacity,
high-speed
transmissions.
Optical fiber
access is limited
to &#147;FLET&#146;S&#148; lines
provided by NTT
East and West.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;50,000. Monthly fees
range from &#165;14,000 to
&#165;190,000, depending on the
speed of connection and
the number of IP addresses
allocated. Monthly fees do
not include optical line
charges, which are paid
directly by the customer
to the optical line
provider.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ DSL/F
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
dedicated line
Internet-access
using ADSL lines at
speeds of up to 47
Mbps, targeted
primarily at small-
and medium-sized
offices and home
offices. ADSL
access is limited
to &#147;FLET&#146;S&#148; lines
provided by NTT
East and West.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;30,000. Monthly fees
range from &#165;9,800 to
&#165;49,800, depending on the
number of allocated IP
addresses. Monthly charges
do not include ADSL
charges, which are paid
directly by the customer
to the ADSL service
provider.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ DSL/A
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
dedicated line
Internet-access
using ADSL lines at
speeds of up to 47
Mbps, targeted
primarily at small-
and medium-sized
offices and home
offices. ADSL
access is limited
to ADSL services
provided by ACCA
Networks, Co., Ltd.
(&#147;ACCA Networks&#148;)
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;75,000. Monthly fees
range from &#165;12,000 to
&#165;52,000, depending on the
number of allocated IP
addresses. Monthly charges
do not include ADSL
charges, which are paid
directly by the customer
to the ADSL service
provider.</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">17
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Pricing</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Service Type</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Summary Description</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(excluding consumption tax)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ ISDN/F
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
dedicated line
Internet-access
using ISDN lines at
speeds of up to 64
kbps, targeted
primarily at small-
and medium-sized
offices and home
offices where ADSL
lines are not
available. ISDN
access is limited
to &#147;FLET&#146;S&#148; lines
provided by NTT
East and West.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;5,000. Monthly fees range
from &#165;4,800 to &#165;6,800,
depending on the number of
allocated IP addresses.
Monthly charges do not include ISDN charges, which are paid directly by
customers to ISDN
providers.</TD>
</TR>



<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ Line Management/F
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">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.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee range
from &#165;5,000 to &#165;43,400.
Monthly fees range from
&#165;2,300 to &#165;44,700,
depending on the optional
services.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B><I>Dial-up access services</I></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ Dial-up Standard
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
corporate users
permitting
simultaneous
Internet-access
from several
dial-up lines under
a single contract.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;5,000. Monthly basic fee
of &#165;2,000 plus access
charges of &#165;10 per minute.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Enterprise Dial-up IP Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
corporate users
offering multiple
dial-up accounts at
a fixed monthly
fee.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;20,000. Monthly basic
fees range from &#165;3,000 to
&#165;4,900 per account
depending on the number of
accounts.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ Dial-up Advanced
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
corporate users
offering bundled
low-cost dial-up
accounts.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initial setup fee of
&#165;5,000. Monthly basic fee
of &#165;10,000 for the first
50 e-mail accounts
including the first two
hours access per account,
plus &#165;5 per minute after
two hours.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ4U
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
individual users,
which includes
Internet-access and
5 megabytes of disk
space for personal
Web pages and
e-mail account
options for
multiple users.
Various access
options such as
ISDN, ADSL and
optical fiber
access are
available.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">This service does not
charge an initial setup
fee. Monthly service fee
of &#165;800 for the first
eight hours and a charge
of &#165;5 per minute, with a
ceiling of &#165;4,100.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ<I>mio </I>DSL/DF Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
individual users
offering Internet
connectivity over
ADSL at speeds of
up to 47 Mbps. ADSL access is limited
to &#147;FLET&#146;S&#148; lines
provided by NTT
East and West. The
IP address is
changed every time
a connection is
made.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">No initial setup fee.
Monthly charge is &#165;1,400.
Monthly charges do not
include ADSL charges,
which are paid directly by the customer to NTT East and West.</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">18
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Pricing</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Service Type</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Summary Description</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(excluding consumption tax)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ<I>mio </I>FiberAccess/DF Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
individual users
offering Internet
connectivity over
optical fiber
network at maximum
10 Mbps or 100
Mbps. Optical fiber
access is limited
to &#147;FLET&#146;S&#148; lines
provided by NTT
East and West. The
IP address is
changed every time
a connection is
made.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">No initial setup fee.
Monthly charges range from
&#165;2,000 to &#165;7,000. Monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to NTT East and West.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ<I>mio </I>DSL/SF Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
individual users
offering Internet
connectivity over
ADSL at speeds of
up to 47 Mbps. ADSL
access is limited
to &#147;FLET&#146;S&#148; lines
provided by NTT
East and West. A
fixed IP address is
provided with this
service.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">No initial setup fee. The
monthly charge is &#165;4,800.
Monthly charges do not
include ADSL charges,
which are paid directly by
the customer to NTT East
and West.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ<I>mio </I>FiberAccess/DC Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
individual users
offering Internet
connectivity over
optical fiber
network at speeds
of up to 50 Mbps or
100 Mbps. Optical
fiber access is
limited to &#147;Access
Commufa&#148; lines
provided by Chubu
Telecommunications
Co., Inc.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">No initial setup fee. The
monthly charge is
&#165;2,000. Monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to Chubu
Telecommunications Co.,
Inc.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ<I>mio </I>FiberAccess/SF Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
individual users
offering Internet
connectivity over
optical fiber
network at speeds
of up to 10 Mbps or
100 Mbps. Optical
fiber access is
limited to &#147;FLET&#146;S&#148;
lines provided by
NTT East and West.
A fixed IP address
is provided with
this service.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">No initial setup fee. The
monthly charges range from
&#165;8,000 to &#165;12,000,
depending on the type of
access line. The monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to NTT East and West.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">IIJ<I>mio </I>MobileAccess Service
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service for
individual users
offering mobile
Internet
connectivity
through several
data communications
services provided
by mobile
telecommunication
companies.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">No initial setup fee. The
monthly charge is &#165;300 and
does not include service
charges to IIJ&#146;s access
points, which are paid
directly by the customer
to the mobile
telecommunication
companies.</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Dedicated Access Services</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our lineup of dedicated line access services includes: IP Service, IIJ T1 Standard, IIJ
Economy, IIJ Data Center Connectivity Service, IIJ FiberAccess/F, IIJ DSL/F, IIJ DSL/A, IIJ ISDN/F
and IIJ Line Management/F. The total bandwidth allocated to our dedicated access services has
increased 60.8% to 194.9 Gbps as of March&nbsp;31, 2006, up from 121.2 Gbps a year earlier.
</DIV>

<P align="center" style="font-size: 10pt">19
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IP Service. </I></B>Our IP Service is a full-scale, high-speed access service that connects a
customer&#146;s network to our network and the Internet. The service is used by corporate customers
mainly for critical purposes, such as Internet connectivity for corporate headquarters or data
centers. As of March&nbsp;31, 2006, we had 896 contracts for our IP Service compared to 863 for our IP
Service as of March&nbsp;31, 2005. The customer chooses the level of service it needs based upon its
bandwidth requirements. As of July 7, 2006, we offered service at speeds ranging from 64 kbps to
10 Gbps.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our IP Service revenues, including revenues of IIJ Data Center Connectivity Service,
represented 16.6% of our total revenues for the fiscal year ended March&nbsp;31, 2006 and 21.4% for the
fiscal year ended March&nbsp;31, 2005. We believe that as businesses continue to develop Internet
capabilities, this service will continue to be the foundation of our total network solutions
offerings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subscribers pay a monthly fee for the leased local access line from the customer&#146;s location to
one of our POPs. The amount of this fee varies depending on the carrier used and the distance
between the customer&#146;s site and our POPs. Customers subscribing to greater bandwidths use ATM
(Asynchronous Transfer Mode) or an Ethernet local access line, which supports over 2 Mbps. We
collect the usage fee from the customer and pay this amount to the carrier.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although fees are charged on a monthly basis, the minimum contract length is one year. For
contracts of at least three years, a 10% per month discount is given.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also offer various IPv6-capable Internet connectivity services, namely IPv6 Tunnel, IPv6
Native and IPv6/IPv4 Dual Stack Services. In addition to corporate users, IPv6 Tunnel Service has
been available to individual users. IPv6 is the next generation Internet Protocol, which allows
IPv6 technology to overcome the problems, such as limited IP address availability, of IPv4, the
protocol generally used. IPv6 Tunnel Service is a service to enable customers to use IPv6
technology via IPv4 access network, by encapsulating IPv6 data with IPv4 data. IPv6 Native and
IPv6/IPv4 Dual Stack Services are services which provide IPv6 environment to customers without
encapsulating it with IPv4 data. IPv6 technology enables customers to connect a vast range of
electronic appliances and equipment, including cellular phones, AV equipment, car navigation
devices and home electronics. We are the first commercial Internet Service Provider, or ISP in
Japan to offer IPv6 service and our management believes that we will reap &#147;first-mover&#148; 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For our IP Service, we offer Service Level Agreements to our customers to better define the
quality of services our customers receive. We were the first ISP in Japan to introduce this type of
agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We guarantee the performance of the following elements under our Service Level Agreements:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>100% availability of our network,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the maximum average latency, or time necessary to transmit a signal, between
designated POPs, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>prompt notification of outage or disruption.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are able to offer these Service Level Agreements because of the high quality and
reliability of our network. Our Service Level Agreements provide customers with credit against the
amount invoiced for the services if our service quality fails to meet the prescribed standards.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subscribers to our IP Service receive technical support 24 hours a day and seven days a week.
</DIV>

<P align="center" style="font-size: 10pt">20
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IIJ T1 Standard. </I></B>Our IIJ T1 Standard is a connectivity service at 1.5 Mbps that we introduced
in October&nbsp;1999. It is a packaged dedicated line service limited to static routing and allocations
of 8 or 16 IP addresses. Last-mile access must be through NTT&#146;s Digital Access 1500 or similar
services from other carriers. We support this service by providing guarantees of latency rates
under Service Level Agreements. As of March&nbsp;31, 2006, we had 109 customers for IIJ T1 Standard and
IIJ Economy. We are no longer promoting the service since customers demand for a higher speed than
the one that the service provides.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IIJ Economy. </I></B>IIJ Economy is a packaged Internet connectivity service via a dedicated line at
64 kbps or 128 kbps, targeting small- and medium-sized businesses. We support this service by
providing guarantees of latency rates under Service Level Agreements. We are no longer promoting
the service since customers demand for a higher speed than the one that the service provides.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IIJ Data Center Connectivity Service. </I></B>We also provide connectivity services with respect to
our data centers. Our data center connectivity services are an important part of being able to
provide high-quality, high-speed, seamless service to our customers. Our connectivity services are
asymmetric, meaning that transmission speeds are not the same in both directions&#151; with the
downstream transmission being faster to accommodate greater amounts of information being accessed
from the Internet versus being sent to the Internet. The fee structure depends on the transmission
capacity required for upstream and downstream transmissions. For downstream transmissions, we offer
either 10BASE-T connectivity (10 Mbps) or 100BASE-T connectivity (100 Mbps). For upstream
transmissions, we offer bandwidths from 1 Mbps to 4 Mbps for 10BASE-T connectivity and 6
Mbps to 48 Mbps for 100BASE-T connectivity. In addition to the above, we offer IPv6-capable data
center services, which offer the same services using IPv6. As of March&nbsp;31, 2006, we had 247
Internet data center connectivity contracts, compared with 231 as of March&nbsp;31, 2005. Total
contracted bandwidth for Internet data center connectivity service was 24.4 Gbps as of March&nbsp;31,
2006, up from 21.7 Gbps as of March&nbsp;31, 2005. We support this service by providing the same three
guarantee elements, availability, maximum average latency and prompt notification of outage or
disruption, as the IP Service above under Service Level Agreements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IIJ FiberAccess/F. </I></B>IIJ FiberAccess/F Service is a dedicated Internet-access service that uses
&#147;BFLET&#146;S&#148; fiber optic access lines provided by NTT East and West allowing service at maximum 10
Mbps or 100 Mbps on a best-efforts basis. The service is available in several variations (Business,
Basic, Family, Mansion and others), optimizing each customer&#146;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&nbsp;31, 2006, we had 13,297 customers for IIJ FiberAccess/F and IIJ DSL/F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IIJ DSL/F and IIJ DSL/A. </I></B>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 &#147;FLET&#146;S ADSL&#148;. We support this service by providing guarantees of latency rates
under Service Level Agreements. In May&nbsp;2006, we began offering IIJ DSL/A, using ADSL lines provided
by ACCA Networks.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IIJ ISDN/F. </I></B>IIJ ISDN/F Service provides dedicated line Internet-access via ISDN lines with
speeds of up to 64 kbps. IIJ ISDN/F Service is primarily targeted at small-and medium-sized offices
and home offices where ADSL lines are not available but have access to ISDN lines provided by NTT
East and West under the name of &#147;FLET&#146;S ISDN&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>IIJ Line Management/F. </I></B>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.
</DIV>

<P align="center" style="font-size: 10pt">21
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Dial-up Access Services</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer a variety of dial-up access services. Our dial-up access services are an important
resource in offering total Internet solutions to corporate customers. Our dial-up services allow
employees out of the office or frequent travelers to access our network or their own corporate
networks through one of our POPs or through our roaming access points. The dial-up services are
usually provided with VPN function, that is provided by our value-added services or systems
integration to access customers&#146; own corporate network securely. We also offer dial-up access
service for individuals and an OEM service (where we provide services for other companies which
sell those services under their own name) for other network operators, such as NTT East and NTT
West.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our main dial-up access services are our IIJ Dial-up Standard, Enterprise Dial-up IP Service,
IIJ Dial-up Advanced, IIJ4U, IIJ<I>mio </I>DSL/DF Service, IIJ<I>mio </I>FiberAccess/DF Service, IIJ<I>mio </I>DSL/SF
Service, IIJ<I>mio </I>FiberAccess/DC Service, IIJ<I>mio </I>FiberAccess/SF Service and IIJ<I>mio </I>MobileAccess
Service, all as described in the table above. We also provide Terminal-type Dial-up IP Service to
customers, but we are no longer promoting this service.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Value-Added Services</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our customers are increasingly seeking additional network-related services, in addition to
Internet connectivity. We provide our customers with a broad range of value-added services and
products such as security, network, server-related outsourcing services in addition to Internet
data center services. Generally, the service period is for one year and customers are billed
monthly. We recognize revenues for these services on a straight-line basis during the service
period. Any initial set-up fees received in connection with our value-added services are deferred
and recognized over the contract period or estimated average period of estimated to customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our value-added services include:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Security-related outsourcing services. </I></B>As of July&nbsp;7, 2006, we offered seven main
security-related outsourcing services that protect customers&#146; internal networks from
unauthorized access and secure remote connections to internal networks: IIJ DDoS
Solution Service, IIJ Security Premium, IIJ Security Standard, IIJ Security Lite, IIJ
Security Scan Service, IIJ Network Intrusion Detection Service and IIJ Secure Remote
Access. We were the first ISP in Japan to provide firewall services, which we first
offered in 1994.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ DDoS Solution Service.</I></U> In October&nbsp;2005, we began offering IIJ DDoS
Solution Service to protect customers&#146; internal networks from distributed denial of
service (&#147;DDoS&#148;) attacks, a type of unauthorized access from Internet. The fee depends
on the type of service that we provide and the initial fee starts at &#165;650,000 and the
monthly fee starts at &#165;498,000.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U><I>IIJ Security Premium.</I></U> In July&nbsp;2000, we began offering IIJ Security
Premium, a high value-added firewall operation and management service based on
Firewall-1, a product which we license from Check Point Software Technologies Ltd. The
service combines and requires contracting for both Firewall Management Service and
Firewall Rental Service. For Firewall Management Service, the initial setup fee is
&#165;200,000 and the monthly fee ranges from &#165;150,000, depending on the redundancy of
firewall equipment. For Firewall Rental Service, the initial setup fee ranges from
&#165;200,000 and the monthly fee ranges from &#165;67,000</TD>
</TR>


</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">22
</DIV>

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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>depending on a number of factors including the number of users and packet
filtering performance. The fees for Firewall Rental Service are multiplied by the
number of firewall equipment if the customer requires redundancy.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U><I>IIJ Security Standard.</I></U> In October&nbsp;1999, we began offering Security
Standard Service pursuant to which we install and manage an around-the-clock operation
of firewall systems. The initial setup fee ranges from &#165;100,000, to &#165;300,000, and the
monthly fee ranges from &#165;50,000,to &#165;130,000 depending on a number of factors including
the number of users, packet filtering performance and 3DES (VPN) (an encryption
technology) performance. Since February&nbsp;2001, a VPN option is available for this
service with an initial cost of &#165;20,000 and a monthly fee of &#165;10,000 per computer.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U><I>IIJ Security Lite.</I></U> In December&nbsp;2002, we began offering IIJ Security Lite,
an economical version of a managed firewall service with limited features of operation
and maintenance targeting small- and medium-sized enterprises. The initial setup fee
ranges from &#165;30,000 to &#165;50,000, and the monthly fee ranges from &#165;25,000 to &#165;35,800.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U><I>IIJ Security Scan Service.</I></U> In March&nbsp;2002, we began offering IIJ Security
Scan Service, a package of services targeting small- and medium-sized enterprises to
identify security weaknesses in order to prevent illicit access from external networks
and to avert virus infection of in-house servers. It is available in two forms: regular
monthly scans and one-time spot checks. The form of service can be selected to meet the
specific needs of the customer, such as checks for protocol and network configuration
or for vulnerability to specific illegal network intrusion. The service was developed
with NRI Secure Technologies Ltd., a Japanese security assessment and auditing
solutions provider. For the regular monthly scan service, the initial charge is &#165;5,000.
The monthly charge for scanning is &#165;25,000 for one IP address, and &#165;24,000 will be
added for every additional IP address. For the spot scan service, the basic charge for
scanning one IP address is &#165;30,000, and &#165;29,000 will be added for every additional IP
address.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U><I>IIJ Network Intrusion Detection Service.</I></U> In April&nbsp;2001, we began offering
IIJ Network Intrusion Detection Service, which offers around-the-clock, non-stop
network monitoring and intrusion-detection capabilities, as well as packet information
for analyzing detected illicit accesses. The initial cost for the service is &#165;300,000,
and the monthly fee starts from &#165;300,000, depending on the customer&#146;s traffic volume.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Secure Remote Access.</I></U> IIJ Secure Remote Access is a packaged service
combining the IIJ Dial-up Advanced with ID Gateway, which controls remote access to
in-house servers protected by firewalls. In addition to the 50 dial-up accounts covered
by the base rate, the service ensures a secure remote environment by controlling
accessible servers and utilization protocols for each dial-up account. In May&nbsp;2002, IIJ
Secure Remote Access was upgraded by adding a remote VPN function. The upgrade enables
remote users to transmit and receive data with encryption, offering a secure enterprise
network environment with a greater variety of access options, such as connections from
overseas via local ISPs. In June&nbsp;2005, IIJ Secure Remote Access was upgraded by adding
an Authentication Service Link Option, which enables customers to use a greater variety
of authentication methods.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Network-related outsourcing services. </I></B>As of July&nbsp;7, 2006, we offered six main
network-related outsourcing services, including provision, monitoring and maintenance
of network equipment and VPN to connect customers&#146; branch and remote offices: IIJ
Internet-LAN Service, IIJ SMF-VPN, IIJ Managed VPN Pro Service, IIJ VPN Standard, SEIL
Rental Service and IIJ NetLightning.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">23
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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Internet-LAN Service.</I></U> IIJ Internet-LAN Service is a service which
provides connectivity among a company&#146;s branch and remote offices. With this service,
customers can use functions provided by Wide-area Ethernet over the Internet.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ SMF-VPN.</I></U> IIJ SMF-VPN is a service which uses IIJ SEIL Management
Framework (&#147;SMF&#148;) which provides remote configuration and monitoring features of SEIL
Series routers at customer remote sites from central management servers at IIJ and the
customer&#146;s main office or data center. The technology is patent granted. When a
customer at a remote site connects the router to the circuit, the router is
automatically configured and connected to the network. System integrators utilizing
this technology can reduce configuration and maintenance costs at the remote site.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Managed VPN Pro Service.</I></U> IIJ Managed VPN Pro Service is a service
which provides connectivity among a company&#146;s branch and remote offices, utilizing SEIL
Series or other routers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ VPN Standard.</I></U> IIJ VPN Standard is a service which provides Internet
VPN connectivity among a company&#146;s branch and remote offices based on encryption
technology. IIJ rents out encryption equipment at customer sites, configures the
equipment for the customer and provides remote monitoring of the encrypted sessions.
Initial cost for the service starts from &#165;30,000, and monthly fees start from &#165;6,900
depending on the equipment features.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>SEIL Rental Service</I>. </U>We rent routers for connection to the Internet and
provide configuration, management and monitoring services. We provide SEIL Series or
CISCO routers depending on customer requirements.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ NetLightning.</I></U> IIJ NetLightning is a service based on Netli, Inc.&#146;s
technology that improves web application performance. By utilizing this service, end
users can access customer websites faster, without any settings, and customers can
thereby reduce the cost of placing mirror sites.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Server-related outsourcing services. </I></B>As of July&nbsp;7, 2006, we offered twelve main
server-related outsourcing services including provision of e-mail and web services and
operation and management of e-mails systems: IIJ Mail Gateway Service, IIJ Post Office
Service, IIJ Mail Box Service, e-mail distribution services, IIJ Web Standard, web
hosting services, IIJ Download Site Service, IIJ URL Filtering Service, IIJ Document
Exchange Service, DNS services, streaming services and IIJ<I>mio </I>Safety Mail Service.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Mail Gateway Service.</I></U> In November&nbsp;2002, we renovated IIJ Mail Gateway
Service to expand the service from large corporate customers to other corporate
segments. The service has three options. The first one is virus protection to check the
viruses on incoming and outgoing e-mails. The second one is audit to detect the keyword
set in advance on the outgoing e-mails. The third one is antispam to check spam for
incoming e-mails, which we started to provide in October&nbsp;2004. Customers can take all
or a selection of the options. The initial cost is &#165;10,000, and the monthly fee ranges
from &#165;30,000 to &#165;70,000 for the first 50 e-mail accounts and an additional fee per
account after the first 50 e-mail accounts ranges from &#165;200 to &#165;850.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Post Office Service.</I></U> IIJ Post Office Service is an e-mail operation
outsourcing service performed by our e-mail server, enabling a customer to allocate and
maintain a number of e-mail accounts under its own domain name for its employees,
members or other relevant users. The customer can administer e-mail accounts online
through our customer support Web interface. In December&nbsp;2002, we added a virus checking
option for incoming and outgoing</TD>
</TR>


</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">24
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>e-mails and an &#147;audit option&#148; to check the content of outgoing e-mails and suspend
the ones containing keywords specified in advance. In addition, we added a spam
checking option which we started to provide in October&nbsp;2004 for no additional charge to
customers contracting the virus checking option or an &#147;audit option&#148;.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Mail Box Service.</I></U> IIJ Mail Box Service is also an e-mail operation
outsourcing service performed by our e-mail server. Unlike IIJ Post Office Service,
customers do not have to obtain their own domain names. A customer can administer
e-mail accounts online through our customer support Web interface.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>E-mail distribution services.</I></U> We offer other e-mail outsourcing services,
such as services for e-mail distribution to large numbers of e-mail addresses and
mailing list functions.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Web Standard.</I></U> The IIJ Web Standard allows customers to use their own
domain names while providing them with up to 200 megabytes of web hosting space. By
limiting specifications, the pricing of the service is kept to a minimum &#165;5,000 per
month. Additionally, careful traffic management of the storage space ensures a
high-performance web-server environment for users is ensured. This service mainly
targets small- and medium-sized enterprises.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>Web hosting services.</I></U> We offer other web hosting services, such as
customized web hosting services and functions to distribute computer files using our
ftp servers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Download Site Service.</I></U> IIJ Download Site Service is a hosting service
dedicated to high-volume content downloads from the Internet. The service started on a
trial basis in November&nbsp;2001, and the full-fledged service was launched in February
2002. A dedicated hosting server and dedicated bandwidth are established for each
contract to ensure constant stable performance. With disk capacity of 500 megabytes per
contract on our hosting servers, access is provided at a maximum transmission bandwidth
per contract of up to 80 Mbps. The initial charge for the service is &#165;50,000. The
monthly charge ranges between &#165;60,000 and &#165;340,000, depending upon the bandwidth. In
April&nbsp;2003, we added the option of 1 Gbps maximum transmission speed for an additional
fee.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ URL Filtering Service.</I></U> IIJ URL Filtering Service is a service enabled
by the use of IIJ&#146;s proxy server which blocks access to websites deemed inappropriate.
The initial cost for the service is &#165;30,000, and the monthly fee is &#165;40,000 as a basic
fee plus an additional fee depending on the number of users in the customer&#146;s internal
network.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJ Document Exchange Service.</I></U> This service is an online storage service
with which customers can upload files onto IIJ&#146;s storage server and share them with
authorized users. The initial cost is &#165;40,000 and the monthly fee is &#165;20,000, which
includes 1GB of disk space and 50 accounts. The fee for each additional set of 10
accounts is &#165;3,000, and each 1GB of additional disk space is &#165;10,000 per month.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>DNS services.</I></U> We offer domain name related services that consist of domain
name administration services and domain name server outsourcing services. Domain names
such as &#147;.jp&#148;, &#147;.com&#148;, &#147;.net&#148; and &#147;.org&#148; are available.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>Streaming services.</I></U> We offer Internet streaming services for live
broadcasts over the Internet, as well as streaming server hosting services.</TD>
</TR>


</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">25
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <U><I>IIJmio Safety Mail Service.</I></U> IIJ<I>mio </I>Safety Mail Service, launched in
December&nbsp;2001, is a standard e-mail service with an anti-virus function for individual
users. The service employs the InterScan VirusWall developed by Trend Micro
Incorporated, and features POP/SMTP over SSL which provides secure e-mail transmission
by encrypting the e-mail transmission between the users and our mail server, in
addition to SMTP authentication, which ensures a higher level of encryption and
authorization than what is currently available for general use. In February&nbsp;2005, we
started to provide spam check function without an additional charge. There is no
initial charge for IIJ<I>mio </I>Safety Mail Service and the monthly charge is &#165;500.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Internet data center services. </I></B>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&#146;
requirements.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Customer support and help desk solutions. </I></B>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.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>IP Phone. </I></B>We began IP Phone service for individual users of IIJ4U and IIJ<I>mio </I>in May
2003, and for corporate users who are using IIJ&#146;s Internet connectivity services
through NTT FLET&#146;S network in December&nbsp;2003. The telephone service is provided via NTT
FLET&#146;S network and customers can make telephone calls with other users connected to
NTT FLET&#146;S network or legacy telephones by interconnection with the Publicly Switched
Telephone Network, the legacy telephone network.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>IIJ EPC Network Service. </I></B>IIJ EPC Network Service is a service to provide network
and server systems for our customers to use Radio Frequency Identification Tag
(&#147;RFID&#148;). We offer three types of services. &#147;Premium&#148; is a service to provide
customized systems for our customers. &#147;Standard&#148; is a service to provide our systems
to provide our systems at our data centers and &#147;Trial&#148; is a service to provide RFID
functions to our customers for their trial usage.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Systems Integration</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer systems integration tailored to our customers&#146; requirements, which include
consulting, project planning, systems design, construction of network systems and systems and
operations outsourcing. Our systems integration mainly focus on Internet business systems and
Intranet and Extranet corporate information systems. We have built a strong record in various
business fields.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Examples of systems integration are:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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,</TD>
</TR>


</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">26
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>voice over IP systems to transmit voice among customer branch offices over
Internet,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>outsourcing of large scale e-mail servers or systems to detect or delete
e-mails with viruses or spam or record all of e-mails incoming to and outgoing
from customers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>construction of wireless local area network (&#147;LAN&#148;),</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>online brokerage systems for securities firms,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>outsourcing of websites for online businesses,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>re-construction of overall corporate network systems suited to increased
traffic data, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="10%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>consultation on corporate network security.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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&#146;s
network and systems with three engineering focuses: reliability, flexibility and extendibility.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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&#146;s content, we take care of the customer&#146;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Equipment Sales</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to the Internet connectivity and value-added services and systems integration, we
sell our network equipment for connection to the Internet and usage of additional features, which
was developed in-house.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>SEIL Series. </I></B>We started to sell our high-end routers SEIL Series, which was developed
in-house, in October&nbsp;2001 through sales agents. The series includes four types, SEIL/TURBO,
SEIL/plus, SEIL/neu 128 and SEIL DOCK 2. SEIL/TURBO has a high throughput and enhanced VPN features
and is placed in customer&#146;s main office or data center when a customer connects its branch and
remote offices. SEIL/plus is
</DIV>

<P align="center" style="font-size: 10pt">27
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">suitable for broadband connection and is placed mainly in customer&#146;s branch and remote
offices. SEIL/neu 128 is suitable for ISDN or 64 k/128 kbps leased line based Internet connection.
SEIL DOCK 2 is equipment to provide a back-up feature to customers. By combining SEIL/TURBO and
other SEIL Series routers, we are able to provide Internet-VPN solutions connecting corporate
branches and remote offices of medium and small enterprises. In addition, we provide rental
services for these routers directly to customers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also sell third-party equipment to meet the one-stop needs of our customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Network</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The primary components of our network are:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our backbone, which includes leased lines and network equipment, such as advanced
Internet routers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Points of Presence (&#147;POPs&#148;) in major metropolitan areas in Japan,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Internet data centers, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a network operations center (&#147;NOC&#148;).</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Backbone</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Leased lines</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our network is anchored by our extensive Internet backbone in Japan and between Japan and the
United States. As of July&nbsp;7, 2006, we had a total capacity of 7.2 Gbps between Japan and the United
States and 600 Mbps between Japan and China. 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We lease high-capacity, high-speed digital transmission lines in Japan from various carriers.
The table below shows our backbone cost.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Backbone Cost</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19" style="border-bottom: 1px solid #000000"><B>For the fiscal year ended March 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Backbone cost (thousand yen)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">5,656,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">5,235,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">4,719,638</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,550,885</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,516,322</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Network upgrades</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a policy, we put a high priority to maintain the quality of our networks and continuously
examine the necessity of upgrades of our networks.
</DIV>

<P align="center" style="font-size: 10pt">28
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Network equipment</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We use advanced equipment in our network. Our primary routers in our network are Cisco
routers. The size of our routers varies depending on the number of customers and volume of traffic
served by our POPs. At each POP we connect our dedicated line and dial-up access routers to Cisco
backbone routers which then transmit and receive information throughout our network. We primarily
lease our network equipment under capital lease arrangements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Points of Presence</I></B><I>. </I>POPs are the main points at which our customers connect to our backbone.
We provide Internet connectivity from our POPs to commercial and residential customers through
leased lines and dial-up connections over local exchange facilities. As of July&nbsp;7, 2006, we had 13
primary POPs which allow for dedicated access and include the main Internet backbone routers that
form our network. As of the same date, we also had 17 POPs for dial-up access. The number of POPs
for dial-up access include one POP that can be accessed from anywhere in Japan with the minimum
local telephone charge.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many of our POPs are located in, or in close physical proximity to, &#147;carrier hotels&#148;. Carrier
hotels are facilities where we and other major carriers and ISPs have POPs. These are mainly
located at facilities of various carriers in Japan like NTT Communications, KDDI Corporation
(&#147;KDDI&#148;) and Japan Telecom Co., Ltd. We lease the physical space from these carriers or use such
space under other arrangements with terms ranging from one to two years and terminable by either
party on three to six months&#146; 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Internet Data Centers. </I></B>We operate twelve Internet data centers which we use to offer our
value-added data center services, three 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. All of these
data centers are leased from NTT Communications, CRC Solutions Corp. and KDDI.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we have invested in data center development outside Japan. We have entered into
the &#147;i-Heart&#148; joint venture with Samsung Corp., which operates in Korea with a total investment by
us of &#165;89&nbsp;million in May&nbsp;2000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Network operations center and technical and customer support. </I></B>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&#146; 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Our Group Companies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer our services directly and together with our group companies. Our group companies work
closely together in providing total network solutions to our customers. We collaborate on the
development of various services and products and market our services and products together as a
group. However, our group companies specialize in different aspects of the Internet and networking.
Our customers&#146; main point of
</DIV>

<P align="center" style="font-size: 10pt">29
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">contact is IIJ itself. We then draw upon the resources and special capabilities of the group
companies to offer total Internet solutions.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The table below sets out our group companies, including our subsidiaries and principal equity
method investees and our direct and indirect ownership of each of them as of July&nbsp;7, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Proportion of ownership</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Company Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>and voting interest</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">IIJ Technology Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">72.1</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">IIJ America Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">97.6</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Care, Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">59.3</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">IIJ Financial Systems Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">72.1</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Internet Multifeed Co.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">29.4</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">atom Co., Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">40.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Internet Revolution Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">30.0</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>IIJ Technology Inc.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IIJ Technology Inc. (&#147;IIJ-Tech&#148;) is an important element in our provision of total network
solutions to our customers. IIJ-Tech is incorporated under the laws of Japan. IIJ-Tech provides
comprehensive network systems integration and consulting services, focusing on design, operation,
and consulting for corporate networks (LANs, enterprise networks, Intranets) and their security
systems. IIJ-Tech assists customers in creating private IP networks, such as Intranets or virtual
private networks, that securely isolate internal network traffic from public Internet traffic and
provide each site on the private IP network access to other sites as well as to the Internet.
IIJ-Tech can integrate an organization&#146;s multiple sites in different locations in Japan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On April&nbsp;27, 2004, IIJ-Tech completed a private placement of 10,000 shares of common stock to
us and other shareholders for an approximate aggregate amount of &#165;1,000&nbsp;million. We accepted most
of the placement. Our ownership increased from 64.1% to 69.0% during the fiscal year ended March
31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In October&nbsp;2005, IIJ-Tech issued 1,235 new shares of common stock to IIJ Media Communications
Inc. (&#147;IIJ-MC&#148;) when a portion of IIJ-MC&#146;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%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IIJ-Tech had sales of approximately &#165;18,441&nbsp;million for the fiscal year ended March&nbsp;31, 2006.
As of March&nbsp;31, 2006, IIJ-Tech had 214 full-time employees, and 32 were seconded from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>IIJ America Inc.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IIJ America Inc. (&#147;IIJ-A&#148;) is a U.S.-based ISP, catering mostly to U.S.-based operations of
Japanese companies. IIJ-A is incorporated under the laws of the state of California.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IIJ-A had revenues of $9,371 thousand for the fiscal year ended December&nbsp;31, 2005. As of March
31, 2006, IIJ-A had 22 employees, 4 of whom were seconded from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Net Care, Inc.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net Care, Inc. (&#147;Net Care&#148;) provides a broad array of support services, from monitoring and
troubleshooting to network operations and an end-user help desk.
</DIV>

<P align="center" style="font-size: 10pt">30
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On April&nbsp;27, 2006, our board of directors approved purchase of 450 shares of Net Care from its
minority shareholders. We purchased the shares on April&nbsp;28, 2006. As a result, our ownership
increased from 57.0% to 59.3%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net Care had sales of approximately &#165;2,367&nbsp;million for the fiscal year ended March&nbsp;31, 2006.
As of March&nbsp;31, 2006, Net Care had 165 employees, 12 of whom were seconded from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>IIJ Financial Systems Inc.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IIJ Financial Systems Inc. (&#147;IIJ-FS&#148;) is a company wholly owned by IIJ-Tech, whose business
was acquired from Yamatane Co., Ltd. in October&nbsp;2004. IIJ-FS provides integration and operation of
security systems.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IIJ-FS had revenues of &#165;2,624&nbsp;million for the fiscal year ended March&nbsp;31, 2006. As of March
31, 2006, IIJ-FS had 73 employees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Internet Multifeed Co.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Internet Multifeed Co. (&#147;Multifeed&#148;) provides location and facilities for directly connecting
high-speed Internet backbones with content servers to make distribution on the Internet more
efficient. Multifeed is incorporated under the laws of Japan. Its technology was developed jointly
with the NTT Group. Multifeed launched new IX (Internet eXchange &#151; where major ISPs exchange
network traffic) services named JPNAP in Tokyo in May&nbsp;2001 and expanded the service to Osaka in
December&nbsp;2001.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Multifeed had sales of approximately &#165;2,376&nbsp;million for the fiscal year ended March&nbsp;31, 2006.
As of March&nbsp;2006, Multifeed had 23 full-time employees, and 4 employees were seconded from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>atom Co., Ltd.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;atom Co., Ltd. (&#147;atom&#148;), which is incorporated under the laws of Japan, is primarily a
web-page design company that aims to define new forms of design work using digital technology in
all network-based aspects of design from content production to graphic design.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;atom had sales of approximately &#165;797&nbsp;million for the fiscal year ended March&nbsp;31, 2006. As of
March&nbsp;31, 2006, atom had 65 employees, 1 of whom was seconded from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Internet Revolution Inc.</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;1, 2006, we and Konami Corporation established a joint venture company, Internet
Revolution Inc. (&#147;i-revo&#148;) to operate comprehensive sites. We invested &#165;750,000 thousand in i-revo
and owned 30% ownership as March&nbsp;31, 2006. We account i-revo as an equity method investee in our
consolidated financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;i-revo had sales of approximately &#165;3&nbsp;million for the fiscal year ended March&nbsp;31, 2006. As of
March&nbsp;31, 2006, i-revo had 34 employees, 10 of whom was seconded from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Capital Expenditures</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<P align="center" style="font-size: 10pt">31
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>For the fiscal year ended March 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11"><B>(millions of yen)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital
expenditures,
including acquisition
of assets by entering
into capital leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,523</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">5,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">4,762</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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 &#165;110&nbsp;million, &#165;144&nbsp;million and &#165;119
million for the fiscal years ended March&nbsp;31, 2004, 2005 and 2006, respectively. The losses for the
fiscal years ended March&nbsp;31, 2004 and 2005 were mainly due to disposal of back-office systems and
telephone rights. The loss for the fiscal year ended March&nbsp;31, 2006 was mainly due to disposal of
software, such as for back-office systems.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Seasonality</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;5.D., &#147;Trend Information &#151; Factors Affecting Our Future Financial Results &#151; Systems
integration revenues, including related equipment sales revenues&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Sales and Marketing</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our sales headquarters are in Tokyo. We also have branches in Osaka, Nagoya, Sapporo, Sendai,
Toyota, Toyama, Hiroshima, Fukuoka and Okinawa in order to cover the major metropolitan areas in
which the majority of large Japanese companies operate. As of March&nbsp;31, 2006, we had approximately
200 people working in sales and marketing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We organize our sales personnel into four distinct, separate divisions, Product and Marketing,
Operation Management Coordination Division and Strategic Sales. In addition, we have nine branch
offices.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales Divisions consists of the following:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Three of Divisions focus on our total network solutions and work with large
corporate clients, including telecommunications carriers and ISPs, financial
institutions, manufacturers, government institutions, universities and other schools,
or focus on the expansion of sales agents for our services and network equipment. In
order to provide total network solutions, personnel in our sales divisions work
closely with other IIJ Group companies such as IIJ-Tech as well as with other
important service providers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>One Division focuses on total network solutions and works with governmental
institutions.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Product and Marketing mainly makes and conducts promotion plans on our products and
services. Operation Management Coordination Division handles administrative issues. Strategic Sales
is responsible for the planning and management on the sales figures, processes and other
information.
</DIV>

<P align="center" style="font-size: 10pt">32
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Customers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have approximately 6,500 business and other institutional customers and approximately
630,000 individual subscribers, which includes individuals subscribing to OEM services, as of March
31, 2006. Our main customers continue to be major corporations, including ISPs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Research and Development</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have always focused on advancing the use of networking technologies, including the
Internet, in Japan. Many of our engineers regularly participate in industry organizations and
government-sponsored research projects such as researching new Internet protocol standards, namely
Internet Protocol Version 6 (IPv6). 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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&nbsp;31, 2006, 2005 and 2004, our research and
development expenses were &#165;158&nbsp;million, &#165;199&nbsp;million and &#165;358&nbsp;million, respectively, most of which
was personnel expense. The level of research and development expenditures is low in relation to our
total costs primarily because we do not engage in extensive research and development of new
technologies and products that require large investments. Rather, as noted above and as set forth
in more detail below, we are intensively engaged in research and development related to our ongoing
business. We focus on monitoring developments in the industry and in developing new and innovative
services and applications by using and modifying existing technologies and products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of March&nbsp;31, 2006, we had approximately 100 people working in our research and development
organization, including the staff 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Research and Development Organization</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have organized our research and development staff to promptly and effectively address the
rapidly changing technological environment of the Internet. Research and development on practical
applications of new and developing technologies is the responsibility of the Applied Research and
Development Department.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>IIJ Research Laboratory. </I>We established the IIJ Research Laboratory in April&nbsp;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. The output of the joint undertaking with WIDE project is distributed freely in order to
promote the introduction of IPv6 on a worldwide scale. IPv6 is designed to solve problems inherent
in the current version of IP, which is IPv4, such as IP address space depletion. In addition, IPv6
is expected to provide new network features such as ubiquitous networking.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Applied Research and Development Department. </I>Applied Research and Development Department
engages in the research and development of technologies to be applied to our services and
solutions, collects information on, evaluates on the new technology and conducts business expansion
based on the technology IIJ Research Laboratory developed.
</DIV>

<P align="center" style="font-size: 10pt">33
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Research and Development Strategy</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our primary research and development objective is to continue to develop innovative services,
applications and products that will meet the current and future demands of our customers and that
will continue to be at the forefront of the Internet industry in Japan. In furtherance of this
objective, our research and development efforts currently are focused on a variety of projects,
including:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>continued improvement of our SEIL router and SEIL Management Framework, systems
which we developed specifically to be integrated into IIJ&#146;s network-related services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>research relating to the methodology of configuration of routers and other servers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>research relating to behavior of Internet routing systems,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>software development for management of border gateway protocol, or BGP, which is
protocol that allows routers to exchange routing information on the TCP/IP network,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>research for Internet traffic monitoring and management,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>development of software and evaluation of hardware relating to improving the
operations of routers located on our customers&#146; premises, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>research and development of IPSec, which is a secure version of IP that provides
secure communication channels over the Internet.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A second research and development objective is to continue participating in or otherwise
closely monitoring the new products, developments and initiatives of manufacturers and
standards-setting and research groups. Through these efforts, we seek to ensure that we have timely
and effective access to new technologies and that we implement these technologies effectively.
Because the rate of change in technology relevant to our business is so rapid, we believe that the
sophistication and experience of our research and development personnel is an important part of our
success.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Proprietary Rights</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Licenses</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For us to provide certain services to our customers, we have been a licensee under agreements
with other suppliers, such as Check Point Software Technologies Ltd., WatchGuard Technologies,
Inc., Trend Micro Incorporated, RSA Security Inc., NRI Secure Technologies, Ltd. and MX Logic, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have purchased licenses from the companies in accordance with customer demands for our
services.
</DIV>

<P align="center" style="font-size: 10pt">34
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Trademarks</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have applied for trademark registrations of our corporate name, &#147;Internet Initiative Japan
Inc.&#148; and certain other corporate and product names in Japan, the United States and certain
European countries. As of July&nbsp;7, 2006, 35 registrations have been granted, with 6 pending
applications.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Patents</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have applied for patent registrations in relation to our technology in Japan and the
United States. As of July&nbsp;5, 2006, 4 registrations have been granted, with 6 pending applications.
The latest acquired patent is for centralized network management system originally developed by us
and is implemented in one of our competitive services, SMF (SEIL Management Framework).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Legal Proceedings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2001, a class action complaint alleging violations of the federal securities laws
was filed against us in the United States District Court for the Southern District of New York,
naming as defendants IIJ; Koichi Suzuki, our President, Chief Executive Officer and Representative
Director; Yasuhiro Nishi, our former Director, Chief Financial Officer and Chief Accounting
Officer; and the Goldman Sachs Group Inc. and Morgan Stanley (formerly, Morgan Stanley Dean Witter,
Inc.), both of which served as underwriters of our initial public offering. Similar complaints have
been filed against over 300 other issuers that have had initial public offerings since 1998, and
all such actions have been included in a single coordinated proceeding in the Southern District of
New York. An amended complaint was filed on April&nbsp;24, 2002. The amended complaint alleges, among
other things, that the underwriters of our initial public offering (i)&nbsp;entered into certain alleged
compensation arrangements with the underwriters&#146; clients, such as undisclosed commissions or tie-in
agreements to purchase stock in the after-market, and (ii)&nbsp;engaged in manipulative practices to
artificially inflate the price of our stock in the after-market subsequent to the initial public
offering. The IIJ defendants are named in the amended complaint pursuant to Sections&nbsp;11 and 15 of
the Securities Act of 1933, as amended, and Sections 10(b) and 20(a), and Rule&nbsp;10b-5 of the
Securities Exchange Act of 1934, as amended, on the basis of an alleged failure to disclose the
underwriters&#146; alleged misconduct. The complaint seeks unspecified damages. On July&nbsp;15, 2002, we
joined in an &#145;omnibus&#146; motion to dismiss the amended complaint filed by the issuers and individuals
named in the various coordinated cases. In June&nbsp;2003, we approved a settlement with the plaintiffs
in this matter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We, along with the settling issuer defendants, filed a motion seeking the court&#146;s preliminary
approval of the settlement. The court granted preliminary approval of the settlement on February
15, 2005, subject to certain modifications. On August&nbsp;31, 2005, the court issued a preliminary
order further approving the modifications to the settlement and certifying the settlement classes.
The court also appointed the Notice Administrator for the settlement and ordered that notice of the
settlement be distributed to all settlement class members beginning on November&nbsp;15, 2005. A
settlement fairness hearing took place on April&nbsp;24, 2006. If the court determines that the
settlement is fair to the class members, the settlement will be approved.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The settlement releases us and the individual defendants from liability for the conduct
alleged in the action. Under the settlement, we agreed to assign away, not assert, or release
certain potential claims we may have against our underwriters. As to financial impact on us, the
settlement provides that the class members will be guaranteed $1&nbsp;billion dollars in recoveries by
the insurers of the issuers. In addition to IIJ&#146;s portion of the proposed settlement, some of the
continuing legal expenses incurred in connection with the partial
</DIV>

<P align="center" style="font-size: 10pt">35
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">settlement would be borne by our insurer based on the settlement agreement and an individual
agreement between us and our insurer. Consequently, we believe that there will be no significant
financial impact on us as a result of this matter.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Regulation of the Telecommunications Industry in Japan</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Ministry of Internal Affairs and Communications (&#147;MIC&#148;) regulates the Japanese
telecommunications industry. Carriers, including us, are regulated by the MIC primarily under the
Telecommunications Business Law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>The Telecommunications Business Law</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Telecommunications Business Law, which became effective in 1985, was established for the
purpose of privatization and deregulation in telecommunications business. After several amendments,
the Telecommunications Business Law was considerably amended in July&nbsp;2003. The amendments to the
Telecommunications Business Law, which came into force on April&nbsp;1, 2004, include, among other
things:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the elimination of the classification of Type I Carriers and Type II Carriers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>deregulation of regulations on charges and terms and conditions for providing
services by Carriers; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the introduction of certain terminal-equipment-supplier&#146;s declaration system
regarding technical standard conformity.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Prior Telecommunications Business Law stipulated that the Carriers shall be classified as
either Type I Carrier or Type II Carrier, and imposed regulations in accordance with such
classification of Carriers. Prior Type I Carriers, such as NTT East, NTT West, provided
telecommunications services by establishing their own telecommunications circuit facilities. Prior
Type II Carriers, including us, engaged in the businesses of telecommunications circuit resale and
the provision of Internet services by using the telecommunications facilities of Type I Carriers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;However, from the viewpoint of encouraging telecommunications carriers to carry out diverse
business, etc, the Telecommunications Business Law was amended so as to abolish the classification
of Type I Carriers and Type II Carriers, and thereupon the rules pertaining to services (i.e.,
start-up, abolition, charges and tariffs, etc.) were deregulated in principle while establishing
rules to protect the users, and the rules pertaining to infrastructure were reviewed as necessary
while maintaining the basic framework stipulated under the prior Telecommunications Business Law.
For example, (i)the approval system for business entries and withdrawals was replaced by a
registration/notification system, (ii)regulations pertaining to service offerings, tariff setting
and interconnection between carriers were liberalized, (iii)regulations to protect service users
such as announcement of withdrawal, explanation of important matters on services and swift
processing of complaints were introduced, and (iv)an authorization system allowing priority usage
of public utilities conducive to facilitation of circuit facilities deployment was introduced.
</DIV>

<P align="center" style="font-size: 10pt">36
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes changes by the amendment above in some of the major regulatory
requirements applicable to telecommunications carriers:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp; <B><I>(Before Amendment)</I></B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="27%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="18%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="19%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="21%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Type I Carriers</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Type II Carriers</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" style="border-bottom: 0px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Special Type II</B></TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>General Type II</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Start-up of services
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Permission from
MIC required
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Registration with
MIC required
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Notification to MIC
required</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Rates and charges
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Notification* to
MIC required
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Notification to
MIC required
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Unregulated</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Share acquisition
by foreign
investors
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Unregulated**
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Unregulated
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Unregulated</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Type I Carriers which operate Category I Designated Telecommunications Facilities are
required to receive MIC approval for their Interconnection charges.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">**</TD>
    <TD>&nbsp;</TD>
    <TD>Prior notification is required under the Foreign Exchange and Foreign Trade Law. This is not
applicable to purchasers of ADSs. A one-third foreign ownership restriction is applicable only
to NTT (which was changed from a 20% foreign ownership restriction on November&nbsp;30, 2001).</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp; <B><I>(After Amendment)</I></B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="21%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="41%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Telecommunications Carriers</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Registration required</B></TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Registration exempted</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Start-up of services
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>Registration with
MIC required*
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Notification to MIC required****</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Rates and charges
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Notification to MIC
required**
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Unregulated</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Share acquisition
by foreign
investors
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Unregulated***
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Unregulated</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Before the amendments to the Telecommunications Business Law, we were classified as a Special
Type II Carrier. After the amendments, we are deemed by the effect of Supplementary Provisions to
the amended Telecommunications Business Law to have filed the notification to MIC under the amended
Telecommunications Business Law. In practice, we filed an actual notification to MIC in April&nbsp;2004
according to the request of MIC.
</DIV>


<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Applicable to telecommunications carriers which install certain large scale circuit
facilities unless an exemption applies as designated by the applicable ministerial ordinance
of MIC from the viewpoint of the scale of the telecommunications circuit facilities and the
scope of areas where such telecommunications circuit facilities are installed.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">**</TD>
    <TD>&nbsp;</TD>
    <TD>Applicable to universal services and services which have the control power over the market
provided by the telecommunications carriers which install what is called the &#147;bottle-neck
facilities&#148;.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>Telecommunications carriers which operate Category I Designated Telecommunications Facilities
are required to receive MIC approval for their Interconnection terms and charges.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">***</TD>
    <TD>&nbsp;</TD>
    <TD>Prior notification is required under the Foreign Exchange and Foreign Trade Law for
acquisition of shares of telecommunications carriers to which registration for start-up
services is applicable. This is not applicable to purchasers of ADSs. A one-third foreign
ownership restriction is applicable only to NTT.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">****</TD>
    <TD>&nbsp;</TD>
    <TD>Currently, carriers which meet the following two requirements established by the ministerial
ordinance of MIC are exempted from registration with MIC: (i)&nbsp;areas of installation of
terminal-related transmission facilities are limited to only within a single municipal (city,
town or village) and (ii)&nbsp;areas of installation of relay-related transmission facilities are
limited to only within a single prefecture.</TD>
</TR>

</TABLE>




<P align="center" style="font-size: 10pt">37
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Regulations of telecommunications carriers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following regulations apply to telecommunications carriers defined in the
Telecommunication Business Law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Start-up of Services</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Carriers with registration</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Registration with the MIC required for telecommunications carriers which exceed
criteria established by MIC&#146;s ordinance in relation to the scale of the
telecommunications circuit facilities and the scope of areas where such
telecommunications circuit facilities are installed.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Other Carriers</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Notification to the MIC required for telecommunications carriers other than the above.
We do business under this category.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Charges and Tariffs</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Unregulated, in general. The requirement that standard terms and conditions be
applied equally to all users was repealed.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Prior notification to the MIC required for Basic Telecommunications Services
(universal services such as basic fee, local call and emergency telecommunication
service) and Designated Telecommunications Services (i.e., services which have the
controlling power over the market provided by the telecommunications carriers which
install what is called the &#147;bottle-neck facilities&#148;). Among the Designated
Telecommunications Services, the telecommunications services to be specified by MIC at
least once a year will be subject to price cap regulations, under which carriers will
be required to obtain approval from the MIC if a proposed change of charge exceeds the
price cap. Providing these telecommunications services other than pursuant to the
terms and conditions notified to the MIC is prohibited, unless minor exceptions apply.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Articles of Interconnection Agreements</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Unregulated, in general.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Approval from the MIC required for Category I Designated Telecommunications Facilities.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Prior notification to the MIC required for Category II Designated
Telecommunications Facilities.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Telecommunications Facilities of Carriers.</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>A telecommunications carrier that owns telecommunications circuit facilities must
maintain its telecommunications facilities (except telecommunications facilities
stipulated in MIC&#146;s ordinances as those having a minor influence on the users&#146; benefit
in the cases of damage or failure thereof) in conformity with the technical standards
provided in the applicable MIC&#146;s ordinances. Such Carriers shall confirm itself that
said telecommunications facilities are in compliance with such technical standards
specified in the applicable MIC&#146;s ordinances.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">38
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>A telecommunications carrier that provides Basic Telecommunications Services must
maintain their telecommunications facilities for provision of their Basic
Telecommunications Services in conformity with the technical standards provided in the
applicable MIC&#146;s ordinances.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Telecommunications Carriers that own telecommunications circuit facilities or
provide Basic Telecommunications Services must establish their own administrative
rules in accordance with MIC&#146;s ordinances in order to secure the reliable and stable
provision of telecommunications services. These administrative rules must regulate the
operation and manipulation of telecommunications facilities and the safeguarding,
inspecting and testing regarding the construction, maintenance and administration of
telecommunications facilities, etc. as provided for by the ministerial ordinance of
MIC. Such administrative rules must be submitted to the MIC prior to the commencement
of operations, and changes must be submitted to the MIC after they are implemented
without delay.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Order to Improve Business Activities</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Minister for MIC may, if it is deemed that business activities of a
telecommunications carrier falls under the inappropriate items set forth in the
Telecommunications Business Law, insofar as necessary to ensure the users&#146; benefit or
the public interest, order said telecommunications carrier to take actions to improve
operations methods or other measures.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Right of Way Privilege for Authorized Carriers</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Authorization on the entire or a part of a carrier&#146;s telecommunications business by
MIC for the privileged use of land or other public utilities for circuit facilities
deployment is required. Right of Way privilege is available to carriers irrespective
of registration.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Merger, Business Transfer or Divestiture of Carriers</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Post facto notification to MIC without delay is required.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Business Suspension, Abolition or Dissolution of Carriers</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Post facto notification to MIC without delay is required. Prior announcement of
withdrawals to service users is required in accordance with MIC&#146;s ordinance.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Foreign Capital Participation</I></B>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Unregulated. Prior notification is required under the Foreign Exchange and Foreign
Trade Law for acquisition of shares of telecommunications carriers to which
registration for start-up services is applicable. This is not applicable to purchasers
of ADSs. The one-third foreign ownership restriction is applicable only to NTT.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Organizational Structure.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this item is in &#147; &#151; Our Group Companies&#148; above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Property, Plants and Equipment.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by this item is in &#147; &#151; Network&#148; above.
</DIV>

<P align="center" style="font-size: 10pt">39
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="106"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4A. Unresolved Staff Comments</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>
<DIV align="left">
<A name="107"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;5. Operating and Financial Review and Prospects.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Operating Results.</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>You should read the following discussion of our financial condition and results of operations
together with Item&nbsp;3.A. of this annual report on </I><I>Form 20-F</I><I> 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&nbsp;3.D.
of this annual report on </I><I>Form 20-F</I><I>.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are a leading provider of a comprehensive range of Internet connectivity services and
network solution services in Japan. We were founded in December&nbsp;1992 and began offering Internet
connectivity services commercially in July&nbsp;1993. We were one of the first commercial ISPs in Japan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our primary sources of revenues are connectivity services, value-added services, systems
integration and equipment sales. Connectivity services consist of dedicated Internet-access
services and dial-up Internet-access services. For value-added services, we provide services such
as network security services, mail and web server hosting services, managed router services and
Internet data center services. For systems integration, we provide systems development and
integration for business-to-business and business-to-consumer-networks, and outsourcing projects.
For equipment sales, we provide equipment as part of our provision of total network. Substantially
all of our revenues are from our customers in Japan, and we are the main point of contact for
customers for these various services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total revenues were &#165;38.8&nbsp;billion, &#165;41.7&nbsp;billion and &#165;49.8&nbsp;billion for the fiscal years ended
March&nbsp;31, 2004, 2005 and 2006, respectively. The increases in revenues for each of the two years
ended March&nbsp;31, 2006 as compared to the previous fiscal years mainly reflect an increase in
value-added services and systems integration revenues.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating income for the fiscal year ended March&nbsp;31, 2006 was &#165;2.4&nbsp;billion, an improvement
from operating income of &#165;1.2&nbsp;billion for the fiscal year ended March&nbsp;31, 2005 and operating loss
of &#165;1.4&nbsp;billion in the fiscal year ended March&nbsp;31, 2004. The improvement compared to the previous
year is mainly due to an increase in relatively higher-margin value-added services and systems
integration.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net income for the fiscal year ended March&nbsp;31, 2006 was &#165;4.8&nbsp;billion, an improvement from net
income of &#165;2.9&nbsp;billion for the fiscal year ended March&nbsp;31, 2005, and a net loss of &#165;2.3&nbsp;billion for
the year ended March&nbsp;31, 2004. The improvement in net income is mainly due to an increase in
operating income and an increase in gains from the sale of available-for-sale securities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have also generated cash in the last three fiscal years from sales of equity. On June&nbsp;26
and September&nbsp;16, 2003, we completed private placements of a total of 15,880 shares of our common
stock to investors in Japan for an aggregate amount of &#165;13.3&nbsp;billion for working capital and
repayment of our outstanding 1.75% convertible notes due on March&nbsp;31, 2005. As a result of these
transactions, the total number of our issued shares of common stock increased to 38,360 and the
Nippon Telegraph and Telephone (&#147;NTT&#148;) Group&#146;s total shareholding increased to 31.6%. On March&nbsp;31,
2005, we redeemed the remainder of
</DIV>

<P align="center" style="font-size: 10pt">40
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">our 1.75% convertible notes due March&nbsp;2005 using our cash and cash equivalents as well as
available-for-sale securities.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;2, 2005, we listed on the Mothers market of the Tokyo Stock Exchange (&#147;TSE&#148;). In
connection with the listing, we issued 12,500 new shares of common stock for an amount of &#165;6.0
billion. As we conducted a 1 to 5 stock split on October&nbsp;11, 2005, the total number of our issued
shares of common stock increased to 204,300.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In order to provide our customers with total network solutions, we provide our services
directly or by working together with the subsidiaries and affiliates of IIJ Group. We refer to our
subsidiaries and certain affiliates as our group companies, and we have invested heavily in and
exercise significant influence over these companies. We consolidate the results of operations of
four subsidiaries included among our group companies <FONT style="font-family: Symbol">&#190;</FONT> IIJ Technology Inc. (&#147;IIJ-Tech&#148;), IIJ
America Inc. (&#147;IIJ-A&#148;), Net Care, Inc. (&#147;Net Care&#148;) and IIJ Financial Systems Inc. We account for
our investments in the affiliated companies by the equity method.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There have been significant changes in the scope of our consolidated subsidiaries and equity
method affiliates in the last three fiscal years. On August&nbsp;20, 2003, Crosswave Communications Inc.
(&#147;Crosswave&#148;), our former equity method investee, filed a voluntary petition for the commencement
of corporate reorganization proceedings in Japan and accordingly, we no longer had the ability to
exercise significant influence over the operating and financial policies of Crosswave thereafter.
For the fiscal year ended March&nbsp;31, 2003, we wrote off our equity method investment as well as a
&#165;5.0&nbsp;billion security deposit advanced to Crosswave in connection with financing provided by four
Japanese commercial banks. In December&nbsp;2003, Crosswave transferred its business operations to NTT
Communications Corporation. We further wrote off &#165;1.7&nbsp;billion of outstanding loans extended to
Crosswave and &#165;0.4&nbsp;billion of accounts receivable owned to us by Crosswave in the fiscal year ended
March&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On October&nbsp;1, 2005, IIJ Media Communications Inc. (&#147;IIJ-MC&#148;), our former consolidated
subsidiary, was merged into us after a portion of IIJ-MC&#146;s business was transferred to IIJ-Tech,
our consolidated subsidiary. Asia Internet Holding Co., Ltd. (&#147;AIH&#148;), our former equity method
investee, became our wholly owned consolidated subsidiary, and was merged into us on October&nbsp;1,
2005. In each of the mergers, we were the surviving company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;1, 2006, we established a joint venture company, Internet Revolution Inc.
(&#147;i-revo&#148;), with Konami Corporation, with the purpose of operating comprehensive portal sites. We
invested &#165;750&nbsp;million and hold 30.0% of the company. i-revo is an equity method investee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For a discussion of factors affecting our future financial results, see &#147;Item. 5.D. Trend
Information&#148;.
</DIV>

<P align="center" style="font-size: 10pt">41
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Results of Operations</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As an aid to understanding our operating results, the following tables show items from our
statement of operations for the periods indicated in millions of yen amounts (or thousands of U.S.
dollars) and as a percentage of total revenues.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="26" style="border-bottom: 1px solid #000000"><B>Fiscal year ended March 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: px solid #000000"><B>(millions of yen except for percentage data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(thousands of</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>U.S.</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>dollars)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">REVENUES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Connectivity and value-added services
revenues:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Dedicated access</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,862</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">33.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">27.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,625</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">21.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">90,443</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Dial-up access</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,088</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,937</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,674</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,760</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Value-added</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53,200</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,118</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,169</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,674</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,272</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total connectivity and
value-added services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,223</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197,675</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Systems integration, including related
equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,848</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,854</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">200,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,085</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,262</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,703</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">424,009</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">COST AND EXPENSES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of connectivity and value-added
services:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Backbone cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,931</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Local access line cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,040</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,801</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other connectivity cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,422</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,361</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,941</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,721</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,160</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,270</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,468</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72,073</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total cost of connectivity and
value-added services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,078</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">170,906</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of systems integration, including
related equipment sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Cost of equipment sales related to
systems integration</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,546</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,591</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,568</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,306</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123,675</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total cost of systems integration</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,120</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">154,243</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,111</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,818</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,987</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total cost of revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,245</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">88.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">83.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">82.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">349,136</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sales and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,528</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,080</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,213</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">General and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,098</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,790</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Research and development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">358</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">199</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,346</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,229</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">103.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,455</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">403,485</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OPERATING INCOME (LOSS)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,450</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3.7</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,248</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,411</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,524</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OTHER INCOME (EXPENSES):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(702</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.9</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(437</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.9</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,723</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign exchange gains (losses)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net gain on other investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,439</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,198</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,219</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other &#151; net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">128</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,622</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Other income &#151; net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">982</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,967</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,259</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INCOME (LOSS)&nbsp;FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY INTERESTS AND
EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(468</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,379</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,783</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">42
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="26" style="border-bottom: 1px solid #000000"><B>Fiscal year ended March 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 0px solid #000000"><B>(millions of yen except for percentage data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(thousands of</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>U.S.</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>dollars)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INCOME TAX EXPENSE</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">257</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">MINORITY INTERESTS IN (EARNINGS)&nbsp;LOSSES OF
SUBSIDIARIES</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(109</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.3</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(354</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.7</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,012</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equity method net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(286</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.8</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(33</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.1</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(117</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Impairment loss on advance to Crosswave</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,720</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4.4</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total equity in net loss of
equity method investees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,006</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5.2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(33</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.1</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(117</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NET INCOME (LOSS)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,271</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5.9</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">7.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">9.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Year Ended March&nbsp;31, 2006 Compared to the Year Ended March&nbsp;31, 2005</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Total revenues</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our total revenues increased 19.4% to &#165;49.8&nbsp;billion for the fiscal year ended March&nbsp;31, 2006
from &#165;41.7&nbsp;billion for the previous fiscal year. These increases were primarily due to an increase
in value-added services and systems integration revenues.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Connectivity and value-added services revenues. </I>Revenues from connectivity services and
value-added services, which comprise our dedicated access, dial-up access, value-added services and
other services, increased 3.3% to &#165;23.2&nbsp;billion for the fiscal year ended March&nbsp;31, 2006 from &#165;22.5
billion for the previous fiscal year.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Dedicated access. </I>Revenues from dedicated access services decreased 6.6% to &#165;10.6
billion for the fiscal year ended March&nbsp;31, 2006 from &#165;11.4&nbsp;billion for the previous
fiscal year. This decrease reflected a decrease of revenues of &#165;468&nbsp;million from the
interconnection of IIJ&#146;s network with AIH, our former equity method investee, which
resulted from the consolidation of AIH&#146;s revenues following the merger of AIH into
IIJ. The decrease is also due to the decline in unit price per bandwidth.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Dial-up access. </I>Revenues from dial-up access services decreased 9.0% to &#165;2.7
billion for the fiscal year ended March&nbsp;31, 2006 from &#165;2.9&nbsp;billion for the previous
fiscal year. This decrease was primarily the result of declining revenues from
services for individuals such as IIJ4U Service. The revenues from IIJ4U decreased by
&#165;0.1&nbsp;billion from the previous fiscal year.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Value-added services. </I>Our value-added services revenues increased 24.9% to &#165;6.2
billion for the fiscal year ended March&nbsp;31, 2006 from &#165;5.0&nbsp;billion for the previous
fiscal year. This increase was mainly due to a steady increase in revenues from
solutions such as data center services, security and e-mail related outsourcing
services and network related solutions such as SEIL and SEIL Management Framework,
along with projects to connect customers&#146; multiple operational sites. The steady
increase is affected by an increase in demand for outsourcing services by corporate
customers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Other. </I>Other revenues, which included rental fees for network equipment, customer
support service, and sale of Wide-area Ethernet services, amounted to &#165;3.7&nbsp;billion for
the fiscal year ended March&nbsp;31, 2006, a 15.9% increase from the previous fiscal year.
The increase was mainly</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">43
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>due to a continuous increase in sales of Wide-area Ethernet services which increased by
43.8% compared to the previous fiscal year.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Systems integration revenues. </I>Our revenues from systems integration, which include equipment
sales related to systems integration, increased 48.3% to &#165;23.5&nbsp;billion for the fiscal year ended
March&nbsp;31, 2006 from &#165;15.9&nbsp;billion for the previous fiscal year. The increase was mainly due to a
significant increase in one-time revenues from the design and construction of large-scale network
systems for corporate customers and a continuous increase in recurring revenues from the operation
and maintenance of the systems.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Equipment sales. </I>Our equipment sales decreased 8.3% to &#165;3.1&nbsp;billion for the fiscal year ended
March&nbsp;31, 2006 from &#165;3.4&nbsp;billion for the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Total cost of revenues</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total cost of revenues increased 17.9% to &#165;41.0&nbsp;billion for the fiscal year ended March&nbsp;31,
2006 from &#165;34.8&nbsp;billion for the previous fiscal year. The increase was mainly because cost of
systems integration revenues increased corresponding with the significant increase in systems
integration revenues, while the cost of connectivity and value-added services revenues slightly
increased compared to the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of connectivity and value-added services revenues</I>. Cost of connectivity and value-added
services revenues increased 3.0% to &#165;20.1&nbsp;billion for the fiscal year ended March&nbsp;31, 2006 from
&#165;19.5&nbsp;billion for the previous fiscal year. The gross margin in connectivity and value-added
services revenues increased to 13.5% for the fiscal year ended March&nbsp;31, 2006 from 13.3% for the
previous fiscal year. This increase is mainly a result of an increase in revenues from relatively
higher-margin value-added services and a decrease in backbone costs. Local access line costs
increased due to steady revenue growth in Wide-area Ethernet services. Backbone costs decreased
1.0% to &#165;3.5&nbsp;billion for the fiscal year ended March&nbsp;31, 2006 from &#165;3.6&nbsp;billion for the previous
fiscal year. Local access line costs increased 12.8% to &#165;4.6&nbsp;billion from &#165;4.0&nbsp;billion for the
previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of systems integration revenues. </I>Our cost of systems integration revenues increased 48.5%
to &#165;18.1&nbsp;billion for the fiscal year ended March&nbsp;31, 2006 from &#165;12.2&nbsp;billion for the previous
fiscal year. The gross margin in systems integration revenues was 22.9% for the fiscal year ended
March&nbsp;31, 2006, compared to 23.0% for the previous fiscal year. Revenues from the construction of
large-scale network systems, that has a lower-margin compared to systems operation and maintenance
increased.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of equipment sales. </I>Our cost of equipment sales decreased 9.4% to &#165;2.8&nbsp;billion for the
fiscal year ended March&nbsp;31, 2006 from &#165;3.1&nbsp;billion for the previous fiscal year. The gross margin
in equipment sales increased to 8.7% for the fiscal year ended March&nbsp;31, 2006 from 7.5% for the
previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Total costs and expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total costs and expenses, which includes total cost of revenues, sales and marketing expenses,
general and administrative expenses and research and development expenses, increased 17.2% to &#165;47.4
billion for the fiscal year ended March&nbsp;31, 2006 from &#165;40.5&nbsp;billion for the previous fiscal year.
The increase in total costs and expenses was primarily a result of an increase in the cost of
systems integration, sales and marketing expenses and general and administrative expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Sales and marketing. </I>Sales and marketing expenses increased 10.2% to &#165;3.1&nbsp;billion for the
fiscal year ended March&nbsp;31, 2006 from &#165;2.8&nbsp;billion for the previous fiscal year. The increase was
mainly due to an increase in advertising expenses, personnel expenses and outsourcing expenses that
increased along with the business expansion.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General and administrative. </I>General and administrative expenses increased 18.1% to &#165;3.1
billion for the fiscal year ended March&nbsp;31, 2006 from &#165;2.7&nbsp;billion for the previous fiscal year.
The increase was mainly due to increases in personnel expenses and rent expenses. The increase in
rent expenses is mainly due to an expansion of the office for the administrative section,
necessitated by an enhancement of administrative function.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Research and development. </I>Research and development expenses decreased 20.5% to &#165;158&nbsp;million
for the fiscal year ended March&nbsp;31, 2006 from &#165;199&nbsp;million for the previous fiscal year. The
decrease is primarily due to reduced development expenses relating to SEIL Series.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating income</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a result of the foregoing factors, operating income increased 93.3% to &#165;2.4&nbsp;billion for the
fiscal year ended March&nbsp;31, 2006 from &#165;1.2&nbsp;billion for the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other income (expenses), net</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net other income of &#165;3.0&nbsp;billion was recorded for the fiscal year ended March&nbsp;31, 2006
compared to &#165;1.9&nbsp;billion for the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Interest income. </I>Interest income was &#165;13&nbsp;million for the fiscal year ended March&nbsp;31, 2006,
almost flat compared to &#165;13&nbsp;million for the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Interest expense. </I>Interest expense, comprised of interest expense in respect of bank
borrowings, convertible notes and capital lease obligations, amounted to &#165;437&nbsp;million for the
fiscal year ended March&nbsp;31, 2006 compared to &#165;686&nbsp;million for the previous fiscal year. Interest
expense decreased due to an absence of interest payment related to the convertible notes that we
redeemed in March&nbsp;2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Foreign exchange gains (losses). </I>Foreign exchange gain amounted to &#165;3&nbsp;million for the fiscal
year ended March&nbsp;2006 compared to gain of &#165;6&nbsp;million for the previous year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Net gain on other investments. </I>For the fiscal year ended March&nbsp;31, 2006, we recorded gain on
other investments of &#165;3.2&nbsp;billion, which included gains of &#165;3.2&nbsp;billion generated by the sale of
certain available-for-sale securities, compared to gains of &#165;2.4&nbsp;billion for the previous year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other-net. </I>For the fiscal year ended March&nbsp;31, 2006, we recorded other income of &#165;191&nbsp;million,
most of which is dividend income of &#165;120&nbsp;million for the fiscal year ended March&nbsp;31, 2006, compared
to income of &#165;128&nbsp;million for the previous year.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Income from operations before income tax expense, minority interests and equity in net loss of
equity method investees</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recorded income from operations before income tax expense, minority interests and equity in
net loss of equity method investees of &#165;5.4&nbsp;billion for the fiscal year ended March&nbsp;31, 2006
compared to income from operations before income tax expense, minority interests and equity in net
loss of equity method investees of &#165;3.1&nbsp;billion for the fiscal year ended March&nbsp;31, 2005. The
improvement primarily reflects the increase in operating income and the increase of gain from the
sale of available-for-sale securities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Income tax expense</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For the fiscal year ended March&nbsp;31, 2006, we recorded an income tax expense of &#165;257&nbsp;million
compared to an income tax expense of &#165;100&nbsp;million for the previous fiscal year. The income tax
expense for
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">the fiscal year ended March&nbsp;31, 2006 increased mainly due to the reserve for tax contingencies
related to the usage of tax operating loss carryforwards by IIJ-A and income taxes payable related
to taxable income of our consolidated subsidiaries.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Minority interests in earnings of subsidiaries</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Minority interests in earnings of subsidiaries increased by &#165;245&nbsp;million to &#165;354&nbsp;million for
the fiscal year ended March&nbsp;31, 2006. Earnings of subsidiaries increased mainly due to improved
performance of IIJ-Tech and Net Care.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Equity in net loss of equity method investees</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Equity method net loss decreased to &#165;14&nbsp;million for the fiscal year ended March&nbsp;31, 2006 from
&#165;33&nbsp;million for the previous fiscal year. Although equity method net income was recorded in
Internet Multifeed Co., equity method net loss was recorded in our new equity method investee,
i-revo.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Net income</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net income for the fiscal year ended March&nbsp;31, 2006 was &#165;4.8&nbsp;billion compared with &#165;2.9
billion for the previous fiscal year. The improvement primarily reflects the increase in operating
income and the increase of gain from the sale of available-for-sale securities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Year Ended March&nbsp;31, 2005 Compared to the Year Ended March&nbsp;31, 2004</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Total revenues</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our total revenues increased 7.5% to &#165;41.7&nbsp;billion for the fiscal year ended March&nbsp;31, 2005
from &#165;38.8&nbsp;billion for the previous fiscal year. These increases were primarily due to an increase
in systems integration revenues.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Connectivity and value-added services revenues. </I>Revenues from connectivity services and
value-added services, which comprise our dedicated access, dial-up access and value-added services
and other services, increased 0.5% to &#165;22.5&nbsp;billion for the fiscal year ended March&nbsp;31, 2005 from
&#165;22.4&nbsp;billion for the previous fiscal year.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Dedicated access. </I>Revenues from dedicated access services decreased 11.6% to &#165;11.4
billion for the fiscal year ended March&nbsp;31, 2005 from &#165;12.9&nbsp;billion for the previous
fiscal year. This decrease reflected decreasing unit prices as a result of both the
cancellation by a regional electric power company&#146;s telecom service arm and general
price competition. Decreased revenues from IP Service, IIJ T1 Standard and IIJ Economy
were partially offset by increased revenues from our IIJ FiberAccess/F Service mainly
due to the expansion of usage of broadband line for multi-site connectivity within
corporate customers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Dial-up access. </I>Revenues from dial-up access services decreased 4.9% to &#165;2.9
billion for the fiscal year ended March&nbsp;31, 2005 from &#165;3.1&nbsp;billion for the previous
fiscal year. This decrease was primarily the result of declining revenues from IIJ4U
Service, offset partially by dial-up access services provided on an OEM basis mainly
due to the increased number of contracts within the individual customers as OEM brand.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Value-added services. </I>Our value-added services revenues increased 16.5% to &#165;5.0
billion for the fiscal year ended March&nbsp;31, 2005 from &#165;4.3&nbsp;billion for the previous
fiscal year. This increase reflected steady growth in Internet data center services,
virtual private network services, and security-related services, in part as a result of focusing sales efforts
on outsourcing services.</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Other. </I>Other revenues, which included rental fees for network equipment, customer
support service, and sale of Wide-area Ethernet services, amounted to &#165;3.2&nbsp;billion for
the fiscal year ended March&nbsp;31, 2005, a 49.7% increase from the previous fiscal year.
This reflected increasing sales of Wide-area Ethernet services.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Systems integration revenues. </I>Our revenues from systems integration, which include equipment
sales related to systems integration, increased 33.8% to &#165;15.9&nbsp;billion for the fiscal year ended
March&nbsp;31, 2005 from &#165;11.8&nbsp;billion for the previous fiscal year. This increase largely reflected
increases in systems integration contracts and monthly recurring revenues from operational
outsourcing services, mainly due to the increase in number of systems integration cases utilizing
broadband lines to connect multi-sites within corporate customers, and continuous acquisition of
operational outsourcing contracts of the newly built systems.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Equipment sales. </I>Our equipment sales decreased 26.3% to &#165;3.4&nbsp;billion for the fiscal year ended
March&nbsp;31, 2005 from &#165;4.6&nbsp;billion for the previous fiscal year. The decrease in equipment sales
revenues reflected our efforts to focus on higher margin systems integration, since equipment sales
do not include added values to raise higher margin, such as construction of systems, setting and
project management.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Total cost of revenues</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total cost of revenues increased 1.6% to &#165;34.8&nbsp;billion for the fiscal year ended March&nbsp;31,
2005 from &#165;34.2&nbsp;billion for the previous fiscal year. Although cost of connectivity and value-added
services revenues decreased as a result of our cost reduction efforts, cost of systems integration
revenues increased corresponding the increase in systems integration revenues.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of connectivity and value-added services revenues</I>. Cost of connectivity and value-added
services revenues decreased 2.8% to &#165;19.5&nbsp;billion for the fiscal year ended March&nbsp;31, 2005 from
&#165;20.0&nbsp;billion for the previous fiscal year. The gross margin in connectivity and value-added
services revenues increased to 13.3% for the fiscal year ended March&nbsp;31, 2005 from 10.4% for the
previous fiscal year. This increase is mainly a result of decreases in international backbone costs
and domestic backbone costs due to price competition among backbone providers, exceeding the price
competition within Internet connectivity services we provide to our customers. Local access line
costs increased due to steady revenue growth in Wide-area Ethernet services. Backbone costs
decreased 24.8% to &#165;3.6&nbsp;billion for the fiscal year ended March&nbsp;31, 2005 from &#165;4.7&nbsp;billion for the
previous fiscal year. Local access line costs increased 15.4% to &#165;4.0&nbsp;billion from &#165;3.5&nbsp;billion for
the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of systems integration revenues. </I>Our cost of systems integration revenues increased 23.8%
to &#165;12.2&nbsp;billion for the fiscal year ended March&nbsp;31, 2005 from &#165;9.9&nbsp;billion for the previous fiscal
year. The gross margin in systems integration revenues increased to 23.0% for the fiscal year ended
March&nbsp;31, 2005 from 16.8% for the previous fiscal year, due to our efforts to focus on higher
margin systems integration such as operational outsourcing services, network design and
consultation services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of equipment sales. </I>Our cost of equipment sales decreased 28.4% to &#165;3.1&nbsp;billion for the
fiscal year ended March&nbsp;31, 2005 from &#165;4.3&nbsp;billion for the previous fiscal year. The gross margin
in equipment sales increased to 7.5% for the fiscal year ended March&nbsp;31, 2005 from 4.8% for the
previous fiscal year, mainly due to decrease in revenues from lower margin equipment sales.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Total costs and expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total costs and expenses, which includes total cost of revenues, sales and marketing expenses,
general and administrative expenses and research and development expenses, increased 0.6% to &#165;40.5
billion for the fiscal year ended March&nbsp;31, 2005 from &#165;40.2&nbsp;billion for the previous fiscal year.
The increase in total costs and expenses was primarily a result of an increase in the cost of
systems integration and general and administrative expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Sales and marketing. </I>Sales and marketing expenses decreased 20.8% to &#165;2.8&nbsp;billion for the
fiscal year ended March&nbsp;31, 2005 from &#165;3.5&nbsp;billion for the previous fiscal year. The decrease was
primarily due to the absence of write-off of accounts receivable from Crosswave amounting to &#165;396
million in the fiscal year ended March&nbsp;31, 2004, and decrease in personnel expenses by &#165;117&nbsp;million
mainly due to enhancement of technical and administrative functions by reallocation of human
resources to engineering and administrative organizations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General and administrative. </I>General and administrative expenses increased 27.0% to &#165;2.7
billion for the fiscal year ended March&nbsp;31, 2005 from &#165;2.1&nbsp;billion for the previous fiscal year.
The increase was mainly due to the disposal and impairment loss in property and equipment and
telephone rights amounting to &#165;243&nbsp;million, and increase in personnel expenses by &#165;152&nbsp;million
mainly due to enhancement of technical and administrative functions by reallocation of human
resources to engineering and administrative organizations for the fiscal year ended March&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Research and development. </I>Research and development expenses decreased 44.4% to &#165;199&nbsp;million
for the fiscal year ended March&nbsp;31, 2005 from &#165;358&nbsp;million for the previous fiscal year. The
decrease is primarily due to reduced development expenses relating to IPv6 technology and our
originally developed network equipment, SEIL Series.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating income (loss)</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a result of the foregoing factors, operating income was &#165;1.2&nbsp;billion for the fiscal year
ended March&nbsp;31, 2005, compared to an operating loss of &#165;1.4&nbsp;billion for the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other income (expenses), net</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net other income of &#165;1.9&nbsp;billion was recorded for the fiscal year ended March&nbsp;31, 2005
compared to &#165;1.0&nbsp;billion for the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Interest income. </I>Interest income decreased to &#165;13&nbsp;million for the fiscal year ended March&nbsp;31,
2005 from &#165;38&nbsp;million for the previous fiscal year. The decrease is mainly due to decreased average
amount of monthly dollar-denominated deposits during the fiscal year ended March&nbsp;31, 2003, and
absence of interest income related to advances to Crosswave in the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Interest expense. </I>Interest expense, comprised of interest expense in respect of bank
borrowings, convertible notes and capital lease obligations, amounted to &#165;686&nbsp;million for the
fiscal year ended March&nbsp;31, 2005 compared to &#165;702&nbsp;million for the previous fiscal year. Interest
expense decreased due to a decrease in interest expense for convertible notes reflecting
repurchases of a portion of convertible notes before the maturity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Foreign exchange gains (losses). </I>Foreign exchange gain amounted to &#165;6&nbsp;million for the fiscal
year ended March&nbsp;2005 compared to loss of &#165;6&nbsp;million for the previous year due to depreciation of
yen to dollar in the fiscal year ended March&nbsp;31, 2005.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Gain (loss)&nbsp;on other investments. </I>For the fiscal year ended March&nbsp;31, 2005, we recorded gain
on other investments of &#165;2.4&nbsp;billion, which included gains of &#165;2.5&nbsp;billion generated by the sale of
certain available-for-sale securities, compared to gains of &#165;1.4&nbsp;billion for the previous year,
mainly generated by the sale of our stake in DLJdirect SFG Securities Inc. The income was partially
offset by losses of &#165;0.2&nbsp;billion on the write down of investments in marketable and nonmarketable
securities to reflect declines in value considered to be other than temporary for the fiscal year
ended March&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other-net. </I>For the fiscal year ended March&nbsp;31, 2005, we recorded other income of &#165;0.1&nbsp;billion,
most of which is dividend income of &#165;0.1&nbsp;billion for the fiscal year ended March&nbsp;31, 2005, compared
to income of &#165;0.2&nbsp;billion for the previous year.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Income (loss)&nbsp;from operations before income tax expense, minority interests and equity in net
loss of equity method investees</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recorded income from operations before income tax expense, minority interests and equity in
net loss of equity method investees of &#165;3.1&nbsp;billion for the fiscal year ended March&nbsp;31, 2005
compared to a loss from operations before income tax expense, minority interests and equity in net
loss of equity method investees of &#165;0.5&nbsp;billion for the fiscal year ended March&nbsp;31, 2004. This
improvement was largely the result of the improvement in operating income and increase in other
income due to gains of &#165;2.5&nbsp;billion generated by the sale of certain available-for-sale securities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Income tax expense</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the fiscal year ended March&nbsp;31, 2005, we recorded an income tax expense of &#165;100&nbsp;million
compared to an income tax expense of &#165;33&nbsp;million for the previous fiscal year. This increase was
due to a new enterprise tax going into effect in the fiscal year ended March&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Minority interests in (earnings)&nbsp;losses of subsidiaries</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Minority interests in earnings of subsidiaries increased by &#165;345&nbsp;million to &#165;109&nbsp;million for
the fiscal year ended March&nbsp;31, 2005. Earnings of subsidiaries increased mainly due to improved
performance of IIJ-Tech.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Equity in net loss of equity method investees</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Equity in net loss of equity method investees consist of equity method net loss in our equity
method investees and impairment loss on advance to Crosswave.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Equity method net loss decreased to &#165;33&nbsp;million for the fiscal year ended March&nbsp;31, 2005 from
&#165;286&nbsp;billion for the previous fiscal year. This decrease was mainly due to the absence of a large
equity method net loss from AIH reflecting the deterioration in its operating result for the
previous year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Impairment loss on advance to Crosswave for the fiscal year ended March&nbsp;31, 2005 no longer
existed compared to the impairment loss of &#165;1.7&nbsp;billion for the fiscal year ended March&nbsp;31, 2004,
as we had written off our equity investment in and loans and advances to Crosswave entirely.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Net income (loss)</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net income for the fiscal year ended March&nbsp;31, 2005 was &#165;2.9&nbsp;billion compared with a net loss
of &#165;2.3&nbsp;billion for the previous fiscal year. The improvement primarily reflects the improvement in
operating income, increase in other income and absence of impairment loss related to Crosswave.
</DIV>

<P align="center" style="font-size: 10pt">49
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Application of Critical Accounting Policies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In reviewing our financial statements, you should consider the sensitivity of our reported
financial condition and results of operations to changes in the conditions and assumptions
underlying the estimates and judgments made by our management in applying critical accounting
policies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The preparation of financial statements requires the use of estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods presented. Actual
results may differ from these estimates, judgments and assumptions. Note 1 to our consolidated
financial statements includes a summary of the significant accounting policies used in the
preparation of our financial statements. Certain accounting policies are particularly critical
because of their significance to our reported results and because of the possibility that future
events may differ significantly from the conditions and assumptions underlying the estimates used
and judgments made by our management in preparing our financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have discussed the development and selection of critical accounting policies and estimates
with our board of directors, and the board of directors has reviewed the disclosure relating to
these, which are included in this &#147;Operating and Financial Review and Prospects.&#148; For all of these
policies, we caution that future events rarely develop exactly as forecast, and even the best
estimates may require adjustment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Useful lives of property and equipment</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and equipment, net recorded on our balance sheet was &#165;10,299&nbsp;million at March&nbsp;31,
2006, representing 20.3% of our total assets. The values of our property and equipment, including
purchased software and property and equipment under capital leases, are recorded in our financial
statements at acquisition cost, and are depreciated or amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the asset. Our total depreciation and
amortization expenses for the fiscal years ended March&nbsp;31, 2004, 2005 and 2006 were &#165;3,909&nbsp;million,
&#165;4,109&nbsp;million and &#165;4,207&nbsp;million, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We estimate the useful lives of property and equipment in order to determine the amount of
depreciation and amortization expense to be recorded in each fiscal year. We determine the useful
lives of our assets at the time the assets are acquired and base our determinations on expected
use, experience with similar assets, established laws and regulations as well as taking into
account anticipated technological or other changes. Estimated useful lives at March&nbsp;31, 2006, were
as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Item </B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Useful Lives</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Data communications, office and other equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">2 to 15 years</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Leasehold improvements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">3 to 15 years</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchased software</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right">5 years</TD>
    <TD>&nbsp;</TD>

</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capitalized leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">4 to 7 years</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If technological or other changes were to occur more rapidly or in a different form than
anticipated or new laws or regulations are enacted or the intended use changes, the useful lives
assigned to these assets may need to be shortened, or we may need to sell or write off the assets,
resulting in recognition of increased depreciation and amortization or losses in future periods.
Our losses on disposal of property and equipment for the fiscal years ended March&nbsp;31, 2004, 2005
and 2006 were &#165;110&nbsp;million, &#165;144&nbsp;million and &#165;119&nbsp;million, respectively. The loss on disposal of
property and equipment for the fiscal year ended March&nbsp;31, 2005 was mainly related to the
relocation of branch offices and disposal of telephone rights as a result of a decrease in revenues
from dial-up access services. The loss on disposal of property and equipment for the fiscal year
ended March&nbsp;31, 2006 was mainly related to disposal of software, such as back-office systems.
</DIV>

<P align="center" style="font-size: 10pt">50
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A one-year change in the useful life of these assets would have increased or decreased
depreciation expense by approximately &#165;1.4&nbsp;billion and &#165;0.9&nbsp;billion, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Ordinary maintenance and repairs are charged to income as incurred. Major replacements and
improvements are capitalized. When properties are retired or otherwise disposed of, the property
and related accumulated depreciation accounts are relieved of the applicable amounts and any
differences are included in operating cost and expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We determined the useful lives of customer relationship intangible assets recognized during
the fiscal year ended March&nbsp;31, 2006 as indefinite.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Impairment of long-lived assets</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Long-lived assets consist primarily of property and equipment, including capitalized leases,
and goodwill and intangible assets. We perform an impairment review for our long-lived assets,
whenever events or changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. This analysis is separate from our analysis of the useful lives of our assets, but
it is affected by some similar factors. Factors that we consider important which could trigger an
impairment review include, but are not limited to, the impact of the following trends or
conditions:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>significant decline in the market value of an asset,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>current period operating cash flow loss,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>introduction of competing technologies or services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>significant underperformance of expected or historical cash flows,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>significant or continuing decline in subscribers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>changes in the manner or use of an asset,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>disruptions in the use of network equipment under capital lease arrangements, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>other negative industry or economic trends.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;When we determine that the carrying amount of specific assets may not be recoverable based on
the existence or occurrence of one or more of the above or other factors, we estimate the future
cash inflows and outflows expected to be generated by the assets over their expected useful lives.
We estimate the sum of expected undiscounted future cash flows based upon historical trends
adjusted to reflect our best estimate of future market and operating conditions. If the sum of the
expected undiscounted future net cash flows is less than the carrying value of the assets, we
record an impairment loss based on the fair values of the assets. Such fair values may be based on
established markets, independent appraisals and valuations or discounted cash flows. If actual
market and operating conditions under which assets are used are less favorable or shorter than
those projected by management, resulting in reduced cash flows, additional impairment charges for
assets not previously written-off may be required. There was no impairment loss for long-lived
assets for the fiscal years ended March&nbsp;31, 2004 and 2006. An impairment loss of &#165;26&nbsp;million on
telephone rights was recorded for the fiscal year ended March&nbsp;31, 2005 because NTT reduced the
price of telephone rights by 50&nbsp;percent after March&nbsp;1, 2005. There was no impairment loss for
long-lived assets, including goodwill and intangible assets other than the telephone rights above,
for the fiscal year ended March&nbsp;31, 2005.
</DIV>

<P align="center" style="font-size: 10pt">51
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Allowance for doubtful accounts and uncollectible contractual prepayments</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. At March&nbsp;31, 2005 and 2006, we maintained allowances
for doubtful accounts of &#165;449&nbsp;million and &#165;114&nbsp;million, respectively. Management specifically
analyzes accounts and loans receivable including historical bad debts, customer concentrations,
customer credit-worthiness and current economic trends when evaluating the adequacy of the
allowances for doubtful accounts. If the financial condition of our customers or debtors were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required. For the fiscal year ended March&nbsp;31, 2006, the reversal of allowance of &#165;0.1
million was recorded reflecting the increase in market price of securities held in pledge for our
advance to i-Heart, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Deferred tax assets</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To date, our deferred tax assets have been offset by a valuation allowance. We record a
valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize the deferred tax assets in the future in excess of the
net recorded amount, an adjustment to the valuation allowance and deferred tax benefit would
increase income in the period such determination was made.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Valuation of investments</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our investment in securities is significant, and the valuation of such investments, requires
us to make judgments using information that is generally uncertain at the time, such as assumptions
regarding future financial conditions and cash flows. As at March&nbsp;31, 2006, we had investments in
securities classified as other investments in the amount of &#165;8,021&nbsp;million. We routinely assess the
impairment of our investments by considering whether any decline in value is other-than-temporary.
The factors we consider are:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the length of time and the extent to which the market value has been less than
cost,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the financial condition and near-term prospects of the issuer, including any
specific events which may influence the operations of the issuer such as changes in
technology that may impair the earnings potential of the investment, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our intent and ability to retain the investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market value. If a decline in
value occurs and is deemed to be other-than-temporary, an impairment loss will be
recorded to write-down the carrying value of the investment to fair value. If, after
taking into account these considerations, the decline is judged to be other than
temporary, the cost basis of the individual security is written down to a new cost
basis and the amount of the write-down is accounted for as a realized loss.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our unrealized loss on an investment in marketable equity security relates to a U.S.
telecommunication equipment supplier. The fair value of the investment is approximately 3% less
than its cost. The duration of the unrealized loss position was less than 6&nbsp;months. Based on our
ability and intent to hold the investment for a reasonable period of time sufficient for a recovery
of fair value, we do not consider the investment to be other-than-temporary impaired at March&nbsp;31,
2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Losses on write-down of investments in certain nonmarketable securities included in other
income were &#165;230&nbsp;million and &#165;30&nbsp;million for the years ended March&nbsp;31, 2004 and 2006, respectively.
Losses on write-down of investments in certain marketable and nonmarketable securities included in
other income were
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">recognized to reflect the declines in value considered to be other than temporary, totaled &#165;34
million and &#165;118&nbsp;million, respectively, for the year ended March&nbsp;31, 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to investments in securities, we also have investments in equities and loans for
which we have significant influence over the investee&#146;s operations and financial policies and are
accounted for by the equity method. For other than temporary declines in the value of such
investments below the carrying amount, the investment is reduced to fair value and an impairment
loss is recognized.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Pension benefits costs</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Employee pension benefit costs and obligations are dependent on certain assumptions including
discount rate, retirement rate and rate of increase in compensation levels, which are based upon
current statistical data, as well as expected long-term rate of return on plan assets and other
factors. Specifically, the discount rate and expected long-term rate of return on assets are two
critical assumptions in the determination of periodic pension cost and pension liabilities.
Assumptions are evaluated at least annually and when events occur or circumstances change which
could have a significant effect on these critical assumptions. In
accordance with U.S. GAAP, actual
results that differ from the assumptions are accumulated and amortized over future periods.
Therefore, actual results generally affect recognized expenses and the recorded obligations for
pensions in future periods. While management believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may affect our pension obligations and
future expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We used a discount rate of 2.0% for the pension plan as of March&nbsp;31, 2006. The discount rate
was determined by using the market yield of Japanese Government Bonds with a term matched against
the average remaining service period of employees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We used an expected long-term rate of return on pension plan assets of 2.1% as of March&nbsp;31,
2006. To determine the expected long-term rate of return on pension plan assets, we consider a
combination of historical returns and prospective return assumptions derived from pension trust
funds&#146; managing company. The actual return on pension plan for the year ended March&nbsp;31, 2006 was
7.9%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table illustrates the sensitivity to a change in the discount rate and the
expected return on pension plan assets, while holding all other assumptions constant, for our
pension plan as of March&nbsp;31, 2006.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #ffffff"><B>Change in Assumption</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #ffffff"><B>Pre-Tax PBO</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #ffffff"><B>Pension Expense</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #ffffff"><B>Equity (Net of Tax)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11"><B>(millions of yen)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">50 basis point
increase/decrease in
discount rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">(115)/129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">(20)/24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">12/</TD>
    <TD nowrap>(14)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">50 basis point
increase/decrease in
expected return on
assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;/5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD nowrap align="right">&#151;/</TD>
    <TD nowrap>(3)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>New Accounting Standards</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2004, the FASB issued revised SFAS No.&nbsp;123 (Revised 2004), &#147;Share-Based Payment&#148;
(&#147;SFAS No.&nbsp;123R&#148;) which replaces the existing SFAS No.&nbsp;123 and supersedes APB No.&nbsp;25. SFAS No.&nbsp;123R
requires compensation expense for stock options and other share-based payment to be measured and
recorded based on the instruments&#146; fair value. SFAS No.&nbsp;123R is effective for the fiscal period
beginning after June&nbsp;15, 2005. The Company will adopt SFAS No.&nbsp;123R and the related FASB Staff
Positions (&#147;FSP&#148;) on April&nbsp;1, 2006 by using modified prospective application, which requires
recognizing expenses for options granted prior to the adoption date equal to the fair value of
unvested amounts over the remaining vesting period. The portion of these options&#146; fair value
attributable to vested awards prior to the adoption of SFAS No.&nbsp;123R is never recognized. As all
existing granted stock-based awards of the Company have vested, the adoption of
</DIV>

<P align="center" style="font-size: 10pt">53
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">SFAS No.&nbsp;123R will not have any impact on the Company&#146;s consolidated financial position or
results of operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In November&nbsp;2005, the FASB issued FSP No.&nbsp;115-1 and No.&nbsp;124-1, &#147;The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,&#148; on the basis of the
EITF&#146;&#146;s consensus on Issue 03-1, &#147;The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments&#148;. FSP No.&nbsp;115-1 and No.&nbsp;124-1 addresses the determination as to
when an investment is impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. FSP No.&nbsp;115-1 and No.&nbsp;124-1 also includes accounting
considerations subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. FSP No.&nbsp;115-1 and No.&nbsp;124-1 is effective for reporting periods beginning after
December&nbsp;15, 2005. The adoption of FSP No.&nbsp;115-1 and No.&nbsp;124-1 did not have a material effect on
the Company&#146;s financial position or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In November&nbsp;2004, the FASB issued SFAS No.&nbsp;151, &#147;Inventory Costs-an amendment of ARB No.&nbsp;43,
Chapter&nbsp;4&#148; (&#147;SFAS No.&nbsp;151&#148;) which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage)&nbsp;and also requires that the
allocation of fixed production overhead be based on the normal capacity of the production
facilities. SFAS No.&nbsp;151 is effective for inventory costs incurred during fiscal years beginning
after June&nbsp;15, 2005. The adoption of SFAS No.&nbsp;151 will not have a material impact on the Company&#146;s
consolidated financial position or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2004, the FASB issued SFAS No.&nbsp;153, &#147;Exchanges of Nonmonetary Assets-amendment of
APB Opinion No.&nbsp;29&#148; (&#147;SFAS No.&nbsp;153&#148;). The statement addresses the measurement of exchanges of
nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception for exchanges that do not
have commercial substance. SFAS No.&nbsp;153 is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June&nbsp;15, 2005. The adoption of SFAS No.&nbsp;153 did not have a material
impact on the Company&#146;s consolidated financial position or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In May&nbsp;2005, the FASB issued SFAS No.&nbsp;154, &#147;Accounting Changes and Error Corrections-a
replacement of APB opinion No.&nbsp;20 and SFAS No.&nbsp;3&#148; (&#147;SFAS No.&nbsp;154&#148;). SFAS No.&nbsp;154 requires that
changes in accounting principle are retrospectively applied by applying the new accounting
principle as of the beginning of the first period presented as if that principle had always been
used, although APB opinion No.&nbsp;20 required that changes in accounting principle are applied
cumulatively in the period of change. SFAS No.&nbsp;154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December&nbsp;15, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July&nbsp;2005, the FASB issued FSP APB No.18-1, &#147;Accounting by an Investor for Its
Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under
the Equity Method in Accordance with APB Opinion No.&nbsp;18 upon a Loss of Significant Influence&#148; (&#147;FSP
APB No.&nbsp;18-1&#148;). FSP APB No.&nbsp;18-1 requires that an investor&#146;s proportionate share of an investee&#146;s
equity adjustments for other comprehensive income is offset against the carrying value of the
investment at the time significant influence is lost. FSP APB No.&nbsp;18-1 is effective for reporting
periods beginning after July&nbsp;12, 2005. The adoption of FSP APB No.&nbsp;18-1 did not have a material
impact on the Company&#146;s consolidated financial position or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Liquidity and Capital Resources.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Liquidity and Capital Requirements</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal capital and liquidity needs in recent years have been for capital expenditures
for the development, expansion and maintenance of our network infrastructure, lease payments,
payment of
</DIV>

<P align="center" style="font-size: 10pt">54
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">principal and interest on outstanding borrowings, investments in current and former group
companies and, other working capital.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Capital expenditures. </I>Our capital expenditures relate primarily to the development, expansion and
maintenance of our network. 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.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>For the fiscal year ended March 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11"><B>(millions of yen)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital
expenditures,
including acquisition
of assets by entering
into capital leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,523</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">5,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">4,762</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not made any material divestitures in the current or past three fiscal years. We
recorded a loss on disposal of property and equipment of &#165;110&nbsp;million, &#165;144&nbsp;million and &#165;119
million for the fiscal years ended March&nbsp;31, 2004, 2005 and 2006, respectively. The loss for the
fiscal year ended March&nbsp;31, 2004 was mainly related to the relocation of headquarter. The loss for
the fiscal year ended March&nbsp;31, 2005 was mainly due to the relocation of branch offices and
disposal of telephone rights. The loss for the fiscal year ended March&nbsp;31, 2006 was mainly due to
disposal of software, such as back-office systems.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Lease payments. </I>We have operating lease agreements with telecommunications carriers and others
for the use of connectivity lines, including our domestic and international backbone as well as
local access lines that customers use to connect to IIJ&#146;s network. The leases for our domestic
backbone are generally either non-cancelable for a minimum one-year lease period or cancellable
during a lease period of three years, with a significant penalty for cancellation (35&nbsp;percent). The
leases for our international backbone connectivity during one-year lease period are substantially
non-cancelable. We also lease office premises and certain office equipment under non-cancelable
operating leases which expire on various dates through the year 2008 and also lease network
operation centers under non-cancelable operating leases.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Lease expenses related to backbone lines for the fiscal years ended March&nbsp;31, 2004, 2005 and
2006, amounted to &#165;4,720&nbsp;million, &#165;3,551&nbsp;million and &#165;3,516&nbsp;million, respectively. Lease expenses
for local access lines for the fiscal years ended March&nbsp;31, 2004, 2005 and 2006, which are only
attributable to dedicated access revenues, amounted to &#165;3,500&nbsp;million, &#165;4,040&nbsp;million and &#165;4,558
million, respectively. Other lease expenses for the fiscal years ended March&nbsp;31, 2004, 2005 and
2006, amounted to &#165;3,787&nbsp;million, &#165; 3,304 million and &#165;3,654&nbsp;million, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We conduct our connectivity and other services by using data communications and other
equipment leased under capital lease arrangements. The fair values of the assets at the execution
of the capital lease agreements and accumulated depreciation amounted to &#165;13,252&nbsp;million and &#165;6,336
million at March&nbsp;31, 2005 and &#165;14,459&nbsp;million and &#165;6,820&nbsp;million at March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of March&nbsp;31, 2006, future lease payments under non-cancelable operating leases, including
the aforementioned non-cancelable connectivity lease agreements (but excluding dedicated access
lines which we charge outright to customers), and capital leases were as follows:
</DIV>

<P align="center" style="font-size: 10pt">55
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Payment due by period</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>(millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>contractual</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Less than</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>More than</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1 year</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1 to 3 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>4 to 5 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>5 years</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Connectivity lines operating leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other operating leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,839</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,377</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,317</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,489</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,262</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,314</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">877</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total minimum lease payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,355</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,631</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">967</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">91</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>See note 7 to the consolidated financial statements included in this annual report.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Payments of principal and interest on outstanding borrowings. </I>We require cash for
payments of interest and principal on our outstanding borrowings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Short-term borrowings. As of March&nbsp;31, 2006, our short-term borrowings consisted of bank
overdrafts of &#165;4.6&nbsp;billion. The weighted average interest rate of our short-term borrowings was
1.375%. We decreased our short-term borrowings by &#165;0.2&nbsp;billion. We also had an unused balance of
&#165;3.2&nbsp;billion in borrowings as of March&nbsp;31, 2006 under our bank overdraft agreements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Long-term borrowings. As of March&nbsp;31, 2006, we had &#165;2.3&nbsp;billion of outstanding long-term
borrowings, including current portions, which consisted of: unsecured, variable-rate loans from
banks of &#165;0.3&nbsp;billion with a weighted average interest rate of 2.206%; unsecured, fixed-rate loans
from banks of &#165;0.6&nbsp;billion with a weighted average interest rate of 1.710%; unsecured,
variable-rate loans from banks of &#165;1.2&nbsp;billion with a weighted average interest rate of 1.130% and
secured, fixed-rate installment loan from a leasing company of &#165;0.2&nbsp;billion with an interest rate
of 2.55%. We entered into interest rate swap contracts to manage our interest rate exposure
resulting in a fixed interest rate for a portion of our long-term debt. The effective weighted
average interest rate for &#165;1.2&nbsp;billion of the long-term loans outstanding at March&nbsp;31, 2006 after
giving effect to such swap agreements was 1.781%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Annual maturities of long-term borrowings outstanding as of March&nbsp;31, 2006, were as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="36%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Fiscal year ending</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Thousands of</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>March 31 </B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Millions of yen</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>U.S. dollars</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,990</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,469</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,280</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">19,408</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Collateral for borrowings. Substantially all of our short-term and long-term borrowings are
made under agreements which, as is customary in Japan, provide that under certain conditions the
banks may require us to provide collateral or guarantees with respect to the borrowings. We did not
provide banks with any collateral for outstanding loans as of March&nbsp;31, 2006. Our primary banking
relationships are with Sumitomo Mitsui Banking Corporation, Mizuho Corporate Bank, Ltd., Bank of
Tokyo-Mitsubishi UFJ, Ltd. and Mitsubishi UFJ Trust and Banking Corporation. The banks are also
shareholders and customers of ours. Our loans from a leasing company are secured by a first
priority pledge against a claim for the guarantee deposits of &#165;1.1&nbsp;billion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Payable under securities loan agreement. Since August&nbsp;2004, we have been a party to a
securities loan agreement with a certain Japanese financial institution. The available-for-sale
securities loaned to the financial institution were &#165;1.2&nbsp;billion, and the cash received in return
was &#165;1.0&nbsp;billion as of March&nbsp;31, 2006. These transactions were accounted for as secured borrowings
and the cash received was recorded as payable under the securities loan agreement and securities
lent were recorded as other investments. The agreement requires us to provide certain marketable
securities as collateral at the commencement of the transaction. We are required to make a partial
payment or receive additional borrowings depending on the market value of
</DIV>

<P align="center" style="font-size: 10pt">56
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">securities pledged. We paid the interest on the payables with a variable rate. The interest
rate was 0.37&nbsp;percent as of March&nbsp;31, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Investments in current and former group companies. </I>In the past, we have made substantial
investments in current and former group companies. We may need to provide additional investment in
our group companies to enhance or maintain our business synergy with our affiliated companies in
the future. See Item&nbsp;4.B., &#147;&#151; Our Group Companies&#148; for information on investment in equity method
investees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Working capital needs. </I>Our principal working capital requirements are for operating lease
payments for our domestic and international backbone and local access lines. We also require
working capital requirements for personnel expenses, office rents and other operating expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Capital Resources</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We seek to manage our capital resources and liquidity to provide adequate funds for current
and future financial obligations. We have traditionally met our capital and liquidity requirements
through cash flows from operating activities, long-term and short-term borrowings from financial
institutions and from the issuance of convertible bonds, capital leases and issuances of equity
securities. At March&nbsp;31, 2006, we had cash of &#165;13.7&nbsp;billion and available-for-sale securities of
&#165;6.8&nbsp;billion. We had &#165;11.8&nbsp;billion of unsecured 1.75% convertible notes due in March&nbsp;2005 at March
31, 2004. At March&nbsp;31, 2005, we fully redeemed the convertible notes. We expect that cash from
operating activities, any proceeds from the sale of available-for-sale securities, our other
sources of liquidity will be sufficient to meet our requirements through the year ending March&nbsp;31,
2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Short-term and long-term Borrowings. </I>Short-term and long-term borrowings provide us with an
important source for maintaining adequate level of working capital and acquisition of fixed assets.
See &#151; Payments of principal and interest on outstanding borrowings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cash flows from operating activities. </I>We generated &#165;6.6&nbsp;billion by operating activities for
the year ended March&nbsp;31, 2006. See &#151; Cash Flows.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Capital Leases. </I>Capital leases also provide us with an important source of financing. See
note 7 to our consolidated financial statements included in this annual report on Form 20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Issuances of Equity Securities. </I>On June&nbsp;26 and September&nbsp;16, 2003, we completed private
placements of a total of 15,880 shares of our common stock to investors in Japan for an aggregate
amount of &#165;13.3&nbsp;billion for working capital and repayment of our outstanding 1.75% convertible
notes due March&nbsp;31, 2005. On December&nbsp;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 &#165;6.0
billion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Cash Flows</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We had cash of &#165;13.7&nbsp;billion at March&nbsp;31, 2006 compared to &#165;5.3&nbsp;billion at March&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table presents information about our cash flows during the fiscal years ended
March&nbsp;31, 2004, 2005 and 2006:
</DIV>



<P align="center" style="font-size: 10pt">57
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Fiscal year ended March 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,238</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,559</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by (used in) investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(852</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,974</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,805</TD>
    <TD>&nbsp;</TD>
</TR>


<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by (used in) financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,669</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,212</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of exchange rate changes on cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(44</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net increase (decrease)&nbsp;in cash and cash equivalent</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,998</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,441</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash at beginning of the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,286</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash at end of the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,727</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Year Ended March&nbsp;31, 2006 as Compared to the Year Ended March&nbsp;31, 2005</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by operating activities was &#165;6.6&nbsp;billion for the fiscal year ended March&nbsp;31,
2006 compared to &#165;5.2&nbsp;billion for the previous fiscal year. The increase of net cash provided by
operating activities for the fiscal year ended March&nbsp;31, 2006 consisted of an increase of &#165;0.9
billion in net income from continuing operations adjusted for non-cash income and expenses such as
depreciation and amortization, gains on other investments, and equity method net loss, and an
increase of &#165;0.4&nbsp;billion changes in operating assets and liabilities (cash provided).This
improvement in cash provided by operating activities mainly resulted from the increase in operating
income before depreciation and amortization which was derived from an increase in revenues from
value-added services and systems integration and the decrease in the backbone costs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by investing activities was &#165;1.8&nbsp;billion for the fiscal year ended March&nbsp;31,
2006 compared to &#165;2.0&nbsp;billion provided by investing activities for the previous fiscal year. The
decrease of net cash provided by investing activities for the fiscal year ended March&nbsp;31, 2006
reflected primarily an increase of &#165;0.3&nbsp;billion in purchases of property and equipment, &#165;0.7
billion in purchase of short-term and other investments, and &#165;0.8&nbsp;billion in investment in an
equity method investee. The increase of cash used was partly offset by an increase of &#165;0.6&nbsp;billion
in proceeds from sales and redemption of short-term and other investments, including certain
available-for-sale securities and an increase of &#165;0.5&nbsp;billion in refund of guarantee deposits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by financing activities was &#165;39&nbsp;million for the fiscal year ended March&nbsp;31,
2006 compared to &#165;14.2&nbsp;billion used in financing activities for the previous fiscal year. The
increase of net cash provided by financing activities for the fiscal year ended March&nbsp;31, 2006
primarily reflected a redemption of convertible notes of &#165;11.1&nbsp;billion that was recorded in the
previous fiscal year, proceeds of &#165;6.0&nbsp;billion from the issuance of common stock along with our
listing on the Mothers market of the TSE, and an increase of &#165;2.4&nbsp;billion in proceeds from security
loan agreement. The increase was partly offset by an increase of &#165;4.8&nbsp;billion in repayments of
securities loan agreement, a decrease of &#165;1.3&nbsp;billion in proceeds from issuance of long-term
borrowings, and an increase of &#165;1.1&nbsp;billion in repayments of long-term borrowings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Year Ended March&nbsp;31, 2005 as Compared to the Year Ended March&nbsp;31, 2004</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by operating activities was &#165;5.2&nbsp;billion for the fiscal year ended March&nbsp;31,
2005 compared to &#165;1.9&nbsp;billion for the previous fiscal year. The increase of net cash provided by
operating activities for the fiscal year ended March&nbsp;31, 2005 consisted of an increase of &#165;2.5
billion in net income from continuing operations adjusted for non-cash income and expenses such as
depreciation and amortization, loss (gains)&nbsp;on other investments, and equity method net loss, and
an increase of &#165;0.8&nbsp;billion changes in operating assets and liabilities (cash provided). This
improvement in cash provided by operating activities mainly resulted from the increase in operating
income before depreciation and amortization which was derived from the decrease in the cost of
connectivity and value-added services such as international backbone costs and
</DIV>

<P align="center" style="font-size: 10pt">58
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">domestic backbone costs, and the improvement in profitability of systems integration. A
decrease of approximately &#165;1.2&nbsp;billion in the payment of international and domestic backbone cost
was attributable to a decline in their unit price and a decrease in backbone lines resulting from
the integrations of some network operation centers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided in investing activities was &#165;2.0&nbsp;billion for the fiscal year ended March&nbsp;31,
2005 compared to &#165;0.9&nbsp;billion used in investing activities for the previous fiscal year. The
increase reflected primarily the absence of the &#165;1.7&nbsp;billion advance to Crosswave in the previous
fiscal year. Purchase of property and equipment decreased to &#165;0.6&nbsp;billion for the year ended March
31, 2005 from &#165;1.7&nbsp;billion for the previous fiscal year, though the acquisition of assets by
entering into capital lease increased. Proceeds from the sale of investments increased to &#165;3.0
billion primarily derived from the sale of certain available-for-sale securities for the year ended
March&nbsp;31, 2005 from &#165;2.2&nbsp;billion primarily derived from the sale of our investment in DLJ direct
SFG Securities Inc., for the previous fiscal year. We paid &#165;0.4&nbsp;billion for acquiring the
securities systems development and operation business from Yamatane in order to initiate a business
relationship with Yamatane&#146;s customer base for the fiscal year ended March&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash used in financing activities was &#165;14.2&nbsp;billion for the fiscal year ended March&nbsp;31,
2005 compared to &#165;7.7&nbsp;billion provided by financing activities for the previous fiscal year. Net
cash used in financing activities for the fiscal year ended March&nbsp;31, 2005 included repurchase and
redemption of convertible notes of &#165;11.8&nbsp;billion. Net cash used in financing slightly offset by
&#165;1.7&nbsp;billion in cash provided by financing activities raised through a securities loan agreement
with a Japanese financial institution. Net cash provided by financing activities for the fiscal
year ended March&nbsp;31, 2004 included proceeds from the issuance of common stock of &#165;13.3&nbsp;billion and
long-term borrowings of &#165;2.3&nbsp;billion. Of the &#165;2.3&nbsp;billion of long-term borrowings, &#165;1.0&nbsp;billion was
from refinancing outstanding long-term borrowings, &#165;1.0&nbsp;billion was existing short-term borrowings
converted into long-term borrowings and &#165;0.3&nbsp;billion was newly financed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Contingencies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We did not have any material contingent liabilities as of March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Research and Development, Patents and Licenses, etc.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See the information in Item&nbsp;4.B., &#147;Business Overview &#151; Research and Development.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Trend Information.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Factors Affecting Our Future Financial Results</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We expect that the following are the most significant factors likely to affect our financial
results and those of our consolidated subsidiaries. You should also consult Item&nbsp;3.D., &#147;Risk
Factors&#148; and the other portions of this annual report on Form 20-F for additional factors affecting
our financial results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Revenues</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We derive our revenues primarily from recurring monthly fees from our Internet connectivity
services and our value-added services, as well as one-time project fees and monthly operating fees
from systems integration services. We have been enhancing and will continue to enhance our Internet
connectivity services through the introduction of a greater variety of access options and bandwidth
options, by expanding our value-added services and systems integration under our total network
solutions strategy, and by focusing our efforts on capturing market share in high-end corporate
markets that are most attractive to us.
</DIV>

<P align="center" style="font-size: 10pt">59
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Connectivity and value-added services revenues</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Connectivity and value-added services revenues consist of our dedicated access services
revenues, our dial-up access services revenues, our value-added services revenues and other
services revenues. Our connectivity and value-added services revenues accounted for 46.6% of our
revenues for the fiscal year ended March&nbsp;31, 2006, 53.9% for the fiscal year ended March&nbsp;31, 2005,
and 57.7% of our revenues for the fiscal year ended March&nbsp;31, 2004. As our connectivity services
customers tend to use our value-added services or systems integration services as their network
needs develop, connectivity services are also important for the growth of our value-added services
or systems integration business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Dedicated access services</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dedicated access services accounted for 21.3% of our revenues for the fiscal year ended March
31, 2006, 27.3% for the fiscal year ended March&nbsp;31, 2005, and 33.2% for the fiscal year ended March
31, 2004. Dedicated access service revenues depend on the size of our customer base, the average
contracted bandwidth and unit price of our services. The market for dedicated access services is
generally following two trends:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Increased contracted bandwidth. </I>Total contracted bandwidth for dedicated access
services including Internet Data Center Connectivity Services increased to 194.9 Gbps
for the fiscal year ended March&nbsp;31, 2006 from 121.2 Gbps for the previous fiscal year.
In addition, average contracted bandwidth for our IP Service jumped to approximately
112 Mbps for the fiscal year ended March&nbsp;31, 2006 from 54 Mbps for the previous fiscal
year. The number of IP Service contracts for the bandwidth over 100Mbps increased to
157 for the fiscal year ended March&nbsp;31, 2006 from 114 for the fiscal year ended March
31, 2005. This increase is mainly due to an increase in customers&#146; demand for higher
bandwidth for their Internet connectivity. The average revenues per contract for IP
Service was approximately &#165;0.6&nbsp;million at the end of March&nbsp;2006, compared to the
revenues per contract of &#165;0.8&nbsp;million at the end of March&nbsp;2005. Though we do not
expect that revenue per contract come to a growing trend for the fiscal year ending
March&nbsp;31, 2007 due to the continuing competition, we believe that customer demand for
higher bandwidth will continue as the use of broadband by corporate customers expands,
and we will try to acquire new customers and increase the bandwidth of existing
customers as well as maintain the quality of our services and differentiate them from
those of our competitors.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Increased demand for broadband services. </I>Demand for broadband services, IIJ
FiberAccess/F and IIJ DSL/F are increasing rapidly as the services are coming to be
used to connect corporate branches and remote offices. The services uses ADSL lines at
maximum 47 Mbps speed or optical lines at maximum 10 Mbps or 100 Mbps as access lines.
The number of contracts for IIJ FiberAccess/F and IIJ DSL/F increased to 13,297 for
the fiscal year ended March&nbsp;31, 2006 from 9,873 for the fiscal year ended March&nbsp;31,
2005. We also expect that it will also contribute to the increase of value-added
services and systems integration revenues as usage and implementation of these
connectivity services will increase the demand for value-added services such as
security services and network systems integration.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Dial-up access services</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dial-up access services, which include both services for corporate customers and individual
users, accounted for 5.4% of our revenues for the fiscal year ended March&nbsp;31, 2006, 7.0% for the
fiscal year ended March&nbsp;31, 2005, and 8.0% for the fiscal year ended March&nbsp;31, 2004. Dial-up
service revenues depend on the size of our customer base and pricing. The size of our customer base
depends primarily on the popularity of OEM services, and the attractiveness of our service
offerings which is measured primarily by the quality of
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">service provided to subscribers and our ability to attract new customers by offering remote
access solutions in combination with dial-up access and security services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although we also market some services under the IIJ name, due to our limited brand name
recognition among consumers not familiar with the Internet and our limited marketing budget, a
primary focus of our efforts to increase our revenues from individual consumers is our range of OEM
services. For example, Excite Japan markets and sells Internet connectivity services to individual
customers under their own names but provides such services through our Internet network
infrastructure.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Value-added services revenues</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our value-added services consist of network security services, data center facility services
and operation and management services. For the fiscal year ended March&nbsp;31, 2006, value-added
services revenues increased to &#165;6,250&nbsp;million from &#165;5,005&nbsp;million for the fiscal year ended March
31, 2005 and from &#165;4,296&nbsp;million for the fiscal year ended March&nbsp;31, 2004. The increase is
primarily due to the increasing demand for these services from our corporate connectivity
customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The growth of these services is primarily due to the increase in demand for security services
and network outsourcing services such as e-mail and web server hosting services. We expect that
business customers will continue to increase their usage of 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. As a result, we expect our revenue from value-added services
to grow.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other revenues, which included rental fees for network equipment, customer support service,
and sale of Wide-area Ethernet services accounted for 7.4% of our revenues for the fiscal year
ended March&nbsp;31, 2006, 7.6% for the fiscal year ended March&nbsp;31, 2005, and 5.4% for the fiscal year
ended March&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Systems integration revenues, including related equipment sales revenues</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are currently targeting systems integration to drive growth in revenues and operating
income. Systems integration revenues, including related equipment sales revenues for the fiscal
year ended March&nbsp;31, 2006 increased by 48.3% from the previous fiscal year. The increase is
primarily due to the steady increase in outsourced operation revenues, which are monthly recurring
revenues, and in one-time revenues due to the provision of a wider range of consulting, network and
system design, project management, implementation of integration compared to the past, such as
system utilizing broadband lines to connect customers&#146; shops or branches with lower cost and higher
speeds, or consulting on network design and operation, and network security. The increase in
revenues is primarily due to the increasing demand for these services from our connectivity
customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Due to the increase in monthly recurring revenues from outsourcing operations, we expect the
revenues from systems integration will continue show a stead increase annually, though the one-time
systems integration has the trend of seasonal fluctuation in the fiscal year. The primary seasonal
variations in systems integration revenues appear to relate to budgetary cycles of Japanese
companies and typically result in greater revenues from systems integration at the end of the
fiscal year as companies attempt to complete large systems integration projects during those
periods. Systems integration revenues can fluctuate significantly, in accordance with the absence
or addition of a single large order, and are accordingly difficult to forecast.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other equipment sales revenues.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our other equipment sales revenues consist primarily of sales of networking and other related
equipment, other than that provide in connection with our systems integration services. Other
equipment sales revenues can fluctuate significantly, in accordance with the absence or addition of
a single large order, and are accordingly difficult to forecast.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Additional factors affecting revenues</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A number of other factors may affect demand for our services and in turn our revenues,
including overall increases in business usage of Internet and network solutions and our range of
service offerings.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Increase in business usage. </I>Our revenues will be affected by the extent and speed
with which businesses in Japan exploit the Internet and network solutions to their
full potential, including, for example, electronic transactions between businesses and
expanding the range of devices that access the Internet. Such services require
high-quality and high-capacity connectivity services for both businesses and
individuals. Such services also require provision of total network solutions including
various Internet connectivity services, systems integration and other value-added
services which we believe we are well positioned to provide. The degree of business
usage will also depend upon a variety of factors including:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>technological advances, reliability of security systems and users&#146; familiarity
with and confidence in new technologies,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the rate at which Japanese companies in certain industries significantly
increase their Internet usage, particularly the financial, manufacturing and
retail segments, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="7%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>corporate budgets for expenditures for information technologies, including
Internet-related items.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Range of service offerings. </I>To increase our revenues from business users, we have
increased the access and connectivity options to include fiber optic lines and ADSL
lines. We have also completed our multi-site Internet data centers and expanded our
service offerings to include systems management and monitoring. We believe these steps
will allow us to sell a greater variety of services to our high-end corporate users
and to capture a greater amount of the current growth and demand. However, we will
still be strongly dependent on increasing acceptance of our services by large Japanese
companies and by increases in their Information Technology budgets. We expect Internet
usage to continue to grow rapidly in Japan and that businesses will continue to
diversify their uses of the Internet. Our ability to offer a broad range of services
to meet our customers&#146; demands will significantly influence our future revenues.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Synergies between connectivity services, value-added services and systems
integration. </I>Most of our systems integration customers become Internet connectivity
service customers as well, and we expect these relationships to continue. As part of
our systems integration business, we offer solution services for corporate information
network systems, consulting, project planning, system design and systems/operation
outsourcing or Internet VPN solution services which combines the FLET&#146;S Internet
connectivity services with the SEIL, adopted by customers who have multiple locations,
such as branches, offices and factories. The number of contracts concerning these
services is steadily increasing and we seek to enlarge these network integration
services with relatively high gross margin services. The ability to introduce a wide
range of services, including solutions necessary to build corporate information
network</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>systems, like disaster recovery services and Internet VPN, Voice over IP (VoIP), SEIL
and the network service operating system SMF, wireless LAN, is an important competitive
factor.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Costs and expenses</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Costs and expenses include cost of connectivity and value-added services revenues, cost of
systems integration revenues and equipment sales, sales and marketing, general and administrative
and research and development expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Cost of connectivity and value-added services revenues</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our primary cost of connectivity services and value-added services revenues is the leasing
fees that we pay for the leased lines which comprise our network and for the dedicated local access
lines that our subscribers use to connect with our network. Other primary components of our costs
are depreciation and amortization of capital leases for network equipment, personnel and other
expenses for technical and customer support staff and network operation center costs. Most of our
network equipment is leased rather than purchased to take advantage of the financing provided by a
capital lease arrangement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have invested heavily in the past few years in developing and expanding our network,
however, due to a decrease in procurement prices for international backbone lines, our costs have
decreased as a result. For the fiscal year ended March&nbsp;31, 2006, our leased line and other
connectivity costs were equal to &#165;8.9&nbsp;billion or 38.3% of our connectivity and value-added services
revenues. For the previous fiscal year, these costs were equal to &#165;9.0&nbsp;billion, or 45.9% of our
connectivity and value-added services revenues.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Backbone cost. </I>Backbone cost decreased to &#165;3.5&nbsp;billion for the fiscal year ended
March&nbsp;2006 from &#165;3.6&nbsp;billion for the fiscal year ended March&nbsp;2005. We do not expect
that our backbone cost will increase significantly as compared with recent fiscal
years.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Dedicated local access line costs. </I>We collect dedicated local access line fees from
subscribers and pay these fees over to the carriers. Dedicated local access line costs
increased to &#165;4.6&nbsp;billion for the fiscal year ended March&nbsp;2006 from &#165;4.0&nbsp;billion for
the fiscal year ended March&nbsp;2005. Other connectivity costs were &#165;0.8&nbsp;billion for the
fiscal year ended March&nbsp;2006 compared to &#165;1.4&nbsp;billion for the previous fiscal year.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Depreciation and amortization cost decreased to &#165;2.7&nbsp;billion for the fiscal year ended March
2006 from &#165;2.9&nbsp;billion for the fiscal year ended March&nbsp;2005. Capital expenditures for the fiscal
year ended March&nbsp;2006 decreased to &#165;4.8&nbsp;billion from &#165;5.0&nbsp;billion for the fiscal year ended March
2005. We do not expect that the depreciation and amortization will change significantly compared
with recent fiscal years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Costs of systems integration revenues and equipment sales</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our cost of systems integration revenues and equipment sales generally increases or decreases
in tandem with systems integration revenues and equipment revenues. In addition, as we incur
significant systems integration costs up front in connection with the provision of new types of
systems integration service or commencement of a systems integration project, our margins tend to
improve as the number of our customers grows and to the extent we provide ongoing systems
integration work for existing customers. The main determinant of whether our costs will be high
relative to our revenues is whether we are able to generate significantly higher margin systems
integration work. To do so, we must generate systems integration work that relies more heavily on
our engineering and technological expertise instead of systems integration work that primarily
focuses on the delivery of networking equipment. By doing more planning, designing and
engineering-related work rather than just equipment procurement, we believe that not only will we
be able to increase our margins, but we will also be able to increase customer satisfaction and our
subscriber retention
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">and repeat business rates because we will be able to provide our customers with advanced and
cost-effective total Internet solutions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our IBPS systems integration services started to generate higher margins for the fiscal year
ended March&nbsp;2004, as most of the time and expense required for development of this service has been
already incurred.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Over the long term, we seek to improve gross margins through systems integration sales. The
gross margin for systems integration services was 22.9% for the fiscal year ended March&nbsp;31, 2006 in
comparison with 23.0% for the fiscal year ended March&nbsp;31, 2005. We seek to retain our systems
integration customers as our customers for higher-margin consulting, operation and maintenance,
software development and upgrades included in systems integration.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Sales and marketing</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our sales and marketing expenses consist primarily of costs related to marketing and general
advertising, written-off accounts receivable, sales and marketing and personnel expenses. Our sales
and marketing expenses will increase to the extent that we expand our operations and increase our
sales and marketing activities. We expect the sales and marketing expenses will increase for the
fiscal year ending March&nbsp;31, 2007 in accordance with our business expansion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>General and administrative</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our general and administrative expenses include primarily expenses associated with our
management, accounting, finance and administrative functions, including personnel expenses. Our
general and administrative expenses will increase to the extent that we grow our business and add
staff. We expect the general and administrative expenses will increase for the fiscal year ending
March&nbsp;31, 2007 in accordance with our business expansion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Research and development</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our research and development expenses include primarily expenses associated with personnel
expenses related to research and development activities. Our research and development expenses will
increase to the extent that we expand our research and development activities. We expect the
research and development expenses will increase for the fiscal year ending March&nbsp;31, 2007 in
accordance with our business expansion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Other income (expenses)</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our other income and expenses include, interest income and expenses and other items such as
foreign exchange gains or losses, impairment losses on available-for-sale securities and gain on
sale of other investments.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Interest expense. </I>Most of our interest expense is from bank borrowing and capital
leases. Interest income and interest expenses are also affected by the fluctuation of
market interest rates and our total amount of outstanding borrowings. As we increase
capital leases or borrowings in order to finance further development of our backbone
and data centers and for other investments, interest expenses will also increase.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Impairment losses. </I>We also hold other investments, including available-for-sale
securities. The book value of other investments are affected by the fluctuation in the
market price or the decrease in fair values of non-marketable investments. If a
decrease below cost in the market</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>price or fair value of an investment is judged to be other than temporary, we will have
impairment losses on other investments.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Gain on sale of other investments. </I>Gain on sales of other investment is mostly
raised from a sale of available-for-sale securities. We expect that we will continue a
sale of available-for-sale securities to raise the gain for the fiscal year ending
March&nbsp;31, 2007.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>E. Off-Balance Sheet Arrangements.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not have any off-balance sheet arrangements as is defined for purposes of Item&nbsp;5.E. of
Form 20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>F. Tabular Disclosure of Contractual Obligations.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table shows our contractual payment obligations under our agreements as of March&nbsp;31,
2006:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>Payments due by period (in million of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>more</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>less than</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>than</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Contractual Obligations</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1 year</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1-3 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>3-5 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>5 years</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,280</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,990</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,489</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,262</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,314</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">877</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,404</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,317</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase obligations <SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other long-term liabilities
reflected on our balance sheet</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total <SUP style="font-size: 85%; vertical-align: text-top">(2) (3)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,635</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,656</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,921</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">967</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">91</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Represents agreements to purchase goods and services that are enforceable and legally binding
on us and that specify all significant terms including fixed or minimum quantities to be
purchased, fixed, minimum or variable price provisions, and the approximate timing of the
transactions.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>In addition to the above, we plan to contribute &#165;155&nbsp;million to our pension plan for the
fiscal year ending March&nbsp;31, 2007. In February&nbsp;2006, we invested &#165;750&nbsp;million in Internet
Revolution Inc. (&#147;i-revo&#148;), a joint venture that we established with Konami Corporation and in
the joint venture agreement, we agreed that we will provide funding up to &#165;90&nbsp;million to
i-revo between November&nbsp;2006 and the end of April&nbsp;2007 for its capital investment and working
capital.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>The table above does not include obligations for interest payments on debt.</TD>
</TR>

</TABLE>



<P align="center" style="font-size: 10pt">65
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="108"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;6. Directors, Senior Management and Employees.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Directors and Senior Management.</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table provides information about our directors, executive officers and statutory
auditors as of July&nbsp;7, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="15%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="13%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Initial date of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>appointment as</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>director,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Number of IIJ</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>executive officer</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>shares owned</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Current term</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>or statutory</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>as of July 7,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Date of birth</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>expires</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>auditor</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2006</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="13" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Koichi Suzuki
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">President, Chief
Executive Officer and
Representative Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Sept. 3, 1946
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2007
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Dec. 1992
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">12,515</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Toshiya Asaba
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Executive Vice President
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">June&nbsp;12, 1962
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2007
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;1999
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">*</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top" nowrap><DIV style="margin-left:0px; text-indent:-0px">Yoshiaki Hisamoto
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Executive Vice President
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Dec. 14, 1954
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2006
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Hideshi Hojo
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Senior Managing Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Dec. 22, 1957
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2007
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2000
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">*</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Takamichi Miyoshi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">May&nbsp;5, 1963
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2002
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">*</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Akihisa Watai
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director, Chief Financial
Officer and Chief
Accounting Officer
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Sept. 30, 1965
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2004
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Hiroyuki Hisashima
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Oct. 11, 1959
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2007
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2005
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">*</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Kazuhiro Tokita
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Apr. 25, 1969
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2007
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2005
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">*</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Yasurou Tanahashi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Jan. 4, 1941
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2004
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Takashi Hiroi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Feb. 13, 1963
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2004
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top" nowrap><DIV style="margin-left:0px; text-indent:-0px">Yoshifumi Nishikawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Aug. 3, 1938
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2007
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2005
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Junnosuke Furukawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Dec. 5, 1935
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2007
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2005
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Senji Yamamoto
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Apr. 14, 1946
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2006
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Junichi Tate
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Standing Statutory Auditor
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Nov. 6, 1949
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2006
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Masaki Okada
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Statutory Auditor
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Jan. 9, 1959
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2004
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Masaaki Koizumi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Statutory Auditor
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Oct. 4, 1964
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2008
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2004
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Hirofumi Takahashi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Statutory Auditor
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Sep. 1, 1939
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2009
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">June&nbsp;2005
</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">*</TD>
    <TD nowrap valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Owns less than 1% of outstanding shares of IIJ&#146;s common stock.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Koichi Suzuki </I></B>has been our president and representative director since April&nbsp;1994, and
has over 20&nbsp;years of experience in the computer and communications industries. In addition, Mr.
Suzuki is chairman of IIJ Technology Inc. (&#147;IIJ-Tech&#148;), and representative director of Net Care, Inc. (&#147;Net
Care&#148;) and Internet Multifeed Co. (&#147;Multifeed&#148;). He also serves as chairman of IIJ America Inc.
(&#147;IIJ-A&#148;) and a director of atom Co., Ltd. and i-Heart, Inc. From December&nbsp;1992 to April&nbsp;1994, Mr.
Suzuki was a director of IIJ. Prior to joining us, Mr.&nbsp;Suzuki was employed at Japan Management
Association where he served as a general manager.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Toshiya Asaba </I></B>has served as an executive vice president and division director of the Network
Service Department since April&nbsp;2006. Mr.&nbsp;Asaba was a managing director of IIJ from June&nbsp;2002 to
June&nbsp;2004. Mr.&nbsp;Asaba was an executive vice president and division director of
the Solution Department from June&nbsp;2004 to March&nbsp;2006. Mr.&nbsp;Asaba is also a director of IIJ-A,
Multifeed and NTT Resonant Inc. From April 1995 to June&nbsp;1999, Mr.&nbsp;Asaba was a general manager of the
Network Engineering Division. Mr.&nbsp;Asaba joined us in 1992. Mr.&nbsp;Asaba has over ten years of Internet
experience including three years of Internet-related research experience and seven years of
Internet backbone engineering experience, including network design, routing and traffic management.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Yoshiaki Hisamoto </I></B>has served as an executive vice president and as division director of the
Administrative Department since June&nbsp;2006. Mr.&nbsp;Hisamoto joined Nippon Telegraph and Telephone
Public
</DIV>

<P align="center" style="font-size: 10pt">66
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Corporation in April&nbsp;1978 and was a senior manager of the Global Business Department and
Corporate Planning Department of NTT Communications Corporation (&#147;NTT Communications&#148;). Mr.
Hisamoto was general manager of the Accounts and Finance Department of NTT Communications.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Hideshi Hojo </I></B>has served as senior managing director of IIJ since June&nbsp;2006 and as division
director of the Sales Department since August&nbsp;2003.
Mr.&nbsp;Hojo is also a director of Net Care and Internet Revolution
Inc. From
February&nbsp;1998 to June&nbsp;2000, Mr.&nbsp;Hojo acted as general
manager of the Sales Division, from June
2000 to June&nbsp;2002, as a director and from June
2002 to August&nbsp;2003, as managing director and division director of the Sales &#038; Marketing Department. Mr.&nbsp;Hojo joined us
in 1996. Prior to joining us, Mr.&nbsp;Hojo had 16&nbsp;years of experience in the field of sales working for
the Itochu Group.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Takamichi Miyoshi </I></B>has served as a director of IIJ since June&nbsp;2002 and as director and general
manager of the Strategy Planning Division since June 2004. Mr.&nbsp;Miyoshi is a
director of Multifeed. Mr.&nbsp;Miyoshi joined us in April&nbsp;1993.
From October&nbsp;1994, Mr.&nbsp;Miyoshi acted
as general manager of the Network Operations and Systems
Administration Division.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Akihisa Watai </I></B>has served as a director, chief financial officer and chief accounting officer
since June&nbsp;2004. Mr.&nbsp;Watai joined The Sumitomo Bank, Limited (currently Sumitomo Mitsui Banking
Corporation) in April&nbsp;1989 and was temporarily transferred to IIJ from August&nbsp;1996. In February
2000, Mr.&nbsp;Watai joined IIJ permanently and has been general manager of the Finance Division since April&nbsp;2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Hiroyuki Hisashima </I></B>has served as a director since June&nbsp;2005 and has been division director of
the Applied Research and Development Department since
April&nbsp;2006. Mr.&nbsp;Hisashima was general manager of the Technology Department since April&nbsp;2004.
Mr.&nbsp;Hisashima is a director of
IIJ-Tech. Mr.&nbsp;Hisashima joined us in May&nbsp;1996. Prior to joining us, Mr.&nbsp;Hisashima
had 12&nbsp;years of experience in the field of software development.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Kazuhiro Tokita </I></B>has served as a director since June&nbsp;2005 and has been division director of the
Solution Department since April&nbsp;2006. Mr.&nbsp;Tokita was a deputy division director of the Sales
Department since April&nbsp;2005. Mr.&nbsp;Tokita is a director of IIJ-Tech. Mr.
Tokita joined us in May&nbsp;1995. Prior to joining us, Mr.&nbsp;Tokita was employed at Yasuda Kasai Systems
Co., Ltd (Currently Sompo Japan Systems Solutions Inc.) .
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Yasurou Tanahashi </I></B>has served as an outside director of IIJ since June&nbsp;2004. Mr.&nbsp;Tanahashi was
a representative director &#038; president of NS Solutions Corporation, an affiliated company of Nippon
Steel Corporation from April&nbsp;2000 and has been chairman of NS Solutions Corporation since April
2003.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Takashi Hiroi </I></B>has served as an outside director of IIJ since June&nbsp;2004. Mr.&nbsp;Hiroi joined
Nippon Telegraph and Telephone Corporation (&#147;NTT&#148;) in April&nbsp;1986 and has been a senior manager of
the Corporate Management Strategy Division of NTT since May&nbsp;2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Yoshifumi Nishikawa </I></B>has served as an outside director of IIJ since June&nbsp;2005. Mr.&nbsp;Nishikawa
has been president and representative director of Japan Post
Corporation since January 2006 and was an Advisor to Sumitomo
Mitsui Financial Group, Inc.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Junnosuke Furukawa </I></B>has served as an outside director of IIJ since June&nbsp;2005. Mr.&nbsp;Furukawa has
been a director, member of the board &#038; senior advisor of The
Furukawa Electric Co., Ltd. since March
2004. From
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">June&nbsp;1995 to June&nbsp;2003, Mr.&nbsp;Furukawa was President &#038; CEO of The Furukawa Electric Co., Ltd.
and from June&nbsp;2003 to March&nbsp;2004, Mr.&nbsp;Furukawa was Chairman &#038; CEO of The Furukawa Electric Co., Ltd.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Senji Yamamoto </I></B>has served as a director of IIJ since June&nbsp;2006. Mr.&nbsp;Yamamoto has been vice
chairman and representative director of IIJ-Tech and president and representative director of IIJ
Financial Systems Inc. since June&nbsp;2006. From June&nbsp;2000 to October&nbsp;2005, Mr.&nbsp;Yamamoto was President
and CEO of Sony Communication Network Corporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Junichi Tate </I></B>has been a standing statutory auditor of IIJ since June&nbsp;2006. Mr.&nbsp;Tate was a
staff general manager of Corporate Planning Department No.2 of Dai-Ichi Life Insurance Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Masaki Okada </I></B>has been a statutory auditor of IIJ since June&nbsp;2004. Mr.&nbsp;Okada has been admitted
to the Dai-ni Tokyo Bar Association and joined Ishii Law Office in April&nbsp;1988. Mr.&nbsp;Okada has been a
partner in Ishii Law Office since April&nbsp;1997.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Masaaki Koizumi </I></B>has been a statutory auditor of IIJ since June&nbsp;2004. Mr.&nbsp;Koizumi is a Japanese
Certified Public Accountant and joined Eiwa &#038; Co. (Currently Azsa &#038; Co.) in October&nbsp;1987. Mr.
Koizumi retired from Azsa &#038; Co. in September&nbsp;2003 and established Koizumi CPA Office in October
2003.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Hirofumi Takahashi </I></B>has been a statutory auditor of IIJ since June&nbsp;2005. Mr.&nbsp;Takahashi joined
us in August&nbsp;2002 as an Advisor. Prior to joining us, Mr.&nbsp;Takahashi was chairman of Shinko
Investment Trust Management. He had nearly 40&nbsp;years of experience in securities companies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Compensation.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the fiscal year ended March&nbsp;31, 2006, the aggregate compensation we paid or accrued for
all of our executive officers, directors and statutory auditors was approximately &#165;347&nbsp;million.
Presently, our executive officers, directors and statutory auditors are not entitled to pension,
retirement or similar benefits. For a description of our stock option and warrant issuances to
directors and employees, see Item&nbsp;6.E. In the shareholders&#146; meeting held on June&nbsp;28, 2006, the
retirement benefit to Mr.&nbsp;Hideki Matsushita, the standing statutory auditor who retired following
the shareholders&#146; meeting, was approved.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Board Practices.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Directors are elected at a general meeting of shareholders, and the normal term of office of a
director is two years, although they may serve any number of consecutive terms. We do not have
audit or remuneration committees, a standard practice in Japan. We do not have any service
contracts with any of our directors providing for benefits upon termination of employment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In accordance with the requirements of the Corporation Law of Japan, our Articles of
Incorporation provide for not more than three statutory auditors. Statutory auditors, of whom at
least half must be from outside of the company, are elected at a general meeting of shareholders,
and the normal term of office of a statutory auditor is four years, although they may serve any
number of consecutive terms. Statutory auditors are under a statutory duty to oversee the
administration of our affairs by the directors, to examine our financial statements and business
reports to be submitted by the Board of Directors to the general meetings of shareholders and to
report their opinions thereon to the shareholders, and to oversee accounting firms which audit our
financial statements. They are required to attend meetings of the Board of Directors and to express
their opinions if necessary, but they are not entitled to vote. Statutory auditors also have a
statutory duty to provide their report on the audit report prepared by our independent certified
public accountants to the board of statutory auditors, which must submit its audit report to the
Board of Directors and/or the general meetings of shareholders. The board of statutory auditors
will also determine matters relating to the duties of the statutory auditors, such as audit policy
and methods of investigation of our affairs.
</DIV>

<P align="center" style="font-size: 10pt">68
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nasdaq Marketplace Rule&nbsp;4350(a)(1) provides that a foreign private issuer may follow its home
country practice in lieu of the requirements of Rule&nbsp;4350, provided that such foreign private
issuer discloses in its annual reports filed with the Securities and Exchange Commission each
requirement of Rule&nbsp;4350 that it does not follow and describes the home country practice followed
by the issuer in lieu of such requirements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nasdaq Marketplace Rule 4350(c) requires that (i)&nbsp;a majority of the board of directors be
independent directors as defined in Rule&nbsp;4200(a)(15), (ii)&nbsp;independent directors have regularly
scheduled meetings at which only they are present, (iii)&nbsp;compensation of the chief executive
officer and other executive officers be determined, or recommended to the board of directors for
determination, either by a majority of the independent directors or by a compensation committee
comprised solely of independent directors, and (iv)&nbsp;director nominees be selected, or recommended
for selection by the board of directors, either by a majority of the independent directors or by a
nominations committee comprised solely of independent directors, in accordance with the nominations
process set forth in a formal written charter or board resolution. For large Japanese companies
under the Company Law of Japan ( &#147;Large Japanese Companies&#148;), including us, which employ a
corporate governance system based on a board of statutory auditors, Japan&#146;s Company Law has no
independence requirement with respect to directors. As discussed above, the task of overseeing
management and accounting firms is assigned to the statutory auditors, who are separate and
independent from the company&#146;s management. Large Japanese Companies, including us, are required to
have at least 50% &#147;outside&#148; statutory auditor who must meet additional independence requirements
under the Company Law. An outside statutory auditor is defined in the Company Law as a statutory
auditor who had not served as a director, manager or any other employee of the company or any of
its subsidiaries at any time prior to the appointment. Currently, we have four outside statutory
auditors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nasdaq Marketplace Rule 4350(d) requires that (i)&nbsp;each issuer have adopted a formal written
audit committee charter meeting the requirements of Rule&nbsp;4350(d)(1) and (ii)&nbsp;the issuer have an
audit committee of at least three members who are independent as defined under Rule&nbsp;4200(a)(15),
meet the independence criteria set forth in Rule&nbsp;10A-3(b)(1) under the U.S. Securities Exchange Act
of 1934 and satisfy certain other criteria. Like a majority of Japanese companies, we employ the
statutory auditor system as described above. Under this system, the board of statutory auditors is
a legally separate and independent body from the board of directors. The function of the board of
statutory auditors is similar to that of independent directors, including those who are members of
the audit committee, of a U.S. company: to monitor the performance of the directors, and review and
express an opinion on the method of auditing by the company&#146;s accounting firm and on such
accounting firm&#146;s audit reports, for the protection of the company&#146;s shareholders. Large Japanese
Companies, including us, are required to have at least three statutory auditors. Currently, we have
four statutory auditors. In addition, as discussed above, our statutory auditors serve a longer
term than our directors. With respect to the requirements of Rule&nbsp;10A-3 under the U.S. Securities
Exchange Act of 1934 relating to listed company audit committees, we rely on an exemption under
paragraph (c)(3) of that rule which is available to foreign private issuers with boards of
statutory auditors meeting certain criteria.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nasdaq Marketplace Rule 4350(f) provides that each issuer provide for a quorum as specified in
its by-laws for any meeting of holders of common stock, which shall be at least 33 1/3% of the
outstanding shares of the issuer&#146;s voting common stock. We provide for a quorum as specified in the
Articles of Incorporation for any meeting of holders of common stock, which shall be at least
one-third of our outstanding shares of the voting common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nasdaq Marketplace Rule 4350(g) provides that each issuer solicit proxies and provide proxy
statements for all meetings of shareholders and provide copies of such proxy solicitation to
Nasdaq. Currently a Japanese company whose shares are listed on the securities exchanges defined in
the Securities and Exchange Law, including us, may, but is not required to, solicit proxies for
meetings of shareholders. If such a Japanese company solicits proxies for a meeting of
shareholders, it is required to provide proxy
</DIV>

<P align="center" style="font-size: 10pt">69
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">statements and documents for reference as provided for in the Securities and Exchange Law and
provide copies of such proxy statements and documents for reference to the Kanto Local Finance
Bureau.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nasdaq Marketplace Rule 4350(h) provides that each issuer conduct appropriate review of all
related party transactions for potential conflict of interest situations on an ongoing basis and
that all such transactions be approved by the issuer&#146;s audit committee or another independent body
of the board of directors. Following the requirements of the Company Law of Japan, we require a
director to obtain the approval of the Board of Directors in order for such director to accept a
transfer of a product or any other asset of IIJ, to transfer a product or any other asset of such
director to IIJ, to receive a loan from IIJ, or to effect any other transaction with IIJ, for
himself or a third party.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nasdaq Marketplace Rule 4350(i) provides that shareholder approval be obtained prior to the
issuance of designated securities under subparagraph (A), (B), (C)&nbsp;or (D)&nbsp;of Rule&nbsp;4350(i). Where a
Japanese joint stock company (Kabushiki-Gaisha), issues common shares or other shares, stock
acquisition rights or bonds with stock acquisition rights under the Commercial Code of Japan, it is
necessary for the board of directors to determine the conditions of issuance; provided, however,
that this shall not apply if the Articles of Incorporation provide that such conditions shall be
determined by the shareholders&#146; meeting. Currently, IIJ&#146;s Articles of Incorporation do not provide
for any such exception. Additionally, if the company issues such securities to persons other than
shareholders (in case of common shares or other shares) at a specially favorable issue price or (in
case of stock acquisition rights or bonds with stock acquisition rights) on specially favorable
conditions, even when there are provisions related thereto in the Articles of Incorporation, some
matters related to such issuance shall be resolved by special resolution of the shareholders&#146;
meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The rights of ADR holders, including their rights relating to corporate governance practices,
are provided in the deposit agreement which is an exhibit to this annual report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;LIMITATION OF LIABILITIES OF SOME OUTSIDE DIRECTORS AND SOME OUTSIDE STATUTORY AUDITORS
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have entered into an agreement with four of our outside directors, Mr.&nbsp;Yoshifumi Nishikawa,
Mr.&nbsp;Junnosuke Furukawa, Mr.&nbsp;Yasurou Tanahashi and Mr.&nbsp;Takashi Hiroi, and two of our outside
statutory auditors, Mr.&nbsp;Masaki Okada and Mr.&nbsp;Masaaki Koizumi that limits their liabilities to us
for damages suffered by us due to their acts taken in good faith and without gross negligence,
amounting to &#165; 10&nbsp;million or the aggregate of the amounts set forth in Article&nbsp;425 paragraph 1 of
the Corporation Law of Japan, whichever is higher.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Employees.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of March&nbsp;31, 2006, we had 987 employees, including employees of our consolidated
subsidiaries, and we had 969 employees as of March&nbsp;31, 2005 and 919 employees as of March&nbsp;31, 2004.
Approximately 70% of these employees were in our engineering division, 20% in our sales division
and 10% in our administrative division for each of the most recent three fiscal years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except for 22 employees in the United States employed by our subsidiary, IIJ-A, all of our
employees work in Japan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have never experienced any labor disputes and consider our labor relations to be good. To
our knowledge, none of our employees is a member of any union.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>E. Share Ownership.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information on share ownership required by this item is in Item&nbsp;6.A. above.
</DIV>

<P align="center" style="font-size: 10pt">70
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Stock Option Plan</B>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>June&nbsp;2001 Stock Option Plan</I>. In June&nbsp;2001, we implemented a stock option plan under
which options to acquire a total of 1,975 shares or 790,000 ADS equivalents, or
approximately 1.8% of total outstanding shares on that date, were granted to 44
directors and employees on August&nbsp;2, 2001. The option exercise price for the shares
was determined by setting the price 5% above the 30-days average of the closing market
prices beginning 45&nbsp;days prior to the date of the grant which
was &#165;403,661 per share
and has been adjusted to &#165;334,448 as a result of issuances of common shares. The
options are exercisable at various times from two years to ten years from the date of
grant.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>April&nbsp;2000 Stock Option Plan</I>. In April&nbsp;2000, we implemented a stock option plan
under which our directors and employees were granted options to
acquire a total of 1,475
shares or 590,000 ADS equivalents, or approximately 1.2% of total outstanding shares
on that date. The options were granted to 34 directors and employees on May&nbsp;31, 2000.
The option exercise price was determined by setting the price at 5% above the 30-day
moving average of closing market prices beginning 45&nbsp;days prior to the date of grant,
which was 2,611,112 per share and has been subsequently
adjusted to &#165;2,163,418 as a
result of issuances of common shares. The options are exercisable at various times
from two years to ten years from the date of grant.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>March&nbsp;2001 Warrant Issuance</I>. On March&nbsp;31, 2001, certain directors of IIJ were
provided with 375 warrants exercisable for shares of common stock of IIJ-Tech. Each
warrant is exercisable for one share of common stock up to seven or eight years from
the date of grant at an exercise price of &#165;300,000 and was purchased for 1% of the
exercise price.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 3%">
We conducted a 1 to 5 stock split effective on October 11, 2005. The
numbers of shares and the option exercise prices for the two stock
option plans above are calculated based on the assumption that the
stock split was made at the time of implementation.</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Employee Stock Purchase Plan</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have an employee stockholding association that holds 1,317 shares of common stock, or 0.6%
of our outstanding shares, as of March&nbsp;31, 2006. The association provides designated employees with
the opportunity to purchase shares at market value. Shares are held in the name of the employee
stock purchase program until the employee resigns or retires. The representative of the employee
shareholders&#146; association exercises voting rights in accordance with the instructions of each
employee shareholder.
</DIV>
<DIV align="left">
<A name="109"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;7. Major Shareholders and Related Party Transactions.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Major Shareholders.</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table shows information regarding beneficial ownership of our common stock as of
July&nbsp;7, 2006 by each shareholder known by us to own beneficially more than 5% of our common stock
and all directors and executive officers as a group. We are not required by Japanese law to
disclose beneficial ownership of our common stock. As explained in &#147;Reporting Requirements of
Shareholders&#151;Report of Substantial Shareholdings&#148; in Item&nbsp;10.B. of this annual report on Form 20-F,
any person who becomes, beneficially and solely or jointly, a holder of more than 5% of our
outstanding common stock must file a report with the relevant local finance bureau of the Ministry
of Finance. The information in this table is based upon our shareholders of record and reports
filed with the Financial Services Agency and U.S. Securities and Exchange Commission.
</DIV>

<P align="center" style="font-size: 10pt">71
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Shares of common stock outstanding,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>beneficially owned as of July 7, 2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Percentage</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nippon Telegraph and Telephone Corporation and affiliates <SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60,675</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">29.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Koichi Suzuki</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Itochu Corporation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,430</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Directors and executive officers as a group <SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.5</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes Nippon Telegraph and Telephone Corporation (&#147;NTT&#148;), which owns 50,475 shares, or
24.7%, and NTT Communications Corporation (&#147;NTT Communications&#148;), which owns 10,200 shares, or
5.0%. NTT acquired ownership of its shares, and NTT Communications acquired additional shares
on September&nbsp;16, 2003.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes Koichi Suzuki&#146;s holding which is also separately set forth above. No other director
or executive officer is a beneficial owner of more than 5%.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our major shareholders have the same voting rights as other holders of our common stock.
Under our share subscription agreement with NTT, we have agreed that NTT has the contractual right
to nominate up to three persons to serve as either directors or statutory auditors subject to
approval by our shareholders at the first meeting of shareholders after NTT&#146;s investment. We are
not controlled directly or indirectly by any other entity and are not aware of any arrangement to
effect a change in control of us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;According to our register of shareholders, as of March&nbsp;31, 2006, there were 5,458 holders of
common stock of record worldwide. As of March&nbsp;31, 2006, The Bank of New York, depositary for our
ADSs, held approximately 20.0% of the outstanding common stock on that date. According to The Bank
of New York, as of March&nbsp;31, 2006, there were eight ADR holders of record with addresses in the
United States. Because some of these shares were held by brokers or other nominees, the number of
record holders with addresses in the United States might not fully show the number of beneficial
owners in the United States. Of the 204,300 shares of common stock outstanding as of March&nbsp;31,
2006, 40,786 shares were held in the form of 16,314,400 ADSs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Related Party Transactions.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>NTT-affiliated Companies. </I>Since April&nbsp;1, 2005 through March&nbsp;31, 2006, we have paid &#165;5,837
million for international and domestic backbone and local access line costs to NTT-affiliated
companies such as NTT Communications, Nippon Telegraph and Telephone East Corporation (&#147;NTT East&#148;)
and Nippon Telegraph and Telephone West Corporation (&#147;NTT West&#148;). In addition, we paid &#165;1,969
million for co-location costs and telecommunication expenses to NTT Communications, NTT East and
NTT West and paid &#165;270&nbsp;million for other costs, mainly outsourcing costs to NTT Communications, NTT
East and NTT West. We received payments of &#165;1,395&nbsp;million for OEM services, Internet connectivity
services and operation fees for data centers from NTT Communications, NTT East and NTT West. On an
ongoing basis in the ordinary course of business, we pay NTT-affiliated companies for international
and domestic backbone and local access line costs and for co-location costs and telecommunications
expenses and receive payments from NTT-affiliated companies for OEM services, Internet connectivity
services and operating fees for data centers. We do not have any outstanding loans between NTT and
its affiliated companies and us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Transactions with equity method affiliates. </I>In the ordinary course of business, we have
various sales, purchase and other transactions with companies which are owned 20% to 50% by us and
are accounted for by the equity method. Account balances and transactions with such 20% to 50%
owned companies as of and for the fiscal year ended March&nbsp;31, 2006 are presented as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>millions of yen</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">253</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,286</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">656</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of March&nbsp;31, 2006, we had loans to certain equity method investees of which the carrying
amount, net of valuation allowance was &#165;35&nbsp;million.
</DIV>

<P align="center" style="font-size: 10pt">72
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In January&nbsp;19, 2006, we entered into a joint venture agreement regarding the establishment and
management of Internet Revolution Inc. (&#147;i-revo&#148;) with Konami Corporation. In the agreement, we
committed an additional contribution for capital investment or working capital to i-revo of up to
&#165;90&nbsp;million for the period from November&nbsp;2006 to April&nbsp;2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except as described above, since March&nbsp;31, 2005, there has been no transaction with or loan
between us or any of our subsidiaries and:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any enterprise that directly or indirectly controls, is controlled by, or is in common
control with us or any of our subsidiaries,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any director, officer, statutory auditor or family member of any of the preceding or
any enterprise over which such person directly or indirectly is able to exercise
significant influence,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any individual shareholder directly or indirectly having significant influence over
us or any of our subsidiaries or a family member of such individual or any enterprise
over which such person directly or indirectly is able to exercise significant influence,
or their respective family members or enterprises over which they exercise significant
influence, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any unconsolidated enterprise in which we have a significant influence or which has a
significant influence over us.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Crosswave. </I>Prior to the year ended March&nbsp;31, 2003, we accounted for Crosswave Communications
Inc. (&#147;Crosswave&#148;) under the equity method. As a result of Crosswave&#146;s commencement of corporate
reorganization, the amounts of transactions with Crosswave as of and for the fiscal year ended
March&nbsp;31, 2004 are presented as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>millions of yen</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">1,196</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,816</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues from Crosswave consisted principally of dedicated Internet connectivity services,
monitoring services and sales of network systems.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our sale of network systems to Crosswave amounted to &#165;28&nbsp;million for the fiscal year ended
March&nbsp;31, 2004. Related cost of purchased equipment sold amounted to &#165;27&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost and expenses incurred from transactions with Crosswave mainly consisted of the cost of
dedicated high-speed data communication services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Interests of Experts and Counsel.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="110"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;8. Financial Information.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Consolidated Statements and Other Financial Information.</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Financial Statements</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The consolidated financial statements required by this item begin on page F-1.
</DIV>


<P align="center" style="font-size: 10pt">73
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Legal or Arbitration Proceedings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information on legal or arbitration proceedings required by this item is in Item&nbsp;4.B.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Dividend Policy</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Due to our accumulated deficit and shareholders&#146; capital deficiency, we are accordingly unable
to legally make and currently has no plans for dividend distributions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Significant Changes.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except as otherwise disclosed in this annual report on Form 20-F, there has been no
significant change in our financial condition since March&nbsp;31, 2006, the date of our last audited
financial statements.
</DIV>
<DIV align="left">
<A name="111"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;9. The Offer and Listing.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Offer and Listing Details.</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;American Depositary Shares (&#147;ADSs&#148;) representing our common stock have been quoted on the
Nasdaq National Market since August&nbsp;4, 1999 under the symbol &#147;IIJI&#148;. The current ADS/share ratio is
400 ADSs per 1 share of our common stock. Our shares of common stock have been quoted on the
Mothers market of the Tokyo Stock Exchange (&#147;TSE&#148;) since December&nbsp;2, 2005 under the stock code
number &#147;3774&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table shows, for the periods indicated, the high and low price of our ADSs and
shares of common stock on the Mothers market of the TSE for the periods indicated:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Nasdaq</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Mothers market of the TSE</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>(per ADS)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>(per share of common stock)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">

<TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Fiscal year ended/ending March 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">11.88</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">4.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.34</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.80</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.41</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.87</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.23</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14.88</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">584,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">409,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.31</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14.88</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">548,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">484,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">409,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.65</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.41</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">517,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">296,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><B>Month</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">January&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">584,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">420,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">February&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">544,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">428,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">March&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">458,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">409,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">April&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.65</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">517,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">425,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">May&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.47</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">456,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">326,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">June&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.41</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">385,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">296,000</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">74
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Price data are based on prices throughout the sessions for each corresponding period at each
stock exchange.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>The high and low price of our shares of common stock on the Mothers market of the TSE for the
fiscal year ended March&nbsp;31, 2006 and the third quarter of the fiscal year ended March&nbsp;31, 2006
show the high and low price for the period on and after December&nbsp;2, 2005, when we listed on
the Mothers market of the TSE.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Plan of Distribution.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Markets.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ADS representing our common stock have been quoted on the Nasdaq National Market since August
4, 1999 under the symbol &#147;IIJI&#148;. Our shares of common stock have been quoted on the Mothers market
of the TSE since December&nbsp;2, 2005 under the stock code number &#147;3774&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Selling Shareholders.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>E. Dilution.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>F. Expenses of the issue.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="112"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;10. Additional Information.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Share Capital.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not required.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Memorandum and Articles of Association.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Objects and Purposes in Our Articles of Incorporation</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Article&nbsp;2 of our Articles of Incorporation states our objects and purposes:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Telecommunications business under the Telecommunications Business Law,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Processing, mediation and provision of information and contents by using
telecommunications networks,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Agency for the management business such as the management of networks and the
management of information and telecommunications systems,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Planning, consulting service, development, operation and maintenance of or for
information and telecommunications systems,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Development, sales, lease and maintenance of computer software,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">75
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Development, sales, lease and maintenance of telecommunications machinery and
equipment,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Telecommunications construction,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Agency for non-life insurance,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Research, study, education and training related to the foregoing, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any and all businesses incidental or related to the foregoing.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Provisions Regarding Our Directors</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no provision in our Articles of Incorporation as to a director&#146;s power to vote on a
proposal, arrangement or contract in which the director is materially interested, but the
Corporation Law of Japan provides that such director is required to refrain from voting on such
matters at the board of director&#146;s meetings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan provides that compensation for directors is determined at a
general meeting of shareholders of a company. Within the upper limit approved by the shareholders&#146;
meeting, the board of directors will determine the amount of compensation for each director. The
board of directors may, by its resolution, leave such decision to the president&#146;s discretion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan provides that a significant loan from third party by a company
should be approved by the board of directors. Our regulations of the board of directors have
adopted this policy.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no mandatory retirement age for directors under the Corporation Law of Japan or our
Articles of Incorporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no requirement concerning the number of shares one individual must hold in order to
qualify him or her as a director under the Corporation Law of Japan or our Articles of
Incorporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Rights of Shareholders of our Common Stock</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have issued only one class of shares, our common stock. Rights of holders of shares of our
common stock have under the Corporation Law of Japan and our Articles of Incorporation include:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the right to receive dividends when the payment of dividends has been approved at a
shareholders&#146; meeting, with this right lapsing three full years after the due date for
payment according to a provision in the Articles,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the right to receive interim dividends as provided for in the Articles, with this
right lapsing three full years after the due date for payment according to a provision
in the Articles,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the right to vote at a shareholders&#146; meeting (cumulative voting is not allowed
under the Articles),</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the right to receive surplus in the event of liquidation, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the right to require us to purchase shares when a shareholder opposes resolutions
including (i)&nbsp;the transfer of all or material part of the business, (ii)&nbsp;an amendment
of the Articles to establish a restriction on share transfer, (iii)&nbsp;a share exchange
or share transfer to establish a holding</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">76
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>company, (iv)&nbsp;split of the company or (v)
merger, all of which must be consummated by a two-thirds affirmative vote of the
voting rights of the shareholders at a shareholders&#146; meeting at which shareholders
having not less than one-third of the total number of voting rights held by all
shareholders who can exercise their voting rights are in attendance.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A shareholder is generally entitled to one vote per one unit of our shares at a shareholders&#146;
meeting. In general, under the Corporation Law of Japan and our Articles of Incorporation, a
shareholders&#146; meeting may adopt a resolution by a majority of the voting rights represented at the
meeting. The Corporation Law of Japan and our Articles of Incorporation require a quorum for the
election of directors and statutory auditors of not less than one-third of the total number of
voting rights held by all shareholders who can exercise their voting rights. A corporate
shareholder, having more than one-quarter of its voting rights directly or indirectly held by us,
does not have voting rights. We have no voting rights with respect to our own common stock.
Shareholders may exercise their voting rights through proxies, provided that a shareholder may
appoint only one shareholder who has a voting right as its proxy. Our board of directors may
entitle our shareholders to cast their votes in writing. Our board of directors may also entitle
our shareholders to cast their votes by electrical devices.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While the Corporation Law of Japan, in general, requires a quorum of the majority of voting
rights and approval of two-thirds of the voting rights presented at the meeting of any material
corporate actions, it allows a company to reduce the quorum for such special resolutions by its
Articles of Incorporation to not less than one-third of the total number of voting rights held by
all shareholders who can exercise their voting rights. We adopted a quorum of not less than
one-third of the total number of voting rights in our Articles of Incorporation for special
resolutions for material corporate actions, such as:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a reduction of the stated capital,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>amendment of our Articles of Incorporation (except amendments that the board of
directors are authorized to make under the Corporation Law of Japan),</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>establishment of a 100% parent-subsidiary relationship through a share exchange or
share transfer requiring shareholders&#146; approval,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a dissolution, merger or consolidation requiring shareholders&#146; approval,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a company split requiring shareholders&#146; approval,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a transfer of the whole or an important part of our business,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the taking over of the whole of the business of any other corporation requiring
shareholders&#146; approval, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>issuance of new shares at a specially favorable price, or issuance of stock
acquisition rights or bonds with stock acquisition rights with specially favorable
conditions to persons other than shareholders.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan provides additional specific rights for shareholders owning a
substantial number of voting rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders holding more than one sixth of the total number of the voting rights of all
shareholders who can exercise their voting rights have the right to oppose:
</DIV>

<P align="center" style="font-size: 10pt">77
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>short-form share transfer (only in respect of the shareholders of the company to be
a 100% parent company by the short-form share transfer),</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>short-form company split into an existing company (only in respect of the
shareholders of the exiting company that takes over the target business of the split
company), and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>short-form absorption (only in respect of the shareholders of the exiting company
that absorbs the target company by the short-form absorption).</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders holding 10% or more of the total number of voting rights of all shareholders (or
our total outstanding shares) have the right to apply to a court of competent jurisdiction, or
competent court, for:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>dissolution, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>commencement of reorganization proceedings as provided for in the Company
Reorganization Law of Japan.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders who have held 3% or more of the total number of voting rights of all shareholders
(or our total outstanding shares) for six months or more have the right to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>demand the convening of a general meeting of shareholders,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>apply to a competent court for removal of a director or statutory auditor,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>apply to a competent court for removal of a liquidator, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>apply to a competent court for an order to inspect our business and assets in a
special liquidation proceeding.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders holding 3% or more of the total number of voting rights of all shareholders (or
our total outstanding shares) have the right to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>examine our accounting books and documents and make copies of them, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>apply to a competent court for appointment of an inspector to inspect our operation
or financial condition.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders who have held 1% or more of the total number of voting rights of all shareholders
for six months or more have the right to apply to a competent court for appointment of an inspector
to review the correctness of the convocation and voting procedures of a general meeting of
shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders who have held 1% or more of the total number of voting rights of all shareholders
or 300 voting rights for six months or more have the right to demand that certain matters be made
objects and added to the agenda items at a general meeting of shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders who have held any number of shares for six months or more have the right to
demand:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>us to institute an action to enforce the liability of one of our directors or
statutory auditors,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>us to institute an action to recover from a recipient the benefit of a proprietary
nature given in relation to exercising the right of a shareholder, and</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">78
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a director on our behalf for the cessation of an illegal or ultra vires action.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no provision under the Corporation Law of Japan or our Articles of Incorporation
which forces shareholders to make additional contributions when requested by us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Corporation Law of Japan, in order to change the rights of shareholders which are
stipulated and defined in our Articles of Incorporation, we must amend our Articles of
Incorporation. Amendment must be approved by a special resolution of shareholders where two-thirds
of shareholders vote at a shareholders&#146; meeting at which shareholders having not less than
one-third of the voting rights held by all shareholders are in attendance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Annual general meetings and extraordinary general meetings of shareholders are convened by a
representative director based on the determination to convene it by our board of directors. A
shareholder having held 3% or more of our total outstanding shares for six months or more is
entitled to demand the directors to convene a shareholders&#146; meeting under the Corporation Law of
Japan. Under our Articles of Incorporation, shareholders of record as of March&nbsp;31 of each year have
the right to attend the annual general meeting of our shareholders. In order to determine the
shareholders entitled to attend extraordinary general meetings of our shareholders, we are required
to make public notice of record date at least two weeks prior to the record date. A convocation
notice will be sent to these shareholders at least two weeks prior to the date of the shareholders&#146;
meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Restrictions on Holders of our Common Stock</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no restriction on non-resident or foreign shareholders on the holding of our shares
or on the exercise of voting rights. However, pursuant to a provision of our share handling
regulations, a shareholder
who does not have an address or residence in Japan is required to file its temporary address
in Japan or that of a standing proxy having any address or residence in Japan with our transfer
agent.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no provision in our Articles of Incorporation that would have the effect of delaying,
deferring or preventing a change in control that would operate only with respect to a merger,
acquisition or corporate restructuring involving us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no provision in our Articles of Incorporation or other subordinated rules regarding
the ownership threshold, above which shareholder ownership must be disclosed. A shareholder holding
more than 5% of the shares in a public company in Japan is required to disclose such shareholding
pursuant to the Securities Exchange Law of Japan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no provision in our Articles of Incorporation governing changes in the capital more
stringent than is required by law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For a description of rights of holders of ADSs, please see the &#147;Description of American
Depositary Receipts&#148; section in our F-1 Registration Statement (File No.&nbsp;333-10584), declared
effective on August&nbsp;3, 1999, as amended, hereby incorporated by reference.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Material Contracts.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
following are summaries of our material contracts, other than those
we entered into in the ordinary course of business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Subscription Agreement, dated September&nbsp;16, 2003, between Internet Initiative Japan Inc. and
Nippon Telegraph and Telephone Corporation. </I>On September&nbsp;16, 2003, we entered into a Subscription
Agreement with Nippon Telegraph and Telephone Corporation (&#147;NTT&#148;) under which NTT agreed to
purchase 10,883
</DIV>

<P align="center" style="font-size: 10pt">79
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">shares of our common stock for &#165;951,300 per share, or approximately &#165;10.4&nbsp;billion.
After the consummation of this agreement, NTT and its affiliates owned a total of 12,315 shares of
our common stock, or approximately 31.6%. Under the terms of this agreement, we and NTT agreed to
undertake efforts to jointly engage in the development of broadband and Information Technology and
other related businesses, to expand the business relationship between the two parties in connection
with new business opportunities of us and to discuss secondment of employees between us and NTT.
The agreement also provides NTT with the right to maintain its current percentage ownership in our
company if we issue new shares and has the right to request that we file a registration statement
to enable NTT to sell its shares in the United States or Japanese markets. In addition, the
agreement gives NTT the right to nominate up to three persons to serve on either our board of
directors or our board of statutory auditors subject to approval of any such nomination by our
shareholders at the first meeting of shareholders after NTT&#146;s investment.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Service Agreement dated, March&nbsp;25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc. </I>On March&nbsp;25, 2004, we entered into a Service Agreement with IIJ America Inc.
(&#147;IIJ-A&#148;), under which IIJ-A provides the operation and maintenance services for the U.S. portion
of our Internet backbone and we and IIJ-A agree to the method for calculating pricing for the
operation and maintenance of the backbone.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Limitation of Liability Agreement dated, June&nbsp;29, 2005 and June&nbsp;28, 2006, between Internet
Initiative Japan Inc. and outside directors and outside statutory auditors. </I>We entered into a
Limitation of Liability Agreement with our outside directors, Mr.&nbsp;Yoshifumi Nishikawa and Mr.
Junnosuke Furukawa on June&nbsp;29, 2005, and Mr.&nbsp;Yasurou Tanahashi and Mr.&nbsp;Takashi Hiroi as our outside
directors and Mr.&nbsp;Masaki Okada and Mr.&nbsp;Masaaki Koizumi as our outside statutory auditors on June
28, 2006, respectively, under which we limit the liability of outside directors and outside
statutory auditors in accordance to the rules defined in Article&nbsp;427 of the Corporation Law of
Japan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Joint Venture Agreement, dated, January&nbsp;19, 2006, between Internet Initiative Japan Inc. and
Konami Corporation. </I>We entered into a joint venture agreement regarding the establishment and
management of Internet Revolution Inc. (&#147;i-revo&#148;) with Konami Corporation. In the agreement, we
committed an additional contribution for capital investment or working capital to i-revo of up to
&#165;90&nbsp;million for the period from November&nbsp;2006 to April&nbsp;2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Exchange Controls.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There are no laws, decrees, regulations or other legislation in Japan that affect either our
ability to import or export capital for our use or our ability to pay dividends to non-resident
holders of our securities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>E. Taxation.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Japanese Taxation</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a discussion summarizing material Japanese tax consequences to an owner of
shares or ADSs who is a non-resident of Japan or a non-Japanese corporation without a permanent
establishment in Japan to which the relevant income is attributable. The statements regarding
Japanese tax laws set forth below are based on the laws in force and as interpreted by the Japanese
taxation authorities as at the date hereof. These statements are subject to changes in the
applicable Japanese laws or double taxation conventions occurring after that date. This summary is
not exhaustive of all possible tax considerations which may apply to a particular investor.
Potential investors should satisfy themselves as to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the overall tax consequences of the ownership and disposition of shares or ADSs,
including specifically the tax consequences under Japanese law,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the laws of the jurisdiction of which they are resident, and</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">80
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any tax treaty between Japan and their country of residence, by consulting their
own tax advisers.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese
withholding tax on dividends paid by Japanese corporations. Stock splits, except when treated as
dividends in certain conditions, are not subject to Japanese income tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Convention between the Government of Japan and the Government of the United States of
America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (the &#147;Treaty&#148;) was newly signed on November&nbsp;7, 2003 and the Treaty entered into
force on March&nbsp;30, 2004. Upon the Treaty coming into force, the Convention between Japan and the
United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income, signed on March&nbsp;8, 1971 (the &#147;Prior Treaty&#148;) ceased to have
effect. The Treaty reduces the maximum rate of Japanese withholding tax which may be imposed on
dividends paid to a United States resident or corporation not having a &#147;permanent establishment&#148; in
Japan. A &#147;permanent establishment&#148; in Japan is generally a fixed place of business for industrial
or commercial activity in Japan. With respect to taxes withheld at source, the Treaty is applicable
for amount taxable on or after July&nbsp;1, 2004. The other provisions of the Treaty are applicable to
the fiscal year beginning on or after January&nbsp;1, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Treaty, the maximum withholding rate for most shareholders is limited to 10% of the
gross amount actually distributed. However, the maximum rate is 5% of the gross amount actually
distributed, if the recipient is a corporation that owns directly or indirectly, on the date on
which entitlement to the dividends is determined, at least 10% of the voting shares of the paying
corporation. Moreover, withholding tax on dividends is not imposed, if the recipient is
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a corporation that has owned, directly or indirectly through one or more residents
of either Japan or the U.S., more than 50% of the voting shares of the paying
corporation for the period of twelve months ending on the date on which entitlement to
the dividends is determined and which meets additional requirements, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a pension fund , provided that such dividends are not derived from the carrying on
of a business, directly or indirectly, by such pension fund.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes changes of the maximum withholding rate imposed on dividends by
the Treaty:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="43%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="17%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="18%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left">The Prior Treaty</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="2">The Treaty</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">10% or more of the voting shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">10</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" nowrap align="left">More than 50% of the voting shares<BR></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left">10% to 50% of the voting shares<BR></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">15</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" nowrap align="left">Others<BR></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">10</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For purposes of the Treaty and Japanese tax law, U.S. holders of ADRs will be treated as the
owners of the shares underlying the ADSs evidenced by the ADRs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unless an applicable tax treaty, convention or agreement reduces the maximum rate of
withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese
corporations to a non-resident or non-Japanese corporation is 20%. Japan has entered into income
tax treaties, conventions or agreements, reducing the above-mentioned withholding tax rate for
investors with a number of countries. These countries include, among others, Australia, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The withholding tax
rate is further reduced if investors and IIJ have some capital relationship as provided for in an
applicable tax treaty.
</DIV>

<P align="center" style="font-size: 10pt">81
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Non-resident holders who are entitled to a reduced rate of Japanese withholding tax on payment
of dividends by IIJ must submit the required form in advance through IIJ to the relevant tax
authority before payment of dividends. The required form is the Application Form for Income Tax
Convention regarding Relief from Japanese Income Tax on Dividends. A standing proxy for
non-resident holders may provide such application service. See &#147;Description of Capital Stock &#151;
General&#148;. With respect to ADSs, the reduced rate is applicable if The Bank of New York, as
depositary, or its agent submits two Application Forms for Income Tax Convention &#151; one form must be
submitted before payment of dividends, and the other form must be submitted within eight months
after our fiscal year end. To claim the reduced rate, a non-resident holder of ADSs will be
required to file proof of taxpayer status, residence and beneficial ownership, as applicable. The
non-resident holder will also be required to provide information or documents clarifying its
entitlement to the tax reduction as may be required by the depositary.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A non-resident holder of shares or ADSs who does not submit an application in advance will be
entitled to claim from the relevant Japanese tax authority a refund of withholding taxes withheld
in excess of the rate of an applicable tax treaty.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gains derived from the sale outside Japan of the shares or ADSs by a non-resident of Japan or
a non-Japanese corporation are in general not subject to Japanese income or corporation taxes. In
addition, gains derived from the sale of shares or ADSs within Japan by a non-resident of Japan or
non-Japanese corporation not having a permanent establishment in Japan are in general not subject
to Japanese income or corporation taxes. An individual who has acquired shares or ADSs as a
distributee, legatee or donee may have to pay Japanese inheritance and gift taxes at progressive
rates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IIJ has paid or will pay any stamp, registration or similar tax imposed by Japan in connection
with the issue of the shares, except that IIJ will not pay any tax payable in connection with the
transfer or sale of the shares by a holder thereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>United States Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discusses United States federal income tax consequences of the ownership of
shares or ADSs. It only applies to U.S. holders of shares or ADSs, as defined below, who hold their
shares or ADSs as capital assets. It does not address special classes of holders, some of whom may
be subject to other rules including:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>tax-exempt entities,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>life insurance companies,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>dealers in securities,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>traders in securities that elect to mark-to-market,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>investors liable for alternative minimum tax,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>investors that actually or constructively own 10% or more of the voting stock of IIJ,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>investors that hold shares or ADSs as part of a straddle or a hedging or conversion
transaction, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>investors whose functional currency is not the U.S. dollar.</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This discussion is based on the tax laws of the United States, including the Internal Revenue
Code of 1986, as amended, its legislative history, existing and proposed regulations and
administrative and judicial interpretations, as currently in effect, as well as on the Treaty.
These laws are subject to change, possibly on a retroactive basis. In addition, this discussion is
based in part upon the representations of the depositary and the assumption that each obligation in
the deposit agreement relating to the ADRs and any related agreement will be performed in
accordance with its terms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For purposes of this discussion, a &#147;U.S. holder&#148; is a beneficial owner of shares or ADSs that is:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a citizen or resident of the United States,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a domestic corporation,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an estate whose income is subject to United States federal income tax regardless of
its source, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a trust if a United States court can exercise primary supervision over the trust&#146;s
administration and one or more United States persons are authorized to control all
substantial decisions of the trust.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This discussion addresses only United States federal income taxation. You should consult your
own tax advisor regarding the United States federal, state and local and other tax consequences of
owning and disposing of shares and ADSs in your particular circumstances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In general, and taking into account the earlier assumptions, for United States federal income
tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares
represented by those ADSs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be
subject to United States federal income tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The discussion under the headings &#147;Taxation of Dividends&#148; and &#147;Taxation of Capital Gains&#148;
assumes that we will not be treated as a passive foreign investment company (PFIC)&nbsp;for U.S. federal
income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see the
discussion under the heading &#147;PFIC Rules&#148; below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Taxation of Dividends</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the United States federal income tax laws, if you are a U.S. holder, the gross amount of
any dividend we pay out of our current or accumulated earnings and profits (as determined for
United States federal income tax purposes) is subject to United States federal income taxation. If
you are a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January
1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of
15% provided that you hold the shares or ADSs for more than 60&nbsp;days during the 121-day period
beginning 60&nbsp;days before the ex-dividend date and meet other holding period requirements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;You must include any Japanese tax withheld from the dividend payment in this gross amount even
though you do not in fact receive it. The dividend is taxable to you when you, in the case of
shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively.
The dividend will not be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States corporations. The
amount of the dividend distribution that you must include in your income as a U.S. holder will be
the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S.
dollar rate on the date the dividend distribution is includible in your income, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting
from currency exchange fluctuations during the period from the date you include the dividend
</DIV>

<P align="center" style="font-size: 10pt">83
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary
income or loss and will not be eligible for the special tax rate applicable to qualified dividend
income. The gain or loss generally will be income or loss from sources within the United States for
foreign tax credit limitation purposes.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Distributions in excess of current and accumulated earnings and profits, as determined for
United States federal income tax purposes, will be treated as a return of capital to the extent of
your basis in the shares or ADSs and thereafter as capital gain.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subject to certain limitations, the Japanese tax withheld in accordance with the Treaty and
paid over to Japan will be creditable against your United States federal income tax liability.
Special rules apply in determining the foreign tax credit limitation with respect to dividends that
are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to
you under Japanese law or under the Treaty, the amount of tax withheld that is refundable will not
be eligible for credit against your United States federal income tax liability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends constitute income from sources outside the United States, but dividends paid in
taxable years beginning before January&nbsp;1, 2007 generally will be &#147;passive&#148; or &#147;financial services&#148;
income, and dividends paid in taxable years beginning after December&nbsp;31, 2006 will, depending on
your circumstances, be &#147;passive&#148; or &#147;general&#148; income which, in either case, is treated separately
from other types of income for purposes of computing the foreign tax credit allowable to you.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Taxation of Capital Gains</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If you sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or
loss for United States federal income tax purposes equal to the difference between the U.S. dollar
value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares
or ADSs. Capital gain of a noncorporate U.S. holder that is recognized in taxable years beginning
before January&nbsp;1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding
period greater than one year. Additionally, gain or loss will generally be from sources within the
United States for foreign tax credit limitation purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>PFIC Rules</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not believe that we will be treated as a PFIC for United States federal income tax
purposes for our most recent taxable year. However, this conclusion is a factual determination made
annually and thus may be subject to change. Because of the nature of our income and assets, we
could be determined to be a PFIC for our current and subsequent taxable years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In general, we will be a PFIC with respect to you if for any of our taxable years in which you
held our ADSs or shares:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>at least 75% of our gross income for the taxable year is passive income, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>at least 50% of the value, determined on the basis of a quarterly average, of our
assets is attributable to assets that produce or are held for the production of
passive income.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Passive income generally includes dividends, interest, royalties, rents (other than certain
rents and royalties derived in the active conduct of a trade or business), annuities and gains from
assets that produce passive income. If a foreign corporation owns at least 25% by value of the
stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as
owning its proportionate share of the assets of the other corporation, and as receiving directly
its proportionate share of the other corporation&#146;s income.
</DIV>

<P align="center" style="font-size: 10pt">84
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we are treated as a PFIC and you did not make a mark-to-market election, as described
below, you will be subject to special rules with respect to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any gain you realize on the sale or other disposition of your shares or ADSs, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any &#147;excess distribution&#148; that we make to you (generally, any distributions to you
during a single taxable year that are greater than 125% of the average annual
distributions received by you in respect of the shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the shares or ADSs).</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under these rules:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the gain or excess distribution will be allocated ratably over your holding period
for the shares or ADSs,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the amount allocated to the taxable year in which you realized the gain or excess
distribution will be taxed as ordinary income,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the amount allocated to each prior year, with certain exceptions, will be taxed at
the highest tax rate in effect for that year, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the interest charge generally applicable to underpayments of tax will be imposed in
respect of the tax attributable to each such year.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Special rules apply for calculating the amount of the foreign tax credit with respect to
excess distributions by a PFIC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If your shares or ADSs are treated as stock of a PFIC, you may make a mark-to-market election.
If you make this election, you will not be subject to the PFIC rules described above. Instead, in
general, you will include as ordinary income each year the excess, if any, of the fair market value
of your shares or ADSs at the end of the taxable year over your adjusted basis in your shares or
ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable
to qualified dividend income or long-term capital gains. You will also be allowed to take an
ordinary loss in respect of the excess, if any, of the adjusted basis of your shares or ADSs over
their fair market value at the end of the taxable year or over their final sale or disposition
prices, but only to the extent of the net amount of previously included income as a result of the
mark-to-market election. Your basis in the shares or ADSs will be adjusted to reflect any such
income or loss amounts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, notwithstanding any election you make with regard to the shares or ADSs,
dividends that you receive from us will not constitute qualified dividend income to you if we are a
PFIC either in the taxable year of the distribution or the preceding taxable year. Dividends that
you receive that do not constitute qualified dividend income are not eligible for taxation at the
15% maximum rate applicable to qualified dividend income. Instead, you must include the gross
amount of any such dividend paid by us out of our accumulated earnings and profits (as determined
for United States federal income tax purposes) in your gross income, and it will be subject to tax
at rates applicable to ordinary income.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If you own shares or ADSs during any year that we are a PFIC, you must file Internal Revenue
Service Form&nbsp;8621.
</DIV>

<P align="center" style="font-size: 10pt">85
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>F. Dividends and Paying Agents.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not required.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>G. Statement by Experts.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>H. Documents on Display.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We file periodic reports and other information with the Securities and Exchange Commission.
The Securities and Exchange Commission maintains a web site at www.sec.gov that contains reports
and other information regarding us and other registrants that file electronically with the
Securities and Exchange Commission. You may read and copy any document we file with the Securities
and Exchange Commission at the Securities and Exchange Commission&#146;s public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of its public reference room. In addition,
you may also inspect reports filed with the Securities and Exchange Commission and other
information at our Tokyo headquarters, located at Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho,
Chiyoda-ku, Tokyo 101-0051, Japan. Some of this information may also be found on our website at
http://www.iij.ad.jp/. This information is not incorporated by reference into this annual report on
Form 20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>I. Subsidiary Information.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="113"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;11. Quantitative and Qualitative Disclosures about Market Risk.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are exposed to market risks from changes in interest rates, equity prices and foreign
currency exchange rates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Interest Rate Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The table below provides information about financial instruments held by us that are sensitive
to changes in interest rates, including debt obligations and interest rate swaps. For debt
obligations, the table presents whether the interest component is fixed or variable, the amount and
timing of cash flows, the expected weighted-average interest rates over the next five years, as
well as the fair value of each debt instrument. For interest rate swaps, the table presents the
notional amounts and weighted average interest rates by expected maturity dates.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19" style="border-bottom: 1px solid #000000"><B>Expected maturity date</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Fair</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>value or</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Gain</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2007</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2008</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2009</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2010</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2011</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(loss)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>(millions of yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Long-term debt obligations:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fixed rate long-term borrowings and
installment payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">756</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">756</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">756</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average interest rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.883</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151; </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151;  </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.883</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Variable rate long-term borrowings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,234</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,524</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,524</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average interest rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.413</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.440</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151;  </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151; </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.418</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">86
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
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    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19" style="border-bottom: 1px solid #000000"><B>Expected maturity date</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Fair</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>value or</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Gain</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2007</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2008</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2009</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2010</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2011</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(loss)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD nowrap><DIV style="margin-left:15px; text-indent:-15px"><B>Interest rate swap contracts &#151;</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notional amount &#150; variable to fixed:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average pay rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.812</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.670</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151; </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151; </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151; </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.781</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average receive rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.166</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.150</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151; </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151;  </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>&#151; </B></TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.162</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19" style="border-bottom: 1px solid #000000"><B>Expected maturity date</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Fair</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>value</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>or</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Gain</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>March 31, 2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2007</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2008</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2009</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2010</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(loss)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>(millions of yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Long-term debt obligations:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fixed rate long-term borrowings and
installment payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,655</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average interest rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.913</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.819</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.877</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Variable rate long-term borrowings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,608</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average interest rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.284</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.544</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.255</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.411</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap><DIV style="margin-left:15px; text-indent:-15px"><B>Interest rate swap contracts &#151;</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notional amount &#150; variable to fixed:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average pay rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.900</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.990</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.926</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Average receive rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.118</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.185</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">&#151; </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.137</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our policy on managing interest rate risk is to hedge our exposure to variability in
future cash flow of floating rate interest payment on long-term bank borrowings. In order to reduce
cash flow risk exposures on floating rate borrowings, we utilize interest rate swaps to convert
floating rate borrowings into fixed rate borrowings. We do not hold derivative instruments for
speculative purposes. Also, we do not hold or issue financial instruments for trading purposes. See
note 15 to our consolidated financial statements included in this annual report on Form 20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Equity Price Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The fair value of certain of our investments, primarily in marketable securities, exposes us
to equity price risks. In general, we have invested in highly liquid and low-risk instruments,
which are not held for trading purposes. We are exposed to changes in the market prices of the
securities. As of March&nbsp;31, 2005 and 2006, the fair value of such investments was &#165;8,948&nbsp;million
and &#165;6,775&nbsp;million, respectively. The potential loss in fair value resulting from a 10% adverse
change in equity prices would be approximately &#165;895&nbsp;million and &#165;678&nbsp;million as of March&nbsp;31, 2005
and 2006, respectively. See Note 2 to our consolidated financial statements, included in this
annual report on Form 20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Foreign Currency Exchange Rate Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The only significant assets held by us which are exposed to foreign currency exchange risk are
U.S. dollar denominated bank deposits. The carrying value, which also represents fair value,
amounted to $6,584 thousand (&#165;706&nbsp;million) and $3,764 thousand (&#165;442&nbsp;million) at March&nbsp;31, 2005 and
2006, respectively. The potential loss in fair value for such financial instruments from a 10%
adverse change in quoted foreign currency exchange rates would have been approximately &#165;71&nbsp;million
and &#165;44&nbsp;million at March&nbsp;31, 2005 and 2006, respectively.
</DIV>

<P align="center" style="font-size: 10pt">87
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="114"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;12. Description of Securities Other than Equity Securities.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="115"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART II</B>
</DIV>

<DIV align="left">
<A name="116"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;13. Defaults, Dividend Arrearages and Delinquencies.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>
<DIV align="left">
<A name="117"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;14. Material Modifications to the Rights of Security Holders and Use of Proceeds.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>
<DIV align="left">
<A name="118"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;15. Controls and Procedures.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Disclosure Controls and Procedures</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of the end of the fiscal year ended March&nbsp;31, 2006, our management, with the participation
of Koichi Suzuki, our president, chief executive officer and representative director, and Akihisa
Watai, our director, chief financial officer and chief accounting officer, performed an evaluation
of our disclosure controls and procedures.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under Rules&nbsp;13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, disclosure
controls and procedures means our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission&#146;s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is
accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on that evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective as of March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Changes in Internal Control Over Financial Reporting</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With the participation of our chief executive officer and chief financial officer, we also
evaluated any change in our internal control over financial reporting that occurred during the
fiscal year ended March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under Rules&nbsp;13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, internal control
over financial reporting means a process designed by, or under the supervision of, our chief
executive officer and chief financial officer and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">88
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>provide reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on that evaluation, our chief executive officer and chief financial officer concluded
that no changes were made in our internal control over financial reporting that occurred during the
fiscal year ended March&nbsp;31, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
</DIV>
<DIV align="left">
<A name="119"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16A. Audit Committee Financial Expert</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At our shareholders&#146; meeting on June&nbsp;24, 2004, two statutory auditors were newly nominated and
our board of statutory auditors has determined that one of the nominated statutory auditors serving
on the Board of Statutory Auditors, Masaaki Koizumi, is an &#147;audit committee financial expert&#148; as
defined in Item&nbsp;16A. of Form 20-F. Mr.&nbsp;Koizumi is independent from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An &#147;audit committee financial expert&#148; is defined in Item&nbsp;16A. of Form 20-F to mean a person
who has the following attributes:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;An understanding of generally accepted accounting principles and financial statements,
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;The ability to assess the general application of such principles in connection with the
accounting for estimates, accruals and reserves,
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3)&nbsp;Experience preparing, auditing, analyzing or evaluating financial statements that present
a breadth and level of complexity of accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be raised by the registrant&#146;s financial
statements, or experience actively supervising one or more persons engaged in such activities,
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4)&nbsp;An understanding of internal controls over financial reporting,
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(5)&nbsp;An understanding of audit committee functions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Such person shall have acquired the attributes described above through:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;Education and experience as a principal financial officer, principal accounting officer,
controller, public accountant or auditor or experience in one or more positions that involve the
performance of similar functions,
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;Experience actively supervising a principal financial officer, principal accounting
officer, controller, public accountant, auditor or person performing similar functions,
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3)&nbsp;Experience overseeing or assessing the performance of companies or public accountants with
respect to the preparation, auditing or evaluation of financial statements, or
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4)&nbsp;Other relevant experience.
</DIV>

<P align="center" style="font-size: 10pt">89
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A person who is determined to be an audit committee financial expert will not be deemed an
&#147;expert&#148; for any purpose, including without limitation for purposes of section 11 of the Securities
Act of 1933 (15 U.S.C. 77k), as a result of being designated or identified as an audit committee
financial expert pursuant to this Item&nbsp;16A. The designation or identification of a person as an
audit committee financial expert pursuant to this Item&nbsp;16A does not impose on such person any
duties, obligations or liability that are greater than the duties, obligations and liability
imposed on such person as a member of the audit committee and board of directors in the absence of
such designation or identification. The designation or identification of a person as an audit
committee financial expert pursuant to this Item&nbsp;16A does not affect the duties, obligations or
liability of any other member of the audit committee or board of directors.
</DIV>
<DIV align="left">
<A name="120"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16B. Code of Ethics.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At our Board of Directors Meeting on April&nbsp;28, 2004, we adopted a Code of Ethics, the Internet
Initiative Japan Code of Conduct, applicable to all employees and officers, including our chief
executive officer, chief financial officer and chief accounting officer. The Code of Conduct is
attached as Exhibit&nbsp;11.1 to this annual report on Form 20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On April&nbsp;27, 2006, we amended the Code of Ethics to add a provision to the effect that
officers and employees shall respect various stake holders.
</DIV>
<DIV align="left">
<A name="121"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16C. Principal Accountant Fees and Services.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Independent Auditor Fees and Services</I></B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board of Directors engaged Deloitte Touche Tohmatsu to perform an annual audit of our
financial statements for each of the fiscal years ended March&nbsp;31, 2005 and 2006. The following
table sets forth the aggregate fees billed for services rendered by Deloitte Touche Tohmatsu for
each of the last two fiscal years.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Fiscal year ended March 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>(millions of yen)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audit fees <SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audit-related fees <SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax fees <SUP style="font-size: 85%; vertical-align: text-top">(3)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">All other fees <SUP style="font-size: 85%; vertical-align: text-top">(4)</SUP></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><I>Total fees</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">84</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>These are the aggregate fees billed for the fiscal year for professional services rendered by
Deloitte Touche Tohmatsu for the audit of our annual financial statements and services that
are normally provided in connection with statutory and regulatory filings or engagements for
those fiscal years.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>These are the aggregate fees billed for the fiscal year for assurance and related services by
Deloitte Touche Tohmatsu that are reasonably related to the performance of the audit or review
of our financial statements other than those reported under &#147;Audit Fees&#148; above. These services
include internal control reviews and consultation concerning financial accounting and
reporting standards.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>These are the aggregate fees billed for the fiscal year for professional services rendered by
Deloitte Touche Tohmatsu for tax compliance, tax advice and tax planning.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>These are the aggregate fees for the fiscal year for all other products and services provided
by Deloitte Touche Tohmatsu including consultation services related to the Sarbanes Oxley Act
of 2002 and the Privacy Mark System being instituted by The Japan Information Processing
Development Center.</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">90
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">






<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Board of Statutory Auditors Pre-Approval Policies and Procedures</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board of Statutory Auditors has adopted policies and procedures for pre-approving all
audit and permissible non-audit work performed by independent registered public accounting firm in
accordance with Rule&nbsp;2-01(c)(7)(i)(B) under Regulation&nbsp;S-X. Under those policies and procedures,
the Board of Statutory Auditors must pre-approve individual audit and non-audit services to be
provided to us by our independent registered public accounting firm and its affiliates. Those
policies and procedures also describe prohibited non-audit services that may never be provided by
independent registered public accounting firm.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the services provided by our independent registered public accounting firm from May&nbsp;6,
2003, when our pre-approval policies went into effect, through the end of the fiscal year ended
March&nbsp;31, 2006 were pre-approved by the Board of Statutory Auditors pursuant to the pre-approval
policies described above, and none of such services were approved pursuant to the procedures
described in Rule&nbsp;2-01(c)(7)(i)(C) of Regulation&nbsp;S-X, which waives the general requirement for
pre-approval in certain circumstances.
</DIV>
<DIV align="left">
<A name="122"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16D. Exemptions from the Listing Standards for Audit Committees.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With respect to the requirements of Rule&nbsp;10A-3 under the Securities Exchange Act of 1934
relating to listed company audit committees, which apply to us through Rules&nbsp;4350(d)(3) and
4350(d)(2)(A)(ii) of the NASD Manual, we rely on an exemption provided by paragraph (c)(3) of that
Rule available to foreign
private issuers with boards of statutory auditors meeting certain requirements. For a
Nasdaq-listed Japanese company with a board of statutory auditors, the requirements for relying on
paragraph (c)(3) of Rule&nbsp;10A-3 are as follows:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The board of statutory auditors must be established, and its members must be
selected, pursuant to Japanese law expressly requiring such a board for Japanese
companies that elect to have a corporate governance system with statutory auditors,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Japanese law must and does require the board of statutory auditors to be separate
from the board of directors,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>None of the members of the board of statutory auditors may be elected by
management, and none of the listed company&#146;s executive officers may be a member of the
board of statutory auditors,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Japanese law must and does set forth standards for the independence of the members
of the board of statutory auditors from the listed company or its management, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The board of statutory auditors, in accordance with Japanese law or the
registrant&#146;s governing documents, must be responsible, to the extent permitted by
Japanese law, for the appointment, retention and oversight of the work of any
registered public accounting firm engaged (including, to the extent permitted by
Japanese law, the resolution of disagreements between management and the auditor
regarding financial reporting) for the purpose of preparing or issuing an audit report
or performing other audit, review or attest services for the listed company, including
its principal accountant which audits its consolidated financial statements included
in its annual reports on Form 20-F.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the extent permitted by Japanese law:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The board of statutory auditors must establish procedures for (i)&nbsp;the receipt,
retention and treatment of complaints received by us regarding accounting, internal
accounting controls, or</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>auditing matters, and (ii)&nbsp;the confidential, anonymous
submission by our employees of concerns regarding questionable accounting or auditing
matters,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The board of statutory auditors must have the authority to engage independent
counsel and other advisers, as it determines necessary to carry out its duties, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The listed company must provide for appropriate funding, as determined by its board
of statutory auditors, for payment of (i)&nbsp;compensation to any registered public
accounting firm engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for us, (ii)&nbsp;compensation to any
advisers employed by the board of statutory auditors, and (iii)&nbsp;ordinary
administrative expenses of the board of statutory auditors that are necessary or
appropriate in carrying out its duties.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In our assessment, our Board of Statutory Auditors, which meets the requirements for reliance
on the exemption in paragraph (c)(3) of Rule&nbsp;10A-3 described above, is not materially less
effective than an audit committee meeting all the requirements of paragraph (b)&nbsp;of Rule&nbsp;10A-3
(without relying on any exemption provided by that Rule) at acting independently of management and
performing the functions of an audit committee as contemplated therein.
</DIV>
<DIV align="left">
<A name="123"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We did not purchase any of our shares for the fiscal year ended March&nbsp;31, 2006.
</DIV>
<DIV align="left">
<A name="124"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART III</B>
</DIV>

<DIV align="left">
<A name="125"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;17. Financial Statements.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="126"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;18. Financial Statements.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Financial Statements for Internet Initiative Japan Inc. and Subsidiaries beginning on page
F-1.
</DIV>
<DIV align="left">
<A name="127"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;19. Exhibits.</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="92%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">1.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Articles of Incorporation, as amended (English translation)</TD>
</TR>

<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">1.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Share Handling Regulations, as amended (English translation)</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">1.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Regulations of the Board of Directors, as amended (English translation)*</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">1.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Regulations of the Board of Statutory Auditors, as amended (English translation)**</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Specimen Common Stock Certificate***</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Bylaws of the IIJ Employee Shareholders&#146; Association (with English translation)***</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Deposit Agreement among IIJ, The Bank of New York as depositary and all owners and
holders from time to time of American Depositary Receipts, including the form of American
Depositary Receipt****</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Basic Agreement to Delegate Services, dated April&nbsp;1, 1997, between Internet Initiative
Japan Inc. and IIJ Technology Inc. (with English translation)***</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Shareholders&#146; Agreement Relating to the Establishment of INTERNET MULTIFEED CO., dated
August&nbsp;20, 1997, between Nippon Telegraph and Telephone Corporation and the Registrant
(with English translation)***</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Basic Agreement to Delegate Services, dated April&nbsp;1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (with English translation)***</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lease Agreement, dated March&nbsp;14, 2003, between Internet Initiative Japan Inc. and Mitsui
Fudosan</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">92
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="92%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:20px; text-indent:-20px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Co., Ltd. (English translation)*</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;&nbsp;4.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Sublease Agreements, dated March&nbsp;15, 2003, between Internet Initiative Japan Inc., IIJ
Technology Inc. and Net Care, Inc. (English translations)*</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;&nbsp;4.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Pledge Agreement, dated March&nbsp;14, 2003, among Internet Initiative Japan Inc., IBJ Leasing
Co., Ltd. and Nissay Leasing Company, Limited (English translation)*</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;&nbsp;4.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Joint Venture Agreement, dated January&nbsp;19, 2006, between Internet Initiative Japan Inc.
and Konami Corporation (English translation)</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.20
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Subscription Agreement, dated September&nbsp;16, 2003, between Internet Initiative Japan Inc.
and Nippon Telegraph and Telephone Corporation (English translation)*</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.21
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Service Agreement, dated March&nbsp;25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc.*****</TD>
</TR>

<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.24
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Agreement on Limited Liability, dated June&nbsp;29, 2005 and June&nbsp;28, 2006, between Internet
Initiative Japan Inc. and outside directors and outside statutory auditors******</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;&nbsp;8.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">List of Significant Subsidiaries (See &#147;Our Group Companies&#148; in Item&nbsp;4.B. of this Form&nbsp;20-F)</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">11.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Internet Initiative Japan Code of Conduct</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">12.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">12.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">13.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the chief executive officer required by 18 U.S.C. Section&nbsp;1350</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">13.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of the chief financial officer required by 18 U.S.C. Section&nbsp;1350</TD>
</TR>
<TR style="font-size:6pt"><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">14.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Selected unaudited financial statement data as of and for the year ended March&nbsp;31, 2003 of
Crosswave Communications Inc.*</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(*)</TD>
    <TD>&nbsp;</TD>
    <TD>Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No.&nbsp;0-30204) filed on September&nbsp;30, 2003.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(**)</TD>
    <TD>&nbsp;</TD>
    <TD>Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No.&nbsp;0-30204) filed on August&nbsp;3, 2005.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(***)</TD>
    <TD>&nbsp;</TD>
    <TD>Incorporated by reference to the corresponding exhibit to our Form F-1 Registration
Statement (File No.&nbsp;333-10584) declared effective on August&nbsp;3, 1999.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(****)</TD>
    <TD>&nbsp;</TD>
    <TD>Incorporated by reference to the Registration Statement on Form F-6 (File No.&nbsp;333-110862)
filed on December&nbsp;2, 2003.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(*****)</TD>
    <TD>&nbsp;</TD>
    <TD>Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No.&nbsp;0-30204) filed on July&nbsp;23, 2004.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(******)</TD>
    <TD>&nbsp;</TD>
    <TD>We and each of Mr.&nbsp;Yoshifumi Nishikawa and Mr.&nbsp;Junnosuke Furukawa as our outside directors
entered into an Agreement on Limited Liability, dated June&nbsp;29, 2005. We and each of Mr.
Yasurou Tanahashi and Mr.&nbsp;Takashi Hiroi as our outside directors and each of Mr.&nbsp;Masaki Okada
and Mr.&nbsp;Masaaki Koizumi as our outside statutory auditors entered into an Agreement on Limited
Liability, dated June&nbsp;28, 2006.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except for Exhibit&nbsp;2.3, we have not included as exhibits certain instruments with respect
to our long-term debt. Except for Exhibit&nbsp;2.3, the amount of debt authorized under each long-term
debt instrument does not exceed 10% or our total assets. We agree to furnish a copy of any
long-term debt instrument to the Commission upon request.
</DIV>

<P align="center" style="font-size: 10pt">93
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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="128"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SIGNATURE</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Internet Initiative Japan Inc.</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:<BR>

</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Koichi Suzuki
<DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
Name: Koichi Suzuki
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Title:
 President, Chief Executive Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and Representative Director</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Date: July&nbsp;11, 2006
</DIV>



<P align="center" style="font-size: 10pt">94
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">





<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Index to Consolidated Financial Statements</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Page</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#300">Report of Independent Registered Public Accounting Firm</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#301">Consolidated Balance Sheets as of March&nbsp;31, 2005 and 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#302">Consolidated Statements of Operations for Each of the Three Years in the Period Ended March&nbsp;31, 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#303">Consolidated Statements of Shareholders&#146; Equity
for Each of the Three Years in the Period Ended March&nbsp;31, 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#304">Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended March&nbsp;31, 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#305">Notes to Consolidated Financial Statements</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-11</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">F-1
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="300"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Report of Independent Registered Public Accounting Firm</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">To the Board of Directors and Shareholders of<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Internet Initiative Japan Inc.:

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have audited the accompanying consolidated balance sheets of Internet Initiative Japan Inc. and
subsidiaries (the &#147;Company&#148;) as of March&nbsp;31, 2005 and 2006 and the related consolidated statements
of operations, shareholders&#146; equity, and cash flows for each of the three years in the period ended
March&nbsp;31, 2006 (all expressed in Japanese yen). These financial statements are the responsibility
of the Company&#146;s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company&#146;s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Internet Initiative Japan Inc. and subsidiaries as of March&nbsp;31, 2005 and
2006 and the results of their operations and their cash flows for each of the three years in the
period ended March&nbsp;31, 2006, in conformity with accounting principles generally accepted in the
United States of America.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and,
in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such
U.S. dollar amounts are presented solely for the convenience of readers outside Japan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">/s/ DELOITTE TOUCHE TOHMATSU<BR>
Tokyo, Japan<BR>
May&nbsp;26, 2006 (June&nbsp;28, 2006 as to Note 17)

</DIV>

<P align="center" style="font-size: 10pt">F-2
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>

<DIV align="left">
<A name="301"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Balance Sheets<BR>
March&nbsp;31, 2005 and 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ASSETS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">CURRENT ASSETS:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash (Note 15)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,286,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,727,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">116,846</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts receivable, net of allowance for
doubtful accounts of &#165;41,400 thousand
and &#165;23,411 thousand ($199 thousand)
at March&nbsp;31, 2005 and 2006, respectively
(Notes 3, 4 and 11)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,407,439</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,962,304</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">101,824</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">140,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">851,857</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,251</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Prepaid expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">604,935</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,031,325</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,778</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other current assets,
net of allowance for doubtful accounts of
&#165;33,250 thousand ($283 thousand) at March&nbsp;31,
2006 (Notes 3 and 9)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">214,121</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,823</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,547,175</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,786,628</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">236,522</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INVESTMENTS IN AND ADVANCES TO
EQUITY METHOD INVESTEES, net of loan loss
valuation allowance of &#165;31,378 thousand and &#165;16,701
thousand ($142 thousand) at March&nbsp;31, 2005 and 2006,
respectively (Notes 3 and 4)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">713,607</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,162,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,899</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OTHER INVESTMENTS (Notes 2, 8 and 15)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,930,781</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,020,705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">68,273</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">PROPERTY AND EQUIPMENT&#151;Net
(Notes 5 and 7)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,722,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,299,496</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">87,670</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INTANGIBLE ASSETS&#151;Net (Note 6)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">561,211</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">632,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,385</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">GUARANTEE DEPOSITS (Notes 7 and 8)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,050,665</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,549,653</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OTHER ASSETS, net of allowance for doubtful
accounts of &#165;376,092 thousand and &#165;40,980
thousand ($349 thousand) at March&nbsp;31, 2005
and 2006 respectively (Notes 3, 9, 10 and 15)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">590,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,252,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,665</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">TOTAL</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">37,116,471</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">50,704,989</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">431,605</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">(Continued)
</DIV>



<P align="center" style="font-size: 10pt">F-3
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Balance Sheets<BR>
March&nbsp;31, 2005 and 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">LIABILITIES AND SHAREHOLDERS&#146; EQUITY</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">CURRENT LIABILITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Short-term borrowings (Note 8)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,724,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,555,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">38,772</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Long-term borrowings&#151;current portion
(Notes 8 and 15)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,736,056</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,989,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Payable under securities loan agreement (Note 8)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,729,520</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">999,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,509</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Capital lease obligations&#151;current portion (Note 7)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,774,974</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,003,914</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,569</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts payable (Notes 4 and 11)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,860,733</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,107,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">86,040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">541,118</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">540,027</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,597</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">817,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,702,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,489</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,184,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,898,654</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">194,915</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">LONG-TERM BORROWINGS (Notes 8 and 15)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,529,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">290,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,469</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">CAPITAL LEASE OBLIGATIONS&#151;Noncurrent (Note 7)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,339,028</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,980,659</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,396</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ACCRUED RETIREMENT AND PENSION COSTS (Note 10)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">223,332</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,901</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OTHER NONCURRENT LIABILITIES (Note 9)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">275,533</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">827,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,472,421</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,219,731</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">248,721</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">MINORITY INTEREST</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,028,977</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,263,320</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,753</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">COMMITMENTS AND CONTINGENCIES
(Note 14)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">SHAREHOLDERS&#146; EQUITY (Notes 11 and 12):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Common stock&#151;authorized, 377,600 shares;
issued and outstanding, 191,800 shares at March&nbsp;31,
2005, authorized, 377,600 shares; issued and
outstanding, 204,300 shares at March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,765,372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,833,847</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,291</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Additional paid-in capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,637,628</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,599,217</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">226,415</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34,434,052</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,680,482</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(252,643</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated other comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,690,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,553,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,785</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Treasury stock&#151;602 shares and 777 shares held by an equity
method investee at March&nbsp;31, 2005 and 2006, respectively</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(44,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(84,238</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(717</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total shareholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,615,073</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,221,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">172,131</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">TOTAL</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">37,116,471</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">50,704,989</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">431,605</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes to consolidated financial statements.
</DIV>


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">(Concluded)
</DIV>



<P align="center" style="font-size: 10pt">F-4
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>

<DIV align="left">
<A name="302"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Statements of Operations<BR>
Three Years in the Period Ended March&nbsp;31, 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">REVENUES (Notes 4 and 11):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Connectivity and value-added services:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Dedicated access</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,862,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,372,701</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,625,268</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">90,443</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Dial-up access</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,088,498</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,936,973</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,673,808</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,760</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Value-added services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,296,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,004,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,249,891</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53,200</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,117,794</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,169,413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,673,872</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,272</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,364,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,483,817</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,222,839</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197,675</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Systems integration</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,847,687</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,853,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,504,537</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">200,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,567,123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,364,926</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,085,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,262</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,779,462</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,702,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49,812,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">424,009</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">COST AND EXPENSES (Notes 4, 7 and 11):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of connectivity and value-added
services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,047,438</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,483,890</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,077,990</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">170,906</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of systems integration</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,851,726</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,200,137</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,120,418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">154,243</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of equipment sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,346,243</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,111,369</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,818,036</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,987</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,245,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,795,396</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,016,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">349,136</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and marketing (Note 16)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,527,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,794,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,079,526</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,213</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and administrative (Note 6)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,098,481</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,665,980</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,147,315</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,790</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">357,968</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">198,979</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,346</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,229,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,454,916</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,401,440</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">403,485</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OPERATING INCOME (LOSS)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,449,884</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,247,651</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,411,144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,524</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OTHER INCOME (EXPENSES):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,877</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,099</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(702,036</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(685,857</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(437,364</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,723</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign exchange gains (losses)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,493</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,958</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,470</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net gain on other investments (Note 2)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,412,858</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,439,330</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,197,690</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,219</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Gain arising from issuance of equity method
investee&#146;s share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,088</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,933</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other&#151;net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">224,287</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102,616</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">190,520</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,622</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Other income&#151;net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">982,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,900,857</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,967,415</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,259</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INCOME (LOSS)&nbsp;FROM OPERATIONS BEFORE INCOME
TAX EXPENSE, MINORITY INTERESTS AND EQUITY IN
NET LOSS OF EQUITY METHOD INVESTEES</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(467,664</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,148,508</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,378,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,783</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INCOME TAX EXPENSE (Note 9)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,536</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">99,870</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">235,812</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(109,161</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(353,883</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,012</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">FORWARD</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(264,388</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,939,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,767,316</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,580</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="right" style="font-size: 10pt; margin-top: 12pt">(Continued)
</DIV>



<P align="center" style="font-size: 10pt">F-5
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Statements of Operations<BR>
Three Years in the Period Ended March&nbsp;31, 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">FORWARD</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(264,388</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,939,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,767,316</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,580</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap><DIV style="margin-left:15px; text-indent:-15px">EQUITY IN
NET LOSS OF EQUITY METHOD INVESTEES (Note 4):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equity method net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(286,317</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(33,208</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13,746</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(117</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Impairment loss on advance to
Crosswave</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,719,981</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total equity in net loss of
equity method investees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,006,298</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(33,208</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13,746</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(117</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NET INCOME (LOSS)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,270,686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NET INCOME PER SHARE (Note 13):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BASIC WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">195,613</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">DILUTED WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">195,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BASIC NET INCOME (LOSS)&nbsp;PER COMMON SHARE</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">207</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">DILUTED NET INCOME (LOSS)&nbsp;PER COMMON SHARE</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">206</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes to consolidated financial statements.
</DIV>


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">(Concluded)
</DIV>



<P align="center" style="font-size: 10pt">F-6
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>

<DIV align="left">
<A name="303"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Statements of Shareholders&#146; Equity<BR>
Three Years in the Period Ended March&nbsp;31, 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Shares of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Accumulated</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Common Stock</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Other</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Outstanding</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Additional</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Comprehensive</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">(Including</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Common</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Paid-in</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Accumulated</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Income</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Treasury</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Treasury Stock)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Stock</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Capital</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Deficit</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 12)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Stock</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Total</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BALANCE, APRIL 1, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">7,082,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">17,068,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(35,069,635</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">914,610</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(10,004,336</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,270,686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,270,686</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,280,839</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,280,839</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,010,153</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Issuance of common stock, net of issuance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">79,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,683,036</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,569,275</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,252,311</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase of common stock by an equity method investee</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(44,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(44,000</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BALANCE, MARCH 31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,765,372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,637,628</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(37,340,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,195,449</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(44,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,214,128</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,494,676</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,494,676</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,400,945</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BALANCE, MARCH 31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,765,372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,637,628</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34,434,052</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,690,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(44,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,615,073</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive loss, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,136,531</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,136,531</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,617,039</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Issuance of common stock, net of issuance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,068,475</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,961,589</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,030,064</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase of common stock by an equity method investee</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,238</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,238</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BALANCE, MARCH 31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">204,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">16,833,847</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">26,599,217</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(29,680,482</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,553,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(84,238</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,221,938</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000">Thousands of U.S. Dollars (Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Accumulated</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Other</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Additional</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Comprehensive</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Common</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Paid-in</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Accumulated</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Income</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Treasury</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Stock</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Capital</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Deficit</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 12)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Stock</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Total</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BALANCE, MARCH 31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">117,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">201,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(293,106</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(375</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">98,868</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive loss, net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(18,186</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(18,186</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,277</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Issuance of common stock, net of issuance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,119</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,209</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51,328</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase of common stock by an equity method investee</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(342</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(342</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BALANCE, MARCH 31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">143,291</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">226,415</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(252,643</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">55,785</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(717</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">172,131</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes to consolidated financial statements.
</DIV>



<P align="center" style="font-size: 10pt">F-7
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>

<DIV align="left">
<A name="304"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Statements of Cash Flows<BR>
Three Years in the Period Ended March&nbsp;31, 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">OPERATING ACTIVITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,270,686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,008,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,193,093</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,209,037</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,828</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Provision for retirement and
pension costs, less payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,960</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,659</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">76,095</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">648</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Provision for (reversal of) allowance for
doubtful accounts and advances</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">449,164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,781</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,009</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(102</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Loss on disposal of property and
equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,887</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118,855</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,012</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Loss on disposal and impairment of
telephone rights</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">99,075</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,040</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net gain on other investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,412,858</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,439,330</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,197,690</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(27,219</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Foreign exchange losses (gains)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,124</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,466</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,825</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(67</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Gain arising from issuance of equity
method investee&#146;s share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,088</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(25,933</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Loss (gains)&nbsp;on retirement of convertible
notes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(88,975</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Equity method net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">286,317</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,746</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Impairment loss on advance
to Crosswave</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,719,981</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Minority interests in earnings (losses)
of subsidiaries</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(235,812</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">353,883</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,012</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred income tax expense (benefit)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,023</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(230,841</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,965</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,539</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">79,247</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Changes in operating assets and
liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Decrease (increase)&nbsp;in accounts
receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">784,728</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,607,692</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,460,173</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(37,965</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Decrease (increase)&nbsp;in
inventories, prepaid expenses and
other current and noncurrent assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(275,103</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">228,358</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,390,398</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,835</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Increase (decrease)&nbsp;in accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,132,209</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,307,729</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,975,623</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,353</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Increase in income taxes payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,041</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,913</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">334,854</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,850</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Increase (decrease)&nbsp;in accrued
expenses and other current
and noncurrent liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(81,926</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">439,440</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,001,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,526</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Net cash provided by
operating
activities&#151;(Forward)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,923,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,238,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,558,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">55,830</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="right" style="font-size: 10pt; margin-top: 12pt">(Continued)
</DIV>



<P align="center" style="font-size: 10pt">F-8
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">





<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Statements of Cash Flows<BR>
Three Years in the Period Ended March&nbsp;31, 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by
operating activities&#151;(Forward)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,923,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,238,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,558,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">55,830</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">INVESTING ACTIVITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchases of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,657,302</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(577,133</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(919,366</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,826</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase of short-term and other investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(325,665</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,566</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(674,569</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,742</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Investment in an equity method investee</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(750,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,384</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase of subsidiary stock
from minority shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61,680</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(192,142</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,635</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from sales and redemption of
short-term and other investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,170,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,976,017</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,613,239</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,756</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Advance to Crosswave</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,719,981</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Payments of guarantee deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,114</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(48,683</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(62,074</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(528</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Refund of guarantee deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">683,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">71,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">568,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,842</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Payment for refundable insurance policies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21,007</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(25,231</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(25,917</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(221</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Refund from insurance policies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,432</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,348</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">54</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of a newly controlled company, net of cash
acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">229,457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,953</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of business</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(375,123</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,458</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,204</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">94</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net cash provided by (used in)
investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(852,463</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,974,003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,804,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,363</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">FINANCING ACTIVITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from issuance of long-term
borrowings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">400,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,250,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,512</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repayments of long-term borrowings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,943,735</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,840,246</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,986,056</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(25,418</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from securities loan agreement</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,546,320</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,897,040</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,684</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repayments of securities loan agreement</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(816,800</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,626,960</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(47,897</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Principal payments under capital leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,733,012</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,867,625</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,105,519</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(26,434</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net increase (decrease)&nbsp;in short-term
borrowings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,740,495</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,839,460</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(169,633</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,444</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repurchase of convertible notes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,047,460</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(745,488</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Redemption of convertible notes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,088,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from issuance of common stock,
net of issuance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,252,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,030,064</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51,328</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from issuance of subsidiary
stock to minority shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">188,632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net cash provided by (used in)
financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,668,599</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,212,667</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,936</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">331</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EFFECT OF EXCHANGE RATE
CHANGES ON CASH</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(43,615</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">323</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NET INCREASE (DECREASE)&nbsp;IN CASH
AND CASH EQUIVALENTS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,695,887</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,997,762</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,440,544</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">71,847</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,588,352</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,284,239</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,286,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,999</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">CASH AND CASH EQUIVALENTS,
END OF YEAR</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,284,239</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,286,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,727,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">116,846</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">(Continued)
</DIV>



<P align="center" style="font-size: 10pt">F-9
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">





<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Consolidated Statements of Cash Flows<BR>
Three Years in the Period Ended March&nbsp;31, 2006</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">(Note 1)</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ADDITIONAL CASH FLOW
INFORMATION:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">625,248</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">613,817</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">426,692</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,632</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income taxes paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,227</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,261</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NONCASH INVESTING AND
FINANCING ACTIVITIES:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of assets by
entering into capital leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,865,309</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,433,906</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,842,952</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,712</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Exchange of common stock
investment due to merger:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Market value of common
shares acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,950</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,390</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">63</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cost of investment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of business and a company:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Assets acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,202,007</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">843,485</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,180</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Cash paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(375,123</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(733,589</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,244</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Liabilities assumed</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">826,884</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,896</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">936</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes to consolidated financial statements.
</DIV>

<DIV align="right" style="font-size: 10pt; margin-top: 12pt">(Concluded)
</DIV>


<P align="center" style="font-size: 10pt">F-10
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Internet Initiative Japan Inc. and Subsidiaries</B>
</DIV>

<DIV align="left">
<A name="305"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Notes to Consolidated Financial Statements</B>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Internet Initiative Japan Inc. (&#147;IIJ,&#148; a Japanese corporation) was founded in December&nbsp;1992 to
develop and operate Internet access services and other Internet-related services in Japan and
is 29.7&nbsp;percent jointly owned by Nippon Telegraph and Telephone Corporation (&#147;NTT&#148;) and its
subsidiary as of March&nbsp;31, 2006. IIJ and subsidiaries (collectively, the &#147;Company&#148;) provide
Internet access services throughout Japan and into the United States of America and the rest
of Asia. The Company also provides Internet systems design and integration representing
principally sales of Internet network systems and equipment and miscellaneous Internet
access-related services.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company manages its business and measures results based on a single Internet-related
services industry segment. Substantially all revenues are from customers operating in Japan.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The accompanying consolidated financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. Although the Company has incurred operating losses and net losses
in each of the past six fiscal years ended March&nbsp;31, 2004 (with the exception of operating
income for the year ended March&nbsp;31, 2002), the Company has recorded operating income and net
income for the years ended March&nbsp;31, 2005 and 2006. At March&nbsp;31, 2006, the Company had
indebtedness of &#165;15,819,136 thousand. As a result of increasing net income, liquidation of
certain available-for-sale securities and completion of a public offering of &#165;6,030,064
thousand (after deducting stock issuance cost) on the Mothers market of the Tokyo Stock
Exchange, the negative working capital of &#165;4,637,376 thousand at March&nbsp;31, 2005 turned
positive in the amount of &#165;4,887,974 thousand at March&nbsp;31, 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Certain Significant Risks and Uncertainties&#151;</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company has available-for-sale securities of &#165;6,775,388 thousand at March&nbsp;31, 2006 and
believes that the fluctuations in stock price of available-for-sale securities could have a
material adverse effect on the Company&#146;s future financial position, results of operations or
cash flows.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company relies on telecommunications carriers for significant portion of network backbone,
and regional NTT subsidiaries, electric power companies and their affiliates for local
connections to customers. Currently, NTT Communications is the largest provider of network
infrastructure. The Company believes that its use of multiple carriers and suppliers
significantly mitigates concentrations of credit risk. However, any disruption of
telecommunication services could have an adverse effect on operating results.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash investments, accounts receivable and guarantee deposits. The
Company&#146;s management believes that the risks associated with accounts receivable is mitigated
by the large number of customers comprising its customer base.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt">F-11
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B>Summary of Significant Accounting Policies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Basis of Presentation&#151;</I></B>IIJ maintains its record in accordance with generally accepted
accounting principles in Japan. Certain adjustment and reclassifications have been
incorporated in the accompanying consolidated financial statements to conform to generally
accepted accounting principles in the United States of America (&#147;U.S. GAAP&#148;). These
adjustments were not recorded in the statutory accounts.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Certain reclassifications have been made to prior periods to conform to the current year
presentation.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Translation into U.S. Dollars&#151;</I></B>IIJ maintains its accounts in Japanese yen, the currency of the
country in which it is incorporated and principally operates. The U.S. dollar amounts
included herein represent a translation using the noon buying rate in New York City for cable
transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York at
March&nbsp;31, 2006 of &#165; 117.48 = $1 solely for the convenience of the reader. The translation
should not be construed as a representation that the yen amounts have been, could have been,
or could in the future be converted into U.S. dollars.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Consolidation&#151;</I></B>The consolidated financial statements include the accounts of IIJ and all of its
subsidiaries, Net Care, Inc. (&#147;Net Care&#148;), IIJ Technology Inc. (&#147;IIJ Technology&#148;), IIJ Media
Communications Inc. (&#147;MC&#148;), which was merged with IIJ on October&nbsp;1, 2005, IIJ America, Inc.
(&#147;IIJ America&#148;) and IIJ Financial Systems Inc. (&#147;IIJ FS&#148;), which have fiscal years ending
March&nbsp;31, except for IIJ America. IIJ America&#146;s fiscal year end is December&nbsp;31 and such date
was used for purposes of preparing the consolidated financial statements as it is not
practicable for the subsidiary to report its financial results as of March&nbsp;31.<BR>
There were no significant events that occurred during the intervening period that would
require adjustment to or disclosure in the accompanying consolidated financial statements.
Significant intercompany transactions and balances have been eliminated in consolidation.
Investments in companies over which IIJ has significant influence but not control are
accounted for by the equity method. For other than a temporary decline in the value of
investments in equity method investees below the carrying amount, the investment is reduced to
fair value and an impairment loss is recognized.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">A subsidiary or equity method investee may issue its shares to third parties at amounts per
share in excess of or less than the Company&#146;s average per share carrying value. With respect
to such transactions, the resulting gains or losses arising from the change in ownership are
recorded in income for the year in which such shares are issued.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Use of Estimates&#151;</I></B>The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and expenses during
the reporting period. Significant estimates and assumptions used are primarily in the areas
of impairment loss on advances to equity method investees, valuation allowances for deferred
tax assets, allowance for doubtful accounts, and estimated useful lives of fixed assets.
Actual results could differ from those estimates.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Revenue Recognition&#151;</I></B>Revenues from customer connectivity services consist principally of
dedicated Internet access services and dial-up Internet access services. Dedicated Internet
access services represent full-line IP services and standard-level IP services (T1 Standard
and IIJ FiberAccess/F Service). Dial-up Internet access services are provided to both
enterprises and individuals (IIJ4U). The term of these contracts is one year for dedicated
Internet access services and generally one month for dial-up Internet access services. All
these services are billed and recognized monthly on a straight-line basis.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Value-added service revenues consist principally of sales of various Internet access-related
services such as firewalls services. Value-added services also include monthly fees from data
center services such as housing, monitoring and security services. Other revenues under
connectivity and value-added services consist principally of Wide-area Ethernet services and
call-center customer support. The terms of these services are generally for one year and
revenues are recognized on a straight-line basis during the service period.
</DIV>

<P align="center" style="font-size: 10pt">F-12
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Initial set up fees received in connection with connectivity services and value-added services
are deferred and recognized over the contract period.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Systems integration revenues consist principally of the development of Internet network
systems or design and related maintenance, monitoring and other operating services. The
period for the development of the systems or designs is less than one year and revenues are
recognized when network systems and equipment are delivered and accepted by the customer. The
development of the Internet network systems or design includes multiple element arrangements
such as planning, systems design, and construction services, and equipment and software
purchased from third parties. When the equipment or system is delivered prior to other
elements of the arrangement, revenue is deferred until other service elements are completed
and accepted by the customer. Maintenance, monitoring and operating service revenues are
recognized ratably over the separate contract period, which is generally for one year.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Systems integration service is subject to the Emerging Issues Task Force (&#147;EITF&#148;) Issue No.
00-21, &#147;Revenue Arrangements with Multiple Deliverables&#148; which was adopted as of April&nbsp;1,
2004. The adoption of EITF No.&nbsp;00-21 did not have any effect on the consolidated financial
statements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Equipment sales are reported on a gross or net basis in accordance with EITF Issue No.&nbsp;99-19
&#147;Reporting Revenue Gross as a Principal versus Net as an Agent&#148;. Revenues are recognized when
equipments are delivered and accepted by the customer.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Cash and cash equivalents&#151;</I></B>Cash and cash equivalents include time deposits and readily
marketable securities with original maturities of three months or less.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Allowance for Doubtful Accounts&#151;</I></B>An allowance for doubtful accounts is established in amounts
considered to be appropriate based primarily upon the Company&#146;s past credit loss experience
and an evaluation of potential losses in the receivables outstanding.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Other Investments&#151;</I></B>In accordance with Statement of Financial Accounting Standards (&#147;SFAS&#148;) No.
115, &#147;Accounting for Certain Investments in Debt and Equity Securities,&#148; all marketable equity
securities are classified as available-for-sale securities, which are accounted for at fair
value with unrealized gains and losses excluded from earnings and reported in accumulated
other comprehensive income (loss). The cost of securities sold is determined based on average
cost.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company reviews the fair value of available-for-sale investments on a regular basis to
determine if the fair value of any individual investment has declined below its cost and if
such decline is other than temporary. If the decline in value is judged to be other than
temporary, the cost basis of the investment is written down to fair value. Other than
temporary declines in value are determined taking into consideration the extent of decline in
fair value, the length of time that the decline in fair value below cost has existed and
events that might accelerate the recognition of impairment. The resulting realized loss is
included in the consolidated statements of operations in the period in which the decline was
deemed to be other than temporary.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Non-marketable equity securities are carried at cost as fair value is not readily
determinable. If the value of a security is estimated to have declined and such decline is
judged to be other than temporary, the security is written down to the fair value.
Determination of impairment is based on the consideration of such factors as operating
results, business plans and change in the regulatory, economic or technological environment of
the investees. Fair value is determined as the Company&#146;s interest in the net assets of
investees.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Inventories&#151;</I></B>Inventories consist mainly of network equipment purchased for resale and
work-in-process for development of Internet network systems. Network equipment purchased for
resale is stated at the lower of cost, which is determined by the average-cost method, or
market. Work-in-process for development of network systems is stated at the lower of actual
production costs, including overhead cost, or market. Inventories are reviewed periodically
and items considered to be slow-moving or obsolete are written down to their estimated net
realizable value.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Leases&#151;</I></B>Capital leases, which meet specific criteria noted in SFAS No.13, &#147;Accounting for
Leases&#148;, are capitalized at the inception of the lease at the present value of the minimum
lease payments. All other leases are accounted for as operating leases. Lease payments for
capital leases are apportioned to interest expense and a reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Operating
lease payments are recognized as an expense on a straight-line basis over the lease term.</DIV>

<P align="center" style="font-size: 10pt">F-13
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">





<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Property and Equipment&#151;</I></B>Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment, including purchased software and capitalized leases,
are computed principally using the straight-line method based on either the estimated useful
lives of assets or the lease period, whichever is shorter.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The useful lives for depreciation and amortization by major asset classes are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Range of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Useful Lives</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Data communications, office and other equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">2 to 15 years</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Leasehold improvements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">3 to 15 years</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchased software</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="right">5 years&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capitalized leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="right">4 to 7 years&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Impairment of Long-lived Assets&#151;</I></B>Long-lived assets consist principally of property and
equipment, including those items leased under capital leases. The Company evaluates the
impairment of long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable in accordance with SFAS No.&nbsp;144,
&#147;Accounting for the Impairment or Disposal of Long-Lived Assets&#148;. There were no impairment
losses for long-lived assets for the three years in the period ended March&nbsp;31, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Goodwill and Intangible Assets&#151;</I></B>In accordance with SFAS No.&nbsp;142, &#147;Goodwill and Other Intangible
Assets&#148;, goodwill (including equity-method goodwill) and intangible assets that are deemed to
have indefinite useful lives are not amortized, but are subject to impairment testing.
Impairment testing is performed annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The Company performs annual
impairment tests on March&nbsp;31.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Pension and severance indemnities plans&#151;</I></B>The Company has pension plans and /or severance
indemnities plans. The cost of the pension plans and severance indemnities plans are accrued
based on amounts determined using actuarial methods, in accordance with SFAS No.&nbsp;87,
&#147;Employers&#146; Accounting for Pensions&#148;.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Income Taxes&#151;</I></B>The provision for income taxes is based on earnings before income taxes and
includes the effects of temporary differences between assets and liabilities recognized for
financial reporting purposes and income tax purposes and operating loss carryforwards.
Valuation allowances are provided against assets that are not likely to be realized.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Foreign Currency Transactions&#151;</I></B>Foreign currency assets and liabilities, which consist
substantially of cash and accounts payable for connectivity leases to international carriers
denominated in U.S. dollars, are stated at the amount as computed by using year-end exchange
rates and the resulting transaction gain or loss is recognized in earnings.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Derivative Financial Instruments&#151;</I></B>All derivatives are recorded at fair value as either asset or
liabilities in the balance sheet in accordance with SFAS No.&nbsp;133, &#147;Accounting for Derivative
Instruments and Hedging Activities,&#148; as amended by SFAS No.&nbsp;138 and No.&nbsp;149 (collectively,
&#147;SFAS No.&nbsp;133&#148;). In accordance with SFAS No.&nbsp;133, the Company designated interest swap
contracts as a hedge of the variability of cash flows to be paid related to interest on
floating rate borrowings (cash flow hedge) and the effective portion of the derivative&#146;s gain
or loss is initially reported as a component of other comprehensive income and subsequently
reclassified into earnings when the underlying transaction affects earnings. The ineffective
portion of the gain or loss is reported in earning immediately. The Company enters into
contracts to hedge interest rate risks and does not enter into contracts or utilize
derivatives for trading purposes. For transactions which occurred after July&nbsp;1, 2003, the
Company adopted SFAS No.&nbsp;149. The adoption of SFAS No.149 had no effect on the Company&#146;s
consolidated financial position or result of operation.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Stock Splits&#151;</I></B>On August&nbsp;4, 2005, IIJ&#146;s board of directors approved a five-for-one split of
IIJ&#146;s common stock. Shareholders of record on August&nbsp;31, 2005 received an additional common
share. The stock split was effective on October&nbsp;11, 2005. In order to reflect this split,
information pertaining to shares, earnings per share and issue price per share during the year
ended March&nbsp;31, 2004, has been restated in the accompanying financial statements and related
notes.
</DIV>

<P align="center" style="font-size: 10pt">F-14
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Stock-based Compensation&#151;</I></B>The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (&#147;APB&#148;) No.&nbsp;25 (&#147;APB No.&nbsp;25&#148;),
&#147;Accounting for Stock Issued to Employees&#148; and related interpretations. Accordingly, the
Company recognizes compensation expense in an amount equal to the excess of the quoted market
price over the exercise price of the option at the grant date. For options with a vesting
period, the compensation expense is charged to operations ratably over the vesting period.
The Company has not recognized any stock-based compensation expense for the years ended March
31, 2004, 2005 and 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In accordance with SFAS No.&nbsp;123, &#147;Accounting for Stock-Based Compensation,&#148; (&#147;SFAS No.&nbsp;123&#148;)
as amended by SFAS No.&nbsp;148, &#147;Accounting for Stock-Based Compensation&#151;Transition and
Disclosure,&#148; the following pro forma net income (loss)&nbsp;and income (loss)&nbsp;per share information
for the years ended March&nbsp;31, 2004, 2005 and 2006, including the effects of fair values
associated with the warrants of IIJ Technology is presented as if the Company accounted for
its stock options using the fair value method. Under the fair value method, the estimated
fair value of the stock options is charged against income on a straight-line basis over the
options&#146; vesting period:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">As reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,270,686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Addition: Total
stock-based employee
compensation
determined under
fair value based
method for all awards,
net of tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(32,020</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Pro forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,302,706</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic net
income (loss) per common shares:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">As reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">207</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Pro forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,523</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">207</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted net
income (loss) per common shares:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">As reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">206</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Pro forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,523</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">206</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Research and developments&#151;</I></B>Research and development costs are expensed as incurred.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Advertising&#151;</I></B>Advertising costs are expensed as incurred.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Basic and Diluted Net Income (Loss) per Share&#151;</I></B>Basic net income (loss)&nbsp;per share is computed by
dividing net income (loss)&nbsp;by the weighted-average number of shares of common stock
outstanding during the year. Diluted net income (loss)&nbsp;per share reflects the potential
dilutive effect of stock options and convertible bonds.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Other Comprehensive Income (Loss)&#151;</I></B>Other comprehensive income (loss)&nbsp;consists of translation
</DIV>

<P align="center" style="font-size: 10pt">F-15
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">adjustments resulting from the translation of financial statements of a foreign subsidiary,
unrealized gains or losses on available-for-sale securities and gains or losses on cash flow
hedging derivative instruments.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>Segment Reporting &#151;</I></B>SFAS No.&nbsp;131, &#147;Disclosures about Segments of an Enterprise and Related
Information,&#148; establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise that engages in business
activities from which it may earn revenues and incur expense and for which separate financial
information is available that is evaluated regularly by the chief operation decision maker in
deciding how to allocate resources and in assessing performance.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company provides a comprehensive range of network solutions to meet its customers&#146; needs
by cross-selling a variety of services, including Internet connectivity services, value-added
services, systems integration and sales of network-related equipment. The Company&#146;s chief
operating decision maker, who is the Company&#146;s Chief Executive Officer, regularly reviews the
revenue and cost of sales on a consolidated basis and makes decisions regarding how to
allocate resources and assess performance based on a single operating unit.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><B><I>New Accounting Standards&#151;</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In December&nbsp;2004, the FASB issued revised SFAS No.&nbsp;123 (Revised 2004), &#147;Share-Based
Payment&#148; (&#147;SFAS No.&nbsp;123R&#148;) which replaces the existing SFAS No.&nbsp;123 and supersedes APB No.&nbsp;25.
SFAS No.&nbsp;123R requires compensation expense for stock options and other share-based payment to
be measured and recorded based on the instruments&#146; fair value. SFAS No.&nbsp;123R is effective for
the fiscal period beginning after June&nbsp;15, 2005. The Company will adopt SFAS No.&nbsp;123R and the
related FASB Staff Positions (&#147;FSP&#148;) on April&nbsp;1, 2006 by using modified prospective
application, which requires recognizing expenses for options granted prior to the adoption
date equal to the fair value of unvested amounts over the remaining vesting period. The
portion of these options&#146; fair value attributable to vested awards prior to the adoption of
SFAS No.&nbsp;123R is never recognized. As all existing granted stock-based awards of the Company
have vested, the adoption of SFAS No.&nbsp;123R will not have any impact on the Company&#146;s
consolidated financial position or results of operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In November&nbsp;2005, the FASB issued FSP No.&nbsp;115-1 and No.&nbsp;124-1, &#147;The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,&#148; on the basis of
the EITF&#146;s consensus on Issue 03-1,&#147;The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments&#148;. FSP No.&nbsp;115-1 and No.&nbsp;124-1 addresses the determination
as to when an investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss. FSP No.&nbsp;115-1 and No.&nbsp;124-1
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses that
have not been recognized as other-than-temporary impairments. FSP No.&nbsp;115-1 and No.&nbsp;124-1 is
effective for reporting periods beginning after December&nbsp;15, 2005. The adoption of FSP No.
115-1 and No.&nbsp;124-1 did not have a material effect on the Company&#146;s financial position or
results of operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In November&nbsp;2004, the FASB issued SFAS No.&nbsp;151, &#147;Inventory Costs-an amendment of ARB No.
43, Chapter&nbsp;4&#148; (&#147;SFAS No.&nbsp;151&#148;) which clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage)&nbsp;and also requires
that the allocation of fixed production overhead be based on the normal capacity of the
production facilities. SFAS No.&nbsp;151 is effective for inventory costs incurred during fiscal
years beginning after June&nbsp;15, 2005. The adoption of SFAS No.&nbsp;151 will not have a material
impact on the Company&#146;s consolidated financial position or results of operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In December&nbsp;2004, the FASB issued SFAS No.&nbsp;153, &#147;Exchanges of Nonmonetary Assets-amendment of
APB Opinion No.&nbsp;29&#148; (&#147;SFAS No.&nbsp;153&#148;). The statement addresses the measurement of exchanges of
nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception for exchanges that do
not have commercial substance. SFAS No.&nbsp;153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June&nbsp;15, 2005. The adoption of SFAS No.&nbsp;153 did
not have a material impact on the Company&#146;s consolidated financial position or results of
operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In May&nbsp;2005, the FASB issued SFAS No.&nbsp;154, &#147;Accounting Changes and Error Corrections-a
replacement of
APB opinion No.&nbsp;20 and SFAS No.&nbsp;3&#148; (&#147;SFAS No.&nbsp;154&#148;). SFAS No.&nbsp;154 requires that changes in
accounting principle are retrospectively applied by applying the new accounting principle as
of the beginning of the first period presented as if that principle had always been used,
although APB opinion No.&nbsp;20 required that changes in accounting principle are applied
cumulatively in the period of change. SFAS No.&nbsp;154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December&nbsp;15, 2005.
</DIV>

<P align="center" style="font-size: 10pt">F-16
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In July&nbsp;2005, the FASB issued FSP APB No.18-1, &#147;Accounting by an Investor for Its
Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for
under the Equity Method in
Accordance with APB Opinion No.&nbsp;18 upon a Loss of Significant Influence&#148; (&#147;FSP APB No.&nbsp;18-1&#148;).
FSP APB No.&nbsp;18-1 requires that an investor&#146;s proportionate share of an investee&#146;s equity
adjustments for other comprehensive income is offset against the carrying value of the
investment at the time significant influence is lost. FSP APB No.&nbsp;18-1 is effective for
reporting periods beginning after July&nbsp;12, 2005. The adoption of FSP APB No.&nbsp;18-1 did not have
a material impact on the Company&#146;s consolidated financial position or results of operations.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-17
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>2.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>OTHER INVESTMENTS</B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Pursuant to SFAS No.&nbsp;115, all of the Company&#146;s marketable equity securities were classified as
available-for-sale securities. Information regarding the securities classified as
available-for-sale at March&nbsp;31, 2005 and 2006 is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Cost</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Gains</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Available-for-sale&#151;Equity
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">215,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">8,738,792</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,882</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">8,948,168</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Available-for-sale&#151;Equity
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">222,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,552,623</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">42</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,775,388</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000">Thousands of U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Cost</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Gains</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Available-for-sale&#151;Equity
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,897</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">55,776</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">57,673</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The following table provides the fair value and gross unrealized losses of the Company&#146;s
investments, which have been deemed to be temporarily impaired, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized
loss position, as of March&nbsp;31, 2005 and 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">Less than</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">12 Months</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">12 Months or More</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Total</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Marketable equity
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">68,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,882</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">68,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,882</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Marketable equity
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,338</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">42</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,338</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">42</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000">Thousands of U.S. Dollars</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">Less than</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">12 Months</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">12 Months or More</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Total</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Fair</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Unrealized</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Losses</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Marketable equity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company regularly reviews all of the Company&#146;s investments to determine if any are
other-than-temporarily impaired. The analysis includes reviewing industry analyst reports,
sector credit ratings and volatility of the security&#146;s market price.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The company&#146;s unrealized loss on an investment in marketable equity security relates to a U.S.
telecommunication equipment supplier. The fair value of the investment is approximately 3%
less than its cost. The duration of the unrealized loss position was less than 6&nbsp;months. Based
on the Company&#146;s ability and intent to hold the investment for a reasonable period of time
sufficient for a recovery of fair value, the Company does not consider the investment to be
other-than-temporarily impaired at March&nbsp;31, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Proceeds from the sale of available-for-sale securities were &#165;122,650 thousand, &#165;2,614,768 thousand and
</DIV>

<P align="center" style="font-size: 10pt">F-18
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">&#165;3,240,805 thousand ($27,586thousand) for the years ended March&nbsp;31, 2004, 2005
and 2006, respectively. Gross realized gains of &#165;55,965 thousand, &#165;2,477,607 thousand and
&#165;3,222,397 thousand ($27,429 thousand) were included in other income (expenses)&nbsp;for the year
ended March&nbsp;31, 2004, 2005 and 2006, respectively, and gross realized losses of &#165;8,925
thousand were included in other income (expenses)&nbsp;for the year ended March&nbsp;31, 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The aggregate cost of the Company&#146;s cost method investments totaled &#165;982,613 thousand and
&#165;1,245,317 thousand ($10,600 thousand) at March&nbsp;31, 2005 and 2006, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Losses on the write-down of investments in certain nonmarketable equity and debt securities,
included in other income (expenses)&nbsp;were recognized to reflect the decline in value considered
to be other than temporary, totaled &#165;229,944 thousand for the year ended March&nbsp;31, 2004.
Losses on write-down of investments in certain marketable and nonmarketable equity securities,
included in other income (expenses), were &#165;34,151 thousand and &#165;118,076 thousand,
respectively, for the year ended March&nbsp;31, 2005. Such losses in certain nonmarketable equity
securities, included in other income (expenses)&nbsp;were &#165;29,513 thousand ($251 thousand) for the
year ended March&nbsp;31, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Gains on exchange of securities of &#165;35,450 thousand and &#165; 4,806 thousand ($41 thousand),
included in other income (expenses), for the year ended March&nbsp;31, 2005 and 2006, respectively,
represented non-monetary gains from the exchange of marketable common shares in a merger
transaction.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">For the year ended March&nbsp;31, 2004, IIJ sold all of its shares of DLJdirectSFG Securities Inc.,
which had been held as other investments, and proceeds and gross realized gain from the sale
were &#165;1,946,875 thousand and &#165;1,571,875 thousand, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In Japan, there is a market in which participants lend and borrow debt and equity
securities without collateral from financial institutions under agreements known as lending
and borrowing debt and equity securities contracts. Under the agreement, the Company loans
equity securities without collateral. The Company has loaned &#165;324,000 thousand ($ 2,758
thousand) of available-for-sale securities to the financial institution as of March&nbsp;31, 2006.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>3.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>ALLOWANCE FOR DOUBTFUL ACCOUNTS AND ADVANCES</B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">An analysis of the allowance for doubtful accounts and advances for the years ended March&nbsp;31,
2004, 2005 and 2006 is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Provision for</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" colspan="2">(Reversal of)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Balance at</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Doubtful</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Beginning of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Credits</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Accounts and</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Balance at</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Year</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Charged Off</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Advances</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Reclassification</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">End of Year</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">125,354</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(81,913</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">449,164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">492,605</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">492,605</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(68,516</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,781</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">448,870</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">448,870</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(357,519</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(12,009</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">35,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">114,342</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000">Thousands
of U.S.&nbsp;Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Reversal of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Balance at</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Doubtful</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Beginning of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Credits</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Accounts and</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Balance at</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Year</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Charged Off</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Advances</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Reclassification</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">End of Year</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,821</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(3,043</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(102</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">297</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">973</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The provision for doubtful accounts and advances for the year ended March&nbsp;31, 2004 included
accounts receivable from Crosswave of &#165;395,780 thousand and certain other customers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The credits charged off for the year ended March&nbsp;31, 2006 included the reversal of allowance for doubtful
</DIV>

<P align="center" style="font-size: 10pt">F-19
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">accounts of Crosswave amounted to &#165;345,994 thousand ($2,945
thousand) due to the final distribution of remaining assets of Crosswave under the
corporate reorganization proceedings.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>4.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>IIJ utilizes various companies in Japan and neighboring countries to form and operate its
Internet business. Businesses operated by its equity method investees include dedicated high-speed data
communication services, data center services (Crosswave) through December&nbsp;15, 2003,
connectivity services in Asian countries (Asia Internet Holding Co., Ltd., &#147;AIH&#148;) through
September&nbsp;2005, multifeed technology services and location facilities for connecting high-speed
Internet backbones (Internet Multifeed Co., &#147;Multifeed&#148;), Web page design services (atom Co.,
Ltd.), and data center services in Asian countries ( i-Heart Inc., &#147;i-Heart&#148; and Ayalaport
Makati Inc., &#147;Ayalaport&#148; through June, 2004).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Since July&nbsp;2004, Ayalaport is no longer accounted for under equity method due to dilution
of the Company&#146;s ownership and loss of ability to exercise significant influence.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>AIH was no longer an equity method investee after October&nbsp;1, 2005 since AIH was merged with
IIJ.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On February&nbsp;1, 2006, IIJ and Konami corporation established a joint venture company (Internet
Revolution Inc.,&#148;i-revo&#148;) to operate comprehensive portal sites. IIJ invested &#165;750,000
thousand ($6,384 thousand) to i-revo and owned 30&nbsp;percent ownership as of March&nbsp;31, 2006. IIJ
accounted i-revo as an equity method investee.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The aggregate amounts of balances and transactions of the Company with these equity method
investees other than Crosswave as of March&nbsp;31, 2005 and 2006, and for each of the three years
in the period ended March&nbsp;31, 2006 are summarized as follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">118,130</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">253,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,155</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">96,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">145</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,329,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,245,361</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,286,275</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,949</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,245,607</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,145,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">656,184</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,585</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">During each of the three years in the period ended March&nbsp;31, 2006, the Company did not receive
any dividends from its equity method investees.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company&#146;s investments in and advances to these equity method investees and respective
ownership percentage at March&nbsp;31, 2005 and 2006 consisted of the following:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">AIH</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">26.69</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">275,386</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Multifeed</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28.58</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">242,719</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29.44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">317,144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,700</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Atom</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116,974</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">995</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">i-revo</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">676,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,761</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,665</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,058</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">443</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">713,607</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,162,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,899</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Advances of &#165;19,868 thousand and &#165;34,545 thousand ($294 thousand ) to i-Heart, net of loan
loss valuation allowance were included in the balances as of March&nbsp;31, 2005 and 2006
respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Crosswave, was formed in October&nbsp;1998 with ownership interests held by IIJ (40&nbsp;percent),
Toyota Motor Corporation (&#147;Toyota&#148;) (30&nbsp;percent) and Sony Corporation (&#147;Sony&#148;) (30&nbsp;percent).
On August&nbsp;9, 2000, Crosswave completed an initial public offering in the NASDAQ National
Market in the United States of America. Concurrently, IIJ purchased 15,000 newly issued
Crosswave common shares and on December&nbsp;27,
</DIV>

<P align="center" style="font-size: 10pt">F-20
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">2000, IIJ also purchased 3,000,000 ADSs,
representing 15,000 shares of Crosswave from the market. As a result of these transactions,
the ownership of IIJ, Sony and Toyota at March&nbsp;31, 2003 was 37.85&nbsp;percent, 23.9&nbsp;percent and
23.9&nbsp;percent, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">On May&nbsp;21, 2002, in connection with the Crosswave Financing Facilities Agreement (the
&#147;Agreement&#148;), the Company entered into a Cash Deficiency Support Agreement (&#147;CDS Agreement&#148;)
with Crosswave and four Japanese commercial banks. In accordance with the provisions of the
CDS Agreement, the Company deposited &#165;5,000,000 thousand into a restricted account with a
participating bank in May&nbsp;2002.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">In May and June&nbsp;2003, the Company made unsecured loans of &#165;1,719,981 thousand in total to
Crosswave in order for Crosswave to meet its scheduled debt service obligation.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">On August&nbsp;20, 2003, Crosswave filed a voluntary petition for the commencement of corporate
reorganization proceedings in Japan. On August&nbsp;28, 2003, Crosswave received an order from the
Tokyo District Court for the commencement of corporate reorganization proceedings. As a
result of the commencement of corporate reorganization proceedings, the Company no longer has
had the ability to exercise significant influence over operating and financial policies of
Crosswave.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company recorded an equity method loss of Crosswave of &#165;5,514,383 thousand for the year
ended March&nbsp;31, 2003, based on unaudited net loss information publicly disclosed by Crosswave
prior to the commencement of corporate reorganization proceedings by Crosswave and not
reflecting any adjustments which may have been required in respect thereof. In addition, the
Company assessed the impairment of its investment in and deposits for Crosswave considering an
evaluation of the recoverability of the equity investee&#146;s underlying net assets through sale
or future operations upon emergence from bankruptcy and recognized an impairment loss on
investment in and deposits for Crosswave of &#165;7,153,087 thousand for the year ended March&nbsp;31,
2003. This impairment loss consisted of the carrying amount of the investment of &#165;2,098,762
thousand, the realized gain of related foreign currency translation adjustments of &#165;1,925
thousand, stock purchase rights of &#165;56,250 thousand and deposits of &#165;5,000,000 thousand under
the CDS Agreement.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The loans of &#165;1,719,981 thousand made by the Company in May and June&nbsp;2003 to Crosswave and
accounts receivable from Crosswave of &#165;395,780 thousand as of August&nbsp;19, 2003 were written off
in the year ended March&nbsp;31, 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left:3%; text-indent:-0px">&nbsp;&nbsp;&nbsp;&nbsp;
Revenues from Crosswave consisted principally of dedicated Internet access services,
monitoring services and sales of network systems which amounted to &#165;1,196,080 thousand for the
year ended March&nbsp;31, 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Cost and expenses incurred from transactions with Crosswave mainly consist of the cost of
dedicated high-speed data communication services, which amounted to &#165;4,816,146 thousand for
the year ended March&nbsp;31, 2004. The revenues and costs and expenses include those recognized
after Crosswave&#146;s filing voluntary petition of corporate reorganization, which amounted to
&#165;425,597 thousand and &#165;1,820,518 thousand, respectively.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>5.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>PROPERTY AND EQUIPMENT</B></TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Property and equipment as of March&nbsp;31, 2005 and 2006 consisted of the following:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Data communications equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">543,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">781,605</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,653</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Office and other equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">904,532</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">718,362</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,115</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Leasehold improvements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">823,313</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">780,143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,641</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchased software</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,917,483</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,425,819</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,185</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capitalized leases, primarily data
communications equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,251,657</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,458,667</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123,073</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,440,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,164,596</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">188,667</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less accumulated depreciation
and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,717,984</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,865,100</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(100,997</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and equipment&#151;net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">9,722,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,299,496</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">87,670</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">F-21
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>6.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>GOODWILL AND INTANGIBLE ASSETS</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The components of intangible assets as of March&nbsp;31, 2005 and 2006 are as follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-amortized intangible assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Telephone rights</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">14,616</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,555</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">107</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Customer relationship</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">965</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">433,235</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">506,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,313</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">561,211</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">632,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,385</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The Company recorded disposal losses of &#165;48,201 thousand, &#165;73,271 thousand and &#165;2,040
thousand ($17 thousand) on telephone rights, which were not used by the Company upon
cancellation of the contracts for the usage of telephone circuits for dial-up access services
and the disposal loss was included in general and administrative expenses for the years ended
March&nbsp;31, 2004, 2005 and 2006, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">NTT reduced the price of telephone rights by 50&nbsp;percent after March&nbsp;1, 2005 and the
Company recorded an impairment loss of &#165;25,804 thousand on telephone rights based on the new
purchase price. The impairment loss was included in general and administrative expenses for
the year ended March&nbsp;31, 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Goodwill of &#165;405,349 thousand and &#165;73,444 thousand ($625 thousand) was recorded for the
years ended March&nbsp;31, 2005 and 2006, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">On October&nbsp;1, 2004, IIJ Financial Systems, a 100&nbsp;percent owned subsidiary of IIJ Technology,
which was a 69&nbsp;percent owned subsidiary of IIJ at October&nbsp;1, 2004, purchased the securities
systems development and operation business from Yamatane Co.,Ltd (&#147;Yamatane&#148;) in order to
initiate a business relationship with Yamatane&#146;s customer base. The primary factor that
contributed to the recognition of goodwill was an assembled workforce. The results of
operations of this business are included in the statement of operations of the Company from
October&nbsp;1, 2004. The cash paid for this business was &#165;375,123 thousand including incremental
costs directly related to the transaction. The Company acquired an order backlog of &#165;6,254
thousand, customer relationships valued at &#165;113,360 thousand and recorded goodwill of &#165;251,127
thousand in the transaction. The backlog became fully amortized during the year ended March
31, 2005. The pro forma impact of the acquisition of the business operations of Yamatane on
consolidated revenues and net income (loss)&nbsp;of the Company, assuming the acquisition had been
completed at the beginning of fiscal 2004 and 2005, would have been an increase to
consolidated revenues of &#165;2.3&nbsp;billion and &#165;1.2&nbsp;billion, respectively, and a decrease to net
loss of &#165;109&nbsp;million in fiscal 2004 and an increase to net income of &#165;56&nbsp;million in fiscal
2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">No impairment on goodwill was recognized during the years ended March&nbsp;31, 2004, 2005 and
2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%"><B>7. LEASES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The Company enters into, in the normal course of business, various leases for domestic and
international backbone services, office premises, network operation centers and data
communications and other equipment. Certain leases that meet one or more of the criteria set
forth in the provision of SFAS No.&nbsp;13, &#147;Accounting for leases&#148; have been classified as capital
leases and the others have been classified as operating leases.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%"><B><I>Operating Leases&#151;</I></B>The Company has operating lease agreements with telecommunications carriers
and others for the use of connectivity lines, including local access lines that customers use
to connect to IIJ&#146;s network. The leases for domestic backbone connectivity are generally
either non-cancelable for a minimum one-year lease period or cancelable during a lease period
of three years, with a significant penalty for cancellation (35&nbsp;percent). The leases for
international backbone connectivity during one-year lease period are substantially
non-cancelable. The Company also leases its office premises, for which refundable lease
deposits are capitalized as guarantee deposits, and certain office equipment under
non-cancelable operating leases which expire on various dates through the year 2008 and also
leases its network operation centers
</DIV>

<P align="center" style="font-size: 10pt">F-22
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">under non-cancelable operating leases.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Refundable guarantee deposits as of March&nbsp;31, 2005 and 2006 consist of as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Head office</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,705,036</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,185,307</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,090</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sales and subsidiaries offices</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">296,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">308,494</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,626</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">475</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total refundable guarantee deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,050,665</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,549,653</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Lease expenses related to backbone lines for the years ended March&nbsp;31, 2004, 2005 and 2006
amounted to &#165;4,719,638 thousand, &#165;3,550,885 thousand and &#165; 3,516,322 thousand ($ 29,931
thousand), respectively. Lease expenses for local access lines for the years ended March&nbsp;31,
2004, 2005 and 2006, which are only attributable to dedicated access revenues, amounted to
&#165;3,500,468 thousand, &#165;4,040,192 thousand and &#165; 4,558,382 thousand ($ 38,801 thousand),
respectively. Other lease expenses for the years ended March&nbsp;31, 2004, 2005 and 2006 amounted
to &#165;3,786,739 thousand, &#165;3,303,717 thousand and &#165; 3,653,766 thousand ($ 31,101 thousand),
respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The Company has subleased a part of its office premises. Lease expenses mentioned above have
been reduced by sublease revenues totaling &#165;88,895 thousand, &#165;406,451 thousand and &#165;435,224
thousand ($3,705 thousand) for the years ended March&nbsp;31, 2004, 2005 and 2006, respectively.
</DIV>

<P align="center" style="font-size: 10pt">F-23
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%"><B><I>Capital Leases&#151;</I></B>The Company conducts its connectivity and other services by using data
communications and other equipment leased under capital lease arrangements. The fair values of
the assets upon execution of the capital lease agreements and accumulated depreciation amounted
to &#165;13,251,657 thousand and &#165;6,336,386 thousand at March&nbsp;31, 2005 and &#165;14,458,667 thousand
($123,073 thousand) and &#165; 6,819,503 thousand ($ 58,048 thousand) at March&nbsp;31, 2006,
respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">As of March&nbsp;31, 2006, future lease payments under non-cancelable operating leases, including the
aforementioned non-cancelable connectivity lease agreements (but excluding dedicated access
lines which the Company charges outright to customers), and capital leases were as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Connectivity</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Connectivity</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Lines</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Other</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Lines</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Other</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Operating</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Operating</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Capital</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Operating</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Operating</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Capital</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Leases</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Leases</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Leases</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Leases</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Leases</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Leases</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ending March&nbsp;31:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">27,302</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,376,986</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,262,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">232</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,721</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">27,769</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,174,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,535,823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,995</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,585</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">142,566</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,778,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,214</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,141</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,354</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">697,143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">599</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,934</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,623</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,496</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,528</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2012 and thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,154</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">304</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total minimum lease payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">27,302</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,838,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">8,489,231</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">232</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">24,165</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">72,261</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less amounts representing interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">504,658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,296</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Present value of net minimum capital
lease payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,984,573</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,965</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,003,914</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,569</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Noncurrent portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,980,659</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">42,396</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>8.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>BORROWINGS AND CONVERTIBLE NOTES</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Short-term borrowings at March&nbsp;31, 2005 and 2006 consist of bank overdrafts. Short-term
borrowings bear fixed-rate interest and their weighted average rates at March&nbsp;31, 2005 and 2006
were 1.375&nbsp;percent.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-24
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Long-term borrowings as of March&nbsp;31, 2005 and 2006 consisted of the following:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unsecured long-term loans payable to
banks, maturing at various dates
through calendar 2007 (see Note 15).
Interest is payable at a variable rate.
Weighted average interest rates were 3.255
percent,
and 2.206&nbsp;percent at March&nbsp;31, 2005 and 2006,
respectively.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">208,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">374,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,184</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unsecured long-term loans payable to
banks (secured in 2005), maturing in calendar 2006
(see Note 15). Weighted average interest rates
were 1.789&nbsp;percent and 1.710&nbsp;percent at March&nbsp;31,
2005 and 2006, respectively.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,350,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">600,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,107</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unsecured long-term loans payable to
banks (secured in 2005), maturing at various dates
through calendar 2007 (see Note 15). Interest is
payable at a variable rate based on TIBOR which
was 0.1&nbsp;percent and 0.133&nbsp;percent as of March&nbsp;31,
2005 and 2006, respectively.
Weighted average interest rates were
1.137&nbsp;percent and 1.130&nbsp;percent at March
31, 2005
and 2006, respectively.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,400,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,789</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term installment loans payable at
various dates through calendar 2007 (see Note 15).
Interest rates were 2.55&nbsp;percent
at March&nbsp;31, 2005 and 2006.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">308,019</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,328</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,266,019</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,279,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,408</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,736,056</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,989,963</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,939</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term borrowings, less current
portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,529,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">290,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,469</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The Company entered into interest rate swap contracts to manage its interest rate exposure
resulting in a fixed interest rate for a portion of its long-term debt. The effective
weighted average interest rates for &#165;1,400,000 thousand and &#165;1,150,000 thousand ($9,789
thousand) of the long-term loan outstanding at March&nbsp;31, 2005 and 2006 after giving effect to
such swap agreements were 1.926&nbsp;percent and 1.781&nbsp;percent per annum, respectively (see Note
15).
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">On March&nbsp;14, 2003, the Company entered into a long-term installment loan agreement with a
leasing company to finance the payment for rental deposits given to other lessor for its new
head office. The principal of the loan is &#165;155,963 thousand ($1,328 thousand) and the loan is
secured by a first priority pledge against a claim for the guarantee deposits of &#165;1,146,039
thousand ($9,755 thousand) at March&nbsp;31, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Substantially all short-term and long-term bank borrowings are made under agreements which, as
is customary in Japan, provide that under certain conditions the bank may require the borrower
to provide collateral (or additional collateral) or guarantor with respect to the borrowings
and that the bank may treat any collateral, whether furnished as security for short-term or
long-term loans or otherwise, as collateral for all indebtedness to such bank. Also,
provisions of certain loan agreements grant certain rights of possession to the lenders in the
event of default. The Company did not provide banks with any collateral for outstanding loans
as of March&nbsp;31, 2006.
</DIV>

<P align="center" style="font-size: 10pt">F-25
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Annual maturities of long-term borrowings outstanding as of March&nbsp;31, 2006 are as
follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="20%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"> Year Ending</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"> March 31</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,989,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">290,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,469</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>

<TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom"><!-- Blank Space -->
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,279,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">19,408</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The Company entered into bank overdraft agreements with certain Japanese banks for which the
unused balance outstanding as of March&nbsp;31, 2006 was &#165;3,210,000 thousand ($27,324 thousand).
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The 1.750&nbsp;percent unsecured yen convertible notes due March&nbsp;2005 in the aggregate principal
amount of &#165;15,000,000 thousand were issued in April&nbsp;11, 2000. The notes were convertible at
the option of the holders at &#165;19,875 thousand per share at any time on or before March&nbsp;15,
2005. The notes were redeemable at the Company&#146;s option at any time before March&nbsp;15, 2005,
in whole or in part, at par with unpaid and accrued interest; provided that the closing
trading price for the Company&#146;s shares for a certain period prior to giving notice of
redemption is of at least 140&nbsp;percent of the conversion price.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">In October and November&nbsp;2003, IIJ repurchased a portion of its 1.750&nbsp;percent unsecured yen
convertible notes, with an aggregate face value of &#165;3,168,000 thousand, for &#165;3,047,460
thousand in the open market, resulting in a realized gain of &#165;120,540 thousand. A portion of
deferred issuance cost, amounting to &#165;31,565 thousand, corresponding to the repurchased
convertible notes was charged to income and was offset against the gain. The net gain
realized on retirement of these convertible notes was presented as other income.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">In June&nbsp;2004, IIJ repurchased a portion of its 1.750&nbsp;percent unsecured yen convertible notes,
with an aggregate face value of &#165;744,000 thousand, for &#165;745,488 thousand in the open market,
resulting in a realized loss of &#165;1,488 thousand. A portion of deferred issuance cost,
amounting to &#165;3,707 thousand, corresponding to the repurchased convertible notes was charged
to loss upon redemption. The net loss realized on retirement of these convertible notes was
presented as other expense.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">In March&nbsp;2005, IIJ redeemed the remainder of its unsecured yen convertible notes
amounting to &#165;11,088,000 thousand at their carrying value.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Since August&nbsp;2004, the Company has been a party to a securities loan agreement with a certain
Japanese financial institution. The available-for-sale securities loaned to the financial
institution were &#165;2,189,600 thousand and &#165;1,230,000 thousand ($10,470 thousand), and the cash
received in return was &#165;1,729,520 thousand and &#165;999,600 thousand ($8,509 thousand) at March
31, 2005 and 2006, respectively. These transactions were accounted for as secured borrowings
and the cash received was recorded as payable under the securities loan agreement and
securities lent were recorded as other investments. The agreement requires the Company to
provide certain marketable securities as collateral at the commencement of the transaction.
The Company is required to make a partial repayment or receive additional borrowings
depending on the market value of securities pledged. The Company paid the interest on the
payables at a variable rate, which was 0.6349&nbsp;percent and 0.37&nbsp;percent as of March&nbsp;31, 2005
and 2006, respectively.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>9.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>INCOME TAXES</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Amendments to Japanese tax regulations were enacted into law on March&nbsp;31, 2003 and became
effective from the fiscal year beginning April&nbsp;1, 2004. Income taxes imposed by the national,
prefectural and municipal governments of Japan resulted in a normal statutory rate of
approximately 42&nbsp;percent for the year ended March&nbsp;31, 2004 and 41&nbsp;percent for the years ended
March&nbsp;31, 2005 and 2006.<BR>
The reserve for tax contingencies related to the denial of the usage of tax operating loss
carryforwards by IIJ America, a U.S. subsidiary, was &#165;197,753 thousand ($1,683 thousand) as of
March&nbsp;31, 2006. This is management&#146;s best estimate of the potential liability for tax
contingencies.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-26
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Income (loss)&nbsp;from operations before income tax expense, minority interests and equity in net
loss of equity method investees and income tax expense for the years ended March&nbsp;31, 2004, 2005,
and 2006 consists of the following components:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;from operations before income tax
expense, minority interests and equity in net loss
of equity method investees:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Domestic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(535,648</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,168,974</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,316,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">45,255</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,984</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,466</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62,024</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">528</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(467,664</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,148,508</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,378,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">45,783</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income
taxes&#151;current:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Domestic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">30,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">118,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">289,376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">198,825</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,693</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">30,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">110,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">488,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,156</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income
taxes&#151;deferred:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Domestic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(11,023</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(230,841</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,965</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(11,023</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(230,841</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,965</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Net deferred income tax assets and liabilities are reflected on the consolidated balance sheets
as of March&nbsp;31, 2005 and 2006 as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current
Assets&#151;Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">26,399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">138,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,183</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Noncurrent
Assets&#151;Other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">193,681</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,649</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Noncurrent
liabilities&#151;Other noncurrent liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,748</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(83,127</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(708</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">18,651</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">249,492</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,124</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The approximate effect of temporary differences and carryforwards giving rise to deferred tax
balances at March&nbsp;31, 2005 and 2006 was as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Deferred</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Deferred</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Deferred</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Deferred</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Deferred</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Deferred</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Assets</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Liabilities</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Assets</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Liabilities</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Assets</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Liabilities</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrealized gains on
available-for-sale securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,580,494</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,686,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">22,868</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Valuation of limited partnership
investments for tax purpose</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">81,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">690</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capitalized leases</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,621</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">84,345</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">718</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">185,732</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">161,902</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Retirement and pension cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">58,885</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89,705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">764</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stock issuance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,548</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,212</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Allowance for doubtful accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,461,058</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,333</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">139</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,699</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net loss on other investment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">92,080</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">127,115</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,082</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating loss carryforward</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,902,013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,602,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">81,735</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">261,843</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,563</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121,659</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,109</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,036</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">588</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,077,479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,643,071</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,257,612</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,836,689</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">87,314</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,146</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,415,757</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,171,431</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61,044</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,661,722</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,643,071</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,086,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,836,689</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">26,270</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">24,146</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt">F-27
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">As of March&nbsp;31, 2005 and 2006, the valuation allowance for deferred tax assets has been provided
at amounts which are not considered more likely than not to be realized. The net changes in the
valuation allowance for deferred tax assets were a decrease of &#165;1,864,583 thousand, a decrease
of &#165;2,224,170 thousand and a decrease of &#165;1,244,326 thousand ($10,592 thousand) for the years
ended March&nbsp;31, 2004, 2005 and 2006, respectively.
</DIV>

<P align="center" style="font-size: 10pt">F-28
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">As of March&nbsp;31, 2006, IIJ and IIJ America had tax operating loss carryforwards of &#165;22,359,559
thousand ($190,327 thousand) and $8,550 thousand, respectively. These loss carryforwards are
available to offset future taxable income, and will expire in the period ending March&nbsp;31, 2013
in Japan and December&nbsp;31, 2025 in the United States of America as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"> Year Ending</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"> March 31</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">915,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,792</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,675,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116,408</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2011 and thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,772,948</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,677</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>

<TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">23,363,986</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">198,877</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">A reconciliation between the amount of reported income taxes and the amount of income taxes
computed using the normal statutory rate for each of the three years in the period ended March
31, 2006 is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amount computed by using
normal Japanese statutory
tax rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(196,419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,290,888</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,205,209</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,771</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase (decrease)&nbsp;in taxes
resulting from:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Expenses not deductible for
tax purpose</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,080</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,820</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,653</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">329</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reserve for tax contingencies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197,753</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,683</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Inhabitant tax-per capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,410</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,085</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">213</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Realization of tax benefit of
operating loss carryforwards</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(51,994</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,426,755</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(439,256</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,739</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other change in valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">454,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">261,380</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,933,379</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,457</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Tax benefit on losses of equity
method investee</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(80,355</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Expiration of operating loss
carryforwards</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">611,498</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">149,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,275</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Effect of change in tax rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(42,034</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Tax benefit on losses of
Crosswave</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(722,098</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other&#151;net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,289</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(83,873</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax expense as reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">32,536</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">99,870</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">257,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-29
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>10.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>RETIREMENT AND PENSION PLANS</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>IIJ and certain subsidiaries have unfunded retirement benefit and noncontributory defined
benefit pension plans which together cover substantially all of their employees who are not
directors and also participate in a contributory multi-employer pension plan, the Japan
Computer Information Service Employee&#146;s Pension Fund (the &#147;Multi-Employer Plan&#148;), covering
substantially all of their employees.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Approximately 70&nbsp;percent of the employees&#146; benefits from IIJ&#146;s severance indemnity plan was
transferred in May&nbsp;1997 to its newly established noncontributory defined benefits pension
plan. The following information regarding net periodic pension cost and accrued pension cost
also includes the 30&nbsp;percent of severance benefits not transferred to the noncontributory
plan. Under the severance and pension plans, all of IIJ&#146;s employees are entitled, upon
voluntary retirement with 15&nbsp;years or more service, or upon mandatory retirement at age 60, to
a 10-year period of annuity payments (or lump-sum severance indemnities) based on the rate of
pay at the time of retirement, length of service and certain other factors. IIJ&#146;s employees
who do not meet these conditions are entitled to lump-sum severance indemnities.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>As stipulated by the Japanese Welfare Pension Insurance Law, the Multi-Employer Plan is
composed of a substitutional portion of Japanese Pension Insurance and a multi-employers&#146;
portion of a contributory defined benefit pension plan. The benefits for the substitutional
portion are based on a standard remuneration schedule under the Welfare Pension Insurance Law
and the length of participation. The multi-employers&#146; portion of the benefits is based on the
employees&#146; length of service. However, assets contributed by an employer are not segregated
in a separate account or restricted to provide benefits only to employees of that employer,
including IIJ. The net pension cost under the Multi-Employer Plan is recognized when
contributions become due.</TD>
</TR>

</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net periodic pension cost for the years ended March&nbsp;31, 2004, 2005 and 2006 included the
following components:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">150,149</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">221,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">240,765</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,049</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,809</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,944</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,524</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">175</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected return on plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,722</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13,129</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,736</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(142</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amortization of transition
obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Recognized net actuarial loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">575</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,262</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,904</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net periodic pension cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">148,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">231,611</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">246,859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,101</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-30
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">The funded status as of March&nbsp;31, 2005 and 2006 is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in benefit obligation:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefit obligation at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">933,969</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,140,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,706</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">221,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">240,765</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,049</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,944</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,524</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">175</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Actuarial loss (gain)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(558</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(31,171</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(266</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefit paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,247</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,906</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(348</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefit obligation at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,140,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,329,452</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,316</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in plan assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fair value of plan assets at beginning
of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">656,443</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">796,946</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,784</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Actual return on plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,844</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">68,185</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">580</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Employer contribution</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143,471</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,321</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefits paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,812</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(22,466</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(191</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fair value of plan assets at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">796,946</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">997,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8,494</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Funded status</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(343,294</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(331,596</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,822</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrecognized actuarial loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">195,530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">945</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrecognized transition obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net amount recognized</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(143,346</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(216,571</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,843</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated benefit obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">635,122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">750,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,392</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Amounts recognized in the consolidated balance sheets consist of accrued retirement and pension
costs of &#165;143,346 thousand as of March&nbsp;31, 2005, and prepaid pension costs of &#165;3,891 ($33
thousand) thousand and accrued retirement and pension costs of &#165;220,462 thousand ($1,877
thousand) as of March&nbsp;31, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company uses a March&nbsp;31 measurement date for all its plans.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Actuarial assumptions as of March&nbsp;31:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">Benefit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000">Obligations</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000">Net Periodic Costs</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2006</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Discount rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.8 </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.6 </TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.8</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected long-term rate of return
on plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Rate of increase in compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.4</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company sets the discount rate assumption annually at March&nbsp;31 to reflect the market yield
of Japanese Government Bonds matched against the average remaining service period of employees.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The basis for determining the long-term rate of returns is a combination of historical returns
and prospective return assumptions derived from pension trust funds&#146; managing company.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">IIJ&#146;s funding policies with respect to the noncontributory plan are generally to contribute
amounts considered tax deductible under applicable income tax regulations. Plan assets
including life insurance pooled investment portfolios consist of Japanese Government bonds,
other debt securities and marketable equity securities.
</DIV>


<P align="center" style="font-size: 10pt">F-31
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Life insurance pooled investment portfolios are managed by an insurance company and guarantee a
minimum rate of return.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company&#146;s investment strategy for the plan assets is to manage the assets in order to pay
retirement benefits to plan participants while minimizing cash contributions from the Company
over the life of the plans. This is accomplished by preserving capital through diversification
in equity and debt securities based on portfolio determined by the insurance company
forecasting macroeconomics in order to maximize long-term rate of return, while considering the
liquidity need of the plans.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The projected allocation of the plan assets managed by the insurance company is developed in
consideration of the expected long-term investment returns for each category of the plan
assets. Approximately 63.0%, 35.0%, and 2.0% of the plan assets excluding pooled investment
portfolios will be allocated to debt securities, equity securities and other financial
instruments, respectively, to moderate the level of volatility in pension plan asset returns
and reduce risks. 50% of the employer&#145;s contribution to the plan during the year ending March
31, 2007 will be allocated to life insurance pooled investment portfolios and other 50% will be
allocated to the forementioned investments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company&#146;s pension plan asset allocations as of March&nbsp;31, 2005 and 2006 by asset category
are as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Asset category:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">21.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34.8</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">22.4</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(35.9</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(63.2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(62.1</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Life insurance pooled investment portfolios</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD nowrap align="right">( &#151; </TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD nowrap align="right">( &#151; </TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.0</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(100.0)</TD>
    <TD nowrap>%*</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(100.0)</TD>
    <TD nowrap>%*</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD colspan="3">*The percentages in parentheses represent the Company&#146;s position plan asset allocation
excluding life insurance pooled investment portfolios.</TD>
</TR>

</TABLE>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The unrecognized net loss and the unrecognized net obligation at the date of initial
application are being amortized over 14&nbsp;years and 21&nbsp;years, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Contributions due and paid during the years ended March&nbsp;31, 2004, 2005 and 2006 under the
Multi-Employer Plan, including its substitutional portion, amounted to &#165;344,900 thousand,
&#165;466,543 thousand and &#165;451,312 thousand ($3,842 thousand), respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">IIJ expects to contribute &#165;155,191 thousand ($1,321 thousand) to its pension plan in the year
ending March&nbsp;31, 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following benefit payments, which reflect expected future service, as appropriate,
are expected to be paid.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left">Year Ending</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">

<TD nowrap align="left" style="border-bottom: 1px solid #000000">&nbsp;&nbsp;&nbsp;March 31</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Thousands of yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">30,823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">262</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">388</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,747</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">355</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,766</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">390</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,970</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">434</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2012 &#151;2016</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">294,075</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,503</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">508,932</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,332</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Under the Japanese Commercial Code (the &#147;Code&#148;), the amount of retirement benefits for retiring
directors and statutory auditors to be approved by the shareholders. In March, 2006, IIJ newly
established a retirement plan for statutory auditors. The Company recorded a liability for the
retirement benefits for statutory auditors of &#165;2,870 thousand ($24 thousand), which would be
required if they retire at March&nbsp;31, 2006.
There were no other benefits approved or paid to retired directors or statutory auditors for
each of three years in the period ended March&nbsp;31, 2006.
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-32
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>11.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>SHAREHOLDERS&#146; EQUITY</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Through May&nbsp;1, 2006, IIJ is subject to the Code.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Code requires that at least 50% of the issue price of new shares be recorded as common
stock and that the rest of the issue price be recorded as additional paid-in capital, which is
a component of capital surplus. The Code permits Japanese companies, in accordance with an
approval of the Board of Directors, to issue shares to existing shareholders without
consideration as a stock split. Such issuance of shares generally does not give rise to
changes within the shareholders&#146; accounts.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Code also provides that an amount equal to at least 10% of the aggregate amount available
for dividends and certain other appropriations of retained earnings associated with cash
outlays applicable to each period shall be appropriated as legal reserve (a component of
retained earnings) until such reserve and additional paid-in capital equals 25% of common
stock. The amount of total legal reserve and additional paid-in capital that exceeds 25% of
common stock may be made available for payment of dividends in accordance with an approval of
a shareholders&#146; meeting. In addition, the Code permits the transfer of a portion of
additional paid-in capital and legal reserve to the common stock in accordance with an
approval of the Board of Directors.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Code allows IIJ to purchase treasury stock and dispose of such treasury stock in
accordance with an approval of the Board of Directors. The amount of treasury stock purchased
cannot exceed the amount available for dividends to shareholders.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In addition to the provision that requires an appropriation for legal reserve in connection
with the cash outlays, the Code also imposes certain limitations on the amount of capital
surplus and retained earnings available for dividends. No amount was available for dividends
under the Code as of March&nbsp;31, 2006, based on the amount recorded in IIJ&#146;s general books of
account.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Dividends are paid in accordance with an approval of a shareholders&#146; meeting held subsequent
to the end of the fiscal year to which the dividends are applicable. Semiannual interim
dividends may also be paid in accordance with an approval of the Board of Directors, subject
to certain limitations imposed by the Code.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On May&nbsp;1, 2006, a new corporation law (the &#147;Corporation Law&#148;) became effective. The
Corporation Law reformed and replaced the Code with various revisions that, for the most part,
are applicable to events or transactions occurring on or after May&nbsp;1, 2006 and for the fiscal
years ending on or after May&nbsp;1, 2006. The significant changes brought about by the Corporation
Law that affect financial matters are summarized below:</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>(a)&nbsp;Dividends</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Under the Corporation Law, companies can pay dividends at any time during the fiscal year in
addition to the year-end dividend in accordance with an approval of a shareholders&#146; meeting.
For companies that meet certain criteria such as: (1)&nbsp;having a Board of Directors, (2)&nbsp;having
independent auditors, (3)&nbsp;having a Board of Statutory Auditors, and (4)&nbsp;having a term of
service for directors prescribed as one year rather than two years as the normal term by its
articles of incorporation, the Board of Directors may declare dividends (except for dividends
in kind) if the company has prescribed so in its articles of incorporation.
Semiannual interim dividends may also be paid once a year in accordance with an approval of
the Board of Directors. Under the Code, certain limitations were imposed on the amount of
capital surplus and retained earnings available for dividends. The Corporation Law also
provides certain limitations on the amounts available for dividends or the purchase of
treasury stock. The limitation is defined as the amount available for dividends to the
shareholders, but the amount of net assets after dividends must be maintained as at least &#165;3
million.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>(b)&nbsp;Increases / decreases and transfer of common stock, reserve and surplus</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Corporation Law requires that an amount equal to 10% of dividends must be appropriated as
legal reserve (a component of retained earnings) or as additional paid-in capital (a component
of capital surplus) depending on the capital account charged at the payment of such dividends
up to the aggregate amount of legal reserve and additional paid-in capital equal to 25% of
common stock. Under the Code, the aggregate amount of additional paid-in capital and legal
reserve that exceeds 25% of the common stock may be made available for dividends in accordance
with an approval of a shareholders&#146; meeting. Under the Corporation Law, the total amount of
additional paid-in capital and legal reserve may be reversed without limitation of such
threshold. The Corporation Law also provides that common stock, legal reserve, additional
paid-in capital, and other capital surplus and retained earnings can be transferred among
these accounts under certain</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-33
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>conditions in accordance with an approval of a shareholders&#146; meeting.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>(c)&nbsp;Treasury stock and treasury stock acquisition
rights</TD>
</TR>
<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Corporation Law also allows companies to purchase treasury stock and dispose of such
treasury stock in accordance with an approval of the Board of Directors if the company has
prescribed so in its articles of incorporation. The amount of treasury stock purchased cannot
exceed the amount available for dividends to the shareholders which is determined by specific
formula.</TD>
</TR>



<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Corporation Law also provides that companies can purchase both treasury stock acquisition
rights and treasury stock.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On June&nbsp;27, 2003, IIJ issued 16,325 new shares of common stock at &#165;83,640 per share for
&#165;1,365,423 thousand by a private placement to third parties in Japan. The proceeds from the
private placement were used as working capital of the Company.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On September&nbsp;17, 2003, primarily to provide for the redemption of the convertible notes due
March&nbsp;2005, IIJ issued 63,075 new shares of common stock at &#165;190,260 per share for &#165;12,000,650
thousand in a private placement in Japan to NTT for &#165;9,603,374 thousand, NTT Communications
for &#165;749,624 thousand,a wholly owned subsidiary of NTT, ITOCHU Corporation and Sumitomo Corporation for &#165;499,432
thousand each and three other companies for &#165;648,787 thousand. As a result of the
transaction, the total number of IIJ&#146;s outstanding common shares increased to 191,800 shares,
and NTT and its subsidiary owned 31.6&nbsp;percent of IIJ&#146;s outstanding common shares.
Concurrently, IIJ entered into a Subscription Agreement with NTT under which IIJ allows NTT to
nominate up to three persons as directors or statutory auditors, subject to approval by IIJ&#146;s
shareholders. The agreement also provides NTT with preemptive rights to subscribe to any
additional future issuances by IIJ in order to maintain its shareholding. In addition, IIJ
and NTT agreed to undertake efforts to jointly engage in the development of broadband and
information technology and other related business, to expand the business relationship between
the two parties in connection with new business opportunities of IIJ and discuss secondment of
employees to each other.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Upon completion of this transaction, NTT and its subsidiaries are related parties of the
Company. The Company entered into a number of different types of transactions with NTT and
its subsidiaries including purchases of wireline telecommunication services for Company&#146;s
offices. For the Company&#146;s connectivity and value added services, the Company purchases
international and domestic backbone services, local access lines and rental rack space in data
centers from NTT and its subsidiaries. The Company sells to NTT and its subsidiaries its
services including OEM services, system integration services and monitoring services for their
data centers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The amounts of balances as of March&nbsp;31, 2005 and 2006 and transactions of the Company with NTT
and its subsidiaries for the each of the three years in the period ended March&nbsp;31, 2006, are
summarized as follows.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Thousands of</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2006</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">286,389</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">366,648</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">3,121</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">687,757</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">710,322</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,046</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">954,341</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,413,379</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,394,791</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,873</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Costs and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,531,189</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,672,480</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,075,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">68,740</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In December, 2005, IIJ completed a public offering 12,500 new shares (equivalent to 5,000,000
ADSs) of common stock by a firm-commitment basis underwriting at an offering price of &#165;534,022
(an issue value of &#165;490,955) per share on the Mothers market of the Tokyo Stock Exchange. The
net proceeds to IIJ from the public offering, after deducting stock issuance costs, were
&#165;6,030,064 thousand. Stock issuance costs of &#165;106,873 thousand were deducted from additional
paid-in capital.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Stock Option Plans&#151;</I></B>In May&nbsp;2000, IIJ granted 295 options to 34 directors and employees. The
options vested fully on April&nbsp;8, 2002 and are exercisable for eight years from that date. In
August&nbsp;2001, IIJ granted 395 options to 44 directors and employees. The options became fully
vested on June&nbsp;28, 2003 and are exercisable for eight years from that date. No options are
available for additional grant as of March&nbsp;31, 2006. No compensation expense has been
recognized in the consolidated statements of operations pursuant to APB No.&nbsp;25, because the
exercise price was greater than the market price on the dates of grant. In March&nbsp;2000, IIJ
Technology issued bonds with 2,000 detachable warrants in the amount of &#165;600,000 thousand.
The bonds were repurchased in April&nbsp;2000 and warrants to
purchase the subsidiary&#146;s 775 common shares at an exercise</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-34
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">price of &#165;300,000 per share based on fair market value were immediately purchased by certain
officers and employees of IIJ and the subsidiary. One thousand warrants were purchased by
IIJ. Warrants were exercisable upon issuance. On March&nbsp;29, 2006, 1,000 of the warrants of IIJ
Technology were expired. The remaining warrants are exercisable through March&nbsp;29, 2007. The
exercise price was revised to &#165;250,326 ($2,131 thousand) per share as of March&nbsp;31, 2006, due
to the effects of issuances of new shares during the year ended March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table summarizes the transactions of IIJ&#146;s stock option plans for the three
years in the period ended March&nbsp;31, 2006:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Weighted Average</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Number of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Number of</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Exercise Price per</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Options</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Shares</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Common Shares</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unexercised options outstanding&#151;April&nbsp;1, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">675</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,336</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,873</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unexercised options outstanding&#151;March&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">615</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,075</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,510</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unexercised options outstanding&#151;March&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,006</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">944</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unexercised options outstanding&#151;March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,007</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Due to the effect of the stock split in October&nbsp;2005, grantees of options can purchase
five shares by exercising one option.
</DIV>


<P align="center" style="font-size: 10pt">F-35
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Summarized information about stock options outstanding as of March&nbsp;31, 2006 is as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="25%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Outstanding</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Exercisable</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exercise Price</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">Number of Shares</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">Remaining Life</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">Number of Shares</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">(Thousands of Yen)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Underlying Options</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">(in Years)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Underlying Options</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">

<TD align="center"><DIV style="margin-left:15px; text-indent:-15px">&#165;&nbsp;&nbsp;2,163</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">975</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4.0</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">975</TD>
</TR>
<TR valign="bottom">

<TD align="center"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;334</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1,675</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">5.3</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1,675</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12. OTHER COMPREHENSIVE INCOME</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The change in each component of other comprehensive income (loss)&nbsp;for the years ended March
31, 2004, 2005 and 2006 is as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Before Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax (Expense)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Net of Tax</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">or Benefit</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2004:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(45,582</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(45,582</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unrealized holding gain (loss)&nbsp;on
securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,354,719</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,184,739</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,169,980</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
losses included in net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(47,040</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(27,848</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">
Release in deferred tax asset valuation
allowance*</DIV></TD>
    <TD>&nbsp;</TD>
    <TD style="border-bottom:1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom:1px solid #000000" align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,165,547</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,165,547</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net unrealized holding gain (loss)&nbsp;during
the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,307,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,307,679</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Gain on cash flow hedging derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,561</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,561</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
losses included in net loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,303</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,303</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net gain on cash flow hedging derivative
instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,742</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,280,839</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,280,839</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2005:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(25,858</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(25,858</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unrealized holding gain (loss)&nbsp;on
securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,989,951</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,045,880</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,944,071</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
gains included in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,478,906</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,016,351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,462,555</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Release in deferred tax asset valuation allowance*</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,029,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,029,529</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net unrealized holding gain (loss)&nbsp;during
the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,511,045</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,511,045</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Gain on cash flow hedging derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,521</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,521</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
losses included in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,010</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,010</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net gain on cash flow hedging derivative
instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,489</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,489</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,494,676</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,494,676</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-36
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Before Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax (Expense)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Net of Tax</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">or Benefit</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2006:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">38,331</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">38,331</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unrealized holding gain (loss)&nbsp;on
securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,046,874</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(429,218</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">617,656</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
gains included in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,227,203</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,323,153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,904,050</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Increase in deferred tax asset valuation
allowance*</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(893,935</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(893,935</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net unrealized holding gain (loss)&nbsp;during
the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,180,329</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">(2,180,329</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Gain on cash flow hedging derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,541</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,541</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
losses included in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,008</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,008</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net gain on cash flow hedging derivative
instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,467</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,467</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,136,531</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,136,531</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Before Tax</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Tax (Expense)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Net of Tax</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">or Benefit</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended March&nbsp;31, 2006:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">326</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">326</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unrealized holding gain (loss)&nbsp;on
securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,911</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,654</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,257</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
gains included in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(27,470</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,263</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,207</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Increase in deferred tax asset
valuation allowance*</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,609</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,609</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net unrealized holding gain (loss)&nbsp;during
the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(18,559</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(18,559</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Gain on cash flow hedging derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amount arising during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(38</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(38</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Less: Reclassification adjustments for
losses included in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net gain on cash flow hedging derivative
instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(18,186</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(18,186</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">

<TD colspan="3"><DIV style="margin-left: 14px; text-indent: -14px">*&nbsp; The release (increase)&nbsp;in the deferred tax asset valuation allowance has resulted from
unrealized gains and (losses)&nbsp;on available-for-sale securities,
respectively.</DIV></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">F-37
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>



<DIV style="font-family: 'Times New Roman',Times,serif">






<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The components of accumulated other comprehensive income (loss)&nbsp;at March&nbsp;31, 2005 and 2006 are
as follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(33,295</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,036</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">43</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrealized holding gain on securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,732,910</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,552,581</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,776</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss on cash flow hedging derivative instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,490</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,023</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">8,690,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">6,553,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">55,785</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>13.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>BASIC AND DILUTED NET INCOME (LOSS)&nbsp;PER SHARE</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Basic and diluted net income (loss)&nbsp;per share computation for three years ended March&nbsp;31,
2004, 2005 and 2006 is as follows.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">Thousands of</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Numerator:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,270,686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Effect of dilution</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income (loss)-diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,270,686</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,906,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,753,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Number of shares</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Denominator:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted-average common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">195,613</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Effect of Stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">342</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">195,955</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Yen</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"  style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic net income (loss)&nbsp;per common share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">207</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted net income (loss)&nbsp;per common share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(14,321</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">206</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>For the year ended March&nbsp;31, 2004, all potential common shares, shares issuable upon
exercise of stock options or conversion of convertible notes, have been excluded from the
computation of diluted net loss per share because the effect would be antidilutive.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>For the year ended March&nbsp;31, 2005, potentially dilutive shares have been excluded from
the computation of diluted net income because the exercise prices of the options were greater
than the average market price of the common shares and the effect of conversion of the
convertible notes would be antidilutive.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>For the year ended March&nbsp;31, 2006, the following potentially dilutive shares have been
excluded from the computation of diluted net income because the exercise prices of the options
were greater than the average market price of the common shares.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Diluted net income (loss)&nbsp;per share does not include the effects of the following
potential common shares:</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-38
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000">Year ended March 31</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shares issuable under stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,075</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">975</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shares issuable related to convertible
notes on an &#147;as-if-converted&#148; basis</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,975</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>14.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>COMMITMENTS AND CONTINGENT LIABILITIES</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In December&nbsp;2001, a class action complaint alleging violations of the federal securities laws
was filed against the Company, naming IIJ, certain of its officers and directors as
defendants, and underwriters of IIJ&#146;s initial public offering. Similar complaints have been
filed against over 300 other issuers that have had initial public offerings since 1998 and
such actions have been included in a single coordinate proceeding in the Southern District of
New York. An amended complaint was filed on April&nbsp;24, 2002 alleging, among other things, that
the underwriters of IIJ&#146;s initial public offering violated the securities laws (i)&nbsp;by failing
to disclose in the offering&#146;s registration statement certain alleged compensation arrangements
entered into with the underwriters&#146; clients, such as undisclosed commissions or tie-in
agreements to purchase stock in the after-market, and (ii)&nbsp;by engaging in manipulative
practices to artificially inflate the price of IIJ&#146;s stock in the after-market subsequent to
the initial public offering. On July&nbsp;15, 2002, the Company joined in an &#145;omnibus&#146; motion to
dismiss the amended complaint filed by the issuers and individuals named in the various
coordinated cases. In June&nbsp;2003, the Company approved a settlement with the plaintiffs in
this matter. IIJ, along with the settling issuer defendants, filed a motion seeking the
court&#146;s preliminary approval of the settlement. The court granted preliminary approval of the
settlement on February&nbsp;15, 2005, subject to certain modifications. On August&nbsp;31, 2005, the
court issued a preliminary order further approving the modifications to the settlement and
certifying the settlement classes. The court also appointed the Notice Administrator for the
settlement and ordered that notice of the settlement be distributed to all settlement class
members beginning on November&nbsp;15, 2005. The settlement fairness hearing has been set for April
24, 2006. Following the hearing, if the court determines that the settlement is fair to the
class members, the settlement will be approved. The settlement releases IIJ and the individual
defendants for liability for the conduct alleged in the action. Under the settlement, the
Company agreed to assign away, not assert, or release certain potential claims the Company may
have against IIJ&#146;s underwriters. Approximately 260 defendant issuers participated in this
settlement. As to financial impact on the Company, the settlement provides that the class
members will be guaranteed $1&nbsp;billion in recoveries by the insurers of the issuers. In
addition to IIJ&#146;s portion of the proposed settlement, some of the continuing legal expenses
incurred in connection with the partial settlement would be borne by IIJ&#146;s insurer based on
the settlement agreement and an individual agreement between IIJ and IIJ&#146;s insurer.
Consequently, the Company believes that there will be no significant financial impact on the
Company as a result of this matter.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In addition to the foregoing, the Company is a party to other suits and claims that arise in
the normal course of business. The negative adverse outcome of such suits and claims would
not have a significant impact on the financial statements.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In January&nbsp;19, 2006, IIJ entered into a joint venture agreement regarding the establishment
and management<BR>
of i-revo with Konami corporation. In the agreement, IIJ committed an additional contribution
for capital investment or working capital to i-revo of up to &#165;90,000 thousand ($766 thousand)
for the period from November&nbsp;2006 to April&nbsp;2007.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>15.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B><I>Interest Rate Swap Agreement&#151;</I></B>The Company is exposed to changes in interest rates that are
associated with long-term bank borrowings. The Company&#146;s policy on managing the interest rate
risk is to hedge the exposure to variability in future cash flows of floating rate interest
payments on the long-term bank borrowings. In order to reduce cash flow risk exposures on
floating rate borrowings, the Company utilizes interest rate swap agreements to convert a
floating rate borrowing to a fixed rate borrowing.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company is also exposed to credit-related losses in the event of non-performance by
counterparties to interest rate swaps, but it is not expected that any counterparties will
fail to meet their obligations, because counterparties are internationally recognized
financial institutions.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-39
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Changes in fair value of interest rate swaps designated as hedging instrument are reported in
accumulated other comprehensive income during the years ended March&nbsp;31, 2004, 2005 and 2006. These
amounts subsequently are reclassified into interest expense as a yield adjustment in the same
period in which the hedged bank borrowings affect earnings. The term, notional amount and
repricing date of interest rate swaps exactly match those of the long-term borrowings. The
swap terms are &#147;at the market,&#148; so they have zero value at inception. Thus, there was no
ineffectiveness recognized in earnings for the years ended March&nbsp;31, 2004, 2005 and 2006. For
the years ended March&nbsp;31, 2004, 2005 and 2006, net derivative loss of &#165;26,303 thousand,
&#165;13,010 thousand and &#165;10,008 thousand ($85 thousand) were reclassified to interest expense,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Approximately &#165;7,116 thousand ($61 thousand) of accumulated other comprehensive loss related
to the interest rate swaps are expected to be reclassified as an adjustment to interest
expense as a yield adjustment of the hedged bank borrowings within the next 12&nbsp;months.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Fair Value&#151;</I></B>In the normal course of business, the Company invests in financial assets and
incurs financial liabilities. To estimate the fair value of those financial assets,
liabilities and derivatives, the Company used quoted market prices to the extent that they
were available. Where a quoted market price is not available, the Company estimates fair
value using primarily the discounted cash flow method. For certain financial assets and
liabilities, such as trade receivables and trade payables, which are expected to be collected
and settled within one year, the Company assumed that the carrying amount approximates fair
value due to their short maturities. Investment for which it is not practicable to estimate
fair value are investments in a number of unaffiliated and unlisted smaller sized companies
and the estimate of their fair values cannot be made without incurring excessive costs.
Refundable insurance policies are carried at cash surrender value. The carrying amounts or
notional amounts and fair value of financial instruments are summarized below:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">Thousands of</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="15" style="border-bottom: 1px solid #000000">Thousands of Yen</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000">U.S. Dollars</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000">2005</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000">2006</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Carrying</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Fair</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Carrying</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Fair</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Carrying</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Fair</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Amount or</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Value</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Amount or</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Value</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Amount or</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Value</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Notional</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">or Gain</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Notional</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">or Gain</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Notional</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">or Gain</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">(Loss)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">(Loss)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Amount</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">(Loss)</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other
investments
for which it is:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Practicable to
estimate
fair value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">8,948,168</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">8,948,168</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">6,775,388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">6,775,388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">57,673</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">57,673</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Not practicable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">982,613</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,245,317</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Noncurrent
refundable
insurance
policies
(other assets)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62,636</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62,636</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">82,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">82,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">700</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term
borrowings and
installment
payable,
including
current
portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,266,019</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,262,908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,279,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,279,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,407</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest rate
swap contracts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,400,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9,490</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,023</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,789</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(34</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-40
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Cash at March&nbsp;31, 2005 and 2006 includes U.S. dollar denominated current bank deposits of
&#165;705,940 thousand and &#165;442,169 thousand ($3,764 thousand), respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>16.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>ADVERTISING EXPENSES</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Advertising expenses incurred during the years ended March&nbsp;31, 2004, 2005 and 2006 related
primarily to advertisements in magazines, journals and newspapers and amounted to &#165;106,525
thousand, &#165;151,226 thousand and &#165;223,696 thousand ($1,904 thousand), respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>17.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>SUBSEQUENT EVENTS</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>At the 14<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> Ordinary General Shareholders&#146; Meeting held on June&nbsp;28, 2006, IIJ&#146;s
shareholders approved the reductions of additional paid-in capital of &#165;21,980,395 thousand
($187,099 thousand) and common stock of &#165;2,539,222 thousand ($21,624 thousand) to eliminate
accumulated deficit for purposes of reporting under the Corporation Law in its
non-consolidated financial statements. The reductions are pursuant to Article&nbsp;447.1 and 448.1
of the Corporation Law. The effective date is August&nbsp;4, 2006.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">* * * * * *
</DIV>



<P align="center" style="font-size: 10pt">F-41
</DIV>

</BODY>
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INTERNET INITIATIVE JAPAN INC.
Table of Contents
As filed with the Securities and Exchange Commission on July 11, 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number:
0-30204
Kabushiki Kaisha Internet Initiative
(Exact Name of Registrant as Specified in Its Charter)
Internet Initiative Japan Inc.
(Translation of Registrant's Name Into English)
Japan
(Jurisdiction of Incorporation or Organization)
Jinbocho Mitsui Bldg.
1-105 Kanda Jinbo-cho
Chiyoda-ku, Tokyo 101-0051, Japan
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange On Which Registered
None
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common
stock as of the close of the period covered by the annual report.
As of March 31, 2006, 204,300 shares of common stock were outstanding, including 40,786 shares
represented by an aggregate of 16,314,400 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
þ
No
o
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
þ
Accelerated Filer
o
Non-Accelerated Filer
o
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17
o
Item 18
þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
TABLE OF CONTENTS
PART I
2
Item 1. Identity of Directors, Senior Management and Advisers
2
Item 2. Offer Statistics and Expected Timetable
2
Item 3. Key Information
2
Item 4. Information on the Company
13
Item 4A. Unresolved Staff Comments
40
Item 5. Operating and Financial Review and Prospects
40
Item 6. Directors, Senior Management and Employees
66
Item 7. Major Shareholders and Related Party Transactions
71
Item 8. Financial Information
73
Item 9. The Offer and Listing
74
Item 10. Additional Information
75
Item 11. Quantitative and Qualitative Disclosures about Market Risk
86
Item 12. Description of Securities Other than Equity Securities
88
PART II
88
Item 13. Defaults, Dividend Arrearages and Delinquencies
88
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
88
Item 15. Controls and Procedures
88
Item 16A. Audit Committee Financial Expert
89
Item 16B. Code of Ethics
90
Item 16C. Principal Accountant Fees and Services
90
Item 16D. Exemptions from the Listing Standards for Audit Committees
91
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
92
PART III
92
Item 17. Financial Statements
92
Item 18. Financial Statements
92
Item 19. Exhibits
92
EX-1.1 ARTICLES OF INCORPORATION
EX-1.2 SHARE HANDLING REGULATIONS
EX-4.7 JOINT VENTURE AGREEMENT
EX-4.24 AGREEMENT ON LIMITED LIABILITY
EX-11.1 INTERNET INITIATIVE JAPAN INC., CODE OF CONDUCT
EX-12.1 CERTIFICATIONS
EX-12.2 CERTIFICATIONS
EX-13.1 CERTIFICATIONS
EX-13.2 CERTIFICATIONS
i
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements about us and our industry that are
based on our current expectations, assumptions, estimates and projections. These forward-looking
statements are subject to various risks and uncertainties. These statements discuss future
expectations, identify strategies, discuss market trends, contain projections of results of our
operations and our financial condition, and state other forward-looking information. Known and
unknown risks, uncertainties and other factors could cause our actual results to differ materially
from those contained in or suggested by any forward-looking statement. We cannot provide any
assurance that our expectations, projections, anticipated estimates or other information expressed
in these forward-looking statements will turn out to be correct. We do not undertake any obligation
to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
Important risks and factors that could cause our actual results to differ materially from our
forward-looking statements are generally provided in Item 3.D. and elsewhere in this annual report
on Form 20-F and include, without limitation:
•
that we may not be able to achieve or sustain profitability in the near future,
•
that we may not be able to compete effectively against competitors which have
greater financial, marketing and other resources, and
•
that we may not be able to attract and retain qualified personnel.
1
Table of Contents
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 the 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, 2002, 2003, 2004, 2005 and 2006, the consolidated
balance sheet data below as of March 31, 2002, 2003, 2004, 2005 and 2006 and consolidated
statements of cash flows for the fiscal years ended March 31, 2002, 2003, 2004, 2005 and 2006 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.
2
Table of Contents
As of and for the fiscal year ended March 31,
2002
2003
2004
2005
2006
2006
(millions of yen, except per share and ADS data)
(thousands of
U.S. dollars,
except per
share and ADS
data
(1)
)
Statement of Operations Data:
REVENUES:
Connectivity and value-added
services revenues:
Dedicated access
¥
14,303
¥
13,815
¥
12,862
¥
11,373
¥
10,625
$
90,443
Dial-up access
3,644
3,155
3,088
2,937
2,674
22,760
Value-added
3,100
3,603
4,296
5,005
6,250
53,200
Other
1,668
1,726
2,118
3,169
3,674
31,272
Total connectivity and
value-added services
revenues
22,715
22,299
22,364
22,484
23,223
197,675
Systems integration revenues,
including related equipment sales
14,356
15,013
11,848
15,854
23,505
200,072
Equipment sales
2,834
6,706
4,567
3,365
3,085
26,262
Total revenues
39,905
44,018
38,779
41,703
49,813
424,009
COST AND EXPENSES:
Cost of connectivity and
value-added services revenues
19,800
20,387
20,047
19,484
20,078
170,906
Cost of systems integration
revenues, including related
equipment sales
12,314
13,090
9,852
12,200
18,120
154,243
Cost of equipment sales
2,540
6,417
4,346
3,111
2,818
23,987
Total cost of revenues
34,654
39,894
34,245
34,795
41,016
349,136
Sales and marketing expenses
3,038
3,176
3,528
2,795
3,080
26,213
General and administrative
expenses
1,840
2,205
2,098
2,666
3,147
26,790
Research and development expenses
319
414
358
199
159
1,346
Total cost and expenses
39,851
45,689
40,229
40,455
47,402
403,485
OPERATING INCOME (LOSS)
54
(1,671
)
(1,450
)
1,248
2,411
20,524
OTHER INCOME (EXPENSES):
Interest income
122
67
38
13
13
111
Interest expense
(659
)
(733
)
(702
)
(686
)
(437
)
(3,723
)
Other — net
(406
)
(603
)
1,646
2,573
3,392
28,871
Other income
(expenses) — net
(943
)
(1,269
)
982
1,900
2,968
25,259
INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY
INTERESTS AND EQUITY IN NET LOSS OF
EQUITY METHOD INVESTEES
(889
)
(2,940
)
(468
)
3,148
5,379
45,783
INCOME TAX EXPENSE
18
23
33
100
257
2,191
MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES
24
153
236
(109
)
(354
)
(3,012
)
3
Table of Contents
As of and for the fiscal year ended March 31,
2002
2003
2004
2005
2006
2006
(millions of yen, except per share and ADS data)
(thousands of
U.S. dollars,
except per
share and ADS
data
(1)
)
EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:
(2)
Equity method net loss
¥
(5,482
)
¥
(5,625
)
¥
(286
)
¥
(33
)
¥
(14
)
$
(117
)
Impairment loss on
investment, advance and
deposits for Crosswave
—
(7,153
)
(1,720
)
—
—
—
Total equity in net
loss of equity method
investees
(5,482
)
(12,778
)
(2,006
)
(33
)
(14
)
(117
)
NET INCOME (LOSS)
¥
(6,365
)
¥
(15,588
)
¥
(2,271
)
¥
2,906
¥
4,754
$
40,463
Per Share and ADS Data
(3)
:
Basic net income (loss) per share
¥
(56,627
)
¥
(138,689
)
¥
(14,321
)
¥
15,172
¥
24,301
$
207
Diluted net income (loss) per share
(56,627
)
(138,689
)
(14,321
)
15,172
24,258
206
Basic net income (loss) per ADS
equivalent
(141.57
)
(346.72
)
(35.80
)
37.93
60.75
0.52
Diluted net income (loss) per ADS
equivalent
(141.57
)
(346.72
)
(35.80
)
37.93
60.65
0.52
Basic weighted average number of
shares
112,400
112,400
158,554
191,559
195,613
Diluted weighted average number of
shares
112,400
112,400
158,554
191,559
195,955
Basic weighted average number of ADS
equivalents (thousands)
44,960
44,960
63,422
76,624
78,245
Diluted weighted average number of
ADS equivalents (thousands)
44,960
44,960
63,422
76,624
78,382
Balance Sheet Data:
Cash and cash equivalent
¥
11,046
¥
3,588
¥
12,284
¥
5,286
¥
13,727
$
116,846
Total assets
45,263
32,064
42,737
37,116
50,705
431,605
Short-term borrowings
3,820
4,824
6,564
4,725
4,555
38,772
Current portion of long-term
borrowings, including capital lease
obligations
3,374
4,660
3,936
5,511
4,994
42,508
Long-term borrowings, including
capital lease obligations
6,262
7,092
5,188
5,869
5,271
44,865
Convertible notes
(4)
15,000
15,000
11,832
—
—
—
Shareholders' equity (capital
deficiency)
7,725
(10,004
)
6,214
11,615
20,222
172,131
Operating Data:
Capital expenditures, including
capitalized leases
(5)
¥
3,773
¥
4,893
¥
3,523
¥
5,011
¥
4,762
$
40,537
Operating margin
(6)
0.1
%
(3.8
)%
(3.7
)%
3.0
%
4.8
%
Net cash provided by (used in):
Operating activities
¥
1,161
¥
1,582
¥
1,923
¥
5,238
¥
6,559
$
55,830
Investing activities
(2,457
)
(7,878
)
(852
)
1,974
1,805
15,363
Financing activities
(1,462
)
(872
)
7,669
(14,213
)
39
331
4
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(1)
The U.S. dollar amounts represent translations of yen amounts at the rate of ¥117.48 which
was the noon buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York prevailing as of March
31, 2006.
(2)
Of total equity method net loss of ¥5,625 million for the fiscal year ended March 31, 2003,
¥5,514 million was based on unaudited financial information made publicly available by
Crosswave Communications Inc. ("Crosswave") and the impairment loss on investment and deposits
for Crosswave was determined to be the amount required to reduce the carrying amount of
investment in and deposits for Crosswave at March 31, 2003 to zero. The audit report of
Deloitte Touche Tohmatsu in respect of our financial statements as of and for the fiscal year
ended March 31, 2003 was qualified as to the effects of such adjustments, if any, as might
have been determined to be necessary if sufficient evidence regarding the equity method loss,
the impairment loss on investment, advance to and deposits for Crosswave and the related
summary information of Crosswave for the year ended March 31, 2003 was available. As described
elsewhere in this annual report, Crosswave filed a voluntary petition for corporate
reorganization proceedings in Japan in August 2003 and has not prepared audited financial
statements for the year ended March 31, 2003 or other sufficient evidence of its results of
operations to permit the independent registered public accounting firm to issue an audit
report on our financial statements as of and for the year ended March 31, 2003 without such
qualification.
(3)
We conducted a 1 to 5 stock split effective on October 11, 2005. The per share data is
calculated based on the assumption that the stock split was made at the beginning of the
fiscal year ended March 31, 2002.
(4)
In April 2000, we issued 1.75 percent unsecured convertible yen notes due March 2005 in the
aggregate principal amount of ¥15,000 million. In November 2003 and June 2004, we repurchased
and cancelled a portion of the aforementioned notes, in the aggregate principal amount of
¥3,168 million and ¥744 million, respectively. We redeemed the remainder of the unsecured
convertible notes in March 2005.
(5)
Further information regarding capital expenditures, including capitalized leases and a
reconciliation to the most directly comparable U.S. GAAP financial measure can be found below.
(6)
Operating income (loss) as a percentage of total revenues.
Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly
Comparable GAAP Financial Measures
Capital expenditures
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 manages these expenditures and believes that it is useful to
investors to 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 purchase of
property and equipment 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,
2002
2003
2004
2005
2006
(millions of yen)
Capital expenditures:
Acquisition of assets by entering into capital leases
¥
2,536
¥
3,578
¥
1,866
¥
4,434
¥
3,843
Purchases of property and equipment
1,237
1,315
1,657
577
919
Total capital expenditures
¥
3,773
¥
4,893
¥
3,523
¥
5,011
¥
4,762
5
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Exchange Rates
Fluctuations in exchange rates between the Japanese yen and the U.S. dollar and other
currencies will affect the U.S. dollar and other currency equivalent of the yen price of our shares
and the U.S. dollar amounts received on conversion of any cash dividends, which in turn will affect
the U.S. dollar price of our ADSs. We have translated some Japanese yen amounts presented in this
annual report into U.S. dollars solely for your convenience. Unless otherwise noted, the rate used
for the translations was ¥117.48 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, 2006, 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,
2002
¥
134.77
¥
115.89
¥
125.64
¥
132.70
2003
133.40
115.71
121.10
118.07
2004
120.55
104.18
112.75
104.18
2005
114.30
102.26
107.28
107.22
2006
120.93
104.41
113.67
117.48
Calendar year 2006
January
¥
117.55
¥
113.96
¥
115.48
¥
116.88
February
118.95
115.82
117.86
115.82
March
119.07
115.89
117.28
117.48
April
118.66
113.79
117.07
113.79
May
113.46
110.07
111.73
112.26
June
116.42
111.66
114.63
114.51
July (through July 7, 2006)
115.65
113.98
114.93
113.98
(1)
For fiscal years, calculated from the average of the exchange rates on the last day of each
month during the period. For calendar year months, calculated based on the average of daily
exchange rates.
The
noon buying rate on July 7, 2006 was ¥113.98 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.
6
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We may not maintain our current level of revenues or achieve our expected revenues and profits
in the future.
Although we recorded operating income and net income in the fiscal years ended March 31, 2005
and 2006, we incurred operating losses and net losses in each of the prior six fiscal years, with
the exception of positive operating income for the fiscal year ended March 31, 2002, and our
accumulated deficit as of March 31, 2006 amounted to ¥29.7 billion.
As we primarily operate in the Japanese market, if the Japanese economy deteriorates or does
not improve, and it results in significantly lower levels of network-related investment or
corporate customers respond to conditions by putting a priority on low price rather than quality,
it may make it difficult to maintain our current level of revenues or achieve our expected revenues
and profits.
In addition to factors related to general economic conditions in Japan, we may not be able to
maintain our current level of revenues and profits or achieve our expected levels of revenues and
profits due to several other factors, including, but not limited to:
•
a continuous decrease in revenues from our Internet connectivity services because
of lower unit prices per bandwidth and cancellation of large accounts especially due
to severe price competition,
•
lower revenue growth and lower margins in our growing value-added services and
systems integration, if we fail to successfully differentiate our services from those
of our competitors, or experience a significant decrease in systems integration revenues from
period to period due to the cancellation of one or more large projects or changes in
the number of projects resulting from a seasonal fluctuation in the systems
integration business in Japan,
•
an increase in backbone costs due to increased volume of Internet traffic and
demand for leasing backbone lines, or a decline in the profitability of connectivity
services if we contract for more capacity than we actually utilize to serve our
customers,
•
an increase in expenses for network infrastructure, research and development and
other similar investments which we may be forced to make in the future in order to
remain competitive, or increased expenses relating to the leasing of additional
equipment,
•
an increase in outsourcing costs, especially in our systems integration, if we fail
to manage outsourcing projects effectively or fail to cover outsourcing costs by
raising enough revenues from outsourced projects,
•
an increase in SG&A costs, such as personnel expenses, in conjunction with our
expected or planned or continued business expansion, and
•
a decline in the value and trading volume of our holding of available-for-sale
securities from which we expect gains on sale.
Please see Item 5, "Operating and Financial Review and Prospects, " for more detailed
information concerning our operations and other results.
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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"), KDDI
Corporation ("KDDI") and Japan Telecom Co., Ltd. ("Japan Telecom"). Especially for Internet
connectivity services, price competition is still severe and may increase. For value-added
services, price competition may also increase. This competition may adversely affect our revenues
and profitability and may make it difficult for us to retain existing customers or attract new
customers. The major competitors of our systems integration business are systems integrators like
IBM Japan, NEC Corporation, Fujitsu Limited, NTT Data Corporation and their affiliates. Our major
competitors have the financial resources to reduce prices in an effort to gain market share. There
is strong competition among systems integrators that may adversely affect our revenues and
profitability. Even though Nippon Telegraph and Telephone Corporation ("NTT") and NTT
Communications purchased shares of our company in September 2003, which resulted in the NTT Group
becoming our largest shareholder, we plan to continue to operate our company separately and
independently from the NTT Group, and will therefore continue to compete with the NTT Group.
Our competitors have advantages over us, including, but not limited to:
•
substantially greater financial resources,
•
more extensive and well-developed marketing and sales networks,
•
higher brand recognition among consumers,
•
larger customer bases, and
•
more diversified operations which allow profits from some operations to support
operations with lower profitability, such as the network services, for which we are a
competitor.
With these advantages, our competitors may be better able to:
•
sustain downward pricing pressure, including pressure on low-price Internet
connectivity services offered to corporate customers, which are our target customers,
•
develop, market and sell their services,
•
adapt quickly to new and changing technologies,
•
obtain new customers, and
•
aggressively pursue mergers and acquisitions to enlarge their customer base and
market share.
We depend on our ability to attract and retain qualified personnel.
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 engineers, research and development and other
personnel. In particular, in order to continue to increase our revenues from value-added services
and systems integration, we require more sales and engineering personnel to achieve our
expectations. We are not sure that we will be able to keep or attract these human resources and
control human resources cost adequately. Competition for
8
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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 material
adverse effects on our business, financial condition and result of operations.
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.
The confidential customer information that we keep and manage may be leaked.
We keep and manage confidential information and trade secrets obtained from our customers. We
exercise care in protecting the confidentiality of such information and take steps to ensure the
security of our network, in accordance with the law protecting personal information that came into
effect in April 2005 and the requirements set by the Ministry of Internal Affairs and
Communications ("MIC "), and the Ministry of Economy, Trade and Industry. However, our network,
like all Information Technology systems, is vulnerable to external attack from computer viruses,
hackers or other such sources. In addition, despite internal controls, misconduct by an employee
could result in the improper use or disclosure of confidential information. If any material leak of
such information were to occur, we could be subject to lawsuits for damages from our customers,
incur expenses associated with repairing or upgrading our security systems and suffer damages to
our reputation that could result in a severe decline in new customers as well as an increase in
service cancellations. The realization of these or similar risks may have a material adverse effect
on our business, financial condition and result of operations.
Business growth and a rapidly changing operating environment may strain our limited resources.
We have limited operational, administrative and financial resources, which could be inadequate
to sustain the growth we want to achieve. As the number of our customers and their Internet usage
increases, as traffic patterns change and as the volume of information transferred increases, we
will need to increase expenditures for our network and other facilities in order to adapt our
services and to maintain and improve the quality of our services. If we are unable to manage our
growth and expansion, the quality of our services could deteriorate and our business may suffer.
If we fail to keep up with the rapid technological changes in our industry, our services may
become obsolete and we may lose customers.
Our markets are characterized by:
•
rapid technological change,
•
frequent new product and service introductions,
9
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•
continually changing customer requirements, and
•
evolving industry standards.
If we fail to obtain access to new or important technologies or to develop and introduce new
services and enhancements that are compatible with changing industry technologies and standards and
customer requirements, we may lose customers.
Our pursuit of necessary technological advances may require substantial time and expense. Many
of our competitors have greater financial and other resources than we do and, therefore, may be
better able to meet the time and expense demands of achieving technological advances. Additionally,
this may allow our competitors to respond more quickly to new and emerging technologies and
standards or invest more heavily in upgrading or replacing equipment to take advantage of new
technologies and standards.
We depend on our executive officers, and if we lose the service of our executive officers,
particularly Mr. Koichi Suzuki, our business and our relationships with the customers, major
shareholders of IIJ and other IIJ Group companies and our employees could suffer.
Our future success depends on the continued service of our executive officers, particularly
Mr. Koichi Suzuki, who is our president, chief executive officer and representative director, as
well as the president and chief executive officer and representative director of most of other IIJ
Group companies. We rely in particular on his expertise in the operation of our businesses and on
his relationships with our shareholders, the shareholders of the IIJ Group companies, our business
partners and our employees. None of our executive officers, including Mr. Suzuki, is bound by an
employment or noncompetition agreement.
Our investments in affiliated companies may not produce the returns we expect and may require
additional funding.
As part of our business strategy and for the purpose of maintaining various strategic business
relations, we have, in the past, invested in a number of companies. There can be no assurance that
we will be able to maintain or enhance the value or performance of such companies in which we have
invested or may invest in the future, or that we will achieve the returns or benefits sought from
these investments. Our substantial investment in Crosswave, our former equity method investee, for
example, became worthless due to Crosswave's commencement of corporate reorganization proceedings.
In August 2003, Crosswave filed a voluntary petition for the commencement of corporate
reorganization proceedings in Japan, and as a result of our equity method net loss and an
impairment loss taken in respect of our investment in Crosswave, our net loss for the fiscal year
ended March 31, 2003 was ¥15.6 billion, the highest net loss that we have ever experienced. We also
wrote off ¥2.1 billion of loans and accounts receivable outstanding from Crosswave for the fiscal
year ended March 31, 2004. We also had an impairment loss relating to our investment in Asia
Internet Holding for the fiscal year ended March 2004. To the extent that these investments are
accounted for by the equity-method and to the extent that the investee companies have net losses,
our financial results will be adversely affected to the extent of our pro rata portion of these
losses. Furthermore, we may lose all or part of our investment in these companies if their value
decreases as a result of their financial performance or if these companies go bankrupt. If our
interests differ from those of other investors in entities over which we do not exercise control,
we may not be able to enjoy synergies with the investees and it may adversely affect our financial
results or financial condition.
We have invested in affiliated companies, such as IIJ Technology Inc. ("IIJ-Tech") and Net
Care, Inc. ("Net Care"), to expand the service offerings available to our customers. In February
2006, we invested ¥750 million in Internet Revolution Inc. ("i-revo"), a joint venture that we
established with Konami Corporation, and i-revo is our equity method investee. In the joint venture
agreement, we agreed that we will provide funding up to ¥90 million to i-revo between November 2006
and the end of April 2007 for its capital
10
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investments and working capital. We may provide additional financial support in the form of
loans to or additional equity investments in these affiliated companies to enhance or maintain our
business synergies with these affiliated companies.
In October 2005, IIJ Media Communications Inc. ("IIJ-MC"), our former subsidiary, was merged
into us after a portion of IIJ-MC's business was transferred to IIJ-Tech and we have acquired Asia
Internet Holding Co., Ltd. ("AIH"), our former equity method investee, after AIH became our wholly
owned consolidated subsidiary. We may consider reorganization of other IIJ Group companies in the
future which may require additional investments by cash, equity or others.
Fluctuations in the stock prices of companies in which we have invested may significantly
influence our financial condition.
We have invested in non-affiliated companies in order to further our business relationships
with these companies. We recorded gross realized gains from the sale of available-for-sale
securities of ¥3.2 billion for the fiscal year ended March 31, 2006 and the book value of our
remaining available-for-sale securities was ¥6.8 billion at March 31, 2006, which is relatively
large in relation to other items on our balance sheet. 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 dispose of all or a portion of
these shares, it is not certain that we will be able to do so on favorable terms.
NTT, our largest shareholder, could exercise substantial influence over us in a manner which
may not necessarily be in our interest or that of our other shareholders.
NTT and its affiliates currently own 29.7% of our outstanding shares. In September 2003, we
entered into a subscription agreement with NTT in which we granted to NTT pre-emptive rights to
subscribe to its pro rata portion of any future issuances of shares by us in order to maintain its
shareholding percentage; NTT did not exercise this pre-emptive right when we issued 12,500
additional shares in December 2005. Under this subscription agreement, we have agreed to allow NTT
to nominate up to three persons as either directors or statutory auditors, subject to approval by
our shareholders at our first general shareholders' meeting after NTT's investment. At our general
shareholders' meeting on June 24, 2004, two directors nominated from NTT Group were appointed, one
of whom was nominated as an executive vice president. At our general shareholders' meeting on June
28, 2006, our executive vice president, Mr. Fukuzo Inoue, completed his term and retired, and an
other director, Mr. Takashi Hiroi was reapproved to be an outside director. As our largest
shareholder, NTT may be able to exercise substantial influence over us. In addition, as part of
this subscription agreement, we have agreed to collaborate with NTT in various businesses. While we
intend to conduct our day-to-day operations independently of NTT and its group companies and
believe that NTT also plans for us to operate independently, NTT may decide to exercise substantial
influence over us in a manner which could impair our ability to operate independently. Furthermore,
NTT may take actions that are in its best interests, which may not be in our interest or that of
other shareholders.
We rely greatly on other telecommunications carriers and other suppliers, and could be
affected by disruptions in service or delays in the delivery of their products and services.
We rely on telecommunications carriers such as NTT Communications, KDDI and Japan Telecom for
a significant portion of our network backbone and Nippon Telegraph and Telephone East Corporation
and Nippon Telegraph Telephone West Corporation and electric power companies and their affiliates
for local access lines for our customers. After the transfer of operating lease agreements from
Crosswave, our former equity method investee, following its filing for corporate reorganization, we
now procure significant portions
11
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of our network backbone and data center facilities pursuant to operating lease agreements with
NTT Communications, our largest provider of network infrastructure. We are subject to potential
disruptions in these telecommunications services and, in the event of such disruption, we may have
no means of replacing these services, on a timely basis or at all.
In the Asia-Pacific region, we depend on telecommunications carriers in various countries
including less-developed countries whose quality of service may not be stable or who are more
susceptible to economic or political instability.
We also depend on third-party suppliers of hardware components like routers that are used in
our network. We acquire certain components from limited sources, typically from Cisco Systems, Inc.
A failure by one of our suppliers to deliver quality products on a timely basis, or the inability
to develop alternative sources if and as required, may delay our ability to expand the capacity and
scope of our network.
Any problems experienced by our telecommunications carriers and other suppliers could have a
material adverse effect on our business, financial condition and results of operations.
There are risks associated with our international business.
By operating our network internationally, we expose ourselves to the risks of international
markets and to other risks that do not exist or are less significant in Japan. One of the
components of our strategy is to continue to expand our network reach through our network between
the United States and Japan to maintain our network quality. In addition, we have invested in the
data center businesses in South Korea. Our international business operations continue to require
management attention and financial resources, both of which are in limited supply. We face
significant exposure to risks in connection with our international operations, including:
•
the impact of economic conditions outside Japan,
•
unexpected changes in or delays resulting from regulatory requirements,
•
the rate of the development of the Internet industry in countries in Asia,
•
political and economic instability, and
•
potential unsatisfactory financial returns from our investments in Asia, including
the data center businesses in which we have invested in South Korea.
These factors could adversely affect our future international expansion and, consequently, our
business, financial condition and results of operations.
If we fail to execute our systems integration projects in a timely or satisfactory manner or
if we fail to manage customer data in a professional manner, we could be sued and our reputation
could suffer.
A significant portion of our future revenue depends on systems integration projects which we,
in cooperation with IIJ-Tech and Net Care, have been contracted to perform. We may not be able to
perform our responsibilities under these contracts to the satisfaction of our customers, or at all,
if we lack a sufficient number of qualified engineers, lack sufficient task-management capabilities
for software-development vendors or fail to manage customer data adequately. If we do not execute
these services and projects as contracted or fail to manage customer data in a professional manner,
our receipt of revenues may be delayed or lost altogether and we could be sued by our
counterparties, which could in turn have an adverse impact on our reputation, results of operation
and financial condition.
12
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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. We believe our licenses
and approvals are in good standing and we expect to be able to continue to fulfill the terms of our
licenses and approvals to the satisfaction of the MIC. However, there can be no assurance that we
will be able to do so.
Existing and future governmental regulation may substantially affect the way in which we
conduct business. These regulations may increase the cost of doing business or may restrict the way
in which we offer products and services. As a result of the amendment in April 2004 of the
Telecommunication Business Law and deregulation including elimination of the regulatory distinction
between carriers providing telecommunications services through networks owned by other
telecommunication carriers and carriers which own or have long-term leases for the networks through
which they offer telecommunication services, competition may increase. Furthermore, we cannot
predict future regulatory changes which may affect our business. Any changes in laws, such as those
described above, or regulations or MIC policy affecting our business activities and those of our
competitors could adversely affect our financial condition or results of operations. For more
information, see Item 4., "Business Overview — Regulation of the Telecommunications Industry in
Japan".
We may be named as defendants in litigation, which could have an adverse impact on our
business, financial condition and results of operations.
We are involved in normal claims and other legal proceedings in the ordinary course of our
business. We believe that there are no cases currently pending which would have a significant
financial impact on us, but we cannot be certain that we will not be named in a future lawsuit. Any
judgment against us in such a lawsuit, or in any future legal proceeding, could have an adverse
effect on our business, financial condition and results of operations.
In the event we need to raise capital, we may sell additional shares of our common stock or
securities convertible into our common stock, which may cause shareholders to incur substantial
dilution.
We may raise additional funds in the future to raise additional working capital and for other
financial needs. We completed private placements in June and September 2003 of an aggregate of
15,880 shares of our common stock to investors in Japan in order to raise funds for working capital
and repayment of convertible notes. We issued 12,500 new shares of our common stock along with our
listing on the Mothers market of the Tokyo Stock Exchange in December 2005, after conducting a
1 to 5 split of our shares of common stock in October 2005. 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
13
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in July 1993, making us one of the first commercial providers in Japan to offer Internet
connectivity services. In February 1994, we acquired a Type II Telecommunications license, which
enables us to operate our own international backbone networks. We became a public company in August
1999 with our initial public offering of American Depositary Shares ("ADSs") on the Nasdaq National
Market.
On August 20, 2003, Crosswave Communications Inc. ("Crosswave"), our former equity method
investee and primary provider of data communication services, and two of its subsidiaries filed
voluntary petitions with the Tokyo District Court for the commencement of corporate reorganization
proceedings, which are proceedings to rehabilitate an insolvent company similar in some respects to
Chapter 11 bankruptcy proceedings in the United States. As a result, we wrote-off our investment in
Crosswave and no longer consider Crosswave to be an IIJ Group company. On December 15, 2003, the
business operations of Crosswave including its network on which we relied to provide services for
our network, were transferred to NTT Communications Corporation ("NTT Communications"). We have
contracted with NTT Communications for the continued use of the network services it acquired from
Crosswave.
On June 26 and September 16, 2003, we completed private placements of a total of 15,880 shares
of our common stock to investors in Japan for an aggregate amount of ¥13.3 billion for working
capital and repayment of our outstanding 1.75% convertible notes due on March 31, 2005. As a result
of these transactions, the total number of our issued shares of common stock increased to 38,360
and shareholding of the Nippon Telegraph and Telephone Corporation ("NTT") Group increased to
31.6%. We have also agreed with NTT that it has the right to nominate three persons to serve as
either our directors or statutory auditors, subject to shareholder approval of any nomination at
our first general shareholders' meeting after NTT's investment. In addition, we and NTT agreed to
undertake efforts to jointly engage in the development of broadband and Information Technology and
other related business, to expand the business relationship between us and NTT in connection with
new business opportunities and to discuss secondment of employees to each other.
On October 1, 2005, IIJ Media Communications Inc. ("IIJ-MC"), our former consolidated
subsidiary, was merged into us after a portion of IIJ-MC's business was transferred to IIJ
Technology Inc., our consolidated subsidiary. Asia Internet Holding Co., Ltd., our former equity
method investee, became our wholly owned consolidated subsidiary, and was merged into us on October
1, 2005. In each of the mergers, we became the surviving company.
On December 2, 2005, we listed on the Mothers market of the Tokyo Stock Exchange. 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 February 1, 2006, we established a joint venture company, Internet Revolution Inc.
("i-revo") with Konami Corporation, with the purpose of operating comprehensive portals sites. We
invested ¥750 million and hold 30.0% of the company. i-revo is our equity method investee.
Our head office is located at Jinbo-cho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo
101-0051, Japan, and our telephone number at that location is (813) 5259-6500. Our agent in the
United States is IIJ America Inc., 1211 Avenue of the Americas, Suite 2900, New York, New York
10036 and the telephone number at that location is (212) 440-8080. We have a web site that you may
access at http://www.iij.ad.jp/. Information contained on our web site does not constitute part of
this annual report on Form 20-F.
For a discussion of capital expenditures and divestitures currently in progress and those for
the past three years, see "Capital Expenditures" in Item 4.B.
14
Table of Contents
B.
Business Overview.
We offer a comprehensive range of Internet connectivity services and network solutions to our
customers in Japan. We offer our services on one of the most advanced and reliable Internet
networks available in Japan. Our services are based upon high-quality networking technology
tailored to meet the specific needs and demands of our customers.
We offer, together with other companies or independently, a variety of services to our
customers as part of our total network solutions. Our primary services are our Internet
connectivity services, value-added services and systems integration. Our Internet connectivity
services range from low-cost dial-up access to high-speed access through dedicated lines for
individual and corporate customers. Our value-added services include security-related outsourcing
services that protect customers' internal networks from unauthorized access and secure remote
connections to internal networks, network-related outsourcing services such as provision,
monitoring and maintenance of network equipment and Virtual Private Network ("VPN"), and
server-related outsourcing services such as provision of e-mail and web servers and operation and
management of e-mail systems, in addition to Internet data center services. Our systems integration
are tailored to our customers' requirements, which include consulting, project planning, systems
design, construction of network systems and systems outsourcing. We also sell a significant amount
of network-related equipment to our systems integration customers as part of our provision of total
network solutions.
Most of our revenues are generated in Japan and are denominated in Japanese yen. The table
below provides a breakdown of the percentage of total revenues among our primary services over the
past three fiscal years.
For the fiscal year ended March 31,
2004
2005
2006
Connectivity services
41.1
%
34.3
%
26.7
%
Value-added services
11.1
%
12.0
%
12.5
%
Systems integration
30.6
%
38.0
%
47.2
%
The variety of Internet connectivity services, value-added services and systems integration we
offer enables our customers to purchase all of their Internet-related services and products through
a single source. To support our services and for the convenience of our customers, we also offer a
variety of hardware, software and other products, such as network equipment, which are sourced
mostly from third-party vendors. We aim to be the leading supplier of total network solutions in
Japan.
We have created an Internet network, that extends throughout Japan by leasing lines from
telecommunications carriers. Our backbone is one of the highest capacity Internet backbones in
Japan. As of July 7, 2006, we operated 13 points of presence ("POPs") for dedicated access, 17
POPs for dial-up access and 12 Internet data centers. POPs are the main points at which our
customers connect to our backbone, throughout Japan. Our policy on the management of our backbone
is that we upgrade the bandwidth depending on demand and with maximum cost effectiveness. Our
backbone network also extends to the United States, with a total capacity of 7.2 Gbps (3 STM-16
trunk lines), and to China, with a capacity of 600 Mbps (1 STM-4 trunk line) as of July 7, 2006.
Total network solutions
We are a provider of total network solutions. We provide our customers with tailored,
end-to-end Internet and private network solutions. The diversity of services we offer permits each
customer to purchase individual services or a bundle of services that we believe provide the most
efficient, reliable and cost-effective solution for that customer's particular needs.
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Table of Contents
The primary resources that we use to provide total network solutions to our customers include:
•
our Internet connectivity services,
•
our line-up of value-added services, including security, network and server-related
outsourcing,
•
our Internet data center services,
•
our systems integration, including ongoing consulting, systems design,
construction, operation and management, and
•
other network and application services that our group companies provide.
Our total network solutions for business users are a primary focus of our business. We consult
with businesses and other customers to identify their particular needs. We then draw upon our
extensive resources to address those needs.
Internet Connectivity Services
We offer two categories of Internet connectivity services: dedicated access services and
dial-up access services. Dedicated access services are based mainly on dedicated local-line
connections provided by carriers between our backbone and customers. Dial-up access services mainly
require customers to connect to our POPs through the publicly-switched telephone network. The
Internet connectivity part of our total network solutions ranges from low-cost, entry-level dial-up
connections from home personal computers to customized wide-area network solutions deploying a
range of the dedicated and dial-up services listed below to connect headquarters, data centers,
branch offices and mobile personnel. Currently, large telecommunications carriers such as Nippon
Telegraph and Telephone East Corporation ("NTT East") and Nippon Telegraph and Telephone West
Corporation ("NTT West") and other providers are rapidly increasing the variety of last-mile access
with ADSL, fiber optic and Ethernet-based lines. Such new lines provide inexpensive high-speed,
high-capacity last mile access, and we continue to introduce new variations to our Internet
connectivity service to accommodate such developments.
The following table shows the number of our Internet connectivity service subscribers as of
the dates indicated:
As of March 31,
2002
2003
2004
2005
2006
Dedicated access service contracts:
IP service:
Low
Bandwidth (64 kbps — 768 kbps)
184
147
93
89
85
Medium
Bandwidth (1 Mbps — 99 Mbps)
413
473
565
660
654
High
Bandwidth (100 Mbps —)
13
43
80
114
157
Total IP Service
610
663
738
863
896
IIJ T1 Standard and IIJ Economy
1,590
939
504
276
109
IIJ Data Center Connectivity Service
110
156
196
231
247
IIJ FiberAccess/F and IIJ DSL/F
(Broadband Services)
1,310
3,550
5,788
9,873
13,297
Total dedicated access service contracts
3,620
5,308
7,226
11,243
14,549
Dial-up access service contracts:
Under IIJ Brand
95,169
86,183
75,136
68,068
62,176
OEM
165,407
443,601
620,731
625,908
568,307
Total dial-up access service contracts
260,576
529,784
695,867
693,976
630,483
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Table of Contents
As of July 7, 2006, we mainly offered the following Internet connectivity services.
Pricing
Service Type
Summary Description
(excluding consumption tax)
Dedicated access services
IP Service
Full-scale
dedicated line
service with
high-speed access
for businesses and
other network
operators with
demanding bandwidth
requirements.
Setup and monthly fees
vary according to carrier,
line speed, line type and
distance involved.
IIJ T1 Standard
Packaged dedicated
line service
offering 1.5 Mbps
connection but not
including certain
features of
full-scale IP
Service such as
dynamic routing and
unlimited IP
addresses.
Initial setup fee of
¥50,000. Monthly access
fee of ¥117,000 for up to
8 IP addresses and
¥167,000 for up to 16 IP
addresses.
IIJ Economy
Service for
dedicated line
access to the
Internet with
inexpensive monthly
fees primarily for
small- and
medium-sized
businesses and
local and regional
offices of
corporate groups.
Initial setup fee of
¥40,000. Monthly access
fees of ¥38,000 for 64
kbps service and ¥45,000
for 128 kbps service.
IIJ Data Center Connectivity Service
Full-scale
dedicated line
service for
customers hosted in
IIJ Data Centers,
with asymmetrical
speeds of upstream
(from the Internet
to data center) and
downstream (from
the data center to
the Internet)
transmissions.
Initial setup fee of
¥100,000. Monthly fees
range from ¥400,000 to
¥10,000,000, depending on
the speed of upstream
transmissions.
IIJ FiberAccess/F
Service for
dedicated line
Internet-access
using optical lines
at speeds of up to
10 Mbps or 100
Mbps, targeted
primarily at small-
and medium-sized
enterprises
requiring
high-capacity,
high-speed
transmissions.
Optical fiber
access is limited
to "FLET'S" lines
provided by NTT
East and West.
Initial setup fee of
¥50,000. Monthly fees
range from ¥14,000 to
¥190,000, depending on the
speed of connection and
the number of IP addresses
allocated. Monthly fees do
not include optical line
charges, which are paid
directly by the customer
to the optical line
provider.
IIJ DSL/F
Service for
dedicated line
Internet-access
using ADSL lines at
speeds of up to 47
Mbps, targeted
primarily at small-
and medium-sized
offices and home
offices. ADSL
access is limited
to "FLET'S" lines
provided by NTT
East and West.
Initial setup fee of
¥30,000. Monthly fees
range from ¥9,800 to
¥49,800, depending on the
number of allocated IP
addresses. Monthly charges
do not include ADSL
charges, which are paid
directly by the customer
to the ADSL service
provider.
IIJ DSL/A
Service for
dedicated line
Internet-access
using ADSL lines at
speeds of up to 47
Mbps, targeted
primarily at small-
and medium-sized
offices and home
offices. ADSL
access is limited
to ADSL services
provided by ACCA
Networks, Co., Ltd.
("ACCA Networks")
Initial setup fee of
¥75,000. Monthly fees
range from ¥12,000 to
¥52,000, depending on the
number of allocated IP
addresses. Monthly charges
do not include ADSL
charges, which are paid
directly by the customer
to the ADSL service
provider.
17
Table of Contents
Pricing
Service Type
Summary Description
(excluding consumption tax)
IIJ ISDN/F
Service for
dedicated line
Internet-access
using ISDN lines at
speeds of up to 64
kbps, targeted
primarily at small-
and medium-sized
offices and home
offices where ADSL
lines are not
available. ISDN
access is limited
to "FLET'S" lines
provided by NTT
East and West.
Initial setup fee of
¥5,000. Monthly fees range
from ¥4,800 to ¥6,800,
depending on the number of
allocated IP addresses.
Monthly charges do not include ISDN charges, which are paid directly by
customers to ISDN
providers.
IIJ Line Management/F
Service for us to
prepare optical
fiber or ADSL
access provided by
NTT East and West
for IIJ
FiberAccess/F, IIJ
DSL/F and IIJ
ISDN/F on behalf of
customers. We
provide customer
support functions
for the access
lines.
Initial setup fee range
from ¥5,000 to ¥43,400.
Monthly fees range from
¥2,300 to ¥44,700,
depending on the optional
services.
Dial-up access services
IIJ Dial-up Standard
Service for
corporate users
permitting
simultaneous
Internet-access
from several
dial-up lines under
a single contract.
Initial setup fee of
¥5,000. Monthly basic fee
of ¥2,000 plus access
charges of ¥10 per minute.
Enterprise Dial-up IP Service
Service for
corporate users
offering multiple
dial-up accounts at
a fixed monthly
fee.
Initial setup fee of
¥20,000. Monthly basic
fees range from ¥3,000 to
¥4,900 per account
depending on the number of
accounts.
IIJ Dial-up Advanced
Service for
corporate users
offering bundled
low-cost dial-up
accounts.
Initial setup fee of
¥5,000. Monthly basic fee
of ¥10,000 for the first
50 e-mail accounts
including the first two
hours access per account,
plus ¥5 per minute after
two hours.
IIJ4U
Service for
individual users,
which includes
Internet-access and
5 megabytes of disk
space for personal
Web pages and
e-mail account
options for
multiple users.
Various access
options such as
ISDN, ADSL and
optical fiber
access are
available.
This service does not
charge an initial setup
fee. Monthly service fee
of ¥800 for the first
eight hours and a charge
of ¥5 per minute, with a
ceiling of ¥4,100.
IIJ
mio
DSL/DF Service
Service for
individual users
offering Internet
connectivity over
ADSL at speeds of
up to 47 Mbps. ADSL access is limited
to "FLET'S" lines
provided by NTT
East and West. The
IP address is
changed every time
a connection is
made.
No initial setup fee.
Monthly charge is ¥1,400.
Monthly charges do not
include ADSL charges,
which are paid directly by the customer to NTT East and West.
18
Table of Contents
Pricing
Service Type
Summary Description
(excluding consumption tax)
IIJ
mio
FiberAccess/DF Service
Service for
individual users
offering Internet
connectivity over
optical fiber
network at maximum
10 Mbps or 100
Mbps. Optical fiber
access is limited
to "FLET'S" lines
provided by NTT
East and West. The
IP address is
changed every time
a connection is
made.
No initial setup fee.
Monthly charges range from
¥2,000 to ¥7,000. Monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to NTT East and West.
IIJ
mio
DSL/SF Service
Service for
individual users
offering Internet
connectivity over
ADSL at speeds of
up to 47 Mbps. ADSL
access is limited
to "FLET'S" lines
provided by NTT
East and West. A
fixed IP address is
provided with this
service.
No initial setup fee. The
monthly charge is ¥4,800.
Monthly charges do not
include ADSL charges,
which are paid directly by
the customer to NTT East
and West.
IIJ
mio
FiberAccess/DC Service
Service for
individual users
offering Internet
connectivity over
optical fiber
network at speeds
of up to 50 Mbps or
100 Mbps. Optical
fiber access is
limited to "Access
Commufa" lines
provided by Chubu
Telecommunications
Co., Inc.
No initial setup fee. The
monthly charge is
¥2,000. Monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to Chubu
Telecommunications Co.,
Inc.
IIJ
mio
FiberAccess/SF Service
Service for
individual users
offering Internet
connectivity over
optical fiber
network at speeds
of up to 10 Mbps or
100 Mbps. Optical
fiber access is
limited to "FLET'S"
lines provided by
NTT East and West.
A fixed IP address
is provided with
this service.
No initial setup fee. The
monthly charges range from
¥8,000 to ¥12,000,
depending on the type of
access line. The monthly
charges do not include
optical fiber access
charges, which are paid
directly by the customer
to NTT East and West.
IIJ
mio
MobileAccess Service
Service for
individual users
offering mobile
Internet
connectivity
through several
data communications
services provided
by mobile
telecommunication
companies.
No initial setup fee. The
monthly charge is ¥300 and
does not include service
charges to IIJ's access
points, which are paid
directly by the customer
to the mobile
telecommunication
companies.
Dedicated Access Services
Our lineup of dedicated line access services includes: IP Service, IIJ T1 Standard, IIJ
Economy, IIJ Data Center Connectivity Service, IIJ FiberAccess/F, IIJ DSL/F, IIJ DSL/A, IIJ ISDN/F
and IIJ Line Management/F. The total bandwidth allocated to our dedicated access services has
increased 60.8% to 194.9 Gbps as of March 31, 2006, up from 121.2 Gbps a year earlier.
19
Table of Contents
IP Service.
Our IP Service is a full-scale, high-speed access service that connects a
customer's network to our network and the Internet. The service is used by corporate customers
mainly for critical purposes, such as Internet connectivity for corporate headquarters or data
centers. As of March 31, 2006, we had 896 contracts for our IP Service compared to 863 for our IP
Service as of March 31, 2005. The customer chooses the level of service it needs based upon its
bandwidth requirements. As of July 7, 2006, we offered service at speeds ranging from 64 kbps to
10 Gbps.
Our IP Service revenues, including revenues of IIJ Data Center Connectivity Service,
represented 16.6% of our total revenues for the fiscal year ended March 31, 2006 and 21.4% for the
fiscal year ended March 31, 2005. We believe that as businesses continue to develop Internet
capabilities, this service will continue to be the foundation of our total network solutions
offerings.
Subscribers pay a monthly fee for the leased local access line from the customer's location to
one of our POPs. The amount of this fee varies depending on the carrier used and the distance
between the customer's site and our POPs. Customers subscribing to greater bandwidths use ATM
(Asynchronous Transfer Mode) or an Ethernet local access line, which supports over 2 Mbps. We
collect the usage fee from the customer and pay this amount to the carrier.
Although fees are charged on a monthly basis, the minimum contract length is one year. For
contracts of at least three years, a 10% per month discount is given.
We also offer various IPv6-capable Internet connectivity services, namely IPv6 Tunnel, IPv6
Native and IPv6/IPv4 Dual Stack Services. In addition to corporate users, IPv6 Tunnel Service has
been available to individual users. IPv6 is the next generation Internet Protocol, which allows
IPv6 technology to overcome the problems, such as limited IP address availability, of IPv4, the
protocol generally used. IPv6 Tunnel Service is a service to enable customers to use IPv6
technology via IPv4 access network, by encapsulating IPv6 data with IPv4 data. IPv6 Native and
IPv6/IPv4 Dual Stack Services are services which provide IPv6 environment to customers without
encapsulating it with IPv4 data. IPv6 technology enables customers to connect a vast range of
electronic appliances and equipment, including cellular phones, AV equipment, car navigation
devices and home electronics. We are the first commercial Internet Service Provider, or ISP in
Japan to offer IPv6 service and our management believes that we will reap "first-mover" benefits
from our initiative. In an effort to promote the dissemination and use of IPv6, we are not
currently charging service fees for IPv6 Tunnel Service.
For our IP Service, we offer Service Level Agreements to our customers to better define the
quality of services our customers receive. We were the first ISP in Japan to introduce this type of
agreement.
We guarantee the performance of the following elements under our Service Level Agreements:
•
100% availability of our network,
•
the maximum average latency, or time necessary to transmit a signal, between
designated POPs, and
•
prompt notification of outage or disruption.
We are able to offer these Service Level Agreements because of the high quality and
reliability of our network. Our Service Level Agreements provide customers with credit against the
amount invoiced for the services if our service quality fails to meet the prescribed standards.
Subscribers to our IP Service receive technical support 24 hours a day and seven days a week.
20
Table of Contents
IIJ T1 Standard.
Our IIJ T1 Standard is a connectivity service at 1.5 Mbps that we introduced
in October 1999. It is a packaged dedicated line service limited to static routing and allocations
of 8 or 16 IP addresses. Last-mile access must be through NTT's Digital Access 1500 or similar
services from other carriers. We support this service by providing guarantees of latency rates
under Service Level Agreements. As of March 31, 2006, we had 109 customers for IIJ T1 Standard and
IIJ Economy. We are no longer promoting the service since customers demand for a higher speed than
the one that the service provides.
IIJ Economy.
IIJ Economy is a packaged Internet connectivity service via a dedicated line at
64 kbps or 128 kbps, targeting small- and medium-sized businesses. We support this service by
providing guarantees of latency rates under Service Level Agreements. We are no longer promoting
the service since customers demand for a higher speed than the one that the service provides.
IIJ Data Center Connectivity Service.
We also provide connectivity services with respect to
our data centers. Our data center connectivity services are an important part of being able to
provide high-quality, high-speed, seamless service to our customers. Our connectivity services are
asymmetric, meaning that transmission speeds are not the same in both directions— with the
downstream transmission being faster to accommodate greater amounts of information being accessed
from the Internet versus being sent to the Internet. The fee structure depends on the transmission
capacity required for upstream and downstream transmissions. For downstream transmissions, we offer
either 10BASE-T connectivity (10 Mbps) or 100BASE-T connectivity (100 Mbps). For upstream
transmissions, we offer bandwidths from 1 Mbps to 4 Mbps for 10BASE-T connectivity and 6
Mbps to 48 Mbps for 100BASE-T connectivity. In addition to the above, we offer IPv6-capable data
center services, which offer the same services using IPv6. As of March 31, 2006, we had 247
Internet data center connectivity contracts, compared with 231 as of March 31, 2005. Total
contracted bandwidth for Internet data center connectivity service was 24.4 Gbps as of March 31,
2006, up from 21.7 Gbps as of March 31, 2005. We support this service by providing the same three
guarantee elements, availability, maximum average latency and prompt notification of outage or
disruption, as the IP Service above under Service Level Agreements.
IIJ FiberAccess/F.
IIJ FiberAccess/F Service is a dedicated Internet-access service that uses
"BFLET'S" fiber optic access lines provided by NTT East and West allowing service at maximum 10
Mbps or 100 Mbps on a best-efforts basis. The service is available in several variations (Business,
Basic, Family, Mansion and others), optimizing each customer's needs in speed and connection
interface. Customers can also choose the number of allocated IP addresses from: 1, 4, 8, 16, 32 and
64. We support this service by providing guarantees of latency rates under Service Level
Agreements. As of March 31, 2006, we had 13,297 customers for IIJ FiberAccess/F and IIJ DSL/F.
IIJ DSL/F and IIJ DSL/A.
IIJ DSL/F Service provides dedicated line Internet connectivity via
ADSL with speeds of up to 47 Mbps. IIJ DSL/F Service is primarily targeted at small- and
medium-sized offices and home offices that have access to ADSL lines provided by NTT East and West
under the name of "FLET'S ADSL". We support this service by providing guarantees of latency rates
under Service Level Agreements. In May 2006, we began offering IIJ DSL/A, using ADSL lines provided
by ACCA Networks.
IIJ ISDN/F.
IIJ ISDN/F Service provides dedicated line Internet-access via ISDN lines with
speeds of up to 64 kbps. IIJ ISDN/F Service is primarily targeted at small-and medium-sized offices
and home offices where ADSL lines are not available but have access to ISDN lines provided by NTT
East and West under the name of "FLET'S ISDN".
IIJ Line Management/F.
IIJ Line Management/F Service is a service for us to prepare optical
fiber or ADSL lines provided by NTT East and West for IIJ FiberAccess/F, IIJ DSL/F and IIJ ISDN/F
on behalf of customers. We provide customer support functions for the access lines.
21
Table of Contents
Dial-up Access Services
We offer a variety of dial-up access services. Our dial-up access services are an important
resource in offering total Internet solutions to corporate customers. Our dial-up services allow
employees out of the office or frequent travelers to access our network or their own corporate
networks through one of our POPs or through our roaming access points. The dial-up services are
usually provided with VPN function, that is provided by our value-added services or systems
integration to access customers' own corporate network securely. We also offer dial-up access
service for individuals and an OEM service (where we provide services for other companies which
sell those services under their own name) for other network operators, such as NTT East and NTT
West.
Our main dial-up access services are our IIJ Dial-up Standard, Enterprise Dial-up IP Service,
IIJ Dial-up Advanced, IIJ4U, IIJ
mio
DSL/DF Service, IIJ
mio
FiberAccess/DF Service, IIJ
mio
DSL/SF
Service, IIJ
mio
FiberAccess/DC Service, IIJ
mio
FiberAccess/SF Service and IIJ
mio
MobileAccess
Service, all as described in the table above. We also provide Terminal-type Dial-up IP Service to
customers, but we are no longer promoting this service.
Value-Added Services
Our customers are increasingly seeking additional network-related services, in addition to
Internet connectivity. We provide our customers with a broad range of value-added services and
products such as security, network, server-related outsourcing services in addition to Internet
data center services. Generally, the service period is for one year and customers are billed
monthly. We recognize revenues for these services on a straight-line basis during the service
period. Any initial set-up fees received in connection with our value-added services are deferred
and recognized over the contract period or estimated average period of estimated to customers.
We believe that business customers will continue to increase their use of the Internet as a
business tool and will increasingly rely on an expanding range of value-added services to enhance
productivity, reduce costs and improve service reliability.
Our value-added services include:
•
Security-related outsourcing services.
As of July 7, 2006, we offered seven main
security-related outsourcing services that protect customers' internal networks from
unauthorized access and secure remote connections to internal networks: IIJ DDoS
Solution Service, IIJ Security Premium, IIJ Security Standard, IIJ Security Lite, IIJ
Security Scan Service, IIJ Network Intrusion Detection Service and IIJ Secure Remote
Access. We were the first ISP in Japan to provide firewall services, which we first
offered in 1994.
IIJ DDoS Solution Service.
In October 2005, we began offering IIJ DDoS
Solution Service to protect customers' internal networks from distributed denial of
service ("DDoS") attacks, a type of unauthorized access from Internet. The fee depends
on the type of service that we provide and the initial fee starts at ¥650,000 and the
monthly fee starts at ¥498,000.
IIJ Security Premium.
In July 2000, we began offering IIJ Security
Premium, a high value-added firewall operation and management service based on
Firewall-1, a product which we license from Check Point Software Technologies Ltd. The
service combines and requires contracting for both Firewall Management Service and
Firewall Rental Service. For Firewall Management Service, the initial setup fee is
¥200,000 and the monthly fee ranges from ¥150,000, depending on the redundancy of
firewall equipment. For Firewall Rental Service, the initial setup fee ranges from
¥200,000 and the monthly fee ranges from ¥67,000
22
Table of Contents
depending on a number of factors including the number of users and packet
filtering performance. The fees for Firewall Rental Service are multiplied by the
number of firewall equipment if the customer requires redundancy.
IIJ Security Standard.
In October 1999, we began offering Security
Standard Service pursuant to which we install and manage an around-the-clock operation
of firewall systems. The initial setup fee ranges from ¥100,000, to ¥300,000, and the
monthly fee ranges from ¥50,000,to ¥130,000 depending on a number of factors including
the number of users, packet filtering performance and 3DES (VPN) (an encryption
technology) performance. Since February 2001, a VPN option is available for this
service with an initial cost of ¥20,000 and a monthly fee of ¥10,000 per computer.
IIJ Security Lite.
In December 2002, we began offering IIJ Security Lite,
an economical version of a managed firewall service with limited features of operation
and maintenance targeting small- and medium-sized enterprises. The initial setup fee
ranges from ¥30,000 to ¥50,000, and the monthly fee ranges from ¥25,000 to ¥35,800.
IIJ Security Scan Service.
In March 2002, we began offering IIJ Security
Scan Service, a package of services targeting small- and medium-sized enterprises to
identify security weaknesses in order to prevent illicit access from external networks
and to avert virus infection of in-house servers. It is available in two forms: regular
monthly scans and one-time spot checks. The form of service can be selected to meet the
specific needs of the customer, such as checks for protocol and network configuration
or for vulnerability to specific illegal network intrusion. The service was developed
with NRI Secure Technologies Ltd., a Japanese security assessment and auditing
solutions provider. For the regular monthly scan service, the initial charge is ¥5,000.
The monthly charge for scanning is ¥25,000 for one IP address, and ¥24,000 will be
added for every additional IP address. For the spot scan service, the basic charge for
scanning one IP address is ¥30,000, and ¥29,000 will be added for every additional IP
address.
IIJ Network Intrusion Detection Service.
In April 2001, we began offering
IIJ Network Intrusion Detection Service, which offers around-the-clock, non-stop
network monitoring and intrusion-detection capabilities, as well as packet information
for analyzing detected illicit accesses. The initial cost for the service is ¥300,000,
and the monthly fee starts from ¥300,000, depending on the customer's traffic volume.
IIJ Secure Remote Access.
IIJ Secure Remote Access is a packaged service
combining the IIJ Dial-up Advanced with ID Gateway, which controls remote access to
in-house servers protected by firewalls. In addition to the 50 dial-up accounts covered
by the base rate, the service ensures a secure remote environment by controlling
accessible servers and utilization protocols for each dial-up account. In May 2002, IIJ
Secure Remote Access was upgraded by adding a remote VPN function. The upgrade enables
remote users to transmit and receive data with encryption, offering a secure enterprise
network environment with a greater variety of access options, such as connections from
overseas via local ISPs. In June 2005, IIJ Secure Remote Access was upgraded by adding
an Authentication Service Link Option, which enables customers to use a greater variety
of authentication methods.
•
Network-related outsourcing services.
As of July 7, 2006, we offered six main
network-related outsourcing services, including provision, monitoring and maintenance
of network equipment and VPN to connect customers' branch and remote offices: IIJ
Internet-LAN Service, IIJ SMF-VPN, IIJ Managed VPN Pro Service, IIJ VPN Standard, SEIL
Rental Service and IIJ NetLightning.
23
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IIJ Internet-LAN Service.
IIJ Internet-LAN Service is a service which
provides connectivity among a company's branch and remote offices. With this service,
customers can use functions provided by Wide-area Ethernet over the Internet.
IIJ SMF-VPN.
IIJ SMF-VPN is a service which uses IIJ SEIL Management
Framework ("SMF") which provides remote configuration and monitoring features of SEIL
Series routers at customer remote sites from central management servers at IIJ and the
customer's main office or data center. The technology is patent granted. When a
customer at a remote site connects the router to the circuit, the router is
automatically configured and connected to the network. System integrators utilizing
this technology can reduce configuration and maintenance costs at the remote site.
IIJ Managed VPN Pro Service.
IIJ Managed VPN Pro Service is a service
which provides connectivity among a company's branch and remote offices, utilizing SEIL
Series or other routers.
IIJ VPN Standard.
IIJ VPN Standard is a service which provides Internet
VPN connectivity among a company's branch and remote offices based on encryption
technology. IIJ rents out encryption equipment at customer sites, configures the
equipment for the customer and provides remote monitoring of the encrypted sessions.
Initial cost for the service starts from ¥30,000, and monthly fees start from ¥6,900
depending on the equipment features.
SEIL Rental Service
.
We rent routers for connection to the Internet and
provide configuration, management and monitoring services. We provide SEIL Series or
CISCO routers depending on customer requirements.
IIJ NetLightning.
IIJ NetLightning is a service based on Netli, Inc.'s
technology that improves web application performance. By utilizing this service, end
users can access customer websites faster, without any settings, and customers can
thereby reduce the cost of placing mirror sites.
•
Server-related outsourcing services.
As of July 7, 2006, we offered twelve main
server-related outsourcing services including provision of e-mail and web services and
operation and management of e-mails systems: IIJ Mail Gateway Service, IIJ Post Office
Service, IIJ Mail Box Service, e-mail distribution services, IIJ Web Standard, web
hosting services, IIJ Download Site Service, IIJ URL Filtering Service, IIJ Document
Exchange Service, DNS services, streaming services and IIJ
mio
Safety Mail Service.
IIJ Mail Gateway Service.
In November 2002, we renovated IIJ Mail Gateway
Service to expand the service from large corporate customers to other corporate
segments. The service has three options. The first one is virus protection to check the
viruses on incoming and outgoing e-mails. The second one is audit to detect the keyword
set in advance on the outgoing e-mails. The third one is antispam to check spam for
incoming e-mails, which we started to provide in October 2004. Customers can take all
or a selection of the options. The initial cost is ¥10,000, and the monthly fee ranges
from ¥30,000 to ¥70,000 for the first 50 e-mail accounts and an additional fee per
account after the first 50 e-mail accounts ranges from ¥200 to ¥850.
IIJ Post Office Service.
IIJ Post Office Service is an e-mail operation
outsourcing service performed by our e-mail server, enabling a customer to allocate and
maintain a number of e-mail accounts under its own domain name for its employees,
members or other relevant users. The customer can administer e-mail accounts online
through our customer support Web interface. In December 2002, we added a virus checking
option for incoming and outgoing
24
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e-mails and an "audit option" to check the content of outgoing e-mails and suspend
the ones containing keywords specified in advance. In addition, we added a spam
checking option which we started to provide in October 2004 for no additional charge to
customers contracting the virus checking option or an "audit option".
IIJ Mail Box Service.
IIJ Mail Box Service is also an e-mail operation
outsourcing service performed by our e-mail server. Unlike IIJ Post Office Service,
customers do not have to obtain their own domain names. A customer can administer
e-mail accounts online through our customer support Web interface.
E-mail distribution services.
We offer other e-mail outsourcing services,
such as services for e-mail distribution to large numbers of e-mail addresses and
mailing list functions.
IIJ Web Standard.
The IIJ Web Standard allows customers to use their own
domain names while providing them with up to 200 megabytes of web hosting space. By
limiting specifications, the pricing of the service is kept to a minimum ¥5,000 per
month. Additionally, careful traffic management of the storage space ensures a
high-performance web-server environment for users is ensured. This service mainly
targets small- and medium-sized enterprises.
Web hosting services.
We offer other web hosting services, such as
customized web hosting services and functions to distribute computer files using our
ftp servers.
IIJ Download Site Service.
IIJ Download Site Service is a hosting service
dedicated to high-volume content downloads from the Internet. The service started on a
trial basis in November 2001, and the full-fledged service was launched in February
2002. A dedicated hosting server and dedicated bandwidth are established for each
contract to ensure constant stable performance. With disk capacity of 500 megabytes per
contract on our hosting servers, access is provided at a maximum transmission bandwidth
per contract of up to 80 Mbps. The initial charge for the service is ¥50,000. The
monthly charge ranges between ¥60,000 and ¥340,000, depending upon the bandwidth. In
April 2003, we added the option of 1 Gbps maximum transmission speed for an additional
fee.
IIJ URL Filtering Service.
IIJ URL Filtering Service is a service enabled
by the use of IIJ's proxy server which blocks access to websites deemed inappropriate.
The initial cost for the service is ¥30,000, and the monthly fee is ¥40,000 as a basic
fee plus an additional fee depending on the number of users in the customer's internal
network.
IIJ Document Exchange Service.
This service is an online storage service
with which customers can upload files onto IIJ's storage server and share them with
authorized users. The initial cost is ¥40,000 and the monthly fee is ¥20,000, which
includes 1GB of disk space and 50 accounts. The fee for each additional set of 10
accounts is ¥3,000, and each 1GB of additional disk space is ¥10,000 per month.
DNS services.
We offer domain name related services that consist of domain
name administration services and domain name server outsourcing services. Domain names
such as ".jp", ".com", ".net" and ".org" are available.
Streaming services.
We offer Internet streaming services for live
broadcasts over the Internet, as well as streaming server hosting services.
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IIJmio Safety Mail Service.
IIJ
mio
Safety Mail Service, launched in
December 2001, is a standard e-mail service with an anti-virus function for individual
users. The service employs the InterScan VirusWall developed by Trend Micro
Incorporated, and features POP/SMTP over SSL which provides secure e-mail transmission
by encrypting the e-mail transmission between the users and our mail server, in
addition to SMTP authentication, which ensures a higher level of encryption and
authorization than what is currently available for general use. In February 2005, we
started to provide spam check function without an additional charge. There is no
initial charge for IIJ
mio
Safety Mail Service and the monthly charge is ¥500.
•
Internet data center services.
Our Internet data center services include three
primary services which are typically bundled together for our customers: IIJ data
center facility services, IIJ data center connectivity services and management and
monitoring services. Our Internet data center facility services are co-location
services which allow companies to house their servers and routers off-site on our
premises. Our Internet data center facilities are leased from third parties such as
NTT Communications and are equipped with robust security systems, 24-hours-a-day
non-stop power supplies and fire extinguishing systems, and have earthquake-resistant
construction and high-speed Internet connectivity with IIJ backbones. We also offer
basic monitoring and maintenance services for the equipment. This service enhances
reliability because we provide 24-hours-a-day monitoring and have specialized
maintenance personnel and facilities. We offer management and monitoring services tailored to our customers'
requirements.
•
Customer support and help desk solutions.
We provide comprehensive customer support
and help desk solutions that include network monitoring and trouble-shooting services.
Most of our customer support services are provided as an integral part of other
services we sell.
•
IP Phone.
We began IP Phone service for individual users of IIJ4U and IIJ
mio
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.
•
IIJ EPC Network Service.
IIJ EPC Network Service is a service to provide network
and server systems for our customers to use Radio Frequency Identification Tag
("RFID"). We offer three types of services. "Premium" is a service to provide
customized systems for our customers. "Standard" is a service to provide our systems
to provide our systems at our data centers and "Trial" is a service to provide RFID
functions to our customers for their trial usage.
Systems Integration
We offer systems integration tailored to our customers' requirements, which include
consulting, project planning, systems design, construction of network systems and systems and
operations outsourcing. Our systems integration mainly focus on Internet business systems and
Intranet and Extranet corporate information systems. We have built a strong record in various
business fields.
Examples of systems integration are:
•
connecting over a hundred locations such as gas stations, bank branches and
retail shops via Internet-VPN, transmission of data over the Internet with an
encryption feature and our proprietary SEIL Series routers and SMF,
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•
voice over IP systems to transmit voice among customer branch offices over
Internet,
•
outsourcing of large scale e-mail servers or systems to detect or delete
e-mails with viruses or spam or record all of e-mails incoming to and outgoing
from customers,
•
construction of wireless local area network ("LAN"),
•
online brokerage systems for securities firms,
•
outsourcing of websites for online businesses,
•
re-construction of overall corporate network systems suited to increased
traffic data, and
•
consultation on corporate network security.
The fee structure of our systems integration is based upon the complexity and scale of the
project. We bill our customers for these services on a fixed-fee basis and recognize the revenue
when the network systems and equipment are delivered and accepted by the customer. Maintenance,
monitoring and operating service revenues are recognized ratably over the separate contract period,
which is generally for one year.
In the planning phase of a systems integration project, we form special project management
teams formulated for every new assignment from the customer. We analyze and design the customer's
network and systems with three engineering focuses: reliability, flexibility and extendibility.
In the network systems construction phase, we procure equipment such as servers and manage
application development and software programming tasks which are outsourced to third parties.
Network systems construction usually incorporates many of our other connectivity and value-added
services.
In the operation phase, by utilizing data center facilities directly linked to our network, we
provide a range of outsourcing services, which take maximum advantage of the Internet system,
network operation and management know-how of the IIJ Group companies. Rather than simply looking
after the customer's content, we take care of the customer's entire computing environment and
provide around-the-clock operation and management services, as well as custom-designed monitoring
systems. These outsourcing services enable customers to free themselves from the burden of
operating the network systems, which demands professional operation and maintenance to ensure
prompt and flexible responses to unexpected system problems.
We also provide our customers with basic, easy-to-order systems integration, which we refer to
as IBPS, including provision of network resources such as network equipment, data storage systems,
network monitoring and systems operation management, on demand and on a monthly basis, therefore
enabling our customers to launch their internal network system securely and cost effectively.
Equipment Sales
In addition to the Internet connectivity and value-added services and systems integration, we
sell our network equipment for connection to the Internet and usage of additional features, which
was developed in-house.
SEIL Series.
We started to sell our high-end routers SEIL Series, which was developed
in-house, in October 2001 through sales agents. The series includes four types, SEIL/TURBO,
SEIL/plus, SEIL/neu 128 and SEIL DOCK 2. SEIL/TURBO has a high throughput and enhanced VPN features
and is placed in customer's main office or data center when a customer connects its branch and
remote offices. SEIL/plus is
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suitable for broadband connection and is placed mainly in customer's branch and remote
offices. SEIL/neu 128 is suitable for ISDN or 64 k/128 kbps leased line based Internet connection.
SEIL DOCK 2 is equipment to provide a back-up feature to customers. By combining SEIL/TURBO and
other SEIL Series routers, we are able to provide Internet-VPN solutions connecting corporate
branches and remote offices of medium and small enterprises. In addition, we provide rental
services for these routers directly to customers.
We also sell third-party equipment to meet the one-stop needs of our customers.
Network
Our network is one of our most important assets. We have developed and currently operate a
high-capacity network that has been designed to provide reliable, high-speed, high-quality Internet
connectivity services.
We are able to achieve and maintain high speeds through our advanced network architecture,
routing technology and load balancing that optimize traffic on our multiple Internet connections.
The primary components of our network are:
•
our backbone, which includes leased lines and network equipment, such as advanced
Internet routers,
•
Points of Presence ("POPs") in major metropolitan areas in Japan,
•
Internet data centers, and
•
a network operations center ("NOC").
Backbone
Leased lines
Our network is anchored by our extensive Internet backbone in Japan and between Japan and the
United States. As of July 7, 2006, we had a total capacity of 7.2 Gbps between Japan and the United
States and 600 Mbps between Japan and China. 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,
2002
2003
2004
2005
2006
Backbone cost (thousand yen)
¥
5,656,116
¥
5,235,517
¥
4,719,638
¥
3,550,885
¥
3,516,322
Network upgrades
As a policy, we put a high priority to maintain the quality of our networks and continuously
examine the necessity of upgrades of our networks.
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Network equipment
We use advanced equipment in our network. Our primary routers in our network are Cisco
routers. The size of our routers varies depending on the number of customers and volume of traffic
served by our POPs. At each POP we connect our dedicated line and dial-up access routers to Cisco
backbone routers which then transmit and receive information throughout our network. We primarily
lease our network equipment under capital lease arrangements.
Points of Presence
.
POPs are the main points at which our customers connect to our backbone.
We provide Internet connectivity from our POPs to commercial and residential customers through
leased lines and dial-up connections over local exchange facilities. As of July 7, 2006, we had 13
primary POPs which allow for dedicated access and include the main Internet backbone routers that
form our network. As of the same date, we also had 17 POPs for dial-up access. The number of POPs
for dial-up access include one POP that can be accessed from anywhere in Japan with the minimum
local telephone charge.
Many of our POPs are located in, or in close physical proximity to, "carrier hotels". Carrier
hotels are facilities where we and other major carriers and ISPs have POPs. These are mainly
located at facilities of various carriers in Japan like NTT Communications, KDDI Corporation
("KDDI") and Japan Telecom Co., Ltd. We lease the physical space from these carriers or use such
space under other arrangements with terms ranging from one to two years and terminable by either
party on three to six months' notice. We maintain our routers and other networking equipment at
these POPs. Our POPs are in, or in close proximity to, the same buildings in which the switches and
routers of these carriers and ISPs are located enabling quick and easy interconnection of our
equipment with theirs.
Internet Data Centers.
We operate twelve Internet data centers which we use to offer our
value-added data center services, three 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. All of these
data centers are leased from NTT Communications, CRC Solutions Corp. and KDDI.
These data centers have 24-hours-a-day, seven-days-a-week operations and security and are
equipped with uninterruptible power supplies and backup generators, anti-seismic damage
precautions, fire suppression equipment and other features to optimize our ability to offer
high-quality services through these data centers.
In addition, we have invested in data center development outside Japan. We have entered into
the "i-Heart" joint venture with Samsung Corp., which operates in Korea with a total investment by
us of ¥89 million in May 2000.
Network operations center and technical and customer support.
Our NOC in Tokyo operates 24
hours a day and seven days a week. From our NOC, we monitor the status of our network, the traffic
on the network, the network equipment and components and many other aspects of our network
including our customers' dedicated access lines leased from carriers. From our NOC, we monitor our
networks to ensure that we meet our commitments under our Service Level Agreements.
Our Group Companies
We offer our services directly and together with our group companies. Our group companies work
closely together in providing total network solutions to our customers. We collaborate on the
development of various services and products and market our services and products together as a
group. However, our group companies specialize in different aspects of the Internet and networking.
Our customers' main point of
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contact is IIJ itself. We then draw upon the resources and special capabilities of the group
companies to offer total Internet solutions.
The table below sets out our group companies, including our subsidiaries and principal equity
method investees and our direct and indirect ownership of each of them as of July 7, 2006:
Proportion of ownership
Company Name
and voting interest
IIJ Technology Inc.
72.1
%
IIJ America Inc.
97.6
%
Net Care, Inc.
59.3
%
IIJ Financial Systems Inc.
72.1
%
Internet Multifeed Co.
29.4
%
atom Co., Ltd.
40.0
%
Internet Revolution Inc.
30.0
%
IIJ Technology Inc.
IIJ Technology Inc. ("IIJ-Tech") is an important element in our provision of total network
solutions to our customers. IIJ-Tech is incorporated under the laws of Japan. IIJ-Tech provides
comprehensive network systems integration and consulting services, focusing on design, operation,
and consulting for corporate networks (LANs, enterprise networks, Intranets) and their security
systems. IIJ-Tech assists customers in creating private IP networks, such as Intranets or virtual
private networks, that securely isolate internal network traffic from public Internet traffic and
provide each site on the private IP network access to other sites as well as to the Internet.
IIJ-Tech can integrate an organization's multiple sites in different locations in Japan.
On April 27, 2004, IIJ-Tech completed a private placement of 10,000 shares of common stock to
us and other shareholders for an approximate aggregate amount of ¥1,000 million. We accepted most
of the placement. Our ownership increased from 64.1% to 69.0% during the fiscal year ended March
31, 2005.
In October 2005, IIJ-Tech issued 1,235 new shares of common stock to IIJ Media Communications
Inc. ("IIJ-MC") 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%.
IIJ-Tech had sales of approximately ¥18,441 million for the fiscal year ended March 31, 2006.
As of March 31, 2006, IIJ-Tech had 214 full-time employees, and 32 were seconded from us.
IIJ America Inc.
IIJ America Inc. ("IIJ-A") is a U.S.-based ISP, catering mostly to U.S.-based operations of
Japanese companies. IIJ-A is incorporated under the laws of the state of California.
IIJ-A had revenues of $9,371 thousand for the fiscal year ended December 31, 2005. As of March
31, 2006, IIJ-A had 22 employees, 4 of whom were seconded from us.
Net Care, Inc.
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.
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On April 27, 2006, our board of directors approved purchase of 450 shares of Net Care from its
minority shareholders. We purchased the shares on April 28, 2006. As a result, our ownership
increased from 57.0% to 59.3%.
Net Care had sales of approximately ¥2,367 million for the fiscal year ended March 31, 2006.
As of March 31, 2006, Net Care had 165 employees, 12 of whom were seconded from us.
IIJ Financial Systems Inc.
IIJ Financial Systems Inc. ("IIJ-FS") is a company wholly owned by IIJ-Tech, whose business
was acquired from Yamatane Co., Ltd. in October 2004. IIJ-FS provides integration and operation of
security systems.
IIJ-FS had revenues of ¥2,624 million for the fiscal year ended March 31, 2006. As of March
31, 2006, IIJ-FS had 73 employees.
Internet Multifeed Co.
Internet Multifeed Co. ("Multifeed") provides location and facilities for directly connecting
high-speed Internet backbones with content servers to make distribution on the Internet more
efficient. Multifeed is incorporated under the laws of Japan. Its technology was developed jointly
with the NTT Group. Multifeed launched new IX (Internet eXchange — where major ISPs exchange
network traffic) services named JPNAP in Tokyo in May 2001 and expanded the service to Osaka in
December 2001.
Multifeed had sales of approximately ¥2,376 million for the fiscal year ended March 31, 2006.
As of March 2006, Multifeed had 23 full-time employees, and 4 employees were seconded from us.
atom Co., Ltd.
atom Co., Ltd. ("atom"), which is incorporated under the laws of Japan, is primarily a
web-page design company that aims to define new forms of design work using digital technology in
all network-based aspects of design from content production to graphic design.
atom had sales of approximately ¥797 million for the fiscal year ended March 31, 2006. As of
March 31, 2006, atom had 65 employees, 1 of whom was seconded from us.
Internet Revolution Inc.
On February 1, 2006, we and Konami Corporation established a joint venture company, Internet
Revolution Inc. ("i-revo") to operate comprehensive sites. We invested ¥750,000 thousand in i-revo
and owned 30% ownership as March 31, 2006. We account i-revo as an equity method investee in our
consolidated financial statements.
i-revo had sales of approximately ¥3 million for the fiscal year ended March 31, 2006. As of
March 31, 2006, i-revo had 34 employees, 10 of whom was seconded from us.
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.
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For the fiscal year ended March 31,
2004
2005
2006
(millions of yen)
Capital
expenditures,
including acquisition
of assets by entering
into capital leases
¥
3,523
¥
5,011
¥
4,762
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 ¥110 million, ¥144 million and ¥119
million for the fiscal years ended March 31, 2004, 2005 and 2006, respectively. The losses for the
fiscal years ended March 31, 2004 and 2005 were mainly due to disposal of back-office systems and
telephone rights. The loss for the fiscal year ended March 31, 2006 was mainly due to disposal of
software, such as for back-office systems.
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. We also have branches in Osaka, Nagoya, Sapporo, Sendai,
Toyota, Toyama, Hiroshima, Fukuoka and Okinawa in order to cover the major metropolitan areas in
which the majority of large Japanese companies operate. As of March 31, 2006, we had approximately
200 people working in sales and marketing.
We organize our sales personnel into four distinct, separate divisions, Product and Marketing,
Operation Management Coordination Division and Strategic Sales. In addition, we have nine branch
offices.
Sales Divisions consists of the following:
•
Three of Divisions focus on our total network solutions and work with large
corporate clients, including telecommunications carriers and ISPs, financial
institutions, manufacturers, government institutions, universities and other schools,
or focus on the expansion of sales agents for our services and network equipment. In
order to provide total network solutions, personnel in our sales divisions work
closely with other IIJ Group companies such as IIJ-Tech as well as with other
important service providers.
•
One Division focuses on total network solutions and works with governmental
institutions.
Our Product and Marketing mainly makes and conducts promotion plans on our products and
services. Operation Management Coordination Division handles administrative issues. Strategic Sales
is responsible for the planning and management on the sales figures, processes and other
information.
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Customers
We have approximately 6,500 business and other institutional customers and approximately
630,000 individual subscribers, which includes individuals subscribing to OEM services, as of March
31, 2006. 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 regularly participate in industry organizations and
government-sponsored research projects such as researching new Internet protocol standards, namely
Internet Protocol Version 6 (IPv6). 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, 2005 and 2004, our research and
development expenses were ¥158 million, ¥199 million and ¥358 million, respectively, most of which
was personnel expense. The level of research and development expenditures is low in relation to our
total costs primarily because we do not engage in extensive research and development of new
technologies and products that require large investments. Rather, as noted above and as set forth
in more detail below, we are intensively engaged in research and development related to our ongoing
business. We focus on monitoring developments in the industry and in developing new and innovative
services and applications by using and modifying existing technologies and products.
As of March 31, 2006, we had approximately 100 people working in our research and development
organization, including the staff in IIJ Research Laboratory. Our research and development staff
works very closely with our sales and marketing personnel and technical engineers to ensure that
our research and development efforts are closely aligned with the demands of our customers.
Research and Development Organization
We have organized our research and development staff to promptly and effectively address the
rapidly changing technological environment of the Internet. Research and development on practical
applications of new and developing technologies is the responsibility of the Applied Research and
Development Department.
IIJ Research Laboratory.
We established the IIJ Research Laboratory in April 1998 to engage in
the research and development of new basic network technologies. Through the IIJ Research
Laboratory, we participate in various research and development activities in cooperation with
organizations from the private and academic sectors to promote the deployment and implementation of
IPv6. The output of the joint undertaking with WIDE project is distributed freely in order to
promote the introduction of IPv6 on a worldwide scale. IPv6 is designed to solve problems inherent
in the current version of IP, which is IPv4, such as IP address space depletion. In addition, IPv6
is expected to provide new network features such as ubiquitous networking.
Applied Research and Development Department.
Applied Research and Development Department
engages in the research and development of technologies to be applied to our services and
solutions, collects information on, evaluates on the new technology and conducts business expansion
based on the technology IIJ Research Laboratory developed.
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Research and Development Strategy
Our primary research and development objective is to continue to develop innovative services,
applications and products that will meet the current and future demands of our customers and that
will continue to be at the forefront of the Internet industry in Japan. In furtherance of this
objective, our research and development efforts currently are focused on a variety of projects,
including:
•
continued improvement of our SEIL router and SEIL Management Framework, systems
which we developed specifically to be integrated into IIJ's network-related services,
•
research relating to the methodology of configuration of routers and other servers,
•
research relating to behavior of Internet routing systems,
•
software development for management of border gateway protocol, or BGP, which is
protocol that allows routers to exchange routing information on the TCP/IP network,
•
research for Internet traffic monitoring and management,
•
development of software and evaluation of hardware relating to improving the
operations of routers located on our customers' premises, and
•
research and development of IPSec, which is a secure version of IP that provides
secure communication channels over the Internet.
A second research and development objective is to continue participating in or otherwise
closely monitoring the new products, developments and initiatives of manufacturers and
standards-setting and research groups. Through these efforts, we seek to ensure that we have timely
and effective access to new technologies and that we implement these technologies effectively.
Because the rate of change in technology relevant to our business is so rapid, we believe that the
sophistication and experience of our research and development personnel is an important part of our
success.
Proprietary Rights
Although we believe that our success is more dependent upon our technical, marketing and
customer service expertise than our proprietary rights, we rely on a combination of trademark and
contractual restrictions to establish and protect our technology.
Licenses
For us to provide certain services to our customers, we have been a licensee under agreements
with other suppliers, such as Check Point Software Technologies Ltd., WatchGuard Technologies,
Inc., Trend Micro Incorporated, RSA Security Inc., NRI Secure Technologies, Ltd. and MX Logic, Inc.
We have purchased licenses from the companies in accordance with customer demands for our
services.
34
Table of Contents
Trademarks
We have applied for trademark registrations of our corporate name, "Internet Initiative Japan
Inc." and certain other corporate and product names in Japan, the United States and certain
European countries. As of July 7, 2006, 35 registrations have been granted, with 6 pending
applications.
Patents
We have applied for patent registrations in relation to our technology in Japan and the
United States. As of July 5, 2006, 4 registrations have been granted, with 6 pending applications.
The latest acquired patent is for centralized network management system originally developed by us
and is implemented in one of our competitive services, SMF (SEIL Management Framework).
Legal Proceedings
We are involved in normal claims and other legal proceedings in the ordinary course of
business. Except as noted below, we are not involved in any litigation or other legal proceedings
that, if determined adversely to us, we believe would individually or in the aggregate have a
material adverse effect on us or our operations.
In December 2001, a class action complaint alleging violations of the federal securities laws
was filed against us in the United States District Court for the Southern District of New York,
naming as defendants IIJ; Koichi Suzuki, our President, Chief Executive Officer and Representative
Director; Yasuhiro Nishi, our former Director, Chief Financial Officer and Chief Accounting
Officer; and the Goldman Sachs Group Inc. and Morgan Stanley (formerly, Morgan Stanley Dean Witter,
Inc.), both of which served as underwriters of our initial public offering. Similar complaints have
been filed against over 300 other issuers that have had initial public offerings since 1998, and
all 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. The amended complaint alleges, among
other things, that the underwriters of our initial public offering (i) entered into certain alleged
compensation arrangements with the underwriters' clients, such as undisclosed commissions or tie-in
agreements to purchase stock in the after-market, and (ii) engaged in manipulative practices to
artificially inflate the price of our stock in the after-market subsequent to the initial public
offering. The IIJ defendants are named in the amended complaint pursuant to Sections 11 and 15 of
the Securities Act of 1933, as amended, and Sections 10(b) and 20(a), and Rule 10b-5 of the
Securities Exchange Act of 1934, as amended, on the basis of an alleged failure to disclose the
underwriters' alleged misconduct. The complaint seeks unspecified damages. On July 15, 2002, we
joined in an 'omnibus' motion to dismiss the amended complaint filed by the issuers and individuals
named in the various coordinated cases. In June 2003, we approved a settlement with the plaintiffs
in this matter.
We, along with the settling issuer defendants, filed a motion seeking the court's preliminary
approval of the settlement. The court granted preliminary approval of the settlement on February
15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary
order further approving the modifications to the settlement and certifying the settlement classes.
The court also appointed the Notice Administrator for the settlement and ordered that notice of the
settlement be distributed to all settlement class members beginning on November 15, 2005. A
settlement fairness hearing took place on April 24, 2006. If the court determines that the
settlement is fair to the class members, the settlement will be approved.
The settlement releases us and the individual defendants from liability for the conduct
alleged in the action. Under the settlement, we agreed to assign away, not assert, or release
certain potential claims we may have against our underwriters. As to financial impact on us, the
settlement provides that the class members will be guaranteed $1 billion dollars in recoveries by
the insurers of the issuers. In addition to IIJ's portion of the proposed settlement, some of the
continuing legal expenses incurred in connection with the partial
35
Table of Contents
settlement would be borne by our insurer based on the settlement agreement and an individual
agreement between us and our insurer. Consequently, we believe that there will be no significant
financial impact on us as a result of this matter.
Regulation of the Telecommunications Industry in Japan
The Ministry of Internal Affairs and Communications ("MIC") regulates the Japanese
telecommunications industry. Carriers, including us, are regulated by the MIC primarily under the
Telecommunications Business Law.
The Telecommunications Business Law
The Telecommunications Business Law, which became effective in 1985, was established for the
purpose of privatization and deregulation in telecommunications business. After several amendments,
the Telecommunications Business Law was considerably amended in July 2003. The amendments to the
Telecommunications Business Law, which came into force on April 1, 2004, include, among other
things:
•
the elimination of the classification of Type I Carriers and Type II Carriers;
•
deregulation of regulations on charges and terms and conditions for providing
services by Carriers; and
•
the introduction of certain terminal-equipment-supplier's declaration system
regarding technical standard conformity.
The Prior Telecommunications Business Law stipulated that the Carriers shall be classified as
either Type I Carrier or Type II Carrier, and imposed regulations in accordance with such
classification of Carriers. Prior Type I Carriers, such as NTT East, NTT West, provided
telecommunications services by establishing their own telecommunications circuit facilities. Prior
Type II Carriers, including us, engaged in the businesses of telecommunications circuit resale and
the provision of Internet services by using the telecommunications facilities of Type I Carriers.
However, from the viewpoint of encouraging telecommunications carriers to carry out diverse
business, etc, the Telecommunications Business Law was amended so as to abolish the classification
of Type I Carriers and Type II Carriers, and thereupon the rules pertaining to services (i.e.,
start-up, abolition, charges and tariffs, etc.) were deregulated in principle while establishing
rules to protect the users, and the rules pertaining to infrastructure were reviewed as necessary
while maintaining the basic framework stipulated under the prior Telecommunications Business Law.
For example, (i)the approval system for business entries and withdrawals was replaced by a
registration/notification system, (ii)regulations pertaining to service offerings, tariff setting
and interconnection between carriers were liberalized, (iii)regulations to protect service users
such as announcement of withdrawal, explanation of important matters on services and swift
processing of complaints were introduced, and (iv)an authorization system allowing priority usage
of public utilities conducive to facilitation of circuit facilities deployment was introduced.
36
Table of Contents
The following table summarizes changes by the amendment above in some of the major regulatory
requirements applicable to telecommunications carriers:
(Before Amendment)
Type I Carriers
Type II Carriers
Special Type II
General Type II
Start-up of services
Permission from
MIC required
Registration with
MIC required
Notification to MIC
required
Rates and charges
Notification* to
MIC required
Notification to
MIC required
Unregulated
Share acquisition
by foreign
investors
Unregulated**
Unregulated
Unregulated
*
Type I Carriers which operate Category I Designated Telecommunications Facilities are
required to receive MIC approval for their Interconnection charges.
**
Prior notification is required under the Foreign Exchange and Foreign Trade Law. This is not
applicable to purchasers of ADSs. A one-third foreign ownership restriction is applicable only
to NTT (which was changed from a 20% foreign ownership restriction on November 30, 2001).
(After Amendment)
Telecommunications Carriers
Registration required
Registration exempted
Start-up of services
Registration with
MIC required*
Notification to MIC required****
Rates and charges
Notification to MIC
required**
Unregulated
Share acquisition
by foreign
investors
Unregulated***
Unregulated
Before the amendments to the Telecommunications Business Law, we were classified as a Special
Type II Carrier. After the amendments, we are deemed by the effect of Supplementary Provisions to
the amended Telecommunications Business Law to have filed the notification to MIC under the amended
Telecommunications Business Law. In practice, we filed an actual notification to MIC in April 2004
according to the request of MIC.
*
Applicable to telecommunications carriers which install certain large scale circuit
facilities unless an exemption applies as designated by the applicable ministerial ordinance
of MIC from the viewpoint of the scale of the telecommunications circuit facilities and the
scope of areas where such telecommunications circuit facilities are installed.
**
Applicable to universal services and services which have the control power over the market
provided by the telecommunications carriers which install what is called the "bottle-neck
facilities".
Telecommunications carriers which operate Category I Designated Telecommunications Facilities
are required to receive MIC approval for their Interconnection terms and charges.
***
Prior notification is required under the Foreign Exchange and Foreign Trade Law for
acquisition of shares of telecommunications carriers to which registration for start-up
services is applicable. This is not applicable to purchasers of ADSs. A one-third foreign
ownership restriction is applicable only to NTT.
****
Currently, carriers which meet the following two requirements established by the ministerial
ordinance of MIC are exempted from registration with MIC: (i) areas of installation of
terminal-related transmission facilities are limited to only within a single municipal (city,
town or village) and (ii) areas of installation of relay-related transmission facilities are
limited to only within a single prefecture.
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Regulations of telecommunications carriers
The following regulations apply to telecommunications carriers defined in the
Telecommunication Business Law.
Start-up of Services
•
Carriers with registration
Registration with the MIC required for telecommunications carriers which exceed
criteria established by MIC's ordinance in relation to the scale of the
telecommunications circuit facilities and the scope of areas where such
telecommunications circuit facilities are installed.
•
Other Carriers
Notification to the MIC required for telecommunications carriers other than the above.
We do business under this category.
Charges and Tariffs
•
Unregulated, in general. The requirement that standard terms and conditions be
applied equally to all users was repealed.
•
Prior notification to the MIC required for Basic Telecommunications Services
(universal services such as basic fee, local call and emergency telecommunication
service) and Designated Telecommunications Services (i.e., services which have the
controlling power over the market provided by the telecommunications carriers which
install what is called the "bottle-neck facilities"). Among the Designated
Telecommunications Services, the telecommunications services to be specified by MIC at
least once a year will be subject to price cap regulations, under which carriers will
be required to obtain approval from the MIC if a proposed change of charge exceeds the
price cap. Providing these telecommunications services other than pursuant to the
terms and conditions notified to the MIC is prohibited, unless minor exceptions apply.
Articles of Interconnection Agreements
•
Unregulated, in general.
•
Approval from the MIC required for Category I Designated Telecommunications Facilities.
•
Prior notification to the MIC required for Category II Designated
Telecommunications Facilities.
Telecommunications Facilities of Carriers.
•
A telecommunications carrier that owns telecommunications circuit facilities must
maintain its telecommunications facilities (except telecommunications facilities
stipulated in MIC's ordinances as those having a minor influence on the users' benefit
in the cases of damage or failure thereof) in conformity with the technical standards
provided in the applicable MIC's ordinances. Such Carriers shall confirm itself that
said telecommunications facilities are in compliance with such technical standards
specified in the applicable MIC's ordinances.
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•
A telecommunications carrier that provides Basic Telecommunications Services must
maintain their telecommunications facilities for provision of their Basic
Telecommunications Services in conformity with the technical standards provided in the
applicable MIC's ordinances.
•
Telecommunications Carriers that own telecommunications circuit facilities or
provide Basic Telecommunications Services must establish their own administrative
rules in accordance with MIC's ordinances in order to secure the reliable and stable
provision of telecommunications services. These administrative rules must regulate the
operation and manipulation of telecommunications facilities and the safeguarding,
inspecting and testing regarding the construction, maintenance and administration of
telecommunications facilities, etc. as provided for by the ministerial ordinance of
MIC. Such administrative rules must be submitted to the MIC prior to the commencement
of operations, and changes must be submitted to the MIC after they are implemented
without delay.
Order to Improve Business Activities
•
The Minister for MIC may, if it is deemed that business activities of a
telecommunications carrier falls under the inappropriate items set forth in the
Telecommunications Business Law, insofar as necessary to ensure the users' benefit or
the public interest, order said telecommunications carrier to take actions to improve
operations methods or other measures.
Right of Way Privilege for Authorized Carriers
•
Authorization on the entire or a part of a carrier's telecommunications business by
MIC for the privileged use of land or other public utilities for circuit facilities
deployment is required. Right of Way privilege is available to carriers irrespective
of registration.
Merger, Business Transfer or Divestiture of Carriers
•
Post facto notification to MIC without delay is required.
Business Suspension, Abolition or Dissolution of Carriers
•
Post facto notification to MIC without delay is required. Prior announcement of
withdrawals to service users is required in accordance with MIC's ordinance.
Foreign Capital Participation
•
Unregulated. Prior notification is required under the Foreign Exchange and Foreign
Trade Law for acquisition of shares of telecommunications carriers to which
registration for start-up services is applicable. This is not applicable to purchasers
of ADSs. The one-third foreign ownership restriction is applicable only to NTT.
C. Organizational Structure.
The information required by this item is in " — Our Group Companies" above.
D. Property, Plants and Equipment.
The information required by this item is in " — Network" above.
39
Table of Contents
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 leading provider of a comprehensive range of Internet connectivity services and
network solution services in Japan. We were founded in December 1992 and began offering Internet
connectivity services commercially in July 1993. We were one of the first commercial ISPs in Japan.
Our primary sources of revenues are connectivity services, value-added services, systems
integration and equipment sales. Connectivity services consist of dedicated Internet-access
services and dial-up Internet-access services. For value-added services, we provide services such
as network security services, mail and web server hosting services, managed router services and
Internet data center services. For systems integration, we provide systems development and
integration for business-to-business and business-to-consumer-networks, and outsourcing projects.
For equipment sales, we provide equipment as part of our provision of total network. Substantially
all of our revenues are from our customers in Japan, and we are the main point of contact for
customers for these various services.
Total revenues were ¥38.8 billion, ¥41.7 billion and ¥49.8 billion for the fiscal years ended
March 31, 2004, 2005 and 2006, respectively. The increases in revenues for each of the two years
ended March 31, 2006 as compared to the previous fiscal years mainly reflect an increase in
value-added services and systems integration revenues.
Operating income for the fiscal year ended March 31, 2006 was ¥2.4 billion, an improvement
from operating income of ¥1.2 billion for the fiscal year ended March 31, 2005 and operating loss
of ¥1.4 billion in the fiscal year ended March 31, 2004. The improvement compared to the previous
year is mainly due to an increase in relatively higher-margin value-added services and systems
integration.
Net income for the fiscal year ended March 31, 2006 was ¥4.8 billion, an improvement from net
income of ¥2.9 billion for the fiscal year ended March 31, 2005, and a net loss of ¥2.3 billion for
the year ended March 31, 2004. The improvement in net income is mainly due to an increase in
operating income and an increase in gains from the sale of available-for-sale securities.
We have also generated cash in the last three fiscal years from sales of equity. On June 26
and September 16, 2003, we completed private placements of a total of 15,880 shares of our common
stock to investors in Japan for an aggregate amount of ¥13.3 billion for working capital and
repayment of our outstanding 1.75% convertible notes due on March 31, 2005. As a result of these
transactions, the total number of our issued shares of common stock increased to 38,360 and the
Nippon Telegraph and Telephone ("NTT") Group's total shareholding increased to 31.6%. On March 31,
2005, we redeemed the remainder of
40
Table of Contents
our 1.75% convertible notes due March 2005 using our cash and cash equivalents as well as
available-for-sale securities.
On December 2, 2005, we listed on the Mothers market of the Tokyo Stock Exchange ("TSE"). In
connection with the listing, we issued 12,500 new shares of common stock for an amount of ¥6.0
billion. As we conducted a 1 to 5 stock split on October 11, 2005, the total number of our issued
shares of common stock increased to 204,300.
In order to provide our customers with total network solutions, we provide our services
directly or by working together with the subsidiaries and affiliates of IIJ Group. We refer to our
subsidiaries and certain affiliates as our group companies, and we have invested heavily in and
exercise significant influence over these companies. We consolidate the results of operations of
four subsidiaries included among our group companies
¾
IIJ Technology Inc. ("IIJ-Tech"), IIJ
America Inc. ("IIJ-A"), Net Care, Inc. ("Net Care") and IIJ Financial Systems Inc. We account for
our investments in the affiliated companies by the equity method.
There have been significant changes in the scope of our consolidated subsidiaries and equity
method affiliates in the last three fiscal years. On August 20, 2003, Crosswave Communications Inc.
("Crosswave"), our former equity method investee, filed a voluntary petition for the commencement
of corporate reorganization proceedings in Japan and accordingly, we no longer had the ability to
exercise significant influence over the operating and financial policies of Crosswave thereafter.
For the fiscal year ended March 31, 2003, we wrote off our equity method investment as well as a
¥5.0 billion security deposit advanced to Crosswave in connection with financing provided by four
Japanese commercial banks. In December 2003, Crosswave transferred its business operations to NTT
Communications Corporation. We further wrote off ¥1.7 billion of outstanding loans extended to
Crosswave and ¥0.4 billion of accounts receivable owned to us by Crosswave in the fiscal year ended
March 31, 2004.
On October 1, 2005, IIJ Media Communications Inc. ("IIJ-MC"), our former consolidated
subsidiary, was merged into us after a portion of IIJ-MC's business was transferred to IIJ-Tech,
our consolidated subsidiary. Asia Internet Holding Co., Ltd. ("AIH"), our former equity method
investee, became our wholly owned consolidated subsidiary, and was merged into us on October 1,
2005. In each of the mergers, we were the surviving company.
On February 1, 2006, we established a joint venture company, Internet Revolution Inc.
("i-revo"), with Konami Corporation, with the purpose of operating comprehensive portal sites. We
invested ¥750 million and hold 30.0% of the company. i-revo is an equity method investee.
For a discussion of factors affecting our future financial results, see "Item. 5.D. Trend
Information".
41
Table of Contents
Results of Operations
As an aid to understanding our operating results, the following tables show items from our
statement of operations for the periods indicated in millions of yen amounts (or thousands of U.S.
dollars) and as a percentage of total revenues.
Fiscal year ended March 31,
2004
2005
2006
(millions of yen except for percentage data)
(thousands of
U.S.
dollars)
REVENUES:
Connectivity and value-added services
revenues:
Dedicated access
¥
12,862
33.2
%
¥
11,373
27.3
%
¥
10,625
21.3
%
$
90,443
Dial-up access
3,088
8.0
2,937
7.0
2,674
5.4
22,760
Value-added
4,296
11.1
5,005
12.0
6,250
12.5
53,200
Other
2,118
5.4
3,169
7.6
3,674
7.4
31,272
Total connectivity and
value-added services
22,364
57.7
22,484
53.9
23,223
46.6
197,675
Systems integration, including related
equipment sales
11,848
30.5
15,854
38.0
23,505
47.2
200,072
Equipment sales
4,567
11.8
3,365
8.1
3,085
6.2
26,262
Total revenues
38,779
100.0
41,703
100.0
49,813
100.0
424,009
COST AND EXPENSES:
Cost of connectivity and value-added
services:
Backbone cost
4,720
12.2
3,551
8.5
3,516
7.0
29,931
Local access line cost
3,500
9.0
4,040
9.7
4,558
9.2
38,801
Other connectivity cost
1,422
3.7
1,361
3.3
815
1.6
6,941
Depreciation and amortization
3,135
8.1
2,938
7.0
2,721
5.5
23,160
Other
7,270
18.7
7,594
18.2
8,468
17.0
72,073
Total cost of connectivity and
value-added services
20,047
51.7
19,484
46.7
20,078
40.3
170,906
Cost of systems integration, including
related equipment sales:
Cost of equipment sales related to
systems integration
1,546
4.0
1,759
4.2
3,591
7.2
30,568
Other
8,306
21.4
10,441
25.0
14,529
29.2
123,675
Total cost of systems integration
9,852
25.4
12,200
29.2
18,120
36.4
154,243
Cost of equipment sales
4,346
11.2
3,111
7.5
2,818
5.7
23,987
Total cost of revenues
34,245
88.3
34,795
83.4
41,016
82.4
349,136
Sales and marketing
3,528
9.1
2,795
6.7
3,080
6.2
26,213
General and administrative
2,098
5.4
2,666
6.4
3,147
6.3
26,790
Research and development
358
0.9
199
0.5
158
0.3
1,346
Total cost and expenses
40,229
103.7
40,455
97.0
47,401
95.2
403,485
OPERATING INCOME (LOSS)
(1,450
)
(3.7
)
1,248
3.0
2,411
4.8
20,524
OTHER INCOME (EXPENSES):
Interest income
38
0.1
13
0.0
13
0.0
111
Interest expense
(702
)
(1.9
)
(686
)
(1.6
)
(437
)
(0.9
)
(3,723
)
Foreign exchange gains (losses)
(7
)
(0.0
)
6
0.0
3
0.0
30
Net gain on other investments
1,413
3.7
2,439
5.9
3,198
6.5
27,219
Other — net
240
0.6
128
0.3
191
0.4
1,622
Other income — net
982
2.5
1,900
4.6
2,967
6.0
25,259
INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY INTERESTS AND
EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES
(468
)
(1.2
)
3,148
7.6
5,379
10.8
45,783
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Fiscal year ended March 31,
2004
2005
2006
(millions of yen except for percentage data)
(thousands of
U.S.
dollars)
INCOME TAX EXPENSE
¥
33
0.1
%
¥
100
0.2
%
¥
257
0.5
%
$
2,191
MINORITY INTERESTS IN (EARNINGS) LOSSES OF
SUBSIDIARIES
236
0.6
(109
)
(0.3
)
(354
)
(0.7
)
(3,012
)
EQUITY IN NET LOSS OF EQUITY METHOD
INVESTEES:
Equity method net loss
(286
)
(0.8
)
(33
)
(0.1
)
(14
)
(0.0
)
(117
)
Impairment loss on advance to Crosswave
(1,720
)
(4.4
)
—
—
—
—
—
Total equity in net loss of
equity method investees
(2,006
)
(5.2
)
(33
)
(0.1
)
(14
)
(0.0
)
(117
)
NET INCOME (LOSS)
¥
(2,271
)
(5.9
)%
¥
2,906
7.0
%
¥
4,754
9.6
%
$
40,463
Year Ended March 31, 2006 Compared to the Year Ended March 31, 2005
Total revenues
Our total revenues increased 19.4% to ¥49.8 billion for the fiscal year ended March 31, 2006
from ¥41.7 billion for the previous fiscal year. These increases were primarily due to an increase
in value-added services and systems integration revenues.
Connectivity and value-added services revenues.
Revenues from connectivity services and
value-added services, which comprise our dedicated access, dial-up access, value-added services and
other services, increased 3.3% to ¥23.2 billion for the fiscal year ended March 31, 2006 from ¥22.5
billion for the previous fiscal year.
•
Dedicated access.
Revenues from dedicated access services decreased 6.6% to ¥10.6
billion for the fiscal year ended March 31, 2006 from ¥11.4 billion for the previous
fiscal year. This decrease reflected a decrease of revenues of ¥468 million from the
interconnection of IIJ's network with AIH, our former equity method investee, which
resulted from the consolidation of AIH's revenues following the merger of AIH into
IIJ. The decrease is also due to the decline in unit price per bandwidth.
•
Dial-up access.
Revenues from dial-up access services decreased 9.0% to ¥2.7
billion for the fiscal year ended March 31, 2006 from ¥2.9 billion for the previous
fiscal year. This decrease was primarily the result of declining revenues from
services for individuals such as IIJ4U Service. The revenues from IIJ4U decreased by
¥0.1 billion from the previous fiscal year.
•
Value-added services.
Our value-added services revenues increased 24.9% to ¥6.2
billion for the fiscal year ended March 31, 2006 from ¥5.0 billion for the previous
fiscal year. This increase was mainly due to a steady increase in revenues from
solutions such as data center services, security and e-mail related outsourcing
services and network related solutions such as SEIL and SEIL Management Framework,
along with projects to connect customers' multiple operational sites. The steady
increase is affected by an increase in demand for outsourcing services by corporate
customers.
•
Other.
Other revenues, which included rental fees for network equipment, customer
support service, and sale of Wide-area Ethernet services, amounted to ¥3.7 billion for
the fiscal year ended March 31, 2006, a 15.9% increase from the previous fiscal year.
The increase was mainly
43
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due to a continuous increase in sales of Wide-area Ethernet services which increased by
43.8% compared to the previous fiscal year.
Systems integration revenues.
Our revenues from systems integration, which include equipment
sales related to systems integration, increased 48.3% to ¥23.5 billion for the fiscal year ended
March 31, 2006 from ¥15.9 billion for the previous fiscal year. The increase was mainly due to a
significant increase in one-time revenues from the design and construction of large-scale network
systems for corporate customers and a continuous increase in recurring revenues from the operation
and maintenance of the systems.
Equipment sales.
Our equipment sales decreased 8.3% to ¥3.1 billion for the fiscal year ended
March 31, 2006 from ¥3.4 billion for the previous fiscal year.
Total cost of revenues
Total cost of revenues increased 17.9% to ¥41.0 billion for the fiscal year ended March 31,
2006 from ¥34.8 billion for the previous fiscal year. The increase was mainly because cost of
systems integration revenues increased corresponding with the significant increase in systems
integration revenues, while the cost of connectivity and value-added services revenues slightly
increased compared to the previous fiscal year.
Cost of connectivity and value-added services revenues
. Cost of connectivity and value-added
services revenues increased 3.0% to ¥20.1 billion for the fiscal year ended March 31, 2006 from
¥19.5 billion for the previous fiscal year. The gross margin in connectivity and value-added
services revenues increased to 13.5% for the fiscal year ended March 31, 2006 from 13.3% for the
previous fiscal year. This increase is mainly a result of an increase in revenues from relatively
higher-margin value-added services and a decrease in backbone costs. Local access line costs
increased due to steady revenue growth in Wide-area Ethernet services. Backbone costs decreased
1.0% to ¥3.5 billion for the fiscal year ended March 31, 2006 from ¥3.6 billion for the previous
fiscal year. Local access line costs increased 12.8% to ¥4.6 billion from ¥4.0 billion for the
previous fiscal year.
Cost of systems integration revenues.
Our cost of systems integration revenues increased 48.5%
to ¥18.1 billion for the fiscal year ended March 31, 2006 from ¥12.2 billion for the previous
fiscal year. The gross margin in systems integration revenues was 22.9% for the fiscal year ended
March 31, 2006, compared to 23.0% for the previous fiscal year. Revenues from the construction of
large-scale network systems, that has a lower-margin compared to systems operation and maintenance
increased.
Cost of equipment sales.
Our cost of equipment sales decreased 9.4% to ¥2.8 billion for the
fiscal year ended March 31, 2006 from ¥3.1 billion for the previous fiscal year. The gross margin
in equipment sales increased to 8.7% for the fiscal year ended March 31, 2006 from 7.5% for the
previous fiscal year.
Total costs and expenses
Total costs and expenses, which includes total cost of revenues, sales and marketing expenses,
general and administrative expenses and research and development expenses, increased 17.2% to ¥47.4
billion for the fiscal year ended March 31, 2006 from ¥40.5 billion for the previous fiscal year.
The increase in total costs and expenses was primarily a result of an increase in the cost of
systems integration, sales and marketing expenses and general and administrative expenses.
Sales and marketing.
Sales and marketing expenses increased 10.2% to ¥3.1 billion for the
fiscal year ended March 31, 2006 from ¥2.8 billion for the previous fiscal year. The increase was
mainly due to an increase in advertising expenses, personnel expenses and outsourcing expenses that
increased along with the business expansion.
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General and administrative.
General and administrative expenses increased 18.1% to ¥3.1
billion for the fiscal year ended March 31, 2006 from ¥2.7 billion for the previous fiscal year.
The increase was mainly due to increases in personnel expenses and rent expenses. The increase in
rent expenses is mainly due to an expansion of the office for the administrative section,
necessitated by an enhancement of administrative function.
Research and development.
Research and development expenses decreased 20.5% to ¥158 million
for the fiscal year ended March 31, 2006 from ¥199 million for the previous fiscal year. The
decrease is primarily due to reduced development expenses relating to SEIL Series.
Operating income
As a result of the foregoing factors, operating income increased 93.3% to ¥2.4 billion for the
fiscal year ended March 31, 2006 from ¥1.2 billion for the previous fiscal year.
Other income (expenses), net
Net other income of ¥3.0 billion was recorded for the fiscal year ended March 31, 2006
compared to ¥1.9 billion for the previous fiscal year.
Interest income.
Interest income was ¥13 million for the fiscal year ended March 31, 2006,
almost flat compared to ¥13 million for the previous fiscal year.
Interest expense.
Interest expense, comprised of interest expense in respect of bank
borrowings, convertible notes and capital lease obligations, amounted to ¥437 million for the
fiscal year ended March 31, 2006 compared to ¥686 million for the previous fiscal year. Interest
expense decreased due to an absence of interest payment related to the convertible notes that we
redeemed in March 2005.
Foreign exchange gains (losses).
Foreign exchange gain amounted to ¥3 million for the fiscal
year ended March 2006 compared to gain of ¥6 million for the previous year.
Net gain on other investments.
For the fiscal year ended March 31, 2006, we recorded gain on
other investments of ¥3.2 billion, which included gains of ¥3.2 billion generated by the sale of
certain available-for-sale securities, compared to gains of ¥2.4 billion for the previous year.
Other-net.
For the fiscal year ended March 31, 2006, we recorded other income of ¥191 million,
most of which is dividend income of ¥120 million for the fiscal year ended March 31, 2006, compared
to income of ¥128 million for the previous year.
Income from operations before income tax expense, minority interests and equity in net loss of
equity method investees
We recorded income from operations before income tax expense, minority interests and equity in
net loss of equity method investees of ¥5.4 billion for the fiscal year ended March 31, 2006
compared to income from operations before income tax expense, minority interests and equity in net
loss of equity method investees of ¥3.1 billion for the fiscal year ended March 31, 2005. The
improvement primarily reflects the increase in operating income and the increase of gain from the
sale of available-for-sale securities.
Income tax expense
For the fiscal year ended March 31, 2006, we recorded an income tax expense of ¥257 million
compared to an income tax expense of ¥100 million for the previous fiscal year. The income tax
expense for
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the fiscal year ended March 31, 2006 increased mainly due to the reserve for tax contingencies
related to the usage of tax operating loss carryforwards by IIJ-A and income taxes payable related
to taxable income of our consolidated subsidiaries.
Minority interests in earnings of subsidiaries
Minority interests in earnings of subsidiaries increased by ¥245 million to ¥354 million for
the fiscal year ended March 31, 2006. Earnings of subsidiaries increased mainly due to improved
performance of IIJ-Tech and Net Care.
Equity in net loss of equity method investees
Equity method net loss decreased to ¥14 million for the fiscal year ended March 31, 2006 from
¥33 million for the previous fiscal year. Although equity method net income was recorded in
Internet Multifeed Co., equity method net loss was recorded in our new equity method investee,
i-revo.
Net income
Net income for the fiscal year ended March 31, 2006 was ¥4.8 billion compared with ¥2.9
billion for the previous fiscal year. The improvement primarily reflects the increase in operating
income and the increase of gain from the sale of available-for-sale securities.
Year Ended March 31, 2005 Compared to the Year Ended March 31, 2004
Total revenues
Our total revenues increased 7.5% to ¥41.7 billion for the fiscal year ended March 31, 2005
from ¥38.8 billion for the previous fiscal year. These increases were primarily due to an increase
in systems integration revenues.
Connectivity and value-added services revenues.
Revenues from connectivity services and
value-added services, which comprise our dedicated access, dial-up access and value-added services
and other services, increased 0.5% to ¥22.5 billion for the fiscal year ended March 31, 2005 from
¥22.4 billion for the previous fiscal year.
•
Dedicated access.
Revenues from dedicated access services decreased 11.6% to ¥11.4
billion for the fiscal year ended March 31, 2005 from ¥12.9 billion for the previous
fiscal year. This decrease reflected decreasing unit prices as a result of both the
cancellation by a regional electric power company's telecom service arm and general
price competition. Decreased revenues from IP Service, IIJ T1 Standard and IIJ Economy
were partially offset by increased revenues from our IIJ FiberAccess/F Service mainly
due to the expansion of usage of broadband line for multi-site connectivity within
corporate customers.
•
Dial-up access.
Revenues from dial-up access services decreased 4.9% to ¥2.9
billion for the fiscal year ended March 31, 2005 from ¥3.1 billion for the previous
fiscal year. This decrease was primarily the result of declining revenues from IIJ4U
Service, offset partially by dial-up access services provided on an OEM basis mainly
due to the increased number of contracts within the individual customers as OEM brand.
•
Value-added services.
Our value-added services revenues increased 16.5% to ¥5.0
billion for the fiscal year ended March 31, 2005 from ¥4.3 billion for the previous
fiscal year. This increase reflected steady growth in Internet data center services,
virtual private network services, and security-related services, in part as a result of focusing sales efforts
on outsourcing services.
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•
Other.
Other revenues, which included rental fees for network equipment, customer
support service, and sale of Wide-area Ethernet services, amounted to ¥3.2 billion for
the fiscal year ended March 31, 2005, a 49.7% increase from the previous fiscal year.
This reflected increasing sales of Wide-area Ethernet services.
Systems integration revenues.
Our revenues from systems integration, which include equipment
sales related to systems integration, increased 33.8% to ¥15.9 billion for the fiscal year ended
March 31, 2005 from ¥11.8 billion for the previous fiscal year. This increase largely reflected
increases in systems integration contracts and monthly recurring revenues from operational
outsourcing services, mainly due to the increase in number of systems integration cases utilizing
broadband lines to connect multi-sites within corporate customers, and continuous acquisition of
operational outsourcing contracts of the newly built systems.
Equipment sales.
Our equipment sales decreased 26.3% to ¥3.4 billion for the fiscal year ended
March 31, 2005 from ¥4.6 billion for the previous fiscal year. The decrease in equipment sales
revenues reflected our efforts to focus on higher margin systems integration, since equipment sales
do not include added values to raise higher margin, such as construction of systems, setting and
project management.
Total cost of revenues
Total cost of revenues increased 1.6% to ¥34.8 billion for the fiscal year ended March 31,
2005 from ¥34.2 billion for the previous fiscal year. Although cost of connectivity and value-added
services revenues decreased as a result of our cost reduction efforts, cost of systems integration
revenues increased corresponding the increase in systems integration revenues.
Cost of connectivity and value-added services revenues
. Cost of connectivity and value-added
services revenues decreased 2.8% to ¥19.5 billion for the fiscal year ended March 31, 2005 from
¥20.0 billion for the previous fiscal year. The gross margin in connectivity and value-added
services revenues increased to 13.3% for the fiscal year ended March 31, 2005 from 10.4% for the
previous fiscal year. This increase is mainly a result of decreases in international backbone costs
and domestic backbone costs due to price competition among backbone providers, exceeding the price
competition within Internet connectivity services we provide to our customers. Local access line
costs increased due to steady revenue growth in Wide-area Ethernet services. Backbone costs
decreased 24.8% to ¥3.6 billion for the fiscal year ended March 31, 2005 from ¥4.7 billion for the
previous fiscal year. Local access line costs increased 15.4% to ¥4.0 billion from ¥3.5 billion for
the previous fiscal year.
Cost of systems integration revenues.
Our cost of systems integration revenues increased 23.8%
to ¥12.2 billion for the fiscal year ended March 31, 2005 from ¥9.9 billion for the previous fiscal
year. The gross margin in systems integration revenues increased to 23.0% for the fiscal year ended
March 31, 2005 from 16.8% for the previous fiscal year, due to our efforts to focus on higher
margin systems integration such as operational outsourcing services, network design and
consultation services.
Cost of equipment sales.
Our cost of equipment sales decreased 28.4% to ¥3.1 billion for the
fiscal year ended March 31, 2005 from ¥4.3 billion for the previous fiscal year. The gross margin
in equipment sales increased to 7.5% for the fiscal year ended March 31, 2005 from 4.8% for the
previous fiscal year, mainly due to decrease in revenues from lower margin equipment sales.
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Total costs and expenses
Total costs and expenses, which includes total cost of revenues, sales and marketing expenses,
general and administrative expenses and research and development expenses, increased 0.6% to ¥40.5
billion for the fiscal year ended March 31, 2005 from ¥40.2 billion for the previous fiscal year.
The increase in total costs and expenses was primarily a result of an increase in the cost of
systems integration and general and administrative expenses.
Sales and marketing.
Sales and marketing expenses decreased 20.8% to ¥2.8 billion for the
fiscal year ended March 31, 2005 from ¥3.5 billion for the previous fiscal year. The decrease was
primarily due to the absence of write-off of accounts receivable from Crosswave amounting to ¥396
million in the fiscal year ended March 31, 2004, and decrease in personnel expenses by ¥117 million
mainly due to enhancement of technical and administrative functions by reallocation of human
resources to engineering and administrative organizations.
General and administrative.
General and administrative expenses increased 27.0% to ¥2.7
billion for the fiscal year ended March 31, 2005 from ¥2.1 billion for the previous fiscal year.
The increase was mainly due to the disposal and impairment loss in property and equipment and
telephone rights amounting to ¥243 million, and increase in personnel expenses by ¥152 million
mainly due to enhancement of technical and administrative functions by reallocation of human
resources to engineering and administrative organizations for the fiscal year ended March 31, 2005.
Research and development.
Research and development expenses decreased 44.4% to ¥199 million
for the fiscal year ended March 31, 2005 from ¥358 million for the previous fiscal year. The
decrease is primarily due to reduced development expenses relating to IPv6 technology and our
originally developed network equipment, SEIL Series.
Operating income (loss)
As a result of the foregoing factors, operating income was ¥1.2 billion for the fiscal year
ended March 31, 2005, compared to an operating loss of ¥1.4 billion for the previous fiscal year.
Other income (expenses), net
Net other income of ¥1.9 billion was recorded for the fiscal year ended March 31, 2005
compared to ¥1.0 billion for the previous fiscal year.
Interest income.
Interest income decreased to ¥13 million for the fiscal year ended March 31,
2005 from ¥38 million for the previous fiscal year. The decrease is mainly due to decreased average
amount of monthly dollar-denominated deposits during the fiscal year ended March 31, 2003, and
absence of interest income related to advances to Crosswave in the previous fiscal year.
Interest expense.
Interest expense, comprised of interest expense in respect of bank
borrowings, convertible notes and capital lease obligations, amounted to ¥686 million for the
fiscal year ended March 31, 2005 compared to ¥702 million for the previous fiscal year. Interest
expense decreased due to a decrease in interest expense for convertible notes reflecting
repurchases of a portion of convertible notes before the maturity.
Foreign exchange gains (losses).
Foreign exchange gain amounted to ¥6 million for the fiscal
year ended March 2005 compared to loss of ¥6 million for the previous year due to depreciation of
yen to dollar in the fiscal year ended March 31, 2005.
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Gain (loss) on other investments.
For the fiscal year ended March 31, 2005, we recorded gain
on other investments of ¥2.4 billion, which included gains of ¥2.5 billion generated by the sale of
certain available-for-sale securities, compared to gains of ¥1.4 billion for the previous year,
mainly generated by the sale of our stake in DLJdirect SFG Securities Inc. The income was partially
offset by losses of ¥0.2 billion on the write down of investments in marketable and nonmarketable
securities to reflect declines in value considered to be other than temporary for the fiscal year
ended March 31, 2005.
Other-net.
For the fiscal year ended March 31, 2005, we recorded other income of ¥0.1 billion,
most of which is dividend income of ¥0.1 billion for the fiscal year ended March 31, 2005, compared
to income of ¥0.2 billion for the previous year.
Income (loss) from operations before income tax expense, minority interests and equity in net
loss of equity method investees
We recorded income from operations before income tax expense, minority interests and equity in
net loss of equity method investees of ¥3.1 billion for the fiscal year ended March 31, 2005
compared to a loss from operations before income tax expense, minority interests and equity in net
loss of equity method investees of ¥0.5 billion for the fiscal year ended March 31, 2004. This
improvement was largely the result of the improvement in operating income and increase in other
income due to gains of ¥2.5 billion generated by the sale of certain available-for-sale securities.
Income tax expense
For the fiscal year ended March 31, 2005, we recorded an income tax expense of ¥100 million
compared to an income tax expense of ¥33 million for the previous fiscal year. This increase was
due to a new enterprise tax going into effect in the fiscal year ended March 31, 2005.
Minority interests in (earnings) losses of subsidiaries
Minority interests in earnings of subsidiaries increased by ¥345 million to ¥109 million for
the fiscal year ended March 31, 2005. Earnings of subsidiaries increased mainly due to improved
performance of IIJ-Tech.
Equity in net loss of equity method investees
Equity in net loss of equity method investees consist of equity method net loss in our equity
method investees and impairment loss on advance to Crosswave.
Equity method net loss decreased to ¥33 million for the fiscal year ended March 31, 2005 from
¥286 billion for the previous fiscal year. This decrease was mainly due to the absence of a large
equity method net loss from AIH reflecting the deterioration in its operating result for the
previous year.
Impairment loss on advance to Crosswave for the fiscal year ended March 31, 2005 no longer
existed compared to the impairment loss of ¥1.7 billion for the fiscal year ended March 31, 2004,
as we had written off our equity investment in and loans and advances to Crosswave entirely.
Net income (loss)
Net income for the fiscal year ended March 31, 2005 was ¥2.9 billion compared with a net loss
of ¥2.3 billion for the previous fiscal year. The improvement primarily reflects the improvement in
operating income, increase in other income and absence of impairment loss related to Crosswave.
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Application of Critical Accounting Policies
In reviewing our financial statements, you should consider the sensitivity of our reported
financial condition and results of operations to changes in the conditions and assumptions
underlying the estimates and judgments made by our management in applying critical accounting
policies.
The preparation of financial statements requires the use of estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods presented. Actual
results may differ from these estimates, judgments and assumptions. Note 1 to our consolidated
financial statements includes a summary of the significant accounting policies used in the
preparation of our financial statements. Certain accounting policies are particularly critical
because of their significance to our reported results and because of the possibility that future
events may differ significantly from the conditions and assumptions underlying the estimates used
and judgments made by our management in preparing our financial statements.
We have discussed the development and selection of critical accounting policies and estimates
with our board of directors, and the board of directors has reviewed the disclosure relating to
these, which are included in this "Operating and Financial Review and Prospects." For all of these
policies, we caution that future events rarely develop exactly as forecast, and even the best
estimates may require adjustment.
Useful lives of property and equipment
Property and equipment, net recorded on our balance sheet was ¥10,299 million at March 31,
2006, representing 20.3% of our total assets. The values of our property and equipment, including
purchased software and property and equipment under capital leases, are recorded in our financial
statements at acquisition cost, and are depreciated or amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the asset. Our total depreciation and
amortization expenses for the fiscal years ended March 31, 2004, 2005 and 2006 were ¥3,909 million,
¥4,109 million and ¥4,207 million, respectively.
We estimate the useful lives of property and equipment in order to determine the amount of
depreciation and amortization expense to be recorded in each fiscal year. We determine the useful
lives of our assets at the time the assets are acquired and base our determinations on expected
use, experience with similar assets, established laws and regulations as well as taking into
account anticipated technological or other changes. Estimated useful lives at March 31, 2006, were
as follows:
Item
Useful Lives
Data communications, office and other equipment
2 to 15 years
Leasehold improvements
3 to 15 years
Purchased software
5 years
Capitalized leases
4 to 7 years
If technological or other changes were to occur more rapidly or in a different form than
anticipated or new laws or regulations are enacted or the intended use changes, the useful lives
assigned to these assets may need to be shortened, or we may need to sell or write off the assets,
resulting in recognition of increased depreciation and amortization or losses in future periods.
Our losses on disposal of property and equipment for the fiscal years ended March 31, 2004, 2005
and 2006 were ¥110 million, ¥144 million and ¥119 million, respectively. The loss on disposal of
property and equipment for the fiscal year ended March 31, 2005 was mainly related to the
relocation of branch offices and disposal of telephone rights as a result of a decrease in revenues
from dial-up access services. The loss on disposal of property and equipment for the fiscal year
ended March 31, 2006 was mainly related to disposal of software, such as back-office systems.
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A one-year change in the useful life of these assets would have increased or decreased
depreciation expense by approximately ¥1.4 billion and ¥0.9 billion, respectively.
Ordinary maintenance and repairs are charged to income as incurred. Major replacements and
improvements are capitalized. When properties are retired or otherwise disposed of, the property
and related accumulated depreciation accounts are relieved of the applicable amounts and any
differences are included in operating cost and expenses.
We determined the useful lives of customer relationship intangible assets recognized during
the fiscal year ended March 31, 2006 as indefinite.
Impairment of long-lived assets
Long-lived assets consist primarily of property and equipment, including capitalized leases,
and goodwill and intangible assets. We perform an impairment review for our long-lived assets,
whenever events or changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. This analysis is separate from our analysis of the useful lives of our assets, but
it is affected by some similar factors. Factors that we consider important which could trigger an
impairment review include, but are not limited to, the impact of the following trends or
conditions:
•
significant decline in the market value of an asset,
•
current period operating cash flow loss,
•
introduction of competing technologies or services,
•
significant underperformance of expected or historical cash flows,
•
significant or continuing decline in subscribers,
•
changes in the manner or use of an asset,
•
disruptions in the use of network equipment under capital lease arrangements, and
•
other negative industry or economic trends.
When we determine that the carrying amount of specific assets may not be recoverable based on
the existence or occurrence of one or more of the above or other factors, we estimate the future
cash inflows and outflows expected to be generated by the assets over their expected useful lives.
We estimate the sum of expected undiscounted future cash flows based upon historical trends
adjusted to reflect our best estimate of future market and operating conditions. If the sum of the
expected undiscounted future net cash flows is less than the carrying value of the assets, we
record an impairment loss based on the fair values of the assets. Such fair values may be based on
established markets, independent appraisals and valuations or discounted cash flows. If actual
market and operating conditions under which assets are used are less favorable or shorter than
those projected by management, resulting in reduced cash flows, additional impairment charges for
assets not previously written-off may be required. There was no impairment loss for long-lived
assets for the fiscal years ended March 31, 2004 and 2006. An impairment loss of ¥26 million on
telephone rights was recorded for the fiscal year ended March 31, 2005 because NTT reduced the
price of telephone rights by 50 percent after March 1, 2005. There was no impairment loss for
long-lived assets, including goodwill and intangible assets other than the telephone rights above,
for the fiscal year ended March 31, 2005.
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Allowance for doubtful accounts and uncollectible contractual prepayments
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. At March 31, 2005 and 2006, we maintained allowances
for doubtful accounts of ¥449 million and ¥114 million, respectively. Management specifically
analyzes accounts and loans receivable including historical bad debts, customer concentrations,
customer credit-worthiness and current economic trends when evaluating the adequacy of the
allowances for doubtful accounts. If the financial condition of our customers or debtors were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required. For the fiscal year ended March 31, 2006, the reversal of allowance of ¥0.1
million was recorded reflecting the increase in market price of securities held in pledge for our
advance to i-Heart, Inc.
Deferred tax assets
To date, our deferred tax assets have been offset by a valuation allowance. We record a
valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize the deferred tax assets in the future in excess of the
net recorded amount, an adjustment to the valuation allowance and deferred tax benefit would
increase income in the period such determination was made.
Valuation of investments
Our investment in securities is significant, and the valuation of such investments, requires
us to make judgments using information that is generally uncertain at the time, such as assumptions
regarding future financial conditions and cash flows. As at March 31, 2006, we had investments in
securities classified as other investments in the amount of ¥8,021 million. We routinely assess the
impairment of our investments by considering whether any decline in value is other-than-temporary.
The factors we consider are:
•
the length of time and the extent to which the market value has been less than
cost,
•
the financial condition and near-term prospects of the issuer, including any
specific events which may influence the operations of the issuer such as changes in
technology that may impair the earnings potential of the investment, and
•
our intent and ability to retain the investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market value. If a decline in
value occurs and is deemed to be other-than-temporary, an impairment loss will be
recorded to write-down the carrying value of the investment to fair value. If, after
taking into account these considerations, the decline is judged to be other than
temporary, the cost basis of the individual security is written down to a new cost
basis and the amount of the write-down is accounted for as a realized loss.
Our unrealized loss on an investment in marketable equity security relates to a U.S.
telecommunication equipment supplier. The fair value of the investment is approximately 3% less
than its cost. The duration of the unrealized loss position was less than 6 months. Based on our
ability and intent to hold the investment for a reasonable period of time sufficient for a recovery
of fair value, we do not consider the investment to be other-than-temporary impaired at March 31,
2006.
Losses on write-down of investments in certain nonmarketable securities included in other
income were ¥230 million and ¥30 million for the years ended March 31, 2004 and 2006, respectively.
Losses on write-down of investments in certain marketable and nonmarketable securities included in
other income were
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recognized to reflect the declines in value considered to be other than temporary, totaled ¥34
million and ¥118 million, respectively, for the year ended March 31, 2005.
In addition to investments in securities, we also have investments in equities and loans for
which we have significant influence over the investee's operations and financial policies and are
accounted for by the equity method. For other than temporary declines in the value of such
investments below the carrying amount, the investment is reduced to fair value and an impairment
loss is recognized.
Pension benefits costs
Employee pension benefit costs and obligations are dependent on certain assumptions including
discount rate, retirement rate and rate of increase in compensation levels, which are based upon
current statistical data, as well as expected long-term rate of return on plan assets and other
factors. Specifically, the discount rate and expected long-term rate of return on assets are two
critical assumptions in the determination of periodic pension cost and pension liabilities.
Assumptions are evaluated at least annually and when events occur or circumstances change which
could have a significant effect on these critical assumptions. In
accordance with U.S. GAAP, actual
results that differ from the assumptions are accumulated and amortized over future periods.
Therefore, actual results generally affect recognized expenses and the recorded obligations for
pensions in future periods. While management believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may affect our pension obligations and
future expenses.
We used a discount rate of 2.0% for the pension plan as of March 31, 2006. The discount rate
was determined by using the market yield of Japanese Government Bonds with a term matched against
the average remaining service period of employees.
We used an expected long-term rate of return on pension plan assets of 2.1% as of March 31,
2006. To determine the expected long-term rate of return on pension plan assets, we consider a
combination of historical returns and prospective return assumptions derived from pension trust
funds' managing company. The actual return on pension plan for the year ended March 31, 2006 was
7.9%.
The following table illustrates the sensitivity to a change in the discount rate and the
expected return on pension plan assets, while holding all other assumptions constant, for our
pension plan as of March 31, 2006.
Change in Assumption
Pre-Tax PBO
Pension Expense
Equity (Net of Tax)
(millions of yen)
50 basis point
increase/decrease in
discount rate
(115)/129
(20)/24
12/
(14)
50 basis point
increase/decrease in
expected return on
assets
—
—/5
—/
(3)
New Accounting Standards
In December 2004, the FASB issued revised SFAS No. 123 (Revised 2004), "Share-Based Payment"
("SFAS No. 123R") which replaces the existing SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R
requires compensation expense for stock options and other share-based payment to be measured and
recorded based on the instruments' fair value. SFAS No. 123R is effective for the fiscal period
beginning after June 15, 2005. The Company will adopt SFAS No. 123R and the related FASB Staff
Positions ("FSP") on April 1, 2006 by using modified prospective application, which requires
recognizing expenses for options granted prior to the adoption date equal to the fair value of
unvested amounts over the remaining vesting period. The portion of these options' fair value
attributable to vested awards prior to the adoption of SFAS No. 123R is never recognized. As all
existing granted stock-based awards of the Company have vested, the adoption of
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SFAS No. 123R will not have any impact on the Company's consolidated financial position or
results of operations.
In November 2005, the FASB issued FSP No. 115-1 and No. 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," on the basis of the
EITF''s consensus on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". FSP No. 115-1 and No. 124-1 addresses the determination as to
when an investment is impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. FSP No. 115-1 and No. 124-1 also includes accounting
considerations subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. FSP No. 115-1 and No. 124-1 is effective for reporting periods beginning after
December 15, 2005. The adoption of FSP No. 115-1 and No. 124-1 did not have a material effect on
the Company's financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of ARB No. 43,
Chapter 4" ("SFAS No. 151") which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) and also requires that the
allocation of fixed production overhead be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of SFAS No. 151 will not have a material impact on the Company's
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets-amendment of
APB Opinion No. 29" ("SFAS No. 153"). The statement addresses the measurement of exchanges of
nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception for exchanges that do not
have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a material
impact on the Company's consolidated financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections-a
replacement of APB opinion No. 20 and SFAS No. 3" ("SFAS No. 154"). SFAS No. 154 requires that
changes in accounting principle are retrospectively applied by applying the new accounting
principle as of the beginning of the first period presented as if that principle had always been
used, although APB opinion No. 20 required that changes in accounting principle are applied
cumulatively in the period of change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
In July 2005, the FASB issued FSP APB No.18-1, "Accounting by an Investor for Its
Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under
the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence" ("FSP
APB No. 18-1"). FSP APB No. 18-1 requires that an investor's proportionate share of an investee's
equity adjustments for other comprehensive income is offset against the carrying value of the
investment at the time significant influence is lost. FSP APB No. 18-1 is effective for reporting
periods beginning after July 12, 2005. The adoption of FSP APB No. 18-1 did not have a material
impact on the Company's consolidated financial position or results of operations.
B. Liquidity and Capital Resources.
Liquidity and Capital Requirements
Our principal capital and liquidity needs in recent years have been for capital expenditures
for the development, expansion and maintenance of our network infrastructure, lease payments,
payment of
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principal and interest on outstanding borrowings, investments in current and former group
companies and, other working capital.
Capital expenditures.
Our capital expenditures relate primarily to the development, expansion and
maintenance of our network. 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,
2004
2005
2006
(millions of yen)
Capital
expenditures,
including acquisition
of assets by entering
into capital leases
¥
3,523
¥
5,011
¥
4,762
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 a loss on disposal of property and equipment of ¥110 million, ¥144 million and ¥119
million for the fiscal years ended March 31, 2004, 2005 and 2006, respectively. The loss for the
fiscal year ended March 31, 2004 was mainly related to the relocation of headquarter. The loss for
the fiscal year ended March 31, 2005 was mainly due to the relocation of branch offices and
disposal of telephone rights. The loss for the fiscal year ended March 31, 2006 was mainly due to
disposal of software, such as back-office systems.
Lease payments.
We have operating lease agreements with telecommunications carriers and others
for the use of connectivity lines, including our domestic and international backbone as well as
local access lines that customers use to connect to IIJ's network. The leases for our domestic
backbone are generally either non-cancelable for a minimum one-year lease period or cancellable
during a lease period of three years, with a significant penalty for cancellation (35 percent). The
leases for our international backbone connectivity during one-year lease period are substantially
non-cancelable. We also lease office premises and certain office equipment under non-cancelable
operating leases which expire on various dates through the year 2008 and also lease network
operation centers under non-cancelable operating leases.
Lease expenses related to backbone lines for the fiscal years ended March 31, 2004, 2005 and
2006, amounted to ¥4,720 million, ¥3,551 million and ¥3,516 million, respectively. Lease expenses
for local access lines for the fiscal years ended March 31, 2004, 2005 and 2006, which are only
attributable to dedicated access revenues, amounted to ¥3,500 million, ¥4,040 million and ¥4,558
million, respectively. Other lease expenses for the fiscal years ended March 31, 2004, 2005 and
2006, amounted to ¥3,787 million, ¥ 3,304 million and ¥3,654 million, respectively.
We conduct our connectivity and other services by using data communications and other
equipment leased under capital lease arrangements. The fair values of the assets at the execution
of the capital lease agreements and accumulated depreciation amounted to ¥13,252 million and ¥6,336
million at March 31, 2005 and ¥14,459 million and ¥6,820 million at March 31, 2006.
As of March 31, 2006, future lease payments under non-cancelable operating leases, including
the aforementioned non-cancelable connectivity lease agreements (but excluding dedicated access
lines which we charge outright to customers), and capital leases were as follows:
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Payment due by period
(millions of yen)
Total
contractual
Less than
More than
amount
1 year
1 to 3 years
4 to 5 years
5 years
Connectivity lines operating leases
¥
27
¥
27
¥
—
¥
—
¥
—
Other operating leases
2,839
1,377
1,317
90
55
Capital leases
8,489
3,262
4,314
877
36
Total minimum lease payments
¥
11,355
¥
4,666
¥
5,631
¥
967
¥
91
(1)
See note 7 to the consolidated financial statements included in this annual report.
Payments of principal and interest on outstanding borrowings.
We require cash for
payments of interest and principal on our outstanding borrowings.
Short-term borrowings. As of March 31, 2006, our short-term borrowings consisted of bank
overdrafts of ¥4.6 billion. The weighted average interest rate of our short-term borrowings was
1.375%. We decreased our short-term borrowings by ¥0.2 billion. We also had an unused balance of
¥3.2 billion in borrowings as of March 31, 2006 under our bank overdraft agreements.
Long-term borrowings. As of March 31, 2006, we had ¥2.3 billion of outstanding long-term
borrowings, including current portions, which consisted of: unsecured, variable-rate loans from
banks of ¥0.3 billion with a weighted average interest rate of 2.206%; unsecured, fixed-rate loans
from banks of ¥0.6 billion with a weighted average interest rate of 1.710%; unsecured,
variable-rate loans from banks of ¥1.2 billion with a weighted average interest rate of 1.130% and
secured, fixed-rate installment loan from a leasing company of ¥0.2 billion with an interest rate
of 2.55%. We entered into interest rate swap contracts to manage our interest rate exposure
resulting in a fixed interest rate for a portion of our long-term debt. The effective weighted
average interest rate for ¥1.2 billion of the long-term loans outstanding at March 31, 2006 after
giving effect to such swap agreements was 1.781%.
Annual maturities of long-term borrowings outstanding as of March 31, 2006, were as follows:
Fiscal year ending
Thousands of
March 31
Millions of yen
U.S. dollars
2007
¥
1,990
$
16,939
2008
290
2,469
Total
¥
2,280
$
19,408
Collateral for borrowings. Substantially all of our short-term and long-term borrowings are
made under agreements which, as is customary in Japan, provide that under certain conditions the
banks may require us to provide collateral or guarantees with respect to the borrowings. We did not
provide banks with any collateral for outstanding loans as of March 31, 2006. Our primary banking
relationships are with Sumitomo Mitsui Banking Corporation, Mizuho Corporate Bank, Ltd., Bank of
Tokyo-Mitsubishi UFJ, Ltd. and Mitsubishi UFJ Trust and Banking Corporation. The banks are also
shareholders and customers of ours. Our loans from a leasing company are secured by a first
priority pledge against a claim for the guarantee deposits of ¥1.1 billion.
Payable under securities loan agreement. Since August 2004, we have been a party to a
securities loan agreement with a certain Japanese financial institution. The available-for-sale
securities loaned to the financial institution were ¥1.2 billion, and the cash received in return
was ¥1.0 billion as of March 31, 2006. These transactions were accounted for as secured borrowings
and the cash received was recorded as payable under the securities loan agreement and securities
lent were recorded as other investments. The agreement requires us to provide certain marketable
securities as collateral at the commencement of the transaction. We are required to make a partial
payment or receive additional borrowings depending on the market value of
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securities pledged. We paid the interest on the payables with a variable rate. The interest
rate was 0.37 percent as of March 31, 2006.
Investments in current and former group companies.
In the past, we have made substantial
investments in current and former group companies. We may need to provide additional investment in
our group companies to enhance or maintain our business synergy with our affiliated companies in
the future. See Item 4.B., "— Our Group Companies" for information on investment in equity method
investees.
Working capital needs.
Our principal working capital requirements are for operating lease
payments for our domestic and international backbone and local access lines. We also require
working capital requirements for personnel expenses, office rents and other operating expenses.
Capital Resources
We seek to manage our capital resources and liquidity to provide adequate funds for current
and future financial obligations. We have traditionally met our capital and liquidity requirements
through cash flows from operating activities, long-term and short-term borrowings from financial
institutions and from the issuance of convertible bonds, capital leases and issuances of equity
securities. At March 31, 2006, we had cash of ¥13.7 billion and available-for-sale securities of
¥6.8 billion. We had ¥11.8 billion of unsecured 1.75% convertible notes due in March 2005 at March
31, 2004. At March 31, 2005, we fully redeemed the convertible notes. We expect that cash from
operating activities, any proceeds from the sale of available-for-sale securities, our other
sources of liquidity will be sufficient to meet our requirements through the year ending March 31,
2007.
Short-term and long-term Borrowings.
Short-term and long-term borrowings provide us with an
important source for maintaining adequate level of working capital and acquisition of fixed assets.
See — Payments of principal and interest on outstanding borrowings.
Cash flows from operating activities.
We generated ¥6.6 billion by operating activities for
the year ended March 31, 2006. See — Cash Flows.
Capital Leases.
Capital leases also provide us with an important source of financing. See
note 7 to our consolidated financial statements included in this annual report on Form 20-F.
Issuances of Equity Securities.
On June 26 and September 16, 2003, we completed private
placements of a total of 15,880 shares of our common stock to investors in Japan for an aggregate
amount of ¥13.3 billion for working capital and repayment of our outstanding 1.75% convertible
notes due March 31, 2005. 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.
Cash Flows
We had cash of ¥13.7 billion at March 31, 2006 compared to ¥5.3 billion at March 31, 2005.
The following table presents information about our cash flows during the fiscal years ended
March 31, 2004, 2005 and 2006:
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Fiscal year ended March 31,
2004
2005
2006
(millions of yen)
Net cash provided by operating activities
¥
1,923
¥
5,238
¥
6,559
Net cash provided by (used in) investing activities
(852
)
1,974
1,805
Net cash provided by (used in) financing activities
7,669
(14,212
)
39
Effect of exchange rate changes on cash
(44
)
2
38
Net increase (decrease) in cash and cash equivalent
8,696
(6,998
)
8,441
Cash at beginning of the year
3,588
12,284
5,286
Cash at end of the year
¥
12,284
¥
5,286
¥
13,727
Year Ended March 31, 2006 as Compared to the Year Ended March 31, 2005
Net cash provided by operating activities was ¥6.6 billion for the fiscal year ended March 31,
2006 compared to ¥5.2 billion for the previous fiscal year. The increase of net cash provided by
operating activities for the fiscal year ended March 31, 2006 consisted of an increase of ¥0.9
billion in net income from continuing operations adjusted for non-cash income and expenses such as
depreciation and amortization, gains on other investments, and equity method net loss, and an
increase of ¥0.4 billion changes in operating assets and liabilities (cash provided).This
improvement in cash provided by operating activities mainly resulted from the increase in operating
income before depreciation and amortization which was derived from an increase in revenues from
value-added services and systems integration and the decrease in the backbone costs.
Net cash provided by investing activities was ¥1.8 billion for the fiscal year ended March 31,
2006 compared to ¥2.0 billion provided by investing activities for the previous fiscal year. The
decrease of net cash provided by investing activities for the fiscal year ended March 31, 2006
reflected primarily an increase of ¥0.3 billion in purchases of property and equipment, ¥0.7
billion in purchase of short-term and other investments, and ¥0.8 billion in investment in an
equity method investee. The increase of cash used was partly offset by an increase of ¥0.6 billion
in proceeds from sales and redemption of short-term and other investments, including certain
available-for-sale securities and an increase of ¥0.5 billion in refund of guarantee deposits.
Net cash provided by financing activities was ¥39 million for the fiscal year ended March 31,
2006 compared to ¥14.2 billion used in financing activities for the previous fiscal year. The
increase of net cash provided by financing activities for the fiscal year ended March 31, 2006
primarily reflected a redemption of convertible notes of ¥11.1 billion that was recorded in the
previous fiscal year, proceeds of ¥6.0 billion from the issuance of common stock along with our
listing on the Mothers market of the TSE, and an increase of ¥2.4 billion in proceeds from security
loan agreement. The increase was partly offset by an increase of ¥4.8 billion in repayments of
securities loan agreement, a decrease of ¥1.3 billion in proceeds from issuance of long-term
borrowings, and an increase of ¥1.1 billion in repayments of long-term borrowings.
Year Ended March 31, 2005 as Compared to the Year Ended March 31, 2004
Net cash provided by operating activities was ¥5.2 billion for the fiscal year ended March 31,
2005 compared to ¥1.9 billion for the previous fiscal year. The increase of net cash provided by
operating activities for the fiscal year ended March 31, 2005 consisted of an increase of ¥2.5
billion in net income from continuing operations adjusted for non-cash income and expenses such as
depreciation and amortization, loss (gains) on other investments, and equity method net loss, and
an increase of ¥0.8 billion changes in operating assets and liabilities (cash provided). This
improvement in cash provided by operating activities mainly resulted from the increase in operating
income before depreciation and amortization which was derived from the decrease in the cost of
connectivity and value-added services such as international backbone costs and
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domestic backbone costs, and the improvement in profitability of systems integration. A
decrease of approximately ¥1.2 billion in the payment of international and domestic backbone cost
was attributable to a decline in their unit price and a decrease in backbone lines resulting from
the integrations of some network operation centers.
Net cash provided in investing activities was ¥2.0 billion for the fiscal year ended March 31,
2005 compared to ¥0.9 billion used in investing activities for the previous fiscal year. The
increase reflected primarily the absence of the ¥1.7 billion advance to Crosswave in the previous
fiscal year. Purchase of property and equipment decreased to ¥0.6 billion for the year ended March
31, 2005 from ¥1.7 billion for the previous fiscal year, though the acquisition of assets by
entering into capital lease increased. Proceeds from the sale of investments increased to ¥3.0
billion primarily derived from the sale of certain available-for-sale securities for the year ended
March 31, 2005 from ¥2.2 billion primarily derived from the sale of our investment in DLJ direct
SFG Securities Inc., for the previous fiscal year. We paid ¥0.4 billion for acquiring the
securities systems development and operation business from Yamatane in order to initiate a business
relationship with Yamatane's customer base for the fiscal year ended March 31, 2005.
Net cash used in financing activities was ¥14.2 billion for the fiscal year ended March 31,
2005 compared to ¥7.7 billion provided by financing activities for the previous fiscal year. Net
cash used in financing activities for the fiscal year ended March 31, 2005 included repurchase and
redemption of convertible notes of ¥11.8 billion. Net cash used in financing slightly offset by
¥1.7 billion in cash provided by financing activities raised through a securities loan agreement
with a Japanese financial institution. Net cash provided by financing activities for the fiscal
year ended March 31, 2004 included proceeds from the issuance of common stock of ¥13.3 billion and
long-term borrowings of ¥2.3 billion. Of the ¥2.3 billion of long-term borrowings, ¥1.0 billion was
from refinancing outstanding long-term borrowings, ¥1.0 billion was existing short-term borrowings
converted into long-term borrowings and ¥0.3 billion was newly financed.
Contingencies
We did not have any material contingent liabilities as of March 31, 2006.
C. Research and Development, Patents and Licenses, etc.
See the information in Item 4.B., "Business Overview — Research and Development."
D. Trend Information.
Factors Affecting Our Future Financial Results
We expect that the following are the most significant factors likely to affect our financial
results and those of our consolidated subsidiaries. You should also consult Item 3.D., "Risk
Factors" and the other portions of this annual report on Form 20-F for additional factors affecting
our financial results.
Revenues
We derive our revenues primarily from recurring monthly fees from our Internet connectivity
services and our value-added services, as well as one-time project fees and monthly operating fees
from systems integration services. We have been enhancing and will continue to enhance our Internet
connectivity services through the introduction of a greater variety of access options and bandwidth
options, by expanding our value-added services and systems integration under our total network
solutions strategy, and by focusing our efforts on capturing market share in high-end corporate
markets that are most attractive to us.
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Connectivity and value-added services revenues
Connectivity and value-added services revenues consist of our dedicated access services
revenues, our dial-up access services revenues, our value-added services revenues and other
services revenues. Our connectivity and value-added services revenues accounted for 46.6% of our
revenues for the fiscal year ended March 31, 2006, 53.9% for the fiscal year ended March 31, 2005,
and 57.7% of our revenues for the fiscal year ended March 31, 2004. As our connectivity services
customers tend to use our value-added services or systems integration services as their network
needs develop, connectivity services are also important for the growth of our value-added services
or systems integration business.
Dedicated access services
Dedicated access services accounted for 21.3% of our revenues for the fiscal year ended March
31, 2006, 27.3% for the fiscal year ended March 31, 2005, and 33.2% for the fiscal year ended March
31, 2004. Dedicated access service revenues depend on the size of our customer base, the average
contracted bandwidth and unit price of our services. The market for dedicated access services is
generally following two trends:
•
Increased contracted bandwidth.
Total contracted bandwidth for dedicated access
services including Internet Data Center Connectivity Services increased to 194.9 Gbps
for the fiscal year ended March 31, 2006 from 121.2 Gbps for the previous fiscal year.
In addition, average contracted bandwidth for our IP Service jumped to approximately
112 Mbps for the fiscal year ended March 31, 2006 from 54 Mbps for the previous fiscal
year. The number of IP Service contracts for the bandwidth over 100Mbps increased to
157 for the fiscal year ended March 31, 2006 from 114 for the fiscal year ended March
31, 2005. This increase is mainly due to an increase in customers' demand for higher
bandwidth for their Internet connectivity. The average revenues per contract for IP
Service was approximately ¥0.6 million at the end of March 2006, compared to the
revenues per contract of ¥0.8 million at the end of March 2005. Though we do not
expect that revenue per contract come to a growing trend for the fiscal year ending
March 31, 2007 due to the continuing competition, we believe that customer demand for
higher bandwidth will continue as the use of broadband by corporate customers expands,
and we will try to acquire new customers and increase the bandwidth of existing
customers as well as maintain the quality of our services and differentiate them from
those of our competitors.
•
Increased demand for broadband services.
Demand for broadband services, IIJ
FiberAccess/F and IIJ DSL/F are increasing rapidly as the services are coming to be
used to connect corporate branches and remote offices. The services uses ADSL lines at
maximum 47 Mbps speed or optical lines at maximum 10 Mbps or 100 Mbps as access lines.
The number of contracts for IIJ FiberAccess/F and IIJ DSL/F increased to 13,297 for
the fiscal year ended March 31, 2006 from 9,873 for the fiscal year ended March 31,
2005. We also expect that it will also contribute to the increase of value-added
services and systems integration revenues as usage and implementation of these
connectivity services will increase the demand for value-added services such as
security services and network systems integration.
Dial-up access services
Dial-up access services, which include both services for corporate customers and individual
users, accounted for 5.4% of our revenues for the fiscal year ended March 31, 2006, 7.0% for the
fiscal year ended March 31, 2005, and 8.0% for the fiscal year ended March 31, 2004. Dial-up
service revenues depend on the size of our customer base and pricing. The size of our customer base
depends primarily on the popularity of OEM services, and the attractiveness of our service
offerings which is measured primarily by the quality of
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service provided to subscribers and our ability to attract new customers by offering remote
access solutions in combination with dial-up access and security services.
Although we also market some services under the IIJ name, due to our limited brand name
recognition among consumers not familiar with the Internet and our limited marketing budget, a
primary focus of our efforts to increase our revenues from individual consumers is our range of OEM
services. For example, Excite Japan markets and sells Internet connectivity services to individual
customers under their own names but provides such services through our Internet network
infrastructure.
Value-added services revenues
Our value-added services consist of network security services, data center facility services
and operation and management services. For the fiscal year ended March 31, 2006, value-added
services revenues increased to ¥6,250 million from ¥5,005 million for the fiscal year ended March
31, 2005 and from ¥4,296 million for the fiscal year ended March 31, 2004. The increase is
primarily due to the increasing demand for these services from our corporate connectivity
customers.
The growth of these services is primarily due to the increase in demand for security services
and network outsourcing services such as e-mail and web server hosting services. We expect that
business customers will continue to increase their usage of 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. As a result, we expect our revenue from value-added services
to grow.
Other.
Other revenues, which included rental fees for network equipment, customer support service,
and sale of Wide-area Ethernet services accounted for 7.4% of our revenues for the fiscal year
ended March 31, 2006, 7.6% for the fiscal year ended March 31, 2005, and 5.4% for the fiscal year
ended March 31, 2004.
Systems integration revenues, including related equipment sales revenues
We are currently targeting systems integration to drive growth in revenues and operating
income. Systems integration revenues, including related equipment sales revenues for the fiscal
year ended March 31, 2006 increased by 48.3% from the previous fiscal year. The increase is
primarily due to the steady increase in outsourced operation revenues, which are monthly recurring
revenues, and in one-time revenues due to the provision of a wider range of consulting, network and
system design, project management, implementation of integration compared to the past, such as
system utilizing broadband lines to connect customers' shops or branches with lower cost and higher
speeds, or consulting on network design and operation, and network security. The increase in
revenues is primarily due to the increasing demand for these services from our connectivity
customers.
Due to the increase in monthly recurring revenues from outsourcing operations, we expect the
revenues from systems integration will continue show a stead increase annually, though the one-time
systems integration has the trend of seasonal fluctuation in the fiscal year. The primary seasonal
variations in systems integration revenues appear to relate to budgetary cycles of Japanese
companies and typically result in greater revenues from systems integration at the end of the
fiscal year as companies attempt to complete large systems integration projects during those
periods. Systems integration revenues can fluctuate significantly, in accordance with the absence
or addition of a single large order, and are accordingly difficult to forecast.
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Other equipment sales revenues.
Our other equipment sales revenues consist primarily of sales of networking and other related
equipment, other than that provide in connection with our systems integration services. Other
equipment sales revenues can fluctuate significantly, in accordance with the absence or addition of
a single large order, and are accordingly difficult to forecast.
Additional factors affecting revenues
A number of other factors may affect demand for our services and in turn our revenues,
including overall increases in business usage of Internet and network solutions and our range of
service offerings.
•
Increase in business usage.
Our revenues will be affected by the extent and speed
with which businesses in Japan exploit the Internet and network solutions to their
full potential, including, for example, electronic transactions between businesses and
expanding the range of devices that access the Internet. Such services require
high-quality and high-capacity connectivity services for both businesses and
individuals. Such services also require provision of total network solutions including
various Internet connectivity services, systems integration and other value-added
services which we believe we are well positioned to provide. The degree of business
usage will also depend upon a variety of factors including:
•
technological advances, reliability of security systems and users' familiarity
with and confidence in new technologies,
•
the rate at which Japanese companies in certain industries significantly
increase their Internet usage, particularly the financial, manufacturing and
retail segments, and
•
corporate budgets for expenditures for information technologies, including
Internet-related items.
•
Range of service offerings.
To increase our revenues from business users, we have
increased the access and connectivity options to include fiber optic lines and ADSL
lines. We have also completed our multi-site Internet data centers and expanded our
service offerings to include systems management and monitoring. We believe these steps
will allow us to sell a greater variety of services to our high-end corporate users
and to capture a greater amount of the current growth and demand. However, we will
still be strongly dependent on increasing acceptance of our services by large Japanese
companies and by increases in their Information Technology budgets. We expect Internet
usage to continue to grow rapidly in Japan and that businesses will continue to
diversify their uses of the Internet. Our ability to offer a broad range of services
to meet our customers' demands will significantly influence our future revenues.
•
Synergies between connectivity services, value-added services and systems
integration.
Most of our systems integration customers become Internet connectivity
service customers as well, and we expect these relationships to continue. As part of
our systems integration business, we offer solution services for corporate information
network systems, consulting, project planning, system design and systems/operation
outsourcing or Internet VPN solution services which combines the FLET'S Internet
connectivity services with the SEIL, adopted by customers who have multiple locations,
such as branches, offices and factories. The number of contracts concerning these
services is steadily increasing and we seek to enlarge these network integration
services with relatively high gross margin services. The ability to introduce a wide
range of services, including solutions necessary to build corporate information
network
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systems, like disaster recovery services and Internet VPN, Voice over IP (VoIP), SEIL
and the network service operating system SMF, wireless LAN, is an important competitive
factor.
Costs and expenses
Costs and expenses include cost of connectivity and value-added services revenues, cost of
systems integration revenues and equipment sales, sales and marketing, general and administrative
and research and development expenses.
Cost of connectivity and value-added services revenues
Our primary cost of connectivity services and value-added services revenues is the leasing
fees that we pay for the leased lines which comprise our network and for the dedicated local access
lines that our subscribers use to connect with our network. Other primary components of our costs
are depreciation and amortization of capital leases for network equipment, personnel and other
expenses for technical and customer support staff and network operation center costs. Most of our
network equipment is leased rather than purchased to take advantage of the financing provided by a
capital lease arrangement.
We have invested heavily in the past few years in developing and expanding our network,
however, due to a decrease in procurement prices for international backbone lines, our costs have
decreased as a result. For the fiscal year ended March 31, 2006, our leased line and other
connectivity costs were equal to ¥8.9 billion or 38.3% of our connectivity and value-added services
revenues. For the previous fiscal year, these costs were equal to ¥9.0 billion, or 45.9% of our
connectivity and value-added services revenues.
•
Backbone cost.
Backbone cost decreased to ¥3.5 billion for the fiscal year ended
March 2006 from ¥3.6 billion for the fiscal year ended March 2005. We do not expect
that our backbone cost will increase significantly as compared with recent fiscal
years.
•
Dedicated local access line costs.
We collect dedicated local access line fees from
subscribers and pay these fees over to the carriers. Dedicated local access line costs
increased to ¥4.6 billion for the fiscal year ended March 2006 from ¥4.0 billion for
the fiscal year ended March 2005. Other connectivity costs were ¥0.8 billion for the
fiscal year ended March 2006 compared to ¥1.4 billion for the previous fiscal year.
Depreciation and amortization cost decreased to ¥2.7 billion for the fiscal year ended March
2006 from ¥2.9 billion for the fiscal year ended March 2005. Capital expenditures for the fiscal
year ended March 2006 decreased to ¥4.8 billion from ¥5.0 billion for the fiscal year ended March
2005. We do not expect that the depreciation and amortization will change significantly compared
with recent fiscal years.
Costs of systems integration revenues and equipment sales
Our cost of systems integration revenues and equipment sales generally increases or decreases
in tandem with systems integration revenues and equipment revenues. In addition, as we incur
significant systems integration costs up front in connection with the provision of new types of
systems integration service or commencement of a systems integration project, our margins tend to
improve as the number of our customers grows and to the extent we provide ongoing systems
integration work for existing customers. The main determinant of whether our costs will be high
relative to our revenues is whether we are able to generate significantly higher margin systems
integration work. To do so, we must generate systems integration work that relies more heavily on
our engineering and technological expertise instead of systems integration work that primarily
focuses on the delivery of networking equipment. By doing more planning, designing and
engineering-related work rather than just equipment procurement, we believe that not only will we
be able to increase our margins, but we will also be able to increase customer satisfaction and our
subscriber retention
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and repeat business rates because we will be able to provide our customers with advanced and
cost-effective total Internet solutions.
Our IBPS systems integration services started to generate higher margins for the fiscal year
ended March 2004, as most of the time and expense required for development of this service has been
already incurred.
Over the long term, we seek to improve gross margins through systems integration sales. The
gross margin for systems integration services was 22.9% for the fiscal year ended March 31, 2006 in
comparison with 23.0% for the fiscal year ended March 31, 2005. We seek to retain our systems
integration customers as our customers for higher-margin consulting, operation and maintenance,
software development and upgrades included in systems integration.
Sales and marketing
Our sales and marketing expenses consist primarily of costs related to marketing and general
advertising, written-off accounts receivable, sales and marketing and personnel expenses. Our sales
and marketing expenses will increase to the extent that we expand our operations and increase our
sales and marketing activities. We expect the sales and marketing expenses will increase for the
fiscal year ending March 31, 2007 in accordance with our business expansion.
General and administrative
Our general and administrative expenses include primarily expenses associated with our
management, accounting, finance and administrative functions, including personnel expenses. Our
general and administrative expenses will increase to the extent that we grow our business and add
staff. We expect the general and administrative expenses will increase for the fiscal year ending
March 31, 2007 in accordance with our business expansion.
Research and development
Our research and development expenses include primarily expenses associated with personnel
expenses related to research and development activities. Our research and development expenses will
increase to the extent that we expand our research and development activities. We expect the
research and development expenses will increase for the fiscal year ending March 31, 2007 in
accordance with our business expansion.
Other income (expenses)
Our other income and expenses include, interest income and expenses and other items such as
foreign exchange gains or losses, impairment losses on available-for-sale securities and gain on
sale of other investments.
•
Interest expense.
Most of our interest expense is from bank borrowing and capital
leases. Interest income and interest expenses are also affected by the fluctuation of
market interest rates and our total amount of outstanding borrowings. As we increase
capital leases or borrowings in order to finance further development of our backbone
and data centers and for other investments, interest expenses will also increase.
•
Impairment losses.
We also hold other investments, including available-for-sale
securities. The book value of other investments are affected by the fluctuation in the
market price or the decrease in fair values of non-marketable investments. If a
decrease below cost in the market
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price or fair value of an investment is judged to be other than temporary, we will have
impairment losses on other investments.
•
Gain on sale of other investments.
Gain on sales of other investment is mostly
raised from a sale of available-for-sale securities. We expect that we will continue a
sale of available-for-sale securities to raise the gain for the fiscal year ending
March 31, 2007.
E. Off-Balance Sheet Arrangements.
We do not have any off-balance sheet arrangements as is defined for purposes of Item 5.E. of
Form 20-F.
F. Tabular Disclosure of Contractual Obligations.
The following table shows our contractual payment obligations under our agreements as of March 31,
2006:
Payments due by period (in million of yen)
more
less than
than
Contractual Obligations
Total
1 year
1-3 years
3-5 years
5 years
Long-term debt obligations
¥
2,280
¥
1,990
¥
290
¥
—
¥
—
Capital lease obligations
8,489
3,262
4,314
877
36
Operating lease obligations
2,866
1,404
1,317
90
55
Purchase obligations
(1)
Other long-term liabilities
reflected on our balance sheet
Total
(2) (3)
¥
13,635
¥
6,656
¥
5,921
¥
967
¥
91
(1)
Represents agreements to purchase goods and services that are enforceable and legally binding
on us and that specify all significant terms including fixed or minimum quantities to be
purchased, fixed, minimum or variable price provisions, and the approximate timing of the
transactions.
(2)
In addition to the above, we plan to contribute ¥155 million to our pension plan for the
fiscal year ending March 31, 2007. In February 2006, we invested ¥750 million in Internet
Revolution Inc. ("i-revo"), a joint venture that we established with Konami Corporation and in
the joint venture agreement, we agreed that we will provide funding up to ¥90 million to
i-revo between November 2006 and the end of April 2007 for its capital investment and working
capital.
(3)
The table above does not include obligations for interest payments on debt.
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Item 6. Directors, Senior Management and Employees.
A. Directors and Senior Management.
The following table provides information about our directors, executive officers and statutory
auditors as of July 7, 2006:
Initial date of
appointment as
director,
Number of IIJ
executive officer
shares owned
Current term
or statutory
as of July 7,
Name
Position
Date of birth
expires
auditor
2006
Koichi Suzuki
President, Chief
Executive Officer and
Representative Director
Sept. 3, 1946
June 2007
Dec. 1992
12,515
Toshiya Asaba
Executive Vice President
June 12, 1962
June 2007
June 1999
*
Yoshiaki Hisamoto
Executive Vice President
Dec. 14, 1954
June 2008
June 2006
—
Hideshi Hojo
Senior Managing Director
Dec. 22, 1957
June 2007
June 2000
*
Takamichi Miyoshi
Director
May 5, 1963
June 2008
June 2002
*
Akihisa Watai
Director, Chief Financial
Officer and Chief
Accounting Officer
Sept. 30, 1965
June 2008
June 2004
—
Hiroyuki Hisashima
Director
Oct. 11, 1959
June 2007
June 2005
*
Kazuhiro Tokita
Director
Apr. 25, 1969
June 2007
June 2005
*
Yasurou Tanahashi
Director
Jan. 4, 1941
June 2008
June 2004
—
Takashi Hiroi
Director
Feb. 13, 1963
June 2008
June 2004
—
Yoshifumi Nishikawa
Director
Aug. 3, 1938
June 2007
June 2005
—
Junnosuke Furukawa
Director
Dec. 5, 1935
June 2007
June 2005
—
Senji Yamamoto
Director
Apr. 14, 1946
June 2008
June 2006
—
Junichi Tate
Standing Statutory Auditor
Nov. 6, 1949
June 2008
June 2006
—
Masaki Okada
Statutory Auditor
Jan. 9, 1959
June 2008
June 2004
—
Masaaki Koizumi
Statutory Auditor
Oct. 4, 1964
June 2008
June 2004
—
Hirofumi Takahashi
Statutory Auditor
Sep. 1, 1939
June 2009
June 2005
*
*
Owns less than 1% of outstanding shares of IIJ's common stock.
Koichi Suzuki
has been our president and representative director since April 1994, and
has over 20 years of experience in the computer and communications industries. In addition, Mr.
Suzuki is chairman of IIJ Technology Inc. ("IIJ-Tech"), and representative director of Net Care, Inc. ("Net
Care") and Internet Multifeed Co. ("Multifeed"). He also serves as chairman of IIJ America Inc.
("IIJ-A") and a director of atom Co., Ltd. and i-Heart, Inc. From December 1992 to April 1994, Mr.
Suzuki was a director of IIJ. Prior to joining us, Mr. Suzuki was employed at Japan Management
Association where he served as a general manager.
Toshiya Asaba
has served as an executive vice president and division director of the Network
Service Department since April 2006. Mr. Asaba was a managing director of IIJ from June 2002 to
June 2004. Mr. Asaba was an executive vice president and division director of
the Solution Department from June 2004 to March 2006. Mr. Asaba is also a director of IIJ-A,
Multifeed and NTT Resonant Inc. From April 1995 to June 1999, Mr. Asaba was a general manager of the
Network Engineering Division. Mr. Asaba joined us in 1992. Mr. Asaba has over ten years of Internet
experience including three years of Internet-related research experience and seven years of
Internet backbone engineering experience, including network design, routing and traffic management.
Yoshiaki Hisamoto
has served as an executive vice president and as division director of the
Administrative Department since June 2006. Mr. Hisamoto joined Nippon Telegraph and Telephone
Public
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Corporation in April 1978 and was a senior manager of the Global Business Department and
Corporate Planning Department of NTT Communications Corporation ("NTT Communications"). Mr.
Hisamoto was general manager of the Accounts and Finance Department of NTT Communications.
Hideshi Hojo
has served as senior managing director of IIJ since June 2006 and as division
director of the Sales Department since August 2003.
Mr. Hojo is also a director of Net Care and Internet Revolution
Inc. From
February 1998 to June 2000, Mr. Hojo acted as general
manager of the Sales Division, from June
2000 to June 2002, as a director and from June
2002 to August 2003, as managing director and division director of the Sales & Marketing Department. Mr. Hojo joined us
in 1996. Prior to joining us, Mr. Hojo had 16 years of experience in the field of sales working for
the Itochu Group.
Takamichi Miyoshi
has served as a director of IIJ since June 2002 and as director and general
manager of the Strategy Planning Division since June 2004. Mr. Miyoshi is a
director of Multifeed. Mr. Miyoshi joined us in April 1993.
From October 1994, Mr. Miyoshi acted
as general manager of the Network Operations and Systems
Administration Division.
Akihisa Watai
has served as a director, chief financial officer and chief accounting officer
since June 2004. Mr. Watai joined The Sumitomo Bank, Limited (currently Sumitomo Mitsui Banking
Corporation) in April 1989 and was temporarily transferred to IIJ from August 1996. In February
2000, Mr. Watai joined IIJ permanently and has been general manager of the Finance Division since April 2004.
Hiroyuki Hisashima
has served as a director since June 2005 and has been division director of
the Applied Research and Development Department since
April 2006. Mr. Hisashima was general manager of the Technology Department since April 2004.
Mr. Hisashima is a director of
IIJ-Tech. Mr. Hisashima joined us in May 1996. Prior to joining us, Mr. Hisashima
had 12 years of experience in the field of software development.
Kazuhiro Tokita
has served as a director since June 2005 and has been division director of the
Solution Department since April 2006. Mr. Tokita was a deputy division director of the Sales
Department since April 2005. Mr. Tokita is a director of IIJ-Tech. Mr.
Tokita joined us in May 1995. Prior to joining us, Mr. Tokita was employed at Yasuda Kasai Systems
Co., Ltd (Currently Sompo Japan Systems Solutions Inc.) .
Yasurou Tanahashi
has served as an outside director of IIJ since June 2004. Mr. Tanahashi was
a representative director & president of NS Solutions Corporation, an affiliated company of Nippon
Steel Corporation from April 2000 and has been chairman of NS Solutions Corporation since April
2003.
Takashi Hiroi
has served as an outside director of IIJ since June 2004. Mr. Hiroi joined
Nippon Telegraph and Telephone Corporation ("NTT") in April 1986 and has been a senior manager of
the Corporate Management Strategy Division of NTT since May 2005.
Yoshifumi Nishikawa
has served as an outside director of IIJ since June 2005. Mr. Nishikawa
has been president and representative director of Japan Post
Corporation since January 2006 and was an Advisor to Sumitomo
Mitsui Financial Group, Inc.
Junnosuke Furukawa
has served as an outside director of IIJ since June 2005. Mr. Furukawa has
been a director, member of the board & senior advisor of The
Furukawa Electric Co., Ltd. since March
2004. From
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June 1995 to June 2003, Mr. Furukawa was President & CEO of The Furukawa Electric Co., Ltd.
and from June 2003 to March 2004, Mr. Furukawa was Chairman & CEO of The Furukawa Electric Co., Ltd.
Senji Yamamoto
has served as a director of IIJ since June 2006. Mr. Yamamoto has been vice
chairman and representative director of IIJ-Tech and president and representative director of IIJ
Financial Systems Inc. since June 2006. From June 2000 to October 2005, Mr. Yamamoto was President
and CEO of Sony Communication Network Corporation.
Junichi Tate
has been a standing statutory auditor of IIJ since June 2006. Mr. Tate was a
staff general manager of Corporate Planning Department No.2 of Dai-Ichi Life Insurance Company.
Masaki Okada
has been a statutory auditor of IIJ since June 2004. Mr. Okada has been admitted
to the Dai-ni Tokyo Bar Association and joined Ishii Law Office in April 1988. Mr. Okada has been a
partner in Ishii Law Office since April 1997.
Masaaki Koizumi
has been a statutory auditor of IIJ since June 2004. Mr. Koizumi is a Japanese
Certified Public Accountant and joined Eiwa & Co. (Currently Azsa & Co.) in October 1987. Mr.
Koizumi retired from Azsa & Co. in September 2003 and established Koizumi CPA Office in October
2003.
Hirofumi Takahashi
has been a statutory auditor of IIJ since June 2005. Mr. Takahashi joined
us in August 2002 as an Advisor. Prior to joining us, Mr. Takahashi was chairman of Shinko
Investment Trust Management. He had nearly 40 years of experience in securities companies.
B. Compensation.
For the fiscal year ended March 31, 2006, the aggregate compensation we paid or accrued for
all of our executive officers, directors and statutory auditors was approximately ¥347 million.
Presently, our executive officers, directors and statutory auditors are not entitled to pension,
retirement or similar benefits. For a description of our stock option and warrant issuances to
directors and employees, see Item 6.E. In the shareholders' meeting held on June 28, 2006, the
retirement benefit to Mr. Hideki Matsushita, the standing statutory auditor who retired following
the shareholders' meeting, was approved.
C. Board Practices.
Directors are elected at a general meeting of shareholders, and the normal term of office of a
director is two years, although they may serve any number of consecutive terms. We do not have
audit or remuneration committees, a standard practice in Japan. We do not have any service
contracts with any of our directors providing for benefits upon termination of employment.
In accordance with the requirements of the Corporation Law of Japan, our Articles of
Incorporation provide for not more than three statutory auditors. Statutory auditors, of whom at
least half must be from outside of the company, are elected at a general meeting of shareholders,
and the normal term of office of a statutory auditor is four years, although they may serve any
number of consecutive terms. Statutory auditors are under a statutory duty to oversee the
administration of our affairs by the directors, to examine our financial statements and business
reports to be submitted by the Board of Directors to the general meetings of shareholders and to
report their opinions thereon to the shareholders, and to oversee accounting firms which audit our
financial statements. They are required to attend meetings of the Board of Directors and to express
their opinions if necessary, but they are not entitled to vote. Statutory auditors also have a
statutory duty to provide their report on the audit report prepared by our independent certified
public accountants to the board of statutory auditors, which must submit its audit report to the
Board of Directors and/or the general meetings of shareholders. The board of statutory auditors
will also determine matters relating to the duties of the statutory auditors, such as audit policy
and methods of investigation of our affairs.
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Nasdaq Marketplace Rule 4350(a)(1) provides that a foreign private issuer may follow its home
country practice in lieu of the requirements of Rule 4350, provided that such foreign private
issuer discloses in its annual reports filed with the Securities and Exchange Commission each
requirement of Rule 4350 that it does not follow and describes the home country practice followed
by the issuer in lieu of such requirements.
Nasdaq Marketplace Rule 4350(c) requires that (i) a majority of the board of directors be
independent directors as defined in Rule 4200(a)(15), (ii) independent directors have regularly
scheduled meetings at which only they are present, (iii) compensation of the chief executive
officer and other executive officers be determined, or recommended to the board of directors for
determination, either by a majority of the independent directors or by a compensation committee
comprised solely of independent directors, and (iv) director nominees be selected, or recommended
for selection by the board of directors, either by a majority of the independent directors or by a
nominations committee comprised solely of independent directors, in accordance with the nominations
process set forth in a formal written charter or board resolution. For large Japanese companies
under the Company Law of Japan ( "Large Japanese Companies"), including us, which employ a
corporate governance system based on a board of statutory auditors, Japan's Company Law has no
independence requirement with respect to directors. As discussed above, the task of overseeing
management and accounting firms is assigned to the statutory auditors, who are separate and
independent from the company's management. Large Japanese Companies, including us, are required to
have at least 50% "outside" statutory auditor who must meet additional independence requirements
under the Company Law. An outside statutory auditor is defined in the Company Law as a statutory
auditor who had not served as a director, manager or any other employee of the company or any of
its subsidiaries at any time prior to the appointment. Currently, we have four outside statutory
auditors.
Nasdaq Marketplace Rule 4350(d) requires that (i) each issuer have adopted a formal written
audit committee charter meeting the requirements of Rule 4350(d)(1) and (ii) the issuer have an
audit committee of at least three members who are independent as defined under Rule 4200(a)(15),
meet the independence criteria set forth in Rule 10A-3(b)(1) under the U.S. Securities Exchange Act
of 1934 and satisfy certain other criteria. Like a majority of Japanese companies, we employ the
statutory auditor system as described above. Under this system, the board of statutory auditors is
a legally separate and independent body from the board of directors. The function of the board of
statutory auditors is similar to that of independent directors, including those who are members of
the audit committee, of a U.S. company: to monitor the performance of the directors, and review and
express an opinion on the method of auditing by the company's accounting firm and on such
accounting firm's audit reports, for the protection of the company's shareholders. Large Japanese
Companies, including us, are required to have at least three statutory auditors. Currently, we have
four statutory auditors. In addition, as discussed above, our statutory auditors serve a longer
term than our directors. With respect to the requirements of Rule 10A-3 under the U.S. Securities
Exchange Act of 1934 relating to listed company audit committees, we rely on an exemption under
paragraph (c)(3) of that rule which is available to foreign private issuers with boards of
statutory auditors meeting certain criteria.
Nasdaq Marketplace Rule 4350(f) provides that each issuer provide for a quorum as specified in
its by-laws for any meeting of holders of common stock, which shall be at least 33 1/3% of the
outstanding shares of the issuer's voting common stock. We provide for a quorum as specified in the
Articles of Incorporation for any meeting of holders of common stock, which shall be at least
one-third of our outstanding shares of the voting common stock.
Nasdaq Marketplace Rule 4350(g) provides that each issuer solicit proxies and provide proxy
statements for all meetings of shareholders and provide copies of such proxy solicitation to
Nasdaq. Currently a Japanese company whose shares are listed on the securities exchanges defined in
the Securities and Exchange Law, including us, may, but is not required to, solicit proxies for
meetings of shareholders. If such a Japanese company solicits proxies for a meeting of
shareholders, it is required to provide proxy
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statements and documents for reference as provided for in the Securities and Exchange Law and
provide copies of such proxy statements and documents for reference to the Kanto Local Finance
Bureau.
Nasdaq Marketplace Rule 4350(h) provides that each issuer conduct appropriate review of all
related party transactions for potential conflict of interest situations on an ongoing basis and
that all such transactions be approved by the issuer's audit committee or another independent body
of the board of directors. Following the requirements of the Company Law of Japan, we require a
director to obtain the approval of the Board of Directors in order for such director to accept a
transfer of a product or any other asset of IIJ, to transfer a product or any other asset of such
director to IIJ, to receive a loan from IIJ, or to effect any other transaction with IIJ, for
himself or a third party.
Nasdaq Marketplace Rule 4350(i) provides that shareholder approval be obtained prior to the
issuance of designated securities under subparagraph (A), (B), (C) or (D) of Rule 4350(i). Where a
Japanese joint stock company (Kabushiki-Gaisha), issues common shares or other shares, stock
acquisition rights or bonds with stock acquisition rights under the Commercial Code of Japan, it is
necessary for the board of directors to determine the conditions of issuance; provided, however,
that this shall not apply if the Articles of Incorporation provide that such conditions shall be
determined by the shareholders' meeting. Currently, IIJ's Articles of Incorporation do not provide
for any such exception. Additionally, if the company issues such securities to persons other than
shareholders (in case of common shares or other shares) at a specially favorable issue price or (in
case of stock acquisition rights or bonds with stock acquisition rights) on specially favorable
conditions, even when there are provisions related thereto in the Articles of Incorporation, some
matters related to such issuance shall be resolved by special resolution of the shareholders'
meeting.
The rights of ADR holders, including their rights relating to corporate governance practices,
are provided in the deposit agreement which is an exhibit to this annual report.
LIMITATION OF LIABILITIES OF SOME OUTSIDE DIRECTORS AND SOME OUTSIDE STATUTORY AUDITORS
We have entered into an agreement with four of our outside directors, Mr. Yoshifumi Nishikawa,
Mr. Junnosuke Furukawa, Mr. Yasurou Tanahashi and Mr. Takashi Hiroi, and two of our outside
statutory auditors, Mr. Masaki Okada and Mr. Masaaki Koizumi that limits their liabilities to us
for damages suffered by us due to their acts taken in good faith and without gross negligence,
amounting to ¥ 10 million or the aggregate of the amounts set forth in Article 425 paragraph 1 of
the Corporation Law of Japan, whichever is higher.
D. Employees.
As of March 31, 2006, we had 987 employees, including employees of our consolidated
subsidiaries, and we had 969 employees as of March 31, 2005 and 919 employees as of March 31, 2004.
Approximately 70% of these employees were in our engineering division, 20% in our sales division
and 10% in our administrative division for each of the most recent three fiscal years.
Except for 22 employees in the United States employed by our subsidiary, IIJ-A, all of our
employees work in Japan.
We have never experienced any labor disputes and consider our labor relations to be good. To
our knowledge, none of our employees is a member of any union.
E. Share Ownership.
The information on share ownership required by this item is in Item 6.A. above.
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Stock Option Plan
•
June 2001 Stock Option Plan
. In June 2001, we implemented a stock option plan under
which options to acquire a total of 1,975 shares or 790,000 ADS equivalents, or
approximately 1.8% of total outstanding shares on that date, were granted to 44
directors and employees on August 2, 2001. The option exercise price for the shares
was determined by setting the price 5% above the 30-days average of the closing market
prices beginning 45 days prior to the date of the grant which
was ¥403,661 per share
and has been adjusted to ¥334,448 as a result of issuances of common shares. The
options are exercisable at various times from two years to ten years from the date of
grant.
•
April 2000 Stock Option Plan
. In April 2000, we implemented a stock option plan
under which our directors and employees were granted options to
acquire a total of 1,475
shares or 590,000 ADS equivalents, or approximately 1.2% of total outstanding shares
on that date. The options were granted to 34 directors and employees on May 31, 2000.
The option exercise price was determined by setting the price at 5% above the 30-day
moving average of closing market prices beginning 45 days prior to the date of grant,
which was 2,611,112 per share and has been subsequently
adjusted to ¥2,163,418 as a
result of issuances of common shares. The options are exercisable at various times
from two years to ten years from the date of grant.
•
March 2001 Warrant Issuance
. On March 31, 2001, certain directors of IIJ were
provided with 375 warrants exercisable for shares of common stock of IIJ-Tech. Each
warrant is exercisable for one share of common stock up to seven or eight years from
the date of grant at an exercise price of ¥300,000 and was purchased for 1% of the
exercise price.
We conducted a 1 to 5 stock split effective on October 11, 2005. The
numbers of shares and the option exercise prices for the two stock
option plans above are calculated based on the assumption that the
stock split was made at the time of implementation.
Employee Stock Purchase Plan
We have an employee stockholding association that holds 1,317 shares of common stock, or 0.6%
of our outstanding shares, as of March 31, 2006. The association provides designated employees with
the opportunity to purchase shares at market value. Shares are held in the name of the employee
stock purchase program until the employee resigns or retires. The representative of the employee
shareholders' association exercises voting rights in accordance with the instructions of each
employee shareholder.
Item 7. Major Shareholders and Related Party Transactions.
A. Major Shareholders.
The following table shows information regarding beneficial ownership of our common stock as of
July 7, 2006 by each shareholder known by us to own beneficially more than 5% of our common stock
and all directors and executive officers as a group. We are not required by Japanese law to
disclose beneficial ownership of our common stock. As explained in "Reporting Requirements of
Shareholders—Report of Substantial Shareholdings" in Item 10.B. of this annual report on Form 20-F,
any person who becomes, beneficially and solely or jointly, a holder of more than 5% of our
outstanding common stock must file a report with the relevant local finance bureau of the Ministry
of Finance. The information in this table is based upon our shareholders of record and reports
filed with the Financial Services Agency and U.S. Securities and Exchange Commission.
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Shares of common stock outstanding,
beneficially owned as of July 7, 2006
Number
Percentage
Nippon Telegraph and Telephone Corporation and affiliates
(1)
60,675
29.7
%
Koichi Suzuki
12,515
6.1
Itochu Corporation
10,430
5.1
Directors and executive officers as a group
(2)
13,300
6.5
(1)
Includes Nippon Telegraph and Telephone Corporation ("NTT"), which owns 50,475 shares, or
24.7%, and NTT Communications Corporation ("NTT Communications"), which owns 10,200 shares, or
5.0%. NTT acquired ownership of its shares, and NTT Communications acquired additional shares
on September 16, 2003.
(2)
Includes Koichi Suzuki's holding which is also separately set forth above. No other director
or executive officer is a beneficial owner of more than 5%.
Our major shareholders have the same voting rights as other holders of our common stock.
Under our share subscription agreement with NTT, we have agreed that NTT has the contractual right
to nominate up to three persons to serve as either directors or statutory auditors subject to
approval by our shareholders at the first meeting of shareholders after NTT's investment. We are
not controlled directly or indirectly by any other entity and are not aware of any arrangement to
effect a change in control of us.
According to our register of shareholders, as of March 31, 2006, there were 5,458 holders of
common stock of record worldwide. As of March 31, 2006, The Bank of New York, depositary for our
ADSs, held approximately 20.0% of the outstanding common stock on that date. According to The Bank
of New York, as of March 31, 2006, there were eight ADR holders of record with addresses in the
United States. Because some of these shares were held by brokers or other nominees, the number of
record holders with addresses in the United States might not fully show the number of beneficial
owners in the United States. Of the 204,300 shares of common stock outstanding as of March 31,
2006, 40,786 shares were held in the form of 16,314,400 ADSs.
B. Related Party Transactions.
NTT-affiliated Companies.
Since April 1, 2005 through March 31, 2006, we have paid ¥5,837
million for international and domestic backbone and local access line costs to NTT-affiliated
companies such as NTT Communications, Nippon Telegraph and Telephone East Corporation ("NTT East")
and Nippon Telegraph and Telephone West Corporation ("NTT West"). In addition, we paid ¥1,969
million for co-location costs and telecommunication expenses to NTT Communications, NTT East and
NTT West and paid ¥270 million for other costs, mainly outsourcing costs to NTT Communications, NTT
East and NTT West. We received payments of ¥1,395 million for OEM services, Internet connectivity
services and operation fees for data centers from NTT Communications, NTT East and NTT West. On an
ongoing basis in the ordinary course of business, we pay NTT-affiliated companies for international
and domestic backbone and local access line costs and for co-location costs and telecommunications
expenses and receive payments from NTT-affiliated companies for OEM services, Internet connectivity
services and operating fees for data centers. We do not have any outstanding loans between NTT and
its affiliated companies and us.
Transactions with equity method affiliates.
In the ordinary course of business, we have
various sales, purchase and other transactions with companies which are owned 20% to 50% by us and
are accounted for by the equity method. Account balances and transactions with such 20% to 50%
owned companies as of and for the fiscal year ended March 31, 2006 are presented as follows:
millions of yen
Accounts receivable
¥
253
Accounts payable
17
Revenues
1,286
Costs and expenses
656
As of March 31, 2006, we had loans to certain equity method investees of which the carrying
amount, net of valuation allowance was ¥35 million.
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In January 19, 2006, we entered into a joint venture agreement regarding the establishment and
management of Internet Revolution Inc. ("i-revo") with Konami Corporation. In the agreement, we
committed an additional contribution for capital investment or working capital to i-revo of up to
¥90 million for the period from November 2006 to April 2007.
Except as described above, since March 31, 2005, there has been no transaction with or loan
between us or any of our subsidiaries and:
•
any enterprise that directly or indirectly controls, is controlled by, or is in common
control with us or any of our subsidiaries,
•
any director, officer, statutory auditor or family member of any of the preceding or
any enterprise over which such person directly or indirectly is able to exercise
significant influence,
•
any individual shareholder directly or indirectly having significant influence over
us or any of our subsidiaries or a family member of such individual or any enterprise
over which such person directly or indirectly is able to exercise significant influence,
or their respective family members or enterprises over which they exercise significant
influence, or
•
any unconsolidated enterprise in which we have a significant influence or which has a
significant influence over us.
Crosswave.
Prior to the year ended March 31, 2003, we accounted for Crosswave Communications
Inc. ("Crosswave") under the equity method. As a result of Crosswave's commencement of corporate
reorganization, the amounts of transactions with Crosswave as of and for the fiscal year ended
March 31, 2004 are presented as follows:
millions of yen
Revenues
¥
1,196
Costs and expenses
4,816
Revenues from Crosswave consisted principally of dedicated Internet connectivity services,
monitoring services and sales of network systems.
Our sale of network systems to Crosswave amounted to ¥28 million for the fiscal year ended
March 31, 2004. Related cost of purchased equipment sold amounted to ¥27 million.
Cost and expenses incurred from transactions with Crosswave mainly consisted of the cost of
dedicated high-speed data communication services.
C. Interests of Experts and Counsel.
Not applicable.
Item 8. Financial Information.
A. Consolidated Statements and Other Financial Information.
Financial Statements
The consolidated financial statements required by this item begin on page F-1.
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Legal or Arbitration Proceedings
The information on legal or arbitration proceedings required by this item is in Item 4.B.
Dividend Policy
Due to our accumulated deficit and shareholders' capital deficiency, we are accordingly unable
to legally make and currently has no plans for dividend distributions.
B. Significant Changes.
Except as otherwise disclosed in this annual report on Form 20-F, there has been no
significant change in our financial condition since March 31, 2006, the date of our last audited
financial statements.
Item 9. The Offer and Listing.
A. Offer and Listing Details.
American Depositary Shares ("ADSs") representing our common stock have been quoted on the
Nasdaq National Market since August 4, 1999 under the symbol "IIJI". The current ADS/share ratio is
400 ADSs per 1 share of our common stock. Our shares of common stock have been quoted on the
Mothers market of the Tokyo Stock Exchange ("TSE") since December 2, 2005 under the stock code
number "3774".
The following table shows, for the periods indicated, the high and low price of our ADSs and
shares of common stock on the Mothers market of the TSE for the periods indicated:
Nasdaq
Mothers market of the TSE
(per ADS)
(per share of common stock)
Fiscal year ended/ending March 31,
High
Low
High
Low
2002
$
11.88
$
4.25
2003
7.34
1.80
2004
14.10
1.41
2005
6.24
2.11
First Quarter
6.24
3.19
Second Quarter
3.87
2.23
Third Quarter
6.02
2.11
Fourth Quarter
5.26
3.33
2006
14.88
3.04
¥
584,000
¥
409,000
First Quarter
13.93
3.04
Second Quarter
11.12
7.31
Third Quarter
14.88
8.45
548,000
484,000
Fourth Quarter
12.99
8.67
584,000
409,000
2007
First Quarter 2006
10.65
6.41
517,000
296,000
Month
January 2006
12.71
9.95
584,000
420,000
February 2006
12.99
9.70
544,000
428,000
March 2006
9.98
8.67
458,000
409,000
April 2006
10.65
9.35
517,000
425,000
May 2006
10.40
7.47
456,000
326,000
June 2006
8.18
6.41
385,000
296,000
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(1)
Price data are based on prices throughout the sessions for each corresponding period at each
stock exchange.
(2)
The high and low price of our shares of common stock on the Mothers market of the TSE for the
fiscal year ended March 31, 2006 and the third quarter of the fiscal year ended March 31, 2006
show the high and low price for the period on and after December 2, 2005, when we listed on
the Mothers market of the TSE.
B. Plan of Distribution.
Not applicable.
C. Markets.
ADS representing our common stock have been quoted on the Nasdaq National Market since August
4, 1999 under the symbol "IIJI". Our shares of common stock have been quoted on the Mothers market
of the TSE since December 2, 2005 under the stock code number "3774".
D. Selling Shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the issue.
Not applicable.
Item 10. Additional Information.
A. Share Capital.
Not required.
B. Memorandum and Articles of Association.
Objects and Purposes in Our Articles of Incorporation
Article 2 of our Articles of Incorporation states our objects and purposes:
•
Telecommunications business under the Telecommunications Business Law,
•
Processing, mediation and provision of information and contents by using
telecommunications networks,
•
Agency for the management business such as the management of networks and the
management of information and telecommunications systems,
•
Planning, consulting service, development, operation and maintenance of or for
information and telecommunications systems,
•
Development, sales, lease and maintenance of computer software,
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•
Development, sales, lease and maintenance of telecommunications machinery and
equipment,
•
Telecommunications construction,
•
Agency for non-life insurance,
•
Research, study, education and training related to the foregoing, and
•
Any and all businesses incidental or related to the foregoing.
Provisions Regarding Our Directors
There is no provision in our Articles of Incorporation as to a director's power to vote on a
proposal, arrangement or contract in which the director is materially interested, but the
Corporation Law of Japan provides that such director is required to refrain from voting on such
matters at the board of director's meetings.
The Corporation Law of Japan provides that compensation for directors is determined at a
general meeting of shareholders of a company. Within the upper limit approved by the shareholders'
meeting, the board of directors will determine the amount of compensation for each director. The
board of directors may, by its resolution, leave such decision to the president's discretion.
The Corporation Law of Japan provides that a significant loan from third party by a company
should be approved by the board of directors. Our regulations of the board of directors have
adopted this policy.
There is no mandatory retirement age for directors under the Corporation Law of Japan or our
Articles of Incorporation.
There is no requirement concerning the number of shares one individual must hold in order to
qualify him or her as a director under the Corporation Law of Japan or our Articles of
Incorporation.
Rights of Shareholders of our Common Stock
We have issued only one class of shares, our common stock. Rights of holders of shares of our
common stock have under the Corporation Law of Japan and our Articles of Incorporation include:
•
the right to receive dividends when the payment of dividends has been approved at a
shareholders' meeting, with this right lapsing three full years after the due date for
payment according to a provision in the Articles,
•
the right to receive interim dividends as provided for in the Articles, with this
right lapsing three full years after the due date for payment according to a provision
in the Articles,
•
the right to vote at a shareholders' meeting (cumulative voting is not allowed
under the Articles),
•
the right to receive surplus in the event of liquidation, and
•
the right to require us to purchase shares when a shareholder opposes resolutions
including (i) the transfer of all or material part of the business, (ii) an amendment
of the Articles to establish a restriction on share transfer, (iii) a share exchange
or share transfer to establish a holding
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company, (iv) split of the company or (v)
merger, all of which must be consummated by a two-thirds affirmative vote of the
voting rights of the shareholders at a shareholders' meeting at which shareholders
having not less than one-third of the total number of voting rights held by all
shareholders who can exercise their voting rights are in attendance.
A shareholder is generally entitled to one vote per one unit of our shares at a shareholders'
meeting. In general, under the Corporation Law of Japan and our Articles of Incorporation, a
shareholders' meeting may adopt a resolution by a majority of the voting rights represented at the
meeting. The Corporation Law of Japan and our Articles of Incorporation require a quorum for the
election of directors and statutory auditors of not less than one-third of the total number of
voting rights held by all shareholders who can exercise their voting rights. A corporate
shareholder, having more than one-quarter of its voting rights directly or indirectly held by us,
does not have voting rights. We have no voting rights with respect to our own common stock.
Shareholders may exercise their voting rights through proxies, provided that a shareholder may
appoint only one shareholder who has a voting right as its proxy. Our board of directors may
entitle our shareholders to cast their votes in writing. Our board of directors may also entitle
our shareholders to cast their votes by electrical devices.
While the Corporation Law of Japan, in general, requires a quorum of the majority of voting
rights and approval of two-thirds of the voting rights presented at the meeting of any material
corporate actions, it allows a company to reduce the quorum for such special resolutions by its
Articles of Incorporation to not less than one-third of the total number of voting rights held by
all shareholders who can exercise their voting rights. We adopted a quorum of not less than
one-third of the total number of voting rights in our Articles of Incorporation for special
resolutions for material corporate actions, such as:
•
a reduction of the stated capital,
•
amendment of our Articles of Incorporation (except amendments that the board of
directors are authorized to make under the Corporation Law of Japan),
•
establishment of a 100% parent-subsidiary relationship through a share exchange or
share transfer requiring shareholders' approval,
•
a dissolution, merger or consolidation requiring shareholders' approval,
•
a company split requiring shareholders' approval,
•
a transfer of the whole or an important part of our business,
•
the taking over of the whole of the business of any other corporation requiring
shareholders' approval, and
•
issuance of new shares at a specially favorable price, or issuance of stock
acquisition rights or bonds with stock acquisition rights with specially favorable
conditions to persons other than shareholders.
The Corporation Law of Japan provides additional specific rights for shareholders owning a
substantial number of voting rights.
Shareholders holding more than one sixth of the total number of the voting rights of all
shareholders who can exercise their voting rights have the right to oppose:
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•
short-form share transfer (only in respect of the shareholders of the company to be
a 100% parent company by the short-form share transfer),
•
short-form company split into an existing company (only in respect of the
shareholders of the exiting company that takes over the target business of the split
company), and
•
short-form absorption (only in respect of the shareholders of the exiting company
that absorbs the target company by the short-form absorption).
Shareholders holding 10% or more of the total number of voting rights of all shareholders (or
our total outstanding shares) have the right to apply to a court of competent jurisdiction, or
competent court, for:
•
dissolution, and
•
commencement of reorganization proceedings as provided for in the Company
Reorganization Law of Japan.
Shareholders who have held 3% or more of the total number of voting rights of all shareholders
(or our total outstanding shares) for six months or more have the right to:
•
demand the convening of a general meeting of shareholders,
•
apply to a competent court for removal of a director or statutory auditor,
•
apply to a competent court for removal of a liquidator, and
•
apply to a competent court for an order to inspect our business and assets in a
special liquidation proceeding.
Shareholders holding 3% or more of the total number of voting rights of all shareholders (or
our total outstanding shares) have the right to:
•
examine our accounting books and documents and make copies of them, and
•
apply to a competent court for appointment of an inspector to inspect our operation
or financial condition.
Shareholders who have held 1% or more of the total number of voting rights of all shareholders
for six months or more have the right to apply to a competent court for appointment of an inspector
to review the correctness of the convocation and voting procedures of a general meeting of
shareholders.
Shareholders who have held 1% or more of the total number of voting rights of all shareholders
or 300 voting rights for six months or more have the right to demand that certain matters be made
objects and added to the agenda items at a general meeting of shareholders.
Shareholders who have held any number of shares for six months or more have the right to
demand:
•
us to institute an action to enforce the liability of one of our directors or
statutory auditors,
•
us to institute an action to recover from a recipient the benefit of a proprietary
nature given in relation to exercising the right of a shareholder, and
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•
a director on our behalf for the cessation of an illegal or ultra vires action.
There is no provision under the Corporation Law of Japan or our Articles of Incorporation
which forces shareholders to make additional contributions when requested by us.
Under the Corporation Law of Japan, in order to change the rights of shareholders which are
stipulated and defined in our Articles of Incorporation, we must amend our Articles of
Incorporation. Amendment must be approved by a special resolution of shareholders where two-thirds
of shareholders vote at a shareholders' meeting at which shareholders having not less than
one-third of the voting rights held by all shareholders are in attendance.
Annual general meetings and extraordinary general meetings of shareholders are convened by a
representative director based on the determination to convene it by our board of directors. A
shareholder having held 3% or more of our total outstanding shares for six months or more is
entitled to demand the directors to convene a shareholders' meeting under the Corporation Law of
Japan. Under our Articles of Incorporation, shareholders of record as of March 31 of each year have
the right to attend the annual general meeting of our shareholders. In order to determine the
shareholders entitled to attend extraordinary general meetings of our shareholders, we are required
to make public notice of record date at least two weeks prior to the record date. A convocation
notice will be sent to these shareholders at least two weeks prior to the date of the shareholders'
meeting.
Restrictions on Holders of our Common Stock
There is no restriction on non-resident or foreign shareholders on the holding of our shares
or on the exercise of voting rights. However, pursuant to a provision of our share handling
regulations, a shareholder
who does not have an address or residence in Japan is required to file its temporary address
in Japan or that of a standing proxy having any address or residence in Japan with our transfer
agent.
There is no provision in our Articles of Incorporation that would have the effect of delaying,
deferring or preventing a change in control that would operate only with respect to a merger,
acquisition or corporate restructuring involving us.
There is no provision in our Articles of Incorporation or other subordinated rules regarding
the ownership threshold, above which shareholder ownership must be disclosed. A shareholder holding
more than 5% of the shares in a public company in Japan is required to disclose such shareholding
pursuant to the Securities Exchange Law of Japan.
There is no provision in our Articles of Incorporation governing changes in the capital more
stringent than is required by law.
For a description of rights of holders of ADSs, please see the "Description of American
Depositary Receipts" section in our F-1 Registration Statement (File No. 333-10584), declared
effective on August 3, 1999, as amended, hereby incorporated by reference.
C. Material Contracts.
The
following are summaries of our material contracts, other than those
we entered into in the ordinary course of business.
Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan Inc. and
Nippon Telegraph and Telephone Corporation.
On September 16, 2003, we entered into a Subscription
Agreement with Nippon Telegraph and Telephone Corporation ("NTT") under which NTT agreed to
purchase 10,883
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shares of our common stock for ¥951,300 per share, or approximately ¥10.4 billion.
After the consummation of this agreement, NTT and its affiliates owned a total of 12,315 shares of
our common stock, or approximately 31.6%. Under the terms of this agreement, we and NTT agreed to
undertake efforts to jointly engage in the development of broadband and Information Technology and
other related businesses, to expand the business relationship between the two parties in connection
with new business opportunities of us and to discuss secondment of employees between us and NTT.
The agreement also provides NTT with the right to maintain its current percentage ownership in our
company if we issue new shares and has the right to request that we file a registration statement
to enable NTT to sell its shares in the United States or Japanese markets. In addition, the
agreement gives NTT the right to nominate up to three persons to serve on either our board of
directors or our board of statutory auditors subject to approval of any such nomination by our
shareholders at the first meeting of shareholders after NTT's investment.
Service Agreement dated, March 25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc.
On March 25, 2004, we entered into a Service Agreement with IIJ America Inc.
("IIJ-A"), under which IIJ-A provides the operation and maintenance services for the U.S. portion
of our Internet backbone and we and IIJ-A agree to the method for calculating pricing for the
operation and maintenance of the backbone.
Limitation of Liability Agreement dated, June 29, 2005 and June 28, 2006, between Internet
Initiative Japan Inc. and outside directors and outside statutory auditors.
We entered into a
Limitation of Liability Agreement with our outside directors, Mr. Yoshifumi Nishikawa and Mr.
Junnosuke Furukawa on June 29, 2005, and Mr. Yasurou Tanahashi and Mr. Takashi Hiroi as our outside
directors and Mr. Masaki Okada and Mr. Masaaki Koizumi as our outside statutory auditors on June
28, 2006, respectively, under which we limit the liability of outside directors and outside
statutory auditors in accordance to the rules defined in Article 427 of the Corporation Law of
Japan.
Joint Venture Agreement, dated, January 19, 2006, between Internet Initiative Japan Inc. and
Konami Corporation.
We entered into a joint venture agreement regarding the establishment and
management of Internet Revolution Inc. ("i-revo") with Konami Corporation. In the agreement, we
committed an additional contribution for capital investment or working capital to i-revo of up to
¥90 million for the period from November 2006 to April 2007.
D. Exchange Controls.
There are no laws, decrees, regulations or other legislation in Japan that affect either our
ability to import or export capital for our use or our ability to pay dividends to non-resident
holders of our securities.
E. Taxation.
Japanese Taxation
The following is a discussion summarizing material Japanese tax consequences to an owner of
shares or ADSs who is a non-resident of Japan or a non-Japanese corporation without a permanent
establishment in Japan to which the relevant income is attributable. The statements regarding
Japanese tax laws set forth below are based on the laws in force and as interpreted by the Japanese
taxation authorities as at the date hereof. These statements are subject to changes in the
applicable Japanese laws or double taxation conventions occurring after that date. This summary is
not exhaustive of all possible tax considerations which may apply to a particular investor.
Potential investors should satisfy themselves as to:
•
the overall tax consequences of the ownership and disposition of shares or ADSs,
including specifically the tax consequences under Japanese law,
•
the laws of the jurisdiction of which they are resident, and
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•
any tax treaty between Japan and their country of residence, by consulting their
own tax advisers.
Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese
withholding tax on dividends paid by Japanese corporations. Stock splits, except when treated as
dividends in certain conditions, are not subject to Japanese income tax.
The Convention between the Government of Japan and the Government of the United States of
America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (the "Treaty") was newly signed on November 7, 2003 and the Treaty entered into
force on March 30, 2004. Upon the Treaty coming into force, the Convention between Japan and the
United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income, signed on March 8, 1971 (the "Prior Treaty") ceased to have
effect. The Treaty reduces the maximum rate of Japanese withholding tax which may be imposed on
dividends paid to a United States resident or corporation not having a "permanent establishment" in
Japan. A "permanent establishment" in Japan is generally a fixed place of business for industrial
or commercial activity in Japan. With respect to taxes withheld at source, the Treaty is applicable
for amount taxable on or after July 1, 2004. The other provisions of the Treaty are applicable to
the fiscal year beginning on or after January 1, 2005.
Under the Treaty, the maximum withholding rate for most shareholders is limited to 10% of the
gross amount actually distributed. However, the maximum rate is 5% of the gross amount actually
distributed, if the recipient is a corporation that owns directly or indirectly, on the date on
which entitlement to the dividends is determined, at least 10% of the voting shares of the paying
corporation. Moreover, withholding tax on dividends is not imposed, if the recipient is
•
a corporation that has owned, directly or indirectly through one or more residents
of either Japan or the U.S., more than 50% of the voting shares of the paying
corporation for the period of twelve months ending on the date on which entitlement to
the dividends is determined and which meets additional requirements, or
•
a pension fund , provided that such dividends are not derived from the carrying on
of a business, directly or indirectly, by such pension fund.
The following table summarizes changes of the maximum withholding rate imposed on dividends by
the Treaty:
The Prior Treaty
The Treaty
10% or more of the voting shares
10
%
More than 50% of the voting shares
0
%
10% to 50% of the voting shares
5
%
Others
15
%
Others
10
%
For purposes of the Treaty and Japanese tax law, U.S. holders of ADRs will be treated as the
owners of the shares underlying the ADSs evidenced by the ADRs.
Unless an applicable tax treaty, convention or agreement reduces the maximum rate of
withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese
corporations to a non-resident or non-Japanese corporation is 20%. Japan has entered into income
tax treaties, conventions or agreements, reducing the above-mentioned withholding tax rate for
investors with a number of countries. These countries include, among others, Australia, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The withholding tax
rate is further reduced if investors and IIJ have some capital relationship as provided for in an
applicable tax treaty.
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Non-resident holders who are entitled to a reduced rate of Japanese withholding tax on payment
of dividends by IIJ must submit the required form in advance through IIJ to the relevant tax
authority before payment of dividends. The required form is the Application Form for Income Tax
Convention regarding Relief from Japanese Income Tax on Dividends. A standing proxy for
non-resident holders may provide such application service. See "Description of Capital Stock —
General". With respect to ADSs, the reduced rate is applicable if The Bank of New York, as
depositary, or its agent submits two Application Forms for Income Tax Convention — one form must be
submitted before payment of dividends, and the other form must be submitted within eight months
after our fiscal year end. To claim the reduced rate, a non-resident holder of ADSs will be
required to file proof of taxpayer status, residence and beneficial ownership, as applicable. The
non-resident holder will also be required to provide information or documents clarifying its
entitlement to the tax reduction as may be required by the depositary.
A non-resident holder of shares or ADSs who does not submit an application in advance will be
entitled to claim from the relevant Japanese tax authority a refund of withholding taxes withheld
in excess of the rate of an applicable tax treaty.
Gains derived from the sale outside Japan of the shares or ADSs by a non-resident of Japan or
a non-Japanese corporation are in general not subject to Japanese income or corporation taxes. In
addition, gains derived from the sale of shares or ADSs within Japan by a non-resident of Japan or
non-Japanese corporation not having a permanent establishment in Japan are in general not subject
to Japanese income or corporation taxes. An individual who has acquired shares or ADSs as a
distributee, legatee or donee may have to pay Japanese inheritance and gift taxes at progressive
rates.
IIJ has paid or will pay any stamp, registration or similar tax imposed by Japan in connection
with the issue of the shares, except that IIJ will not pay any tax payable in connection with the
transfer or sale of the shares by a holder thereof.
United States Taxation
The following discusses United States federal income tax consequences of the ownership of
shares or ADSs. It only applies to U.S. holders of shares or ADSs, as defined below, who hold their
shares or ADSs as capital assets. It does not address special classes of holders, some of whom may
be subject to other rules including:
•
tax-exempt entities,
•
life insurance companies,
•
dealers in securities,
•
traders in securities that elect to mark-to-market,
•
investors liable for alternative minimum tax,
•
investors that actually or constructively own 10% or more of the voting stock of IIJ,
•
investors that hold shares or ADSs as part of a straddle or a hedging or conversion
transaction, or
•
investors whose functional currency is not the U.S. dollar.
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This discussion is based on the tax laws of the United States, including the Internal Revenue
Code of 1986, as amended, its legislative history, existing and proposed regulations and
administrative and judicial interpretations, as currently in effect, as well as on the Treaty.
These laws are subject to change, possibly on a retroactive basis. In addition, this discussion is
based in part upon the representations of the depositary and the assumption that each obligation in
the deposit agreement relating to the ADRs and any related agreement will be performed in
accordance with its terms.
For purposes of this discussion, a "U.S. holder" is a beneficial owner of shares or ADSs that is:
•
a citizen or resident of the United States,
•
a domestic corporation,
•
an estate whose income is subject to United States federal income tax regardless of
its source, or
•
a trust if a United States court can exercise primary supervision over the trust's
administration and one or more United States persons are authorized to control all
substantial decisions of the trust.
This discussion addresses only United States federal income taxation. You should consult your
own tax advisor regarding the United States federal, state and local and other tax consequences of
owning and disposing of shares and ADSs in your particular circumstances.
In general, and taking into account the earlier assumptions, for United States federal income
tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares
represented by those ADSs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be
subject to United States federal income tax.
The discussion under the headings "Taxation of Dividends" and "Taxation of Capital Gains"
assumes that we will not be treated as a passive foreign investment company (PFIC) for U.S. federal
income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see the
discussion under the heading "PFIC Rules" below.
Taxation of Dividends
Under the United States federal income tax laws, if you are a U.S. holder, the gross amount of
any dividend we pay out of our current or accumulated earnings and profits (as determined for
United States federal income tax purposes) is subject to United States federal income taxation. If
you are a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January
1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of
15% provided that you hold the shares or ADSs for more than 60 days during the 121-day period
beginning 60 days before the ex-dividend date and meet other holding period requirements.
You must include any Japanese tax withheld from the dividend payment in this gross amount even
though you do not in fact receive it. The dividend is taxable to you when you, in the case of
shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively.
The dividend will not be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States corporations. The
amount of the dividend distribution that you must include in your income as a U.S. holder will be
the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S.
dollar rate on the date the dividend distribution is includible in your income, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting
from currency exchange fluctuations during the period from the date you include the dividend
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payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary
income or loss and will not be eligible for the special tax rate applicable to qualified dividend
income. The gain or loss generally will be income or loss from sources within the United States for
foreign tax credit limitation purposes.
Distributions in excess of current and accumulated earnings and profits, as determined for
United States federal income tax purposes, will be treated as a return of capital to the extent of
your basis in the shares or ADSs and thereafter as capital gain.
Subject to certain limitations, the Japanese tax withheld in accordance with the Treaty and
paid over to Japan will be creditable against your United States federal income tax liability.
Special rules apply in determining the foreign tax credit limitation with respect to dividends that
are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to
you under Japanese law or under the Treaty, the amount of tax withheld that is refundable will not
be eligible for credit against your United States federal income tax liability.
Dividends constitute income from sources outside the United States, but dividends paid in
taxable years beginning before January 1, 2007 generally will be "passive" or "financial services"
income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on
your circumstances, be "passive" or "general" income which, in either case, is treated separately
from other types of income for purposes of computing the foreign tax credit allowable to you.
Taxation of Capital Gains
If you sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or
loss for United States federal income tax purposes equal to the difference between the U.S. dollar
value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares
or ADSs. Capital gain of a noncorporate U.S. holder that is recognized in taxable years beginning
before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding
period greater than one year. Additionally, gain or loss will generally be from sources within the
United States for foreign tax credit limitation purposes.
PFIC Rules
We do not believe that we will be treated as a PFIC for United States federal income tax
purposes for our most recent taxable year. However, this conclusion is a factual determination made
annually and thus may be subject to change. Because of the nature of our income and assets, we
could be determined to be a PFIC for our current and subsequent taxable years.
In general, we will be a PFIC with respect to you if for any of our taxable years in which you
held our ADSs or shares:
•
at least 75% of our gross income for the taxable year is passive income, or
•
at least 50% of the value, determined on the basis of a quarterly average, of our
assets is attributable to assets that produce or are held for the production of
passive income.
Passive income generally includes dividends, interest, royalties, rents (other than certain
rents and royalties derived in the active conduct of a trade or business), annuities and gains from
assets that produce passive income. If a foreign corporation owns at least 25% by value of the
stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as
owning its proportionate share of the assets of the other corporation, and as receiving directly
its proportionate share of the other corporation's income.
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If we are treated as a PFIC and you did not make a mark-to-market election, as described
below, you will be subject to special rules with respect to:
•
any gain you realize on the sale or other disposition of your shares or ADSs, and
•
any "excess distribution" that we make to you (generally, any distributions to you
during a single taxable year that are greater than 125% of the average annual
distributions received by you in respect of the shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the shares or ADSs).
Under these rules:
•
the gain or excess distribution will be allocated ratably over your holding period
for the shares or ADSs,
•
the amount allocated to the taxable year in which you realized the gain or excess
distribution will be taxed as ordinary income,
•
the amount allocated to each prior year, with certain exceptions, will be taxed at
the highest tax rate in effect for that year, and
•
the interest charge generally applicable to underpayments of tax will be imposed in
respect of the tax attributable to each such year.
Special rules apply for calculating the amount of the foreign tax credit with respect to
excess distributions by a PFIC.
If your shares or ADSs are treated as stock of a PFIC, you may make a mark-to-market election.
If you make this election, you will not be subject to the PFIC rules described above. Instead, in
general, you will include as ordinary income each year the excess, if any, of the fair market value
of your shares or ADSs at the end of the taxable year over your adjusted basis in your shares or
ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable
to qualified dividend income or long-term capital gains. You will also be allowed to take an
ordinary loss in respect of the excess, if any, of the adjusted basis of your shares or ADSs over
their fair market value at the end of the taxable year or over their final sale or disposition
prices, but only to the extent of the net amount of previously included income as a result of the
mark-to-market election. Your basis in the shares or ADSs will be adjusted to reflect any such
income or loss amounts.
In addition, notwithstanding any election you make with regard to the shares or ADSs,
dividends that you receive from us will not constitute qualified dividend income to you if we are a
PFIC either in the taxable year of the distribution or the preceding taxable year. Dividends that
you receive that do not constitute qualified dividend income are not eligible for taxation at the
15% maximum rate applicable to qualified dividend income. Instead, you must include the gross
amount of any such dividend paid by us out of our accumulated earnings and profits (as determined
for United States federal income tax purposes) in your gross income, and it will be subject to tax
at rates applicable to ordinary income.
If you own shares or ADSs during any year that we are a PFIC, you must file Internal Revenue
Service Form 8621.
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F. Dividends and Paying Agents.
Not required.
G. Statement by Experts.
Not applicable.
H. Documents on Display.
We file periodic reports and other information with the Securities and Exchange Commission.
The Securities and Exchange Commission maintains a web site at www.sec.gov that contains reports
and other information regarding us and other registrants that file electronically with the
Securities and Exchange Commission. You may read and copy any document we file with the Securities
and Exchange Commission at the Securities and Exchange Commission's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of its public reference room. In addition,
you may also inspect reports filed with the Securities and Exchange Commission and other
information at our Tokyo headquarters, located at Jinbocho Mitsui Bldg., 1-105 Kanda Jinbo-cho,
Chiyoda-ku, Tokyo 101-0051, Japan. Some of this information may also be found on our website at
http://www.iij.ad.jp/. This information is not incorporated by reference into this annual report on
Form 20-F.
I. Subsidiary Information.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks from changes in interest rates, equity prices and foreign
currency exchange rates.
Interest Rate Risk
The table below provides information about financial instruments held by us that are sensitive
to changes in interest rates, including debt obligations and interest rate swaps. For debt
obligations, the table presents whether the interest component is fixed or variable, the amount and
timing of cash flows, the expected weighted-average interest rates over the next five years, as
well as the fair value of each debt instrument. For interest rate swaps, the table presents the
notional amounts and weighted average interest rates by expected maturity dates.
Expected maturity date
Fair
value or
Gain
March 31, 2006
2007
2008
2009
2010
2011
Total
(loss)
(millions of yen)
Long-term debt obligations:
Fixed rate long-term borrowings and
installment payable
756
—
—
—
—
756
756
Average interest rate
1.883
%
—
%
—
%
—
%
—
%
1.883
%
Variable rate long-term borrowings
1,234
290
—
—
—
1,524
1,524
Average interest rate
1.413
%
1.440
%
—
%
—
%
—
%
1.418
%
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Expected maturity date
Fair
value or
Gain
March 31, 2006
2007
2008
2009
2010
2011
Total
(loss)
Interest rate swap contracts —
Notional amount – variable to fixed:
900
250
—
—
—
1,150
(4
)
Average pay rate
1.812
%
1.670
%
—
%
—
%
—
%
1.781
%
Average receive rate
1.166
%
1.150
%
—
%
—
%
—
%
1.162
%
Expected maturity date
Fair
value
or
Gain
March 31, 2005
2006
2007
2008
2009
2010
Total
(loss)
(millions of yen)
Long-term debt obligations:
Fixed rate long-term borrowings and
installment payable
1,652
1,006
—
—
—
2,658
2,655
Average interest rate
1.913
%
1.819
%
—
%
—
%
—
%
1.877
%
Variable rate long-term borrowings
1,084
484
40
—
—
1,608
1,608
Average interest rate
1.284
%
1.544
%
3.255
%
—
%
—
%
1.411
%
Interest rate swap contracts —
Notional amount – variable to fixed:
1,000
400
—
—
—
1,400
(9
)
Average pay rate
1.900
%
1.990
%
—
%
—
%
—
%
1.926
%
Average receive rate
1.118
%
1.185
%
—
%
—
%
—
%
1.137
%
Our policy on managing interest rate risk is to hedge our exposure to variability in
future cash flow of floating rate interest payment on long-term bank borrowings. In order to reduce
cash flow risk exposures on floating rate borrowings, we utilize interest rate swaps to convert
floating rate borrowings into fixed rate borrowings. We do not hold derivative instruments for
speculative purposes. Also, we do not hold or issue financial instruments for trading purposes. See
note 15 to our consolidated financial statements included in this annual report on Form 20-F.
Equity Price Risk
The fair value of certain of our investments, primarily in marketable securities, exposes us
to equity price risks. In general, we have invested in highly liquid and low-risk instruments,
which are not held for trading purposes. We are exposed to changes in the market prices of the
securities. As of March 31, 2005 and 2006, the fair value of such investments was ¥8,948 million
and ¥6,775 million, respectively. The potential loss in fair value resulting from a 10% adverse
change in equity prices would be approximately ¥895 million and ¥678 million as of March 31, 2005
and 2006, respectively. See Note 2 to our consolidated financial statements, included in this
annual report on Form 20-F.
Foreign Currency Exchange Rate Risk
The only significant assets held by us which are exposed to foreign currency exchange risk are
U.S. dollar denominated bank deposits. The carrying value, which also represents fair value,
amounted to $6,584 thousand (¥706 million) and $3,764 thousand (¥442 million) at March 31, 2005 and
2006, respectively. The potential loss in fair value for such financial instruments from a 10%
adverse change in quoted foreign currency exchange rates would have been approximately ¥71 million
and ¥44 million at March 31, 2005 and 2006, respectively.
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Item 12. Description of Securities Other than Equity Securities.
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
None.
Item 15. Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the fiscal year ended March 31, 2006, our management, with the participation
of Koichi Suzuki, our president, chief executive officer and representative director, and Akihisa
Watai, our director, chief financial officer and chief accounting officer, performed an evaluation
of our disclosure controls and procedures.
Under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, disclosure
controls and procedures means our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is
accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective as of March 31, 2006.
Changes in Internal Control Over Financial Reporting
With the participation of our chief executive officer and chief financial officer, we also
evaluated any change in our internal control over financial reporting that occurred during the
fiscal year ended March 31, 2006.
Under Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, internal control
over financial reporting means a process designed by, or under the supervision of, our chief
executive officer and chief financial officer and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets,
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•
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors, and
•
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Based on that evaluation, our chief executive officer and chief financial officer concluded
that no changes were made in our internal control over financial reporting that occurred during the
fiscal year ended March 31, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
At our shareholders' meeting on June 24, 2004, two statutory auditors were newly nominated and
our board of statutory auditors has determined that one of the nominated statutory auditors serving
on the Board of Statutory Auditors, Masaaki Koizumi, is an "audit committee financial expert" as
defined in Item 16A. of Form 20-F. Mr. Koizumi is independent from us.
An "audit committee financial expert" is defined in Item 16A. of Form 20-F to mean a person
who has the following attributes:
(1) An understanding of generally accepted accounting principles and financial statements,
(2) The ability to assess the general application of such principles in connection with the
accounting for estimates, accruals and reserves,
(3) Experience preparing, auditing, analyzing or evaluating financial statements that present
a breadth and level of complexity of accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be raised by the registrant's financial
statements, or experience actively supervising one or more persons engaged in such activities,
(4) An understanding of internal controls over financial reporting,
(5) An understanding of audit committee functions.
Such person shall have acquired the attributes described above through:
(1) Education and experience as a principal financial officer, principal accounting officer,
controller, public accountant or auditor or experience in one or more positions that involve the
performance of similar functions,
(2) Experience actively supervising a principal financial officer, principal accounting
officer, controller, public accountant, auditor or person performing similar functions,
(3) Experience overseeing or assessing the performance of companies or public accountants with
respect to the preparation, auditing or evaluation of financial statements, or
(4) Other relevant experience.
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A person who is determined to be an audit committee financial expert will not be deemed an
"expert" for any purpose, including without limitation for purposes of section 11 of the Securities
Act of 1933 (15 U.S.C. 77k), as a result of being designated or identified as an audit committee
financial expert pursuant to this Item 16A. The designation or identification of a person as an
audit committee financial expert pursuant to this Item 16A does not impose on such person any
duties, obligations or liability that are greater than the duties, obligations and liability
imposed on such person as a member of the audit committee and board of directors in the absence of
such designation or identification. The designation or identification of a person as an audit
committee financial expert pursuant to this Item 16A does not affect the duties, obligations or
liability of any other member of the audit committee or board of directors.
Item 16B. Code of Ethics.
At our Board of Directors Meeting on April 28, 2004, we adopted a Code of Ethics, the Internet
Initiative Japan Code of Conduct, applicable to all employees and officers, including our chief
executive officer, chief financial officer and chief accounting officer. The Code of Conduct is
attached as Exhibit 11.1 to this annual report on Form 20-F.
On April 27, 2006, we amended the Code of Ethics to add a provision to the effect that
officers and employees shall respect various stake holders.
Item 16C. Principal Accountant Fees and Services.
Independent Auditor Fees and Services
The Board of Directors engaged Deloitte Touche Tohmatsu to perform an annual audit of our
financial statements for each of the fiscal years ended March 31, 2005 and 2006. The following
table sets forth the aggregate fees billed for services rendered by Deloitte Touche Tohmatsu for
each of the last two fiscal years.
Fiscal year ended March 31,
2005
2006
(millions of yen)
Audit fees
(1)
74
80
Audit-related fees
(2)
—
—
Tax fees
(3)
0
—
All other fees
(4)
35
4
Total fees
109
84
(1)
These are the aggregate fees billed for the fiscal year for professional services rendered by
Deloitte Touche Tohmatsu for the audit of our annual financial statements and services that
are normally provided in connection with statutory and regulatory filings or engagements for
those fiscal years.
(2)
These are the aggregate fees billed for the fiscal year for assurance and related services by
Deloitte Touche Tohmatsu that are reasonably related to the performance of the audit or review
of our financial statements other than those reported under "Audit Fees" above. These services
include internal control reviews and consultation concerning financial accounting and
reporting standards.
(3)
These are the aggregate fees billed for the fiscal year for professional services rendered by
Deloitte Touche Tohmatsu for tax compliance, tax advice and tax planning.
(4)
These are the aggregate fees for the fiscal year for all other products and services provided
by Deloitte Touche Tohmatsu including consultation services related to the Sarbanes Oxley Act
of 2002 and the Privacy Mark System being instituted by The Japan Information Processing
Development Center.
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Board of Statutory Auditors Pre-Approval Policies and Procedures
The Board of Statutory Auditors has adopted policies and procedures for pre-approving all
audit and permissible non-audit work performed by independent registered public accounting firm in
accordance with Rule 2-01(c)(7)(i)(B) under Regulation S-X. Under those policies and procedures,
the Board of Statutory Auditors must pre-approve individual audit and non-audit services to be
provided to us by our independent registered public accounting firm and its affiliates. Those
policies and procedures also describe prohibited non-audit services that may never be provided by
independent registered public accounting firm.
All of the services provided by our independent registered public accounting firm from May 6,
2003, when our pre-approval policies went into effect, through the end of the fiscal year ended
March 31, 2006 were pre-approved by the Board of Statutory Auditors pursuant to the pre-approval
policies described above, and none of such services were approved pursuant to the procedures
described in Rule 2-01(c)(7)(i)(C) of Regulation S-X, which waives the general requirement for
pre-approval in certain circumstances.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934
relating to listed company audit committees, which apply to us through Rules 4350(d)(3) and
4350(d)(2)(A)(ii) of the NASD Manual, we rely on an exemption provided by paragraph (c)(3) of that
Rule available to foreign
private issuers with boards of statutory auditors meeting certain requirements. For a
Nasdaq-listed Japanese company with a board of statutory auditors, the requirements for relying on
paragraph (c)(3) of Rule 10A-3 are as follows:
•
The board of statutory auditors must be established, and its members must be
selected, pursuant to Japanese law expressly requiring such a board for Japanese
companies that elect to have a corporate governance system with statutory auditors,
•
Japanese law must and does require the board of statutory auditors to be separate
from the board of directors,
•
None of the members of the board of statutory auditors may be elected by
management, and none of the listed company's executive officers may be a member of the
board of statutory auditors,
•
Japanese law must and does set forth standards for the independence of the members
of the board of statutory auditors from the listed company or its management, and
•
The board of statutory auditors, in accordance with Japanese law or the
registrant's governing documents, must be responsible, to the extent permitted by
Japanese law, for the appointment, retention and oversight of the work of any
registered public accounting firm engaged (including, to the extent permitted by
Japanese law, the resolution of disagreements between management and the auditor
regarding financial reporting) for the purpose of preparing or issuing an audit report
or performing other audit, review or attest services for the listed company, including
its principal accountant which audits its consolidated financial statements included
in its annual reports on Form 20-F.
To the extent permitted by Japanese law:
•
The board of statutory auditors must establish procedures for (i) the receipt,
retention and treatment of complaints received by us regarding accounting, internal
accounting controls, or
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auditing matters, and (ii) the confidential, anonymous
submission by our employees of concerns regarding questionable accounting or auditing
matters,
•
The board of statutory auditors must have the authority to engage independent
counsel and other advisers, as it determines necessary to carry out its duties, and
•
The listed company must provide for appropriate funding, as determined by its board
of statutory auditors, for payment of (i) compensation to any registered public
accounting firm engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for us, (ii) compensation to any
advisers employed by the board of statutory auditors, and (iii) ordinary
administrative expenses of the board of statutory auditors that are necessary or
appropriate in carrying out its duties.
In our assessment, our Board of Statutory Auditors, which meets the requirements for reliance
on the exemption in paragraph (c)(3) of Rule 10A-3 described above, is not materially less
effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3
(without relying on any exemption provided by that Rule) at acting independently of management and
performing the functions of an audit committee as contemplated therein.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
We did not purchase any of our shares for the fiscal year ended March 31, 2006.
PART III
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
See Financial Statements for Internet Initiative Japan Inc. and Subsidiaries beginning on page
F-1.
Item 19. Exhibits.
1.1
Articles of Incorporation, as amended (English translation)
1.2
Share Handling Regulations, as amended (English translation)
1.3
Regulations of the Board of Directors, as amended (English translation)*
1.4
Regulations of the Board of Statutory Auditors, as amended (English translation)**
2.1
Specimen Common Stock Certificate***
2.2
Bylaws of the IIJ Employee Shareholders' Association (with English translation)***
2.3
Form of Deposit Agreement among IIJ, The Bank of New York as depositary and all owners and
holders from time to time of American Depositary Receipts, including the form of American
Depositary Receipt****
4.1
Basic Agreement to Delegate Services, dated April 1, 1997, between Internet Initiative
Japan Inc. and IIJ Technology Inc. (with English translation)***
4.2
Shareholders' Agreement Relating to the Establishment of INTERNET MULTIFEED CO., dated
August 20, 1997, between Nippon Telegraph and Telephone Corporation and the Registrant
(with English translation)***
4.3
Basic Agreement to Delegate Services, dated April 1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (with English translation)***
4.4
Lease Agreement, dated March 14, 2003, between Internet Initiative Japan Inc. and Mitsui
Fudosan
92
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Co., Ltd. (English translation)*
4.5
Sublease Agreements, dated March 15, 2003, between Internet Initiative Japan Inc., IIJ
Technology Inc. and Net Care, Inc. (English translations)*
4.6
Pledge Agreement, dated March 14, 2003, among Internet Initiative Japan Inc., IBJ Leasing
Co., Ltd. and Nissay Leasing Company, Limited (English translation)*
4.7
Joint Venture Agreement, dated January 19, 2006, between Internet Initiative Japan Inc.
and Konami Corporation (English translation)
4.20
Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan Inc.
and Nippon Telegraph and Telephone Corporation (English translation)*
4.21
Service Agreement, dated March 25, 2004, between Internet Initiative Japan Inc. and IIJ
America Inc.*****
4.24
Agreement on Limited Liability, dated June 29, 2005 and June 28, 2006, between Internet
Initiative Japan Inc. and outside directors and outside statutory auditors******
8.1
List of Significant Subsidiaries (See "Our Group Companies" in Item 4.B. of this Form 20-F)
11.1
Internet Initiative Japan Code of Conduct
12.1
Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)
12.2
Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)
13.1
Certification of the chief executive officer required by 18 U.S.C. Section 1350
13.2
Certification of the chief financial officer required by 18 U.S.C. Section 1350
14.1
Selected unaudited financial statement data as of and for the year ended March 31, 2003 of
Crosswave Communications Inc.*
(*)
Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on September 30, 2003.
(**)
Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on August 3, 2005.
(***)
Incorporated by reference to the corresponding exhibit to our Form F-1 Registration
Statement (File No. 333-10584) declared effective on August 3, 1999.
(****)
Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-110862)
filed on December 2, 2003.
(*****)
Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F
(File No. 0-30204) filed on July 23, 2004.
(******)
We and each of Mr. Yoshifumi Nishikawa and Mr. Junnosuke Furukawa as our outside directors
entered into an Agreement on Limited Liability, dated June 29, 2005. We and each of Mr.
Yasurou Tanahashi and Mr. Takashi Hiroi as our outside directors and each of Mr. Masaki Okada
and Mr. Masaaki Koizumi as our outside statutory auditors entered into an Agreement on Limited
Liability, dated June 28, 2006.
Except for Exhibit 2.3, we have not included as exhibits certain instruments with respect
to our long-term debt. Except for Exhibit 2.3, the amount of debt authorized under each long-term
debt instrument does not exceed 10% or our total assets. We agree to furnish a copy of any
long-term debt instrument to the Commission upon request.
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SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
Internet Initiative Japan Inc.
By:
/s/ Koichi Suzuki
Name: Koichi Suzuki
Title:
 President, Chief Executive Officer
and Representative Director
Date: July 11, 2006
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Internet Initiative Japan Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of March 31, 2005 and 2006
F-3
Consolidated Statements of Operations for Each of the Three Years in the Period Ended March 31, 2006
F-5
Consolidated Statements of Shareholders' Equity
for Each of the Three Years in the Period Ended March 31, 2006
F-7
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended March 31, 2006
F-8
Notes to Consolidated Financial Statements
F-11
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Internet Initiative Japan Inc.:
We have audited the accompanying consolidated balance sheets of Internet Initiative Japan Inc. and
subsidiaries (the "Company") as of March 31, 2005 and 2006 and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the three years in the period ended
March 31, 2006 (all expressed in Japanese yen). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Internet Initiative Japan Inc. and subsidiaries as of March 31, 2005 and
2006 and the results of their operations and their cash flows for each of the three years in the
period ended March 31, 2006, in conformity with accounting principles generally accepted in the
United States of America.
Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and,
in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such
U.S. dollar amounts are presented solely for the convenience of readers outside Japan.
/s/ DELOITTE TOUCHE TOHMATSU
Tokyo, Japan
May 26, 2006 (June 28, 2006 as to Note 17)
F-2
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2005 and 2006
Thousands of
U.S. Dollars
Thousands of Yen
(Note 1)
2005
2006
2006
ASSETS
CURRENT ASSETS:
Cash (Note 15)
¥
5,286,477
¥
13,727,021
$
116,846
Accounts receivable, net of allowance for
doubtful accounts of ¥41,400 thousand
and ¥23,411 thousand ($199 thousand)
at March 31, 2005 and 2006, respectively
(Notes 3, 4 and 11)
7,407,439
11,962,304
101,824
Inventories
140,096
851,857
7,251
Prepaid expenses
604,935
1,031,325
8,778
Other current assets,
net of allowance for doubtful accounts of
¥33,250 thousand ($283 thousand) at March 31,
2006 (Notes 3 and 9)
108,228
214,121
1,823
Total current assets
13,547,175
27,786,628
236,522
INVESTMENTS IN AND ADVANCES TO
EQUITY METHOD INVESTEES, net of loan loss
valuation allowance of ¥31,378 thousand and ¥16,701
thousand ($142 thousand) at March 31, 2005 and 2006,
respectively (Notes 3 and 4)
713,607
1,162,971
9,899
OTHER INVESTMENTS (Notes 2, 8 and 15)
9,930,781
8,020,705
68,273
PROPERTY AND EQUIPMENT—Net
(Notes 5 and 7)
9,722,366
10,299,496
87,670
INTANGIBLE ASSETS—Net (Note 6)
561,211
632,594
5,385
GUARANTEE DEPOSITS (Notes 7 and 8)
2,050,665
1,549,653
13,191
OTHER ASSETS, net of allowance for doubtful
accounts of ¥376,092 thousand and ¥40,980
thousand ($349 thousand) at March 31, 2005
and 2006 respectively (Notes 3, 9, 10 and 15)
590,666
1,252,942
10,665
TOTAL
¥
37,116,471
¥
50,704,989
$
431,605
(Continued)
F-3
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2005 and 2006
Thousands of
U.S. Dollars
Thousands of Yen
(Note 1)
2005
2006
2006
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 8)
¥
4,724,633
¥
4,555,000
$
38,772
Long-term borrowings—current portion
(Notes 8 and 15)
2,736,056
1,989,963
16,939
Payable under securities loan agreement (Note 8)
1,729,520
999,600
8,509
Capital lease obligations—current portion (Note 7)
2,774,974
3,003,914
25,569
Accounts payable (Notes 4 and 11)
4,860,733
10,107,942
86,040
Accrued expenses
541,118
540,027
4,597
Other current liabilities
817,517
1,702,208
14,489
Total current liabilities
18,184,551
22,898,654
194,915
LONG-TERM BORROWINGS (Notes 8 and 15)
1,529,963
290,000
2,469
CAPITAL LEASE OBLIGATIONS—Noncurrent (Note 7)
4,339,028
4,980,659
42,396
ACCRUED RETIREMENT AND PENSION COSTS (Note 10)
143,346
223,332
1,901
OTHER NONCURRENT LIABILITIES (Note 9)
275,533
827,086
7,040
Total liabilities
24,472,421
29,219,731
248,721
MINORITY INTEREST
1,028,977
1,263,320
10,753
COMMITMENTS AND CONTINGENCIES
(Note 14)
SHAREHOLDERS' EQUITY (Notes 11 and 12):
Common stock—authorized, 377,600 shares;
issued and outstanding, 191,800 shares at March 31,
2005, authorized, 377,600 shares; issued and
outstanding, 204,300 shares at March 31, 2006
13,765,372
16,833,847
143,291
Additional paid-in capital
23,637,628
26,599,217
226,415
Accumulated deficit
(34,434,052
)
(29,680,482
)
(252,643
)
Accumulated other comprehensive income
8,690,125
6,553,594
55,785
Treasury stock—602 shares and 777 shares held by an equity
method investee at March 31, 2005 and 2006, respectively
(44,000
)
(84,238
)
(717
)
Total shareholders' equity
11,615,073
20,221,938
172,131
TOTAL
¥
37,116,471
¥
50,704,989
$
431,605
See notes to consolidated financial statements.
(Concluded)
F-4
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Operations
Three Years in the Period Ended March 31, 2006
Thousands of
U.S. Dollars
Thousands of Yen
(Note 1)
2004
2005
2006
2006
REVENUES (Notes 4 and 11):
Connectivity and value-added services:
Dedicated access
¥
12,862,132
¥
11,372,701
¥
10,625,268
$
90,443
Dial-up access
3,088,498
2,936,973
2,673,808
22,760
Value-added services
4,296,228
5,004,730
6,249,891
53,200
Other
2,117,794
3,169,413
3,673,872
31,272
Total
22,364,652
22,483,817
23,222,839
197,675
Systems integration
11,847,687
15,853,824
23,504,537
200,072
Equipment sales
4,567,123
3,364,926
3,085,208
26,262
Total revenues
38,779,462
41,702,567
49,812,584
424,009
COST AND EXPENSES (Notes 4, 7 and 11):
Cost of connectivity and value-added
services
20,047,438
19,483,890
20,077,990
170,906
Cost of systems integration
9,851,726
12,200,137
18,120,418
154,243
Cost of equipment sales
4,346,243
3,111,369
2,818,036
23,987
Total cost
34,245,407
34,795,396
41,016,444
349,136
Sales and marketing (Note 16)
3,527,490
2,794,561
3,079,526
26,213
General and administrative (Note 6)
2,098,481
2,665,980
3,147,315
26,790
Research and development
357,968
198,979
158,155
1,346
Total cost and expenses
40,229,346
40,454,916
47,401,440
403,485
OPERATING INCOME (LOSS)
(1,449,884
)
1,247,651
2,411,144
20,524
OTHER INCOME (EXPENSES):
Interest income
37,516
12,877
13,099
111
Interest expense
(702,036
)
(685,857
)
(437,364
)
(3,723
)
Foreign exchange gains (losses)
(6,493
)
5,958
3,470
30
Net gain on other investments (Note 2)
1,412,858
2,439,330
3,197,690
27,219
Gain arising from issuance of equity method
investee's share
16,088
25,933
—
—
Other—net
224,287
102,616
190,520
1,622
Other income—net
982,220
1,900,857
2,967,415
25,259
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME
TAX EXPENSE, MINORITY INTERESTS AND EQUITY IN
NET LOSS OF EQUITY METHOD INVESTEES
(467,664
)
3,148,508
5,378,559
45,783
INCOME TAX EXPENSE (Note 9)
32,536
99,870
257,360
2,191
MINORITY INTERESTS IN (EARNINGS)
LOSSES OF SUBSIDIARIES
235,812
(109,161
)
(353,883
)
(3,012
)
FORWARD
¥
(264,388
)
¥
2,939,477
¥
4,767,316
$
40,580
(Continued)
F-5
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Operations
Three Years in the Period Ended March 31, 2006
Thousands of
U.S. Dollars
Thousands of Yen
(Note 1)
2004
2005
2006
2006
FORWARD
¥
(264,388
)
¥
2,939,477
¥
4,767,316
$
40,580
EQUITY IN
NET LOSS OF EQUITY METHOD INVESTEES (Note 4):
Equity method net loss
(286,317
)
(33,208
)
(13,746
)
(117
)
Impairment loss on advance to
Crosswave
(1,719,981
)
—
—
—
Total equity in net loss of
equity method investees
(2,006,298
)
(33,208
)
(13,746
)
(117
)
NET INCOME (LOSS)
¥
(2,270,686
)
¥
2,906,269
¥
4,753,570
$
40,463
NET INCOME PER SHARE (Note 13):
BASIC WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
158,554
191,559
195,613
DILUTED WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING
158,554
191,559
195,955
Yen
U.S. Dollars
BASIC NET INCOME (LOSS) PER COMMON SHARE
¥
(14,321
)
¥
15,172
¥
24,301
$
207
DILUTED NET INCOME (LOSS) PER COMMON SHARE
¥
(14,321
)
¥
15,172
¥
24,258
$
206
See notes to consolidated financial statements.
(Concluded)
F-6
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Three Years in the Period Ended March 31, 2006
Thousands of Yen
Shares of
Accumulated
Common Stock
Other
Outstanding
Additional
Comprehensive
(Including
Common
Paid-in
Accumulated
Income
Treasury
Treasury Stock)
Stock
Capital
Deficit
(Note 12)
Stock
Total
BALANCE, APRIL 1, 2003
112,400
¥
7,082,336
¥
17,068,353
¥
(35,069,635
)
¥
914,610
¥
(10,004,336
)
Net loss
(2,270,686
)
(2,270,686
)
Other comprehensive income, net of tax
5,280,839
5,280,839
Total comprehensive income
3,010,153
Issuance of common stock, net of issuance cost
79,400
6,683,036
6,569,275
13,252,311
Purchase of common stock by an equity method investee
¥
(44,000
)
(44,000
)
BALANCE, MARCH 31, 2004
191,800
13,765,372
23,637,628
(37,340,321
)
6,195,449
(44,000
)
6,214,128
Net income
2,906,269
2,906,269
Other comprehensive income, net of tax
2,494,676
2,494,676
Total comprehensive income
5,400,945
BALANCE, MARCH 31, 2005
191,800
13,765,372
23,637,628
(34,434,052
)
8,690,125
(44,000
)
11,615,073
Net income
4,753,570
4,753,570
Other comprehensive loss, net of tax
(2,136,531
)
(2,136,531
)
Total comprehensive income
2,617,039
Issuance of common stock, net of issuance cost
12,500
3,068,475
2,961,589
6,030,064
Purchase of common stock by an equity method investee
(40,238
)
(40,238
)
BALANCE, MARCH 31, 2006
204,300
¥
16,833,847
¥
26,599,217
¥
(29,680,482
)
¥
6,553,594
¥
(84,238
)
¥
20,221,938
Thousands of U.S. Dollars (Note 1)
Accumulated
Other
Additional
Comprehensive
Common
Paid-in
Accumulated
Income
Treasury
Stock
Capital
Deficit
(Note 12)
Stock
Total
BALANCE, MARCH 31, 2005
$
117,172
$
201,206
$
(293,106
)
$
73,971
$
(375
)
$
98,868
Net income
40,463
40,463
Other comprehensive loss, net of tax
(18,186
)
(18,186
)
Total comprehensive income
22,277
Issuance of common stock, net of issuance cost
26,119
25,209
51,328
Purchase of common stock by an equity method investee
(342
)
(342
)
BALANCE, MARCH 31, 2006
$
143,291
$
226,415
$
(252,643
)
$
55,785
$
(717
)
$
172,131
See notes to consolidated financial statements.
F-7
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2006
Thousands of
U.S. Dollars
Thousands of Yen
(Note 1)
2004
2005
2006
2006
OPERATING ACTIVITIES:
Net income (loss)
¥
(2,270,686
)
¥
2,906,269
¥
4,753,570
$
40,463
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization
4,008,324
4,193,093
4,209,037
35,828
Provision for retirement and
pension costs, less payments
(16,960
)
70,659
76,095
648
Provision for (reversal of) allowance for
doubtful accounts and advances
449,164
24,781
(12,009
)
(102
)
Loss on disposal of property and
equipment
109,588
143,887
118,855
1,012
Loss on disposal and impairment of
telephone rights
48,201
99,075
2,040
17
Net gain on other investments
(1,412,858
)
(2,439,330
)
(3,197,690
)
(27,219
)
Foreign exchange losses (gains)
5,124
(15,466
)
(7,825
)
(67
)
Gain arising from issuance of equity
method investee's share
(16,088
)
(25,933
)
—
—
Loss (gains) on retirement of convertible
notes
(88,975
)
5,195
—
—
Equity method net loss
286,317
33,208
13,746
117
Impairment loss on advance
to Crosswave
1,719,981
—
—
—
Minority interests in earnings (losses)
of subsidiaries
(235,812
)
109,161
353,883
3,012
Deferred income tax expense (benefit)
1,976
(11,023
)
(230,841
)
(1,965
)
Others
38,539
79,247
18,490
157
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable
784,728
1,607,692
(4,460,173
)
(37,965
)
Decrease (increase) in
inventories, prepaid expenses and
other current and noncurrent assets
(275,103
)
228,358
(1,390,398
)
(11,835
)
Increase (decrease) in accounts payable
(1,132,209
)
(2,307,729
)
4,975,623
42,353
Increase in income taxes payable
2,041
97,913
334,854
2,850
Increase (decrease) in accrued
expenses and other current
and noncurrent liabilities
(81,926
)
439,440
1,001,567
8,526
Net cash provided by
operating
activities—(Forward)
¥
1,923,366
¥
5,238,497
¥
6,558,824
$
55,830
(Continued)
F-8
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2006
Thousands of
U.S. Dollars
Thousands of Yen
(Note 1)
2004
2005
2006
2006
Net cash provided by
operating activities—(Forward)
¥
1,923,366
¥
5,238,497
¥
6,558,824
$
55,830
INVESTING ACTIVITIES:
Purchases of property and equipment
(1,657,302
)
(577,133
)
(919,366
)
(7,826
)
Purchase of short-term and other investments
(325,665
)
(12,566
)
(674,569
)
(5,742
)
Investment in an equity method investee
—
—
(750,000
)
(6,384
)
Purchase of subsidiary stock
from minority shareholders
—
(61,680
)
(192,142
)
(1,635
)
Proceeds from sales and redemption of
short-term and other investments
2,170,584
2,976,017
3,613,239
30,756
Advance to Crosswave
(1,719,981
)
—
—
—
Payments of guarantee deposits
(9,114
)
(48,683
)
(62,074
)
(528
)
Refund of guarantee deposits
683,132
71,850
568,869
4,842
Payment for refundable insurance policies
(21,007
)
(25,231
)
(25,917
)
(221
)
Refund from insurance policies
7,432
18,348
6,301
54
Acquisition of a newly controlled company, net of cash
acquired
—
—
229,457
1,953
Acquisition of business
—
(375,123
)
—
—
Other
19,458
8,204
11,052
94
Net cash provided by (used in)
investing activities
(852,463
)
1,974,003
1,804,850
15,363
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
borrowings
400,000
2,250,000
1,000,000
8,512
Repayments of long-term borrowings
(1,943,735
)
(1,840,246
)
(2,986,056
)
(25,418
)
Proceeds from securities loan agreement
—
2,546,320
4,897,040
41,684
Repayments of securities loan agreement
—
(816,800
)
(5,626,960
)
(47,897
)
Principal payments under capital leases
(2,733,012
)
(2,867,625
)
(3,105,519
)
(26,434
)
Net increase (decrease) in short-term
borrowings
1,740,495
(1,839,460
)
(169,633
)
(1,444
)
Repurchase of convertible notes
(3,047,460
)
(745,488
)
—
—
Redemption of convertible notes
—
(11,088,000
)
—
—
Proceeds from issuance of common stock,
net of issuance cost
13,252,311
—
6,030,064
51,328
Proceeds from issuance of subsidiary
stock to minority shareholders
—
188,632
—
—
Net cash provided by (used in)
financing activities
7,668,599
(14,212,667
)
38,936
331
EFFECT OF EXCHANGE RATE
CHANGES ON CASH
(43,615
)
2,405
37,934
323
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
8,695,887
(6,997,762
)
8,440,544
71,847
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
3,588,352
12,284,239
5,286,477
44,999
CASH AND CASH EQUIVALENTS,
END OF YEAR
¥
12,284,239
¥
5,286,477
¥
13,727,021
$
116,846
(Continued)
F-9
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2006
Thousands of
U.S. Dollars
Thousands of Yen
(Note 1)
2004
2005
2006
2006
ADDITIONAL CASH FLOW
INFORMATION:
Interest paid
¥
625,248
¥
613,817
¥
426,692
$
3,632
Income taxes paid
48,413
29,227
148,101
1,261
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of assets by
entering into capital leases
1,865,309
4,433,906
3,842,952
32,712
Exchange of common stock
investment due to merger:
Market value of common
shares acquired
—
37,950
7,390
63
Cost of investment
—
2,500
2,584
22
Acquisition of business and a company:
Assets acquired
—
1,202,007
843,485
7,180
Cash paid
—
(375,123
)
(733,589
)
(6,244
)
Liabilities assumed
—
826,884
109,896
936
See notes to consolidated financial statements.
(Concluded)
F-10
Table of Contents
Internet Initiative Japan Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Internet Initiative Japan Inc. ("IIJ," a Japanese corporation) was founded in December 1992 to
develop and operate Internet access services and other Internet-related services in Japan and
is 29.7 percent jointly owned by Nippon Telegraph and Telephone Corporation ("NTT") and its
subsidiary as of March 31, 2006. IIJ and subsidiaries (collectively, the "Company") provide
Internet access services throughout Japan and into the United States of America and the rest
of Asia. The Company also provides Internet systems design and integration representing
principally sales of Internet network systems and equipment and miscellaneous Internet
access-related services.
The Company manages its business and measures results based on a single Internet-related
services industry segment. Substantially all revenues are from customers operating in Japan.
The accompanying consolidated financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. Although the Company has incurred operating losses and net losses
in each of the past six fiscal years ended March 31, 2004 (with the exception of operating
income for the year ended March 31, 2002), the Company has recorded operating income and net
income for the years ended March 31, 2005 and 2006. At March 31, 2006, the Company had
indebtedness of ¥15,819,136 thousand. As a result of increasing net income, liquidation of
certain available-for-sale securities and completion of a public offering of ¥6,030,064
thousand (after deducting stock issuance cost) on the Mothers market of the Tokyo Stock
Exchange, the negative working capital of ¥4,637,376 thousand at March 31, 2005 turned
positive in the amount of ¥4,887,974 thousand at March 31, 2006.
Certain Significant Risks and Uncertainties—
The Company has available-for-sale securities of ¥6,775,388 thousand at March 31, 2006 and
believes that the fluctuations in stock price of available-for-sale securities could have a
material adverse effect on the Company's future financial position, results of operations or
cash flows.
The Company relies on telecommunications carriers for significant portion of network backbone,
and regional NTT subsidiaries, electric power companies and their affiliates for local
connections to customers. Currently, NTT Communications is the largest provider of network
infrastructure. The Company believes that its use of multiple carriers and suppliers
significantly mitigates concentrations of credit risk. However, any disruption of
telecommunication services could have an adverse effect on operating results.
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash investments, accounts receivable and guarantee deposits. The
Company's management believes that the risks associated with accounts receivable is mitigated
by the large number of customers comprising its customer base.
F-11
Table of Contents
Summary of Significant Accounting Policies
Basis of Presentation—
IIJ maintains its record in accordance with generally accepted
accounting principles in Japan. Certain adjustment and reclassifications have been
incorporated in the accompanying consolidated financial statements to conform to generally
accepted accounting principles in the United States of America ("U.S. GAAP"). These
adjustments were not recorded in the statutory accounts.
Certain reclassifications have been made to prior periods to conform to the current year
presentation.
Translation into U.S. Dollars—
IIJ maintains its accounts in Japanese yen, the currency of the
country in which it is incorporated and principally operates. The U.S. dollar amounts
included herein represent a translation using the noon buying rate in New York City for cable
transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York at
March 31, 2006 of ¥ 117.48 = $1 solely for the convenience of the reader. The translation
should not be construed as a representation that the yen amounts have been, could have been,
or could in the future be converted into U.S. dollars.
Consolidation—
The consolidated financial statements include the accounts of IIJ and all of its
subsidiaries, Net Care, Inc. ("Net Care"), IIJ Technology Inc. ("IIJ Technology"), IIJ Media
Communications Inc. ("MC"), which was merged with IIJ on October 1, 2005, IIJ America, Inc.
("IIJ America") and IIJ Financial Systems Inc. ("IIJ FS"), which have fiscal years ending
March 31, except for IIJ America. IIJ America's fiscal year end is December 31 and such date
was used for purposes of preparing the consolidated financial statements as it is not
practicable for the subsidiary to report its financial results as of March 31.
There were no significant events that occurred during the intervening period that would
require adjustment to or disclosure in the accompanying consolidated financial statements.
Significant intercompany transactions and balances have been eliminated in consolidation.
Investments in companies over which IIJ has significant influence but not control are
accounted for by the equity method. For other than a temporary decline in the value of
investments in equity method investees below the carrying amount, the investment is reduced to
fair value and an impairment loss is recognized.
A subsidiary or equity method investee may issue its shares to third parties at amounts per
share in excess of or less than the Company's average per share carrying value. With respect
to such transactions, the resulting gains or losses arising from the change in ownership are
recorded in income for the year in which such shares are issued.
Use of Estimates—
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and expenses during
the reporting period. Significant estimates and assumptions used are primarily in the areas
of impairment loss on advances to equity method investees, valuation allowances for deferred
tax assets, allowance for doubtful accounts, and estimated useful lives of fixed assets.
Actual results could differ from those estimates.
Revenue Recognition—
Revenues from customer connectivity services consist principally of
dedicated Internet access services and dial-up Internet access services. Dedicated Internet
access services represent full-line IP services and standard-level IP services (T1 Standard
and IIJ FiberAccess/F Service). Dial-up Internet access services are provided to both
enterprises and individuals (IIJ4U). The term of these contracts is one year for dedicated
Internet access services and generally one month for dial-up Internet access services. All
these services are billed and recognized monthly on a straight-line basis.
Value-added service revenues consist principally of sales of various Internet access-related
services such as firewalls services. Value-added services also include monthly fees from data
center services such as housing, monitoring and security services. Other revenues under
connectivity and value-added services consist principally of Wide-area Ethernet services and
call-center customer support. The terms of these services are generally for one year and
revenues are recognized on a straight-line basis during the service period.
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Initial set up fees received in connection with connectivity services and value-added services
are deferred and recognized over the contract period.
Systems integration revenues consist principally of the development of Internet network
systems or design and related maintenance, monitoring and other operating services. The
period for the development of the systems or designs is less than one year and revenues are
recognized when network systems and equipment are delivered and accepted by the customer. The
development of the Internet network systems or design includes multiple element arrangements
such as planning, systems design, and construction services, and equipment and software
purchased from third parties. When the equipment or system is delivered prior to other
elements of the arrangement, revenue is deferred until other service elements are completed
and accepted by the customer. Maintenance, monitoring and operating service revenues are
recognized ratably over the separate contract period, which is generally for one year.
Systems integration service is subject to the Emerging Issues Task Force ("EITF") Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" which was adopted as of April 1,
2004. The adoption of EITF No. 00-21 did not have any effect on the consolidated financial
statements.
Equipment sales are reported on a gross or net basis in accordance with EITF Issue No. 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent". Revenues are recognized when
equipments are delivered and accepted by the customer.
Cash and cash equivalents—
Cash and cash equivalents include time deposits and readily
marketable securities with original maturities of three months or less.
Allowance for Doubtful Accounts—
An allowance for doubtful accounts is established in amounts
considered to be appropriate based primarily upon the Company's past credit loss experience
and an evaluation of potential losses in the receivables outstanding.
Other Investments—
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," all marketable equity
securities are classified as available-for-sale securities, which are accounted for at fair
value with unrealized gains and losses excluded from earnings and reported in accumulated
other comprehensive income (loss). The cost of securities sold is determined based on average
cost.
The Company reviews the fair value of available-for-sale investments on a regular basis to
determine if the fair value of any individual investment has declined below its cost and if
such decline is other than temporary. If the decline in value is judged to be other than
temporary, the cost basis of the investment is written down to fair value. Other than
temporary declines in value are determined taking into consideration the extent of decline in
fair value, the length of time that the decline in fair value below cost has existed and
events that might accelerate the recognition of impairment. The resulting realized loss is
included in the consolidated statements of operations in the period in which the decline was
deemed to be other than temporary.
Non-marketable equity securities are carried at cost as fair value is not readily
determinable. If the value of a security is estimated to have declined and such decline is
judged to be other than temporary, the security is written down to the fair value.
Determination of impairment is based on the consideration of such factors as operating
results, business plans and change in the regulatory, economic or technological environment of
the investees. Fair value is determined as the Company's interest in the net assets of
investees.
Inventories—
Inventories consist mainly of network equipment purchased for resale and
work-in-process for development of Internet network systems. Network equipment purchased for
resale is stated at the lower of cost, which is determined by the average-cost method, or
market. Work-in-process for development of network systems is stated at the lower of actual
production costs, including overhead cost, or market. Inventories are reviewed periodically
and items considered to be slow-moving or obsolete are written down to their estimated net
realizable value.
Leases—
Capital leases, which meet specific criteria noted in SFAS No.13, "Accounting for
Leases", are capitalized at the inception of the lease at the present value of the minimum
lease payments. All other leases are accounted for as operating leases. Lease payments for
capital leases are apportioned to interest expense and a reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Operating
lease payments are recognized as an expense on a straight-line basis over the lease term.
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Property and Equipment—
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment, including purchased software and capitalized leases,
are computed principally using the straight-line method based on either the estimated useful
lives of assets or the lease period, whichever is shorter.
The useful lives for depreciation and amortization by major asset classes are as follows:
Range of
Useful Lives
Data communications, office and other equipment
2 to 15 years
Leasehold improvements
3 to 15 years
Purchased software
5 years
Capitalized leases
4 to 7 years
Impairment of Long-lived Assets—
Long-lived assets consist principally of property and
equipment, including those items leased under capital leases. The Company evaluates the
impairment of long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". There were no impairment
losses for long-lived assets for the three years in the period ended March 31, 2006.
Goodwill and Intangible Assets—
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets", goodwill (including equity-method goodwill) and intangible assets that are deemed to
have indefinite useful lives are not amortized, but are subject to impairment testing.
Impairment testing is performed annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The Company performs annual
impairment tests on March 31.
Pension and severance indemnities plans—
The Company has pension plans and /or severance
indemnities plans. The cost of the pension plans and severance indemnities plans are accrued
based on amounts determined using actuarial methods, in accordance with SFAS No. 87,
"Employers' Accounting for Pensions".
Income Taxes—
The provision for income taxes is based on earnings before income taxes and
includes the effects of temporary differences between assets and liabilities recognized for
financial reporting purposes and income tax purposes and operating loss carryforwards.
Valuation allowances are provided against assets that are not likely to be realized.
Foreign Currency Transactions—
Foreign currency assets and liabilities, which consist
substantially of cash and accounts payable for connectivity leases to international carriers
denominated in U.S. dollars, are stated at the amount as computed by using year-end exchange
rates and the resulting transaction gain or loss is recognized in earnings.
Derivative Financial Instruments—
All derivatives are recorded at fair value as either asset or
liabilities in the balance sheet in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138 and No. 149 (collectively,
"SFAS No. 133"). In accordance with SFAS No. 133, the Company designated interest swap
contracts as a hedge of the variability of cash flows to be paid related to interest on
floating rate borrowings (cash flow hedge) and the effective portion of the derivative's gain
or loss is initially reported as a component of other comprehensive income and subsequently
reclassified into earnings when the underlying transaction affects earnings. The ineffective
portion of the gain or loss is reported in earning immediately. The Company enters into
contracts to hedge interest rate risks and does not enter into contracts or utilize
derivatives for trading purposes. For transactions which occurred after July 1, 2003, the
Company adopted SFAS No. 149. The adoption of SFAS No.149 had no effect on the Company's
consolidated financial position or result of operation.
Stock Splits—
On August 4, 2005, IIJ's board of directors approved a five-for-one split of
IIJ's common stock. Shareholders of record on August 31, 2005 received an additional common
share. The stock split was effective on October 11, 2005. In order to reflect this split,
information pertaining to shares, earnings per share and issue price per share during the year
ended March 31, 2004, has been restated in the accompanying financial statements and related
notes.
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Stock-based Compensation—
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and related interpretations. Accordingly, the
Company recognizes compensation expense in an amount equal to the excess of the quoted market
price over the exercise price of the option at the grant date. For options with a vesting
period, the compensation expense is charged to operations ratably over the vesting period.
The Company has not recognized any stock-based compensation expense for the years ended March
31, 2004, 2005 and 2006.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and
Disclosure," the following pro forma net income (loss) and income (loss) per share information
for the years ended March 31, 2004, 2005 and 2006, including the effects of fair values
associated with the warrants of IIJ Technology is presented as if the Company accounted for
its stock options using the fair value method. Under the fair value method, the estimated
fair value of the stock options is charged against income on a straight-line basis over the
options' vesting period:
Thousands of
Thousands of Yen
U.S. Dollars
2004
2005
2006
2006
Net income (loss):
As reported
¥
(2,270,686
)
¥
2,906,269
¥
4,753,570
$
40,463
Addition: Total
stock-based employee
compensation
determined under
fair value based
method for all awards,
net of tax
(32,020
)
—
—
—
Pro forma
¥
(2,302,706
)
¥
2,906,269
¥
4,753,570
$
40,463
Yen
U.S. Dollars
2004
2005
2006
2006
Basic net
income (loss) per common shares:
As reported
¥
(14,321
)
¥
15,172
¥
24,301
$
207
Pro forma
(14,523
)
15,172
24,301
207
Yen
U.S. Dollars
2004
2005
2006
2006
Diluted net
income (loss) per common shares:
As reported
¥
(14,321
)
¥
15,172
¥
24,258
$
206
Pro forma
(14,523
)
15,172
24,258
206
Research and developments—
Research and development costs are expensed as incurred.
Advertising—
Advertising costs are expensed as incurred.
Basic and Diluted Net Income (Loss) per Share—
Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted-average number of shares of common stock
outstanding during the year. Diluted net income (loss) per share reflects the potential
dilutive effect of stock options and convertible bonds.
Other Comprehensive Income (Loss)—
Other comprehensive income (loss) consists of translation
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adjustments resulting from the translation of financial statements of a foreign subsidiary,
unrealized gains or losses on available-for-sale securities and gains or losses on cash flow
hedging derivative instruments.
Segment Reporting —
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise that engages in business
activities from which it may earn revenues and incur expense and for which separate financial
information is available that is evaluated regularly by the chief operation decision maker in
deciding how to allocate resources and in assessing performance.
The Company provides a comprehensive range of network solutions to meet its customers' needs
by cross-selling a variety of services, including Internet connectivity services, value-added
services, systems integration and sales of network-related equipment. The Company's chief
operating decision maker, who is the Company's Chief Executive Officer, regularly reviews the
revenue and cost of sales on a consolidated basis and makes decisions regarding how to
allocate resources and assess performance based on a single operating unit.
New Accounting Standards—
In December 2004, the FASB issued revised SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123R") which replaces the existing SFAS No. 123 and supersedes APB No. 25.
SFAS No. 123R requires compensation expense for stock options and other share-based payment to
be measured and recorded based on the instruments' fair value. SFAS No. 123R is effective for
the fiscal period beginning after June 15, 2005. The Company will adopt SFAS No. 123R and the
related FASB Staff Positions ("FSP") on April 1, 2006 by using modified prospective
application, which requires recognizing expenses for options granted prior to the adoption
date equal to the fair value of unvested amounts over the remaining vesting period. The
portion of these options' fair value attributable to vested awards prior to the adoption of
SFAS No. 123R is never recognized. As all existing granted stock-based awards of the Company
have vested, the adoption of SFAS No. 123R will not have any impact on the Company's
consolidated financial position or results of operations.
In November 2005, the FASB issued FSP No. 115-1 and No. 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," on the basis of
the EITF's consensus on Issue 03-1,"The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". FSP No. 115-1 and No. 124-1 addresses the determination
as to when an investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss. FSP No. 115-1 and No. 124-1
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses that
have not been recognized as other-than-temporary impairments. FSP No. 115-1 and No. 124-1 is
effective for reporting periods beginning after December 15, 2005. The adoption of FSP No.
115-1 and No. 124-1 did not have a material effect on the Company's financial position or
results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of ARB No.
43, Chapter 4" ("SFAS No. 151") which clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) and also requires
that the allocation of fixed production overhead be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of SFAS No. 151 will not have a material
impact on the Company's consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets-amendment of
APB Opinion No. 29" ("SFAS No. 153"). The statement addresses the measurement of exchanges of
nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception for exchanges that do
not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did
not have a material impact on the Company's consolidated financial position or results of
operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections-a
replacement of
APB opinion No. 20 and SFAS No. 3" ("SFAS No. 154"). SFAS No. 154 requires that changes in
accounting principle are retrospectively applied by applying the new accounting principle as
of the beginning of the first period presented as if that principle had always been used,
although APB opinion No. 20 required that changes in accounting principle are applied
cumulatively in the period of change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
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In July 2005, the FASB issued FSP APB No.18-1, "Accounting by an Investor for Its
Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for
under the Equity Method in
Accordance with APB Opinion No. 18 upon a Loss of Significant Influence" ("FSP APB No. 18-1").
FSP APB No. 18-1 requires that an investor's proportionate share of an investee's equity
adjustments for other comprehensive income is offset against the carrying value of the
investment at the time significant influence is lost. FSP APB No. 18-1 is effective for
reporting periods beginning after July 12, 2005. The adoption of FSP APB No. 18-1 did not have
a material impact on the Company's consolidated financial position or results of operations.
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2.
OTHER INVESTMENTS
Pursuant to SFAS No. 115, all of the Company's marketable equity securities were classified as
available-for-sale securities. Information regarding the securities classified as
available-for-sale at March 31, 2005 and 2006 is as follows:
Thousands of Yen
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
March 31, 2005
Available-for-sale—Equity
securities
¥
215,258
¥
8,738,792
¥
5,882
¥
8,948,168
March 31, 2006
Available-for-sale—Equity
securities
¥
222,807
¥
6,552,623
¥
42
¥
6,775,388
Thousands of U.S. Dollars
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
March 31, 2006
Available-for-sale—Equity
securities
$
1,897
$
55,776
$
0
$
57,673
The following table provides the fair value and gross unrealized losses of the Company's
investments, which have been deemed to be temporarily impaired, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized
loss position, as of March 31, 2005 and 2006:
Thousands of Yen
Less than
12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
March 31, 2005
Marketable equity
securities
¥
68,742
¥
5,882
¥
—
¥
—
¥
68,742
¥
5,882
March 31, 2006
Marketable equity
securities
¥
1,338
¥
42
¥
—
¥
—
¥
1,338
¥
42
Thousands of U.S. Dollars
Less than
12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
March 31, 2006
Marketable equity securities
$
11
$
0
$
—
$
—
$
11
$
0
The Company regularly reviews all of the Company's investments to determine if any are
other-than-temporarily impaired. The analysis includes reviewing industry analyst reports,
sector credit ratings and volatility of the security's market price.
The company's unrealized loss on an investment in marketable equity security relates to a U.S.
telecommunication equipment supplier. The fair value of the investment is approximately 3%
less than its cost. The duration of the unrealized loss position was less than 6 months. Based
on the Company's ability and intent to hold the investment for a reasonable period of time
sufficient for a recovery of fair value, the Company does not consider the investment to be
other-than-temporarily impaired at March 31, 2006.
Proceeds from the sale of available-for-sale securities were ¥122,650 thousand, ¥2,614,768 thousand and
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¥3,240,805 thousand ($27,586thousand) for the years ended March 31, 2004, 2005
and 2006, respectively. Gross realized gains of ¥55,965 thousand, ¥2,477,607 thousand and
¥3,222,397 thousand ($27,429 thousand) were included in other income (expenses) for the year
ended March 31, 2004, 2005 and 2006, respectively, and gross realized losses of ¥8,925
thousand were included in other income (expenses) for the year ended March 31, 2004.
The aggregate cost of the Company's cost method investments totaled ¥982,613 thousand and
¥1,245,317 thousand ($10,600 thousand) at March 31, 2005 and 2006, respectively.
Losses on the write-down of investments in certain nonmarketable equity and debt securities,
included in other income (expenses) were recognized to reflect the decline in value considered
to be other than temporary, totaled ¥229,944 thousand for the year ended March 31, 2004.
Losses on write-down of investments in certain marketable and nonmarketable equity securities,
included in other income (expenses), were ¥34,151 thousand and ¥118,076 thousand,
respectively, for the year ended March 31, 2005. Such losses in certain nonmarketable equity
securities, included in other income (expenses) were ¥29,513 thousand ($251 thousand) for the
year ended March 31, 2006.
Gains on exchange of securities of ¥35,450 thousand and ¥ 4,806 thousand ($41 thousand),
included in other income (expenses), for the year ended March 31, 2005 and 2006, respectively,
represented non-monetary gains from the exchange of marketable common shares in a merger
transaction.
For the year ended March 31, 2004, IIJ sold all of its shares of DLJdirectSFG Securities Inc.,
which had been held as other investments, and proceeds and gross realized gain from the sale
were ¥1,946,875 thousand and ¥1,571,875 thousand, respectively.
In Japan, there is a market in which participants lend and borrow debt and equity
securities without collateral from financial institutions under agreements known as lending
and borrowing debt and equity securities contracts. Under the agreement, the Company loans
equity securities without collateral. The Company has loaned ¥324,000 thousand ($ 2,758
thousand) of available-for-sale securities to the financial institution as of March 31, 2006.
3.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND ADVANCES
An analysis of the allowance for doubtful accounts and advances for the years ended March 31,
2004, 2005 and 2006 is as follows:
Thousands of Yen
Provision for
(Reversal of)
Balance at
Doubtful
Beginning of
Credits
Accounts and
Balance at
Year
Charged Off
Advances
Reclassification
End of Year
Year ended March 31, 2004
¥
125,354
¥
(81,913
)
¥
449,164
—
¥
492,605
Year ended March 31, 2005
¥
492,605
¥
(68,516
)
¥
24,781
—
¥
448,870
Year ended March 31, 2006
¥
448,870
¥
(357,519
)
¥
(12,009
)
¥
35,000
¥
114,342
Thousands
of U.S. Dollars
Reversal of
Balance at
Doubtful
Beginning of
Credits
Accounts and
Balance at
Year
Charged Off
Advances
Reclassification
End of Year
Year ended March 31, 2006
$
3,821
$
(3,043
)
$
(102
)
$
297
$
973
The provision for doubtful accounts and advances for the year ended March 31, 2004 included
accounts receivable from Crosswave of ¥395,780 thousand and certain other customers.
The credits charged off for the year ended March 31, 2006 included the reversal of allowance for doubtful
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accounts of Crosswave amounted to ¥345,994 thousand ($2,945
thousand) due to the final distribution of remaining assets of Crosswave under the
corporate reorganization proceedings.
4.
INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES
IIJ utilizes various companies in Japan and neighboring countries to form and operate its
Internet business. Businesses operated by its equity method investees include dedicated high-speed data
communication services, data center services (Crosswave) through December 15, 2003,
connectivity services in Asian countries (Asia Internet Holding Co., Ltd., "AIH") through
September 2005, multifeed technology services and location facilities for connecting high-speed
Internet backbones (Internet Multifeed Co., "Multifeed"), Web page design services (atom Co.,
Ltd.), and data center services in Asian countries ( i-Heart Inc., "i-Heart" and Ayalaport
Makati Inc., "Ayalaport" through June, 2004).
Since July 2004, Ayalaport is no longer accounted for under equity method due to dilution
of the Company's ownership and loss of ability to exercise significant influence.
AIH was no longer an equity method investee after October 1, 2005 since AIH was merged with
IIJ.
On February 1, 2006, IIJ and Konami corporation established a joint venture company (Internet
Revolution Inc.,"i-revo") to operate comprehensive portal sites. IIJ invested ¥750,000
thousand ($6,384 thousand) to i-revo and owned 30 percent ownership as of March 31, 2006. IIJ
accounted i-revo as an equity method investee.
The aggregate amounts of balances and transactions of the Company with these equity method
investees other than Crosswave as of March 31, 2005 and 2006, and for each of the three years
in the period ended March 31, 2006 are summarized as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2004
2005
2006
2006
Accounts receivable
¥
—
¥
118,130
¥
253,208
$
2,155
Accounts payable
—
96,727
17,084
145
Revenues
1,329,482
1,245,361
1,286,275
10,949
Costs and expenses
1,245,607
1,145,834
656,184
5,585
During each of the three years in the period ended March 31, 2006, the Company did not receive
any dividends from its equity method investees.
The Company's investments in and advances to these equity method investees and respective
ownership percentage at March 31, 2005 and 2006 consisted of the following:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
AIH
26.69
%
¥
275,386
—
%
¥
—
$
—
Multifeed
28.58
242,719
29.44
317,144
2,700
Atom
40.00
155,837
40.00
116,974
995
i-revo
—
30.00
676,795
5,761
Other
39,665
—
52,058
443
Total
¥
713,607
¥
1,162,971
$
9,899
Advances of ¥19,868 thousand and ¥34,545 thousand ($294 thousand ) to i-Heart, net of loan
loss valuation allowance were included in the balances as of March 31, 2005 and 2006
respectively.
Crosswave, was formed in October 1998 with ownership interests held by IIJ (40 percent),
Toyota Motor Corporation ("Toyota") (30 percent) and Sony Corporation ("Sony") (30 percent).
On August 9, 2000, Crosswave completed an initial public offering in the NASDAQ National
Market in the United States of America. Concurrently, IIJ purchased 15,000 newly issued
Crosswave common shares and on December 27,
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2000, IIJ also purchased 3,000,000 ADSs,
representing 15,000 shares of Crosswave from the market. As a result of these transactions,
the ownership of IIJ, Sony and Toyota at March 31, 2003 was 37.85 percent, 23.9 percent and
23.9 percent, respectively.
On May 21, 2002, in connection with the Crosswave Financing Facilities Agreement (the
"Agreement"), the Company entered into a Cash Deficiency Support Agreement ("CDS Agreement")
with Crosswave and four Japanese commercial banks. In accordance with the provisions of the
CDS Agreement, the Company deposited ¥5,000,000 thousand into a restricted account with a
participating bank in May 2002.
In May and June 2003, the Company made unsecured loans of ¥1,719,981 thousand in total to
Crosswave in order for Crosswave to meet its scheduled debt service obligation.
On August 20, 2003, Crosswave filed a voluntary petition for the commencement of corporate
reorganization proceedings in Japan. On August 28, 2003, Crosswave received an order from the
Tokyo District Court for the commencement of corporate reorganization proceedings. As a
result of the commencement of corporate reorganization proceedings, the Company no longer has
had the ability to exercise significant influence over operating and financial policies of
Crosswave.
The Company recorded an equity method loss of Crosswave of ¥5,514,383 thousand for the year
ended March 31, 2003, based on unaudited net loss information publicly disclosed by Crosswave
prior to the commencement of corporate reorganization proceedings by Crosswave and not
reflecting any adjustments which may have been required in respect thereof. In addition, the
Company assessed the impairment of its investment in and deposits for Crosswave considering an
evaluation of the recoverability of the equity investee's underlying net assets through sale
or future operations upon emergence from bankruptcy and recognized an impairment loss on
investment in and deposits for Crosswave of ¥7,153,087 thousand for the year ended March 31,
2003. This impairment loss consisted of the carrying amount of the investment of ¥2,098,762
thousand, the realized gain of related foreign currency translation adjustments of ¥1,925
thousand, stock purchase rights of ¥56,250 thousand and deposits of ¥5,000,000 thousand under
the CDS Agreement.
The loans of ¥1,719,981 thousand made by the Company in May and June 2003 to Crosswave and
accounts receivable from Crosswave of ¥395,780 thousand as of August 19, 2003 were written off
in the year ended March 31, 2004.
Revenues from Crosswave consisted principally of dedicated Internet access services,
monitoring services and sales of network systems which amounted to ¥1,196,080 thousand for the
year ended March 31, 2004.
Cost and expenses incurred from transactions with Crosswave mainly consist of the cost of
dedicated high-speed data communication services, which amounted to ¥4,816,146 thousand for
the year ended March 31, 2004. The revenues and costs and expenses include those recognized
after Crosswave's filing voluntary petition of corporate reorganization, which amounted to
¥425,597 thousand and ¥1,820,518 thousand, respectively.
5.
PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2005 and 2006 consisted of the following:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Data communications equipment
¥
543,365
¥
781,605
$
6,653
Office and other equipment
904,532
718,362
6,115
Leasehold improvements
823,313
780,143
6,641
Purchased software
4,917,483
5,425,819
46,185
Capitalized leases, primarily data
communications equipment
13,251,657
14,458,667
123,073
Total
20,440,350
22,164,596
188,667
Less accumulated depreciation
and amortization
(10,717,984
)
(11,865,100
)
(100,997
)
Property and equipment—net
¥
9,722,366
¥
10,299,496
$
87,670
F-21
Table of Contents
6.
GOODWILL AND INTANGIBLE ASSETS
The components of intangible assets as of March 31, 2005 and 2006 are as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Non-amortized intangible assets:
Telephone rights
¥
14,616
¥
12,555
$
107
Customer relationship
113,360
113,360
965
Goodwill
433,235
506,679
4,313
Total intangible assets
¥
561,211
¥
632,594
$
5,385
The Company recorded disposal losses of ¥48,201 thousand, ¥73,271 thousand and ¥2,040
thousand ($17 thousand) on telephone rights, which were not used by the Company upon
cancellation of the contracts for the usage of telephone circuits for dial-up access services
and the disposal loss was included in general and administrative expenses for the years ended
March 31, 2004, 2005 and 2006, respectively.
NTT reduced the price of telephone rights by 50 percent after March 1, 2005 and the
Company recorded an impairment loss of ¥25,804 thousand on telephone rights based on the new
purchase price. The impairment loss was included in general and administrative expenses for
the year ended March 31, 2005.
Goodwill of ¥405,349 thousand and ¥73,444 thousand ($625 thousand) was recorded for the
years ended March 31, 2005 and 2006, respectively.
On October 1, 2004, IIJ Financial Systems, a 100 percent owned subsidiary of IIJ Technology,
which was a 69 percent owned subsidiary of IIJ at October 1, 2004, purchased the securities
systems development and operation business from Yamatane Co.,Ltd ("Yamatane") in order to
initiate a business relationship with Yamatane's customer base. The primary factor that
contributed to the recognition of goodwill was an assembled workforce. The results of
operations of this business are included in the statement of operations of the Company from
October 1, 2004. The cash paid for this business was ¥375,123 thousand including incremental
costs directly related to the transaction. The Company acquired an order backlog of ¥6,254
thousand, customer relationships valued at ¥113,360 thousand and recorded goodwill of ¥251,127
thousand in the transaction. The backlog became fully amortized during the year ended March
31, 2005. The pro forma impact of the acquisition of the business operations of Yamatane on
consolidated revenues and net income (loss) of the Company, assuming the acquisition had been
completed at the beginning of fiscal 2004 and 2005, would have been an increase to
consolidated revenues of ¥2.3 billion and ¥1.2 billion, respectively, and a decrease to net
loss of ¥109 million in fiscal 2004 and an increase to net income of ¥56 million in fiscal
2005.
No impairment on goodwill was recognized during the years ended March 31, 2004, 2005 and
2006.
7. LEASES
The Company enters into, in the normal course of business, various leases for domestic and
international backbone services, office premises, network operation centers and data
communications and other equipment. Certain leases that meet one or more of the criteria set
forth in the provision of SFAS No. 13, "Accounting for leases" have been classified as capital
leases and the others have been classified as operating leases.
Operating Leases—
The Company has operating lease agreements with telecommunications carriers
and others for the use of connectivity lines, including local access lines that customers use
to connect to IIJ's network. The leases for domestic backbone connectivity are generally
either non-cancelable for a minimum one-year lease period or cancelable during a lease period
of three years, with a significant penalty for cancellation (35 percent). The leases for
international backbone connectivity during one-year lease period are substantially
non-cancelable. The Company also leases its office premises, for which refundable lease
deposits are capitalized as guarantee deposits, and certain office equipment under
non-cancelable operating leases which expire on various dates through the year 2008 and also
leases its network operation centers
F-22
Table of Contents
under non-cancelable operating leases.
Refundable guarantee deposits as of March 31, 2005 and 2006 consist of as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Head office
¥
1,705,036
¥
1,185,307
$
10,090
Sales and subsidiaries offices
296,971
308,494
2,626
Others
48,658
55,852
475
Total refundable guarantee deposits
¥
2,050,665
¥
1,549,653
$
13,191
Lease expenses related to backbone lines for the years ended March 31, 2004, 2005 and 2006
amounted to ¥4,719,638 thousand, ¥3,550,885 thousand and ¥ 3,516,322 thousand ($ 29,931
thousand), respectively. Lease expenses for local access lines for the years ended March 31,
2004, 2005 and 2006, which are only attributable to dedicated access revenues, amounted to
¥3,500,468 thousand, ¥4,040,192 thousand and ¥ 4,558,382 thousand ($ 38,801 thousand),
respectively. Other lease expenses for the years ended March 31, 2004, 2005 and 2006 amounted
to ¥3,786,739 thousand, ¥3,303,717 thousand and ¥ 3,653,766 thousand ($ 31,101 thousand),
respectively.
The Company has subleased a part of its office premises. Lease expenses mentioned above have
been reduced by sublease revenues totaling ¥88,895 thousand, ¥406,451 thousand and ¥435,224
thousand ($3,705 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively.
F-23
Table of Contents
Capital Leases—
The Company conducts its connectivity and other services by using data
communications and other equipment leased under capital lease arrangements. The fair values of
the assets upon execution of the capital lease agreements and accumulated depreciation amounted
to ¥13,251,657 thousand and ¥6,336,386 thousand at March 31, 2005 and ¥14,458,667 thousand
($123,073 thousand) and ¥ 6,819,503 thousand ($ 58,048 thousand) at March 31, 2006,
respectively.
As of March 31, 2006, future lease payments under non-cancelable operating leases, including the
aforementioned non-cancelable connectivity lease agreements (but excluding dedicated access
lines which the Company charges outright to customers), and capital leases were as follows:
Thousands of Yen
Thousands of U.S. Dollars
Connectivity
Connectivity
Lines
Other
Lines
Other
Operating
Operating
Capital
Operating
Operating
Capital
Leases
Leases
Leases
Leases
Leases
Leases
Year ending March 31:
2007
¥
27,302
¥
1,376,986
¥
3,262,311
$
232
$
11,721
$
27,769
2008
—
1,174,192
2,535,823
—
9,995
21,585
2009
—
142,566
1,778,729
—
1,214
15,141
2010
—
70,354
697,143
—
599
5,934
2011
—
19,623
179,496
—
167
1,528
2012 and thereafter
—
55,154
35,729
—
469
304
Total minimum lease payments
¥
27,302
¥
2,838,875
¥
8,489,231
$
232
$
24,165
$
72,261
Less amounts representing interest
504,658
4,296
Present value of net minimum capital
lease payments
7,984,573
67,965
Less current portion
3,003,914
25,569
Noncurrent portion
¥
4,980,659
$
42,396
8.
BORROWINGS AND CONVERTIBLE NOTES
Short-term borrowings at March 31, 2005 and 2006 consist of bank overdrafts. Short-term
borrowings bear fixed-rate interest and their weighted average rates at March 31, 2005 and 2006
were 1.375 percent.
F-24
Table of Contents
Long-term borrowings as of March 31, 2005 and 2006 consisted of the following:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Unsecured long-term loans payable to
banks, maturing at various dates
through calendar 2007 (see Note 15).
Interest is payable at a variable rate.
Weighted average interest rates were 3.255
percent,
and 2.206 percent at March 31, 2005 and 2006,
respectively.
¥
208,000
¥
374,000
$
3,184
Unsecured long-term loans payable to
banks (secured in 2005), maturing in calendar 2006
(see Note 15). Weighted average interest rates
were 1.789 percent and 1.710 percent at March 31,
2005 and 2006, respectively.
2,350,000
600,000
5,107
Unsecured long-term loans payable to
banks (secured in 2005), maturing at various dates
through calendar 2007 (see Note 15). Interest is
payable at a variable rate based on TIBOR which
was 0.1 percent and 0.133 percent as of March 31,
2005 and 2006, respectively.
Weighted average interest rates were
1.137 percent and 1.130 percent at March
31, 2005
and 2006, respectively.
1,400,000
1,150,000
9,789
Long-term installment loans payable at
various dates through calendar 2007 (see Note 15).
Interest rates were 2.55 percent
at March 31, 2005 and 2006.
308,019
155,963
1,328
Total
4,266,019
2,279,963
19,408
Less current portion
(2,736,056
)
(1,989,963
)
(16,939
)
Long-term borrowings, less current
portion
¥
1,529,963
¥
290,000
$
2,469
The Company entered into interest rate swap contracts to manage its interest rate exposure
resulting in a fixed interest rate for a portion of its long-term debt. The effective
weighted average interest rates for ¥1,400,000 thousand and ¥1,150,000 thousand ($9,789
thousand) of the long-term loan outstanding at March 31, 2005 and 2006 after giving effect to
such swap agreements were 1.926 percent and 1.781 percent per annum, respectively (see Note
15).
On March 14, 2003, the Company entered into a long-term installment loan agreement with a
leasing company to finance the payment for rental deposits given to other lessor for its new
head office. The principal of the loan is ¥155,963 thousand ($1,328 thousand) and the loan is
secured by a first priority pledge against a claim for the guarantee deposits of ¥1,146,039
thousand ($9,755 thousand) at March 31, 2006.
Substantially all short-term and long-term bank borrowings are made under agreements which, as
is customary in Japan, provide that under certain conditions the bank may require the borrower
to provide collateral (or additional collateral) or guarantor with respect to the borrowings
and that the bank may treat any collateral, whether furnished as security for short-term or
long-term loans or otherwise, as collateral for all indebtedness to such bank. Also,
provisions of certain loan agreements grant certain rights of possession to the lenders in the
event of default. The Company did not provide banks with any collateral for outstanding loans
as of March 31, 2006.
F-25
Table of Contents
Annual maturities of long-term borrowings outstanding as of March 31, 2006 are as
follows:
Year Ending
Thousands of
March 31
Thousands of Yen
U.S. Dollars
2007
¥
1,989,963
$
16,939
2008
290,000
2,469
Total
¥
2,279,963
$
19,408
The Company entered into bank overdraft agreements with certain Japanese banks for which the
unused balance outstanding as of March 31, 2006 was ¥3,210,000 thousand ($27,324 thousand).
The 1.750 percent unsecured yen convertible notes due March 2005 in the aggregate principal
amount of ¥15,000,000 thousand were issued in April 11, 2000. The notes were convertible at
the option of the holders at ¥19,875 thousand per share at any time on or before March 15,
2005. The notes were redeemable at the Company's option at any time before March 15, 2005,
in whole or in part, at par with unpaid and accrued interest; provided that the closing
trading price for the Company's shares for a certain period prior to giving notice of
redemption is of at least 140 percent of the conversion price.
In October and November 2003, IIJ repurchased a portion of its 1.750 percent unsecured yen
convertible notes, with an aggregate face value of ¥3,168,000 thousand, for ¥3,047,460
thousand in the open market, resulting in a realized gain of ¥120,540 thousand. A portion of
deferred issuance cost, amounting to ¥31,565 thousand, corresponding to the repurchased
convertible notes was charged to income and was offset against the gain. The net gain
realized on retirement of these convertible notes was presented as other income.
In June 2004, IIJ repurchased a portion of its 1.750 percent unsecured yen convertible notes,
with an aggregate face value of ¥744,000 thousand, for ¥745,488 thousand in the open market,
resulting in a realized loss of ¥1,488 thousand. A portion of deferred issuance cost,
amounting to ¥3,707 thousand, corresponding to the repurchased convertible notes was charged
to loss upon redemption. The net loss realized on retirement of these convertible notes was
presented as other expense.
In March 2005, IIJ redeemed the remainder of its unsecured yen convertible notes
amounting to ¥11,088,000 thousand at their carrying value.
Since August 2004, the Company has been a party to a securities loan agreement with a certain
Japanese financial institution. The available-for-sale securities loaned to the financial
institution were ¥2,189,600 thousand and ¥1,230,000 thousand ($10,470 thousand), and the cash
received in return was ¥1,729,520 thousand and ¥999,600 thousand ($8,509 thousand) at March
31, 2005 and 2006, respectively. These transactions were accounted for as secured borrowings
and the cash received was recorded as payable under the securities loan agreement and
securities lent were recorded as other investments. The agreement requires the Company to
provide certain marketable securities as collateral at the commencement of the transaction.
The Company is required to make a partial repayment or receive additional borrowings
depending on the market value of securities pledged. The Company paid the interest on the
payables at a variable rate, which was 0.6349 percent and 0.37 percent as of March 31, 2005
and 2006, respectively.
9.
INCOME TAXES
Amendments to Japanese tax regulations were enacted into law on March 31, 2003 and became
effective from the fiscal year beginning April 1, 2004. Income taxes imposed by the national,
prefectural and municipal governments of Japan resulted in a normal statutory rate of
approximately 42 percent for the year ended March 31, 2004 and 41 percent for the years ended
March 31, 2005 and 2006.
The reserve for tax contingencies related to the denial of the usage of tax operating loss
carryforwards by IIJ America, a U.S. subsidiary, was ¥197,753 thousand ($1,683 thousand) as of
March 31, 2006. This is management's best estimate of the potential liability for tax
contingencies.
F-26
Table of Contents
Income (loss) from operations before income tax expense, minority interests and equity in net
loss of equity method investees and income tax expense for the years ended March 31, 2004, 2005,
and 2006 consists of the following components:
Thousands of
Thousands of Yen
U.S. Dollars
2004
2005
2006
2006
Income (loss) from operations before income tax
expense, minority interests and equity in net loss
of equity method investees:
Domestic
¥
(535,648
)
¥
3,168,974
¥
5,316,535
$
45,255
Foreign
67,984
(20,466
)
62,024
528
Total
¥
(467,664
)
¥
3,148,508
¥
5,378,559
$
45,783
Income
taxes—current:
Domestic
¥
30,560
¥
118,893
¥
289,376
$
2,463
Foreign
—
0
198,825
1,693
Total
¥
30,560
¥
110,893
¥
488,201
$
4,156
Income
taxes—deferred:
Domestic
¥
1,976
¥
(11,023
)
¥
(230,841
)
$
(1,965
)
Foreign
—
—
—
—
Total
¥
1,976
¥
(11,023
)
¥
(230,841
)
$
(1,965
)
Net deferred income tax assets and liabilities are reflected on the consolidated balance sheets
as of March 31, 2005 and 2006 as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Current
Assets—Other current assets
¥
26,399
¥
138,938
$
1,183
Noncurrent
Assets—Other assets
—
193,681
1,649
Noncurrent
liabilities—Other noncurrent liabilities
(7,748
)
(83,127
)
(708
)
Total
¥
18,651
¥
249,492
$
2,124
The approximate effect of temporary differences and carryforwards giving rise to deferred tax
balances at March 31, 2005 and 2006 was as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Deferred
Deferred
Deferred
Deferred
Deferred
Deferred
Tax
Tax
Tax
Tax
Tax
Tax
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
Unrealized gains on
available-for-sale securities
¥
—
¥
3,580,494
¥
—
¥
2,686,560
$
—
$
22,868
Valuation of limited partnership
investments for tax purpose
—
35,014
—
81,020
—
690
Capitalized leases
74,621
—
84,345
—
718
—
Accrued expenses
185,732
—
161,902
—
1,378
—
Retirement and pension cost
58,885
—
89,705
—
764
—
Stock issuance cost
15,548
—
29,212
—
249
—
Allowance for doubtful accounts
1,461,058
—
16,333
—
139
—
Depreciation
25,699
—
25,070
—
213
—
Net loss on other investment
92,080
—
127,115
—
1,082
—
Operating loss carryforward
9,902,013
—
9,602,271
—
81,735
—
Other
261,843
27,563
121,659
69,109
1,036
588
Total
12,077,479
3,643,071
10,257,612
2,836,689
87,314
24,146
Valuation allowance
(8,415,757
)
—
(7,171,431
)
—
(61,044
)
—
Total
¥
3,661,722
¥
3,643,071
¥
3,086,181
¥
2,836,689
$
26,270
$
24,146
F-27
Table of Contents
As of March 31, 2005 and 2006, the valuation allowance for deferred tax assets has been provided
at amounts which are not considered more likely than not to be realized. The net changes in the
valuation allowance for deferred tax assets were a decrease of ¥1,864,583 thousand, a decrease
of ¥2,224,170 thousand and a decrease of ¥1,244,326 thousand ($10,592 thousand) for the years
ended March 31, 2004, 2005 and 2006, respectively.
F-28
Table of Contents
As of March 31, 2006, IIJ and IIJ America had tax operating loss carryforwards of ¥22,359,559
thousand ($190,327 thousand) and $8,550 thousand, respectively. These loss carryforwards are
available to offset future taxable income, and will expire in the period ending March 31, 2013
in Japan and December 31, 2025 in the United States of America as follows:
Year Ending
Thousands of
March 31
Thousands of Yen
U.S. Dollars
2007
¥
—
$
—
2008
—
—
2009
915,435
7,792
2010
13,675,603
116,408
2011 and thereafter
8,772,948
74,677
Total
¥
23,363,986
$
198,877
A reconciliation between the amount of reported income taxes and the amount of income taxes
computed using the normal statutory rate for each of the three years in the period ended March
31, 2006 is as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2004
2005
2006
2006
Amount computed by using
normal Japanese statutory
tax rate
¥
(196,419
)
¥
1,290,888
¥
2,205,209
$
18,771
Increase (decrease) in taxes
resulting from:
Expenses not deductible for
tax purpose
11,080
34,820
38,653
329
Reserve for tax contingencies
—
—
197,753
1,683
Inhabitant tax-per capital
30,560
23,410
25,085
213
Realization of tax benefit of
operating loss carryforwards
(51,994
)
(1,426,755
)
(439,256
)
(3,739
)
Other change in valuation allowance
454,009
261,380
(1,933,379
)
(16,457
)
Tax benefit on losses of equity
method investee
(80,355
)
—
—
—
Expiration of operating loss
carryforwards
611,498
—
149,750
1,275
Effect of change in tax rate
(42,034
)
—
—
—
Tax benefit on losses of
Crosswave
(722,098
)
—
—
—
Other—net
18,289
(83,873
)
13,545
116
Income tax expense as reported
¥
32,536
¥
99,870
¥
257,360
$
2,191
F-29
Table of Contents
10.
RETIREMENT AND PENSION PLANS
IIJ and certain subsidiaries have unfunded retirement benefit and noncontributory defined
benefit pension plans which together cover substantially all of their employees who are not
directors and also participate in a contributory multi-employer pension plan, the Japan
Computer Information Service Employee's Pension Fund (the "Multi-Employer Plan"), covering
substantially all of their employees.
Approximately 70 percent of the employees' benefits from IIJ's severance indemnity plan was
transferred in May 1997 to its newly established noncontributory defined benefits pension
plan. The following information regarding net periodic pension cost and accrued pension cost
also includes the 30 percent of severance benefits not transferred to the noncontributory
plan. Under the severance and pension plans, all of IIJ's employees are entitled, upon
voluntary retirement with 15 years or more service, or upon mandatory retirement at age 60, to
a 10-year period of annuity payments (or lump-sum severance indemnities) based on the rate of
pay at the time of retirement, length of service and certain other factors. IIJ's employees
who do not meet these conditions are entitled to lump-sum severance indemnities.
As stipulated by the Japanese Welfare Pension Insurance Law, the Multi-Employer Plan is
composed of a substitutional portion of Japanese Pension Insurance and a multi-employers'
portion of a contributory defined benefit pension plan. The benefits for the substitutional
portion are based on a standard remuneration schedule under the Welfare Pension Insurance Law
and the length of participation. The multi-employers' portion of the benefits is based on the
employees' length of service. However, assets contributed by an employer are not segregated
in a separate account or restricted to provide benefits only to employees of that employer,
including IIJ. The net pension cost under the Multi-Employer Plan is recognized when
contributions become due.
Net periodic pension cost for the years ended March 31, 2004, 2005 and 2006 included the
following components:
Thousands of
Thousands of Yen
U.S. Dollars
2004
2005
2006
2006
Service cost
¥
150,149
¥
221,132
¥
240,765
$
2,049
Interest cost
8,809
14,944
20,524
175
Expected return on plan assets
(11,722
)
(13,129
)
(16,736
)
(142
)
Amortization of transition
obligation
402
402
402
3
Recognized net actuarial loss
575
8,262
1,904
16
Net periodic pension cost
¥
148,213
¥
231,611
¥
246,859
$
2,101
F-30
Table of Contents
The funded status as of March 31, 2005 and 2006 is as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Change in benefit obligation:
Benefit obligation at beginning of year
¥
933,969
¥
1,140,240
$
9,706
Service cost
221,132
240,765
2,049
Interest cost
14,944
20,524
175
Actuarial loss (gain)
(558
)
(31,171
)
(266
)
Benefit paid
(29,247
)
(40,906
)
(348
)
Benefit obligation at end of year
¥
1,140,240
¥
1,329,452
$
11,316
Change in plan assets:
Fair value of plan assets at beginning
of year
¥
656,443
¥
796,946
$
6,784
Actual return on plan assets
17,844
68,185
580
Employer contribution
143,471
155,191
1,321
Benefits paid
(20,812
)
(22,466
)
(191
)
Fair value of plan assets at end of year
¥
796,946
¥
997,856
$
8,494
Funded status
(343,294
)
(331,596
)
(2,822
)
Unrecognized actuarial loss
195,530
111,009
945
Unrecognized transition obligation
4,418
4,016
34
Net amount recognized
¥
(143,346
)
¥
(216,571
)
$
(1,843
)
Accumulated benefit obligation
¥
635,122
¥
750,900
$
6,392
Amounts recognized in the consolidated balance sheets consist of accrued retirement and pension
costs of ¥143,346 thousand as of March 31, 2005, and prepaid pension costs of ¥3,891 ($33
thousand) thousand and accrued retirement and pension costs of ¥220,462 thousand ($1,877
thousand) as of March 31, 2006.
The Company uses a March 31 measurement date for all its plans.
Actuarial assumptions as of March 31:
Benefit
Obligations
Net Periodic Costs
2005
2006
2004
2005
2006
Discount rate
1.8
%
2.0
%
1.5
%
1.6
%
1.8
%
Expected long-term rate of return
on plan assets
2.5
2.0
2.1
Rate of increase in compensation
3.4
3.4
2.0
3.25
3.4
The Company sets the discount rate assumption annually at March 31 to reflect the market yield
of Japanese Government Bonds matched against the average remaining service period of employees.
The basis for determining the long-term rate of returns is a combination of historical returns
and prospective return assumptions derived from pension trust funds' managing company.
IIJ's funding policies with respect to the noncontributory plan are generally to contribute
amounts considered tax deductible under applicable income tax regulations. Plan assets
including life insurance pooled investment portfolios consist of Japanese Government bonds,
other debt securities and marketable equity securities.
F-31
Table of Contents
Life insurance pooled investment portfolios are managed by an insurance company and guarantee a
minimum rate of return.
The Company's investment strategy for the plan assets is to manage the assets in order to pay
retirement benefits to plan participants while minimizing cash contributions from the Company
over the life of the plans. This is accomplished by preserving capital through diversification
in equity and debt securities based on portfolio determined by the insurance company
forecasting macroeconomics in order to maximize long-term rate of return, while considering the
liquidity need of the plans.
The projected allocation of the plan assets managed by the insurance company is developed in
consideration of the expected long-term investment returns for each category of the plan
assets. Approximately 63.0%, 35.0%, and 2.0% of the plan assets excluding pooled investment
portfolios will be allocated to debt securities, equity securities and other financial
instruments, respectively, to moderate the level of volatility in pension plan asset returns
and reduce risks. 50% of the employer's contribution to the plan during the year ending March
31, 2007 will be allocated to life insurance pooled investment portfolios and other 50% will be
allocated to the forementioned investments.
The Company's pension plan asset allocations as of March 31, 2005 and 2006 by asset category
are as follows:
2005
2006
Asset category:
Equity securities
21.3
%
(34.8
)%
22.4
%
(35.9
)%
Debt securities
38.8
(63.2
)
38.8
(62.1
)
Life insurance pooled investment portfolios
38.7
( —
)
37.6
( —
)
Other
1.2
(2.0
)
1.2
(2.0
)
Total
100.0
%
(100.0)
%*
100.0
%
(100.0)
%*
*The percentages in parentheses represent the Company's position plan asset allocation
excluding life insurance pooled investment portfolios.
The unrecognized net loss and the unrecognized net obligation at the date of initial
application are being amortized over 14 years and 21 years, respectively.
Contributions due and paid during the years ended March 31, 2004, 2005 and 2006 under the
Multi-Employer Plan, including its substitutional portion, amounted to ¥344,900 thousand,
¥466,543 thousand and ¥451,312 thousand ($3,842 thousand), respectively.
IIJ expects to contribute ¥155,191 thousand ($1,321 thousand) to its pension plan in the year
ending March 31, 2007.
The following benefit payments, which reflect expected future service, as appropriate,
are expected to be paid.
Year Ending
Thousands of
March 31
Thousands of yen
U.S. Dollars
2007
¥
30,823
$
262
2008
45,551
388
2009
41,747
355
2010
45,766
390
2011
50,970
434
2012 —2016
294,075
2,503
Total
¥
508,932
$
4,332
Under the Japanese Commercial Code (the "Code"), the amount of retirement benefits for retiring
directors and statutory auditors to be approved by the shareholders. In March, 2006, IIJ newly
established a retirement plan for statutory auditors. The Company recorded a liability for the
retirement benefits for statutory auditors of ¥2,870 thousand ($24 thousand), which would be
required if they retire at March 31, 2006.
There were no other benefits approved or paid to retired directors or statutory auditors for
each of three years in the period ended March 31, 2006.
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Table of Contents
11.
SHAREHOLDERS' EQUITY
Through May 1, 2006, IIJ is subject to the Code.
The Code requires that at least 50% of the issue price of new shares be recorded as common
stock and that the rest of the issue price be recorded as additional paid-in capital, which is
a component of capital surplus. The Code permits Japanese companies, in accordance with an
approval of the Board of Directors, to issue shares to existing shareholders without
consideration as a stock split. Such issuance of shares generally does not give rise to
changes within the shareholders' accounts.
The Code also provides that an amount equal to at least 10% of the aggregate amount available
for dividends and certain other appropriations of retained earnings associated with cash
outlays applicable to each period shall be appropriated as legal reserve (a component of
retained earnings) until such reserve and additional paid-in capital equals 25% of common
stock. The amount of total legal reserve and additional paid-in capital that exceeds 25% of
common stock may be made available for payment of dividends in accordance with an approval of
a shareholders' meeting. In addition, the Code permits the transfer of a portion of
additional paid-in capital and legal reserve to the common stock in accordance with an
approval of the Board of Directors.
The Code allows IIJ to purchase treasury stock and dispose of such treasury stock in
accordance with an approval of the Board of Directors. The amount of treasury stock purchased
cannot exceed the amount available for dividends to shareholders.
In addition to the provision that requires an appropriation for legal reserve in connection
with the cash outlays, the Code also imposes certain limitations on the amount of capital
surplus and retained earnings available for dividends. No amount was available for dividends
under the Code as of March 31, 2006, based on the amount recorded in IIJ's general books of
account.
Dividends are paid in accordance with an approval of a shareholders' meeting held subsequent
to the end of the fiscal year to which the dividends are applicable. Semiannual interim
dividends may also be paid in accordance with an approval of the Board of Directors, subject
to certain limitations imposed by the Code.
On May 1, 2006, a new corporation law (the "Corporation Law") became effective. The
Corporation Law reformed and replaced the Code with various revisions that, for the most part,
are applicable to events or transactions occurring on or after May 1, 2006 and for the fiscal
years ending on or after May 1, 2006. The significant changes brought about by the Corporation
Law that affect financial matters are summarized below:
(a) Dividends
Under the Corporation Law, companies can pay dividends at any time during the fiscal year in
addition to the year-end dividend in accordance with an approval of a shareholders' meeting.
For companies that meet certain criteria such as: (1) having a Board of Directors, (2) having
independent auditors, (3) having a Board of Statutory Auditors, and (4) having a term of
service for directors prescribed as one year rather than two years as the normal term by its
articles of incorporation, the Board of Directors may declare dividends (except for dividends
in kind) if the company has prescribed so in its articles of incorporation.
Semiannual interim dividends may also be paid once a year in accordance with an approval of
the Board of Directors. Under the Code, certain limitations were imposed on the amount of
capital surplus and retained earnings available for dividends. The Corporation Law also
provides certain limitations on the amounts available for dividends or the purchase of
treasury stock. The limitation is defined as the amount available for dividends to the
shareholders, but the amount of net assets after dividends must be maintained as at least ¥3
million.
(b) Increases / decreases and transfer of common stock, reserve and surplus
The Corporation Law requires that an amount equal to 10% of dividends must be appropriated as
legal reserve (a component of retained earnings) or as additional paid-in capital (a component
of capital surplus) depending on the capital account charged at the payment of such dividends
up to the aggregate amount of legal reserve and additional paid-in capital equal to 25% of
common stock. Under the Code, the aggregate amount of additional paid-in capital and legal
reserve that exceeds 25% of the common stock may be made available for dividends in accordance
with an approval of a shareholders' meeting. Under the Corporation Law, the total amount of
additional paid-in capital and legal reserve may be reversed without limitation of such
threshold. The Corporation Law also provides that common stock, legal reserve, additional
paid-in capital, and other capital surplus and retained earnings can be transferred among
these accounts under certain
F-33
Table of Contents
conditions in accordance with an approval of a shareholders' meeting.
(c) Treasury stock and treasury stock acquisition
rights
The Corporation Law also allows companies to purchase treasury stock and dispose of such
treasury stock in accordance with an approval of the Board of Directors if the company has
prescribed so in its articles of incorporation. The amount of treasury stock purchased cannot
exceed the amount available for dividends to the shareholders which is determined by specific
formula.
The Corporation Law also provides that companies can purchase both treasury stock acquisition
rights and treasury stock.
On June 27, 2003, IIJ issued 16,325 new shares of common stock at ¥83,640 per share for
¥1,365,423 thousand by a private placement to third parties in Japan. The proceeds from the
private placement were used as working capital of the Company.
On September 17, 2003, primarily to provide for the redemption of the convertible notes due
March 2005, IIJ issued 63,075 new shares of common stock at ¥190,260 per share for ¥12,000,650
thousand in a private placement in Japan to NTT for ¥9,603,374 thousand, NTT Communications
for ¥749,624 thousand,a wholly owned subsidiary of NTT, ITOCHU Corporation and Sumitomo Corporation for ¥499,432
thousand each and three other companies for ¥648,787 thousand. As a result of the
transaction, the total number of IIJ's outstanding common shares increased to 191,800 shares,
and NTT and its subsidiary owned 31.6 percent of IIJ's outstanding common shares.
Concurrently, IIJ entered into a Subscription Agreement with NTT under which IIJ allows NTT to
nominate up to three persons as directors or statutory auditors, subject to approval by IIJ's
shareholders. The agreement also provides NTT with preemptive rights to subscribe to any
additional future issuances by IIJ in order to maintain its shareholding. In addition, IIJ
and NTT agreed to undertake efforts to jointly engage in the development of broadband and
information technology and other related business, to expand the business relationship between
the two parties in connection with new business opportunities of IIJ and discuss secondment of
employees to each other.
Upon completion of this transaction, NTT and its subsidiaries are related parties of the
Company. The Company entered into a number of different types of transactions with NTT and
its subsidiaries including purchases of wireline telecommunication services for Company's
offices. For the Company's connectivity and value added services, the Company purchases
international and domestic backbone services, local access lines and rental rack space in data
centers from NTT and its subsidiaries. The Company sells to NTT and its subsidiaries its
services including OEM services, system integration services and monitoring services for their
data centers.
The amounts of balances as of March 31, 2005 and 2006 and transactions of the Company with NTT
and its subsidiaries for the each of the three years in the period ended March 31, 2006, are
summarized as follows.
Thousands of
Thousands of Yen
U.S. Dollars
2004
2005
2006
2006
Accounts receivable
¥
—
¥
286,389
¥
366,648
$
3,121
Accounts payable
—
687,757
710,322
6,046
Revenues
954,341
1,413,379
1,394,791
11,873
Costs and expenses
4,531,189
7,672,480
8,075,542
68,740
In December, 2005, IIJ completed a public offering 12,500 new shares (equivalent to 5,000,000
ADSs) of common stock by a firm-commitment basis underwriting at an offering price of ¥534,022
(an issue value of ¥490,955) per share on the Mothers market of the Tokyo Stock Exchange. The
net proceeds to IIJ from the public offering, after deducting stock issuance costs, were
¥6,030,064 thousand. Stock issuance costs of ¥106,873 thousand were deducted from additional
paid-in capital.
Stock Option Plans—
In May 2000, IIJ granted 295 options to 34 directors and employees. The
options vested fully on April 8, 2002 and are exercisable for eight years from that date. In
August 2001, IIJ granted 395 options to 44 directors and employees. The options became fully
vested on June 28, 2003 and are exercisable for eight years from that date. No options are
available for additional grant as of March 31, 2006. No compensation expense has been
recognized in the consolidated statements of operations pursuant to APB No. 25, because the
exercise price was greater than the market price on the dates of grant. In March 2000, IIJ
Technology issued bonds with 2,000 detachable warrants in the amount of ¥600,000 thousand.
The bonds were repurchased in April 2000 and warrants to
purchase the subsidiary's 775 common shares at an exercise
F-34
Table of Contents
price of ¥300,000 per share based on fair market value were immediately purchased by certain
officers and employees of IIJ and the subsidiary. One thousand warrants were purchased by
IIJ. Warrants were exercisable upon issuance. On March 29, 2006, 1,000 of the warrants of IIJ
Technology were expired. The remaining warrants are exercisable through March 29, 2007. The
exercise price was revised to ¥250,326 ($2,131 thousand) per share as of March 31, 2006, due
to the effects of issuances of new shares during the year ended March 31, 2006.
The following table summarizes the transactions of IIJ's stock option plans for the three
years in the period ended March 31, 2006:
Thousands of Yen
Weighted Average
Number of
Number of
Exercise Price per
Options
Shares
Common Shares
Unexercised options outstanding—April 1, 2003
675
3,375
¥
1,336
Options granted
—
—
—
Options exercised
—
—
—
Options forfeited
60
300
1,873
Unexercised options outstanding—March 31, 2004
615
3,075
¥
1,063
Options granted
—
—
—
Options exercised
—
—
—
Options forfeited
70
350
1,510
Unexercised options outstanding—March 31, 2005
545
2,725
¥
1,006
Options granted
—
—
—
Options exercised
—
—
—
Options forfeited
15
75
944
Unexercised options outstanding—March 31, 2006
530
2,650
¥
1,007
Due to the effect of the stock split in October 2005, grantees of options can purchase
five shares by exercising one option.
F-35
Table of Contents
Summarized information about stock options outstanding as of March 31, 2006 is as follows:
Outstanding
Exercisable
Exercise Price
Number of Shares
Remaining Life
Number of Shares
(Thousands of Yen)
Underlying Options
(in Years)
Underlying Options
¥  2,163
975
4.0
975
334
1,675
5.3
1,675
12. OTHER COMPREHENSIVE INCOME
The change in each component of other comprehensive income (loss) for the years ended March
31, 2004, 2005 and 2006 is as follows:
Thousands of Yen
Before Tax
Tax (Expense)
Net of Tax
Amount
or Benefit
Amount
Year ended March 31, 2004:
Foreign currency translation adjustments
¥
(45,582
)
¥
—
¥
(45,582
)
Unrealized holding gain (loss) on
securities:
Amount arising during the period
5,354,719
(2,184,739
)
3,169,980
Less: Reclassification adjustments for
losses included in net loss
(47,040
)
19,192
(27,848
)
Release in deferred tax asset valuation
allowance*
—
2,165,547
2,165,547
Net unrealized holding gain (loss) during
the period
5,307,679
—
5,307,679
Gain on cash flow hedging derivative
instruments:
Amount arising during the period
(7,561
)
—
(7,561
)
Less: Reclassification adjustments for
losses included in net loss
26,303
—
26,303
Net gain on cash flow hedging derivative
instruments
18,742
—
18,742
Other comprehensive income (loss)
¥
5,280,839
¥
—
¥
5,280,839
Year ended March 31, 2005:
Foreign currency translation adjustments
¥
(25,858
)
¥
—
¥
(25,858
)
Unrealized holding gain (loss) on
securities:
Amount arising during the period
4,989,951
(2,045,880
)
2,944,071
Less: Reclassification adjustments for
gains included in net income
(2,478,906
)
1,016,351
(1,462,555
)
Release in deferred tax asset valuation allowance*
—
1,029,529
1,029,529
Net unrealized holding gain (loss) during
the period
2,511,045
—
2,511,045
Gain on cash flow hedging derivative
instruments:
Amount arising during the period
(3,521
)
—
(3,521
)
Less: Reclassification adjustments for
losses included in net income
13,010
—
13,010
Net gain on cash flow hedging derivative
instruments
9,489
—
9,489
Other comprehensive income (loss)
¥
2,494,676
¥
—
¥
2,494,676
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Table of Contents
Thousands of Yen
Before Tax
Tax (Expense)
Net of Tax
Amount
or Benefit
Amount
Year ended March 31, 2006:
Foreign currency translation adjustments
¥
38,331
¥
—
¥
38,331
Unrealized holding gain (loss) on
securities:
Amount arising during the period
1,046,874
(429,218
)
617,656
Less: Reclassification adjustments for
gains included in net income
(3,227,203
)
1,323,153
(1,904,050
)
Increase in deferred tax asset valuation
allowance*
—
(893,935
)
(893,935
)
Net unrealized holding gain (loss) during
the period
(2,180,329
)
—
(2,180,329
)
Gain on cash flow hedging derivative
instruments:
Amount arising during the period
(4,541
)
—
(4,541
)
Less: Reclassification adjustments for
losses included in net income
10,008
—
10,008
Net gain on cash flow hedging derivative
instruments
5,467
—
5,467
Other comprehensive income (loss)
¥
(2,136,531
)
¥
—
¥
(2,136,531
)
Thousands of U.S. Dollars
Before Tax
Tax (Expense)
Net of Tax
Amount
or Benefit
Amount
Year ended March 31, 2006:
Foreign currency translation adjustments
$
326
$
—
$
326
Unrealized holding gain (loss) on
securities:
Amount arising during the period
8,911
(3,654
)
5,257
Less: Reclassification adjustments for
gains included in net income
(27,470
)
11,263
(16,207
)
Increase in deferred tax asset
valuation allowance*
—
(7,609
)
(7,609
)
Net unrealized holding gain (loss) during
the period
(18,559
)
—
(18,559
)
Gain on cash flow hedging derivative
instruments:
Amount arising during the period
(38
)
—
(38
)
Less: Reclassification adjustments for
losses included in net income
85
—
85
Net gain on cash flow hedging derivative
instruments
47
—
47
Other comprehensive income (loss)
$
(18,186
)
$
—
$
(18,186
)
*  The release (increase) in the deferred tax asset valuation allowance has resulted from
unrealized gains and (losses) on available-for-sale securities,
respectively.
F-37
Table of Contents
The components of accumulated other comprehensive income (loss) at March 31, 2005 and 2006 are
as follows:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Foreign currency translation adjustments
¥
(33,295
)
¥
5,036
$
43
Unrealized holding gain on securities
8,732,910
6,552,581
55,776
Loss on cash flow hedging derivative instruments
(9,490
)
(4,023
)
(34
)
¥
8,690,125
¥
6,553,594
$
55,785
13.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share computation for three years ended March 31,
2004, 2005 and 2006 is as follows.
Thousands of
Thousands of Yen
U.S. Dollars
2004
2005
2006
2006
Numerator:
Net income (loss)
¥
(2,270,686
)
¥
2,906,269
¥
4,753,570
$
40,463
Effect of dilution
—
—
—
—
Net income (loss)-diluted
¥
(2,270,686
)
¥
2,906,269
¥
4,753,570
$
40,463
Number of shares
2004
2005
2006
Denominator:
Weighted-average common shares outstanding
158,554
191,559
195,613
Effect of Stock options
—
—
342
Diluted common shares outstanding
158,554
191,559
195,955
Yen
U.S. Dollars
2004
2005
2006
2006
Basic net income (loss) per common share
¥
(14,321
)
¥
15,172
¥
24,301
$
207
Diluted net income (loss) per common share
¥
(14,321
)
¥
15,172
¥
24,258
$
206
For the year ended March 31, 2004, all potential common shares, shares issuable upon
exercise of stock options or conversion of convertible notes, have been excluded from the
computation of diluted net loss per share because the effect would be antidilutive.
For the year ended March 31, 2005, potentially dilutive shares have been excluded from
the computation of diluted net income because the exercise prices of the options were greater
than the average market price of the common shares and the effect of conversion of the
convertible notes would be antidilutive.
For the year ended March 31, 2006, the following potentially dilutive shares have been
excluded from the computation of diluted net income because the exercise prices of the options
were greater than the average market price of the common shares.
Diluted net income (loss) per share does not include the effects of the following
potential common shares:
F-38
Table of Contents
Year ended March 31
2004
2005
2006
Shares issuable under stock options
3,075
2,725
975
Shares issuable related to convertible
notes on an "as-if-converted" basis
2,975
—
—
14.
COMMITMENTS AND CONTINGENT LIABILITIES
In December 2001, a class action complaint alleging violations of the federal securities laws
was filed against the Company, naming IIJ, certain of its officers and directors as
defendants, and underwriters of IIJ's initial public offering. Similar complaints have been
filed against over 300 other issuers that have had initial public offerings since 1998 and
such actions have been included in a single coordinate proceeding in the Southern District of
New York. An amended complaint was filed on April 24, 2002 alleging, among other things, that
the underwriters of IIJ's initial public offering violated the securities laws (i) by failing
to disclose in the offering's registration statement certain alleged compensation arrangements
entered into with the underwriters' clients, such as undisclosed commissions or tie-in
agreements to purchase stock in the after-market, and (ii) by engaging in manipulative
practices to artificially inflate the price of IIJ's stock in the after-market subsequent to
the initial public offering. On July 15, 2002, the Company joined in an 'omnibus' motion to
dismiss the amended complaint filed by the issuers and individuals named in the various
coordinated cases. In June 2003, the Company approved a settlement with the plaintiffs in
this matter. IIJ, along with the settling issuer defendants, filed a motion seeking the
court's preliminary approval of the settlement. The court granted preliminary approval of the
settlement on February 15, 2005, subject to certain modifications. On August 31, 2005, the
court issued a preliminary order further approving the modifications to the settlement and
certifying the settlement classes. The court also appointed the Notice Administrator for the
settlement and ordered that notice of the settlement be distributed to all settlement class
members beginning on November 15, 2005. The settlement fairness hearing has been set for April
24, 2006. Following the hearing, if the court determines that the settlement is fair to the
class members, the settlement will be approved. The settlement releases IIJ and the individual
defendants for liability for the conduct alleged in the action. Under the settlement, the
Company agreed to assign away, not assert, or release certain potential claims the Company may
have against IIJ's underwriters. Approximately 260 defendant issuers participated in this
settlement. As to financial impact on the Company, the settlement provides that the class
members will be guaranteed $1 billion in recoveries by the insurers of the issuers. In
addition to IIJ's portion of the proposed settlement, some of the continuing legal expenses
incurred in connection with the partial settlement would be borne by IIJ's insurer based on
the settlement agreement and an individual agreement between IIJ and IIJ's insurer.
Consequently, the Company believes that there will be no significant financial impact on the
Company as a result of this matter.
In addition to the foregoing, the Company is a party to other suits and claims that arise in
the normal course of business. The negative adverse outcome of such suits and claims would
not have a significant impact on the financial statements.
In January 19, 2006, IIJ entered into a joint venture agreement regarding the establishment
and management
of i-revo with Konami corporation. In the agreement, IIJ committed an additional contribution
for capital investment or working capital to i-revo of up to ¥90,000 thousand ($766 thousand)
for the period from November 2006 to April 2007.
15.
DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
Interest Rate Swap Agreement—
The Company is exposed to changes in interest rates that are
associated with long-term bank borrowings. The Company's policy on managing the interest rate
risk is to hedge the exposure to variability in future cash flows of floating rate interest
payments on the long-term bank borrowings. In order to reduce cash flow risk exposures on
floating rate borrowings, the Company utilizes interest rate swap agreements to convert a
floating rate borrowing to a fixed rate borrowing.
The Company is also exposed to credit-related losses in the event of non-performance by
counterparties to interest rate swaps, but it is not expected that any counterparties will
fail to meet their obligations, because counterparties are internationally recognized
financial institutions.
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Table of Contents
Changes in fair value of interest rate swaps designated as hedging instrument are reported in
accumulated other comprehensive income during the years ended March 31, 2004, 2005 and 2006. These
amounts subsequently are reclassified into interest expense as a yield adjustment in the same
period in which the hedged bank borrowings affect earnings. The term, notional amount and
repricing date of interest rate swaps exactly match those of the long-term borrowings. The
swap terms are "at the market," so they have zero value at inception. Thus, there was no
ineffectiveness recognized in earnings for the years ended March 31, 2004, 2005 and 2006. For
the years ended March 31, 2004, 2005 and 2006, net derivative loss of ¥26,303 thousand,
¥13,010 thousand and ¥10,008 thousand ($85 thousand) were reclassified to interest expense,
respectively.
Approximately ¥7,116 thousand ($61 thousand) of accumulated other comprehensive loss related
to the interest rate swaps are expected to be reclassified as an adjustment to interest
expense as a yield adjustment of the hedged bank borrowings within the next 12 months.
Fair Value—
In the normal course of business, the Company invests in financial assets and
incurs financial liabilities. To estimate the fair value of those financial assets,
liabilities and derivatives, the Company used quoted market prices to the extent that they
were available. Where a quoted market price is not available, the Company estimates fair
value using primarily the discounted cash flow method. For certain financial assets and
liabilities, such as trade receivables and trade payables, which are expected to be collected
and settled within one year, the Company assumed that the carrying amount approximates fair
value due to their short maturities. Investment for which it is not practicable to estimate
fair value are investments in a number of unaffiliated and unlisted smaller sized companies
and the estimate of their fair values cannot be made without incurring excessive costs.
Refundable insurance policies are carried at cash surrender value. The carrying amounts or
notional amounts and fair value of financial instruments are summarized below:
Thousands of
Thousands of Yen
U.S. Dollars
2005
2006
2006
Carrying
Fair
Carrying
Fair
Carrying
Fair
Amount or
Value
Amount or
Value
Amount or
Value
Notional
or Gain
Notional
or Gain
Notional
or Gain
Amount
(Loss)
Amount
(Loss)
Amount
(Loss)
Other
investments
for which it is:
Practicable to
estimate
fair value
¥
8,948,168
¥
8,948,168
¥
6,775,388
¥
6,775,388
$
57,673
$
57,673
Not practicable
982,613
—
1,245,317
—
10,600
—
Noncurrent
refundable
insurance
policies
(other assets)
62,636
62,636
82,252
82,252
700
700
Long-term
borrowings and
installment
payable,
including
current
portion
4,266,019
4,262,908
2,279,963
2,279,963
19,407
19,407
Interest rate
swap contracts
1,400,000
(9,490
)
1,150,000
(4,023
)
9,789
(34
)
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Table of Contents
Cash at March 31, 2005 and 2006 includes U.S. dollar denominated current bank deposits of
¥705,940 thousand and ¥442,169 thousand ($3,764 thousand), respectively.
16.
ADVERTISING EXPENSES
Advertising expenses incurred during the years ended March 31, 2004, 2005 and 2006 related
primarily to advertisements in magazines, journals and newspapers and amounted to ¥106,525
thousand, ¥151,226 thousand and ¥223,696 thousand ($1,904 thousand), respectively.
17.
SUBSEQUENT EVENTS
At the 14
th
Ordinary General Shareholders' Meeting held on June 28, 2006, IIJ's
shareholders approved the reductions of additional paid-in capital of ¥21,980,395 thousand
($187,099 thousand) and common stock of ¥2,539,222 thousand ($21,624 thousand) to eliminate
accumulated deficit for purposes of reporting under the Corporation Law in its
non-consolidated financial statements. The reductions are pursuant to Article 447.1 and 448.1
of the Corporation Law. The effective date is August 4, 2006.
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