Highlights of First Quarter FY2009 Financial Results

    * Revenue was JPY15,835 million ($164 million), down 3.0% YoY.    While recurring revenues increased YoY, systems construction    revenue decreased as a result of the weak IT related investments    in Japan.   * Operating income was JPY351 million ($4 million), down 14.7% YoY    due to increase in operating loss related to our new ATM    operation business of JPY165 million YoY, while operating income    from connectivity and outsourcing service and SI increased 21.9%    YoY to JPY584 million.   * Net income attributable to IIJ(2) was JPY180 million ($2    million), up 6.7% YoY. 

Overview of 1st Quarter FY2009 Financial Results and Business Outlook

"In an economic environment that continues to remain challenging, our operating income was above our original target largely because operating income from connectivity and outsourcing service and SI increased along with the increase in recurring revenues and the continuous tight cost control, while operating loss related to our ATM operation business increased as it is still in its course of business start up," said Koichi Suzuki, President and CEO of IIJ.

"As for the situation of our recurring revenue (87.7% of our 1Q09 total revenue), while it increased by 6.4% YoY, it dropped by 1.0% compared to 4Q08. There were price pressures which are common in the beginning of the fiscal year with corporate trying to reduce their running cost. However, we believe it will increase in the following quarters, especially because corporate needs for cost reduction are a following wind toward our outsourcing services. Security related services such as SMX service or anti-DDoS service are also expected to grow because companies must prevent their network from getting attacked. Needs for reliable and stable connectivity services also remain strong. Connectivity of over 1Gbps has been increasing quarter by quarter and we believe this trend will continue.

"As for SI, although anticipated, our systems construction revenue decreased by 40.6% YoY. Corporate customers are withholding their investments due to the sudden change in economy from the latter half of FY2008. Yet we see some light towards its recovery compared to when the economy was at a halt during last fiscal year. While we strive to receive orders, we will continue with our resolute operation for tight cost control through the rest of the fiscal year and increase SI gross margin.

"For our mid-term growth, we'll continuously introduce new services, which we believe will result in strengthening the basis of our business. In July 2009, we've introduced a new service brand 'LaIT' which offers reliable but affordable services packed with our technology to mid- to small-sized enterprises. We are also preparing the launch of cloud computing related services and additional features for our services such as IIJ Mobile service, email related services and VPN services.

"We hope that these new service developments will contribute to the innovation of the internet, as well as strengthening the basis of our business growth and lead to revenue growth."

1st Quarter FY2009 Financial Results Summary

                              Operating Results Summary  ---------------------------------------------------------------------                                          1Q08      1Q09         YoY %                                                                 change   ---------------------------------------------------------------------                                          JPY       JPY                                                        millions  millions               Total Revenues                          16,328   15,835        (3.0%)  ---------------------------------------------------------------------                                                                          Connectivity and Outsourcing Services   8,396    9,126         8.7%   ---------------------------------------------------------------------   SI                                      7,689    6,565       (14.6%)  ---------------------------------------------------------------------   Equipment Sales                           238      137       (42.6%)  ---------------------------------------------------------------------   ATM Operation Business                      5        7        54.3%   ---------------------------------------------------------------------  Total Costs                             13,303   12,837        (3.5%)  ---------------------------------------------------------------------   Connectivity and Outsourcing Services   7,065    7,650         8.3%   ---------------------------------------------------------------------   SI                                      6,024    4,876       (19.1%)  ---------------------------------------------------------------------   Equipment Sales                           199      119       (40.2%)  ---------------------------------------------------------------------   ATM Operation Business                     15      192     1,206.2%   ---------------------------------------------------------------------  SG&A Expenses and R&D                    2,614    2,647         1.3%   ---------------------------------------------------------------------  Operating Income                           411      351       (14.7%)  ---------------------------------------------------------------------  Income before Income Tax Expense           310      300        (3.1%)  ---------------------------------------------------------------------  Net income attributable to IIJ             169      180         6.7%   --------------------------------------------------------------------- 

                               Segment Summary                             ---------------------------------------------------------------------                                                      1Q08       1Q09    ---------------------------------------------------------------------                                                      JPY        JPY                                                       millions   millions  Net Revenues                                       16,328     15,835   ---------------------------------------------------------------------   Network services and SI business                  16,342     15,922   ---------------------------------------------------------------------   ATM operation business                                 5          7   ---------------------------------------------------------------------   Elimination                                           19         94   ---------------------------------------------------------------------  Operating Income (Loss)                               411        351   ---------------------------------------------------------------------   Network service and SI business                      484        589   ---------------------------------------------------------------------   ATM operation business                               (69)      (233)  ---------------------------------------------------------------------   Elimination                                            4          5   --------------------------------------------------------------------- 

We have omitted segment analysis because most of our revenues are dominated by Network services and systems integration business.

1st Quarter FY2009 Results of Operation

Revenues

Revenues were JPY15,835 million, a decrease of 3.0% YoY.

Connectivity and Outsourcing Services revenue were JPY9,126 million, up 8.7% YoY. Connectivity service increased by 9.4% YoY to JPY5,146 million and outsourcing service increased by 7.8% YoY to JPY3,980 million. Connectivity service for corporate use grew followed by the steady increase in the use of broadband connectivity, especially connectivity of over 1Gbps and strong demands for IIJ Mobile Service. Contracts of over 1Gbps increased by 30 contracts YoY and total contracted bandwidth increased. Connectivity services for home use also grew YoY followed by the growth in mobile data communication service which was launched in Dec. 2008 and by the shift towards optical line services which charge higher monthly fees. Outsourcing service also increased followed by the steady demands for email security related services and network related services such as IIJ SMF service.

SI revenues were JPY6,565 million, down 14.6% YoY. Systems construction revenue, a one-time revenue, decreased by 40.6% YoY as Japanese companies are very careful towards new investments. The budget system in Japan, of which many ends in March, had also affected the weak systems construction revenues. Systems operation and maintenance, a recurring revenue, was a steady increase of 2.3% YoY.

Order backlog for SI and equipment sales as of June 30, 2009 was JPY16,341 million (down 2.9% YoY) compared to JPY16,836 million as of June 30, 2008, and orders received for 1Q09 was JPY8,171 million (down 7.7% YoY.) The order backlog and orders received for systems construction including equipment sales was JPY3,844 million (down 24.3% YoY) compared to JPY5,081 million as of June 30, 2008 and JPY2,921 million (down 18.7% YoY), respectively. The order backlog and orders received for systems operation and maintenance was JPY12,497 million (up 6.3%) compared to JPY11,755 million as of June 30, 2008 and JPY5,250 million (down 0.2% YoY), respectively.

Equipment sales revenues were JPY137 million, down 42.6% YoY (JPY238 million in 1Q08).

ATM Operation Business revenues were JPY7 million compared to JPY5 million in 1Q08. During 1Q09, Trust Networks began placing ATMs in Kansai areas. As of June 30, 2009, Trust Networks operates 26 ATMs.

Cost and expense

Cost of revenues was JPY12,837 million, a decrease of 3.5% YoY (JPY13,303 million in 1Q08).

Cost of Connectivity and Outsourcing Services revenue was JPY7,650 million (JPY7,065 million in 1Q08), an increase of 8.3% YoY largely affected by the increase in network operation related costs. Circuit related costs also increased corresponding with the growth of mobile data communication services. Backbone cost was JPY919 million, up 2.6% YoY. Gross margin was JPY1,475 million (JPY1,331 million in 1Q08), up 10.8% YoY and gross margin ratio was 16.2%.

Cost of SI revenues was JPY4,876 million, a decrease of 19.1% YoY (JPY6,024 million in 1Q08). Purchasing costs decreased along with the decrease in systems construction revenues. Outsourcing related costs also decreased as a result of reduction in full-time outsourcing personnel. Gross margin was JPY1,689 million, up 1.5% YoY (JPY1,665 million in 1Q08) and gross margin ratio was 25.7%.

Cost of Equipment Sales revenues was JPY119 million, a decrease of 40.2% YoY due to the decrease in equipment sales revenues. Gross margin was JPY18 million (JPY39 million in 1Q08) and gross margin ratio was 12.9%.

Cost of ATM Operation Business revenues was JPY192 million compared to JPY15 million in 1Q08 as the ATM operation business has moved on from business start up to business expansion phase.

SG&A Expenses and R&D

Sales and marketing expenses were JPY1,325 million (JPY1,173 million in 1Q08), an increase of 13.0% YoY largely due to the increase in disposal of customer relationship of non-amortized intangible assets. There were also increases in personnel related expenses.

General and administrative expenses were JPY1,245 million (JPY1,383 million in 1Q08), a decrease of 9.9% YoY mainly due to the decrease in outsourcing related expenses and general expenses as a result of tight cost control, especially from the latter half of FY2008.

Research and development expenses were JPY77 million (JPY58 million in 1Q08), an increase of 31.0% YoY as expenses related to IIJ Innovation Institute Inc. increased.

Operating income

Operating income decreased by 14.7% YoY to JPY351 million (JPY411 million in 1Q08). While gross margin for connectivity and outsourcing services and SI increased, operating loss related to ATM operation business increased and SG&A and R&D expenses also increased.

Other income (expenses)

Other income (expenses) was net other expenses of JPY51 million compared to net other expenses of JPY102 million in 1Q08. There were decreases in interest expense and gains in foreign exchange.

Income before income tax expenses

Income before income tax expenses was JPY300 million, a decrease of 3.1% YoY (JPY310 million in 1Q08).

Net Income

Net income was JPY87 million, down 23.3% YoY (JPY114 million in 1Q08).

Income tax expense was JPY244 million compared to JPY213 million in 1Q08. Deferred tax expenses was JPY186 million compared to expenses of JPY127 million in 1Q08.

Equity in net income of equity method investees was JPY32 million compared to JPY18 million in 1Q08.

Net income attributable to IIJ

Net income attributable to IIJ was JPY180 million, up 6.7% YoY (JPY169 million in 1Q08).

Net losses attributable to noncontrolling interests was JPY93 million compared to JPY55 million in 1Q08, both related to GDX Japan Inc. and Trust Networks Inc.

1st Quarter FY2009 Financial Condition

Balance Sheets

As of June 30, 2009, the balance of total assets was JPY50,671 million, a decrease of JPY1,630 million from the balance as of March 31, 2009.

For current assets, as compared to each of the respective balances as of March 31, 2009, accounts receivable decreased by JPY1,724 million and prepaid expenses increased by JPY839 million mainly for bonus payments to our employees and maitenance expenses related to SI projects increased. As for current liabilities, short-term borrowings decreased by JPY200 million and accounts payable decreased by JPY1,291 million, from each of the respective balances as of March 31, 2009.

As of June 30, 2009, we had net deferred tax asset (current) of JPY586 million and net deferred tax asset (non-current) of JPY2,254 million, respectively.

The balance of other investments as of June 30, 2009 was JPY2,125 million, an increase of JPY211 million from the balance as of March 31, 2009. The breakdown of other investments were JPY900 million in available-for-sale securities, JPY861 million in nonmarketable equity securities and JPY364 million in other.

As of June 30, 2009, the balance of non-amortized intangible assets (excluding telephone rights) such as goodwill was JPY5,418 million and the balance of amortized intangible assets were JPY274 million. The breakdown of non-amortized intangible assets were JPY2,639 million in goodwill, JPY2,587 million in customer relationships and JPY192 million in trademark. The breakdown of amortized intangible assets were JPY154 million in customer relationships and JPY119 million in licenses.

Total IIJ shareholders' equity as of June 30, 2009 was JPY25,296 million, an increase of JPY127 million from the balance as of March 31, 2009. IIJ Shareholders' equity ratio (IIJ shareholders' equity/total assets) as of June 30, 2009 was 49.9%, up 1.8% compared to March 31, 2009.

Cash Flows

Cash and cash equivalents as of June 30, 2009 were JPY9,897 million compared to JPY9,943 million as of June 30, 2008.

Net cash provided by operating activities in 1Q09 was JPY2,164 million, compared to net cash provided by operating activities of JPY2,018 million in 1Q08. While operating income was JPY351 million (JPY411 million in 1Q08), a decrease compared to 1Q08, there were changes in operating assets and liabilities during 1Q09, mainly resulting from the decrease in accounts receivable of JPY1,735 million, decrease in inventories, decrease in prepaid expenses and other current and noncurrent assets of JPY501 million, decrease in accounts payable related to on-going SI projects of JPY937 million and payment of JPY208 million in income taxes.

Net cash used in investing activities in 1Q09 was JPY1,105 million, compared to net cash used in investing activities of JPY825 million in 1Q08, mainly due to payment of JPY1,094 million for the purchase of property and equipment (JPY768 million in 1Q08).

Net cash used in financing activities in 1Q09 was JPY1,332 million, compared to net cash used in financing activities of JPY2,695 million in 1Q08, mainly due to principal payments under capital leases of JPY930 million (payment of JPY839 million in 1Q08), net repayments of short-term borrowings with initial maturities less than three months of JPY200 million (net repayment of JPY1,400 million in 1Q08) and payments of JPY203 million for the year-end dividends for the fiscal year ended March 31, 2009.

Supplemental Information

                    Number of Contracts for Connectivity Services  ---------------------------------------------------------------------                                    June 30,    June 30,       YoY                                           2008        2009        Change     ---------------------------------------------------------------------  Connectivity Services                                                   (Corporate Use)                   32,939      53,513       20,574      ---------------------------------------------------------------------    IP Service (-99Mbps)                854         925           71      ---------------------------------------------------------------------    IP Service (100Mbps-999Mbps)        203         227           24      ---------------------------------------------------------------------    IP Service (1Gbps-)                  72         102           30      ---------------------------------------------------------------------    IIJ Data Connectivity Service       286         298           12      ---------------------------------------------------------------------    IIJ FiberAccess/F and IIJ DSL/F  24,466      26,274        1,808      ---------------------------------------------------------------------    IIJ Mobile Service(3)             5,399      24,201       18,802      ---------------------------------------------------------------------    Others                            1,659       1,486        (173)     ---------------------------------------------------------------------  Connectivity Services (Home Use)  467,453     428,171     (39,282)     ---------------------------------------------------------------------    Under IIJ Brand                  49,279      48,053      (1,226)     ---------------------------------------------------------------------    hi-ho                           188,575     176,225     (12,350)     ---------------------------------------------------------------------    OEM                             229,599     203,893     (25,706)     ---------------------------------------------------------------------  Total Contracted Bandwidth      422.1Gbps   584.7Gbps   162.6Gbps  --------------------------------------------------------------------- 

             Connectivity and Outsourcing Services Revenues Breakdown         ---------------------------------------------------------------------                                            1Q08     1Q09        YoY %                                                                 change   ---------------------------------------------------------------------                                            JPY       JPY                                                        millions  millions             Connectivity Service (Corporate Use)     3,110     3,448       10.9%   ---------------------------------------------------------------------    IP Service(4)                          2,270     2,347        3.4%   ---------------------------------------------------------------------    IIJ FiberAccess/F and IIJ DSL/F          713       726        1.9%   ---------------------------------------------------------------------    IIJ Mobile Service(5)                     36       299      719.7%   ---------------------------------------------------------------------    Others                                    91        76      (15.6%)  ---------------------------------------------------------------------  Connectivity Service (Home Use)          1,596     1,698        6.4%   ---------------------------------------------------------------------    Under IIJ Brand                          257       253       (2.0%)  ---------------------------------------------------------------------    hi-ho                                  1,203     1,302        8.3%   ---------------------------------------------------------------------    OEM                                      136       143        5.5%   ---------------------------------------------------------------------  Outsourcing Services                     3,690     3,980        7.8%   ---------------------------------------------------------------------     Total Connectivity and Outsourcing                                      Services                             8,396     9,126        8.7%   --------------------------------------------------------------------- 

Reconciliation of Non-GAAP Financial Measures

The following table summarizes the reconciliation of adjusted EBITDA to net income in our consolidated statements of income that are prepared in accordance with U.S. GAAP.