FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 under the Securities Exchange Act of 1934 For August 14, 2007 Commission File Number: 0-30204 ------- Internet Initiative Japan Inc. (Translation of registrant's name into English) Jinbocho Mitsui Bldg. 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F: Form 20-F [ X ] Form 40-F [ ] Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____ Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders. Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____ Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR. Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [ X ] If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ------------- EXHIBIT INDEX Exhibit Date Description of Exhibit ------- ---- ---------------------- 1 2007/08/13 IIJ Announces First Quarter Results for the Fiscal Year Ending March 31, 2008 2 2007/08/13 IIJ Revises Targets for the Financial Results for the First Half of the Fiscal Year Ending March 31, 2008 3 2007/08/13 Consolidated Financial Results for the Three Months Ended June 30, 2007 - English Translation of IIJ's consolidated financial results in the form defined by the Tokyo Stock Exchange EXHIBIT 1 --------- IIJ Announces First Quarter Results for the Fiscal Year Ending March 31, 2008 TOKYO--(BUSINESS WIRE)--Aug. 13, 2007--Internet Initiative Japan Inc. (Nasdaq: IIJI, Tokyo Stock Exchange First Section: 3774) ("IIJ"), one of Japan's leading Internet-access and comprehensive network solutions providers, today announced its financial results for the first quarter of the fiscal year ending March 31, 2008 ("FY2007").(1) Highlights of First Quarter FY2007 Results -- Revenue totaled JPY 13,696 million ($111.0 million), an increase of 10.1% from 1Q06. -- Operating income was JPY 692 million ($5.6 million), an increase of 23.7% from 1Q06. -- Net income was JPY 571 million ($4.6 million), a decrease of 22.2% from 1Q06. The decrease is mainly due to a decrease in gains from the sale of available-for-sale securities and the recording of deferred tax expenses caused by a decrease in deferred income tax assets as a result of recording taxable income. Financial Targets for FY2007(2) -- We favorably revised our initial target for the net income for the first half of FY2007 that we disclosed on May 15, 2007, due to our plan in 2Q07 to record deferred tax benefits exceeding the deferred tax expenses that we recorded in 1Q07. We are maintaining our initial targets for the full FY2007. Overview of 1st Quarter FY2007 Financial Results and Business Outlook(2) "We had a very good start in 1Q07," said Koichi Suzuki, President and CEO of IIJ. "Revenues increased by 10.1% and operating income increased by 23.7% compared to 1Q06. The steady increase in revenues and improving operating profitability is largely because of the favorable business trends and a steady increase in monthly recurring revenues from our connectivity services and value-added services. Revenues from connectivity services showed a significant increase compared to 1Q06, especially an 8.8% increase for corporate use. The increase is mainly due to the continuous trend of corporate customers shifting to higher speeds along with an increase in utilization of the Internet. For value-added services, there is strong demand for "Secure MX Services", which was introduced in October 2006 to provide comprehensive e-mail security. Revenues from these services increased to over JPY 50 million per month. In April 2007, we started operation of another data center in Tokyo to meet an increase in demand for data centers. The gross margin ratio for connectivity and value-added services improved significantly to 17.5% in 1Q07 from 13.5% in 1Q06." "We completed the business investments for our mid- and long-term expansion announced previously," continued Koichi Suzuki. "We acquired hi-ho, Inc. ("hi-ho") from Panasonic Network Services Inc. in June 2007 to expand our Internet business for home users. We invested in GDX Japan K.K. jointly with GDX Network, Inc. in April 2007 to offer a safer e-mail environment. We made our two consolidated subsidiaries wholly owned in May 2007 to enhance our group structure." "We recorded deferred tax expenses in 1Q07 because we recorded deferred tax benefits in the last fiscal year and taxable income in 1Q07," said Akihisa Watai, CFO of IIJ. "However in 2Q07, we expect to record deferred tax benefits exceeding the deferred tax expenses that we recorded in 1Q07 by revising valuation allowance against deferred income tax assets, related to the application of the consolidated tax payment system for us and our wholly owned subsidiaries in addition to the increasing income trend. As a result, we favorably revised our target for the net income for the first half of FY2007 that we disclosed on May 15, 2007. The revision is related to the timing of record of income tax benefits or expenses in the fiscal year and we maintain our initial targets for the full FY2007." 1st Quarter FY2007 Financial Results Results of Operation Operating Results Summary (JPY in millions) YoY % 1Q07 1Q06 change ------------------------------------- ---------- ---------- ---------- Total Revenues 13,696 12,437 10.1% ------------------------------------- ---------- ---------- ---------- Total Costs 10,942 10,134 8.0% ------------------------------------- ---------- ---------- ---------- SG&A Expenses and R&D 2,062 1,744 18.2% ------------------------------------- ---------- ---------- ---------- Operating Income 692 559 23.7% ------------------------------------- ---------- ---------- ---------- Income before Income Tax Expense 757 999 (24.3%) ------------------------------------- ---------- ---------- ---------- Net Income 571 734 (22.2%) ------------------------------------- ---------- ---------- ---------- Revenues Revenues in 1Q07 totaled JPY 13,696 million, an increase of 10.1% from JPY 12,437 million in 1Q06. Revenues (JPY in millions) YoY % 1Q07 1Q06 change ------------------------------------- ---------- ---------- ---------- Total Revenues: 13,696 12,437 10.1% ------------------------------------- ---------- ---------- ---------- Connectivity and Value-added Services 6,871 5,864 17.2% ------------------------------------- ---------- ---------- ---------- Systems Integration 6,334 6,032 5.0% ------------------------------------- ---------- ---------- ---------- Equipment Sales 491 541 (9.5%) ------------------------------------- ---------- ---------- ---------- Connectivity and Value-added Services ("VAS") revenues were JPY 6,871 million in 1Q07, an increase of 17.2% compared to 1Q06. The increase was mainly due to an increase in revenues from connectivity services for corporate users and value-added services overall. The increase was also affected by additional revenues of JPY 435 million from hi-ho, which IIJ acquired in June 1, 2007. SI revenues increased 5.0% to JPY 6,334 million in 1Q07 compared to 1Q06. The increase was due to a steady increase in monthly recurring revenues from systems operation and maintenance. Equipment sales revenues were JPY 491 million in 1Q07, a decrease of 9.5% compared to 1Q06. Cost and expense Cost of revenues was JPY 10,942 million in 1Q07, an increase of 8.0% compared to 1Q06. Cost of Revenues (JPY in millions) YoY % 1Q07 1Q06 change ------------------------------------- ---------- ---------- ---------- Cost of Revenues: 10,942 10,134 8.0% ------------------------------------- ---------- ---------- ---------- Connectivity and Value-added Services 5,670 5,070 11.8% ------------------------------------- ---------- ---------- ---------- Systems Integration 4,849 4,581 5.8% ------------------------------------- ---------- ---------- ---------- Equipment Sales 423 483 (12.3%) ------------------------------------- ---------- ---------- ---------- Cost of Connectivity and VAS revenues was JPY 5,670 million in 1Q07, an increase of 11.8% compared to 1Q06, mainly due to an increase in costs of JPY 406 million along with additional revenues from hi-ho starting from June 1, 2007. Cost of SI revenues was JPY 4,849 million in 1Q07, an increase of 5.8% compared to 1Q06. The increase was mainly due to an increase in revenues from systems integration projects and an increase in personnel expenses. Cost of Equipment Sales revenues was JPY 423 million in 1Q07, a decrease of 12.3% compared to 1Q06. Sales and marketing expenses were JPY 939 million in 1Q07, an increase of 18.9% compared to 1Q06. The increase was mainly due to an increase in personnel expenses and advertising expenses along with business expansion, as well as the addition of sales and marketing expenses from hi-ho starting from June 1, 2007. General and administrative expenses were JPY 1,067 million in 1Q07, an increase of 16.6% compared to 1Q06. The increase was mainly due to an increase in personnel expenses and outsourcing expenses. Operating income Operating income was JPY 692 million in 1Q07, an increase of 23.7% compared to 1Q06. The increase was mainly due to the increase of JPY 407 million in gross margin from connectivity and value-added services, despite of the increase in sales and marketing expenses and general and administrative expenses. Other income and others Other income in 1Q07 was JPY 65 million, a decrease of 85.1% from JPY 440 million in 1Q06. The decrease was mainly due to a decrease in gains from the sale of available-for-sale securities. The gains from the sale of available-for-sale securities in 1Q07 were JPY 214 million, compared to JPY 478 million in 1Q06. Income tax expense in 1Q07 was JPY 175 million, compared to income tax expense of JPY 149 million in 1Q06. The increase is mainly due to deferred tax expenses of JPY 144 million. Minority interests in losses of subsidiaries in 1Q07 was JPY 9 million. The decrease of minority interests in losses of subsidiaries was mainly due to the elimination of minority interests related to our 4 consolidated subsidiaries wholly owned by us, because we acquired shares of IIJ Technology Inc. and Net Care, Inc. from their minority shareholders. Equity in net loss of equity method investees in 1Q07 was JPY 20 million, mainly affected by equity in net loss of Internet Revolution Inc. Net income was JPY 571 million in 1Q07, a decrease of 22.2% compared to 1Q06. Financial Condition Balance Sheets As of June 30, 2007, total assets increased by JPY 4,082 million from the amount as of March 31, 2007 to JPY 51,775 million. For current assets, inventories increased by JPY 966 million, mainly due to an increase of on-going systems integration projects; prepaid expenses increased by JPY 1,175 million, mainly for bonus payments to our employees and maintenance expenses related to systems integration projects; and account receivables decreased by JPY 1,731 million, each from the respective amount as of March 31, 2007. Property and equipment increased by JPY 1,486 million from the amount as of March 31, 2007 mainly due to our acquisition of hi-ho and an increase of property for us to provide services to our customers and ourselves. Intangible assets increased by JPY 2,979 million from the amount as of March 31, 2007, mainly due to the recording of non-amortized intangible assets upon our acquisition of shares of two consolidated subsidiaries and hi-ho. For current liabilities, borrowings increased by JPY 5,000 million from the amount as of March 31, 2007 due to our acquisition of shares of two consolidated subsidiaries from their minority shareholders, and accounts payable decreased by JPY 2,548 million from the amount as of March 31, 2007. Total shareholders' equity as of June 30, 2007 was JPY 21,077 million, an increase of JPY 965 million from the amount as of March 31, 2007. Cash Flows Cash as of June 30, 2007 was JPY 12,598 million. Net cash used in operating activities in 1Q07 was JPY 1,328 million, compared to net cash provided by operating activities of JPY 905 million in 1Q06. Operating income increased compared to 1Q06, mainly due to a steady increase in monthly recurring revenues from connectivity and value-added services. On the other hand during 1Q07, we recorded an increase in inventories and prepaid expenses related to on-going systems integration projects, a decrease in accounts payable of JPY 1,065 million related to a systems integration project that was completed in the previous fiscal year, and payment of JPY 726 million for income taxes. Net cash used in investing activities in 1Q07 was JPY 3,520 million, compared to JPY 267 million in 1Q06. We recorded proceeds of JPY 538 million from the sale of available-for-sale securities (the fair value of available-for-sale securities at June 30, 2007 was JPY 1,018 million). We paid JPY 1,975 million for the purchase of subsidiary stock from minority shareholders, JPY 912 million for the acquisition of a newly controlled company, hi-ho, and JPY 570 million for the purchase of property and equipment. Net cash provided by financing activities in 1Q07 was JPY 3,898 million, compared to net cash used in financing activities of JPY 1,268 million in 1Q06. We recorded proceeds from net borrowings of JPY 5,729 million, including new borrowings of JPY 5,000 million for our acquisition of shares of two consolidated subsidiaries from their minority shareholders. We also recorded principal payments under capital leases of JPY 775 million and a net decrease in short-term borrowings with initial maturities of less than three months of JPY 750 million. 1st Quarter FY2007 Business Review Analysis by Service Connectivity and Value-added Services For connectivity services for corporate use, customers continued to shift to higher speeds. Total contracted bandwidth increased by 104.9 Gbps to 330.3 Gbps compared to 1Q06. Revenues from connectivity services for corporate users were JPY 2,973 million, an increase of 8.8% compared to 1Q06. Revenues from IP Services, the services mainly used for corporate headquarters and data centers, increased by 8.4% compared to 1Q06, mainly due to new contracts and the shift of our corporate customers to higher speeds. Revenues from broadband services increased by 21.2% compared to 1Q06, mainly due to the expansion of broadband utilization in the corporate internal network. Revenues from connectivity services for home users were JPY 806 million in 1Q07, an increase of 64.5% compared to 1Q06. The increase was mainly due to additional revenues of JPY 339 million related to IIJ's acquisition of hi-ho on June 1, 2007. VAS revenues were JPY 2,105 million in 1Q07, an increase of 20.9% compared to 1Q06. The increase was mainly due to an increase in revenues from e-mail, security, Internet VPN related services and data centers. Other revenues were JPY 987 million in 1Q07, an increase of 9.7% compared to 1Q06. As a result, revenues from Internet connectivity and VAS in 1Q07 were JPY 6,871 million, an increase of 17.2% compared to 1Q06. The gross margin for Internet connectivity and value-added services in 1Q07 was JPY 1,202 million, an increase of 51.3% compared to 1Q06. The gross margin ratio in 1Q07 improved to 17.5% compared to 13.5% in 1Q06. Number of Contracts for Connectivity Services(3) YoY 1Q07 1Q06 Change --------------------------------------- --------- --------- ---------- Connectivity Services (Corporate Use) 21,210 17,031 4,179 --------------------------------------- --------- --------- ---------- IP Service (-99Mbps) 773 747 26 --------------------------------------- --------- --------- ---------- IP Service (100Mbps-999Mbps) 168 131 37 --------------------------------------- --------- --------- ---------- IP Service (1Gbps-) 58 51 7 --------------------------------------- --------- --------- ---------- IIJ Data Center Connectivity Service 278 264 14 --------------------------------------- --------- --------- ---------- IIJ FiberAccess/F and IIJ DSL/F 18,252 14,085 4,167 --------------------------------------- --------- --------- ---------- Others 1,681 1,753 (72) --------------------------------------- --------- --------- ---------- Connectivity Services (Home Use) 555,946 594,951 (39,005) --------------------------------------- --------- --------- ---------- Under IIJ Brand 54,192 59,545 (5,353) --------------------------------------- --------- --------- ---------- hi-ho 186,677 -- 186,677 --------------------------------------- --------- --------- ---------- OEM(4) 315,077 535,406 (220,329) --------------------------------------- --------- --------- ---------- Total Contracted Bandwidth 330.3Gbps 225.4Gbps 104.9Gbps --------------------------------------- --------- --------- ---------- Connectivity and VAS Revenue Breakdown and Cost(5) (JPY in millions) YoY % 1Q07 1Q06 Change --------------------------------------------- ------- -------- ------- Connectivity Service Revenues (Corporate Use) 2,973 2,733 8.8% --------------------------------------------- ------- -------- ------- IP Service(6) 2,218 2,046 8.4% --------------------------------------------- ------- -------- ------- IIJ FiberAccess/F and IIJ DSL/F 615 508 21.2% --------------------------------------------- ------- -------- ------- Others 140 179 (22.0%) --------------------------------------------- ------- -------- ------- Connectivity Service Revenues (Home Use) 806 490 64.5% --------------------------------------------- ------- -------- ------- Under IIJ Brand 282 303 (6.9%) --------------------------------------------- ------- -------- ------- hi-ho 339 -- -- --------------------------------------------- ------- -------- ------- OEM 185 187 (1.1%) --------------------------------------------- ------- -------- ------- VAS Revenues 2,105 1,741 20.9% --------------------------------------------- ------- -------- ------- Other Revenues 987 900 9.7% --------------------------------------------- ------- -------- ------- Total Connectivity and VAS Revenues 6,871 5,864 17.2% --------------------------------------------- ------- -------- ------- Cost of Connectivity and VAS 5,670 5,070 11.8% --------------------------------------------- ------- -------- ------- Backbone Cost (included in the cost of Connectivity and VAS) 819 872 (6.1%) --------------------------------------------- ------- -------- ------- Connectivity and VAS Gross Margin Ratio 17.5% 13.5% -- --------------------------------------------- ------- -------- ------- Systems Integration Revenues from systems integration were JPY 6,334 million in 1Q07, an increase of 5.0% compared to 1Q06. The increase was mainly due to an increase of 16.2% in monthly recurring revenues from systems operation and maintenance compared to 1Q06, while one-time revenues from systems construction decreased by 8.1% compared to 1Q06 because there were more projects that are expected to be completed in the second half of FY2007 and a smaller number of projects that continued from the previous quarter compared to 1Q06. The gross margin for systems integration in 1Q07 was JPY 1,486 million and the gross margin ratio in 1Q07 was 23.5%, compared to 24.0% in 1Q06. The order backlog for systems integration and equipment sales at June 30, 2007 was JPY 17,174 million, an increase of 81.3% from the amount as of March 31, 2007. Systems Integration Revenue Breakdown and Cost (JPY in millions) YoY % 1Q07 1Q06 Change ------------------------------------------------- ------ ------ ------ Systems Integration Revenues 6,334 6,032 5.0% ------------------------------------------------- ------ ------ ------ Systems Construction 2,552 2,778 (8.1%) ------------------------------------------------- ------ ------ ------ Systems Operation and Maintenance 3,782 3,254 16.2% ------------------------------------------------- ------ ------ ------ Cost of Systems Integration 4,849 4,581 5.8% ------------------------------------------------- ------ ------ ------ Systems Integration Gross Margin Ratio 23.5% 24.0% -- ------------------------------------------------- ------ ------ ------ Equipment Sales Revenue from equipment sales was JPY 491 million in 1Q07. The gross margin ratio for equipment sales in 1Q07 was 13.6%, compared to 10.8% in 1Q06. Equipment Sales Revenue and Cost (JPY in millions) YoY % 1Q07 1Q06 Change -------------------------------------------------- ----- ----- ------- Equipment Sales Revenues 491 541 (9.5%) -------------------------------------------------- ----- ----- ------- Cost of Equipment Sales 423 483 (12.3%) -------------------------------------------------- ----- ----- ------- Equipment Sales Gross Margin Ratio 13.6% 10.8% -- -------------------------------------------------- ----- ----- ------- Other Financial Statistics Other Financial Statistics (JPY in millions) YoY % 1Q07 1Q06 change -------------------------------------------------- ----- ----- ------- Adjusted EBITDA(7) 1,740 1,666 4.4% -------------------------------------------------- ----- ----- ------- CAPEX, including capital leases(8) 2,232 842 165.1% -------------------------------------------------- ----- ----- ------- Depreciation and amortization 1,048 1,107 (5.4%) -------------------------------------------------- ----- ----- ------- Reconciliation of Non-GAAP Financial Measures The following table summarizes the reconciliation of adjusted EBITDA to net income in IIJ's consolidated statements of income that are prepared in accordance with U.S. GAAP and presented in Appendix 2: Adjusted EBITDA (JPY in millions) 1Q07 1Q06 --------------------------------------------------- -------- --------- Adjusted EBITDA 1,740 1,666 --------------------------------------------------- -------- --------- Depreciation and Amortization 1,048 (1,107) --------------------------------------------------- -------- --------- Operating Income 692 559 --------------------------------------------------- -------- --------- Other Income 65 440 --------------------------------------------------- -------- --------- Income Tax Expense 175 149 --------------------------------------------------- -------- --------- Minority Interests in Losses (Earnings) of Subsidiaries 9 (43) --------------------------------------------------- -------- --------- Equity in Net Loss of Equity Method Investees (20) (73) --------------------------------------------------- -------- --------- Net Income 571 734 --------------------------------------------------- -------- --------- The following table summarizes the reconciliation of capital expenditures to purchase of property and equipment in IIJ's consolidated statements of cash flows that are prepared and presented in accordance with U.S. GAAP and presented in Appendix 3: CAPEX (JPY in millions) 1Q07 1Q06 ---------------------------------------------------- -------- -------- CAPEX, including capital leases 2,232 842 ---------------------------------------------------- -------- -------- Acquisition of Assets by Entering into Capital Leases 1,662 406 ---------------------------------------------------- -------- -------- Purchase of Property and Equipment 570 436 ---------------------------------------------------- -------- -------- Target Our targets for the financial results for the first half of FY2007 and the full FY2007 are as follows: (JPY in millions) Income before Income Tax Operating Expense Net Revenues Income (Benefit) Income ----------------------- ------------ ------------- ----------- ------- First half of FY2007 30,200 1,800 1,800 3,000 ----------------------- ------------ ------------- ----------- ------- Full FY2007 69,000 4,600 5,100 5,600 ----------------------- ------------ ------------- ----------- ------- We favorably revised our initial target for the net income for the first half of FY2007 that we disclosed on May 15, 2007. For the details, please see the press release that we made on August 13, 2007, "IIJ Revises Targets for the Financial Results for the First Half of the Fiscal Year Ending March 31, 2008." We maintain our initial target for the full FY2007. IIJ expects a cash dividend of JPY 750 per share of common stock for the interim period ending September 30, 2007 and JPY 750 per share of common stock for the fiscal year ending March 31, 2008. 400 American Depository Shares represent 1 share of common stock. Presentation On August 14, 2007, IIJ will post a presentation of its results on its website. For details, please access the following URL: http://www.iij.ad.jp/en/IR/ About Internet Initiative Japan Inc. Founded in 1992, Internet Initiative Japan Inc. (IIJ, NASDAQ: IIJI, Tokyo Stock Exchange First Section: 3774) is one of Japan's leading Internet-access and comprehensive network solutions providers. The company has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. IIJ and its group of companies provide total network solutions that mainly cater to high-end corporate customers. The company's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design. Statements made in this press release regarding IIJ's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ's and management's current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding FY2007 revenues and operating and net profitability, are subject to various risks, uncertainties and other factors that could cause IIJ's actual results to differ materially from those contained in any forward-looking statement. These risks, uncertainties and other factors include: IIJ's ability to maintain and increase revenues from higher-margin services such as systems integration and value-added services; the possibility that revenues from connectivity services may decline substantially as a result of competition and other factors; the ability to compete in a rapidly evolving and competitive marketplace; the impact on IIJ's profits of fluctuations in costs such as backbone costs and subcontractor costs; the impact on IIJ's profits of fluctuations in the price of available-for-sale securities; the impact of technological changes in its industry; IIJ's ability to raise additional capital to cover its indebtedness; the possibility that NTT, IIJ's largest shareholder, may decide to exercise substantial influence over IIJ; and other risks referred to from time to time in IIJ's filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission. (1) Unless otherwise stated, all financial figures discussed in this announcement are prepared in accordance with U.S. GAAP. All financial figures are unaudited and consolidated. For all 1Q07 results, translations of Japanese yen amounts into U.S. dollars are solely for the convenience of readers outside of Japan and have been made at the rate of JPY 123.39 = US$1.00. (2) This Overview and Business Outlook contains forward-looking statements and projections such as statements regarding FY2007 revenues and operating and net income that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements. These risks and uncertainties include, but are not limited to, the factors noted at the end of this release and to the risk factors and other information included in IIJ's annual report on Form 20-F, filed with the SEC on July 6, 2007, as well as other filings and documents furnished to the Securities and Exchange Commission. IIJ plans to keep this press release publicly available on its Web site (www.iij.ad.jp), but may discontinue this practice at any time. IIJ intends to publish its next Overview and Business Outlook in its 2Q07 earnings release, presently scheduled for release in November 2007. (3) The classification in the table was changed in June 2007 from the one used in the past because of our acquisition of hi-ho, a company engaged mainly in the Internet business for home use. For the table with the previous classification, please see Appendix 4. (4) OEM services provided to other service providers. (5) The classification in the table was changed in June 2007 from the one used in the past because of our acquisition of hi-ho, a company engaged mainly in the Internet business for home use. For the table with the previous classification, please see Appendix 4. (6) IP Service revenues include revenues from the Data Center Connectivity Service. (7) Please refer to the Reconciliation of Non-GAAP Financial Measures below. (8) Please refer to the Reconciliation of Non-GAAP Financial Measures below. Appendix 1 Internet Initiative Japan Inc. ---------------------------------------------------------------------- Quarterly Consolidated Balance Sheets (Unaudited) ---------------------------------------------------------------------- (As of June 30, 2007 and March 31, 2007) As of June 30, 2007 As of March 31, 2007 ----------------------------- --------------------- Thousands of U.S. Thousands of % Thousands of % Dollars Yen Yen --------- ------------ ------ ------------ -------- ASSETS CURRENT ASSETS: Cash 102,099 12,597,948 13,554,544 Short-term investments 98 12,146 12,093 Accounts receivable, net of allowance for doubtful accounts of JPY 29,115 thousand and JPY 32,489 thousand at June 30, 2007 and March 31, 2007, respectively 64,385 7,944,525 9,675,725 Inventories 16,835 2,077,268 1,111,086 Prepaid expenses 18,058 2,228,120 1,053,270 Other current assets, net of allowance for doubtful accounts of JPY 4,570 thousand at June 30, 2007 and March 31, 2007 6,369 785,912 930,571 --------- ------------ ------------ Total current assets 207,844 25,645,919 49.5 26,337,289 55.2 INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES, net of loan loss valuation allowance of JPY 16,701 thousand at June 30, 2007 and March 31, 2007 6,833 843,176 1.6 858,490 1.8 OTHER INVESTMENTS 20,405 2,517,824 4.9 2,841,741 6.0 PROPERTY AND EQUIPMENT--Net 91,731 11,318,712 21.9 9,832,396 20.6 INTANGIBLE ASSETS--Net 47,462 5,856,277 11.3 2,876,894 6.0 GUARANTEE DEPOSITS 15,912 1,963,354 3.8 1,686,141 3.5 OTHER ASSETS, net of allowance for doubtful accounts of JPY 67,662 thousand and JPY 69,050 thousand at June 30, 2007 and March 31, 2007, respectively 29,417 3,629,716 7.0 3,260,053 6.9 --------- ------------ ------------ TOTAL 419,604 51,774,978 100.0 47,693,004 100.0 --------- ------------ ------------ As of June 30, 2007 As of March 31, 2007 ----------------------------- --------------------- Thousands of U.S. Thousands of % Thousands of % Dollars Yen Yen --------- ------------ ------ ------------ -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings 89,553 11,050,000 6,050,000 Long-term borrowings-- current portion 2,180 269,000 290,000 Capital lease obligations-- current portion 27,380 3,378,436 2,953,173 Accounts payable 47,951 5,916,634 8,464,835 Accrued expenses 7,928 978,228 897,355 Other current liabilities 18,196 2,245,179 2,477,486 --------- ------------ ------------ Total current liabilities 193,188 23,837,477 46.0 21,132,849 44.3 CAPITAL LEASE OBLIGATIONS -- Noncurrent 41,213 5,085,243 9.8 4,318,309 9.1 ACCRUED RETIREMENT AND PENSION COSTS 6,465 797,672 1.6 750,042 1.5 OTHER NONCURRENT LIABILITIES 6,713 828,377 1.6 564,618 1.2 --------- ------------ ------------ Total Liabilities 247,579 30,548,769 59.0 26,765,818 56.1 --------- ------------ ------------ MINORITY INTEREST 1,207 148,983 0.3 815,182 1.7 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common-stock-- authorized, 377,600 shares; issued and outstanding, 206,478 shares at June 30, 2007 and authorized, 377,600 shares; issued and outstanding, 204,300 shares at March 31, 2007 136,428 16,833,847 32.5 16,833,847 35.3 Additional paid- in capital 223,776 27,611,737 53.3 26,599,217 55.8 Accumulated deficit (194,558) (24,006,463) (46.3) (24,270,769) (50.9) Accumulated other comprehensive income 5,172 638,105 1.2 949,709 2.0 --------- ------------ ------------ Total shareholders' equity 170,818 21,077,226 40.7 20,112,004 42.2 --------- ------------ ------------ TOTAL 419,604 51,774,978 100.0 47,693,004 100.0 --------- ------------ ------------ (Note) 1) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 123.39 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 June 29, 2007. Appendix 2 Internet Initiative Japan Inc. ---------------------------------------------------------------------- Quarterly Consolidated Statements of Income (Unaudited) ---------------------------------------------------------------------- (For the three months ended June 30, 2007 and June 30, 2006) Three Months Ended June 30, Three Months Ended 2007 June 30, 2006 ------------------------------ -------------------- Thousands % of % of of U.S. Thousands total Thousands total Dollars of Yen revenues of Yen revenues --------- ---------- --------- ---------- --------- REVENUES: Connectivity and value-added services: Connectivity (corporate use) 24,092 2,972,772 2,732,789 Connectivity (home use) 6,535 806,326 490,096 Value-added services 17,061 2,105,108 1,741,318 Other 7,998 986,870 899,726 --------- ---------- ---------- Total 55,686 6,871,076 5,863,929 Systems integration 51,337 6,334,464 6,031,963 Equipment sales 3,973 490,211 541,545 --------- ---------- ---------- Total revenues 110,996 13,695,751 100.0 12,437,437 100.0 --------- ---------- ---------- COST AND EXPENSES: Cost of connectivity and value-added services 45,948 5,669,522 5,069,730 Cost of systems integration 39,297 4,848,884 4,581,313 Cost of equipment sales 3,435 423,783 483,015 --------- ---------- ---------- Total cost 88,680 10,942,189 79.9 10,134,058 81.5 Sales and marketing 7,611 939,130 6.9 789,932 6.3 General and administrative 8,646 1,066,843 7.8 914,711 7.4 Research and development 454 56,051 0.4 39,684 0.3 --------- ---------- ---------- Total cost and expenses 105,391 13,004,213 95.0 11,878,385 95.5 --------- ---------- ---------- OPERATING INCOME 5,605 691,538 5.0 559,052 4.5 --------- ---------- ---------- OTHER INCOME: Interest income 91 11,212 3,049 Interest expense (785) (96,908) (107,002) Foreign exchange gains (losses) (8) (926) 690 Net gain on other investments 1,147 141,601 478,186 Other--net 83 10,233 65,181 --------- ---------- ---------- Other income-- net 528 65,212 0.5 440,104 3.5 --------- ---------- ---------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE, MINORITY INTERESTS AND EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES 6,133 756,750 5.5 999,156 8.0 --------- ---------- ---------- INCOME TAX EXPENSE 1,421 175,366 1.3 148,874 1.2 MINORITY INTERESTS IN LOSSES (EARNINGS) OF SUBSIDIARIES 75 9,224 0.1 (43,574) (0.3) EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES (161) (19,852) (0.1) (73,037) (0.6) --------- ---------- ---------- NET INCOME 4,626 570,756 4.2 733,671 5.9 --------- ---------- --------- ---------- --------- Three Months Ended June 30, Three Months Ended 2007 June 30, 2006 ------------------------------ -------------------- Thousands of U.S. Dollars Thousands of Yen Thousands of Yen ------------------ --------- -------------------- -------------------- BASIC WEIGHTED- AVERAGE NUMBER OF SHARES 205,521 203,989 DILUTED WEIGHTED- AVERAGE NUMBER OF SHARES 205,850 204,230 BASIC WEIGHTED- AVERAGE NUMBER OF ADS EQUIVALENTS 82,208,255 81,595,702 DILUTED WEIGHTED- AVERAGE NUMBER OF ADS EQUIVALENTS 82,340,017 81,692,077 BASIC NET INCOME PER SHARE 22.51 2,777 3,597 DILUTED NET INCOME PER SHARE 22.47 2,773 3,592 BASIC NET INCOME PER ADS EQUIVALENT 0.06 6.94 8.99 DILUTED NET INCOME PER ADS EQUIVALENT 0.06 6.93 8.98 ------------------ --------- -------------------- -------------------- (Note) 1) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 123.39 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 June 29, 2007. Appendix 3 Internet Initiative Japan Inc. ---------------------------------------------------------------------- Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited) ---------------------------------------------------------------------- (For the three months ended June 30, 2007 and June 30, 2006) Three Three Months Ended Months June 30, 2007 Ended June 30, 2006 --------------------- ----------- Thousands of U.S. Thousands Thousands Dollars of Yen of Yen ------------------------------------ --------- ----------- ----------- OPERATING ACTIVITIES: Net income 4,626 570,756 733,671 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 8,490 1,047,580 1,107,155 Provision for (reversal of) doubtful accounts and advances (34) (4,183) 3,413 Net gain on other investments (1,147) (141,601) (478,186) Foreign exchange losses 22 2,686 3,284 Equity in net loss of equity method investees 161 19,852 73,037 Minority interests in (loss) earnings of subsidiaries (75) (9,224) 43,574 Deferred income tax expense 1,169 144,247 21,054 Others 435 53,676 34,300 Changes in operating assets and liabilities: Decrease in accounts receivable 14,100 1,739,821 5,807,822 Increase in inventories, prepaid expenses and other current and noncurrent assets (20,727) (2,557,479) (635,408) Decrease in accounts payable (18,702) (2,307,593) (6,071,242) Increase in accrued expenses, other current and noncurrent liabilities 923 113,864 262,210 ------------------------------------ --------- ----------- ----------- Net cash provided by (used in) operating activities (10,759) (1,327,598) 904,684 ------------------------------------ --------- ----------- ----------- INVESTING ACTIVITIES: Purchase of property and equipment (4,616) (569,590) (436,264) Purchase of available-for-sale -- securities (2,331) (287,609) Purchase of short-term and other investments (257) (31,670) (279,230) Purchase of subsidiary stock from minority shareholders (16,007) (1,975,123) (27,559) Proceeds from sales of available- for-sale securities 4,361 538,112 480,806 Proceeds from sales and redemption of other investments 27 3,310 1,542 Acquisition of a newly controlled -- company, net of cash acquired (7,395) (912,450) Payment of guarantee deposits--net (2,162) (266,766) (5,562) Other (144) (17,772) (726) ------------------------------------ --------- ----------- ----------- Net cash used in investing activities (28,524) (3,519,558) (266,993) ------------------------------------ --------- ----------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of short- term borrowings with initial maturities over three months 83,475 10,300,000 4,350,000 Repayments of short-term borrowings with initial maturities over three months and long-term borrowings (37,045) (4,571,000) (659,621) Proceeds from securities loan agreement -- -- 496,080 Repayments of securities loan agreement -- -- (999,600) Principal payments under capital leases (6,279) (774,817) (899,879) Net decrease in short-term borrowings with initial maturities less than three months (6,078) (750,000) (3,555,000) Payment of dividends (2,484) (306,450) -- ------------------------------------ --------- ----------- ----------- Net cash provided by (used in) financing activities 31,589 3,897,733 (1,268,020) ------------------------------------ --------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (58) (7,173) (5,672) NET DECREASE IN CASH (7,752) (956,596) (636,001) CASH, BEGINNING OF EACH PERIOD 109,851 13,554,544 13,727,021 ------------------------------------ --------- ----------- ----------- CASH, END OF EACH PERIOD 102,099 12,597,948 13,091,020 ------------------------------------ --------- ----------- ----------- ADDITIONAL CASH FLOW INFORMATION: Interest paid 774 95,500 91,001 Income taxes paid 5,880 725,557 225,563 NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of assets by entering into capital leases 13,473 1,662,475 405,621 Purchase of minority interests of -- consolidated subsidiaries through share exchanges 8,206 1,012,520 Acquisition of business and a company: Assets acquired 12,730 1,570,720 -- Cash paid (9,972) (1,230,450) -- Liabilities assumed 2,758 340,270 -- ------------------------------------ --------- ----------- ----------- (Note) 1) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 123.39 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 June 29, 2007. (Reference information) Appendix 4 The classification in the tables for connectivity service revenues and the number of contracts was changed in June 2007 from the one used in the past because of our acquisition of hi-ho, a company engaged mainly in the Internet business for home use. The following data for the past two fiscal years and the first quarter of FY2007 is disclosed for reference. Number of Contracts for Connectivity Services New Classification --------------------------------------------------------------------- FY2005 ----------------------------------------- 1Q 2Q 3Q 4Q --------------------------- ---------- ---------- --------- --------- Connectivity Services (Corporate Use) 14,202 14,538 15,495 16,200 --------------------------- ---------- ---------- --------- --------- IP Service (-99Mbps) 702 698 696 739 -------------------------- ---------- ---------- --------- --------- IP Service (100Mbps- 999Mbps) 98 100 107 117 -------------------------- ---------- ---------- --------- --------- IP Service (1Gbps-) 33 43 38 40 -------------------------- ---------- ---------- --------- --------- IIJ Data Center Connectivity Service 234 234 240 247 -------------------------- ---------- ---------- --------- --------- IIJ FiberAccess/F and IIJ DSL/F 10,999 11,445 12,489 13,297 -------------------------- ---------- ---------- --------- --------- Others 2,136 2,018 1,925 1,760 -------------------------- ---------- ---------- --------- --------- Connectivity Services (Home Use) 675,279 661,691 645,693 628,832 --------------------------- ---------- ---------- --------- --------- Under IIJ Brand 64,197 62,974 59,869 60,525 -------------------------- ---------- ---------- --------- --------- hi-ho -- -- -- -- -------------------------- ---------- ---------- --------- --------- OEM 611,082 598,717 585,824 568,307 -------------------------- ---------- ---------- --------- --------- FY2006 ----------------------------------------- 1Q 2Q 3Q 4Q --------------------------- ---------- ---------- --------- --------- Connectivity Services (Corporate Use) 17,031 17,739 18,261 19,293 --------------------------- ---------- ---------- --------- --------- IP Service (-99Mbps) 747 752 754 751 -------------------------- ---------- ---------- --------- --------- IP Service (100Mbps- 999Mbps) 131 143 153 161 -------------------------- ---------- ---------- --------- --------- IP Service (1Gbps-) 51 55 60 63 -------------------------- ---------- ---------- --------- --------- IIJ Data Center Connectivity Service 264 266 264 282 -------------------------- ---------- ---------- --------- --------- IIJ FiberAccess/F and IIJ DSL/F 14,085 14,830 15,379 16,418 -------------------------- ---------- ---------- --------- --------- Others 1,753 1,693 1,651 1,618 --------------------------- ---------- ---------- --------- --------- Connectivity Services (Home Use) 594,951 583,844 569,282 532,390 --------------------------- ---------- ---------- --------- --------- Under IIJ Brand 59,545 58,378 57,286 55,907 -------------------------- ---------- ---------- --------- --------- hi-ho -- -- -- -- -------------------------- ---------- ---------- --------- --------- OEM 535,406 525,466 511,996 476,483 --------------------------- ---------- ---------- --------- --------- FY2007 ---------- 1Q --------------------------- ---------- Connectivity Services (Corporate Use) 21,210 --------------------------- ---------- IP Service (-99Mbps) 773 -------------------------- ---------- IP Service (100Mbps- 999Mbps) 168 -------------------------- ---------- IP Service (1Gbps-) 58 -------------------------- ---------- IIJ Data Center Connectivity Service 278 -------------------------- ---------- IIJ FiberAccess/F and IIJ DSL/F 18,252 -------------------------- ---------- Others 1,681 -------------------------- ---------- Connectivity Services (Home Use) 555,946 --------------------------- ---------- Under IIJ Brand 54,192 -------------------------- ---------- hi-ho 186,677 -------------------------- ---------- OEM 315,077 -------------------------- ---------- Old Classification --------------------------------------------------------------------- FY2005 ----------------------------------------- 1Q 2Q 3Q 4Q --------------------------- ---------- ---------- --------- --------- Dedicated Access Service Contracts 12,274 12,702 13,724 14,549 --------------------------- ---------- ---------- --------- --------- IP Service (Low Bandwidth: 64kbps-768kbps) 65 61 51 85 -------------------------- ---------- ---------- --------- --------- IP Service (Medium Bandwidth: 1Mbps-99Mbps) 637 637 645 654 -------------------------- ---------- ---------- --------- --------- IP Service (High Bandwidth: 100Mbps-) 131 143 145 157 -------------------------- ---------- ---------- --------- --------- IIJ T1 Standard and IIJ Economy 208 182 154 109 -------------------------- ---------- ---------- --------- --------- IIJ Data Center Connectivity Service 234 234 240 247 -------------------------- ---------- ---------- --------- --------- IIJ FiberAccess/F and IIJ DSL/F 10,999 11,445 12,489 13,297 -------------------------- ---------- ---------- --------- --------- Dial-up Access Service Contracts 677,207 663,527 647,464 630,483 --------------------------- ---------- ---------- --------- --------- Dial-up Access Services, under IIJ Brand 66,125 64,810 61,640 62,176 -------------------------- ---------- ---------- --------- --------- Dial-up Access Services, OEM 611,082 598,717 585,824 568,307 --------------------------- ---------- ---------- --------- --------- FY2006 ----------------------------------------- 1Q 2Q 3Q 4Q --------------------------- ---------- ---------- --------- --------- Dedicated Access Service Contracts 15,354 16,112 16,663 17,720 --------------------------- ---------- ---------- --------- --------- IP Service (Low Bandwidth: 64kbps-768kbps) 74 70 69 64 -------------------------- ---------- ---------- --------- --------- IP Service (Medium Bandwidth: 1Mbps-99Mbps) 673 682 685 687 -------------------------- ---------- ---------- --------- --------- IP Service (High Bandwidth: 100Mbps-) 182 198 213 224 -------------------------- ---------- ---------- --------- --------- IIJ T1 Standard and IIJ Economy 76 66 53 45 -------------------------- ---------- ---------- --------- --------- IIJ Data Center Connectivity Service 264 266 264 282 -------------------------- ---------- ---------- --------- --------- IIJ FiberAccess/F and IIJ DSL/F 14,085 14,830 15,379 16,418 -------------------------- ---------- ---------- --------- --------- Dial-up Access Service Contracts 596,628 585,471 570,880 533,963 --------------------------- ---------- ---------- --------- --------- Dial-up Access Services, under IIJ Brand 61,222 60,005 58,884 57,480 -------------------------- ---------- ---------- --------- --------- Dial-up Access Services, OEM 535,406 525,466 511,996 476,483 -------------------------- ---------- ---------- --------- --------- FY2007 ---------- 1Q --------------------------- ---------- Dedicated Access Service Contracts 19,563 --------------------------- ---------- IP Service (Low Bandwidth: 64kbps-768kbps) 66 -------------------------- ---------- IP Service (Medium Bandwidth: 1Mbps-99Mbps) 707 -------------------------- ---------- IP Service (High Bandwidth: 100Mbps-) 226 -------------------------- ---------- IIJ T1 Standard and IIJ Economy 34 -------------------------- ---------- IIJ Data Center Connectivity Service 278 -------------------------- ---------- IIJ FiberAccess/F and IIJ DSL/F 18,252 --------------------------- ---------- Dial-up Access Service Contracts 557,593 --------------------------- ---------- Dial-up Access Services, under IIJ Brand 55,839 -------------------------- ---------- Dial-up Access Services, OEM 186,677 -------------------------- ---------- Dial-up Access Services, hi-ho 315,077 -------------------------- ---------- Connectivity Revenue Breakdown New Classification (JPY thousand) ---------------------------------------------------------------------- FY2005 -------------------------------------------------- 1Q 2Q 3Q 4Q Full Year ------------------- --------- --------- --------- -------------------- Connectivity Services 3,445,570 3,377,764 3,227,255 3,248,487 13,299,076 ------------------- --------- --------- --------- -------------------- Connectivity Services (Corporate Use) 2,899,273 2,844,659 2,711,736 2,723,650 11,179,318 ------------------ --------- --------- --------- -------------------- IP Service (including Data Center Connectivity Service) 2,166,078 2,121,083 1,987,448 2,015,813 8,290,422 ----------------- --------- --------- --------- -------------------- IIJ FiberAccess/F and IIJ DSL/F 446,469 461,044 494,460 505,298 1,907,271 ----------------- --------- --------- --------- -------------------- Others 286,726 262,532 229,828 202,539 981,625 ----------------- --------- --------- --------- -------------------- Connectivity Services (Home Use) 546,297 533,105 515,519 524,837 2,119,758 ------------------ --------- --------- --------- -------------------- Under IIJ Brand 313,344 307,084 288,886 292,663 1,201,977 ----------------- --------- --------- --------- -------------------- hi-ho -- -- -- -- -- ----------------- --------- --------- --------- -------------------- OEM 232,953 226,021 226,633 232,174 917,781 ----------------- --------- --------- --------- -------------------- FY2006 -------------------------------------------------- 1Q 2Q 3Q 4Q Full Year ------------------- --------- --------- --------- -------------------- Connectivity Services 3,222,885 3,292,554 3,307,353 3,385,218 13,208,010 ------------------- --------- --------- --------- -------------------- Connectivity Services (Corporate Use) 2,732,789 2,799,493 2,813,474 2,893,306 11,239,062 ------------------ --------- --------- --------- -------------------- IP Service (including Data Center Connectivity Service) 2,045,908 2,094,465 2,112,793 2,176,196 8,429,362 ----------------- --------- --------- --------- -------------------- IIJ FiberAccess/F and IIJ DSL/F 507,821 541,014 546,817 571,942 2,167,594 ----------------- --------- --------- --------- -------------------- Others 179,060 164,014 153,864 145,168 642,106 ----------------- --------- --------- --------- -------------------- Connectivity Services (Home Use) 490,096 493,061 493,879 491,912 1,968,948 ------------------ --------- --------- --------- -------------------- Under IIJ Brand 303,262 298,938 294,196 289,780 1,186,176 ----------------- --------- --------- --------- -------------------- hi-ho -- -- -- -- -- ----------------- --------- --------- --------- -------------------- OEM 186,834 194,123 199,683 202,132 782,772 ----------------- --------- --------- --------- -------------------- FY2007 --------- 1Q ------------------- --------- Connectivity Services 3,779,098 ------------------- --------- Connectivity Services (Corporate Use) 2,972,772 ------------------ --------- IP Service (including Data Center Connectivity Service) 2,217,533 ----------------- --------- IIJ FiberAccess/F and IIJ DSL/F 615,532 ----------------- --------- Others 139,707 ----------------- --------- Connectivity Services (Home Use) 806,326 ------------------ --------- Under IIJ Brand 282,453 ----------------- --------- hi-ho 339,097 ----------------- --------- OEM 184,776 ----------------- --------- Old Classification (JPY thousand) ---------------------------------------------------------------------- FY2005 -------------------------------------------------- 1Q 2Q 3Q 4Q Full Year ------------------- --------- --------- --------- -------------------- Connectivity Services 3,445,570 3,377,764 3,227,255 3,248,487 13,299,076 ------------------- --------- --------- --------- -------------------- Dedicated Access Service Revenues 2,746,900 2,695,325 2,579,659 2,603,384 10,625,268 ------------------ --------- --------- --------- -------------------- IP Service (including Data Center Connectivity Service) 2,166,078 2,121,083 1,987,448 2,015,813 8,290,422 ----------------- --------- --------- --------- -------------------- IIJ T1 Standard and Economy 134,353 113,198 97,751 82,273 427,575 ----------------- --------- --------- --------- -------------------- IIJ FiberAccess/F and IIJ DSL/F 446,469 461,044 494,460 505,298 1,907,271 ----------------- --------- --------- --------- -------------------- Dial-up Access Service Revenues 698,670 682,439 647,596 645,103 2,673,808 ------------------ --------- --------- --------- -------------------- Under IIJ brand 465,717 456,418 420,963 412,929 1,756,027 ----------------- --------- --------- --------- -------------------- hi-ho -- -- -- -- -- ----------------- --------- --------- --------- -------------------- OEM 232,953 226,021 226,633 232,174 917,781 ----------------- --------- --------- --------- -------------------- FY2006 -------------------------------------------------- 1Q 2Q 3Q 4Q Full Year ------------------- --------- --------- --------- -------------------- Connectivity Services 3,222,885 3,292,554 3,307,353 3,385,218 13,208,010 ------------------- --------- --------- --------- -------------------- Dedicated Access Service Revenues 2,615,890 2,686,745 2,702,783 2,786,285 10,791,703 ------------------ --------- --------- --------- -------------------- IP Service (including Data Center Connectivity Service) 2,045,908 2,094,465 2,112,793 2,176,196 8,429,362 ----------------- --------- --------- --------- -------------------- IIJ T1 Standard and Economy 62,161 51,266 43,173 38,147 194,747 ----------------- --------- --------- --------- -------------------- IIJ FiberAccess/F and IIJ DSL/F 507,821 541,014 546,817 571,942 2,167,594 ------------------ --------- --------- --------- -------------------- Dial-up Access Service Revenues 606,995 605,809 604,570 598,933 2,416,307 ------------------ --------- --------- --------- -------------------- Under IIJ brand 420,161 411,686 404,887 396,801 1,633,535 ----------------- --------- --------- --------- -------------------- hi-ho -- -- -- -- -- ----------------- --------- --------- --------- -------------------- OEM 186,834 194,123 199,683 202,132 782,772 ----------------- --------- --------- --------- -------------------- FY2007 --------- 1Q ------------------- --------- Connectivity Services 3,779,098 ------------------- --------- Dedicated Access Service Revenues 2,864,993 ------------------ --------- IP Service (including Data Center Connectivity Service) 2,217,533 ----------------- --------- IIJ T1 Standard and Economy 31,928 ----------------- --------- IIJ FiberAccess/F and IIJ DSL/F 615,532 ----------------- --------- Dial-up Access Service Revenues 914,105 ------------------ --------- Under IIJ brand 390,232 ----------------- --------- hi-ho 339,097 ----------------- --------- OEM 184,776 ----------------- --------- CONTACT: IIJ Investor Relations Office Taisuke ONO Tel: +81-3-5259-6500 E-mail: ir@iij.ad.jp http://www.iij.ad.jp/ EXHIBIT 2 --------- IIJ Revises Targets for the Financial Results for the First Half of the Fiscal Year Ending March 31, 2008 TOKYO--(BUSINESS WIRE)--Aug. 13, 2007--Internet Initiative Japan Inc. ("IIJ", NASDAQ: IIJI, TSE1: 3774), one of Japan's leading Internet access and comprehensive network solutions providers, today announced that it has revised targets for the financial results for the first half of the fiscal year ending March 31, 2008 ("1H2007") that it announced on May 15, 2007*. IIJ is not revising targets for the financial results for the full fiscal year ending March 31, 2008 ("FY2007"). 1. Revised Consolidated Financial Targets under Generally Accepted Accounting Principles in the United States of America ("U.S. GAAP") (1H2007 (From April 1, 2007 to September 30, 2007)) (Millions of Yen) Income before Operating Income Tax Revenues Income Expense (Benefit) Net Income ---------------------------------------------------------------------- Target Previously Announced on May 15, 2007 (A) 30,200 1,800 1,800 1,400 ---------------------------------------------------------------------- Revised Target (B) 30,200 1,800 1,800 3,000 ---------------------------------------------------------------------- Change (B-A) 0 0 0 1,600 ---------------------------------------------------------------------- Change (%) 0% 0% 0% 114.3% ---------------------------------------------------------------------- (For Reference) Fiscal Year Ended March 31, 2007 ("FY2006") 26,444 1,370 2,144 2,854 ---------------------------------------------------------------------- 2. Reasons for the Revision As of March 31, 2007, IIJ had tax operating loss carryforwards of JPY 17,083 million. IIJ recorded deferred tax benefits of JPY 1,245 million resulting from a release of valuation allowance against deferred income tax assets in the first half of FY2006 in consideration of the income trend. In the second quarter of FY2007, IIJ plans to revise valuation allowance against deferred income tax assets, related to the application of the consolidated tax payment system for IIJ and its wholly owned subsidiaries in addition to the increasing income trend. As a result, IIJ expects to record deferred tax benefits exceeding the deferred tax expenses that it recorded in the first quarter of FY2007. In consideration of the above, IIJ has revised targets for the financial results for 1H2007. The revision is related to the timing of the recording of income tax benefits or expenses in the fiscal year and will not affect targets for the financial results for full FY2007. 3. (Reference) Consolidated Financial Targets for full FY2007 (From April 1, 2007 to March 31, 2008) IIJ is not revising targets for the financial results for full FY2007 that it announced on May 15, 2007. (Millions of Yen) Income before Income Tax Operating Expense Net Income per Revenues Income (Benefit) Net Income Share ---------------------------------------------------------------------- Full FY2007 69,000 4,600 5,100 5,600 27,122 ---------------------------------------------------------------------- Note: The number of shares used for calculation of the net income per share above is 206,478. * As a company listed on the Tokyo Stock Exchange, IIJ is requested to disclose targets for the financial results for the first half of the fiscal year in addition to the targets for the full fiscal year. IIJ disclosed its initial targets for 1H2007 on May 15, 2007, and on Form 6-K filed with the United States Securities and Exchange Commission on May 15, 2007. About IIJ Founded in 1992, Internet Initiative Japan Inc. ("IIJ", NASDAQ: IIJI, TSE1: 3774) is one of Japan's leading Internet-access and comprehensive network solutions providers. IIJ and its group of companies provide total network solutions that mainly cater to high-end corporate customers. The company's services include high-quality systems integration and security services, Internet access, hosting/housing, and content design. Moreover, the company has built one of the largest Internet backbone networks in Japan, and between Japan and the United States. IIJ was listed on NASDAQ in 1999 and on the First Section of the Tokyo Stock Exchange in 2006. For more information about IIJ, visit the IIJ Web site at site at http://www.iij.ad.jp/en/. Statements made in this press release regarding IIJ's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ's and managements' current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding FY2007 revenues and operating and net profitability, are subject to various risks, uncertainties and other factors that could cause IIJ's actual results to differ materially from those contained in any forward-looking statement. These risks, uncertainties and other factors include: IIJ's ability to maintain and increase revenues from higher-margin services such as systems integration and value-added services; the possibility that revenues from connectivity services may decline substantially as a result of competition and other factors; the ability to compete in a rapidly evolving and competitive marketplace; the impact on IIJ's profits of fluctuations in costs such as backbone costs and subcontractor costs; the impact on IIJ's profits of fluctuations in the price of available-for-sale securities; the impact of technological changes in its industry; IIJ's ability to raise additional capital to cover its indebtedness; the possibility that NTT, IIJ's largest shareholder, may decide to exercise substantial influence over IIJ; and other risks referred to from time to time in IIJ's filings on Form 20-F of its annual report and other filings with the United States Securities and Exchange Commission. CONTACT: IIJ Corporate Communications Tel: +81-3-5259-6500 Fax: +81-3-5259-6311 ir@iij.ad.jp http://www.iij.ad.jp/ EXHIBIT 3 --------- (English translation) Note: The following information is to disclose IIJ's consolidated financial results (unaudited) for the three months ended June 30, 2007 in the form defined by the Tokyo Stock Exchange. August 13, 2007 Consolidated Financial Results for the Three Months Ended June 30, 2007 [Under accounting principles generally accepted in the United States ("U.S. GAAP")] Company name: Internet Initiative Japan Inc. Exchange listed: Tokyo Stock Exchange-First Section Stock code number: 3774 URL: http://www.iij.ad.jp/ Representative: Koichi Suzuki, President and Representative Director Contact: Akihisa Watai, Director and CFO / TEL: (+81-3) 5259-6500 (Amounts less than one million yen are rounded) 1. Consolidated Financial Results for the Three Months Ended June 30, 2007 (April 1, 2007 - June 30, 2007) (1) Consolidated Results of Operations (% shown are YoY change) Income before Income Total Revenues Operating Income Tax Expense Net Income ------------------------------------------------------------------------------------------------------------------------ Millions of Yen % Millions of Yen % Millions of Yen % Millions of Yen % Three Months Ended June 30, 2007 13,696 10.1 692 23.7 757 (24.3) 571 (22.2) Three Months Ended June 30, 2006 12,437 25.9 559 126.6 999 46.5 734 17.8 ------------------------------------------------------------------------------------------------------------------------ Fiscal Year Ended March 31, 2007 57,055 3,500 5,049 5,410 ------------------------------------------------------------------------------------------------------------------------ Basic Net Income per Diluted Net Income per Share Share --------------------------------------------------------------------------- Yen Yen Three Months Ended June 30, 2007 2,777 2,773 Three Months Ended June 30, 2006 3,597 3,592 --------------------------------------------------------------------------- Fiscal Year Ended March 31, 2007 26,519 26,487 --------------------------------------------------------------------------- (Note) o The figures used in this document for "Income before Income Tax Expense" are of "Income from operations before income tax expense, minority interests and equity in net loss of equity method investees". o The weighted average number of shares outstanding: For the three months ended June 30, 2007 205,521 shares For the three months ended June 30, 2006 203,989 shares For the fiscal year ended March 31, 2007 203,992 shares 2) Consolidated Financial Position Total Shareholders' Equity-to-Assets Total Shareholders' Total Assets Equity Ratio Equity per Share ----------------------------------------------------------------------------------------------- Millions of Yen Millions of Yen % Yen Three Months Ended June 30, 2007 51,775 21,077 40.7 102,080 Three Months Ended June 30, 2006 42,001 18,475 44.0 90,570 ----------------------------------------------------------------------------------------------- Fiscal Year Ended March 31, 2007 47,693 20,112 42.2 98,592 ----------------------------------------------------------------------------------------------- (Note) Total shareholders' equity, equity-to-assets ratio and total shareholders'equity per share are calculated and presented based on IIJ's consolidated financial results in accordance with US GAAP. 3) Consolidated Cash Flows Net Cash Provided Net Cash Provided Cash and Cash by (Used in) Net Cash Used in by (Used in) Equivalents at End Operating Activities Investing Activities Financing Activities of Period ------------------------------------------------------------------------------------------------------------------- Millions of Yen Millions of Yen Millions of Yen Millions of Yen Three Months Ended June 30, 2007 (1,328) (3,520) 3,898 12,598 Three Months Ended June 30, 2006 905 (267) (1,268) 13,091 ------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended March 31, 2007 7,402 (3,014) (4,560) 13,555 ------------------------------------------------------------------------------------------------------------------- 2. Dividends Dividend per Share ----------------------------------------------------- Interim Year-end Total --------------------------------------------------------------------------------- Yen Yen Yen Fiscal Year Ended March 31, 2007 - 1,500.00 1,500.00 --------------------------------------------------------------------------------- Fiscal Year Ended March 31, 2008 (Target) 750.00 750.00 1,500.00 --------------------------------------------------------------------------------- (Note) IIJ maintains its initial dividend target for FY2007 that IIJ announced on May 15, 2007. 3. Target of Consolidated Financial Results for the Fiscal Year Ending March 31, 2008 (Reference) (April 1, 2007 through March 31, 2008) (% shown is YoY change for fiscal year and interim period, respectively) Income before Basic Net Income Tax Income per Total Revenues Operating Income Expense (Benefit) Net Income Share ---------------------------------------------------------------------------------------------------------------- Millions of Millions of Millions of Millions of Yen % Yen % Yen % Yen % Yen Interim Period Ending September 30, 2007 30,200 14.2 1,800 31.3 1,800 (16.1) 3,000 5.1 14,529 Year Ending March 31, 2008 69,000 20.9 4,600 31.4 5,100 1.0 5,600 3.5 27,122 ---------------------------------------------------------------------------------------------------------------- (Note) The number of shares of common stock used to calculate basic net income per share above is 206,478 shares. 4. Others (1) Change of Condition in Consolidated Subsidiaries during the Three Months Ended June 30, 2007 (Change of Condition in Specific Consolidated Subsidiaries with the Change of Scope of Consolidation): None (2) Adoption of Simplified Accounting Method: None (3) Changes in Accounting and Reporting of Significant Accounting and Reporting Policies from the Most Recent Fiscal Year: None Forward-looking statements for the target of operation and other notes ---------------------------------------------------------------------- The target for the financial results for 1H2007 has been changed from the initial target that IIJ announced on May 15, 2007. However, IIJ maintains its initial target for full FY2007. Statements made in this press release regarding IIJ's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements that are based on IIJ's and managements' current expectations, assumptions, estimates and projections about its business and the industry. These forward-looking statements, such as statements regarding revenues and operating and net profitability are subject to various risks, uncertainties and other factors that could cause IIJ's actual results to differ materially from those contained in any forward-looking statement. [Overview of the Period and Financial Statements] ------------------------------------------------- 1. Overview of Results of Operation (1) Overview of Results of Operation for the Three Months Ended June 30, 2007 (from April 1, 2007 to June 30, 2007, "1Q07") IIJ set a favorable start for the fiscal year ending March 31, 2008 ("FY2007") with operating results showing growth in both total revenues and operating income compared to the same period of the prior fiscal year driven by growth in the Japanese corporate IT spending. Especially steady increase in monthly recurring revenues from connectivity and value-added services ("VAS") contributed to the significant growth in operating income. Gross margin of connectivity and VAS increased by JPY 407 million in 1Q07 compared to 1Q06. For the consolidated results of operation for 1Q07, revenues totaled JPY 13,696 million (up 10.1% year-on-year), operating income was JPY 692 million (up 23.7% year-on-year), income before income tax expense was JPY 757 million (down 24.3% year-on-year) and net income was JPY 571 million (down 22.2% year-on-year). Connectivity services are strengthening their significant growth trend since the fiscal year ended March 31, 2007 ("FY2006") as IIJ sees notable increase in the usage of bandwidth for corporate users. Revenues from Internet connectivity services for corporate users grew 8.8% compared to the same period of the prior fiscal year. For VAS, "IIJ Secure MX Service (introduced in October 2006)" contributed to the overall growth which has grown to a service bringing in revenues of approximately JPY 50 million a month. IIJ has also begun the operation of "Ikebukuro Data Center" in April 2007 for corporate customers' strong needs for data centers. Income before income tax expense and net income for 1Q07 was down compared to the same period of the prior fiscal year due to a decrease in gains from the sale of available-for-sale securities and a record of deferred tax expenses caused by a decrease in deferred income tax assets. IIJ revised its target for the net income for the first half of FY2007 due to the following reasons. In the second quarter of FY2007, when IIJ plans to apply for the consolidated tax payment system for IIJ and its wholly owned subsidiaries, IIJ plans to revise valuation allowance against deferred income tax assets in the increasing income trend. As a result of the revision, IIJ expects to record additional deferred tax benefits exceeding the deferred tax expenses that it recorded in the first quarter of FY2007. The revision is related to the timing of the record of income tax benefits or expenses in the fiscal year and will not affect targets for the financial results for full FY2007. IIJ maintains its initial target for the full FY2007. IIJ has made its two consolidated subsidiary 100% owned through share exchanges in May 2007 to strengthen its group management structures. IIJ has also invested in the following business for its mid/long-term growth: the acquisition of hi-ho Inc. ("hi-ho", effective June 2007) to expand ISP service for personal users and the establishment of GDX Japan, K.K. (effective April 2007) in joint venture with US-based GDX Network, Inc. to offer a safer e-mail environment. (2) Analysis of Results of Operation 1) Revenues Revenues for 1Q07 were JPY 13,696 million (up 10.1% year-on-year). Three Months Ended Three Months Ended YoY % June 30, 2007 June 30, 2006 Change --------------------------------------------------------------------------------------------- Millions of Yen Millions of Yen % Connectivity and VAS 6,871 5,864 17.2 --------------------------------------------------------------------------------------------- Systems Integration ("SI") 6,334 6,032 5.0 --------------------------------------------------------------------------------------------- Equipment Sales 491 541 (9.5) --------------------------------------------------------------------------------------------- Total Revenues 13,696 12,437 10.1 --------------------------------------------------------------------------------------------- Revenues of connectivity and VAS were JPY 6,871 million in 1Q07 (up 17.2% year-on-year) as revenues from Internet connectivity services for corporate use and VAS in overall grew respectively. Additional revenues from hi-ho of JPY 435 million (for one month from June 1, 2007) also contributed to the growth. SI revenues increased to JPY 6,334 million in 1Q07 (up 5.0% year-on-year), as recurring revenues from systems operation and maintenance showed steady growth. Equipment sales revenues were JPY 491 million 1Q07 (down 9.5% year-on-year). 2) Cost of Revenues Cost of revenues for the three months ended June 30, 2007 was JPY 10,942 million (up 8.0% year-on-year). Three Months Ended Three Months Ended YoY % June 30, 2007 June 30, 2006 Change --------------------------------------------------------------------------------------------- Millions of Yen Millions of Yen % Connectivity and VAS 5,670 5,070 11.8 --------------------------------------------------------------------------------------------- SI 4,849 4,581 5.8 --------------------------------------------------------------------------------------------- Equipment Sales 423 483 (12.3) --------------------------------------------------------------------------------------------- Total Cost of Revenues 10,942 10,134 8.0 --------------------------------------------------------------------------------------------- The cost of connectivity and VAS revenues was JPY 5,670 million in 1Q07 (up 11.8% year-on-year) mainly due to an increase in costs of JPY 406 million along with additional revenues from hi-ho from June 1, 2007. The cost of SI revenues was JPY 4,849 million in 1Q07 (up 5.8% year-on-year). The increase was mainly due to an increase in revenues from SI projects and an increase in personnel expenses. The cost of equipment sales revenues was JPY 423 million in 1Q07 (down 12.3% year-on-year) as revenues from equipment sales declined. 3) Sales and Marketing Expenses Sales and marketing expenses were JPY 939 million in 1Q07 (up 18.9% year-on-year) resulting from the increase in personnel expenses and advertising expenses along with business expansion together with the additional sales and marketing expenses from hi-ho from June 1, 2007. 4) General and Administrative Expenses General and administrative expenses were JPY 1,067 million in 1Q07 (up 16.6% year-on-year) as personnel expenses and outsourcing expenses increased. 5) Operating Income Operating income was JPY 692 million in 1Q07 (up 23.7% year-on-year) as gross margin from connectivity and VAS increased by JPY 407 million compared to the same period of the prior fiscal year, despite of the increase in sales and marketing and general and administrative expenses. 6) Other Income Other income decreased to JPY 65 million in 1Q07 compared to the JPY 440 million in 1Q06. The decrease was mainly due to a decrease in the gains from the sale of available-for-sale securities (decreased to JPY 214 million compared to the JPY 478 million in 1Q06). 7) Income before Income Tax Expense Income before income tax expense was JPY 757 million in 1Q07 (down 24.3% year-on-year) as other income decreased due to a decrease in gains from the sale of available-for-sale securities. 8) Income Tax Expense, Minority Interests and Equity in Net Loss of Equity Method Investees Income tax expense was JPY 175 million in 1Q07 mainly due to a record of deferred tax expense of JPY 144 million. Minority interests in losses of subsidiaries in 1Q07 were JPY 9 million. The decrease of minority interests in losses of subsidiaries was mainly due to an elimination of minority interests related to IIJ's 4 consolidated subsidiaries wholly owned by IIJ, because IIJ acquired shares of IIJ Technology Inc. and Net Care, Inc. from their minority shareholders. Equity in net loss of equity method investees in 1Q07 was JPY 20 million, mainly affected by equity in net loss of Internet Revolution Inc. 9) Net Income Net income was JPY 571 million in 1Q07 (down 22.2% year-on-year). (3) Analysis by Service 1) Internet connectivity and VAS Revenues from connectivity services for corporate use was 2,973 million in 1Q07 (up 8.8% year-on-year) mainly because revenues from IP services, the service mainly used for corporate headquarters and data centers increased as existing customers shifted to higher speeds together with the growth in new contracts. Number of the contracts for broadband services also increased mainly due to the expansion of broadband utilization in the corporate internal network. Revenues from connectivity services for home use was JPY 806 million in 1Q07 (up 64.5% year-on-year) with additional revenue of JPY 339 million (for one month) related to IIJ's acquisition of hi-ho in June 1, 2007 making contributions while sales under IIJ Brand declined. Revenues from VAS was JPY 2,105 million in 1Q07 (up 20.9% year-on-year) as network-related outsourcing services such as e-mail services, security services, Internet VPN and data center services grew respectively. Other revenues were JPY 987 million in 1Q07 (up 9.7% year-on-year). As a result, revenues from Internet connectivity and VAS totaled JPY 6,871 million in 1Q07 (up 17.2% year-on-year). The gross margin was JPY 1,202 million in 1Q07 (up 51.3% year-on-year) and the gross margin ratio in 1Q07 improved to 17.5% from 13.5% in 1Q06. (Connectivity and VAS Revenues, Cost of Revenues and Gross Margin Ratio) Three Months Ended Three Months Ended YoY % June 30, 2007 June 30, 2006 Change ----------------------------------------------------------------------------------------------- Millions of Yen Millions of Yen % Connectivity and VAS Revenues 6,871 5,864 17.2 ----------------------------------------------------------------------------------------------- Connectivity Service Revenues (Corporate Use) 2,973 2,733 8.8 ----------------------------------------------------------------------------------------------- IP Service (Including Data Center Connectivity Service) 2,218 2,046 8.4 ----------------------------------------------------------------------------------------------- IIJ FiberAccess/F and IIJ DSL/F 615 508 21.2 ----------------------------------------------------------------------------------------------- Others 140 179 (22.0) ----------------------------------------------------------------------------------------------- Connectivity Service Revenues (Home Use) 806 490 64.5 ----------------------------------------------------------------------------------------------- Under IIJ Brand 282 303 (6.9) ----------------------------------------------------------------------------------------------- hi-ho 339 -- -- ----------------------------------------------------------------------------------------------- OEM 185 187 (1.1) ----------------------------------------------------------------------------------------------- VAS Revenues 2,105 1,741 20.9 ----------------------------------------------------------------------------------------------- Other Revenues 987 900 9.7 ----------------------------------------------------------------------------------------------- Cost of Connectivity and VAS 5,670 5,070 11.8 ----------------------------------------------------------------------------------------------- Backbone Cost 819 872 (6.1) ----------------------------------------------------------------------------------------------- Gross Margin Ratio 17.5% 13.5% -- ----------------------------------------------------------------------------------------------- (Numbers of Internet Connectivity Contracts and Total Contracted Bandwidth) (Numbers of contracts) Three Months Ended Three Months Ended June 30, 2007 June 30, 2006 Change -------------------------------------------------------------------------------------------------- Connectivity Services (Corporate Use) 21,210 17,031 4,179 -------------------------------------------------------------------------------------------------- IP Service (-99Mbps) 773 747 26 -------------------------------------------------------------------------------------------------- IP Service (100Mbps-999Mbps) 168 131 37 -------------------------------------------------------------------------------------------------- IP Service (1Gbps-) 58 51 7 -------------------------------------------------------------------------------------------------- IIJ Data Center Connectivity Service 278 264 14 -------------------------------------------------------------------------------------------------- IIJ FiberAccess/F and IIJ DSL/F 18,252 14,085 4,167 -------------------------------------------------------------------------------------------------- Others 1,681 1,753 (72) -------------------------------------------------------------------------------------------------- Connectivity Services (Home Use) 555,946 594,951 (39,005) -------------------------------------------------------------------------------------------------- Under IIJ Brand 54,192 59,545 (5,353) -------------------------------------------------------------------------------------------------- hi-ho 186,677 -- 186,677 -------------------------------------------------------------------------------------------------- OEM 315,077 535,406 (220,329) -------------------------------------------------------------------------------------------------- Total Contracted Bandwidth 330.3 Gbps 225.4 Gbps 104.9 Gbps -------------------------------------------------------------------------------------------------- (Note) The classification in the table for connectivity services has been changed from the 1Q07 due to the acquisition of hi-ho in June 2007. Please refer to the Appendix 4 of the press release that IIJ made on August 13, 2007, "IIJ Announces First Quarter Results for the Fiscal Year Ending March 31, 2008" for the tables with the previous classification. 2) SI Revenues from SI was JPY 6,334 million in 1Q07 (up 5.0% year-on-year). The increase mainly came from the increase in monthly recurring revenues from systems operation and maintenance of JPY 3,782 million in 1Q07 (up 16.2% year-on-year) while one-time revenues from systems construction was JPY 2,552 million in 1Q07, a decrease by 8.1% compared to 1Q06 because there were more projects that is expected to complete in the second half of FY2007 and less number of projects that continued from the previous quarter compared to 1Q06. The gross margin from systems integration in 1Q07 was JPY 1,486 million (up 2.4% year-on-year) and the gross margin ration was 23.5%, compared to 24.0% in 1Q06. The order backlog for SI and equipment sales at June 30, 2007 was JPY 17,174 million, an increase of 81.3% from March 31, 2007. (SI Revenues, Cost of Revenues and Gross Margin Ratio) Three Months Ended Three Months Ended YoY % June 30, 2007 June 30, 2006 Change ----------------------------------------------------------------------------------------------- Millions of Yen Millions of Yen % SI Revenues 6,334 6,032 5.0 ----------------------------------------------------------------------------------------------- Systems Construction 2,552 2,778 (8.1) ----------------------------------------------------------------------------------------------- Systems Operation and Maintenance 3,782 3,254 16.2 ----------------------------------------------------------------------------------------------- Cost of SI 4,849 4,581 5.8 ----------------------------------------------------------------------------------------------- SI Gross Margin Ratio 23.5% 24.0% -- ----------------------------------------------------------------------------------------------- 3) Equipment sales Revenue from equipment sales was JPY 491 million. The gross margin for equipment sales was JPY 66 million and the gross margin ratio was up to 13.6% from 10.8% of the same period of the prior fiscal year. (Equipment Sales Revenue and Cost) Three Months Ended Three Months Ended YoY % June 30, 2007 June 30, 2006 Change ----------------------------------------------------------------------------------------------- Millions of Yen Millions of Yen % Equipment Sales Revenues 491 541 (9.5) ----------------------------------------------------------------------------------------------- Cost of Equipment Sales 423 483 (12.3) ----------------------------------------------------------------------------------------------- Equipment Sales Gross Margin Ratio 13.6% 10.8% -- ----------------------------------------------------------------------------------------------- 2. Overview of Financial Position (1) Assets, Liabilities and Total Shareholders' Equity As of June 30, 2007, total assets increased by JPY 4,082 million from the amount as of March 31, 2007 to JPY 51,775 million. For current assets, inventories increased by JPY 966 million, mainly due to an increase of on-going SI projects; prepaid expenses increased by JPY 1,175 million, mainly for bonus payments to IIJ's employees and maintenance expenses related to SI projects; and account receivables decreased by JPY 1,731 million, each from the respective amount as of March 31, 2007. Property and equipment increased by JPY 1,486 million from the amount as of March 31, 2007 mainly due to IIJ's acquisition of hi-ho and an increase of property for IIJ to provide services to its customers and itself. Intangible assets increased by JPY 2,979 million from the amount as of March 31, 2007, mainly due to the recording of non-amortized intangible assets upon IIJ's acquisition of shares of two consolidated subsidiaries and hi-ho. For current liabilities, borrowings increased by JPY 5,000 million from the amount as of March 31, 2007 for IIJ's acquisition of shares of two consolidated subsidiaries from their minority shareholders, and accounts payable decreased by JPY 2,548 million from the amount as of March 31, 2007. Total shareholders' equity as of June 30, 2007 was JPY 21,077 million, an increase by JPY 965 million from the amount as of March 31, 2007. (2) Cash Flows Cash as of June 30, 2007 decrease to JPY 12,598 million, compared to JPY 13,555 million as of March 31, 2007. (Net cash used in operating activities) Net cash used in operating activities in 1Q07 was JPY 1,328 million, compared to net cash provided by operating activities of JPY 905 million in 1Q06. Operating income increased compared to 1Q06, mainly due to a steady increase in monthly recurring revenues from connectivity and VAS. On the other hand during 1Q07, IIJ recorded an increase in inventories and prepaid expenses related to on-going SI projects, a decrease in accounts payable of JPY 1,065 million related to a SI project that was completed in the previous fiscal year, and payment of JPY 726 million for income taxes. (Net cash used in investing activities) Net cash used in investing activities in 1Q07 was JPY 3,520 million, compared to JPY 267 million in 1Q06. IIJ recorded proceeds of JPY 538 million from the sale of available-for-sale securities (the fair value of available-for-sale securities as of June 30, 2007 was JPY 1,018 million). IIJ paid JPY 1,975 million for the purchase of subsidiary stock from minority shareholders, JPY 912 million for the acquisition of a newly controlled company, hi-ho, and JPY 570 million for the purchase of property and equipment. (Net cash provided by financing activities) Net cash provided by financing activities in 1Q07 was JPY 3,898 million, compared to net cash used in financing activities of JPY 1,268 million in 1Q06. IIJ recorded proceeds from net borrowings of JPY 5,729 million, including new borrowings of JPY 5,000 million for its acquisition of shares of two consolidated subsidiaries from their minority shareholders. IIJ also recorded principal payments under capital leases of JPY 775 million and a net decrease in short-term borrowings with initial maturities less than three month of JPY 750 million. 3. Target for FY2007 As of March 31, 2007, IIJ had tax operating loss carryforwards of JPY 17,083 million. IIJ recorded deferred tax benefits of JPY 1,245 million resulting from a release of valuation allowance against deferred income tax assets in the first half of FY2006 in consideration of the income trend. In the second quarter of FY2007, IIJ plans to revise valuation allowance against deferred income tax assets in the increasing income trend, related to application of consolidated tax payment system for IIJ and its wholly owned subsidiaries. As a result, IIJ expects to record deferred tax benefits exceeding the deferred tax expenses that it recorded in the first quarter of FY2007. In consideration of the above, IIJ revises targets for the financial results for the first half of FY2007. The revision is related to the timing of record of income tax benefits or expenses in the fiscal year and will not affect targets for the financial results for full FY2007. 4. Others (1) Change of Condition in Consolidated Subsidiaries during the Three Months Ended June 30, 2007 (Change of Condition in Specific Consolidated Subsidiaries with the Change of Scope of Consolidation): None (2) Adoption of Simplified Accounting Method: None (3) Changes in Accounting and Reporting Policies from the Most Recent Fiscal year: None (4) Other Issues to be Addressed: On August 3, 2007, the reduction of capital and the dividends of capital surplus of Net Care, IIJ's 100% owned subsidiary has been approved at the extraordinary general meeting of shareholders of Net Care. The capital of Net Care will be reduced to JPY 400 million from JPY 1,000 million effective September 10, 2007. The dividend of capital surplus will be paid effective September 11, 2007. Quarterly Consolidated Financial Statements (From April 1, 2007 through June 30, 2007) (1) Quarterly Consolidated Balance Sheets ------------------------------------------------------------------------------------------------------------------------ As of June 30, 2007 As of June 30, 2006 As of March 31, 2007 ------------------------------------------------------------------------------------------------------------------------ Thousands of Thousands of Thousands of Thousands of U.S. Dollars Yen % Yen % Yen % ------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash 102,099 12,597,948 13,091,020 13,554,544 Short-term investments 98 12,146 -- 12,093 Accounts receivable, net of allowance for doubtful accounts of JPY 29,115 thousand, JPY 29,054 thousand and JPY 32,489 thousand at June 30, 2007, June 30, 2006 and March 31, 2007, respectively 64,385 7,944,525 6,143,361 9,675,725 Inventories 16,835 2,077,268 709,047 1,111,086 Prepaid expenses 18,058 2,228,120 1,835,908 1,053,270 Other current assets, net of allowance for doubtful accounts of JPY 4,570 thousand, JPY 30,850 thousand and JPY 4,570 thousand at June 30, 2007, June 30, 2006 and March 31, 2007, respectively 6,369 785,912 177,320 930,571 --------------------------- ------------ ------------- Total current assets 207,844 25,645,919 49.5 21,956,656 52.3 26,337,289 55.2 INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES, net of loan loss valuation allowance of JPY 16,701 thousand at June 30, 2007, June 30, 2006 and March 31, 2007 6,833 843,176 1.6 1,095,058 2.6 858,490 1.8 OTHER INVESTMENTS 20,405 2,517,824 4.9 5,811,019 13.8 2,841,741 6.0 PROPERTY AND EQUIPMENT --Net 91,731 11,318,712 21.9 9,771,187 23.3 9,832,396 20.6 INTANGIBLE ASSETS--Net 47,462 5,856,277 11.3 635,152 1.5 2,876,894 6.0 GUARANTEE DEPOSITS 15,912 1,963,354 3.8 1,554,601 3.7 1,686,141 3.5 OTHER ASSETS, net of allowance for doubtful accounts of JPY 67,662 thousand, JPY 39,657 thousand and JPY 69,050 thousand at June 30, 2007, June 30, 2006 and March 31, 2007, respectively 29,417 3,629,716 7.0 1,177,744 2.8 3,260,053 6.9 --------------------------- ------------ ------------- TOTAL 419,604 51,774,978 100.0 42,001,417 100.0 47,693,004 100.0 --------------------------- ------------ ------------- --------------------------------------------------------------------------------------------------------------- As of June 30, 2007 As of June 30, 2006 As of March 31, 2007 --------------------------------------------------------------------------------------------------------------- Thousands of Thousands of Thousands of Thousands of U.S. Dollars Yen % Yen % Yen % --------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings 89,553 11,050,000 5,350,000 6,050,000 Long-term borrowings--current portion 2,180 269,000 1,351,342 290,000 Payable under securities loan -- -- -- agreement 496,080 Capital lease obligations-- current portion 27,380 3,378,436 3,457,253 2,953,173 Accounts payable 47,951 5,916,634 3,786,846 8,464,835 Accrued expenses 7,928 978,228 531,849 897,355 Other current liabilities 18,196 2,245,179 2,051,859 2,477,486 ---------------------------- ------------- ------------- Total current liabilities 193,188 23,837,477 46.0 17,025,229 40.5 21,132,849 44.3 LONG-TERM BORROWINGS -- -- -- 269,000 0.6 -- -- CAPITAL LEASE OBLIGATIONS --Noncurrent 41,213 5,085,243 9.8 4,022,923 9.6 4,318,309 9.1 ACCRUED RETIREMENT AND PENSION COSTS 6,465 797,672 1.6 244,823 0.6 750,042 1.5 OTHER NONCURRENT LIABILITIES 6,713 828,377 1.6 682,291 1.6 564,618 1.2 ---------------------------- ------------- ------------- Total Liabilities 247,579 30,548,769 59.0 22,244,266 52.9 26,765,818 56.1 ---------------------------- ------------- ------------- MINORITY INTEREST 1,207 148,983 0.3 1,281,860 3.1 815,182 1.7 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common-stock--authorized, 377,600 shares; issued and outstanding, 206,478 shares at June 30, 2007 and authorized, 377,600 shares; issued and outstanding, 204,300 shares at June 30, 2006 and at March 31, 2007 136,428 16,833,847 32.5 16,833,847 40.1 16,833,847 35.3 Additional paid-in capital 223,776 27,611,737 53.3 26,599,217 63.3 26,599,217 55.8 Accumulated deficit (194,558) (24,006,463) (46.3) (28,946,811) (68.9) (24,270,769) (50.9) Accumulated other comprehensive income 5,172 638,105 1.2 4,073,276 9.7 949,709 2.0 Treasury stock--777 shares held -- -- -- -- -- by an equity method investee at June 30, 2006 (84,238) (0.2) ---------------------------- ------------- ------------- Total shareholders' equity 170,818 21,077,226 40.7 18,475,291 44.0 20,112,004 42.2 ---------------------------- ------------- ------------- TOTAL 419,604 51,774,978 100.0 42,001,417 100.0 47,693,004 100.0 ---------------------------- ------------- ------------- --------------------------------------------------------------------------------------------------------------- (Note) 1) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 123.39 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 June 29, 2007. (2) Quarterly Consolidated Statements of Income ----------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 2007 Three Months Ended June Fiscal Year Ended March 30, 2006 31, 2007 ----------------------------------------------------------------------------------------------------------------- Thousands of Thousands of % of total Thousands of % of total Thousands of % of total U.S. Dollars Yen revenues Yen revenues Yen revenues ----------------------------------------------------------------------------------------------------------------- REVENUES: Connectivity and value-added services: Connectivity (corporate use) 24,092 2,972,772 2,732,789 11,239,062 Connectivity (home use) 6,535 806,326 490,096 1,968,948 Value-added services 17,061 2,105,108 1,741,318 7,415,533 Other 7,998 986,870 899,726 3,729,633 ------------------------------ ------------- ------------- Total 55,686 6,871,076 5,863,929 24,353,176 Systems integration 51,337 6,334,464 6,031,963 30,527,081 Equipment sales 3,973 490,211 541,545 2,174,324 ------------------------------ ------------- ------------- Total revenues 110,996 13,695,751 100.0 12,437,437 100.0 57,054,581 100.0 ------------------------------ ------------- ------------- COST AND EXPENSES: Cost of connectivity and value-added services 45,948 5,669,522 5,069,730 20,545,358 Cost of systems integration 39,297 4,848,884 4,581,313 23,529,045 Cost of equipment sales 3,435 423,783 483,015 1,893,216 ------------------------------ ------------- ------------- Total cost 88,680 10,942,189 79.9 10,134,058 81.5 45,967,619 80.6 Sales and marketing 7,611 939,130 6.9 789,932 6.3 3,438,725 6.0 General and administrative 8,646 1,066,843 7.8 914,711 7.4 3,970,692 7.0 Research and development 454 56,051 0.4 39,684 0.3 177,273 0.3 ------------------------------ ------------- ------------- Total cost and expenses 105,391 13,004,213 95.0 11,878,385 95.5 53,554,309 93.9 ------------------------------ ------------- ------------- OPERATING INCOME 5,605 691,538 5.0 559,052 4.5 3,500,272 6.1 ------------------------------ ------------- ------------- OTHER INCOME: Interest income 91 11,212 3,049 23,037 Interest expense (785) (96,908) (107,002) (397,439) Foreign exchange gains (8) (926) 690 (297) Net gain on other investments 1,147 141,601 478,186 1,866,510 Other--net 83 10,233 65,181 56,605 ------------------------------ ------------- ------------- Other income-- net 528 65,212 0.5 440,104 3.5 1,548,416 2.7 ------------------------------ ------------- ------------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE, MINORITY INTERESTS AND EQUITY IN NET INCOME (LOSS) OF EQUITY METHOD INVESTEES 6,133 756,750 5.5 999,156 8.0 5,048,688 8.8 ------------------------------ ------------- ------------- INCOME TAX EXPENSE 1,421 175,366 1.3 148,874 1.2 (803,943) (1.4) MINORITY INTERESTS IN EARNINGS OF SUBSIDIARIES 75 9,224 0.1 (43,574) (0.3) (232,719) (0.4) EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES (161) (19,852) (0.1) (73,037) (0.6) (210,199) (0.3) ------------------------------- ------------- ------------- NET INCOME 4,626 570,756 4.2 733,671 5.9 5,409,713 9.5 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- Three Months Ended June 30, 2007 Three Months Ended Fiscal Year Ended March June 30, 2006 31, 2007 ------------------------------------------------------------------------------- Thousands of U.S. Dollars Thousands of Yen Thousands of Yen Thousands of Yen ----------------------------------------------------------------------------------------------------- BASIC WEIGHTED- AVERAGE NUMBER OF SHARES 205,521 203,989 203,992 DILUTED WEIGHTED- AVERAGE NUMBER OF SHARES 205,850 204,230 204,244 BASIC WEIGHTED- AVERAGE NUMBER OF ADS EQUIVALENTS 82,208,255 81,595,702 81,596,724 DILUTED WEIGHTED- AVERAGE NUMBER OF ADS EQUIVALENTS 82,340,017 81,692,077 81,697,407 BASIC NET INCOME PER SHARE 22.51 2,777 3,597 26,519 DILUTED NET INCOME PER SHARE 22.47 2,773 3,592 26,487 BASIC NET INCOME PER ADS EQUIVALENT 0.06 6.94 8.99 66.3 DILUTED NET INCOME PER ADS EQUIVALENT 0.06 6.93 8.98 66.22 ----------------------------------------------------------------------------------------------------- (Note) 1) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 123.39 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 June 29, 2007. (3) Consolidated Statements of Shareholders' Equity Consolidated statements of shareholders' equity for three months ended June 30, 2007 (Unit: Thousands of Yen) ----------------------------------------------------------------------------------------------------------------------- Shares of Common Stock Outstanding (Including Accumulated Treasury Additional Other Stock) Common Paid-in Accumulated Comprehensive Treasury (Shares) Stock Capital Deficit Income Stock Total ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 1, 2007 204,300 16,833,847 26,599,217 (24,270,769) 949,709 -- 20,112,004 Net income 570,756 570,756 Other comprehensive loss, net of tax (311,604) (311,604) ----------- Total comprehensive income 259,152 Payment of dividends (306,450) (306,450) Issuance of common stock related to share excahnges, net of issuance cost 2,178 1,012,520 1,012,520 ----------------------------------------------------------------------------------- BALANCE, JUNE 30, 2007 206,478 16,833,847 27,611,737 (24,006,463) 638,105 -- 21,077,226 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- Consolidated statements of shareholders' equity for three months ended June 30, 2007 (Unit: Thousands of U.S. Dollars) ----------------------------------------------------------------------------------------------------------------------- Shares of Common Stock Outstanding (Including Accumulated Treasury Additional Other Stock) Common Paid-in Accumulated Comprehensive Treasury (Shares) Stock Capital Deficit Income Stock Total ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 1, 2007 204,300 136,428 215,570 (196,700) 7,697 -- 162,995 Net income 4,626 4,626 Other comprehensive loss, net of tax (2,525) (2,525) ----------- Total comprehensive income 2,101 Payment of dividends (2,484) (2,484) Issuance of common stock, net of issuance cost 2,178 8,206 8,206 ----------------------------------------------------------------------------------- BALANCE, JUNE 30, 2007 206,478 136,428 223,776 (194,558) 5,172 -- 170,818 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- (Note) 1) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 123.39 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 June 29, 2007. Consolidated statements of shareholders' equity for three months ended June 30, 2006 (Unit: Thousands of Yen) ----------------------------------------------------------------------------------------------------------------------- Shares of Common Stock Outstanding (Including Accumulated Treasury Additional Other Stock) Common Paid-in Accumulated Comprehensive Treasury (Shares) Stock Capital Deficit Income Stock Total ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 1, 2006 204,300 16,833,847 26,599,217 (29,680,482) 6,553,594 (84,238) 20,221,938 Net income 733,671 733,671 Other comprehensive income, net of tax (2,480,318) (2,480,318) ----------- Total comprehensive income (1,746,647) ----------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2006 204,300 16,833,847 26,599,217 (28,946,811) 4,073,276 (84,238) 18,475,291 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- Consolidated statements of shareholders' equity for the fiscal year ended March 31, 2007 (Unit: Thousands of Yen) ----------------------------------------------------------------------------------------------------------------------- Shares of Common Stock Outstanding (Including Accumulated Treasury Additional Other Stock) Common Paid-in Accumulated Comprehensive Treasury (Shares) Stock Capital Deficit Income Stock Total ----------------------------------------------------------------------------------------------------------------------- BALANCE, APRIL 1, 2006 204,300 16,833,847 26,599,217 (29,680,482) 6,553,594 (84,238) 20,221,938 Net income 5,409,713 5,409,713 Other comprehensive loss, net of tax (5,492,154) (5,492,154) ----------- Total comprehensive loss (82,441) Adjustment to initially apply SFAS158, net of tax (111,731) (111,731) Dissolution of reciprocal interests due to sale of investment in an equity method investee 84,238 84,238 ----------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 2007 204,300 16,833,847 26,599,217 (24,270,769) 949,709 -- 20,112,004 ----------------------------------------------------------------------------------- (4) Quarterly Condensed Consolidated Statements of Cash Flows ------------------------------------------------------------------------------------------------------------------------ Fiscal Year Three Months Ended Ended March Three Months Ended June 30, 2007 June 30, 2006 31, 2007 ------------------------------------------------------------------------------------------------------------------------ Thousands of U.S. Thousands of Dollars Thousands of Yen Thousands of Yen Yen ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income 4,626 570,756 733,671 5,409,713 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 8,490 1,047,580 1,107,155 4,228,048 Provision for (reversal of) doubtful accounts and advances (34) (4,183) 3,413 12,232 Net gain on other investments (1,147) (141,601) (478,186) (1,866,510) Foreign exchange losses 22 2,686 3,284 2,226 Equity in net loss of equity method investees 161 19,852 73,037 210,199 Minority interests in (loss) earnings of subsidiaries (75) (9,224) 43,574 232,719 Deferred income tax expense (benefit) 1,169 144,247 21,054 (1,494,685) Others 435 53,676 34,300 534,035 Changes in operating assets and liabilities: Decrease in accounts receivable 14,100 1,739,821 5,807,822 2,376,126 Increase in inventories, prepaid expenses and other current and noncurrent assets (20,727) (2,557,479) (635,408) (1,235,003) Decrease in accounts payable (18,702) (2,307,593) (6,071,242) (1,872,969) Increase in accrued expenses, other current and noncurrent liabilities 923 113,864 262,210 865,376 ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities (10,759) (1,327,598) 904,684 7,401,507 ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Purchase of property and equipment (4,616) (569,590) (436,264) (1,287,906) Purchase of available-for-sale securities (2,331) (287,609) -- (802,662) Purchase of short-term and other investments (257) (31,670) (279,230) (1,794,358) Proceeds from sales of investment in an equity -- -- -- method investee 185,900 Purchase of subsidiary stock from minority shareholders (16,007) (1,975,123) (27,559) (3,077,764) Proceeds from sales of available-for-sale securities 4,361 538,112 480,806 3,883,915 Proceeds from sales and redemption of other investments 27 3,310 1,542 110,446 Acquisition of a newly controlled company, net -- -- of cash acquired (7,395) (912,450) Acquisition of business -- -- -- (74,751) Payment of guarantee deposits--net (2,162) (266,766) (5,562) (118,411) Other (144) (17,772) (726) (38,020) ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (28,524) (3,519,558) (266,993) (3,013,611) ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Proceeds from issuance of short-term borrowings with initial maturities over three months 83,475 10,300,000 4,350,000 10,500,000 Repayments of short-term borrowings with initial maturities over three months and long- term borrowings (37,045) (4,571,000) (659,621) (7,639,963) Proceeds from securities loan agreement -- -- 496,080 1,057,680 Repayments of securities loan agreement -- -- (999,600) (2,057,280) Principal payments under capital leases (6,279) (774,817) (899,879) (3,259,875) Net decrease in short-term borrowings with initial maturities less than three months (6,078) (750,000) (3,555,000) (3,355,000) Proceeds from issuance of subsidiary stock to -- -- -- minority shareholders 194,679 Payment of dividends (2,484) (306,450) -- -- ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 31,589 3,897,733 (1,268,020) (4,559,759) ------------------------------------------------------------------------------------------------------------------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (58) (7,173) (5,672) (614) NET DECREASE IN CASH (7,752) (956,596) (636,001) (172,477) CASH, BEGINNING OF EACH PERIOD 109,851 13,554,544 13,727,021 13,727,021 ------------------------------------------------------------------------------------------------------------------------ CASH, END OF EACH PERIOD 102,099 12,597,948 13,091,020 13,554,544 ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ ADDITIONAL CASH FLOW INFORMATION: Interest paid 774 95,500 91,001 383,461 Income taxes paid 5,880 725,557 225,563 347,826 NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of assets by entering into capital leases 13,473 1,662,475 405,621 2,664,706 Purchase of minority interests of consolidated -- -- subsidiaries throught share exchanges 8,206 1,012,520 Acquisition of business and a company: Assets acquired 12,730 1,570,720 -- 236,307 Cash paid (9,972) (1,230,450) -- (74,751) Liabilities assumed 2,758 340,270 -- 161,556 ------------------------------------------------------------------------------------------------------------------------ (Note) 1) The U.S. dollar amounts represent translations of yen amounts at the rate of JPY 123.39 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 June 30, 2006. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Internet Initiative Japan Inc. Date: August 14, 2007 By: /s/ Koichi Suzuki ----------------------------------------- Koichi Suzuki President, Chief Executive Officer and Representative Director