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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 20-F/A

(EMPTY BALLOT BOX)   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR(BALLOT BOX WITH AN X)   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001OR(EMPTY BALLOT BOX)   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________

Commission file number: 0-30204

Kabushiki Kaisha Internet Initiative
(Exact name of Registrant as specified in its charter)Internet Initiative Japan Inc.
(Translation of Registrants name into English)

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|----------------------------------------------- |  | ----------------------------------------
|                                                |  | Takebashi Yasuda Bldg                   
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|                                                |  | 3-13, Kanda Nishiki-cho                 
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|Japan                                           |  | Chiyoda-ku, Tokyo 101-0054 Japan        
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|(Jurisdiction of incorporation or organization) |  | (Address of principal executive offices)

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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange On Which
Registered
|None                |  | None                                     

Securities registered or to be registered pursuant to Section 12(g) of the Act.

(1) Common Stock, par value ¥50,000 per share (Shares)*
(2) American Depositary Shares (ADSs), each of which represents 1/2000th of a Share
(Title of Class)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)

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

As of March 31, 2001, 22,480 shares of common stock were outstanding,
comprised of 16,484 Shares and 11,992,000 ADSs (equivalent to 5,996 shares).

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

Yes [X]  No [   ]

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

Item 17 [   ]  Item 18 [X]



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*Not for trading, but only in connection with the registration of the ADSs.




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TABLE OF CONTENTS



|                                                |                                                                                       |  |  |  |  |  |  | 
|----------------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Forward-looking Statement                      
|PART I                                         
|                                                | Item 1. Identity of Directors, Senior Management and Advisors                        
|                                                | Item 2. Offer Statistics and Expected Timetable                                      
|                                                | Item 3. Key Information                                                              
|                                                | Item 4. Information on the Company                                                   
|                                                | Item 5. Operating and Financial Review and Prospects                                 
|                                                | Item 6. Directors and Senior Management and Employees                                
|                                                | Item 7. Major Shareholders and Related Party Transactions                            
|                                                | Item 8. Financial Information                                                        
|                                                | Item 9. The Offer and Listing                                                        
|                                                | Item 10. Additional Information                                                      
|                                                | Item 11. Quantitative and Qualitative Disclosures about Market Risk                  
|                                                | Item 12. Description of Securities Other than Equity Securities                      
|PART II                                        
|                                                | Item 13. Defaults, Dividend Arrearages and Delinquencies.                            
|                                                | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
|                                                | Item 15. [Reserved]                                                                  
|                                                | Item 16. [Reserved]                                                                  
|PART III                                       
|                                                | Item 17. Financial Statements.                                                       
|                                                | Item 18. Financial Statements.                                                       
|                                                | Item 19. Exhibits.                                                                   
|SIGNATURE                                      
|INDEPENDENT AUDITORS REPORT                   
|Consolidated Balance Sheets                    
|Consolidated Statements of Operations          
|Consolidated Statements of Shareholders Equity
|Consolidated Statements of Cash Flows          
|Notes to Consolidated Financial Statements     
|ARTICLES OF INCORPORATION                      



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TABLE OF CONTENTS

|                          |  |                                                                              |   |  |    |      |  | 
|------------------------- |  | ---------------------------------------------------------------------------- | - |  | -- | ---- |  | 
|                          |  |                                                                              |   |  |    | Page
|                          |  |                                                                              |   |  |    |     
|Forward-looking Statement |  |                                                                              | 1 | 
|                         
|                         
|                         
|                         
|PART I                   
|                         
|                         
|                         
|                         
|Item 1.                   |  | Identity of Directors, Senior Management and Advisors                        |   |  | 2  |     
|                         
|                         
|                         
|                         
|Item 2.                   |  | Offer Statistics and Expected Timetable                                      |   |  | 2  |     
|                         
|                         
|                         
|                         
|Item 3.                   |  | Key Information                                                              |   |  | 2  |     
|                         
|                         
|                         
|                         
|Item 4.                   |  | Information on the Company                                                   |   |  | 12 |     
|                         
|                         
|                         
|                         
|Item 5.                   |  | Operating and Financial Review and Prospects                                 |   |  | 36 |     
|                         
|                         
|                         
|                         
|Item 6.                   |  | Directors and Senior Management and Employees                                |   |  | 53 |     
|                         
|                         
|                         
|                         
|Item 7.                   |  | Major Shareholders and Related Party Transactions                            |   |  | 55 |     
|                         
|                         
|                         
|                         
|Item 8.                   |  | Financial Information                                                        |   |  | 57 |     
|                         
|                         
|                         
|                         
|Item 9.                   |  | The Offer and Listing                                                        |   |  | 57 |     
|                         
|                         
|                         
|                         
|Item 10.                  |  | Additional Information                                                       |   |  | 58 |     
|                         
|                         
|                         
|                         
|Item 11.                  |  | Quantitative and Qualitative Disclosures about Market Risk                   |   |  | 69 |     
|                         
|                         
|                         
|                         
|Item 12.                  |  | Description of Securities Other than Equity Securities                       |   |  | 69 |     
|                         
|                         
|                         
|                         
|PART II                  
|                         
|                         
|                         
|                         
|Item 13.                  |  | Defaults, Dividend Arrearages and Delinquencies                              |   |  | 70 |     
|                         
|                         
|                         
|                         
|Item 14.                  |  | Material Modifications to the Rights of Security Holders
and Use of Proceeds |   |  | 70 |     
|                         
|                         
|                         
|                         
|Item 15.                  |  | [Reserved]                                                                   |   |  | 70 |     
|                         
|                         
|                         
|                         
|Item 16.                  |  | [Reserved]                                                                   |   |  | 70 |     
|                         
|                         
|                         
|                         
|PART III                 
|                         
|                         
|                         
|                         
|Item 17.                  |  | Financial Statements                                                         |   |  | 71 |     
|                         
|                         
|                         
|                         
|Item 18.                  |  | Financial Statements                                                         |   |  | 71 |     
|                         
|                         
|                         
|                         
|Item 19.                  |  | Exhibits                                                                     |   |  | 71 |     

-i-



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Forward-looking Statement

This annual report contains forward-looking statements that are based
on our current expectations, assumptions, estimates and projections about us and
our industry and that are subject to various risks and uncertainties. These
statements discuss future expectations, identify strategies, contain projections
of results of operations or of financial condition of ours or our group
companies or state other forward-looking information. Known and unknown risks,
uncertainties and other factors could cause the actual results to differ
materially from those contained in any forward-looking statement.

Although we believe that expectations we express in these
forward-looking statements are reasonable, we cannot promise that our
expectations will turn out to be correct. Our actual results could be materially
different from and worse than our expectations. Important risks and factors that
could cause our actual results to be materially different from our expectations
are generally set forth in Item 3.D. and include, without limitation:



| |  |  | that we may not continue to increase subscribers to our connectivity services, particularly
subscribers at higher bandwidths, 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | that our large capital investment in Crosswave Communications Inc. may not yield the expected
returns in the future or at all,
|
| |  |  | that we may not generate significant revenues from our systems integration services or our Internet
data center services, and 
|
| |  |  | that leased line costs may not decrease as rapidly as expected or at all.                                                     

-1-



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##### Table of Contents






PART I




Item 1. Identity of Directors, Senior Management and Advisors

Not Applicable




Item 2. Offer Statistics and Expected Timetable

Not Applicable




Item 3. Key Information

A. Selected financial data

The selected consolidated financial data set forth below should be read
in conjunction with our consolidated financial statements and the notes to the
financial statements beginning on page F-1. You should also read Operating and
Financial Review and Prospects included as Item 5. The statement of operations
data set forth below for the fiscal years ended March 31, 1997, 1998, 1999, 2000
and 2001 and the balance sheet data as of March 31, 1998, 1999, 2000 and 2001
are derived from our audited financial statements, which have been prepared in
accordance with U.S. GAAP and audited by Deloitte Touche Tohmatsu, independent
auditors. The balance sheet data as of March 31, 1997 is derived from our
unaudited financial statements. The unaudited data reflect all adjustments,
consisting of normal recurring adjustments, that, in the opinion of management,
are necessary for a fair presentation of the amounts involved, on a basis
consistent with selected consolidated financial data derived from the audited
financial statements. The historical results are not necessarily indicative of
results to be expected for any future period.

-2-



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|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |         | 
|---------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------- | ------- | ------------------------------------------------ | ----- | ------------------- | -------- | ------ | ------ | ---- | -------- | ------ | ------ | ---- | --------- | ------ | ------ |  | --------- | ------- | ------ | - | ------- | ------------------- | ------- | 
|                                                                             |                                                     |                         |         | As of and for the year ended March 31,          
|                                                                             |                                                     |                         |         |                                                 
|                                                                             |                                                     |                         |         | 1997                                             |       | 1998                |          | 1999   |        | 2000 |          | 2001   |        | 2001
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |     
|                                                                             |                                                     |                         |         | (millions of yen, except per share and ADS data) |       | (thousands of U.S. 
|                                                                             |                                                     |                         |         |                                                  |       | dollars, except per
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         | share and ADS data)
|Statement of Operations Data:                                                |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Connectivity and value-added services
revenues:                              |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Dedicated access                                    |                         |         | ¥4,291                                           |       |                     |          | ¥6,756 |        |      |          | ¥7,798 |        |      |           | ¥9,999 |        |  |           | ¥12,779 |        |   | $       | 101,794             |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Dial-up access                                      |                         |         | 3,478                                            |       |                     |          | 4,474  |        |      |          | 4,101  |        |      |           | 4,496  |        |  |           | 4,423   |        |   |         | 35,231              |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Value-added                                         |                         |         | 202                                              |       |                     |          | 368    |        |      |          | 496    |        |      |           | 884    |        |  |           | 2,136   |        |   |         | 17,011              |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Other                                               |                         |         | 44                                               |       |                     |          | 132    |        |      |          | 110    |        |      |           | 408    |        |  |           | 592     |        |   |         | 4,714               |        
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|                                                                             | Total connectivity and value-added
services revenue |                         |         | 8,015                                            |       |                     |          | 11,730 |        |      |          | 12,505 |        |      |           | 15,787 |        |  |           | 19,930  |        |   |         | 158,750             |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Systems integration revenues, including
related equipment sales              |                                                     |                         | 455     |                                                  |       |                     | 527      |        |        |      | 1,179    |        |        |      | 7,640     |        |        |  | 10,556    |         |        |   | 84,082  |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other equipment sales revenues                                               |                                                     |                         | 63      |                                                  |       |                     | 66       |        |        |      | 1,085    |        |        |      | 1,875     |        |        |  | 1,390     |         |        |   | 11,076  |                    
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|                                                                             |                                                     | Total revenues          |         |                                                  | 8,533 |                     |          |        | 12,323 |      |          |        | 14,769 |      |           |        | 25,302 |  |           |         | 31,876 |   |         |                     | 253,908 | 
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|Cost of connectivity and value-added services
revenues                       |                                                     |                         | 5,159   |                                                  |       |                     | 9,015    |        |        |      | 11,178   |        |        |      | 15,091    |        |        |  | 18,983    |         |        |   | 151,213 |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cost of systems integration revenues,
including related equipment sales      |                                                     |                         | 306     |                                                  |       |                     | 329      |        |        |      | 950      |        |        |      | 6,272     |        |        |  | 9,117     |         |        |   | 72,626  |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cost of other equipment sales revenues                                       |                                                     |                         | 62      |                                                  |       |                     | 60       |        |        |      | 1,074    |        |        |      | 1,807     |        |        |  | 1,289     |         |        |   | 10,264  |                    
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|                                                                             |                                                     | Total cost of revenues  |         |                                                  | 5,527 |                     |          |        | 9,404  |      |          |        | 13,202 |      |           |        | 23,170 |  |           |         | 29,389 |   |         |                     | 234,103 | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Sales and marketing                                                          |                                                     |                         | 1,211   |                                                  |       |                     | 1,508    |        |        |      | 1,570    |        |        |      | 2,604     |        |        |  | 3,252     |         |        |   | 25,903  |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|General and administrative                                                   |                                                     |                         | 892     |                                                  |       |                     | 939      |        |        |      | 1,065    |        |        |      | 1,234     |        |        |  | 1,618     |         |        |   | 12,888  |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Research and development                                                     |                                                     |                         | 103     |                                                  |       |                     | 152      |        |        |      | 243      |        |        |      | 364       |        |        |  | 287       |         |        |   | 2,285   |                    
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|                                                                             |                                                     | Total cost and expenses |         |                                                  | 7,733 |                     |          |        | 12,002 |      |          |        | 16,080 |      |           |        | 27,372 |  |           |         | 34,546 |   |         |                     | 275,179 | 
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|Operating income (loss)                                                      |                                                     |                         | 800     |                                                  |       |                     | 320      |        |        |      | (1,311   | )      |        |      | (2,070    | )      |        |  | (2,670    | )       |        |   | (21,271 | )                  
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|Other income (expenses):                                                     |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest income                                     |                         |         | 5                                                |       |                     |          | 7      |        |      |          | 4      |        |      |           | 362    |        |  |           | 454     |        |   |         | 3,620               |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest expense                                    |                         |         | (120                                             | )     |                     |          | (216   | )      |      |          | (219   | )      |      |           | (277   | )      |  |           | (643    | )      |   |         | (5,124              | )      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Other  net                                         |                         |         | (30                                              | )     |                     |          | (35    | )      |      |          | (16    | )      |      |           | (830   | )      |  |           | 1,088   |        |   |         | 8,667               |        
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|Other income (expenses)  net                                                |                                                     |                         | (145    | )                                                |       |                     | (244     | )      |        |      | (199     | )      |        |      | (745      | )      |        |  | 899       |         |        |   | 7,163   |                    
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|Income (loss) before income taxes                                            |                                                     |                         | 655     |                                                  |       |                     | (76      | )      |        |      | (1,510   | )      |        |      | (2,815    | )      |        |  | (1,771    | )       |        |   | (14,108 | )                  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Income tax expense (benefit)                                                 |                                                     |                         | 377     |                                                  |       |                     | 289      |        |        |      | 16       |        |        |      | (1,280    | )      |        |  | (926      | )       |        |   | (7,374  | )                  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Minority interest in consolidated subsidiaries                               |                                                     |                         | (31     | )                                                |       |                     | (42      | )      |        |      | 123      |        |        |      | (70       | )      |        |  | 160       |         |        |   | 1,273   |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Equity in net income (loss) of affiliated
companies                          |                                                     |                         | (44     | )                                                |       |                     | (105     | )      |        |      | (26      | )      |        |      | (3,180    | )      |        |  | (4,015    | )       |        |   | (31,979 | )                  
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                     |        
|Net income (loss)                                                            |                                                     |                         | ¥203    |                                                  |       |                     | ¥(360    | )      |        |      | ¥(1,429  | )      |        |      | ¥(4,785   | )      |        |  | ¥(4,700   | )       |        | $ | (37,440 | )                  
|                                                                             |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                    
|Per Share and ADS Data:                                                      |                                                     |                         |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |   |         |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Basic and diluted net income (loss) per share                                |                                                     |                         | ¥13,552 |                                                  |       |                     | ¥(23,565 | )      |        |      | ¥(75,720 | )      |        |      | ¥(225,791 | )      |        |  | ¥(209,085 | )       |        | $ | (1,665  | )                  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Basic and diluted net income (loss) per ADS
equivalent                       |                                                     |                         | 6.78    |                                                  |       |                     | (11.78   | )      |        |      | (37.86   | )      |        |      | (112.89   | )      |        |  | (104.54   | )       |        |   | (0.8    | )                  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Weighted average number of shares                                            |                                                     |                         | 15,000  |                                                  |       |                     | 15,286   |        |        |      | 18,868   |        |        |      | 21,190    |        |        |  | 22,480    |         |        |   |         |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Weighted average number of ADS equivalents
(thousands)                       |                                                     |                         | 30,000  |                                                  |       |                     | 30,572   |        |        |      | 37,736   |        |        |      | 42,380    |        |        |  | 44,960    |         |        |   |         |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Balance Sheet Data:                                                          |                                                     | (unaudited)             |         |                                                  |       |                     |          |        |        |      |          |        |        |      |           |        |        |  |           |         |        |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash                                                                         |                                                     |                         | ¥  376  |                                                  |       |                     | ¥1,158   |        |        |      | ¥1,061   |        |        |      | ¥16,158   |        |        |  | ¥13,571   |         |        | $ | 108,099 |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Total assets                                                                 |                                                     |                         | 7,615   |                                                  |       |                     | 9,340    |        |        |      | 13,359   |        |        |      | 39,001    |        |        |  | 50,641    |         |        |   | 403,384 |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Short-term borrowings                                                        |                                                     |                         | 1,880   |                                                  |       |                     | 2,440    |        |        |      | 6,679    |        |        |      | 13,690    |        |        |  | 5,620     |         |        |   | 44,767  |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Current portion of long-term borrowings,
including capital lease obligations |                                                     |                         | 812     |                                                  |       |                     | 1,142    |        |        |      | 1,855    |        |        |      | 2,255     |        |        |  | 1,644     |         |        |   | 13,098  |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Long-term borrowings, including capital lease
obligations                    |                                                     |                         | 2,394   |                                                  |       |                     | 2,929    |        |        |      | 2,151    |        |        |      | 2,300     |        |        |  | 5,479     |         |        |   | 43,643  |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Convertible
notes(1)                                                         |                                                     |                         |        |                                                  |       |                     |         |        |        |      |         |        |        |      |          |        |        |  | 15,000    |         |        |   | 119,484 |                    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Shareholders equity                                                         |                                                     |                         | 1,361   |                                                  |       |                     | 1,868    |        |        |      | 485      |        |        |      | 15,001    |        |        |  | 16,928    |         |        |   | 134,839 |                    

-3-



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##### Table of Contents



|                                                   |                      |  |        |                                                  |   |                     |        |      |   |      |        |        |   |      |        |        |   |  |        |        |   |   |        |                    |   | 
|-------------------------------------------------- | -------------------- |  | ------ | ------------------------------------------------ | - | ------------------- | ------ | ---- | - | ---- | ------ | ------ | - | ---- | ------ | ------ | - |  | ------ | ------ | - | - | ------ | ------------------ | - | 
|                                                   |                      |  |        | As of and for the year ended March 31,          
|                                                   |                      |  |        |                                                 
|                                                   |                      |  |        | 1997                                             |   | 1998                |        | 1999 |   | 2000 |        | 2001   |   | 2001
|                                                   |                      |  |        |                                                  |   |                     |        |      |   |      |        |        |   |     
|                                                   |                      |  |        | (millions of yen, except per share and ADS data) |   | (thousands of U.S. 
|                                                   |                      |  |        |                                                  |   | dollars, except per
|                                                   |                      |  |        |                                                  |   |                     |        |      |   |      |        |        |   |      |        |        |   |  |        |        |   |   |        | share and ADSdata)
|                                                  
|                                                  
|                                                  
|                                                  
|Operating Data:                                    |                      |  |        |                                                  |   |                     |        |      |   |      |        |        |   |      |        |        |   |  |        |        |   |   |        |                   
|                                                  
|                                                  
|                                                  
|                                                  
|Capital expenditures, including capitalized
leases |                      |  | ¥2,501 |                                                  |   |                     | ¥1,696 |      |   |      | ¥1,929 |        |   |      | ¥3,465 |        |   |  | ¥3,963 |        |   | $ | 31,568 |                   
|                                                  
|                                                  
|                                                  
|                                                  
|EBITDA(2)                                          |                      |  | 1,356  |                                                  |   |                     | 1,448  |      |   |      | 111    |        |   |      | (37    | )      |   |  | (72    | )      |   |   | (574   | )                 
|                                                  
|                                                  
|                                                  
|                                                  
|Operating margin(3)                                |                      |  | 9.4    | %                                                |   |                     | 2.6    | %    |   |      | (8.9   | )%     |   |      | (8.2   | )%     |   |  | (8.4   | )%     |   |   |        |                   
|                                                  
|                                                  
|                                                  
|                                                  
|EBITDA margin(2)(4)                                |                      |  | 15.9   | %                                                |   |                     | 11.7   | %    |   |      | 0.7    | %      |   |      | (0.1   | )%     |   |  | (0.2   | )%     |   |   |        |                   
|                                                  
|                                                  
|                                                  
|                                                  
|Net cash provided by (used in):                    |                      |  |        |                                                  |   |                     |        |      |   |      |        |        |   |      |        |        |   |  |        |        |   |   |        |                   
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Operating activities |  |        | ¥219                                             |   |                     |        | ¥292 |   |      |        | ¥400   |   |      |        | ¥1,199 |   |  |        | ¥(271  | ) |   | $      | (2,155             | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Investing activities |  |        | (1,695                                           | ) |                     |        | (300 | ) |      |        | (3,695 | ) |      |        | (7,135 | ) |  |        | (9,544 | ) |   |        | (76,025            | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Financing activities |  |        | 1,274                                            |   |                     |        | 785  |   |      |        | 3,186  |   |      |        | 22,192 |   |  |        | 6,428  |   |   |        | 51,201             |  



---

|(1) |  | In April 2000, IIJ issued the 1.75 percent unsecured yen convertible
notes due March 2005 in the aggregate principal amount of ¥15,000 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | EBITDA represents operating income (loss) plus depreciation and
amortization. EBITDA is provided because it is a measure commonly used by
investors to analyze and compare companies on the basis of operating
performance. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be construed as a
substitute for operating income, net income or cash flows from operating
activities for purposes of analyzing IIJs operating performance,
financial position and cash flows. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
|   
|   
|   
|   
|(3) |  | Operating income (loss) as a percentage of total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(4) |  | EBITDA as a percentage of total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

-4-



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##### Table of Contents



Exchange rates

In parts of this annual report, we have translated Japanese yen amounts
into U.S. dollars for the convenience of investors. The rate we used for the
translations was ¥125.54 equal to $1.00, which was the noon buying rate
announced by the Federal Reserve Bank of New York on March 30, 2001. The
following table shows the noon buying rates for Japanese yen expressed in
Japanese yen per $1.00. The noon buying rate on September 24, 2001 was $1=
¥117.52.

|                                       |  |      |        |     |  |         |        |            |  |   |        |  |  |   |        | 
|-------------------------------------- |  | ---- | ------ | --- |  | ------- | ------ | ---------- |  | - | ------ |  |  | - | ------ | 
|Year ended/ending March 31,            |  | High |        | Low |  | Average |        | Period end
|                                       |  |      |        |     |  |         |        |           
|1997                                   |  | ¥    | 124.54 |     |  | ¥       | 104.49 |            |  | ¥ | 112.52 |  |  | ¥ | 123.72 | 
|                                      
|                                      
|                                      
|                                      
|1998                                   |  |      | 133.99 |     |  |         | 111.42 |            |  |   | 122.78 |  |  |   | 133.29 | 
|                                      
|                                      
|                                      
|                                      
|1999                                   |  |      | 147.14 |     |  |         | 108.83 |            |  |   | 128.19 |  |  |   | 118.43 | 
|                                      
|                                      
|                                      
|                                      
|2000                                   |  |      | 124.45 |     |  |         | 101.53 |            |  |   | 111.35 |  |  |   | 102.73 | 
|                                      
|                                      
|                                      
|                                      
|2001                                   |  |      | 125.54 |     |  |         | 104.19 |            |  |   | 110.60 |  |  |   | 125.54 | 
|                                      
|                                      
|                                      
|                                      
|2002 (through September 25, 2001)      |  |      | 126.75 |     |  |         | 114.26 |            |  |   | 120.25 |  |  |   | 117.78 | 
|                                      
|                                      
|                                      
|                                      
|                                       |  |      |        |     |  |         |        |            |  |   |        |  |  |   |        | 
|Calendar Year 2001                     |  |      |        |     |  |         |        |            |  |   |        |  |  |   |        | 
|April                                  |  |      | 126.75 |     |  |         | 121.68 |            |  |   | 123.77 |  |  |   | 123.57 | 
|                                      
|                                      
|                                      
|                                      
|May                                    |  |      | 123.67 |     |  |         | 118.88 |            |  |   | 121.77 |  |  |   | 118.88 | 
|                                      
|                                      
|                                      
|                                      
|June                                   |  |      | 124.73 |     |  |         | 119.13 |            |  |   | 122.35 |  |  |   | 124.73 | 
|                                      
|                                      
|                                      
|                                      
|July                                   |  |      | 125.85 |     |  |         | 122.85 |            |  |   | 124.50 |  |  |   | 125.00 | 
|                                      
|                                      
|                                      
|                                      
|August                                 |  |      | 124.87 |     |  |         | 118.75 |            |  |   | 121.37 |  |  |   | 118.75 | 
|                                      
|                                      
|                                      
|                                      
|September (through September 25,
2001) |  |      | 121.08 |     |  |         | 115.89 |            |  |   | 118.60 |  |  |   | 117.78 | 
|                                      
|                                      
|                                      
|                                      
|                                       |  |      |        |     |  |         |        |            |  |   |        |  |  |   |        | 
|Quarter ending June 30,                |  |      |        |     |  |         |        |            |  |   |        |  |  |   |        | 
|2001                                   |  |      | 126.75 |     |  |         | 118.88 |            |  |   | 120.73 |  |  |   | 124.73 | 

B. Capitalization and indebtedness

Not applicable.

C. Reasons for the offer and use of proceeds

Not applicable.

D. Risk factors

You should carefully consider the risks described below before making an
investment decision. If any of the risks described below actually occurs, our
business, financial condition or results of operations could be adversely
affected. The trading price of our securities could decline, and you may lose
all or part of your investment.

We had operating and net losses last year which we expect will continue for an uncertain period

We incurred an operating loss of ¥2,670 million and a net loss of ¥4,700
million for the year ended March 31, 2001. We may incur operating and net
losses in the future. Our results of operations and, therefore, the magnitude
of our losses and the extent to which they continue, will be affected by a
number of factors. For example:



| |  |  | A further deterioration or a lack of improvement in the
Japanese economy could significantly curtail interest in our
services in Japan, which, because of our dependence on the Japanese
markets, could impact negatively on our revenue.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Because of the harsh competition in the retail ISP market, we
may lose our ISP customers.                                                                                                                                                

-5-



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##### Table of Contents





| |  |  | Our revenues may be adversely affected by price reductions, or
by failure to retain our customers or to attract new
customers.                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fluctuations in foreign exchange rates may produce foreign exchange losses.                                                                                                              
|
| |  |  | Our cost of revenues may adversely affect our financial
results if we contract for more backbone capacity than we
need, or if we are unable to reduce our leased line costs as
we intend.
|
| |  |  | Increased expenses resulting from our leasing of additional
equipment may adversely affect our overall cost structure.                                                                   
|
| |  |  | Margins from our growing systems integration business and
Internet data center business might not be profitable.                                                                         

Please see Item 5. Operating and Financial Review and Prospects for
more detailed information concerning our losses and other operating results.

Our large capital investment in Crosswave may not produce profits

In December 2000, we purchased an additional 3.0 million outstanding
ADSs of Crosswaves at fair market value in a privately negotiated transaction
for ¥2.7 billion cash. As of March 31, 2001, we own 37.9% of the outstanding
shares of Crosswave and the carrying value of investment in Crosswave increased
to ¥13.0 billion.

Our investment in Crosswave is substantial and we are not certain that
this investment will produce profits. Crosswave has incurred losses since its
inception and we expect that Crosswave will continue to record net losses for
the next several fiscal years. These losses will have a direct impact on our
financial performance as a portion of these losses will be included in our
financial results under the equity method of accounting that we have used to
account for our investment in Crosswave.

Crosswave is a very important part of our business. In addition to
being one of our group companies, we procure significant portions of our network
backbone, the rack space and other essential elements of our Internet data
center services from Crosswave and as an important network component of many of
our systems integration projects. We are considering various ways to protect our
substantial investment in Crosswave such that we will be able to continue to
receive the services that they provide us, including the possibility that we may
provide it with financial assistance or increase our level of ownership.

Since Crosswave started operating only in May 1999, it has a limited
operating history. Crosswave could have problems in operating and managing its
nationwide optical fiber network. Currently, we are Crosswaves largest
customer. Although Crosswave is currently expanding its customer base, it may
have difficulty attracting additional customers to its services. The data
communications market is a new market in Japan, and Japans lagging economy may
prevent companies from spending in new network investment. Although Crosswave
operates the first nationwide optical fiber network dedicated to high-speed data
communications in Japan, competitors of Crosswave including NTT Communications,
Japan Telecom and KDDI are introducing data communications services that may
compete with Crosswaves service. Additionally, this competition may lead to
downward pricing pressure which may result in Crosswave generating less revenue
than anticipated and potentially increasing Crosswaves losses.

-6-



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##### Table of Contents



Crosswave will need additional cash to further develop its network and fund its
operations and if it is unable to obtain it they will not be able to complete
their network development plans as scheduled or we will be forced to modify or
abandon some or all of our plans

Crosswave believes that cash on hand and cash flow from service
revenues will be sufficient to satisfy its cash requirements into the first
quarter of fiscal 2002, including cash required to execute its network buildout
plan and to fund negative cash flows from operations. Crosswave will need
additional capital for further development of its network, including its
nationwide, metropolitan and local access network buildouts, to add
international capacity, to construct and develop its data centers and to fund
its operations. Crosswave will need approximately an additional ¥60 billion
through the year ending March 31, 2004. Crosswave expects to obtain the
additional funds that it needs from bank borrowings or strategic placements of
debt and equity securities and public offerings. However, there can be no
assurance that funding will be available to Crosswave on a timely basis or at
all, or on terms acceptable to Crosswave, especially in light of the general
tightening of the credit markets in Japan. Any inability to raise funds may
prevent Crosswave from implementing its plans or may require us to modify or
abandon some or all of our plans and may have an adverse effect on our
operations.

Our competitors decisions can strongly influence our markets and we may be
vulnerable to decisions resulting in downward pricing pressure

The marketing and pricing decisions of our competitors can strongly
influence our markets. Increased competition in the industry has caused
significant downward pricing pressure including lower-priced Internet access
services offered to small- and medium-sized companies and to larger corporations
which are our primary target markets. To the extent that potential and existing
customers make decisions based solely or primarily on price, we may be unable to
retain existing or attract new customers or we may be forced to reduce our
prices to keep existing customers.

We may not be able to compete effectively, especially against established
competitors which have greater financial, marketing and other resources

Our major competitors in the Internet access business and Internet data
center business are major telecommunications carriers like NTT Communications,
KDDI and Japan Telecom and their affiliates. In systems integration business,
our major competitors are large hardware vendors such as IBM, NEC and Hitachi
and systems integraters like NTT Data. These competitors have certain advantages
over us including:



| |  |  | substantially greater financial resources,                     
| | - |  | ---------------------------------------------------------------
|
| |  |  | more extensive and well-developed marketing and sales networks,
|
| |  |  | higher brand recognition among consumers, and                  
|
| |  |  | large customer bases.                                          

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



| |  |  | develop, market and sell their services,                
| | - |  | --------------------------------------------------------
|
| |  |  | adapt more quickly to new and changing technologies, and
|
| |  |  | more easily obtain new subscribers.                     

In addition, if telecommunications carriers replace their existing
switches and equipment with more advanced switches and equipment, this may
increase their ability to use their existing extensive networks for Internet and
data transmission.

-7-



---



##### Table of Contents



New competitors may attract customers away from us

In the field of Internet access services, we may also compete with new
ISPs that emerge as the Internet market continues to grow. For example, many of
the major cable television companies, mobile communications companies and ADSL
companies are increasing the number of subscribers to their Internet access
services (ADSL stands for Asymmetric Digital Subscriber Line, which is a
high-speed method for transmitting data over existing copper wires). Although we
provide backbone services to such companies including cable television Internet
providers, it may also affect our customer base expansion in retail market.

In the field of Internet data center services, competition from other
data center operators may attract customers away from us. Various companies in
the data center business such as NTT Communications, KDDI and Powernets may be
strong competitors of ours and if they are successful in the market we could
lose customers or grow less rapidly.

We depend on key personnel and our business and relationship with customers and
major shareholders may suffer if we cannot attract or retain qualified personnel
or if we lose the services of our executive officers

If we fail to attract or retain the qualified personnel we need, our
business may be adversely affected. Because our network, services, products and
technologies are complex, we depend on the continued service of our existing
engineering and other personnel and we will need to hire additional engineers
and research and development personnel. Competition for qualified engineers,
research and development personnel and employees in the Internet services
industry in Japan is intense and there are a limited number of persons with the
necessary knowledge and experience.

Our future success also depends on the continued service of our
executive officers, particularly Mr. Koichi Suzuki, who is our President and
also serves as the President of Crosswave and most of the other IIJ group
companies. We rely on his expertise in the operation of our businesses and on
his personal relationships with our shareholders and the shareholders of the IIJ
group companies and with our business partners. None of our officers or key
employees, including Mr. Suzuki, is bound by an employment or noncompetition
agreement.

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

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

Our business may be adversely affected if we fail to maintain the reliability and security of our network

The reliability of our network could be affected by damage from fire,
earthquakes and other natural disasters, power loss, telecommunications failures
and similar events. Much of our computer and networking equipment and the lines
that make up our network backbones are concentrated in a few locations that are
in earthquake-prone areas. Computer viruses and interruptions in service as a
result of the accidental or intentional actions of Internet users and others may
also prevent us from providing service to our customers. Any problems that cause
interruptions in the services we provide could have a material adverse effect on
our business, financial condition and results of operations.

-8-



---



##### Table of Contents



We may be sued if we fail to execute our systems integration projects

A significant portion of our future revenue depends on systems
integration projects which we, in cooperation with IIJ Technology and IIJ Media
communications, have been contracted to perform. We may not be able to perform
our responsibilities under these contracts to the satisfaction of our customers
or at all because lack of qualified engineers, or lack of task-management
capabilities for software-development vendors. If we do not execute these
projects as contracted, we may be sued by our counterparties.

Our minority interest in several affiliates upon whose performance we greatly
depend does not allow us complete control over their operations

We conduct our business directly and by working together with a number
of subsidiaries and affiliates. While we have invested heavily in and exercise
significant influence over these companies, we do not own a majority interest in
our affiliates. There are risks associated with this group structure:



| |  |  | Crosswaves operations are an integral part of the groups
business and we are dependent on its fiber lines and data
centers facilities to some extent.                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Crosswave will require significant additional funding to
complete its network buildout and we may be requested to
assist it with this financing, in additions to our current
investment.        
|
| |  |  | Our success is dependent on Crosswaves success to buildout
its network and attract enough customers to become profitable
to recover the significant capital investments in fixed
assets.       
|
| |  |  | These affiliated companies financial contributions to our
results of operations are limited even though we offer our
services and operate as a group.                                          
|
| |  |  | We may not be able to exercise significant influence over
these companies in the future, and our interests may diverge
from those of one or more of these companies or their other
shareholders.

There are risks associated with our continued international expansion

By operating our network internationally, we expose ourselves to the
risks of international markets and other risks that do not exist or are less
significant in Japan. One of the key components of our strategy is to continue
to expand our network reach through our international networks, particularly
between the United States and Japan. This will require significant management
attention and financial resources. We may have significant exposure to risks in
connection with our international operations. Among these risks are the
following:



| |  |  | the impact of recessions in economies outside Japan;                          
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | unexpected changes in or delays resulting from regulatory requirements;       
|
| |  |  | the rate of the development of the Internet industry in countries in Asia; and
|
| |  |  | political and economic instability.                                           

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

-9-



---



##### Table of Contents



We depend on telecommunications
carriers and other suppliers and we could be affected by disruptions in service
or delays in the delivery of their products and services

We rely on telecommunications carriers like Crosswave, KDDI, Japan Telecom
and AT&T for a significant portion of our network backbone and regional NTTs
for our customers local access lines to provide telecommunications services
that we need. We are subject to potential disruptions in these
telecommunications services and we may have no means of replacing these
services, on a timely basis or at all, in the event of any such disruption.

In the Asia-Pacific region and for the operation of the A-Bone by Asia
Internet Holding, we depend on telecommunications carriers in various countries
including lesser developed countries in regions whose quality of service may
not be stable or who are more susceptible to economic or political instability
in regions where they conduct business.

We also depend on third-party suppliers of hardware components like
routers that are used in our network. We acquire some components from only one
or two sources, including Cisco Systems and Lucent Technologies. A failure by
one of our suppliers to deliver quality products on a timely basis, or the
inability to develop alternative sources if and as required, could delay our
ability to increase the number of our POPs or to expand the capacity of our
network.

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

Our markets are characterized by:



| |  |  | rapid technological change,                    
| | - |  | -----------------------------------------------
|
| |  |  | frequent new product and service introductions,
|
| |  |  | changes in customer requirements and           
|
| |  |  | evolving industry standards.                   

The introduction of services using new technologies and the emergence of
new industry standards could render our existing services obsolete.

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

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

Foreign exchange fluctuations could negatively affect our results of operations
because of our committed U.S. dollar obligations and may negatively affect the
value of our U.S. dollar monetary assets

Our reporting currency and most of our revenues are in Japanese yen.
However, a substantial amount of our lease payments for international lines are
payable in U.S. dollars, although we expect the total amount of these payments
to decrease. In connection with our initial public offering in August 1999, we
obtained U.S. dollar proceeds, and as of March 31, 2001 we held approximately
$43 million in dollar-denominated demand and short-term time deposits. We
recorded a ¥1.1 billion foreign exchange

- 10 -



---



##### Table of Contents



gain for the year ended March 31, 2001
as a result of the depreciation of the yen
against the dollar. Although we are going to use these proceeds mainly
for the U.S. dollar lease payments for international lines, future fluctuations
in currency exchange rates may adversely affect our financial results.

- 11 -



---



##### Table of Contents






Item 4. Information on the Company

A. Historical Background

We are incorporated in Japan as a joint stock corporation under the name
Internet Initiative Japan Inc. We were founded in December 1992 and operate
under the laws of Japan. We began operations in July 1993, making us one of
the first commercial Internet service providers in Japan offering Internet
access. We became a public company in August 1999 with our initial public
offering on the Nasdaq National Market.

Our head office is located at Takebashi Yasuda Bldg., 3-13, Kanda
Nishiki-cho, Chiyoda-ku, Tokyo 101-0054, Japan, and our telephone number at
that location is 81-3-5259-6500. Our agent in the United States is IIJ
America, Inc., 399 Park Avenue, 23rd Floor, New York, New York 10022 and our
telephone number at that location is 212-350-1300. We have a Web site that you
may access at http://www.iij.ad.jp/. Information contained on our Web site
does not constitute part of this annual report.

For a discussion of capital expenditures for the past three years see
Capital Expenditures in Item 4.B. For a discussion of current capital
expenditures see Item 5.B., Liquidity and Capital Resources.

B. Business overview

We offer a comprehensive range of Internet access and network solutions to
our customers in Japan. We offer our services on one of the most advanced and
reliable Internet networks available in Japan and between Japan and the United
States. Our services are based upon high-quality networking technology
tailored to meet the specific needs and demands of our customers.

We offer a variety of services to our customers as part of our total
network solutions. Our primary services are our Internet access services,
which range from low-cost dial-up access to high-speed access through dedicated
lines, and our systems integration services and Internet data center services.

We also offer independently, or together with our IIJ group companies, a
variety of other value-added services, including:



| |  |  | security services, such as managed firewalls with VPN function,
network intrusion detection and comprehensive network security
services;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
| |  |  | mail server outsourcing services;                                                                                                       
| |  |  | Web hosting services;                                                                                                                   
| |  |  | content development, distribution and Internet broadcasting services; and                                                               
| |  |  | gateway services for remote user access and roaming.                                                                                    

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

We have created a high-quality network that extends throughout Japan. Our
backbone is one of the highest capacity Internet backbones in Japan. Our
backbone network was formed by leasing lines from telecommunications carriers.
Our domestic backbone is anchored by 1 STM-4c trunk line (equivalent to 622
Mbps) and 1 STM-1 trunk line (equivalent to 155 Mbps) between Tokyo and Osaka,
and has large connections to the other major business regions in Japan. As of
March 31, 2001, we have

- 12 -



---



##### Table of Contents



24 Network Operation Center and 74 PoPs nationwide.
Our backbone network
also extends to the United States with a total capacity of 1.7Gbps (7
STM-1 trunk lines and 1 STM-4c trunk line) as of June 30, 2001.

In addition to our network, we have significant interests in two other
networks: the A-Bone and the Crosswave network. We currently own 26.7% of Asia
Internet Holding, the company that owns the A-Bone. The A-Bone is an Internet
network using leased lines that connects eight countries in the Asia-Pacific
region, including Japan, China, Singapore, Hong Kong, Malaysia, the
Philippines, Indonesia and Thailand. Using our network and engineering
expertise and pursuant to an agreement with Asia Internet Holding, we operate
and manage the A-Bone.

We also owned 37.9% of Crosswave at March 31, 2001, which operates one of
the first high-speed telecommunications facilities and networks in Japan
designed specifically for data communications. Through DWDM and SONET,
advanced multiplexing and transmission technologies, we believe that
Crosswaves network has the capacity to provide over 100 Gbps of bandwidth with
multiplexing and transmission equipment upgrades.

Crosswaves network began operating in May 1999, and extended the network
nationwide, except to Shimane and Okinawa, as of March 31, 2001.

Crosswave provides its customers with access to dedicated lines at prices
that are generally less than currently available. We are Crosswaves largest
customer and use Crosswaves lines for a significant portion of our domestic
backbonecurrently we transmit more than 90% of our domestic Internet traffic
over Crosswaves fiber optic lines. We will continue to use Crosswaves lines
as we add new lines and replace or upgrade existing lines. Crosswaves lines
allow us to significantly expand our network by adding additional capacity to
handle increasing traffic volume and by increasing the number of our POPs. It
will also allow us to improve our cost structure. We also started utilizing
Crosswaves Japan-US fiber optic lines, which is 600Mbps line as of June 30,
2001. We expect that going forward we will procure significant amounts of our
international capacity from Crosswave.

Services

Our Total Network Solutions

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

The primary resources that we use to provide total network solutions to
our customers and the primary reasons that our customers choose us to provide
them total network solutions include:



| |  |  | Our Internet access services.                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
| |  |  | Our systems integration services ranging from ongoing
consulting, systems design and construction, operation and
management.
| |  |  | Our line-up of value-added services which includes security and server outsourcing.                                         
| |  |  | Our Internet data center services.                                                                                          
| |  |  | Other network and application services that our group companies provide.                                                    

Our total network solutions for business users is one of the primary
focuses of our business. We consult with businesses and other customers to
identify their particular situations and needs. We draw upon our extensive
resources to address those needs.

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Our Internet Access Services

We offer two categories of Internet access services: dedicated access
services and dial-up access services. Dedicated access services are based on
dedicated local-line connections provided by carriers between our backbone and
customers. Dial-up access services require customers to connect to our POPs
through public-switched telephone network. The Internet access part of our
total network solutions ranges from cost-effective, entry-level dial-up
connections from home personal computers to customized wide-area network
solutions deploying a range of the dedicated and dial-up services listed below
to connect the headquarters, data centers, branch offices and mobile personnel.

The following table shows the numbers of our Internet access service
subscribers as of the dates indicated.

|                                    |                            |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |        |         |     | 
|----------------------------------- | -------------------------- | ---------------------------------------- | ---------------- | ------ | --------------- | --- | ---- | ------ | ------ | --- | ---- | ------ | ------ | ----- | ---- | ------ | ------ | --- |  | ------ | ------- | --- |  | ------ | ------- | --- | 
|                                    |                            |                                          |                  |        | As of March 31,
|                                    |                            |                                          |                  |        |                
|                                    |                            |                                          |                  |        | 1996            |     | 1997 |        | 1998   |     | 1999 |        | 2000   |       | 2001
|                                    |                            |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |     
|Dedicated access service contracts: |                            |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |       
|                                   
|                                   
|                                   
|                                   
|                                    | IP Service                 |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    |                            | 64kbps - 128kbps                         |                  |        | 320             |     |      |        | 711    |     |      |        | 794    |       |      |        | 654    |     |  |        | 484     |     |  |        | 295     |    
|                                   
|                                   
|                                   
|                                   
|                                    |                            | 192kbps - 768kbps                        |                  |        | 57              |     |      |        | 122    |     |      |        | 169    |       |      |        | 171    |     |  |        | 155     |     |  |        | 80      |    
|                                   
|                                   
|                                   
|                                   
|                                    |                            | 1Mbps - 2Mbps                            |                  |        | 12              |     |      |        | 52     |     |      |        | 51     |       |      |        | 66     |     |  |        | 140     |     |  |        | 240     |    
|                                   
|                                   
|                                   
|                                   
|                                    |                            | 3Mbps - 150Mbps                          |                  |        | 2               |     |      |        | 12     |     |      |        | 34     |       |      |        | 57     |     |  |        | 71      |     |  |        | 111     |    
|                                    |                            |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |       
|                                    |                            |                                          | Total IP Service |        |                 | 391 |      |        |        | 897 |      |        |        | 1,048 |      |        |        | 948 |  |        |         | 850 |  |        |         | 726 | 
|                                   
|                                   
|                                   
|                                   
|                                    | IIJ T1 Standard (1.5 Mbps) |                                          |                  |       |                 |     |      |       |        |     |      |       |        |       |      |       |        |     |  | 146    |         |     |  | 575    |        
|                                   
|                                   
|                                   
|                                   
|                                    | IIJ Economy                |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |        |        
|                                   
|                                   
|                                   
|                                   
|                                    |                            | 64kbps - 128kbps                         |                  |        |                |     |      |        |       |     |      |        | 156    |       |      |        | 708    |     |  |        | 1,008   |     |  |        | 1,295   |    
|                                    |                            |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |       
|                                    |                            | Total dedicated access service contracts |                  |        | 391             |     |      |        | 897    |     |      |        | 1,204  |       |      |        | 1,656  |     |  |        | 2,004   |     |  |        | 2,596   |    
|                                   
|                                   
|                                   
|                                   
|Dial-up access service contracts:   |                            |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |       
|                                   
|                                   
|                                   
|                                   
|                                    | IIJ4U                      |                                          |                  |       |                 |     |      | 10,766 |        |     |      | 21,422 |        |       |      | 48,195 |        |     |  | 75,170 |         |     |  | 95,273 |        
|                                   
|                                   
|                                   
|                                   
|                                    | Others                     |                                          |                  | 17,706 |                 |     |      | 17,929 |        |     |      | 14,534 |        |       |      | 10,508 |        |     |  | 54,970 |         |     |  | 66,857 |        
|                                    |                            |                                          |                  |        |                 |     |      |        |        |     |      |        |        |       |      |        |        |     |  |        |         |     |  |       
|                                    |                            | Total dial-up access service contracts   |                  |        | 17,706          |     |      |        | 28,695 |     |      |        | 35,956 |       |      |        | 58,703 |     |  |        | 130,140 |     |  |        | 162,130 |    

As of July 31, 2001, we offered the following Internet access services:

|                          |  |                                                                                                                                                                              |  |                                                                                                                                              
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Service Type              |  | Summary Description                                                                                                                                                          |  | Pricing                                                                                                                                      
|                          |  |                                                                                                                                                                              |  |                                                                                                                                              
|Dedicated access services |  |                                                                                                                                                                              |  |                                                                                                                                              
|                         
|                         
|                         
|                         
|IP Service                |  | Full-scale
dedicated line
service with
high-speed access
for businesses and
other ISPs with
demanding
throughput
requirements.                                              |  | The fees include
various setup fees
and monthly fees
that vary according
to carrier, line
speed, line type
and distance
involved.            
|                         
|                         
|                         
|                         
|IIJ T1 Standard           |  | Packaged dedicated
line service
offering 1.5 Mbps
connection but not
including certain
features of
full-scale IP
Service such as
dynamic routing and
unlimited IP
addresses. |  | Initial setup fee
of ¥50,000.
The monthly access
fee was charged to
¥117,000 for up to
8 IP addresses and
¥167,000 for up to
16 IP addresses.

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|                              |  |                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                       
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Service Type                  |  | Summary Description                                                                                                                                                                                           |  | Pricing                                                                                                                                                                                                                                                               
|                              |  |                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                       
|IIJ Economy                   |  | Service for
dedicated-line
access to the
Internet with
inexpensive monthly
fees primarily for
medium and small
businesses and
local and regional
offices of
corporate groups.                                 |  | Initial setup fee
of ¥40,000 and
¥15,000 for an IP
address
application.
Monthly access fees
of ¥38,000 for 64
kbps service and
¥45,000 for 128
kbps service.                                                                                                          
|                             
|                             
|                             
|                             
|IIJ Fiber Access/F            |  | Service for
dedicated line
Internet access
using optical lines
at either 10 Mbps
or 100 Mbps
targeted primarily
at small and medium
size enterprises
requirements for
high capacity high
speed
transmissions. |  | Initial setup of
¥50,000. Monthly
fees from ¥100,000
to ¥250,000
depending on the
speed of connection
and the number of
IP addresses
allocated. Monthly
fees do not include
optical line
charges which are
paid directly by
the customer to the
optical line
provider.
|                             
|                             
|                             
|                             
|IIJ DSL/F Service             |  | Service for
dedicated-line
Internet access
using ADSL lines at
speeds up to 1.5
Mbps targeted
primarily at small
and medium sizes
offices and home
offices.                                                   |  | Initial setup of
¥30,000. Monthly
access fees of
¥39,800 to ¥49,800
depending on the
number of allocated
IP addresses.
Monthly charges do
not include ADSL
charges which are
to be paid directly
by customer to ADSL
service provider.                                
|                             
|                             
|                             
|                             
|Dial-up access services       |  |                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                       
|IIJ Dial-up Standard          |  | Service for
corporate users
permitting
simultaneous
Internet access
from several
dial-up lines under
a single contract.                                                                                       |  | Initial setup fee
of ¥5,000, Monthly
basic fee of ¥2,000
plus access charges
of ¥10 per minute.                                                                                                                                                                       
|                             
|                             
|                             
|                             
|Enterprise Dial-up IP Service |  | Service for
businesses offering
multiple dial-up
accounts at a fixed
monthly fee.                                                                                                                             |  | Initial setup fee
of ¥20,000. Monthly
basic fees from
¥3,000 to ¥4,900
per account
depending on the
number of accounts.                                                                                                                                               
|                             
|                             
|                             
|                             
|IIJ Dial-up Advanced          |  | Service for
corporate users
offering bundled
low-cost dial-up
accounts.                                                                                                                                       |  | Initial setup fee
of ¥5,000.
Monthly basic fee
of ¥10,000 for the
first 50 email
accounts with
first 2 hours
access per account,
plus ¥5 per minute
after 2 hours.                                                                                                    

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|                      |  |                                                                                                                                                                                                                                          |  |                                                                                                                                                                            
|--------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Service Type          |  | Summary Description                                                                                                                                                                                                                      |  | Pricing                                                                                                                                                                    
|                      |  |                                                                                                                                                                                                                                          |  |                                                                                                                                                                            
|IIJ4U                 |  | Service for
individual users
which includes
Internet access and
5 megabytes of disk
space for personal
Web pages and
e-mail account
options for
multiple users.
Various access
options such as
fiber optic, ISDN
and ADSL are
available. |  | Initial setup fee
of ¥1,900. Monthly
service fee of ¥800
for the first 8
hours and charge of
¥5 per minute, with
a ceiling of
¥4,900, for the
next 13 hours and
40 minutes.
|                     
|                     
|                     
|                     
|Dial-up Erate Service |  | Service for
educational
institutions.
Services include
Internet access,
e-mail and disk
space for home
pages.                                                                                                                            |  | Initial setup fee
of ¥5,000. ¥30,000
per year.                                                                                                                             

Dedicated Access Services

In our dedicated line access services, we have a line-up of IP Service,
IIJ T1 Standard, IIJ Economy, IIJ Fiber Access/F and IIJ DSL/F. We have
recently added IIJ Fiber Access/F (August 2001) and IIJ DSL/F (May 2001) to
take advantage of new ways to solve last-mile connection problems by getting
access to customers through newly installed fiber optic lines and through ADSL
lines both of which are new options in Japan with strong growth potential.
Total bandwidth allocated to our dedicated access services has increased to
approximately 3.5 Gbps as of March 31, 2001, an approximately 227% increase
from approximately 1.5 Gbps at March 31, 2000. In addition, the number of
customers who had subscribed for our service at 1 Mbps or higher increased to
926 as of March 31, 2001 from 357 as of March 31, 2000.

IP Service. Our IP Service is a full-scale, high-speed access service
that connects the customers network to our network and the Internet and is the
core service we offer. As of March 31, 2001, we had 726 customers for our IP
Service compared to 850 for our IP Service as of March 31, 2000. Our IP
Service allows unlimited, two-way communications not only with sites in Japan,
but also with any organization connected to the Internet worldwide. The
customer chooses the level of service it needs based upon its bandwidth
requirements. As of March 31, 2001, we offered service from 64 kbps to 150
Mbps.

Our IP Service revenues, including IIJ T1 Standard revenues, represented
36.1% of our total revenues for the year ended March 31, 2001 and 36.0% for the
year ended March 31, 2000. We believe that, as businesses continue to develop
Internet capabilities, this service will continue to be the central focus of
our business.

The subscriber must pay a monthly fee for the leased local access line
from the customers location to one of our POPs. The amount of this fee varies
depending on the carrier used and the distance between the customers site and
our POPs. We collect this fee from the customer and pay this fee amount over
to the carrier.

Although fees are charged on a monthly basis, the minimum contract length
is one year. For contracts of three years, a 10% per month discount is given.
27.5% of our IP Service contracts as of the end of March 2001 are for at least
three years.

We have introduced ATM access to our IP Service in several larger
metropolitan areas including Tokyo and Osaka. A subscriber may now connect to
our network using NTTs ATM MegaLink service or the equivalent service from
other carriers. ATM service was available at speeds from 2 Mbps to 135 Mbps as
of March 31, 2001 at rates comparable to our IP Service rates.

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We have also begun offering IPv6-capable Internet access services. IPv6
is the next generation Internet Protocol which allows IPv6 technology overcomes
the problems of the protocol currently used, IPv4, which include limited IP
address availability and which will enable customers to hook-up a vast range of
electronic appliances and equipment ranging from cellular phones, AV equipment,
car navigation devices and home electronics. We are the first commercial ISP
in Japan to offer IPv6 service and our management believes that we will reap
first-mover benefits from our initiative. We currently offer IPv6 service on
a trial basis, and in an effort to promote the dissemination and use of IPv6,
we are not currently charging service fees for this service.

For our IP Service, we offer service level agreements to our customers to
better define the high quality of services our customers receive. We were the
first ISP in Japan to introduce this agreement.

We guarantee the performance of the following elements under our service level agreements:



| |  |  | 100% availability of our network;                                                              
| | - |  | -----------------------------------------------------------------------------------------------
|
| |  |  | maximum average latencies, or time necessary to transmit a signal, between designated POPs; and
|
| |  |  | prompt notification of outage or disruption.                                                   

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

Subscribers to our IP Service receive 24-hour-a-day, seven-day-a-week
technical support.

IIJ T1 Standard. Our IIJ T1 Standard is a connectivity service at 1.5
Mbps that we introduced in October 1999. It is similar to our IP Service but
offers a more limited range of services in a package. For example, with IIJ T1
Standard customers are limited to static routing only and can have only up to
16 IP addresses depending on the level of service and service level guarantees
only extend to latency rates. Otherwise, a customer of IIJ T1 Standard enjoys
essentially the same benefits and high quality of service available under our
IP Service. Local access must be through NTTs Digital Access 1500 or Digital
Reach 1500 or similar services from other carriers.

IIJ T1 Standard is specifically designed for medium and small businesses
who may not need the full services available from IP Service but who do need
high-speed reliable Internet connectivity service.

As of March 31, 2001, we had 575 subscribers to IIJ T1 Standard.

IIJ Economy. IIJ Economy is Internet access via a dedicated line at 64
kbps or 128 kbps. IIJ Economy represented approximately 4.0% of our total
revenue for the year ended March 31, 2001 compared to 3.5% in the year ended
March 31, 2000. We had 1,295 customers for IIJ Economy as of March 31, 2001
compared to 1,008 customers as of March 31, 2000. We introduced IIJ Economy in
November 1997.

IIJ Economy is specifically designed for users such as medium and small
businesses who do not have large throughput requirements and do not require the
higher levels of support available to IP Service subscribers. IIJ Economy
allows them to access the IIJ network at either 64 kbps or 128 kbps at
affordable rates but limits the amount of IP addresses a customer may have. In
addition to medium and small businesses, another important group of subscribers
to this service is regional and local offices of large corporations. The head
office and other larger offices would use our IP Service to handle the larger
numbers of employees and higher throughput requirements while the local and
regional offices would use our IIJ Economy. We currently guarantee latency
rates under service level agreements for IIJ Economy.

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IIJ Fiber Access/F Service.IIJ Fiber Access/F services is a new
dedicated Internet access service that uses fiber optic lines allowing service
at 10 Mbps or 100 Mbps. We began offering service in August 2001.

IIJ Fiber Access/F Service is primarily targeted at small and medium
enterprises which need high speed, high capacity Internet access. Currently,
large telecommunications carries such as NTT and other providers are rapidly
increasing the installation of last-mile fiber optic connections. This service
takes advantage of the current and expected growth of last mile fiber optic
connections to provide relatively inexpensive high speed, high capacity
service. We also support this service by providing guarantees of latency rates
under service level agreements.

IIJ DSL/F Service.IIJ DSL/F Service is a new dedicated Internet access
via an ADSL line with service at up to 1.5 Mbps for downstream transmission and
up to 512 kbps for upstream transmission. We began offering this service in
May 2001 and as of July 31, 2001, we had 45 customers.

IIJ DSL/F Service is primarily targeted at small and medium size offices
and home offices which have access to ADSL lines. ADSL lines are generally
quite easy to have installed at they use the existing transmission liens
thereby avoiding the time and expense associated with installing new
transmission lines, such as fiber optic lines. Because of this ease of
installation and the associated lower costs, the growth potential is high. We
also support this service by providing guarantees of latency rates under
service agreements.

Dial-up Access Services

We offer a variety of dial-up access services. Our dial-up access
services provide essentially the same high-quality services on the same
high-quality network as our dedicated access services but do not have the same
variety of options for bandwidth and levels of customer service and support.
We consider our dial-up services to be primarily cost-effective, entry-level
Internet access services for businesses and individuals.

Our dial-up access services are also, however, an important resource in
offering total Internet solutions to corporate customers. It is our dial-up
services for example that allow frequent travelers to access our network or
their own corporate networks through one of our POPs or through our roaming
access points. Our dial-up access services are also an important option for
our large corporate groups that will be linking many offices through our
network. Although these corporate groups would use dedicated lines for the
main offices and their larger regional and local offices, they would also
likely use our dial-up access services for their smaller branch offices.

Our main dial-up access services are our IIJ Dial-up Standard, Enterprise
Dial-up IP Service, IIJ Dial-up Advanced, IIJ4U, and Dial-up E-rate Service all
as described in the table above. We also provide Network-type Dial-up IP
Service, Terminal-type Dial-up IP Service and UUCP Service to customers but we
are no longer promoting these services.

We will be expanding dial-up access to our network by increasing the
number of our POPs. We will do this primarily by leveraging off Crosswave and
its nationwide network of POPs. We believe that increasing our POPs will be
the key to enhancing customer satisfaction as well as to successfully
introducing and implementing our OEM services.

We have also expanded access to our network through roaming agreements
that are an important part of our dial-up access services. We offer global
Internet roaming areas in 31 countries with over 257 POPs as of June 29, 2001.
Additionally, in the United States and Canada through IIJ America, we have
roaming access through a toll-free number for areas where we dont already have
local POPs through roaming agreements or otherwise. We will continue to expand
our roaming areas through these arrangements.

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Our Systems Integration Services

We offer systems integrations services tailored to customers
requirements, which include consulting/project planning, systems design,
construction of network systems and systems outsourcing. Our systems
integration services mainly focuses on Internet business systems and corporate
information systems such as Intranet, Extranet and VPN. We have built a strong
record in various business fields, including the following representative
examples:



| |  |  | Examples of corporate information systems include:
| | - |  | --------------------------------------------------

| |  |  | an Extranet enabling data conversion for a major printing company                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------
| |  |  | an Internet environment with a giga-class trunk
network as well as a LAN system linking classrooms at a
university
| |  |  | Internet server systems for central government ministries and agencies                                            
| |  |  | an Extranet for wholesale transactions by financial institutions                                                  



| |  |  | Examples of Internet business systems include:
| | - |  | ----------------------------------------------

| |  |  | online brokerage systems for investment banks and securities firms                             
| | - |  | -----------------------------------------------------------------------------------------------
| |  |  | large-scale portal sites for PDA users                                                         
| |  |  | virtual campus systems including both Internet connectivity and Intranet information services
| |  |  | a B2B online distribution system for digital content                                           
| |  |  | systems for Internet CATV infrastructure                                                       

The fee structure of our systems integration services is based upon the
complexity and scale of the project required by customers. We bill our
customers for these services on a fixed fee basis and recognize the revenue
when the network systems and equipment are delivered and accepted by the
customer.

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

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

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

We also provide our customers with basic, easy-order systems integration
services, which we refer to as iBPS, e-business solutions, consisting of
consulting and supplying various shared components such as server equipment,
settlement distribution systems, data storage systems, CRM (Customer Relations
Management) systems, network monitoring and systems operation management that
allow our customers to launch their own e-commerce businesses quickly and
cost-effectively.

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Our Value-added Services

Although our primary service to our customers has been Internet access,
our customers are increasingly seeking additional network-related services. We
provide our customers with a broad range of value-added services and products
such as network security services, mail hosting services, and managed router
services, which complement and enhance our Internet access services and systems
integration services. Generally, the service period is for one year and
customers are billed monthly. We recognize revenues for these services on a
straight-line basis during the service period. Any initial set-up fees
received in connection with our value-added services are deferred and
recognized over the contract period or estimable average period of service to
customers.

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

Our value-added services include:



| |  |  | Security solutions. As of March 31, 2001, we offered three
main security services that protect customers internal networks
from unauthorized access: IIJ Security Standard, IIJ Security
Premium, and IIJ Secure Remote Access. We were the first ISP in
Japan to provide firewall services, which we first offered in 1994.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Security StandardWe began offering in October 1999 the
Security Standard Services as managed firewall service pursuant to
which we install and manage (24 x 7) the operation of firewall
systems. The initial setup fee is ¥120,000 and the monthly fee is
¥60,000 or ¥90,000 depending on the customers hardware. Since
February 2001, a virtual private network (VPN) option is available
for this service with a initial cost of JPY20,000 and a monthly fee
of JPY10,000 per computer.
|
| | IIJ
Security PremiumIn July 2000, we also began offering
IIJ Security Premium, a high value-added firewall operation and
management service based on Firewall-1, a product which has the
biggest market share, and which we license from Check Point
Software Technologies.                                                                                                                                                                                                                  
|
| | IIJ
Secure Remote AccessIIJ Secure Remote Access is a
packaged service with the new IIJ Dial-up Advanced service with ID
Gateway, which controls remote access via the Internet to in-house
servers protected by firewalls. In addition to the 50 dial-up
accounts covered by the base rate, the service will ensure a secure
remote environment by controlling accessible servers and
utilization protocols for each dial-up account.                                                         



| |  |  | IIJ Post Office Service. IIJ Post Office Service essentially
outsources to us the job performed by an e-mail server  an easy,
inexpensive way for a customer to allocate and maintain a number of
e-mail accounts under its own domain name for its employees, members
or other relevant users. We do all the necessary work to set up a
mail server so the customer does not have to incur trouble and
expense of setting up its own mail server. The customer can
administer e-mail accounts on-line through our customer support Web
interface. IIJ Post Office Service is available to customers
subscribing to our IP Service, IIJ Economy, Enterprise Dial-Up IP
service, IIJ Dial-up Standard and to Internet connection services of
other ISPs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | IIJ Mail Box Service.IIJ Mail Box Service is essentially
the same as IIJ Post Office Service. However, customers do not have
to obtain their own domain names. IIJ serves as the mail box for
the customers. As with IIJ Post Office Service, the customer can
administer the e-mail accounts on-line through IIJs Customer
Support Website.                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  |  | ID GatewayService.ID Gateway Service is an access control
service available to complement our Enterprise Dial-up IP Service.
When used in combination with our Enterprise Dial-up IP Service, ID
Gateway Service provides customers employees and associates the
ability to access the customers networks through any of our POPs.
A customer that buys our ID Gateway Service is spared the trouble of
authenticating users. ID Gateway systems placed at the entry to the
customers network identify the accessing user by interacting with
the ID servers at our sites which keep the information relating to
user accounts and IP addresses. ID Gateway provides access control
functions based on this user account information.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | IIJ Web StandardThe IIJ Web Standard allows customers to
use their own domain names while providing them with up to 200 Mega
Bytes of web hosting space. By only including the limited
specifications such as access counter and reference of access log,
IIJ kept to setup pricing of the service to a minimum, JPY
5,000/month. Additionally, through careful traffic management of
the storage space, IIJ will ensure a high-performance web-server
environment for users. This service mainly targets Small Office /
Home Office (SOHO) and other corporate users.                                                                                                                                                                  
|
| |  |  | Web Access Management Service.We provide a full-scale web
access control service which controls inappropriate access to Web
sites for businesses and other organizations. This service allows
customers to clearly control Web site access by changing firewall
and proxy server settings through application software over the
Internet.                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | Backup4U EnterpriseWe offer a data storage services which
automatically back up the hard disk data of individual and corporate
users at our data centers by use of the Internet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | Content development and distribution solutions including IP
streaming.We provide content development and distribution
services. In addition to helping customers in designing their Web
pages, we also offer content distribution functions under Mailing
List Server Service and Simultaneous E-mail Distribution Services.
We also provide Internet streaming services for live broadcasts over
the Internet, as well as streaming server hosting services with our
Streaming-On-Demand Channel.                                                                                                                                                                                                                                      
|
| |  |  | Customer support and help desk solutions. We provide
comprehensive customer support and help desk solutions that include
a network monitoring and trouble-shooting service. Most of our
customer support services are provided as an integral part of other
services we sell, such as systems integrations.                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | IIJ DNS ServicesWe offer domain name related services which
consists of domain name administration services and domain name
server outsourcing services. In a category of domain name
administration services, domain names such as .jp, .com, .net
and .org, are available. Since February 2001, so-called JP domain
which uses Japanese-letter in shorter format ([name].JP) has also
been introduced.                                                                                                                                                                                                                                                                                                                        

Our Internet Data Center Services

As part of our value-added services, we offer Internet data center
services. There are three primary services which are typically bundled
together for our customers: IIJ data center facility services, IIJ data center
connectivity services and management and monitoring services. Generally, the
service period for all Internet data center services is for one year and
customers are billed monthly. We recognize revenues for these services on a
straight-line basis during the service period. Any initial set-up fees
received in connection with our value-added services are deferred and
recognized over the contract period or estimable average period of service to
customers.

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Our IIJ data center facility services are co-location services which allow
companies to house their servers and routers off-site at our data centers. Our
Internet data center facilities are leased from Crosswave and the CRC Solutions
Corp., which are equipped with robust security systems, 24 hour non-stop power
supply, fire extinguishing systems, earthquake-resistant construction and
high-speed Internet connectivity with IIJ backbones. We also offer basic
monitoring and maintenance services for the equipment. This service enhances
reliability, since we provide 24-hour monitoring and have specialized
maintenance personnel and facilities. The initial cost of IIJs Internet data
center services is ¥250,000, with ¥300,000 of monthly charge per rack.

We also provide connectivity services with respect to our data centers.
Our IIJ data center connectivity services are an important part of being able
to provide high quality, high speed, seamless services to our customers. Our
data center connectivity services also helps us to gather in greater volumes
of traffic. Our connectivity services are asymmetric meaning that transmission
speeds in both directions are not the same  with the downstream transmission
being faster to accommodate greater amounts of information being accessed from
the Internet versus being sent to the Internet. The fee structure depends on
the transmission capacity required for upstream and downstream transmissions.
For downstream, we offer either 10BASE-T Connectivity (10Mbps) and 100BASE-T
Connectivity (100Mbps). For upstream transmissions, we offer bandwidths from
1Mbps to 4Mbps for 10BASE-T connectivity contracts, and 6Mbps to 48Mbps for
100BASE-T connectivity.

Generally, the service period for our connectivity services is for one
year and customers are billed monthly. We recognize revenues for these
services on a straight-line basis during the service period. Any initial
set-up fees received in connection with our value-added services are deferred
and recognized over the contract period or estimable average period of service
to customers.

We offer management and monitoring services which we tailor in accordance
with our customers requirements.

In addition to the above, we offer IPv6-capable data center services,
which offer the same services, but with IPv6.

Network

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

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

The primary components of our network consist of:



| |  |  | our backbone, which includes leased lines and network
equipment such as advanced Internet routers;
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | POPs in major metropolitan areas in Japan;                                                        
|
| |  |  | data centers; and                                                                                 
|
| |  |  | a network operations center or NOC.                                                               

Backbone

Leased lines. Our network is anchored by our extensive Internet backbone
in Japan and between Japan and the United States. As of June 31, 2001, we had
a total capacity of 1.7Gbps between Japan and the United States. We use our
expertise in developing and operating our network to organize and connect these
leased lines to form a backbone that has substantial transmission capacity.

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We lease high-capacity, high-speed digital transmission lines in Japan
from various carriers, including Crosswave. However, because Crosswaves
standard leased line rates are generally lower than other carriers, recently we
have been converting our existing leases to leases from Crosswave. As of March
31, 2001, we had shifted over 90% of our domestic backbone capacity to
Crosswave. We also plan to use Crosswaves SONET technology to further improve
the efficiency of our network.

Because of the scalable nature of our network, we have had no problems
integrating Crosswaves networks with ours. One of the primary means to grow
our network in terms of capacity and geographic coverage in the coming years
will be through our use of Crosswaves network.

With respect to our leased lines to the United States, IIJ has long-term
contracts with Crosswave, KDDI, C&W IDC, NTT Communications and AT&T. The
table below sets out our international backbone capacity and cost. Average
total capacity is calculated by averaging the international capacity at the end
of each month.

International Backbone Capacity and Cost

|                                       |  |                              |           |      |  |      |           |      |  |      |           |  |  |  |           |  |  |  |           | 
|-------------------------------------- |  | ---------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- |  |  |  | --------- | 
|                                       |  | For the year ended March 31,
|                                       |  |                             
|                                       |  | 1997                         |           | 1998 |  | 1999 |           | 2000 |  | 2001
|                                       |  |                              |           |      |  |      |           |      |  |     
|Backbone cost (thousand yen)           |  |                              | 1,372,452 |      |  |      | 3,095,149 |      |  |      | 3,722,676 |  |  |  | 5,660,277 |  |  |  | 5,548,527 | 
|                                      
|                                      
|                                      
|                                      
|Average total capacity (Mbps)          |  |                              | 78.75     |      |  |      | 204.58    |      |  |      | 282.08    |  |  |  | 620.00    |  |  |  | 1,162.50  | 
|                                      
|                                      
|                                      
|                                      
|Average cost per 1 Mbps
(thousand yen) |  |                              | 17,428    |      |  |      | 15,129    |      |  |      | 13,197    |  |  |  | 9,129     |  |  |  | 4,772.93  | 

In the United States, our network backbone connects to the following major
interexchange points (IX):



| |  |  | MAE West in San Jose, California;                               
| | - |  | ----------------------------------------------------------------
|
| |  |  | MAE ATM in San Jose, California;                                
|
| |  |  | PAIX (Palo Alto Internet Exchange) in Palo Alto, California; and
|
| |  |  | the Sprint Network Access Point in Pennsauken, New Jersey.      
|
| |  |  | NYIIX (New York International Internet Exchange) in New York.   

Through these IX points we connect to many other ISPs in the United
States, including Sprint, C&W (Internet MCI) and MCI WorldCom (UUNET).

In Asia, we have established a backbone connection through the A-Bone, the
Internet backbone network covering the Asia-Pacific region. The A-Bone is
operated by Asia Internet Holding, of which we own 20.6%. Asia Internet
Holding commissioned IIJ to design and build the A-Bone and IIJ currently
manages the A-Bone.

In Europe, Asia Internet Holding has established a roaming alliance with
KPN Qwest through the A-Bone that allows us to offer roaming to our customers.

Expansion plans.We have placed a high priority on the continued
expansion of the capacity and geographic reach of our networks. We will look
first at increasing our domestic network and our network between Japan and the
United States. We will also look at expanding our network in the Asia-Pacific
region, into Europe and in the United States as opportunities arise.

With respect to our domestic expansion, we are extending our geographic
coverage and our capacity procuring optical fiber lines from Type I carriers
such as Crosswave, particularly in areas where we do not currently have POPs.
We are also replacing our existing lines with new lines of the same or higher
capacity from Crosswave.

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Between Japan and the United States, we will look primarily to increase
our capacity by securing long-term committed capacity either directly or
through Crosswave, who would then lease all or a substantial portion of the
international capacity to us on a long-term basis. To this end, Crosswave
entered into a long-term IRU contract (23 years) with Global Crossing in March
2000 for significant amounts of dedicated capacity between Japan and the United
States.

We believe that our total expenditures for additional capacity in the near
term will decrease in absolute terms, we believe that the per unit costs will
be significantly reduced because of the availability of lower-cost lines in the
market place and because of the anticipated increase of available capacity
between Japan and the United States from the expected completion of a number of
undersea cables later this year. To the extent that domestic and trans-Pacific
leased line costs do not decline as anticipated, we may not realize the cost
savings we anticipate and/or we may choose not to add as much capacity as we
currently plan to.

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

POPs

POPs are the main points at which our customers connect to the IIJ
backbone. We provide Internet access from our POPs to commercial and
residential customers through leased lines and dial-up connections over local
exchange facilities. As of March 31, 2001, we had 24 primary POPs which allow
for dedicated and dial-up access and include the main Internet backbone routers
that form our network. As of the same date, we also had 74 POPs for dial-up
access. We are also in a position to leverage off Crosswaves nationwide
network and access points and can easily add additional POPs for either
dedicated or dial-up access as demand merits.

Many of our POPs are located in, or in close physical proximity to,
carrier hotels. Carrier hotels are facilities where we and other major
carriers and ISPs have POPs. These are mainly located at facilities of various
carriers in Japan like NTT, KDDI, and Japan Telecom. We lease the physical
space from these carriers or use such space under other arrangements with terms
ranging from one to two years most of which can be terminated by either party
on three to six months notice. We maintain our routers and other networking
equipment at these POPs. Our actual location in, or in close proximity to, the
same building in which the switches and routers of these carriers and ISPs are
located offers us the ability to quickly and easily interconnect our equipment
to theirs.

Internet Data Centers

In addition to existing Internet data centers in Yokohama and Tokyo, in
fiscal 2000, Crosswave has set-up 6 new Internet data centers nationwide in
Sapporo, Sendai, Osaka, Nagoya, Fukuoka and a second data center in Tokyo which
we use to offer over value-added data center services. IIJ now has eight data
centers throughout Japan for our Internet data center services. Furthermore,
our ninth data center is expected to open in Kyoto in October 2001, and two
other large scale Internet data centers in the suburbs of Tokyo, in Yokohama
and in the Saitama Kawaguchi Intelligent Park complex, are expected to be
operational by the end of fiscal 2003.

A portion of our current Internet data center services and data center
connectivity services are performed by using Crosswaves existing facilities.
Crosswave operates data centers in major areas in Japan (Tokyo, Osaka, Sapporo,
Sendai, Nagoya and Fukuoka) in buildings leased under renewable leases. These
data centers are specifically designed for application hosting, co-location
services and

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high capacity access to both IIJs and Crosswaves networks. We offer the
same IIJ Internet data center services at these data centers as described
above.

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

In addition, we have invested in data center development outside Japan.
We have entered into the i-Heart joint venture with Samsung Corp which
operates in Korea with a total investment of ¥89 million. Our other Internet
data center venture, AyalaPort Makati, with the Ayala Group in the
Philippines is preparing for its service launch by September 2001 with a floor
space of over 1,900 square meters and a total investment of ¥116 million.

Network operations center and technical and customer support

Our network operations center, or NOC, in Tokyo operates 24 hours a day,
seven days a week. From our NOC we monitor the status of our network, the
traffic on the network, the network equipment and components and many other
aspects of our network including our customers dedicated access lines leased
from carriers. From our NOC, we monitor our networks to ensure that we meet
our commitments under our service level agreements.

Our Group Companies

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

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The chart below sets out our group companies, including our principal
subsidiaries, and our ownership of each of them as of September 28, 2001:

(CHART)

Crosswave Communications Inc.

Crosswave is a pioneer in the introduction of broadband data
communications infrastructure and services to businesses and telecommunications
carriers in Japan, including the high-speed backbone, Wide-area Ethernet
platform, data center services. Crosswave operates the first nationwide fiber
optic network in Japan specifically designed for the high-speed transmission of
data. Its network uses advanced optical technologies that allow it to deliver
high-capacity, cost-effective and highly reliable data communication services,
eliminating the burden of multiple layers of equipment employed in traditional
telephony systems. Its extensive, flexible, and scalable network can be easily
upgraded to increase capacity, support new services and incorporate new
transmission technologies, as the market demands.

Crosswave was formed in October 1998 by IIJ, Sony and Toyota Motor and
began offering services in May 1999. In August 2000, Crosswave became a public
company with an initial public offering on the Nasdaq National Market under
ticker code of CWCI. As of March 31, 2001, IIJ, Sony and Toyota Motor owned
37.9%, 23.9% and 23.9%, respectively, of Crosswave.

As of March 31, 2001, Crosswave had 113 full-time employees, 22 of whom
were seconded to Crosswave from IIJ.

Crosswave is a Type I carrier, which allows it to provide
telecommunications services through its own telecommunications circuit
facilities.

For the year ended March 31, 2001, it had revenues of  ¥2,629 million and a
net loss of  ¥10,847 million.

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Crosswaves network.Crosswaves primary asset is its network. As of
March 31, 2001, it had made operational the 3,689 route miles of backbone fiber
in its network that are leased from KDDI providing a nationwide backbone
reaching into every prefecture in Japan except Shimane and Okinawa.
Crosswaves primary expenses are related to the development of its domestic
network. Crosswave has also contracted with KDDI to receive dark fiber and
maintenance services covering the lines. For a discussion of Crosswaves
expenses and the contract with KDDI, please see Item 5. Operating and Financial
Review and Prospects.

We have been primarily responsible for and have actively participated, as
a third party contractor or through our seconded employees, in the planning and
design of the Crosswave network and services. We worked closely with Crosswave
to ensure that its network is well suited, in terms of quality of technology
and otherwise, to integrate with our network and the services we currently
offer and will offer in the future. In addition, we assist Crosswave in the
operation and maintenance of its optical fiber network as a third-party
contractor.

In addition to its optical fiber network in Japan, Crosswave expanded its
network internationally by securing contractual rights from third parties to
dedicated capacity between Japan and the United States. Depending upon the
rate of expansion, we would anticipate securing leases for a large amount of
our international capacity from Crosswave. As with domestic leased lines that
Crosswave offers, we expect that this international capacity would be available
at significantly lower per unit costs than we are currently paying.

Crosswaves primary services.Crosswave offers four main types of
services: high speed backbone service, Wide-Area Ethernet platform service,
dial-up port service and data center services.



| |  |  | High-speed backbone service.Its high-speed backbone service
targets telecommunications carriers, network operators such as ISPs
and companies with large data transmission requirements such as
cable television broadcasters and media organizations. The service
offers speeds of up to 600 Mbps on its point-to-point high-speed
backbone services using Dense Wavelength Division Multiplexing or
DWDM and Synchronous Optical Network or SONET transmission
technologies. Using the DWDM and SONET advanced multiplexing and
transmission technologies, we believe Crosswave will be able to
increase its capacity on its optical fiber network to over 100 Gbps
through transmission equipment upgrades.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Wide-area Ethernet platform service.This service targets
corporations, particularly those with multiple offices or buildings
nationwide. Its Wide-area Ethernet platform service provides
customers with a seamless multi-point to multi-point LAN environment
over a large geographical area.                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Dial-up port service.Crosswave offers this service to
value-added networks operators, such as ISPs, and corporations
needing nationwide networks. The service allows its customers to
offer nationwide dial-up access to their own networks via its over
80 access points nationwide.                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Data center services.Crosswave offers data centers in major
metropolitan areas targeted at a wide range of customers, including
large companies that demand a variety of network services and
resources, value-added network service providers such as application
and digital content service providers, and new entrants into the
Japanese telecommunications market.                                                                                                                                                                                                                                                                                                                                       

Crosswaves customers. Crosswaves sales and marketing is primarily done
by Crosswave and IIJ although Crosswave also uses third-party agents throughout
Japan. In addition, IIJ markets Crosswaves services as an agent and as part
of the services offered by the IIJ group. As a Type I

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carrier, Crosswave is required to make its tariff-based services available
on the same terms and conditions to all customers, without special treatment to
its shareholders, including IIJ.

Our plan to increase our use of Crosswaves services. We will benefit from
Crosswaves network in four primary ways. First, we will be able over time to
replace existing leased lines with Crosswaves leased lines. As the lease
periods of our current leased lines expire, we will switch to a Crosswave line
if one is available as Crosswaves leased line rates are significantly lower
than rates we currently pay to others. As of March 31, 2001, more than 90% of
our domestic IP traffic is running through Crosswaves fiber optic network.

Second, we will be able to add additional capacity to our current network
in a more cost effective manner. As the volume of traffic across our network
continues to increase, we need to add additional capacity. Crosswave allows us
to add significant capacity to our existing networks at lower rates than we are
currently paying to others.

Third, we will be able to leverage Crosswaves network infrastructure to
expand the geographic coverage of our network. Crosswave had over 80 access
points as of March 31, 2001. We will be able to use those access points if we
purchase Crosswaves leased line service or network platform service. We can
also use Crosswaves dial-up ports as dial-up access points for our own dial-up
access services, including IIJ4U and OEM services.

Fourth, we will perform joint service and product development with
Crosswave to produce advanced and flexible carrier services which are designed
primarily for us. Through this joint development, we should be able to provide
unique services using Crosswaves advanced services prior to the introduction
of comparable services by our competitors. This will also allow us to reduce
our dependence on the incumbent telecommunications carriers.

Our contributions to Crosswave. In order to complete a nationwide network,
Crosswave requires substantial investment. In accordance with the joint
venture agreement, the three joint venture partners have contributed ¥20
billion of capital contributions on a pro rata basis. As of March 31, 2000, we
had contributed ¥8 billion (our pro rata contribution based on our 40% interest
at that time). Crosswave raised approximately ¥24 billion in proceeds after
payment of underwriting commissions and expenses from its August 2000 initial
public offering, at which time we purchased an additional 15,000 shares of
Crosswave for ¥4.6 billion. Furthermore, we purchased an additional 3.0 million
outstanding American Depositary Receipts (ADRs) of Crosswave at fair market
value in a privately negotiated transaction in December 2000. The 3.0 million
ADRs are equivalent to 15,000 shares of Crosswaves common stock. As a result,
our ownership in Crosswave decreased from 40.0% to approximately 37.9%.

Our financial results will be affected by Crosswaves performance because
we account for Crosswave on the equity method. However, we are not directly
responsible for any of the expenses of Crosswave beyond our equity investment.
Crosswaves accumulated deficit as of March 31, 2001 was ¥18,779 million.

More detailed information on Crosswave can be found in its registration
statement initially filed with the SEC on July 10, 2000, as amended, and its
annual report on form 20-F to be filed with the SEC in September 2001.

Our most significant investment in our group companies continues to be in
Crosswave.

IIJ Technology Inc.

IIJ Technology is becoming an increasingly important element in our
providing total Internet solutions to our customers. In June 1999, we
increased ownership of IIJ Technology from 39% to 64.1%. IIJ Technology
provides comprehensive Internet network systems integration and consulting

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services, focusing on design, operation, and consulting for corporate
networks (LANs, enterprise networks, Intranets) and their security systems.
IIJ Technology assists customers in creating private IP networks, such as
Intranets or virtual private networks, that securely isolate internal network
traffic from public Internet traffic and provide each site on the private IP
network access to other sites as well as to the Internet. IIJ Technology can
integrate an organizations multiple sites in different locations in Japan and
different countries throughout the world.

As of March 31, 2001, we owned 64.1% of IIJ Technology.

IIJ Technology had sales of approximately ¥10,163 million for the year
ended March 31, 2001. As of March 31, 2001, IIJ Technology had approximately
90 full-time employees, 22 of whom were seconded from IIJ.

IIJ Media Communications Inc.

IIJ Media Communications provides expert services to help customers
exploit the potential of the Internet as new communications medium. IIJ Media
Communications core business is providing various hosting and home page
development services as well as Internet broadcasting services. For this
purpose, IIJ Media Communications engages in research and development of the
newest technologies for media communications, such as streaming technologies
including multicast and portal service applications, and incorporates the
technologies into various applications.

IIJ Media Communications also provides total support for customers
content and systems, particularly those customers who engage in e-commerce
related activities. IIJ Media Communications provides consultation, planning,
configuration (including selection of hardware and choices of applications),
content production and ongoing support for its customers.

Other basic media services offered by IIJ Media Communications include
information management services related to the Internet. IIJ Media
Communications also offers servers to manage mailing lists, to provide
simultaneous distribution services and to operate IIJ Net News services.

As of March 31, 2001, we own 50.1% of IIJ Media Communications.

IIJ Media Communications had sales of approximately ¥880 million for the
year ended March 31, 2001. As of March 31, 2001, IIJ Media Communications had
approximately 29 full-time employees, 27 of whom were seconded from IIJ.

Net Care, Inc.

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

As of March 31, 2001, we own 50% of Net Care. Other major shareholders of
Net Care include Sumitomo Corp., Itochu Corp., Toyota Motor and Intelligence,
each of which owns 10%.

Net Care had sales of approximately ¥941 million for the year ended March
31, 2001. As of March 31, 2001, Net Care had approximately 50 employees, 7 of
whom were seconded from IIJ. Besides full time employee, Netcare had 144
part-time staff.

In September 2001, IIJ increased its stake in Net Care to 52.5%.

IIJ America, Inc.

IIJ America is a U.S.-based Internet access provider, catering mostly to
U.S.-based operations of Japanese companies that use IIJs services in Japan.

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At the end of the fiscal year
ended March 31, 2001, we owned 88.2% of IIJ America and IIJ Technology owned
11.8% as a result of the issuance of 20,000 new shares of IIJ America to IIJ
for a total of $2 million.

IIJ America had revenues of $3,078 thousand for the year ended December
31, 2000.

Asia Internet Holding Co., Ltd.

Asia Internet Holding was created to own and manage the A-Bone, which is a
high-speed Internet backbone network that connects countries in the
Asia-Pacific region to a common network infrastructure.

Currently, the A-Bone ties into networks in Japan and seven other
countries in the region: Singapore, Hong Kong, Malaysia, Indonesia, the Philippines, Thailand and
China. Asia Internet Holding has network operations centers in each of these
countries. The A-Bone also connects to the United States through IIJ. Asia
Internet Holding is considering establishing connections to Taiwan, South
Korea, Vietnam, India, and Australia in the near future.

The primary customers of Asia Internet Holding are carriers and ISPs
throughout Asia including Japan.

As of March 31, 2001, we own 20.6% of Asia Internet Holding. We would
like to increase our ownership of Asia Internet Holding and have initiated
discussions with other shareholders to that end. We operate and manage the
A-Bone pursuant to an agreement with Asia Internet Holding for which we are
paid ¥10 million per month. The agreement is a yearly contract that renews
automatically although it may be terminated by either party upon two months
prior notice in writing. We operate the A-Bone from our network operations
center in Tokyo.

Asia Internet Holding had sales of approximately ¥1,969 million for the
year ended March 31, 2001. As of March 31, 2001, Asia Internet Holding had
approximately 11 full-time employees, 6 of whom were seconded from IIJ. In
August 2001, IIJ increased its stake in Asia Internet Holding to 26.7% through
an additional Investment of ¥295 million.

atom, Co., Ltd.

atom is primarily a Web page design company, atom aims to define new forms
of design work using digital technology in all network-based aspects, including
from content production to graphic design. As of March 31, 2001, we own 40% of
atom, which had sales of approximately ¥906 million for the year ended March
31, 2001. As of March 31, 2001, atom had approximately 39 employees.

Internet Multifeed Co.

Internet Multifeed, known as MFEED, provides a location and facilities for
directly connecting high-speed Internet backbones with content servers to make
distribution on the Internet more efficient. MFEEDs technology was jointly
developed by IIJ and NTT. In May 2001, MFEED launched new IX (Internet
eXchange) services named JPNAP in Tokyo.

Through its Multifeed connectivity and Multifeed housing services, MFEED
has already had connection with major ISPs to its premises. Having such
environment, MFEED provides Multifeed housing services for content providers,
which allows such content providers to distribute content more efficient by
reducing the number of networks that data must travel through to connect
content providers with end users. Besides major newspaper companies such as
Asahi Shimbun, Nikkei, CNNfn, MFEED has one of Japans largest Internet
security trading systems of Matsui Securities as its customers.

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As of March 31, 2001, we own 26% of MFEED and IIJ Technology and IIJ Media
Communications each own 2%. MFEED had sales of approximately ¥1,440 million
for the year ended March 31, 2001. As of March 2001, MFEED had approximately
14 full-time employees, 2 of whom were seconded from IIJ.

Capital Expenditures

The table below represents our capital expenditures, including capitalized
leases for the last four years.

|                                                   |  |                              |        |      |  |                   |        |      |  |  |        |  |  |  |        | 
|-------------------------------------------------- |  | ---------------------------- | ------ | ---- |  | ----------------- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                   |  | For the year ended March 31,
|                                                   |  |                             
|                                                   |  | 1998                         |        | 1999 |  | 2000              |        | 2001
|                                                   |  |                              |        |      |  |                   |        |     
|                                                   |  |                              |        |      |  | (millions of yen) |        |      |  | 
|Capital expenditures, including capitalized leases |  |                              | ¥1,696 |      |  |                   | ¥1,929 |      |  |  | ¥3,465 |  |  |  | ¥3,963 | 

Our capital expenditures are difficult to plan given the rapid changes and
uncertainties in the Internet markets. However, most of our capital
expenditures relate to the expansion and improvement of our existing network,
including the leasing of lines that form our network backbone and the
installation of the routers and servers necessary to offer services on our
network. Our current plans call for us to invest approximately ¥4.0 to ¥5.0
billion in each of the next few years to increase the access to our networks by
adding more POPs and increasing our data center facilities. In addition, we
will continue to add equipment to our network as we expand the capacity of our
network.

During the year ended March 31, 2001, we also increased our investment in
Crosswave by investing an additional ¥7.3 billion, bringing our carrying value
of investment in Crosswave to ¥13.0 billion as of March 31, 2001. We will
continue to look for opportunities to increase our investment in our affiliated
companies.

We have not made any material divestitures in the past three fiscal years.

Sales and Marketing

Our sales headquarters is in Tokyo. We also have branches in Osaka,
Nagoya, Sapporo, Sendai, Toyama, Hiroshima, Fukuoka and Okinawa in order to
cover the major metropolitan areas in which the majority of large Japanese
companies operate. As of March 31, 2001, we had approximately 113 people
working in sales and marketing.

We organized our sales personnel into three distinct, separate divisions:
sales, sales planning, sales administration, solution sales and new business
promotion.

Personnel in our sales division are further separated into three sections:



| |  |  | Two of the sections focus on our total Internet solutions and
work with large corporate clients, including telecommunications
carriers and ISPs, government institutions, and universities and
other schools. Our sales force works with both customers that
approach us because of our reputation and brand name as well as
those specifically targeted as potential customers such as large
corporate groups, including financial institutions, manufacturing
companies and retail sales operations, that plan on introducing
efficient and comprehensive communication networks through the
Internet to all of their group companies. We have continued to
target current heavy users of our IIJ Economy, IIJ Dial-up Standard
and our other dial-up access services as they are likely candidates
to be shifted to our IP Service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | One of the sections focuses on sales out of Tokyo.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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In addition to the above, we have a contact center in sales administration
division which functions to promote our Internet access services, particularly
our IIJ T1 Standard and IIJ Economy dedicated access services, our corporate
dial-up services, and applications to enhance Internet access for small and
medium businesses. This contact center also focuses on and works with our
third party sales agents and other sales representatives. Although we have 50
sales agent in contract, we focus on several of them to effectively promote our
sales activities. In fiscal 2000, we increased our sales and marketing to
small and medium businesses by co-working these agents offering IIJ T1
Standard, IIJ Economy and IIJ Dial-up Standard. We also host conferences and
lectures to increase the awareness of small and medium businesses of the
opportunities available to them through the Internet.

Customers

We had approximately 6,000 business and other institutional customers and
approximately 157,000 individual subscribers to our Internet access and
value-added services as of March 31, 2001, as compared with over 6,000
businesses and other institutional customers and over 124,000 individual
subscribers as of March 31, 2000. Our main customers continue to be major
corporations and ISPs. We rated as the top Internet service provider for
customer satisfaction in terms of customer support, service reliability,
international and domestic backbone capacity, network operation capability and
new technology consultation for dedicated line connections services according
to a Nikkei Communications survey dated November, 2000. The Nikkei
Communications survey results were based upon questionnaires provided to
companies in Japan to which 981 companies responded.

Research and Development (R&D)

We have always focused on advancing the use of the Internet in Japan.
Many of our engineers were among the participants in the WIDE project and
continue to regularly participate in industry organizations and
government-sponsored research projects such as researching new Internet
protocol standards such as Internet Protocol Version 6 (IPv6). These engineers
have continued to develop innovative services, applications and products many
of which have set the standard for the Internet industry in Japan. We continue
to strive to develop new services, applications and products. Our research and
development efforts are a fundamental part of that effort.

Our research and development expenses are not particularly substantial
averaging less than 1.5% of total revenues for the past three years. For the
years ended March 31, 2001, 2000 and 1999, our research and development
expenses were ¥287 million, ¥364 million and ¥243 million, respectively. The
level of research and development expenditures is low in relation to our total
costs primarily because we do not engage in extensive research and development
of new technologies and products. Rather, as noted above and as set forth in
more detail below, we focus on monitoring the developments in the industry and
in developing new and innovative services and applications using and modifying
existing technologies and products.

As of March 31, 2001, we had approximately 99 people working as our R&D
staff, all of whom also have additional responsibilities in the Technology
Department. Our R&D staff works very closely with our sales and marketing
personnel and technical engineers to ensure that our research and development
efforts are closely aligned with the demands of our customers.

R&D Organization

We have organized our research and development staff to cope promptly and
effectively with the rapidly changing technological environment in the
Internet. R&D on practical applications of new and developing technologies is
the responsibility of the Technology Department, the Service Administrative
Department and of the IIJ Research Lab.

Technology department.As of March 31, 2001 the Technology Department
comprised the following divisions:

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| |  |  | Network Operations and Administrations Division, which
operates IIJ backbones and data centers;                                                                                                                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Network Engineering Division, which designs network
infrastructures including Internet data centers and network-related
products, such as network monitoring devices and routers, and
software development aimed at enhancing network monitoring and
traffic management;
|
| |  |  | Applied Technology Division, which develops Internet security
technology such as firewalls;                                                                                                                                                                             
|
| |  |  | Media Technology Division, which develops multimedia
distribution systems such as IP multicast and Internet broadcasting;                                                                                                                                               
|
| |  |  | Planning and Development Division, which plans and develops
various new services; and                                                                                                                                                                                   
|
| |  |  | Project Promotion Division, which develops backoffice
technologies such as customer databases, billing systems and service
management systems.                                                                                                                          

Service administrative department.As of March 31, 2001, the Service
administrative department comprised the following divisions:



| |  |  | Customer Support Division, which operates customer-related
back-office tasks such as management of customer databases, billing
flow, and so on; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Internet Technology Division, which is responsible for
technological requirements of each IP services customer.                                    

IIJ Research Lab.We established the IIJ Research Lab in April 1998 to
engage in R&D of new basic Internet technologies. For example, through the IIJ
Research Lab, we are participating in a joint undertaking among WIDE Project
and organizations from private and academic sectors to promote the deployment
and implementation of IPv6. The output of this joint undertaking will be
distributed freely in order to promote the introduction of IPv6 on a worldwide
scale. IPv6 is designed to solve problems inherent in the current version of
IP, IPv4, such as IP address space depletion. In addition, IPv6 will provide
features necessary to sustain continuous growth of the Internet as an
information infrastructure for business and private uses.

R&D Strategy

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



| |  |  | continued improvement of our SEIL router and new SEIL T1
router, routers we developed specifically to be integrated into
IIJs Internet-related services;           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | research relating to the methodology of configuration of routers and other servers;                                                                                 
|
| |  |  | research relating to behavior of Internet routing systems;                                                                                                          
|
| |  |  | software development for management of border gateway
protocol, or BGP, which is protocol that allows routers to exchange
routing information on the TCP/lP network;
|
| |  |  | research for Internet traffic monitoring and management;                                                                                                            
|
| |  |  | development of software and evaluation of hardware relating
to improving the operations of routers located on our customers
premises; and                          
|
| |  |  | R&D of IPsec, which is a secure version of IP that provides
secure communication channels over the Internet.                                                        

A second R&D objective is to continue participating in or otherwise
closely monitoring the new products, developments and initiatives of
manufacturers and standards-setting and research groups. Through these
efforts, we seek to ensure that we have timely and effective access to new
technologies

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and that we implement these technologies effectively. Because the
rate of change in technology relevant to our business is so rapid, we believe
that the sophistication and experience of our R&D personnel is an important
part of our success.

Proprietary Rights

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

Licenses

We have acquired a license from Check Point Software Technologies which
will allow us to provide managed firewall services for high-end users using
Check Points Firewall-1 and Provider-1 products.

Since June 1999, IIJ is also a licensee under an agreement with WatchGuard
Technologies, Inc. for the right to use WatchGuards managed firewall service
products which provide the ability to manage, update and configure firewalls
remotely.

Trademarks

IIJ has applied for trademark registrations of its corporate name
Internet Initiative Japan Inc. and certain other corporate and product names
in Japan, the United States and certain European countries. As of March 31,
2001, there were 5 applications pending and 10 which have been completed.

Employees

As of March 31, 2001, we had 469 employees, including employees of our
consolidated subsidiaries. Approximately 60% of these employees were in
engineering, 25% in sales functions and 15% in administrative. We had 151,222,
266 and 339 employees as of March 31, 1997, 1998, 1999 and 2000. We had an
average of approximately 332 temporary employees for the fiscal year ending
March 31, 2001, including temporary employees of our consolidated subsidiaries.
Our employees are not members of any union.

Legal Proceedings

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

In November 2000, IIJ Media Communications was sued in Japan by K.K.
Gavali Digital Entertainment, a company which planned to launch an Internet
game based on the stock market. IIJ Media Communications was sub-contracted to
construct web-servers and databases and to perform consulting and management
functions. Gavali is suing us for breach of contract in the amount of ¥332
million. Our management does not believe there is any merit in their claims.
The matter is pending. Gavali alleges, among other things, that we failed to
secure users personal information and that the simulated stock market did not
close at the same time as the real market.

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REGULATION OF TELECOMMUNICATIONS INDUSTRY IN JAPAN

Regulation of Telecommunications Industry in Japan

The Ministry of Public Management, Home Affairs, Posts and
Telecommunications (MPHPT) regulates the Japanese telecommunications industry
primarily under the Telecommunications Business Law (TBL). The TBL authorizes
the MPHPT to regulate two types of telecommunications companies, Type I
Carriers and Type II Carriers. Type I Carriers provide telecommunications
services by establishing their own telecommunications circuit facilities. Type
II Carriers, such as IIJ, are telecommunications carriers other than Type I
Carriers. Type II Carriers may engage in the businesses of telecommunications
circuit resale and the provision of Internet services. Type II Carriers provide
telecommunications services to customers by using the telecommunications
facilities of Type I Carriers, typically NTT East, NTT West or NTT
Communications. Thus, Type II Carriers can potentially be customers of Type I
Carriers as well as their competitors. Type II Carriers are subdivided into
Special Type II Carriers and General Type II Carriers. Special Type II Carriers
are limited to Type II Carriers which provide telecommunications facilities
designed for communications between Japan and foreign points or provide voice
telecommunication services to many unspecified members of the public through
interconnections of public switched networks and leased circuits at each end.
IIJ falls under the category of Special Type II Carriers.

In June 2001, the Telecommunications Business Law was amended to allow
Type I Carriers and Special Type II Carriers to engage in wholesale
telecommunications services for other Type I Carriers and Type II Carriers with
prior notification to the MPHPT. The amendment will take effect in December
2001.

Regulations of Special Type II Carriers

The following regulations apply to IIJ as a Special Type II Carrier.

Registration.Special Type II Carriers must obtain registration from the
MPHPT before commencing a Special Type II business. The applicant must specify
the categories of services to be provided and the facilities to be used by the
carrier. IIJs registration as a Special Type II Carrier is made under the
service category of data transmission.

Terms and conditions for the provision of services.Special Type II
Carriers must establish terms and conditions for the provision of
telecommunications services that they offer. The terms and conditions may be
established and changed simply by prior notification to the MPHPT and without
any need for MPHPT approval. Special Type II Carriers are prohibited from
providing telecommunications services other than pursuant to the terms and
conditions notified to the MPHPT.

Revocation of registration.If a Special Type II Carrier has violated the
provisions of the TBL or any orders or administrative decisions, and is
determined to impair the public interest, its registration may be revoked by
the MPHPT.

Technical standards for Special Type II Carriers.Special Type II Carriers
must maintain their telecommunications facilities in conformity with the
technical standards provided in the applicable ordinances of the MPHPT. If the
MPHPT determines that the telecommunications facilities fail to meet the
technical standards, the MPHPT may order the Carrier to improve, repair or
limit the use of its telecommunications facilities. The technical standards are
specified to avoid damage or failure of, or interference to, telecommunications
facilities, to maintain the quality of the telecommunications service, to
maintain secrecy of communications and to clarify the demarcation of
responsibilities between the telecommunications facilities of
telecommunications carriers.

In addition, Special Type II Carriers must establish their own
administrative rules in accordance with MPHPT ordinances in order to secure the
reliable and stable provision of

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telecommunications services. These
administrative rules must regulate the operation and manipulation of
telecommunications facilities and the safeguarding, inspecting and testing
regarding the construction, maintenance and administration of
telecommunications facilities, etc. Such administrative rules must be submitted
to the MPHPT prior to the commencement of operations, and changes must be
submitted to the MPHPT after they are implemented without delay.

Universal Service Fund

The Universal Service Fund was provided for in the June 2001 amendment to
the Telecommunications Business Law. It will take effect one year after the
effective date of such the amendment. The Universal Service Fund is a subsidy
system for telecommunications carriers which is designated by the MPHPT as a
Subsidy Eligible Telecommunications Carrier. A subsidy will be provided to a
Subsidy Eligible Telecommunications Carrier if the cost for providing a
nationwide universal service is estimated to exceed the revenue from the
service. The subsidy will be partly taken from other carriers who entered into
interconnection agreements with the Eligible Carrier. We have interconnection
agreements with NTT East and NTT West, which will be designated as a Subsidy
Eligible Telecommunications Carrier. Therefore, we will have to pay a certain
amount of burden charge to be pooled in the Universal Service Fund. It will be
distributed to Eligible Carriers as a subsidiary.

C. Organizational structure

See the information contained in Our group companies above.

D. Property, plants and equipment

See the information contained in Network, Backbone, POPs, and
"Internet Data Centers above.




Item 5. Operating and Financial Review and Prospects

A. Operating results.

You should read the following discussion of the financial condition and
results of operations at IIJ together with the consolidated financial
statements and the notes to those financial statements beginning on page F-1 in
response to Item 8 and Item 18. The discussion in this section contains
forward-looking statements and you should read the risk factors relating to
forward-looking statements appearing at the beginning of this document.

B. Overview

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

Our primary sources of revenues are Internet access and connectivity
services, systems integration services, Internet data center services and other
value-added services. We also generate revenues from sales of purchased
equipment, which are components of our total Internet solutions. Substantially
all of our revenues are from our customers in Japan.

We provide our services directly or by working together with the
subsidiaries and affiliates in the IIJ group.

IIJ provides Internet access services and related value-added services,
such as Internet data center services, security services, and mail server
outsourcing services. The IIJ group also provides

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systems integration
services, various applications services and systems operation and maintenance
services, such as systems development and integration for BtoB and BtoC
networks, Web design, content development and distribution, network monitoring
and call center support. The customers main point of contact for these
various services is IIJ. We draw upon our group companies to provide the
resources necessary to provide total Internet solutions to our customers.

We refer to our subsidiaries and certain affiliates as our group
companies, and we have invested heavily in and exercise significant influence
over these companies. We consolidate four of our group companies  IIJ
Technology, IIJ Media Communications, IIJ America and Net Care. We account for
our non-consolidated group companies by the equity method. The primary
companies that we consider to be in the IIJ group are discussed in Our Group
Companies. We and our, when used in relation to financial results and
information, refers to the consolidated financial results and information of
Internet Initiative Japan Inc. and its consolidated subsidiaries only.

Due to the growth of our Internet data center services, we have changed
our revenues presentation in the statements of operations beginning with our
financial statements for the year ended March 31, 2001. We have reclassified
revenue in the financial statements for the prior years to conform with the
presentation of the current fiscal year.

We categorize our Internet access services revenues into dedicated access
services and dial-up access services; however, there is no reasonable means to,
and accordingly we do not, allocate the leasing fees for leased lines, other
than customers local access lines, and the lease payments, depreciation and
other charges for network equipment to each such category of our Internet
access service revenues.

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Results of Operations

As an aid to understanding our operating results, the following tables set
forth items from our statement of operations for the periods indicated in
millions of yen amounts and as a percentage of total revenues.

|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |        |        | 
|------------------------------------------------------------------------ | ------------------------------------------------------ | ---------------------------------------------------- | ---------------------- | ----------------------- | ------ | -------------------- | ------ | ------ | ------ | ----- | ------ | ----- | ------ | ------ | ------ | 
|                                                                         |                                                        |                                                      |                        |                         |        | Year Ended March 31,
|                                                                         |                                                        |                                                      |                        |                         |        |                     
|                                                                         |                                                        |                                                      |                        |                         |        | 1999                 |        | 2000   |        | 2001 
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |      
|                                                                         |                                                        |                                                      |                        |                         |        | (millions of yen)   
|Statement of Operations Data:                                            |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Connectivity and value-added services revenues:                          |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Dedicated access:                                      |                                                      |                        |                         |        |                      |        |        |        |       |        |       |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | IP Service (including IIJ T1 Standard)               |                        | ¥                       | 7,272  |                      |        | ¥      | 9,099  |       |        | ¥     | 11,520 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | IIJ Economy                                          |                        |                         | 526    |                      |        |        | 900    |       |        |       | 1,259  |       
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        |                                                      | Total dedicated access |                         |        | 7,798                |        |        |        | 9,999 |        |       |        | 12,779 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Dial-up access                                         |                                                      |                        | 4,101                   |        |                      |        | 4,496  |        |       |        | 4,423 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Value-added:                                           |                                                      |                        |                         |        |                      |        |        |        |       |        |       |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | Internet data center                                 |                        |                         | 161    |                      |        |        | 347    |       |        |       | 1,237  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | Other                                                |                        |                         | 335    |                      |        |        | 537    |       |        |       | 899    |       
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        |                                                      | Total value-added      |                         |        | 496                  |        |        |        | 884   |        |       |        | 2,136  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other                                                  |                                                      |                        | 110                     |        |                      |        | 408    |        |       |        | 592   |       
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        | Total connectivity and value-added services revenues |                        |                         | 12,505 |                      |        |        | 15,787 |       |        |       | 19,930 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Systems integration revenues, including related equipment sales          |                                                        |                                                      | 1,179                  |                         |        |                      | 7,640  |        |        |       | 10,556 |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Other equipment sales revenues                                           |                                                        |                                                      | 1,085                  |                         |        |                      | 1,875  |        |        |       | 1,390  |      
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        |                                                      |                        | Total revenues          |        |                      | 14,769 |        |        |       | 25,302 |       |        |        | 31,876 | 
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|Cost of connectivity and value-added services revenues:                  |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | International backbone cost                            |                                                      |                        | 3,723                   |        |                      |        | 5,660  |        |       |        | 5,549 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Domestic backbone cost                                 |                                                      |                        | 1,109                   |        |                      |        | 1,533  |        |       |        | 2,574 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Local access line cost                                 |                                                      |                        | 1,884                   |        |                      |        | 2,090  |        |       |        | 3,142 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other connectivity cost                                |                                                      |                        | 704                     |        |                      |        | 1,220  |        |       |        | 1,366 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Depreciation and amortization                          |                                                      |                        | 1,249                   |        |                      |        | 1,831  |        |       |        | 2,361 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other                                                  |                                                      |                        | 2,509                   |        |                      |        | 2,757  |        |       |        | 3,991 |       
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        | Total cost of connectivity and value-added services  |                        |                         | 11,178 |                      |        |        | 15,091 |       |        |       | 18,983 |       
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|Cost of systems integration revenues, including related
equipment sales: |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Cost of equipment sales related to systems integration |                                                      |                        | 410                     |        |                      |        | 2,749  |        |       |        | 2,755 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other                                                  |                                                      |                        | 540                     |        |                      |        | 3,523  |        |       |        | 6,362 |       
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        | Total cost of systems integration revenues           |                        |                         | 950    |                      |        |        | 6,272  |       |        |       | 9,117  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Cost of other equipment sales revenues                                   |                                                        |                                                      | 1,074                  |                         |        |                      | 1,807  |        |        |       | 1,289  |      
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        |                                                      |                        | Total cost of revenues  |        |                      | 13,202 |        |        |       | 23,170 |       |        |        | 29,389 | 
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Sales and marketing                                                      |                                                        |                                                      | 1,570                  |                         |        |                      | 2,604  |        |        |       | 3,252  |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|General and administrative                                               |                                                        |                                                      | 1,065                  |                         |        |                      | 1,234  |        |        |       | 1,618  |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Research and development                                                 |                                                        |                                                      | 243                    |                         |        |                      | 364    |        |        |       | 287    |      
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        |                                                      |                        | Total cost and expenses |        |                      | 16,080 |        |        |       | 27,372 |       |        |        | 34,546 | 
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                        
|Operating loss                                                           |                                                        |                                                      | (1,311                 | )                       |        |                      | (2,070 | )      |        |       | (2,670 | )    
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|Other income (expenses):                                                 |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Interest income                                        |                                                      |                        | 4                       |        |                      |        | 362    |        |       |        | 454   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Interest expense                                       |                                                      |                        | (219                    | )      |                      |        | (277   | )      |       |        | (643  | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Foreign exchange gains (losses)                        |                                                      |                        | 1                       |        |                      |        | (1,128 | )      |       |        | 1,132 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Othernet                                              |                                                      |                        | 15                      |        |                      |        | 298    |        |       |        | (44   | )     
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                         |                                                        | Other income (expenses)  net                        |                        |                         | (199   | )                    |        |        | (745   | )     |        |       | 899    |       
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|                                                                        
|Loss from consolidated operations before income tax
expense (benefit)    |                                                        |                                                      | (1,510                 | )                       |        |                      | (2,815 | )      |        |       | (1,771 | )    
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income tax expense (benefit)                                             |                                                        |                                                      | 16                     |                         |        |                      | (1,280 | )      |        |       | (926   | )    
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Minority interests in consolidated subsidiaries                          |                                                        |                                                      | 123                    |                         |        |                      | (70    | )      |        |       | 160    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Equity in net loss of affiliated companies                               |                                                        |                                                      | (26                    | )                       |        |                      | (3,180 | )      |        |       | (4,015 | )    
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       
|Net loss                                                                 |                                                        | ¥                                                    | (1,429                 | )                       |        | ¥                    | (4,785 | )      |        | ¥     | (4,700 | )    
|                                                                         |                                                        |                                                      |                        |                         |        |                      |        |        |        |       |        |       |        |       

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##### Table of Contents



|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |      |       | 
|------------------------------------------------------------------------ | ------------------------------------------------------ | ---------------------------------------------------- | ---------------------- | ----------------------- | ---- | -------------------- | ----- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | 
|                                                                         |                                                        |                                                      |                        |                         |      | Year Ended March 31,
|                                                                         |                                                        |                                                      |                        |                         |      |                     
|                                                                         |                                                        |                                                      |                        |                         |      | 1999                 |       | 2000 |      | 2001
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |     
|Statement of Operations Data:                                            |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Connectivity and value-added services revenues:                          |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Dedicated access:                                      |                                                      |                        |                         |      |                      |       |      |      |      |       |      |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | IP Service (including IIJ T1 Standard)               |                        |                         | 49.2 | %                    |       |      | 36.0 | %    |       |      | 36.1 | %   
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | IIJ Economy                                          |                        |                         | 3.6  |                      |       |      | 3.5  |      |       |      | 4.0  |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        |                                                      | Total dedicated access |                         |      | 52.8                 |       |      |      | 39.5 |       |      |      | 40.1 |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Dial-up access                                         |                                                      |                        | 27.8                    |      |                      |       | 17.8 |      |      |       | 13.9 |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Value-added:                                           |                                                      |                        |                         |      |                      |       |      |      |      |       |      |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | Internet data center                                 |                        |                         | 1.1  |                      |       |      | 1.8  |      |       |      | 3.9  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                        | Other                                                |                        |                         | 2.3  |                      |       |      | 1.7  |      |       |      | 2.8  |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        |                                                      | Total value-added      |                         |      | 3.4                  |       |      |      | 3.5  |       |      |      | 6.7  |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other                                                  |                                                      |                        | 0.7                     |      |                      |       | 1.6  |      |      |       | 1.8  |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        | Total connectivity and value-added services revenues |                        |                         | 84.7 |                      |       |      | 62.4 |      |       |      | 62.5 |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Systems integration, including related equipment sales |                                                      |                        | 8.0                     |      |                      |       | 30.2 |      |      |       | 33.1 |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other equipment sales revenues                         |                                                      |                        | 7.3                     |      |                      |       | 7.4  |      |      |       | 4.4  |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        |                                                      |                        | Total revenues          |      |                      | 100.0 |      |      |      | 100.0 |      |      |      | 100.0 | 
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|Cost of connectivity and value-added services:                           |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | International backbone cost                            |                                                      |                        | 25.2                    |      |                      |       | 22.4 |      |      |       | 17.4 |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Domestic backbone cost                                 |                                                      |                        | 7.5                     |      |                      |       | 6.1  |      |      |       | 8.1  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Local access line cost                                 |                                                      |                        | 12.8                    |      |                      |       | 8.3  |      |      |       | 9.9  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other connectivity cost                                |                                                      |                        | 4.8                     |      |                      |       | 4.8  |      |      |       | 4.3  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Depreciation and amortization                          |                                                      |                        | 8.4                     |      |                      |       | 7.2  |      |      |       | 7.4  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other                                                  |                                                      |                        | 17.0                    |      |                      |       | 10.9 |      |      |       | 12.5 |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        | Total cost of connectivity and value-added services  |                        |                         | 75.7 |                      |       |      | 59.7 |      |       |      | 59.6 |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|Cost of systems integration revenues, including related
equipment sales: |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Cost of equipment sales related to systems integration |                                                      |                        | 2.8                     |      |                      |       | 10.9 |      |      |       | 8.6  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other                                                  |                                                      |                        | 3.6                     |      |                      |       | 13.9 |      |      |       | 20.0 |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        | Total cost of systems integration revenues           |                        |                         | 6.4  |                      |       |      | 24.8 |      |       |      | 28.6 |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Cost of other equipment sales revenue                                    |                                                        |                                                      | 7.3                    |                         |      |                      | 7.1   |      |      |      | 4.0   |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        |                                                      |                        | Total cost of revenues  |      |                      | 89.4  |      |      |      | 91.6  |      |      |      | 92.2  | 
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Sales and marketing                                                      |                                                        |                                                      | 10.6                   |                         |      |                      | 10.3  |      |      |      | 10.2  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|General and administrative                                               |                                                        |                                                      | 7.2                    |                         |      |                      | 4.9   |      |      |      | 5.1   |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Research and development                                                 |                                                        |                                                      | 1.7                    |                         |      |                      | 1.4   |      |      |      | 0.9   |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        |                                                      |                        | Total cost and expenses |      |                      | 108.9 |      |      |      | 108.2 |      |      |      | 108.4 | 
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|Operating loss                                                           |                                                        |                                                      | (8.9                   | )                       |      |                      | (8.2  | )    |      |      | (8.4  | )   
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|Other income (expenses):                                                 |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Interest income                                        |                                                      |                        | 0.0                     |      |                      |       | 1.4  |      |      |       | 1.4  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Interest expense                                       |                                                      |                        | (1.4                    | )    |                      |       | (1.1 | )    |      |       | (2.0 | )   
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Foreign exchange gains (losses)                        |                                                      |                        | 0.0                     |      |                      |       | (4.4 | )    |      |       | 3.6  |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Othernet                                              |                                                      |                        | 0.1                     |      |                      |       | 1.2  |      |      |       | (0.2 | )   
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|                                                                         |                                                        | Other income (expenses)  net                        |                        |                         | (1.3 | )                    |       |      | (2.9 | )    |       |      | 2.8  |     
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|Loss from consolidated operations before income tax expense
(benefit)    |                                                        |                                                      | (10.2                  | )                       |      |                      | (11.1 | )    |      |      | (5.6  | )   
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income tax expense (benefit)                                             |                                                        |                                                      | 0.1                    |                         |      |                      | (5.1  | )    |      |      | (2.9  | )   
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Minority interests in consolidated subsidiaries                          |                                                        |                                                      | 0.8                    |                         |      |                      | (0.3  | )    |      |      | 0.5   |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Equity in net loss of affiliated companies                               |                                                        |                                                      | (0.2                   | )                       |      |                      | (12.6 | )    |      |      | (12.6 | )   
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |       |      |      |     
|Net loss                                                                 |                                                        |                                                      | (9.7                   | )%                      |      |                      | (18.9 | )%   |      |      | (14.8 | )%  
|                                                                         |                                                        |                                                      |                        |                         |      |                      |       |      |      |      |      

Year ended March 31, 2001 compared to the year ended March 31, 2000

Connectivity and value-added services revenues.Connectivity services and
value-added services revenues increased 26.2% to ¥19.9 billion in the year
ended March 31, 2001 from ¥15.8 billion in the year ended March 31, 2000.

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##### Table of Contents



Revenues from dedicated access services increased 27.8% to ¥12.8 billion
in the year ended March 31, 2001 from ¥10.0 billion in the year ended March 31,
2000. The increase was primarily a result of strong demand for higher
bandwidth services from new customers and the migration of existing customers
to higher bandwidth services. In particular, our IIJ T1 Standard service
showed strong growth reflecting the strong demand for more capacity (i.e.,
higher bandwidth services) by small and medium-sized companies. Overall, our
IP Service revenues, which include IIJ T1 Standard, increased to ¥11.5 billion
in the year ended March 31, 2001 from ¥9.1 billion in the year ended March 31,
2000.

Revenues from IIJ Economy steadily increased 39.9% to ¥1.3 billion due to
continuing growth in the number of subscribers to this service.

Revenues from dial-up access services decreased 1.6% to ¥4.4 billion in
the year ended March 31, 2001 from ¥4.5 billion in the year ended March 31,
2000. This marginal decrease was primarily a result of declining revenues from
our older dial-up access services: network-type and terminal-type.

Our value-added services revenues increased 141.4% to ¥2.1 billion in the
year ended March 31, 2001 from ¥0.9 billion in the year ended March 31, 2000.
This significant increase was due to the strong growth of our Internet data
center services, which increased by 256.5% to ¥1.2 billion, compared to only
¥0.3 billion in the prior year. Other revenues increased 45% to ¥0.6 billion
in the year ended March 31, 2001 from ¥0.4 billion in the year ended March 31,
2000.

Systems integration revenues.Our revenues from systems integration,
which include equipment sales related to systems integration, increased 38.2%
to ¥10.6 billion in the year ended March 31, 2001 from ¥7.6 billion in the year
ended March 31, 2000. Systems integration revenues, including related
equipment sales, accounted for 33.1% of our total revenues during the period
compared to 30.2% in the previous year. This increase was attributable to the
growth of our systems integration business, particularly the growth of our iBPS
systems integration services which appealed to small and medium sized
businesses. Approximately 36% of systems integration revenues was related to
equipment sales.

Other equipment sales revenues.Our other equipment sales revenues
decreased to ¥1.4 billion in the year ended March 31, 2001 from ¥1.9 billion in
the year ended March 31, 2000 as a result of the lower sales of
telecommunications equipment to Crosswave as compared to the prior year.

Total revenues.Overall, our total revenues increased 26.0% to ¥31.9
billion in the year ended March 31, 2001 from ¥25.3 billion in the year ended
March 31, 2000. As noted above, the primary drivers of this growth were the
increases in systems integration revenues and Internet data center services and
the increases in services for higher bandwidths by our corporate customers.

Cost of connectivity and value-added services revenues. Cost of
connectivity and value-added services revenues increased 25.8% to ¥19.0 billion
in the year ended March 31, 2001 from ¥15.1 billion in the year ended March 31,
2000. The primary increases in cost of connectivity and value-added services
revenues were related to a 67.9% increase in domestic backbone costs, a 50.4%
increase in local access line costs, a 28.9% increase in depreciation and
amortization and a 44.8% increase in other cost. The increases in domestic
backbone costs were primarily attributable to the expansion of our trunk lines
that form our domestic backbone, which underwent substantial upgrades in
connection with our Internet data center services and our support of CATV
services. Our increased costs were partially offset by a 2.0% decrease to ¥5.5
billion in international backbone costs despite the significant expansion of
our international trunk lines between Japan and the United States. In
addition, the international network per unit cost of trunk lines decreased
approximately 48%. The increase in local access line cost was due mainly to
the revenue increase in dedicated access services. The increase in other cost
was related to fees for leased data center facilities and an increased payroll
cost in line with the increase in employees.

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---



##### Table of Contents



Our cost of connectivity and value-added services revenues as a percentage
of the corresponding revenues was 95.3% for the year ended March 31, 2001, a
slight decrease from 95.6% in the year ended March 31, 2000.

Cost of systems integration revenues.Our cost of systems integration
revenues, including related equipment sales, increased 45.4% to ¥9.1 billion in
the year ended March 31, 2001 from ¥6.3 billion in the year ended March 31,
2000. This significant increase in cost of systems integration was primarily a
result of the significant growth of our systems integration businesses as well
as pre-expenditures, principally amortization of software development cost
relating to our iBPS systems integration services, which raised our costs of
systems integration revenues to 86.4% of systems integration revenues from
82.1% in the prior period.

Cost of other equipment sales revenues.Our cost of other equipment sales
revenues decreased 28.7% to ¥1.3 billion in the year ended March 31, 2001 from
¥1.8 billion in the year ended March 31, 2000. This decrease was primarily
related to significant decreases in cost of equipment sold to Crosswave
compared to the prior year.

Sales and marketing.Sales and marketing expenses increased 24.9% to ¥3.3
billion in the year ended March 31, 2001 from ¥2.6 billion in the year ended
March 31, 2000. The increase reflected an increase in sales and marketing
staff and higher advertising and other marketing expenses, particularly for the
promotion of our IIJ4U and Internet data center services. Although in
percentage terms the increase was significant, as a percentage of total
revenues, sales and marketing costs actually declined marginally to 10.2% from
10.3%.

General and administrative.General and administrative expenses increased
31.1% to ¥1.6 billion in the year ended March 31, 2001 from ¥1.2 billion in the
year ended March 31, 2000. The increase in expenses was due to increases in
employees as a result of the growth of our operations and increases in
recruiting expenses.

Research and development.Research and development expenses decreased
21.2% to ¥0.3 billion in the year ended March 31, 2001 from ¥0.4 billion in the
year ended March 31, 2000. This decrease was related to the development of a
proprietary router for 1.5 Mbps services known as a SEIL T1 in the prior
period.

Interest income.Interest income increased to ¥0.5 billion in the year
ended March 31, 2001 from ¥0.4 billion in the year ended March 31, 2000.
Interest income is generated by U.S. dollar denominated monetary assets such as
bonds and deposits. The increase was attributable to the overall appreciation
of the U.S. dollar against the Japanese yen.

Interest expense. Interest expense increased to ¥0.6 billion in the year
ended March 31, 2001 from ¥0.3 billion in the year ended March 31, 2000. This
increase was primarily a result of the interest expense incurred on the
unsecured convertible notes, 1.75 percent due 2005 which was issued in April
2000.

Foreign exchange gains (losses). For the year ended March 31, 2001, we
recorded a foreign exchange gain of ¥1.1 billion, mainly due to a foreign
exchange gain on the U.S. dollar denominated monetary assets attributable to
the depreciation of the Japanese yen against the U.S. dollar.

Other-net. Other expenses for the year ended March 31, 2001 included
losses of ¥398 million on write down of investments in equity securities to
reflect the decline in value considered to be other than temporary and cash
dividend income of ¥433 million on investments in a limited partnership, which
is accounted for by the cost method.

Income tax expense (benefit). Income tax benefit was ¥0.9 billion in the
year ended March 31, 2001 compared to a ¥1.3 billion income tax benefit in the
year ended March 31, 2000. This income tax

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##### Table of Contents



benefit was a result of an increase
of deferred tax assets due to operating loss incurred during the year ended
March 31, 2001 and a decrease in the valuation allowance for deferred tax
assets, attributable primarily to the income tax effect of unrealized gains on
certain available-for-sale securities.

Minority interests in consolidated subsidiaries. Minority interests in
consolidated subsidiaries amounted to income of ¥0.2 billion in the year ended
March 31, 2001 which reflects the portion of losses of majority owned
operations, principally IIJ Technology, which are applicable to the minority
shareholders.

Equity in net loss of affiliated companies.Our equity in net loss of
affiliated companies increased substantially to ¥4.0 billion in the year ended
March 31, 2001 from ¥3.2 billion in the year ended March 31, 2000. This
increase resulted from equity in loss of Crosswave. Crosswaves losses related
mainly to the cost of data communication services, including fees for the lease
of dark fiber and maintenance relating thereto and depreciation expenses.

Year ended March 31, 2000 compared to the year ended March 31, 1999

Connectivity and value-added services revenues.Connectivity services and
value-added services revenues increased 26.2% to ¥15.8 billion in the year
ended March 31, 2000 from ¥12.5 billion in the year ended March 31, 1999.

Revenues from dedicated access services increased 28.2% to ¥10.0 billion
in the year ended March 31, 2000 from ¥7.8 billion in the year ended March 31,
1999. The increase was primarily a result of strong demand for higher
bandwidth services from our large corporate customers as well as the
introduction of our new IIJ T1 Standard dedicated access service. The
year-over-year growth rate of dedicated access revenues was 28.2% for the year
ended March 31, 2000 compared to year-over-year growth of 15.4% for the year
ended March 31, 1999. This increased growth rate reflected an improved
economic outlook in Japan, which we believe has led corporations to begin
increasing their Internet technology and communications budgets and has led to
an increase in bandwidth subscribed for by our subscribers. Subscriptions have
increased particularly in the categories of service at 1 Mbps and above which
generate greater revenues and result in better margins.

Our IP Service revenues increased to ¥9.1 billion in the year ended March
31, 2000 from ¥7.3 billion in the year ended March 31, 1999. This was
primarily due to growth in the number of customers in services at higher
bandwidths and the introduction of our new IIJ T1 Standard. The growth was due
both to growth in new customers and in the migration of a number of customers
from services at lower bandwidths to services at higher bandwidths.

Revenues from IIJ Economy increased by approximately ¥0.4 billion due to
continuing growth in the number of subscribers to this service.

Revenues from dial-up access services increased 9.6% to ¥4.5 billion in
the year ended March 31, 2000 from ¥4.1 billion in the year ended March 31,
1999. Although only increasing 9.6%, this increase is a significant
improvement compared to the year-over-year period from March 31, 1998 to March
31, 1999, which had experienced an 8.3% decrease in revenues. This increase
was primarily a result of two factors: an increase in subscribers to our IIJ4U
service and to other customers which are primarily OEM subscribers of Sharp,
and the resulting increase in revenues offset decreases in revenues to our
other traditional dial-up access services.

Our value-added services revenues increased to ¥0.9 billion in the year
ended March 31, 2000 from ¥0.5 billion in the year ended March 31, 1999. Other
revenues increased to ¥0.4 billion in the year ended March 31, 2000 from ¥0.1
billion in the year ended March 31, 1999.

Systems integration revenues. Our revenues from systems integration,
which include equipment sales related to systems integration, increased 548.1%
to ¥7.6 billion in the year ended

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March 31, 2000 from ¥1.2 billion in the year
ended March 31, 1999. Systems integration revenues, including related
equipment sales, accounted for 30.2% of our total revenues during the period.
This significant increase was attributable to the growth of our systems
integration business and the completion of a number of large systems
integration projects during the period. During the year ended March 31, 2000,
we increased our ownership interests in IIJ Technology and IIJ Media
Communications and included these entities in our consolidated operations
effective July 1, 1999. Our revenues from systems integration for the year
ended March 31, 2000 included an aggregate effect of consolidation of these
subsidiaries in the amount of ¥1,566 million. The corresponding amount of
revenues of these subsidiaries derived directly from outside customers for the
years ended March 31, 1999 and 2000 was ¥1,263 million and ¥1,769 million,
respectively.

Other equipment sales revenues. Our other equipment sales revenues grew
to ¥1.9 billion in the year ended March 31, 2000 from ¥1.1 billion in the year
ended March 31, 1999. This increase was primarily attributable to the sale of
telecommunications equipment to Crosswave, which was approximately ¥1.3 billion
and for which our margins were not significant.

Total revenues. Overall, our total revenues increased 71.3% to ¥25.3
billion in the year ended March 31, 2000 from ¥14.8 billion in the year ended
March 31, 1999. As noted above, the primary drivers of this growth were the
increase in systems integration revenues and the increase in services at higher
bandwidths subscribed for by our corporate customers.

Cost of connectivity services and value-added services revenues. Cost of
connectivity services and value-added services revenues increased 35.0% to
¥15.1 billion in the year ended March 31, 2000 from ¥11.2 billion in the year
ended March 31, 1999. The primary increases in cost of connectivity services
and value-added services revenues were related to a 52.0% increase in
international backbone costs, a 38.2% increase in domestic backbone costs, a
10.9% increase in local access line costs, a 73.5% increase in other
connectivity costs and a 46.6% increase in depreciation and amortization. The
increases in international and domestic backbone costs were primarily
attributable to the expansion of our international trunk lines between Japan
and the United States, where we increased transmission capacity to 775 Mbps
from 445 Mbps, and the trunk lines that form our domestic backbone. However,
in both the international and domestic networks, our per unit cost of trunk
lines decreased as a result of the leasing of higher bandwidths, the conversion
of our domestic trunk lines to Crosswave from other carriers and as a result of
price decreases for capacity. Other connectivity costs increased primarily as
a result of connectivity costs we pay to connect with the A-Bone, which are
connections to the rest of Asia. Depreciation and amortization increased
because of the continuing addition of capitalized equipment for the buildout of
our network.

Our cost of connectivity and value-added services revenues as a percentage
of total revenues was 59.7% for the year ended March 31, 2000, a significant
decrease from 75.7% in the year ended March 31, 1999. However, as a percentage
of revenues from connectivity and value-added services, our cost of
connectivity and value-added services increased to 95.6% from 89.4%. This
increase of cost of connectivity and value-added services as a percentage of
revenues was a result of a number of factors, including the introduction of
less expensive IIJ T1 Standard services, downward revisions to the basic fees
for IIJ4U services, general price competition and resulting price reductions
for our dedicated access services and the aggressive expansion of the capacity
of our network in anticipation of future growth. These factors were partially
offset by the increase in the number of customers at higher bandwidths, which
generate higher-margin revenues, and a decrease in the per unit costs for the
domestic and international trunk lines that comprise our network.

Cost of systems integration revenues. Our cost of systems integration
revenues, including related equipment sales, increased to ¥6.3 billion in the
year ended March 31, 2000 from ¥1.0 billion in the year ended March 31, 1999.
This significant increase in cost of systems integration was primarily a result
of the significant growth of our systems integration businesses.

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Cost of other equipment sales revenues. Our cost of other equipment sales
revenues increased to ¥1.8 billion in the year ended March 31, 2000 from ¥1.1
billion in the year ended March 31, 1999. This increase was primarily related
to significant increases in cost of equipment sold to Crosswave. The cost of
other equipment sales revenues is approximately equal to other equipment sales
revenues because the equipment sales to Crosswave generate low margins.

Sales and marketing. Sales and marketing expenses increased 65.9% to ¥2.6
billion in the year ended March 31, 2000 from ¥1.6 billion in the year ended
March 31, 1999. The increase reflected an increase in sales and marketing
staff and higher advertising and other marketing expenses, particularly for the
promotion of our IIJ4U and IIJ T1 Standard services. Although in percentage
terms the increase was significant, as a percentage of total revenues, sales
and marketing costs actually declined to 10.3% from 10.6%.

General and administrative. General and administrative expenses increased
15.9% to ¥1.2 billion in the year ended March 31, 2000 from ¥1.1 billion in the
year ended March 31, 1999. The increase in expenses relates to increases in
staff as a result of the growth of our operations. As a percentage of total
revenues, this is a decrease to 4.9% from 7.2% for the prior period.

Research and development. Research and development expenses increased to
¥0.4 billion in the year ended March 31, 2000 from ¥0.2 billion in the year
ended March 31, 1999. This increase was primarily related to the development
of a proprietary router for 1.5 Mbps services known as a SEIL T1.

Interest income. Interest income increased to ¥362 million in the year
ended March 31, 2000 from ¥4 million in the year ended March 31, 1999. This
increase was a result of the interest income generated by the investment of the
proceeds in U.S. dollar denominated monetary assets such as commercial paper,
bonds and deposits, from our initial public offering in August 1999.

Interest expense. Interest expense increased marginally to ¥0.3 billion
in the year ended March 31, 2000.

Foreign exchange gains (losses). For the year ended March 31, 2000, we
recorded a foreign exchange loss of ¥1.1 billion mainly due to a foreign
exchange loss on the U.S. dollar proceeds from our initial public offering
attributable to the appreciation of the Japanese yen against the U.S. dollar.

Other-net. We had an increase in other  net of other expenses to ¥0.3
billion that was primarily due to a non-monetary gain as a result of an
exchange of non-marketable securities for marketable common stock in connection
with a merger transaction.

Income tax. Income tax benefit was ¥1.3 billion in the year ended March
31, 2000 compared to a ¥16 million income tax expense in the year ended March
31, 1999. This income tax benefit was a result of a decrease in the valuation
allowance for deferred tax assets, attributable primarily to the income tax
effect of unrealized gains on certain available-for-sale securities.

Minority interests in consolidated subsidiaries. Minority interests in
consolidated subsidiaries amounted to ¥70 million loss in the year ended March
31, 2000, compared to a gain of ¥123 million in the year ended March 31, 1999,
reflecting the consolidation of IIJ Technology and IIJ Media Communications
effective July 1, 1999.

Equity in net loss of affiliated companies. Our equity in net loss of
affiliated companies increased substantially to ¥3.2 billion in the year ended
March 31, 2000 from ¥26 million in the year ended March 31, 1999. This
increase was mainly caused by equity in loss of Crosswave, which began
operations in May 1999. Crosswaves losses related mainly to the cost of data
communications services, including fees for the lease of dark fiber and
maintenance relating thereto and depreciation expenses.

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Liquidity and Capital Resources

Our principal capital and liquidity needs historically have related to the
development and expansion of our network infrastructure, our investments in our
group companies, including Crosswave, sales and marketing activities and
general working capital needs. We have met these capital needs primarily from
cash flows from operations, the issuance of our common shares, capital lease
arrangements and short-term and long-term borrowings.

In August 1999, we completed an initial public offering of 7,160,000 ADSs
representing 3,580 shares of common stock at an initial offering price of
$23.00 per ADS on the Nasdaq National Market. The net proceeds from the
initial public offering, after deducting applicable underwriting discounts and
stock issue cost, was ¥17,359 million.

Net cash used in operating activities was ¥0.3 billion for the year ended
March 31, 2001 and ¥1.2 billion provided for the year ended March 31, 2000.
Cash used in operating activities was primarily a result of a sizable net loss,
an increase in accounts receivable and a deferred income tax benefit, which
were substantially offset by a large amount of depreciation and amortization, a
large amount of equity in net loss of affiliated companies and an increase in
accounts payable.

Net cash used in investing activities was ¥9.5 billion for the year ended
March 31, 2001 and ¥7.1 billion for the year ended March 31, 2000. Cash used
in investing activities for the years ended March 31, 2001 and 2000 included
investments in and advances to affiliated companies, mainly Crosswave, and
purchases of property and equipment.

Net cash provided by financing activities was ¥6.4 billion for the year
ended March 31, 2001 and ¥22.2 billion for the year ended March 31, 2000. Cash
provided by financing activities for the year ended March 31, 2001 consisted
primarily of proceeds from the issuance of unsecured convertible notes in an
aggregate amount of ¥15.0 billion, offset by a decrease in short-term
borrowings.

As of March 31, 2001, our cash decreased to ¥13.6 billion from ¥16.2
billion as of March 31, 2000.

As of March 31, 2001, our short-term borrowings consisted primarily of
unsecured notes payable to banks of ¥50 million and bank overdrafts of ¥5.6
billion. The interest rates of the short-term borrowings ranged from 1.375% to
1.50%. We decreased our short-term borrowings by ¥8.1 billion in the year
ended March 31, 2001 as a result of utilization of cash proceeds from the
issuance of the unsecured convertible notes. The bank overdraft agreements
with certain Japanese banks allow for additional borrowings of up to ¥6.5
billion as of March 31, 2001.

As of March 31, 2001, we had ¥2.8 billion of outstanding long-term loans
payable to banks which were all unsecured, fixed rate loans with interest rates
ranging from 1.25% to 1.96%. These loans mature from September 2002 to January
2004. Additionally as noted above, on April 11, 2000 we issued ¥15.0 billion
of 1.75% unsecured convertible notes due 2005. The notes are subject to
conversion at ¥24,000 thousand per share at any time on or after July 3, 2000
and on or before March 15, 2005.

Substantially all of our short- and long-term borrowings contain
conditions that would allow the banks to require us to provide collateral or
guarantees with respect to the borrowings. However, we have never received a
request to provide such collateral or guarantees to any bank. Our primary
banking relationships are with Sumitomo Mitsui Banking Corporation, Fuji Bank
and Sanwa Bank. The banks are also shareholders and customers of ours.

In general, we procure data communications equipment for our network under
capital lease arrangements. The terms of the leases are generally set based
upon our estimate of the useful life of equipment, typically four years. As of
March 31, 2001, the current portion and the non-current portion

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of capital
lease obligations amounted to ¥1.6 billion and ¥2.7 billion, respectively,
compared with ¥1.6 billion and ¥2.1 billion as of March 31, 2000. The fair
value of equipment under purchase commitments with respect to capital lease
arrangements and purchase commitments for network system equipment outstanding
at March 31, 2001, amounted to ¥0.4 billion and ¥3.6 billion, respectively.

Although it is currently unlikely in the short to medium term, we may need
to obtain additional financing for a variety of reasons. For example, in order
to meet increased demand for our services, we may need to expand and enhance
our network on a larger scale or more quickly, or make available additional
working capital in amounts greater than we anticipate. In order to enhance our
provision of total Internet solutions, we may need to increase capital
expenditures or make investments in affiliated companies that we do not
currently contemplate. If we do need additional capital and if we are
unsuccessful in raising sufficient additional capital, we may need to modify,
delay or abandon some of our future investment plans which could have a
material adverse effect on our business, prospects, financial conditions and
results of operations.

Research and Development, Patents and Licenses, etc.

See the information in Item 4.B. Business overview Research and
development.

Factors Affecting Our Future Financial Results

We expect that the following are the most significant factors likely to
affect the financial results of IIJ and its consolidated subsidiaries.

Revenues

We derive our revenues primarily from recurring monthly fees from our
Internet access services and our value-added services, as well as one-time
project fees and monthly operating fees from systems integration services. Our
connectivity and value-added services revenues accounted for over 60% of our
revenues for the years ended March 31, 2001, and 2000, and over 80% of our
revenues for the year ended March 31, 1999 and over 90% of our revenues for
each of the years ended March 31, 1998 and 1997.

We are seeking to increase our revenue growth by enhancing our Internet
access services through the introduction of a greater variety of access
services and bandwidth options, by expanding our value-added services, systems
integration and Internet data center services under our total network solutions
strategy and by focusing our efforts on capturing market share in high-end
corporate markets that are most attractive to us.

Dedicated access services.Dedicated access services are services that
connect our customers directly to one of our POPs by a dedicated line. Our
three dedicated access services are our IP Service, IIJ T1 Standard and IIJ
Economy. Revenues from dedicated access services increased by 27.8% compared
to the prior fiscal year because we successfully captured demands for higher
bandwidth in the marketplace. Dedicated access services have been the largest
source of revenues for us over the past several years to date accounting for
40.1% of our revenues for the year ended March 31, 2001, 39.5% for the year
ended March 31, 2000, 52.8% for the year ended March 31, 1999, 54.8% for the
year ended March 31, 1998 and 50.3% for the year ended March 31, 1997. One of
the keys to our revenue growth is retaining our dedicated access service
subscribers and migrating them to higher bandwidth services. We offer
discounts for long-term subscribers including a 10% discount on the monthly
fees for IP Service subscribers who enter into three-year contracts. As of
March 31, 2001, 27.5% of our IP Service contracts were for at least three
years. However, in light of the relatively short-term nature of most of our
customer contracts, if customers find our competitors services more attractive
than ours, they may switch to our competitors services and our revenues may be
adversely affected.

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Our revenues will be affected by our ability to retain our existing
business customers and to attract new business customers. We have had a
decline in the number of subscribers to our IP Service, which was attributable
to lower-bandwidth subscribers who opted to shift to services offered by other
ISPs and IIJ T1 Standard because these subscribers preferred lower-priced
services. Of the subscribers that have continued their IP Service, however,
many have migrated to higher bandwidth service. As a result, while the number
of IP Service subscribers declined, we have seen that 62.5% of our IP revenues
are derived from 3 Mbps  150 Mbps contracts and an overall increase in our
revenues from our IP Service. Although price competition is increasing, we
expect market demand for high-end services from business customers to grow
further. Our success will depend in large part on our ability to continue to
shift existing IP Service subscribers to higher bandwidth levels and to
increase the number of subscribers to our other dedicated access services such
as IIJ T1 Standard. Further increase in our revenues from IP Service will also
depend on the degree to which our customers value and appreciate the high
quality of our services, which we have emphasized and will further define and
differentiate from our competitors by the service level agreements we
introduced in June 1999 as well as our capability to offer total network
solutions in combination with our IP services and other services. We are not
seeking to compete by underpricing our competitors but we may have to continue
to introduce second-tier, lower-priced new Internet access services in order to
meet the competition.

We have had an increase in the number of subscribers to our economy-type
dedicated access service that we refer to as IIJ Economy. IIJ Economy costs
less and includes more limited support than IP Service. Our future revenues
will be affected by our ability to continue to attract subscribers to such
economy-type services such as IIJ Economy, or services with ADSL access lines,
as this is one of the fastest growing segments of the Japanese access market.
It is also a market in which there is significant price competition.

We have also seen a number of new and existing subscribers subscribe to
our new IIJ T1 Standard service. IIJ TI Standard is a dedicated-line 1.5 Mbps
service aimed at medium-sized companies with limited requirements but a desire
to have faster Internet connectivity services. As with IIJ Economy, IIJ T1
Standard costs less and includes more limited support and features than our IP
Service. Also, as with IIJ Economy, this is a fast-growing, price competitive
segment of the market. Our ability to attract subscribers to these services
and then to upgrade them to our IP Service as their needs increase will be a
significant factor affecting our future revenues.

Dial-up access services.Another source of our revenues is our dial-up
access services. Dial-up access is access to one of our POPs by making a local
call. Dial-up access services, which include services for corporate customers
and individual users, accounted for 13.9% of our revenues for the year ended
March 31, 2001, 17.8% for the year ended March 31, 2000, 27.8% for the year
ended March 31, 1999, 36.3% for the year ended March 31, 1998 and 40.8% for the
year ended March 31, 1997.

Our revenues from dial-up access services will be affected primarily by
our ability to attract new subscribers to our dial-up access services, to
retain our existing subscribers, and to shift existing corporate subscribers to
our dedicated access services. The timely introduction of additional broadband
access options such as ADSL and FTTH (Fiber to the Home) will be important in
attracting and retaining customers. Our dial-up access service revenues will
also be affected by the continued expansion and development of our high-quality
network, the rate at which we are able to increase our POPs and the number of
subscribers we are able to add in the new coverage areas.

Our ability to capture market share among individual customers has been
somewhat limited due to our relatively low brand-name recognition among
consumers not familiar with the Internet and our limited marketing budget to
date. A primary focus of our efforts to increase our revenues from individual
customers will be our OEM services and services like L-mode, in which our OEM
services business partner markets and sells Internet access services to
individual customers under its own name, and such services are provided through
our Internet network infrastructure. L-mode is the service of regional NTTs,
which is offered through fixed telephone terminals. IIJ acts as Internet
service provider

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in the L-mode service offer. Our ability to introduce and
expand these services successfully will affect our revenue growth from this
source.

Systems integration revenues.We are currently targeting systems
integration to be a driver of growth in revenues and income. In the year ended
March 31, 2001, we had significant growth in our systems integration revenues,
including related equipment sales, which increased by 38.2% to ¥10.6 billion
from ¥7.6 billion in the year ended March 31, 2000 and ¥1.2 billion in the year
ended March 31, 1999. Systems integration consisted of systems and content
development, maintenance and operation of networks and equipment sales related
to systems integration.

Our systems integration business consists of two parts: softwarerelated
and hardware-related. Since the fiscal year ended March 31, 2000, we have
experienced substantial growth in revenues relating to large systems
integration projects which were not specifically related to hardware concerns,
such as equipment sales, but rather related to software concerns, such as the
planning, development and deployment of a large system for our clients.

Over the long term, we seek to improve revenues and margins through
systems integration sales. We seek to retain our systems integration customers
as our customers for higher-margin consulting, co-location services, operation
and maintenance, software development and upgrades included in systems
integration. Systems integration sales also provide other benefits to us.
Most of our systems integration customers also become Internet access service
customers, and we expect those relationships to continue. In addition, these
projects enable us to accumulate experience and build on our reputation in
systems integration, which we believe will give us the opportunity to share in
the growth of the market for such services. As with other equipment sales, our
revenues in any particular fiscal quarter may vary substantially as a result of
concentrated sales from large projects.

We have also increased systems integration revenues through iBPS
contracts, which is our e-business solutions packaged service. We introduced
iBPS services in February 2000 and have expanded our iBPS service lineup with
various additional components such as data storage and CRM (Customer Relations
Management). We expect iBPS services to positively influence our systems
integration revenues and our margins, especially since most of the time and
expense required to develop this package has already been incurred.

The primary seasonal variations in systems integration revenues appear to
relate to Japanese companies budgetary cycles and result in greater revenues
from systems integration at the end of the first half of the fiscal year and
the end of the fiscal year as companies attempt to complete large systems
integration projects during those periods. This seasonality may affect our
revenues on a quarter-to-quarter basis. In addition, as nature of the
business, lack of large-scale contracts or deferred contracts in the business
may adversely affect our revenues growth in systems integration.

Internet Data Center Revenues.Internet data center business was one of
the areas we focused in fiscal 2000. Internet data center business is the core
of our network service infrastructure and enables us to provide comprehensive
network solutions to our customers. In the fiscal year ended March 2001, we
completed the establishment of our multi-site data centers with total 8
Internet data centers nationwide. In the year ended March 31, 2001, we had
significant growth in our Internet data center revenues, which increased to
¥1,237 million from ¥347 million in the year ended March 31, 2000 and ¥161
million in the year ended March 31, 1999. Internet data center services
consisted of data center connectivity services, facility services and operation
and management services. We have seen an increase in the number of customers to
113 at the end of March 2001 from 42 at the end of March 2000.

The growth in our revenues from Internet data center services will depend
on whether and to what extent Japanese corporations outsource server and
network management and operations as data traffic grows. Although the Internet
data center market is experiencing strong price competition, we

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expect to
capitalize on the market demand by offering not only co-location services, but
also comprehensive network solutions services at our data centers in
cooperation with IIJ group companies.

Additional factors affecting revenues. Our revenues will be affected by
the extent and speed with which businesses in Japan exploit the Internet to its
full potential on a commercial basis, including, for example, creating Internet
sites for advertisements, e-commerce between businesses and consumers or
between businesses and businesses and expanding of the range of devices that
access the Internet. The active commercial application of the Internet will
require high-quality and high-capacity connectivity services for both
businesses and individuals. It will also require total Internet solutions
provision including various Internet access services, systems integration and
other value-added services which we are well positioned to provide.

The degree of business usage will also depend upon a variety of factors
including technological advances, reliability of security systems and users
familiarity with and confidence in new technologies. The advancement of
business usage will also depend upon the rate at which Japanese companies in
certain industries begin or significantly increase their Internet usage,
particularly the financial, manufacturing or retail segments. We believe
Japanese companies in these and other industries have not yet fully embraced
the Internet to the extent their counterparts in the United States have.

To increase our revenues from business users, we have increased the access
and connectivity options to include fiber optic lines and ADSL lines. We have
also completed our multi-site data centers and expanded our service offerings
to include systems management and monitoring. We believe these steps will
allow us to sell a greater variety of services to our high-end corporate users
and to capture a greater amount of the current growth and demand. However, we
will still be partially to strongly dependent on increasing acceptance of our
services by large Japanese companies and by increases in their information
technology (IT) budgets.

Although Internet use has continued to grow rapidly in Japan over the past
few years, many businesses have limited their expenditures for information
technologies, including Internet-related items. If the economic situation
continues to decline or does not improve, our revenues may be adversely
affected.

We expect Internet usage to continue to grow rapidly in Japan and that
businesses will continue to diversify their uses of the Internet. Our ability
to offer a broad range of services to meet our customers demands will
significantly influence our future revenues.

Costs and Expenses

We provide our Internet access services on a high-quality network that we
have developed and operate. Our backbone is constructed by using leased lines.
Our primary cost of connectivity services and value-added services revenues is
the leasing fees that we pay for these lines and for the dedicated local access
lines that our subscribers use to connect with our network. Other primary
components of our costs are depreciation and amortization of capital leases for
network equipment, cost of equipment sold, personnel and other expenses for
technical and customer support staff and network operation center costs. Most
of our network equipment is leased rather than purchased to take advantage of
the financing provided by a capital lease arrangement.

We have invested heavily in the past few years in developing and expanding
our network. Our costs have increased substantially as a result. In the year
ended March 31, 2001, our leased line and other connectivity costs were equal
to ¥12.6 billion, or 39.6% of our revenues. In the year ended March 31, 2000,
these costs were equal to ¥10.5 billion, or 41.5% of our revenues. Of this
¥12.6 billion for the year ended March 31, 2001, our international backbone
cost was ¥5.5 billion, domestic backbone cost was ¥2.6 billion, dedicated local
access line cost was ¥3.1 billion and other connectivity cost was ¥1.4 billion.
We collect dedicated local access line fees from the subscribers and pay these
fees over to the carriers.

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Although we expect our international backbone costs to decline in absolute
terms in the year ended March 2002, we expect our domestic backbone costs to
increase as we add capacity to handle the rapidly increasing domestic traffic
as well as to link our Internet data centers. As a result, we expect total
leased line costs to continue to rise in absolute terms. The per unit cost of
leased transmission lines in Japan, and between Japan and the United States, is
declining. Existing carriers and new carriers like Crosswave are expanding
available bandwidth in Japan through installation of new fiber and through
technology that expands bandwidth of existing fiber. Significant additional
capacity between Japan and the United States has come on to the market because
of the completion of a number of undersea cables, and the additional
trans-Pacific capacity is less expensive than capacity obtained from
traditional leased lines. These lower prices will help us reduce our
international backbone costs.

Since April 1999, we have upgraded the capacity of a number of our trunk
lines by using Crosswaves lines. We expect our domestic backbone costs to
increase because we have expanded our domestic backbone network along with our
multi-site Internet data center operations.

If trans-Pacific leased line costs do not decline as we expect, and/or if
the rate of expansion of our domestic backbone is much greater as we expect,
our earnings and results of operations will be adversely affected.

With respect to the cost of systems integration revenues, including
related equipment sales, as noted above, the main determinant of whether our
costs will be high relative to our revenues is whether we are able to generate
significantly higher margin systems integration work. To do so, we must
generate systems integration work that relies more heavily on our engineering
and technological expertise instead of systems integration work that primarily
focuses on the delivery of networking equipment. By doing more planning,
designing and engineering-related work rather than just equipment procurement,
we believe that not only will we be able to increase our margins, but we will
also be able to increase customer satisfaction and our subscriber retention and
repeat business rates because we will be able to provide our customers with
advanced, cost-effective total Internet solutions.

Our iBPS systems integration services are expected to be higher margin
products, especially in the future. In developing this service, we spent
significant time and expense which resulted in higher costs and expenses last
year but should result in higher margins in the next few years as sales
increase with only incremental additional time and expense.

Sales and Marketing

Our sales and marketing expenses consist primarily of costs related to
marketing and general advertising and sales and marketing personnel expenses.
Our sales and marketing expenses will increase as we expand our operations
significantly and as we increase our sales and marketing activities. These
increases will include increases in sales personnel expenses and commissions
payable to sales agents.

General and Administrative

Our general and administrative expenses include primarily expenses
associated with our management, accounting, finance and administrative
functions, including personnel expenses. We believe that these expenses will
increase as we grow our business and as we add staff.

Other Income and Expenses

Our other income and expenses include, among other things, interest income
and expenses and other items such as foreign exchange gains or losses. Most of
our interest expense is from bank borrowing, capital leases and unsecured
convertible notes issued on April 11, 2000. As we increase capital leases or
borrowings in order to finance further development of our backbone and data
centers

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and for other investments, interest expenses will also increase.
Interest income and interest expenses are also affected by the fluctuation of
market interest rates.

Additionally, and importantly, our results of operations may continue to
be affected by volatility in the foreign currency fluctuations, particularly if
we have to convert the U.S. dollar funds to yen at unfavorable exchange rates.
As noted, we continue to hold a significant amount of the proceeds from our
initial public offering in U.S. dollars. These funds are not hedged by
currency borrowings or other hedging instruments. To the extent there is
additional strengthening of the yen, we will have additional accounting foreign
exchange losses. However, to the extent the dollar appreciates and/or we have
uses for the U.S. dollar funds, our results of operations will not be adversely
affected.

Crosswave Communications Inc.

Another important factor that will affect our future financial results is
the performance of Crosswave. Our results of operations will be affected by
the results of operations of Crosswave because we account for Crosswave using
the equity method and Crosswaves operations are an integral part of our
business and we are dependent on its fiber lines and data centers to a certain
extent.

Crosswaves primary expenses are related to the development of its
domestic network, including primarily the fees that it pays to KDDI for dark
fiber and maintenance of the lines as well as the costs of networking
equipment. Other significant expenses include sales and marketing expenses.

We estimate that the total cash required to develop Crosswaves network as
set forth in Crosswaves network development plan and to operate its
infrastructure for the three fiscal years ending March 31, 2004 will be up to
approximately ¥60 billion. However, if Crosswave takes initiatives not
contemplated by its current business plan, such as expansion of its network to
include domestic local access lines, expanding its business to include local
access through fixed wireless access or entering into arrangements or long-term
contracts to obtain rights to international lines or any other businesses,
Crosswaves required cash would increase.

We expect that Crosswave will require additional funds beyond those
currently contemplated in its business plan which it may obtain by securing
loans from third party financial institutions or pursuant to capital raising
transactions in the financial markets. However, there can be no assurance that
funding will be available on a timely basis or at all, or available on terms
acceptable to Crosswave.

The contract with KDDI for dark fiber is treated as an operating lease.
Under the contract, which is through April 2009, payments consist of variable
and fixed portions. The amount of the variable portions will vary depending
upon the level of Crosswaves gross revenue but will increase annually by a
minimum amount defined in the contract. The amount of the fixed portions will
be flat, except that the amount will increase in April 2002 as prescribed for
in the contract. The maintenance fee will also increase annually until the
year ending March 31, 2003 and will stay flat thereafter. Accordingly,
Crosswaves cash payments under the lease in later years of the contract will
be larger than those in earlier years. In accordance with generally accepted
accounting principles the fixed portions of the lease payment and the
maintenance fee will be averaged over the entire term of the lease so that in
the early years Crosswave will recognize expenses which will be greater than
cash payments; then, this treatment will reverse in the later years of the
contract.

We expect that Crosswave will operate at a loss for at least the next
several fiscal years. Crosswaves loss for the year ended March 31, 2001 may
not be representative of future losses as we expect that expenses will increase
after March 31, 2001. However, Crosswave has a limited operating history, the
business environment surrounding Crosswave is uncertain and the manner in which
Crosswave conducts its business may change significantly depending upon a
number of considerations (e.g., networking equipment can be leased or
purchased, or Crosswave may engage in the domestic local line business, the
international leased line business or other businesses that are beyond the
scope of its current business plan). Consequently Crosswaves total annual
expenses could be larger than we

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anticipate, or its revenues could be smaller
than we anticipate; however, we are not directly responsible for any of the
expenses of Crosswave beyond our equity investment.

New Accounting Standards

In June 1998, Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 138.
These statements establish accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133 requires that an entity
recognizes all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or losses or other
comprehensive income (loss), depending on whether a derivative is designated as
part of a hedge transaction and the type of hedge transaction. The ineffective
portion of all hedges will be recognized in earnings. The adoption of SFAS No.
133, as amended by SFAS No. 138, effective April 1, 2001, did not have a
significant impact on the Companys consolidated financial statements.

In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. These statements establish
accounting and reporting standards for business combinations and the treatment
of goodwill and other intangible assets. SFAS No. 141 requires that all
business combinations be accounted for using the purchase method of accounting
and requires tangible, intangible and goodwill assets to be separately
identified and recorded. This statement shall apply to all business
combinations initiated or completed after June 30, 2001. SFAS No. 142 no
longer allows goodwill to be amortized but requires goodwill to be tested for
impairment at least annually. Goodwill should be tested for impairment by
comparing the implied fair value of goodwill, as determined by similar methods
as in a business combination, to its carrying amount. If the carrying amount
of goodwill exceeds its implied fair value, an impairment loss is recognized
equal to that excess. This statement will be effective for fiscal years
beginning after December 15, 2001, with early adoption allowed. Goodwill and
intangible assets acquired after June 30, 2001 should not be amortized.

Upon adoption of SFAS No. 142 effective April 1, 2002, goodwill of
¥1,712,270 thousand as of March 31, 2001 which consist substantially of equity
method goodwill and is being amortized over a five year period, will no longer
be amortized, but will be subject to an annual impairment test. Until this
standard is adopted, such goodwill will continue to be amortized.

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Item 6. Directors and Senior Management and Employees

A. Directors and senior management

Our directors, executive officers and statutory auditors as of June 30,
2001 were:

|                  |  |     |    |          |  |                                                                |  |               |       | 
|----------------- |  | --- | -- | -------- |  | -------------------------------------------------------------- |  | ------------- | ----- | 
|                  |  |     |    |          |  |                                                                |  | Number of IIJ
|                  |  |     |    |          |  |                                                                |  | shares owned 
|Name              |  | Age |    | Position |  | as of June 30, 2001                                           
|                  |  |     |    |          |  |                                                               
|Koichi Suzuki     |  |     | 54 |          |  | President, Chief Executive Officer and
Representative Director |  |               | 2,320 | 
|                 
|                 
|                 
|                 
|Toshiya Asaba     |  |     | 39 |          |  | Director and Co-chief Technology Officer                       |  |               | *     | 
|                 
|                 
|                 
|                 
|Yasuhiro Nishi    |  |     | 42 |          |  | Director, Chief Financial Officer and
Chief Accounting Officer |  |               | *     | 
|                 
|                 
|                 
|                 
|Shunichi Kozasa   |  |     | 52 |          |  | Director                                                       |  |               | *     | 
|                 
|                 
|                 
|                 
|Hideshi Hojo      |  |     | 43 |          |  | Director                                                       |  |               | *     | 
|                 
|                 
|                 
|                 
|Kazumasa Utashiro |  |     | 40 |          |  | Co-chief Technology Officer                                    |  |               | *     | 
|                 
|                 
|                 
|                 
|Akio Onishi       |  |     | 42 |          |  | Director                                                       |  |               | *     | 
|                 
|                 
|                 
|                 
|Hideki Matsushita |  |     | 58 |          |  | Standing Statutory Auditor                                     |  |               | *     | 
|                 
|                 
|                 
|                 
|Tsumoru Suzuki    |  |     | 57 |          |  | Standing Statutory Auditor                                     |  |               | *     | 
|                 
|                 
|                 
|                 
|Shingo Yoshii     |  |     | 53 |          |  | Statutory Auditor                                              |  |               |       | 
|                 
|                 
|                 
|                 
|Hiroo Inoue       |  |     | 48 |          |  | Statutory Auditor                                              |  |               |       | 



---

|* |  | Owns less than 1% of outstanding shares of IIJs common stock.
|- |  | --------------------------------------------------------------

Koichi Suzukihas been our President and Representative Director since
April 1994, and has over 20 years of experience in the computer and
communication industry. From December 1992 to April 1994, Mr. Suzuki was a
Director of IIJ. In addition, Mr. Suzuki is the Representative Director of
Crosswave, Crosswave Facilities, Crosswave Service, IIJ America, IIJ Media
Communications, IIJ Technology, Internet Multifeed, Net Care, Asia Internet
Holding, Asia Internet Holding, Taiwan and AIH Korea. He also serves as a
Director of atom, and Monex, Inc. Prior to joining IIJ, Mr. Suzuki was
employed at Japan Management Association where he served as general manager.

Toshiya Asabahas served as a Director of IIJ since June 1999 and as our
Co-Chief Technology Officer since May 1999. From 1995 to June 1999, Mr. Asaba
was General Manager, Network Engineering Division. Mr. Asaba is also a
Director of Asia Internet Holding, Asia Internet Holding Taiwan, IIJ America
and Internet Multifeed. Mr. Asaba joined us in 1992. Mr. Asaba had over 10
years of Internet experience including three years of Internet-related research
experience and seven years of Internet backbone engineering experience,
including network design, routing and traffic management.

Yasuhiro Nishihas served as a Director of IIJ since June 1999 and as our
Chief Financial Officer and Chief Accounting Officer since May 1999. In
addition, Mr. Nishi serves as Statutory Auditor of Query Solutions and Cyber
Net Communications. From March 1999 to June 1999, Mr. Nishi was the Manager of
the Corporate Planning Department and the General Manager of the Strategic
Sales Division. Prior to joining us, Mr. Nishi had 17 years of experience in
the finance industry working at The Industrial Bank of Japan, Limited where he
had been since 1982.

Shunichi Kozasahas served as a Director of IIJ since June 1999. Mr.
Kozasa joined us in April 1998 as the head of our regional office in Osaka.
Prior to joining us, Mr. Kozasa worked at NTT for over 20 years, most recently
as a general manager of the corporate sales division.

Hideshi Hojohas served as a Director of IIJ since June 2000 and as
General Manager of the Sales Division in the Marketing Headquarters since
February 1998. Mr. Hojo is also a General Manager of the Sales & Marketing
Planning Division of Crosswave, General Manager of the Market Development
Department of IIJ Technology, Director of East Communication Co., Ltd., and
Director

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##### Table of Contents



of Cyber Net Communications Co., Ltd. Mr. Hojo joined us in 1996.
Prior to joining us, Mr. Hojo had 16 years of experience in the field of sales
working for the Itochu Group.

Kazumasa Utashirohas served as a Director of IIJ since June 2001 and as
our Co-Chief Technology Officer since May 1999. He has 16 years of Unix
software development and Internet-related research experiences. From April
1995 to June 1999, Mr. Utashiro was General Manager, Applied Technology
Division. Mr. Utashiro joined us in 1994. Prior to joining us, Mr. Utashiro
worked at Software Research Associates.

Akio Onishihas been a Director of IIJ since June 1998. Mr. Onishi joined
us in April 1997 and served as Chief Strategic Officer from May 1999 to June
2000. Mr. Onishi became Chief Executive Officer of Crosswave in May 2000. Mr.
Onishi is also a Director of Crosswave, Internet Multifeed, Net Care and
DLJdirectSFG Securities Inc. Prior to joining IIJ, Mr. Onishi worked at the
Organization for Economic Cooperation and Development from February 1995 to
April 1997, at McKinsey & Company Japan as a consultant from October 1989 to
February 1995, and at the Ministry of International Trade and Industry of Japan
from April 1982 to July 1989.

Hideki Matsushitahas been a Standing Statutory Auditor of IIJ since June
1998. Mr. Matsushita had been seconded from Dai-Ichi Life Insurance, a leading
life insurance company in Japan, since April 1997.

Tsumoru Suzukihas been a Standing Statutory Auditor of IIJ since June
2001. Prior to joining us, Mr. Suzuki had 29 years of experience in the field
of accounting at Itochu Group.

Shingo Yoshiihas served as a Statutory Auditor of IIJ since June 2001.
Mr. Yoshii has been a corporate officer and assistant general manager of
Network Business Division of Sumitomo Corporation since April 2000. He started
working at Sumitomo Corporation in April 1971.

Hiroo Inouehas served as a Statutory Auditor of IIJ since June 2001. Mr.
Inoue has been general manager of Information Technology Business Department of
Itochu Corporation since August 2000. He started working at Itochu Corporation
in April 1975.

B. Compensation

For the year ended March 31, 2001, the aggregate compensation we paid or
accrued for all of our executive officers, directors and statutory auditors was
approximately ¥198 million, including accrued one-time retirement benefits to
Mr. Hiroyuki Fukase, a former chairman, amounting to ¥36 million. Presently,
our executive officers, directors and statutory auditors are not entitled to
pension, retirement or similar benefits. In May 2000, we implemented a stock
option plan for our executive officers, directors and employees under which
options to acquire a total of 295 shares or 590,000 ADS equivalents, or
approximately 1.2% of total outstanding shares. The options to acquire 100
shares were granted to the executive officers and directors listed above on May
31, 2000. The option exercise price was determined by setting the price at 5%
above the 30-day moving average of closing market prices beginning 45 days
prior to the date of grant which was ¥13,055,664 per share. The options vest
over two years and will be exercisable at various times from 2 years to 10
years from the date of grant. On March 31, 2001, certain directors of IIJ were
provided with 375 warrants exercisable for shares of common stock of IIJ
Technology. Each warrant is exercisable for one share of common stock up to 7
or 8 years from the date of grant at an exercise price of ¥300,000 and was
purchased for 1% of the exercise price.

C. Board practices

The current terms of Messrs. Suzuki, Fukase, Onishi, Nishi, Asaba, Kozasa
and Matsushita expire at the ordinary general meeting of shareholders held for
fiscal 2001. The current terms for Messrs. Hojo, Yoshida and Kobayashi expire
at the ordinary general meeting for shareholders held for

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##### Table of Contents



fiscal 2001. As is
standard practice in Japan, we do not have an audit remuneration committee.
Neither we nor any of our subsidiaries has any service contracts with any of
our board and neither we nor any of our subsidiaries provides benefits to any
of our board upon termination of employment.

D. Employees

As of March 31, 2001, we had 469 employees, including employees of our
consolidated subsidiaries. About 60% of these employees were in engineering,
25% in sales functions and 15% in administrative. We had 151, 222, 266 and 339
employees as of March 31, 1997, 1998, 1999 and 2000. We had an average of
approximately 332 temporary employees for the fiscal year ending March 31,
2001, including temporary employees of our consolidated subsidiaries. Our
employees are not members of any union.

E. Share ownership

The information required by this item is provided in Item 6.A above.

Stock option plan

In June 2001, we implemented a stock option plan for our directors and
employees under which options to acquire a total of 395 shares or 790,000 ADS
equivalents, or approximately 1.8% of total outstanding shares. The options
were granted to 44 directors and employees on August 2, 2001. The option
exercise price for the shares was determined to be ¥2,018,306; greater amount
of the price at 5% above the 30-day moving average of closing market prices
beginning 45 days prior to the date of the grant or the price at 5% above
market price of the common share at the date of grant. The options will be
exercisable at various times from 2 years to 10 years from the date of grant.

Prior to the above stock option plan, in May 2000, we implemented a stock
option plan for our directors and employees under which options to acquire a
total of 295 shares or 590,000 ADS equivalents, or approximately 1.2% of total
outstanding shares. The options were granted to 34 directors and employees on
May 31, 2000. The option exercise price for the shares was determined to be
¥13,055,664 which represents the price 5% above the 30-day moving average of
closing market prices beginning 45 days prior to the date of the grant. The
options will be exercisable at various times from 2 years to 10 years from the
date of grant.




Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders.

The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of the end of July 2001 by each
shareholder known by us to own beneficially more than 5% of our common stock
and all directors and executive officers as a group.

|                                               |  |                    |           |            |  |  |       | 
|---------------------------------------------- |  | ------------------ | --------- | ---------- |  |  | ----- | 
|                                               |  | Shares of         
|                                               |  | Common Stock      
|                                               |  | Beneficially Owned
|                                               |  |                   
|Name of Beneficial Owner                       |  | Number             |           | Percentage
|                                               |  |                    |           |           
|Koichi Suzuki                                  |  |                    | 2,320     |            |  |  | 10.32 | 
|                                              
|                                              
|                                              
|                                              
|Itochu Corp. and affiliates                    |  |                    | 1,611     |            |  |  | 7.17  | 
|                                              
|                                              
|                                              
|                                              
|Sumitomo Corp.                                 |  |                    | 1,582     |            |  |  | 7.04  | 
|                                              
|                                              
|                                              
|                                              
|NTT Communications                             |  |                    | 1,252     |            |  |  | 5.57  | 
|                                              
|                                              
|                                              
|                                              
|Joho Capital LLC                               |  |                    | 2,280,900 | (1)        |  |  | 5.07  | 
|                                              
|                                              
|                                              
|                                              
|Directors and executive officers as a
group(2) |  |                    | 2,499     |            |  |  | 11.12 | 



---

|(1) |  | Stocks of Joho Capital LLC are in the form of ADS, shared voting power.
|--- |  | -----------------------------------------------------------------------

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---



##### Table of Contents



|(2) |  | Includes Koichi Suzukis holding which is also separately set forth
above. No other director or executive officer is a beneficial owner of
more than 5%.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

We are aware of a schedule 13-D filed with the SEC on March 21, 2001 and
amended on April 18, 2001 relating to the entering into by a group of
shareholders including Sumitomo Corporation, NTT Communications Corporation,
Koichi Suzuki, our President, Chief Executive and Representative Director,
Dai-ichi Mutual Life Insurance Company, Hiroyuki Fukase, ITOCHU Corporation,
Software Research Associates Inc., Applied Research Institute, Inc., Sumitomo
Mitsui Banking Corporation, The Fuji Bank, Limited, The Sanwa Bank, Limited,
Toyota Motor Corporation, Sony Corporation, Hiroyuki Fukase, KDDI, I.T.G. Co.,
The Japan Research Institute, Limited, Digital Technologies Corporation,
Toyotsu Telecom Corporation and 13 other shareholders with respective
shareholdings less than 1%. Because the shareholders agreement restricts
transfer of their respective shareholdings without the consent of the other
shareholders party to the agreement, the shareholders as a group may be deemed
to beneficially own 13,222 shares of common stock that are subject to the
shareholders agreement, representing 58.82% of IIJs common stock at the time.
However, the shareholders do not claim beneficial ownership of each others
holdings.

Our ADSs are traded only on the Nasdaq National Market. Our common stock
is not otherwise registered for trading on any exchange. Of the 22,480 shares
of common stock outstanding as of March 31, 2001, 5,996 shares were held in the
form of ADSs, which is equal to 11,992,000 ADSs.

According to The Bank of New York, depositary for our ADSs, as of July 31,
2001, 5,998 shares of our common stock were held in the form of ADRs and there
were 4 ADR holders of record in the United States. According to our register
of shareholders, as of July 31, 2001, there were 99 holders of common stock of
record worldwide. As of July 31, 2001, the Bank of New York was the sole
recordholder of our common stock in the United States and its shareholdings
represented approximately 26.7% of the outstanding common stock on that date.
Because some of these shares were held by brokers or other nominees, the number
of record holders with addresses in the United States might not fully show the
number of beneficial owners in the United States.

Our major shareholders have the same voting rights as other holders of our
common stock. We are not controlled directly or indirectly by any other entity
and are not aware of any arrangement to effect a change in control of IIJ.

B. Related party transactions.

In the ordinary course of business, we have various sales, purchase and
other transactions with companies which are owned 20% to 50% by us and are
accounted for by the equity method. Account balances and transactions with
such 20% to 50% owned companies as of and for the year ended March 31, 2001 are
presented as follows:

|                    |  |                |       | 
|------------------- |  | -------------- | ----- | 
|                    |  | Million of Yen
|                    |  |               
|Accounts receivable |  | ¥              | 268   | 
|                   
|                   
|                   
|                   
|Accounts payable    |  |                | 328   | 
|                   
|                   
|                   
|                   
|Guarantees          |  |                | 12    | 
|                   
|                   
|                   
|                   
|Revenues            |  |                | 2,001 | 
|                   
|                   
|                   
|                   
|Costs and expenses  |  |                | 2,444 | 

Among transactions summarized above, our transactions with Crosswave are as
follows:

Since April 1, 2000 through March 31, 2001, we have paid approximately
¥1,804.6 million for services from Crosswave. IIJ Technology has paid ¥117.7
million in revenues for services that we purchased from Crosswave. IIJ
received payment of approximately ¥315.9 million from Crosswave for network
equipment that IIJ sold to Crosswave. IIJ Technology received ¥214.1 million
for network

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##### Table of Contents



systems that IIJ Technology sold to Crosswave. IIJ also received
approximately ¥11.0 million in various access services that IIJ provided
Crosswave.

In fiscal 2000, we seconded a number of employees to Crosswave. For these
employees, we received approximately ¥157.3 million from Crosswave.
Additionally, we and our subsidiary received approximately ¥284.4 million for
services that were outsourced by Crosswave to us.

There are no loans, or guarantees of any kind, outstanding to or for the
benefit of, any directors, officers, statutory auditors, their respective
family members or enterprises over which they exercise significant influence.

In October 2000 we lent to IIJ America Inc, a subsidiary which we control,
$866,600.94 at 6.77% interest and payable on March 31, 2001. That loan was
repaid by IIJ America and in April 2001 we lent IIJ America another $866,600.94
at 4.71% interest and payable on September 30, 2001. We have not made any
other loans to any subsidiary or affiliate which we control.

C. Interests of experts and counsel.

Not applicable.




Item 8. Financial Information

The information required by this item has been attached hereto beginning on page F-1.




Item 9. The Offer and Listing

American Depositary Shares representing our common stock have been quoted
on the Nasdaq National Market since August 9, 1999 under the symbol IIJI.
The following table shows, for the periods indicated, the high and low closing
per-ADS sale price of the ADSs.

The price history of our ADSs is reflected in the table below:

|                                  |  |  |        |  |  |           |       |     |  |  |  | 
|--------------------------------- |  |  | ------ |  |  | --------- | ----- | --- |  |  |  | 
|                                  |  |  |        |  |  | NASDAQ($)
|                                  |  |  |        |  |  |          
|                                  |  |  |        |  |  | High      |       | Low
|Quarter ended September 30, 1999* |  |  | 82.94  |  |  |           | 23.00 |    
|                                 
|                                 
|                                 
|                                 
|Quarter ended December 31, 1999   |  |  | 129.13 |  |  |           | 38.75 |    
|                                 
|                                 
|                                 
|                                 
|Quarter ended March 31, 2000      |  |  | 123.38 |  |  |           | 69.75 |    
|                                 
|                                 
|                                 
|                                 
|Year ended March 31, 2000*        |  |  |       |  |  |           |      |    
|                                 
|                                 
|                                 
|                                 
|Quarter ended June 30, 2000       |  |  | 67.50  |  |  |           | 33.00 |    
|                                 
|                                 
|                                 
|                                 
|Quarter ended September 30, 2000  |  |  | 61.00  |  |  |           | 32.50 |    
|                                 
|                                 
|                                 
|                                 
|Quarter ended December 31, 2000   |  |  | 42.50  |  |  |           | 8.38  |    
|                                 
|                                 
|                                 
|                                 
|February 2001                     |  |  | 14.25  |  |  |           | 7.81  |    
|                                 
|                                 
|                                 
|                                 
|March 2001                        |  |  | 11.69  |  |  |           | 7.14  |    
|                                 
|                                 
|                                 
|                                 
|Quarter ended March 2001          |  |  | 14.25  |  |  |           | 8.56  |    
|                                 
|                                 
|                                 
|                                 
|Year ended March 31, 2001         |  |  |       |  |  |           |      |    
|                                 
|                                 
|                                 
|                                 
|April 2001                        |  |  | 11.48  |  |  |           | 8.28  |    
|                                 
|                                 
|                                 
|                                 
|May 2001                          |  |  | 10.82  |  |  |           | 8.90  |    
|                                 
|                                 
|                                 
|                                 
|June 2001                         |  |  | 7.26   |  |  |           | 7.05  |    
|                                 
|                                 
|                                 
|                                 
|August 2001                       |  |  | 6.78   |  |  |           | 6.00  |    



---

|* |  | Since the Companys initial public offering in August, 1999.
|- |  | ------------------------------------------------------------

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##### Table of Contents






Item 10. Additional Information

A. Share capital

Not applicable.

B. Memorandum and articles of association

Objects and purposes in our Articles of Incorporation

Article 2 of our Articles of Incorporation states our objects and
purposes:



| |  |  | Provision of a value-added information network under the
Telecommunications Business Law;                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Business of construction for telecommunications;                                                                                                                         
|
| |  |  | Undertaking of maintenance services for telecommunications facilities;                                                                                                   
|
| |  |  | Manufacture, maintenance, sale, purchase, lease, export and
import of telecommunications machinery and equipment, and systems
and software concerning telecommunications;
|
| |  |  | Undertaking of research and study concerning the
telecommunications market and telecommunications technology;                                                            
|
| |  |  | Planning and designing of, and introduction and guidance
concerning the management and operation of telecommunications
systems;                                          
|
| |  |  | The holding of lectures, symposiums and seminars, etc.
concerning telecommunications and information processing;                                                         
|
| |  |  | The sale and purchase of telephone subscribers rights; and                                                                                                              
|
| |  |  | Any and all businesses related or incidental to the foregoing.                                                                                                           

Provisions regarding Directors

There is no provision in the Articles as to a Directors power to vote on
a proposal, arrangement or contract in which the Director is materially
interested, but the Commercial Code of Japan provides that such Director is
required to refrain from voting on such matters at the Board of Directors
meetings.

The Code provides that compensation for Directors is determined at a
general meeting of shareholders of a company. Within the upper limit approved
by the shareholders meeting, the Board of Directors will determine the amount
of compensation for each Director. The Board of Directors may, by its
resolution, leave such decision to the presidents discretion.

The Code provides that a significant loan from third party by a company
should be approved by the Board of Directors. Our Regulations of the Board of
Directors have adopted this policy.

There is no mandatory retirement age for Directors under the Code or the
Articles.

There is no requirement concerning the number of shares one individual
must hold in order to qualify him or her as a Director under the Code or the
Articles.

Rights of shareholders of our common stock

We have issued only one class of shares, our common stock. Rights of
holders of shares of our common stock have under the Code and the Articles of
Incorporation include:
-58-Table of Contents



| |  |  | the right to receive dividends when the payment of dividends
has been approved at a shareholders meeting, with this right
lapsing three full years after the due date for payment according to
a provision in the Articles;                                                                                                                                                                                                                                                                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the right to receive interim dividends as provided for in the
Articles, with this right lapsing three full years after the due
date for payment according to a provision in the Articles;                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | the right to vote at a shareholders meeting (cumulative
voting is not allowed under the Articles);                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | the right to receive surplus in the event of liquidation; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | the right to require us to purchase shares when a shareholder
opposes (i) the transfer of all or material part of the business,
(ii) an amendment of the Articles to establish a restriction on
share transfer, (iii) a share exchange or share transfer to
establish a holding company, (iv) split of the company or (v)
merger; all of which must be consummated by a two-thirds affirmative
vote of the voting rights of the shareholders at a shareholders
meeting at which shareholders having a majority of the voting rights
are in attendance.

The Code provides additional specific rights for shareholders owning a
substantial number of shares.

Shareholders holding 10% or more of the total issued shares have the right
to apply to a court of competent jurisdiction, or competent court, for:



| |  |  | dissolution, and                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | commencement of reorganization proceedings as provided for in
The Company Reorganization Law of Japan.

Shareholders who have held 3% or more of the total issued shares for six
months or more have the right to:



| |  |  | demand the convening of a general meeting of shareholders,                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | apply to a competent court for removal of a director or statutory auditor,                                     
|
| |  |  | apply to a competent court for removal of a liquidator,                                                        
|
| |  |  | apply to a competent court for reorganization of the company, and                                              
|
| |  |  | apply to a competent court for an order to inspect our
business and assets in a special liquidation proceeding.

Shareholders holding 3% or more of the total issued shares have the right to:



| |  |  | examine our accounting books and documents and make copies of them,                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | apply to a competent court for permission to examine
accounting books and documents of a subsidiary and make copies of
them, and
|
| |  |  | appointment of an inspector to inspect our operation or
financial condition.                                                    

Shareholders who have held 1% or more of the total issued shares for six
months or more have the right to:



| |  |  | demand that certain matters be made agenda items at a general
meeting of shareholders, and                                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | apply to a competent court for appointment of an inspector to
review the correctness of the convocation and voting procedures of a
general meeting of shareholders.

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Shareholders who have held 300 shares for six months or more have the
right to demand that certain matters be made objects at a general meeting of
shareholders.

Shareholders who have held any number of shares for six months or more
have the right to demand:



| |  |  | us to institute an action to enforce the liability of one of
our directors or statutory auditors,                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | us to institute an action to recover from a recipient the
benefit of a proprietary nature given in relation to exercising the
right of a shareholder, and
|
| |  |  | a director on our behalf for the cessation of an illegal or
ultra vires action.                                                                          

There is no provision under the Code or the Articles which forces
shareholders to make additional contributions when requested by us.

Under the Code, in order to change the rights of stockholders which are
stipulated and defined in the Articles of Incorporation, we must amend the
Articles. Amendment must be approved by a special resolution of shareholders
where two-thirds of shareholders vote at a shareholders meeting at which
shareholders having a majority of the voting rights of the stock are in
attendance.

Annual general meetings and extraordinary general meetings of shareholders
are convened by a representative director based on the determination to convene
it by the Board of Directors. A shareholder having held 3% or more of our
total outstanding shares for six months or more is entitled to demand the Board
of Directors to convene a shareholders meeting under the Code. Under the
Articles, shareholders of record as of March 31 of each year have the right to
attend the annual general meeting of our shareholders. In order to determine
the shareholders entitled to attend extraordinary general meetings of our
shareholders, we are required to make public notice of record date at least two
weeks prior to the record date. A convocation notice will be sent to these
shareholders at least two weeks prior to the date of the shareholders meeting.

Rights of holders of fractional shares of our common stock

The amendment of the Commercial Code of Japan regarding fractional shares
was enacted in June, 2001 and will be enforced on October 1, 2001. On and
after October 1, 2001, under the amended Commercial Code of Japan (the New
Code), holders of fractional shares representing 1/100th (this ratio can be
varied or fractional share system can be abandoned by being provided in
articles of incorporation) of a share or integral multiples of 1/100th of a
share have the following rights, :



| |  |  | to inspect and copy the register of fractional shares;                                                                                                                                                
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to receive additional shares or money in the event of
cancellation, consolidation or split of shares, stock transfer,
exchange of shares, company split or merger, and to receive residual
properties;
|
| |  |  | to request a company to convert the shares if they are the
fractional shares of convertible shares, unless otherwise provided
for in articles of incorporation and                                    
|
| |  |  | to receive dividend, interim dividend or preemptive rights,
unless otherwise provided for in articles of incorporation;                                                                               

Under the New Code, a certificate of fractional shares cannot be issued by
a company, and the only way for holders of fractional shares to recover their
investment is to request the company to purchase their fractional shares.

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In the event that holders of fractional shares representing 1/100th arise
as a result of issuance of shares, or consolidation or split of shares, such
holders are recorded in the register of fractional shares. Such holders
recorded in the register may exercise their rights.

Restrictions on holders of our common stock

There is no restriction on non-resident or foreign shareholders on the
holding of our shares or on the exercise of voting rights. However, pursuant
to a provision of the Articles, a shareholder who does not have an address or
residence in Japan is required to file its temporary address in Japan or that
of a standing proxy having any address or residence in Japan with our transfer
agent.

There is no provision in our Articles that would have the effect of
delaying, deferring or preventing a change in control that would operate only
with respect to a merger, acquisition or corporate restructuring involving us.

There is no provision in our Articles or other subordinated rules
regarding the ownership threshold, above which shareholder ownership must be
disclosed. Although a shareholder holding more than 5% of the shares in a
public company in Japan is required to disclose such shareholding pursuant to
the Securities Exchange Law of Japan, this is inapplicable to us as we are not
a public company in Japan.

There is no provision in our Articles governing changes in the capital
more stringent than is required by law.

For a description of rights of holders of ADSs, please see the
Description of American Depositary Receipts section in our F-1 Registration
Statement (File No. 333-10584), declared effective on August 3, 1999, as
amended, hereby incorporated by reference.

C. Material contracts

Joint Venture Agreement, dated January 26, 1999 and amended May 10, 1999,
May 31, 1999, September 26, 1999, November 30, 1999, January 26, 2000 and May
11, 2000, among IIJ, Toyota Motor Corporation and Sony Corporation, providing
for the establishment of Crosswave Communications Inc. with initial investment
provided by each of these three companies in the amount of  ¥40 million, ¥30
million and ¥30 million, respectively, as well a commitment to subscribe to
newly issued shares of Crosswave at the same ratio.

Right of Use Agreement for Transmission Network Facilities, dated November
30, 1998, between Crosswave Communications Inc. and Teleway Corporation
(presently, KDDI Corporation), granting Crosswave a ten-year indefeasible right
of use to use lines of optical fiber, optical fiber cable and other
telecommunication facilities needed to transmit telecommunication signals over
a total distance of 7,670 kilometers throughout 45 of Japans 47 prefectures.
The grant is renewable for additional three-year periods. The fixed fees for
the grant, which are subject to renegotiation in the event that changed
circumstance make the fees unreasonable, are set at ¥2 billion for the first
three years and then increase yearly to a maximum almost ¥11 million by the
tenth year.

Memorandum on Amendments to the Original Agreement, dated November 30,
1998, between Crosswave Communications Inc. and Teleway Corporation (presently,
KDDI Corporation), revising, among other things, the total distance and pricing
terms and also establishing fees for the maintenance of transmission
facilities. The fixed fees for the right of use were maintained at ¥2 billion
for the first three years but reduced to ¥4 billion for the fourth through the
tenth years. Fees linked with sales were set at 5% of the gross sales for each
business year. Maintenance fees were set at ¥500 million for the first year,
¥1 billion for the second year, ¥2 billion for the third year and ¥2.5 billion
for all subsequent years.

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Confirmation of IRU Fees, dated November 30, 1998, between Crosswave
Communications Inc. and Teleway Corporation (presently, KDDI Corporation),
confirming the pricing terms set forth under the Right of Use Agreement for
Transmission Network Facilities and the Memorandum on Amendments to the
Original Agreement such that the target amounts for the fixed fees and fees
linked with sales would range from ¥2.4 billion in the first year to ¥9 billion
in the tenth year.

Memorandum on Business Cooperation, dated November 30, 1998, between
Crosswave Communications Inc. and Teleway Corporation (presently, KDDI
Corporation), providing that Teleway will perform services for Crosswave with
regard to the design, operation and maintenance of the network relating to the
Original Agreement and that Crosswave will not engage in voice/sound
transmission services using telephone switching equipment. The term of this
memorandum is the same as the Original Agreement.

Basic Agreement to Delegate Services, dated April 1, 1997, between IIJ and
IIJ Technology Inc. sets forth a general framework and basic conditions, such
as treatment of confidential information and intellectual property, pursuant to
which IIJ will consign certain business to IIJ Technology. The content, scope
and other detailed matters of the business to be entrusted are to be provided
in separate contracts. The term of the agreement was one year with a provision
for automatic one-year renewals.

Shareholders Agreement Relating to the Establishment of INTERNET
MULTIFEED CO., dated August 20, 1997, between Nippon Telegraph and Telephone
Corporation and the Registrant, establishing the terms under which the two
parties will cooperate in the incorporation and financing of Internet Multifeed
Co. The term of this agreement is three years with a provision for automatic
one-year renewals.

Basic Agreement to Delegate Services, dated January 30, 1995, between IIJ
and IIJ Media Communications Inc. setting forth a general framework and basic
conditions, such as treatment of confidential information, pursuant to which
IIJ will consign certain Internet-related business to IIJ Media Communications
Inc. The content, scope and other detailed matters of the business to be
entrusted are to be provided in separate contracts. The term of the agreement
is one year with a provision for automatic one-year renewals.

Memorandum of Understanding Regarding Technical Cooperation, dated April
1, 1997, between IIJ and IIJ Media Communications Inc., setting forth a general
framework and basic conditions, such as treatment of confidential information
and intellectual property, pursuant to which the two companies will cooperate
on technical research and development relating to Internet applications and
services. The term of the memorandum is three years and it may be extended upon
agreement between the parties.

Basic Agreement to Delegate Services, dated April 1, 1998, between IIJ and
Net Care, Inc. (with English translation), setting forth a general framework
and basic conditions, such as treatment of confidential information, pursuant
to which IIJ will consign certain Internet-related business to Net Care, Inc.
The content, scope and other detailed matters related to the business to be
entrusted are to be provided in separate contracts. The term of the agreement
is one year with a provision for automatic one-year renewals.

Under the Individual Agreement on Entrustment of Business between IIJ and
Asia Internet Holding Co., Ltd., dated July 1, 1998 Asia Internet Holding,
entrusting IIJ with the construction of AIHs network, management and operation
of AIHs network and related business in exchange for a monthly fee of ¥10
million. This term of this agreement is one year with a provision for
automatic one-year renewals subject to certain conditions.

Enforcement Rules with regard to the Payment of Fee for Right of Use of
Transmission Network Facilities, dated September 30, 1999, between Crosswave
Communications Inc. and KDDI Corporation, establishing rules with regard to the
payment of a fee by Crosswave Communications Inc.

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to KDDI Corporation for its
right of use of transmission network facilities, pursuant to Article 22 of the
Right of Use Agreement for Transmission Network Facilities, executed on
November 30, 1998. The rules took effect on May 1, 1999.

Sales Cooperation Agreement, dated August 20, 1999, between Crosswave
Communications Inc. and Internet Initiative Japan Inc. is an annually renewable
agreement pursuant to which IIJ acts as a sales agent for Crosswave
Communications and refers IIJ customers for non-Internet services in exchange
for a sales commission of between 5 and 20% of the monthly basic line fee for
IIJs high-speed backbone services and Wide-Area Ethernet platform services.

Under the Business Entrustment Agreement, dated April 1, 1999 between
Crosswave Communications Inc. and Internet Initiative Japan Inc. Crosswave
Communications Inc., entrusting to IIJ daily accounting business, preparation
of trial balance and statement of accounts, and purchase of goods in exchange
for ¥500,000 per month. This term of this agreement is one year with a
provision for automatic one-year renewals subject to certain conditions.

Under the Agreement On Trial Service Of the International Dedicated Line
dated June 1, 2000 between Crosswave Communications Inc. and Internet
Initiative Japan Inc. Crosswave Communications is to provide IIJ with a 155
mbps leased line between Japan and the U.S. on a trial basis beginning July
2000 at a fee of ¥20 million per month.

Under the Data Center Service Agency Agreement dated March 1, 2000 between
Crosswave Communications Inc. and Internet Initiative Japan Inc. Crosswave
Communications leases racks in its data centers at a fixed amount per rack. The
payment terms for the leases are set at fair market value based on market
pricing. The term of the agreement is three years with a provision for
automatic one-year renewals subject to certain conditions.

D. Exchange controls.

The Foreign Exchange and Foreign Trade Law of Japan, frequently referred
to as the Foreign Exchange Law, and related cabinet orders and ministerial
ordinances govern the issuance of notes or shares by companies and the
acquisition and holding of shares by exchange non-residents and foreign
investors under the Foreign Exchange Law.

Exchange non-residents are:



| |  |  | individuals who do not reside in Japan; and           
| | - |  | ------------------------------------------------------
|
| |  |  | corporations whose principal offices are not in Japan.

Generally, branches and other offices located within Japan of non-resident
corporations are regarded as exchange residents of Japan and branches and other
offices of Japanese corporations located outside Japan are regarded as exchange
non-residents of Japan.

Foreign investors are:



| |  |  | individuals who do not reside in Japan;                                                                                                                                                                                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | corporations which are organized under the laws of foreign
countries whose principal offices are located outside Japan; and                                                                                                                               
|
| |  |  | corporations in which more than 50% of the shares are held by
individuals who do not reside in Japan and/or corporations which are
organized under the laws of foreign countries or whose principal
offices are located outside Japan or a majority of the

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| |  |  | officers (or
officers having the power of representation) are persons who do not
reside in Japan.
| |  |  | -------------------------------------------------------------------------------------------------

Under the Foreign Exchange Law certain aspects of foreign exchange and
foreign trade transactions by exchange non-residents and foreign investors
require post-transaction reporting. The Minister of Finance of Japan also has
the power to impose licensing requirements for transactions in limited
circumstances.

An acquisition of shares of a Japanese company by an exchange non-resident
from a resident of Japan is not generally subject to any prior filing
requirements. In exceptional circumstances, the MOF may require a prior
approval for an acquisition. An exchange non-resident who acquired 10% or more
of the shares must file an report concerning such acquisition with the MOF
within 15 days after such acquisition.

Under the Foreign Exchange Law, dividends paid on, and the proceeds of
sales in Japan of shares held by exchange non-residents generally may be
converted into any foreign currency and repatriated abroad.

E. Taxation

Japanese Taxation

The following is a discussion summarizing material Japanese tax
consequences to an owner of shares or ADSs who is a non-resident of Japan or a
non-Japanese corporation without a permanent establishment in Japan to which
the relevant income is attributable. The statements regarding Japanese tax
laws set forth below are based on the laws in force and as interpreted by the
Japanese taxation authorities as at the date hereof. These statements are
subject to changes in the applicable Japanese laws or double taxation
conventions occurring after that date. This summary is not exhaustive of all
possible tax considerations which may apply to a particular investor.
Potential investors should satisfy themselves as to



| |  |  |   the overall tax consequences of the ownership and disposition
of shares or ADSs, including specifically the tax consequences
    under Japanese law,
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |   the laws of the jurisdiction of which they are resident, and                                                                                        
|
| |  |  |   any tax treaty between Japan and their country of residence,
by consulting their own tax advisers.                                                  

Generally, a non-resident of Japan or a non-Japanese corporation is
subject to Japanese withholding tax on dividends paid by Japanese corporations.
Stock splits, except when treated as dividends in certain conditions, are not
subject to Japanese income tax.

The Convention Between the United States of America and Japan for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income (the Treaty), establishes the maximum rate of Japanese
withholding tax which may be imposed on dividends paid to a United States
resident or corporation not having a permanent establishment in Japan. A
permanent establishment in Japan is generally a fixed place of business for
industrial or commercial activity in Japan. Under the Treaty, the maximum
withholding rate for most shareholders is limited to 15% of the gross amount
actually distributed. However, the maximum rate is 10% of the gross amount
actually distributed, if the recipient is a corporation and



| |  |  |   during the part of the paying corporations taxable year
which precedes the date of payment of the dividend and during the
    whole of its prior taxable year, if any, at least
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | 10% of the voting
shares of the paying corporation were owned by the recipient
corporation, and                                                                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | not more than 25% of the gross income of the paying
corporation for such prior taxable year, if any, consists of
interest or dividends as defined in the Treaty.

For purposes of the Treaty and Japanese tax law, U.S. holders of ADRs will
be treated as the owners of the shares underlying the ADSs evidenced by the
ADRs.

Unless an applicable tax treaty, convention or agreement reduces the
maximum rate of withholding tax, the rate of Japanese withholding tax
applicable to dividends paid by Japanese corporations to a non-resident or
non-Japanese corporation is 20%. Japan has entered into income tax treaties,
conventions or agreements, reducing the above-mentioned withholding tax rate to
15% for investors with a number of countries. These countries include, among
others, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland, the United Kingdom and the United States of America. The
withholding tax rate is further reduced if investors and IIJ have some capital
relationship as provided for in an applicable tax treaty.

Non-resident holders who are entitled to a reduced rate of Japanese
withholding tax on payment of dividends by IIJ must submit the required form in
advance through IIJ to the relevant tax authority before payment of dividends.
The required form is the Application Form for Income Tax Convention regarding
Relief from Japanese Income Tax on Dividends. A standing proxy for
non-resident holders may provide such application service. See Description of
Capital Stock-General. With respect to ADSs, the reduced rate is applicable
if The Bank of New York, as depositary, or its agent submits two Application
Forms for Income Tax Convention-one form must be submitted before payment of
dividends, and the other form must be submitted within eight months after our
fiscal year-end. To claim the reduced rate, a non-resident holder of ADSs will
be required to file proof of taxpayer status, residence and beneficial
ownership, as applicable. The non-resident holder will also be required to
provide information or documents clarifying its entitlement to the tax
reduction as may be required by the depositary.

A non-resident holder of shares or ADSs who does not submit an application
in advance will be entitled to claim from the relevant Japanese tax authority a
refund of withholding taxes withheld in excess of the rate of an applicable tax
treaty.

Gains derived from the sale outside Japan of the shares or ADSs by a
non-resident of Japan or a non-Japanese corporation are in general not subject
to Japanese income or corporation taxes. In addition, gains derived from the
sale of shares or ADSs within Japan by a non-resident of Japan or non-Japanese
corporation not having a permanent establishment in Japan are in general not
subject to Japanese income or corporation taxes. An individual who has
acquired shares or ADSs as a distributee, legatee or donee may have to pay
Japanese inheritance and gift taxes at progressive rates.

IIJ has paid or will pay any stamp, registration or similar tax imposed by
Japan in connection with the issue of the shares, except that IIJ will not pay
any tax payable in connection with the transfer or sale of the shares by a
holder thereof.

United States Taxation

The following discusses United States federal income tax consequences of
the ownership of shares or ADSs. It only applies to holders of shares or ADSs
as capital assets. It does not address special classes of holders, some of
whom may be subject to other rules including:



| |  |  | tax-exempt entities,        
| | - |  | ----------------------------
|
| |  |  | certain insurance companies,

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| |  |  | broker-dealers,                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | traders in securities that elect to mark-to-market,                                                
|
| |  |  | investors liable for alternative minimum tax,                                                      
|
| |  |  | investors that actually or constructively own 10% or more of
the voting stock of IIJ,              
|
| |  |  | investors that hold shares of ADSs as part of a straddle or a
hedging or conversion transaction, or
|
| |  |  | investors whose functional currency is not the U.S. dollar.                                        

This discussion is based on the tax laws of the United States, including
the Internal Revenue Code of 1986, as amended, its legislative history,
existing and proposed regulations and administrative and judicial
interpretations, as currently in effect, as well as on the Treaty. These laws
are subject to change, possibly on a retroactive basis. In addition, this
discussion is based in part upon the representations of the depositary and the
assumption that each obligation in the deposit agreement relating to the ADRs
and any related agreement will be performed in accordance with its terms.

For purposes of this discussion, a U.S. holder is a beneficial owner of
shares or ADSs that is:



| |  |  | a citizen or resident of the United States,                                                                                                                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a domestic corporation,                                                                                                                                                                                  
|
| |  |  | an estate whose income is subject to United States federal
income tax regardless of its source, or                                                                                                       
|
| |  |  | a trust if a United States court can exercise primary
supervision over the trusts administration and one or more United
States persons are authorized to control all substantial decisions
of the trust.

This discussion addresses only United States federal income taxation. You
should consult your own tax advisor regarding the United States federal, state
and local and other tax consequences of owning and disposing of shares and ADSs
in your particular circumstances.

In general, and taking into account the earlier assumptions, for United
States federal income tax purposes, if you hold ADRs evidencing ADSs, you will
be treated as the owner of the shares represented by those ADSs. Exchanges of
shares for ADSs, and ADSs for shares, generally will not be subject to United
States federal income tax.

The discussion under the headings Taxation of Dividends and Taxation of
Capital Gains assumes that we will not be treated as a Passive Foreign
Investment Company (PFIC) for U.S. federal income tax purposes. For a
discussion of the rules that apply if we are treated as a PFIC, see the
discussion under the heading below PFIC Rules.

Taxation of dividends

Under the United States federal income tax laws if you are a U.S. holder,
you must include in your gross income the gross amount of any dividend paid by
IIJ out of its current or accumulated earnings and profits, as determined for
United States federal income tax purposes. You must include any Japanese tax
withheld from the dividend payment in this gross amount even though you do not
in fact receive it.

The dividend is ordinary income that you must include in income when you,
in the case of shares, or the depositary, in the case of ADSs, receive the
dividend, actually or constructively. The dividend will not be eligible for
the dividends-received deduction.

The amount of the dividend distribution that you must include in your
income as a U.S. holder will be the U.S. dollar value of the Japanese yen
payments made, determined at the spot Japanese yen/U.S. dollar rate on the date
the dividend distribution is includible in your income, regardless of whether
the payment is in fact converted into U.S. dollars. Generally, any gain or
loss resulting from

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currency exchange fluctuations during the period from the
date you include the dividend payment in income to the date you convert the
payment into U.S. dollars will be treated as ordinary income or loss. The gain
or loss generally will be from sources within the United States for foreign tax
credit limitation purposes.

Distributions in excess of current and accumulated earnings and profits,
as determined for United States federal income tax purposes, will be treated as
a return of capital to the extent of your basis in the shares or ADSs and
thereafter as capital gain.

Subject to certain limitations, the Japanese tax withheld in accordance
with the Treaty and paid over to Japan will be creditable against your United
States federal income tax liability. To the extent a refund of the tax
withheld is available to you under Japanese law or under the Treaty, the amount
of tax withheld that is refundable will not be eligible for credit against your
United States federal income tax liability. Please see Japanese Taxation,
above, for the procedures for obtaining a tax refund.

Dividends constitute income from sources outside the United States, but
generally will be passive income or, if received by financial institutions,
financial services income. Passive income or financial services income must
be treated separately from other types of income for purposes of computing the
foreign tax credit allowable to you.

Distributions of additional shares to you with respect to shares or ADSs
that are made as part of a pro rata distribution to all shareholders of IIJ
generally will not be subject to United States federal income tax.

Taxation of capital gains

If you are a U.S. holder and sell or otherwise dispose of your shares or
ADSs, you will recognize capital gain or loss for United States federal income
tax purposes equal to the difference between the U.S. dollar value of the
amount that you realize and your tax basis, determined in U.S. dollars, in your
shares or ADSs. Capital gain of a noncorporate U.S. holder is generally taxed
at a maximum rate of 20% for property held more than one year. Additionally,
gain or loss will generally be from sources within the United States for
foreign tax credit limitation purposes.

PFIC rules

We do not believe that we will be treated as a PFIC for United States
federal income tax purposes for our most recent taxable year. However, this
conclusion is a factual determination made annually and thus may be subject to
change. Because of the nature of our income and assets we could be determined
to be a PFIC for our current and subsequent taxable years.

In general, if you are a U.S. holder, we will be a PFIC with respect to
you if for any of our taxable years in which you held our ADSs or shares:



| |  |  | at least 75% of our gross income for the taxable year is
passive income, or                                                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | at least 50% of the value, determined on the basis of a
quarterly average of our assets are attributable to assets that
produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents,
other than certain rents and royalties derived in the active conduct of a trade
or business, annuities and gains from assets that produce passive income. If a
foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and
as receiving directly its proportionate share of the other corporations
income.

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If we are treated as a PFIC, and you are a U.S. holder that did not make a
mark-to-market election, as described below, you will be subject to special
rules with respect to:



| |  |  | any gain you realize on the sale or other disposition of your
shares or ADSs and                                                                                                                                                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | any excess distribution that we make to you, generally, any
distributions to you during a single taxable year that are greater
than 125% of the average annual distributions received by you in
respect of the shares or ADSs during the three preceding taxable
years or, if shorter, your holding period for the shares or ADSs.

Under these rules:



| |  |  | the gain or excess distribution will be allocated ratably
over your holding period for the shares or ADSs,                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the amount allocated to the taxable year in which you
realized the gain or excess distribution will be taxed as ordinary
income,      
|
| |  |  | the amount allocated to each prior year, with certain
exceptions, will be taxed at the highest tax rate in effect for that
year, and  
|
| |  |  | the interest charge generally applicable to underpayments of
tax will be imposed in respect of the tax attributable to each such
year.

Special rules apply for calculating the amount of the foreign tax credit
with respect to excess distributions by a PFIC.

If you own shares or ADSs in a PFIC you may make a mark-to-market
election. If you make this election, you will not be subject to the PFIC rules
described above. Instead, in general, you will include as ordinary income each
year the excess, if any, of the fair market value of your shares or ADSs at the
end of the taxable year over your adjusted basis in your shares or ADSs, and
you will recognize the additional gain, if any, on sale or other disposition of
your shares or ADSs as ordinary income for that taxable year. You will also be
allowed to take an ordinary loss in respect of the excess, if any, of the
adjusted basis of your shares or ADSs over their fair market value at the end
of the taxable year or over their final sale or disposition prices, but only to
the extent of the net amount of previously included income as a result of the
mark-to-market election. Your basis in the shares or ADSs will be adjusted to
reflect any such income or loss amounts.

If you own shares or ADSs during any year that IIJ is a PFIC you must file
Internal Revenue Service Form 8621.

F. Dividends and paying agents

Not applicable.

G. Statement by experts

Not applicable.

H. Subsidiary Information

Not applicable.

I. Documents on display

Our 20-F, 6-K reports and other filings with the SEC can be inspected and
copied without charge at the SECs public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the SECs regional office located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You

-68-



---



##### Table of Contents



may also get
copies by calling the SEC at 1-800-SEC-0330 or by writing the SEC upon payment
of a prescribed fee.

In addition, documents referred to in this 20-F filing may be inspected at
Internet Initiative Japans Tokyo headquarters, located at Takebashi Yasuda
Bldg., 3-13, Kanda Nishiki-cho, Chiyoda-ku, Tokyo 101-0054, Japan.

J. Subsidiary information

Not applicable.




Item 11. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk exposures are to foreign exchange rate and
interest rate fluctuations.

As a result of our initial public offering in August 1999, we retained a
significant amount of dollar-denominated assets, primarily demand and
short-term time deposits and they remain as of today.

Our periodic payment obligations under certain trans-Pacific dedicated
line leases are denominated in U.S. dollars. We do not have any material
periodic U.S. dollar revenue to match the dollar payments, and thus we are
exposed to fluctuations in the yen-dollar exchange rate to the extent the
dollar-denominated payments are not hedged.

Our exposure to fluctuations in interest rates relates primarily to
short-term and long-term borrowings, convertible notes and lease obligations
related to capitalized equipment. As of March 31, 2001, short-term borrowings
of ¥5.6 billion were payable at a variable interest rate, ranging from 1.375 to
1.50 percent and long-term borrowings included a ¥1.0 billion variable interest
rate bank loan at 1.34 percent. In November 2000, we entered into a
three-year-period interest swap contract to manage its interest rate exposure
resulting in a fixed interest rate by which the effective interest rate for the
long-term loan of ¥1.0 billion outstanding at March 31, 2001 after giving
effect to such swap agreement was 1.96 percent per annum.

We will continue to obtain fixed rate long-term borrowings and capital
lease obligations to the extent that current favorable interest rate conditions
continue. However, we may reconsider this policy if these conditions change.

We hold certain marketable equity securities as investments with market
price risk and their fair value and net unrealized gains as of March 31, 2001
amounted to ¥6.7 billion and ¥6.0 billion, respectively.




Item 12. Description of Securities Other than Equity Securities

Not applicable.

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##### Table of Contents






PART II




Item 13. Defaults, Dividend Arrearages and Delinquencies.

Not applicable.




Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Use of proceeds

On August 9, 1999, we completed an initial public offering of ADSs
representing our shares. The offering was lead managed by Goldman Sachs & Co.
and Morgan Stanley & Co. Incorporated. The ADSs are quoted on the Nasdaq
National Market. Registration Statement (No. 333-10584) for the offering was
declared effective August 3, 1999.

|                               |  |                     |       |                     |  |                    |             | 
|------------------------------ |  | ------------------- | ----- | ------------------- |  | ------------------ | ----------- | 
|                               |  |                     |       |                     |  | Aggregate Offering
|                               |  | Amount of Shares    |       | price of Shares    
|                               |  | Registered and Sold |       | Registered and Sold
|                               |  |                     |       |                    
|Internet Initiative Japan Inc. |  |                     | 3,600 |                     |  | $                  | 165,600,000 | 
|                              
|                              
|                              
|                              
|ASCII Corporation              |  |                     | 300   |                     |  |                    | 13,800,000  | 
|                              
|                              
|                              
|                              
|JAFCO                          |  |                     | 80    |                     |  |                    | 3,680,000   | 
|                              
|                              
|                              
|                              
|Nikko Capital                  |  |                     | 40    |                     |  |                    | 1,840,000   | 
|                              
|                              
|                              
|                              
|ORIX Capital                   |  |                     | 30    |                     |  |                    | 1,380,000   | 
|                              
|                              
|                              
|                              
|Sanwa Capital                  |  |                     | 20    |                     |  |                    | 920,000     | 
|                               |  |                     |       |                     |  |                    |             | 
|Total                          |  |                     | 4,070 |                     |  | $                  | 187,220,000 | 



---

|* |  | Based on initial public offering price before underwriting discount and
offering expenses.
|- |  | ------------------------------------------------------------------------------------------

In connection with the issuance and distribution of ADSs, we incurred
approximately $14,886,300 in expenses. Of these expenses, $11,160,000 was for
underwriting discounts and commissions, approximately $816,800 was to reimburse
the underwriters for certain of their expenses, and approximately $2,909,500
was for other expenses related to the registration and offering of the ADSs.
No finders fees were paid.

We received approximately ¥17.5 billion in net proceeds from the sale of
ADSs in the initial public offering. Of the net proceeds, we have used
approximately ¥8 billion for our investment in Crosswave, ¥0.7 billion for our
investment in IIJ Technology, ¥0.4 billion for repayment of long-term borrowing
and ¥3.5 billion for lease of plant and equipment.




Item 15. [Reserved]




Item 16. [Reserved]

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---



##### Table of Contents






PART III




Item 17. Financial Statements.

Not applicable.




Item 18. Financial Statements.

See Financial Statements for Internet Initiative Japan Inc. and
Subsidiaries attached hereto beginning on page F-1. The separate Financial
Statements for Crosswave Communications Inc. to the Form 20-F Annual Report for
the year ended March 31, 2001 are also attached hereto immediately following
the Financial Statements for Internet Initiative Japan Inc. and Subsidiaries.




Item 19. Exhibits.

|    |  |                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1 |  | Articles of Incorporation, as amended (with English translation)                                                                                                                                            
|   
|   
|   
|   
|   
|1.2 |  | Share Handling Regulations (with English translation)*                                                                                                                                                      
|   
|   
|   
|   
|   
|1.3 |  | Regulations of the Board of Directors (with English translation)*                                                                                                                                           
|   
|   
|   
|   
|   
|1.4 |  | Regulations of the Board of Statutory Auditors (with English translation)*                                                                                                                                  
|   
|   
|   
|   
|   
|2.1 |  | Specimen Common Stock Certificate*                                                                                                                                                                          
|   
|   
|   
|   
|   
|2.2 |  | Bylaws of the IIJ Employee Shareholders Association (with English translation)*                                                                                                                            
|   
|   
|   
|   
|   
|4.1 |  | Right of Use Agreement for Transmission Network Facilities, dated November 30,
1998, between Crosswave Communications Inc. and Teleway Corporation (presently,
KDD Corporation) (with English translation)**
|   
|   
|   
|   
|   
|4.2 |  | Memorandum on Amendments to the Original Agreement, dated November 30, 1998,
between Crosswave Communications Inc. and Teleway Corporation (presently, KDD
Corporation) (with English translation)**        
|   
|   
|   
|   
|   
|4.3 |  | Confirmation of IRU Fees, dated November 30, 1998, between Crosswave
Communications Inc. and Teleway Corporation (presently, KDD Corporation) (with
English translation)**                                  
|   
|   
|   
|   
|   
|4.4 |  | Memorandum on Business Cooperation, dated November 30, 1998, between Crosswave
Communications Inc. and Teleway Corporation (presently, KDD Corporation) (with
English translation)*                         
|   
|   
|   
|   
|   
|4.5 |  | Basic Agreement to Delegate Services, dated April 1, 1997, between Internet
Initiative Japan Inc. and IIJ Technology Inc. (with English translation)*                                                       
|   
|   
|   
|   
|   
|4.6 |  | Shareholders Agreement Relating to the Establishment of INTERNET MULTIFEED
CO., dated August 20, 1997, between Nippon Telegraph and Telephone Corporation
and the Registrant (with English translation)*   
|   
|   
|   
|   
|   
|4.7 |  | Basic Agreement to Delegate Services, dated January 30, 1995, between Internet
Initiative Japan Inc. and IIJ Media Communications Inc. (with English
translation)*                                          

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##### Table of Contents



|     |  |                                                                                                                                                                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|4.8  |  | Memorandum of Understanding Regarding Technical Cooperation, dated April 1,
1997, between Internet Initiative Japan Inc. and IIJ Media Communications Inc.
(with English translation)*                                                                                                                                              
|    
|    
|    
|    
|    
|4.9  |  | Basic Agreement to Delegate Services, dated April 1, 1998, between Internet
Initiative Japan Inc. and Net Care, Inc. (with English translation)*                                                                                                                                                                                    
|    
|    
|    
|    
|    
|4.10 |  | Software License Agreement between Trusted Information Systems, Inc. (TIS)
and IIJ, dated November 9, 1994, including two amendment agreements thereto,
dated March 30, 1998 and February 17, 1999 (TIS merged into Networks
Associates, Inc. (NAI) on April 30, 1998, and NAI acceded to the Agreement.)*                      
|    
|    
|    
|    
|    
|4.11 |  | Purchase and Sales Agreement, dated January 8, 1999, between Internet
Initiative Japan Inc. and Crosswave Communications Inc. (with English
translation)*                                                                                                                                                                           
|    
|    
|    
|    
|    
|4.12 |  | Individual Agreement on Entrustment of Business between Internet Initiative
Japan Inc. and Asia Internet Holding Co., Ltd., dated July 1, 1998 (with
English translation)*                                                                                                                                                          
|    
|    
|    
|    
|    
|4.13 |  | Enforcement Rules with regard to the Payment of Fee for Right of Use of
Transmission Network Facilities, dated September 30, 1999, between Crosswave
Communications Inc. and KDD Corporation establishes rules with regard to the
payment of a fee by Crosswave Communications Inc. to KDD Corporation (with
English translation)***
|    
|    
|    
|    
|    
|4.14 |  | Sales Cooperation Agreement, dated August 20, 1999, between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                          
|    
|    
|    
|    
|    
|4.15 |  | Business Entrustment Agreement, dated April 1, 1999 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                          
|    
|    
|    
|    
|    
|4.16 |  | Letter of Confirmation, dated November 16, 1999 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                              
|    
|    
|    
|    
|    
|4.17 |  | Agreement On Trial Service Of the International Dedicated Line dated June 1,
2000 between Crosswave Communications Inc. and Internet Initiative Japan Inc.
(with English translation)***                                                                                                                                            
|    
|    
|    
|    
|    
|4.18 |  | Data Center Service Agency Agreement dated March 1, 2000 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                     
|    
|    
|    
|    
|    
|4.19 |  | Shareholders Agreement, dated May 11, 2000, between Internet Initiative Japan
Inc., Toyota Motor Corporation and Sony Corporation ****                                                                                                                                                                                             
|    
|    
|    
|    
|    
|8.1  |  | List of Subsidiaries (see Organizational Structure in Item
4.C. of this Form 20-F/A)                                                                                                                                                                                                                                              



---

|*    |  | Incorporated by reference to the corresponding exhibit to our Form F-1
Registration Statement (File No. 333-10584) declared effective on August
3, 1999.                                                                                                                                                                                  
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|**   |  | Incorporated by reference to the corresponding exhibit to the Form F-1 of
Crosswave Communications Inc. (File No. 333-12264) declared effective on
August 3, 1999. Portions of the corresponding exhibit to our Form F-1
Registration Statement (File No. 333-10584) were previously omitted
pursuant to a confidential treatment request.
|    
|    
|    
|    
|***  |  | Incorporated by reference to the corresponding exhibit to the Form F-1 of
Crosswave Communications, Inc. (File No. 333-12264) declared effective on
August 3, 2000.                                                                                                                                                                       
|    
|    
|    
|    
|**** |  | Incorporated by reference to the corresponding exhibit to our annual
report on Form F-20/A (File No. 0-30204) filed on October 23, 2000.                                                                                                                                                                                                  

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##### Table of Contents






SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F/A and that it has duly caused and authorized the undersigned to sign
this amendment to the annual report on its behalf.

|                       |  |                                |        |  |                                                               
|---------------------- |  | ------------------------------ | ------ |  | --------------------------------------------------------------
|                       |  | Internet Initiative Japan Inc. |        |  |                                                               
|                      
|                       |  |                                | By:    | 
|                       |  |                                |        |  | (-s- Koichi Suzuki)                                           
|                       |  |                                | Name:  |  | Koichi Suzuki                                                 
|                      
|                      
|                      
|                      
|                       |  |                                | Title: |  | President, Chief
Executive Officer and Representative Director
|                      
|                      
|                      
|                      
|Date:
October 11, 2001 |  |                                |        |  |                                                               

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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries

Index to Consolidated Financial Statements

|                                                                                                               |  |      |      | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                               |  | Page
|                                                                                                               |  |     
|Independent Auditors Report                                                                                   |  |      | F-2  | 
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Balance Sheets as of March 31, 2000 and 2001                                                      |  |      | F-3  | 
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Statements of Operations for Each of
the Three Years in the Period Ended March 31, 2001           |  |      | F-5  | 
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Statements of Shareholders Equity for Each of
the Three Years in the Period Ended March 31, 2001 |  |      | F-7  | 
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Consolidated Statements of Cash Flows for Each of
the Three Years in the Period Ended March 31, 2001           |  |      | F-9  | 
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Notes to Consolidated Financial Statements                                                                     |  |      | F-11 | 

F-1



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Internet Initiative Japan Inc.:

We have audited the accompanying consolidated balance sheets of Internet
Initiative Japan Inc. (IIJ) and subsidiaries (the Company) as of March 31,
2000 and 2001, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three years in the period
ended March 31, 2001 (all expressed in Japanese yen). These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Crosswave
Communications Inc. (Crosswave), a 37.85 percent owned affiliated company,
IIJs investment in which is accounted for by use of the equity method. The
Companys equity investment of ¥4,768,866 thousand and ¥11,368,160 thousand in
Crosswaves net assets at March 31, 2000 and 2001, respectively, and equity in
net losses of ¥33,238 thousand, ¥3,139,814 thousand and ¥4,136,869 thousand for
the period from October 28, 1998 (date of incorporation) to March 31, 1999 and
for the years ended March 31, 2000 and 2001, respectively, are included in the
accompanying consolidated financial statements. The financial statements of
Crosswave were audited by other auditors whose report dated May 31, 2001 has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Crosswave, is based solely on the report of such other auditors.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of March 31, 2000 and 2001, and the
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

Our audits also comprehended the translation of Japanese yen amounts into U.S.
dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 1. Such U.S. dollar amounts are
presented solely for the convenience of readers outside Japan.

(-s- Deloitte Touche Tohmatsu)

DELOITTE TOUCHE TOHMATSU

Tokyo, Japan
August 14, 2001

F-2



---



##### Table of Contents






Internet Initiative Japan Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2000 and 2001

---

|                                                             |                                                                                                                                                                                |                      |            |                  |            |          |            |            |            |   |         |              |         | 
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------- | ---------- | ---------------- | ---------- | -------- | ---------- | ---------- | ---------- | - | ------- | ------------ | ------- | 
|                                                             |                                                                                                                                                                                |                      |            |                  |            |          |            |            |            |   |         | Thousands of
|                                                             |                                                                                                                                                                                |                      |            |                  |            |          |            |            |            |   |         | U.S. Dollars
|                                                             |                                                                                                                                                                                |                      |            | Thousands of Yen |            | (Note 1)
|                                                             |                                                                                                                                                                                |                      |            |                  |            |         
|ASSETS                                                       |                                                                                                                                                                                | 2000                 |            | 2001             |            | 2001    
|                                                             |                                                                                                                                                                                |                      |            |                  |            |         
|CURRENT ASSETS:                                              |                                                                                                                                                                                |                      |            |                  |            |          |            |            |            |   |         |             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Cash (Note 12)                                                                                                                                                                 |                      | ¥          | 16,158,439       |            |          | ¥          | 13,570,707 |            |   | $       | 108,099      |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Short-term investments (Notes 2 and 12)                                                                                                                                        |                      |            | 791,275          |            |          |            |           |            |   |         |             |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts receivable, net of allowance for
doubtful accounts of ¥73,265 thousand and
¥123,745 thousand ($986 thousand) at
March 31, 2000 and 2001, respectively
(Notes 3 and 4) |                      |            | 4,499,685        |            |          |            | 5,417,456  |            |   |         | 43,153       |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Inventories                                                                                                                                                                    |                      |            | 214,001          |            |          |            | 245,520    |            |   |         | 1,956        |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Prepaid expenses                                                                                                                                                               |                      |            | 226,213          |            |          |            | 253,648    |            |   |         | 2,020        |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other current assets (Note 10)                                                                                                                                                 |                      |            | 1,007,274        |            |          |            | 347,600    |            |   |         | 2,769        |        
|                                                             |                                                                                                                                                                                |                      |            |                  |            |          |            |            |            |   |         |              |        
|                                                             |                                                                                                                                                                                | Total current assets |            |                  | 22,896,887 |          |            |            | 19,834,931 |   |         |              | 157,997 | 
|                                                            
|                                                            
|                                                            
|                                                            
|INVESTMENTS IN AND ADVANCES TO
AFFILIATED COMPANIES (Note 4) |                                                                                                                                                                                |                      | 5,301,608  |                  |            |          | 13,895,654 |            |            |   | 110,687 |             
|                                                            
|                                                            
|                                                            
|                                                            
|OTHER INVESTMENTS (Notes 2 and 12)                           |                                                                                                                                                                                |                      | 4,278,915  |                  |            |          | 8,455,840  |            |            |   | 67,356  |             
|                                                            
|                                                            
|                                                            
|                                                            
|PROPERTY AND EQUIPMENT, net (Notes 5 and 6)                  |                                                                                                                                                                                |                      | 5,542,863  |                  |            |          | 6,927,575  |            |            |   | 55,182  |             
|                                                            
|                                                            
|                                                            
|                                                            
|GUARANTEE DEPOSITS                                           |                                                                                                                                                                                |                      | 701,891    |                  |            |          | 837,115    |            |            |   | 6,668   |             
|                                                            
|                                                            
|                                                            
|                                                            
|OTHER ASSETS (Note 12)                                       |                                                                                                                                                                                |                      | 278,580    |                  |            |          | 689,687    |            |            |   | 5,494   |             
|                                                             |                                                                                                                                                                                |                      |            |                  |            |          |            |            |            |   |         |              |        
|TOTAL                                                        |                                                                                                                                                                                | ¥                    | 39,000,744 |                  |            | ¥        | 50,640,802 |            |            | $ | 403,384 |             
|                                                             |                                                                                                                                                                                |                      |            |                  |            |          |            |            |            |   |         |              |        

(Continued)

F-3



---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2000 and 2001

---

|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |         | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ---------------- | ---------- | -------- | ---------- | ----------- | ---------- | - | ------- | ------------ | ------- | 
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         | Thousands of
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         | U.S. Dollars
|                                              |                                                                                                   |                            |            | Thousands of Yen |            | (Note 1)
|                                              |                                                                                                   |                            |            |                  |            |         
|LIABILITIES AND SHAREHOLDERS' EQUITY          |                                                                                                   | 2000                       |            | 2001             |            | 2001    
|                                              |                                                                                                   |                            |            |                  |            |         
|CURRENT LIABILITIES:                          |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |             
|                                             
|                                             
|                                             
|                                             
|                                              | Short-term borrowings (Note 7)                                                                    |                            | ¥          | 13,690,376       |            |          | ¥          | 5,620,000   |            |   | $       | 44,767       |        
|                                             
|                                             
|                                             
|                                             
|                                              | Accounts payable (Note 4)                                                                         |                            |            | 3,559,334        |            |          |            | 4,313,811   |            |   |         | 34,362       |        
|                                             
|                                             
|                                             
|                                             
|                                              | Accrued expenses                                                                                  |                            |            | 309,387          |            |          |            | 211,302     |            |   |         | 1,683        |        
|                                             
|                                             
|                                             
|                                             
|                                              | Other current liabilities (Note 10)                                                               |                            |            | 930,608          |            |          |            | 455,212     |            |   |         | 3,626        |        
|                                             
|                                             
|                                             
|                                             
|                                              | Long-term borrowingscurrent portion
(Notes 7 and 12)                                             |                            |            | 690,000          |            |          |            |            |            |   |         |             |        
|                                             
|                                             
|                                             
|                                             
|                                              | Capital lease obligationscurrent portion
(Note 6)                                                |                            |            | 1,564,922        |            |          |            | 1,644,354   |            |   |         | 13,098       |        
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |        
|                                              |                                                                                                   | Total current liabilities  |            |                  | 20,744,627 |          |            |             | 12,244,679 |   |         |              | 97,536  | 
|                                             
|                                             
|                                             
|                                             
|LONG-TERM BORROWINGS (Notes 7 and 12)         |                                                                                                   |                            | 200,000    |                  |            |          | 2,800,000  |             |            |   | 22,304  |             
|                                             
|                                             
|                                             
|                                             
|CONVERTIBLE NOTES (Notes 7 and 12)            |                                                                                                   |                            |           |                  |            |          | 15,000,000 |             |            |   | 119,484 |             
|                                             
|                                             
|                                             
|                                             
|CAPITAL LEASE OBLIGATIONSNoncurrent
(Note 6) |                                                                                                   |                            | 2,099,571  |                  |            |          | 2,679,224  |             |            |   | 21,341  |             
|                                             
|                                             
|                                             
|                                             
|ACCRUED RETIREMENT AND PENSION COSTS
(Note 9) |                                                                                                   |                            | 114,226    |                  |            |          | 124,640    |             |            |   | 993     |             
|                                             
|                                             
|                                             
|                                             
|DEFERRED TAX LIABILITIESNoncurrent (Note 8)  |                                                                                                   |                            | 3,109      |                  |            |          | 188,413    |             |            |   | 1,501   |             
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |        
|                                              |                                                                                                   | Total liabilities          |            |                  | 23,161,533 |          |            |             | 33,036,956 |   |         |              | 263,159 | 
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |        
|MINORITY INTEREST                             |                                                                                                   |                            | 838,071    |                  |            |          | 676,096    |             |            |   | 5,386   |             
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |        
|COMMITMENTS AND CONTINGENCIES
(Notes 4 and 6) |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |             
|                                             
|                                             
|                                             
|                                             
|SHAREHOLDERS EQUITY (Notes 10 and 11):       |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |             
|                                             
|                                             
|                                             
|                                             
|                                              | Common stock, ¥50,000 par value
authorized, 75,520 shares;
issued and outstanding, 22,480 shares |                            |            | 7,082,336        |            |          |            | 7,082,336   |            |   |         | 56,415       |        
|                                             
|                                             
|                                             
|                                             
|                                              | Additional paid-in capital                                                                        |                            |            | 12,028,557       |            |          |            | 17,068,353  |            |   |         | 135,959      |        
|                                             
|                                             
|                                             
|                                             
|                                              | Accumulated deficit                                                                               |                            |            | (6,062,112       | )          |          |            | (10,762,334 | )          |   |         | (85,728      | )      
|                                             
|                                             
|                                             
|                                             
|                                              | Accumulated other comprehensive income                                                            |                            |            | 1,952,359        |            |          |            | 3,539,395   |            |   |         | 28,193       |        
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |        
|                                              |                                                                                                   | Total shareholders equity |            |                  | 15,001,140 |          |            |             | 16,927,750 |   |         |              | 134,839 | 
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |        
|TOTAL                                         |                                                                                                   | ¥                          | 39,000,744 |                  |            | ¥        | 50,640,802 |             |            | $ | 403,384 |             
|                                              |                                                                                                   |                            |            |                  |            |          |            |             |            |   |         |              |        

See notes to consolidated financial statements.

(Concluded)

F-4



---



##### Table of Contents






Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Operations
Three Years in the Period Ended March 31, 2001

---

|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |         | 
|--------------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------- | ---------------- | --------------------------- | ---------- | ---------------- | ---------- | -------- | ---------- | --------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ------- | ------------ | ------- | 
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         | Thousands of
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         | U.S. Dollars
|                                                                      |                                        |                                                               |                  |                             |            | Thousands of Yen |            | (Note 1)
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |         
|                                                                      |                                        |                                                               |                  |                             |            | 1999             |            | 2000     |            | 2001      |            | 2001
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |     
|REVENUES (Note 4):                                                    |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Connectivity and value-added services: |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        |                                                               | Dedicated access |                             | ¥          | 7,797,457        |            |          | ¥          | 9,998,533 |            |      | ¥          | 12,779,284 |            |   | $       | 101,794,284  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        |                                                               | Dial-up access   |                             |            | 4,101,291        |            |          |            | 4,496,159 |            |      |            | 4,422,884  |            |   |         | 35,231       |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        |                                                               | Value-added:     |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        |                                                               |                  | Internet Data Center        |            |                  | 160,991    |          |            |           | 346,805    |      |            |            | 1,236,524  |   |         |              | 9,850   | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        |                                                               |                  | Other                       |            |                  | 335,182    |          |            |           | 537,660    |      |            |            | 898,996    |   |         |              | 7,161   | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        |                                                               | Other            |                             |            | 109,709          |            |          |            | 407,912   |            |      |            | 591,819    |            |   |         | 4,714        |        
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|                                                                      |                                        |                                                               |                  | Total                       |            |                  | 12,504,630 |          |            |           | 15,787,069 |      |            |            | 19,929,507 |   |         |              | 158,750 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Systems integration                                           |                  |                             | 1,178,961  |                  |            |          | 7,640,360  |           |            |      | 10,555,675 |            |            |   | 84,082  |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Equipment sales                                               |                  |                             | 1,085,259  |                  |            |          | 1,874,503  |           |            |      | 1,390,407  |            |            |   | 11,076  |             
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|                                                                      |                                        |                                                               |                  | Total revenues              |            |                  | 14,768,850 |          |            |           | 25,301,932 |      |            |            | 31,875,589 |   |         |              | 253,908 | 
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|COST AND EXPENSES:                                                    |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Cost of connectivity and value-added
services (Notes 4 and 6) |                  |                             | 11,178,332 |                  |            |          | 15,090,991 |           |            |      | 18,983,305 |            |            |   | 151,213 |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Cost of systems integration                                   |                  |                             | 950,198    |                  |            |          | 6,272,322  |           |            |      | 9,117,410  |            |            |   | 72,626  |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Cost of equipment sales                                       |                  |                             | 1,073,845  |                  |            |          | 1,806,974  |           |            |      | 1,288,530  |            |            |   | 10,264  |             
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|                                                                      |                                        |                                                               |                  | Total cost                  |            |                  | 13,202,375 |          |            |           | 23,170,287 |      |            |            | 29,389,245 |   |         |              | 234,103 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Sales and marketing (Note 13)                                 |                  |                             | 1,569,731  |                  |            |          | 2,603,462  |           |            |      | 3,251,900  |            |            |   | 25,903  |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | General and administrative                                    |                  |                             | 1,065,119  |                  |            |          | 1,234,189  |           |            |      | 1,617,984  |            |            |   | 12,888  |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Research and development                                      |                  |                             | 242,575    |                  |            |          | 363,546    |           |            |      | 286,850    |            |            |   | 2,285   |             
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|                                                                      |                                        |                                                               |                  | Total cost and expenses     |            |                  | 16,079,800 |          |            |           | 27,371,484 |      |            |            | 34,545,979 |   |         |              | 275,179 | 
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|OPERATING LOSS                                                        |                                        |                                                               | (1,310,950       | )                           |            |                  | (2,069,552 | )        |            |           | (2,670,390 | )    |            |            | (21,271    | )
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|OTHER INCOME (EXPENSES):                                              |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Interest income                                               |                  |                             | 4,035      |                  |            |          | 362,485    |           |            |      | 454,527    |            |            |   | 3,620   |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Interest expense                                              |                  |                             | (218,583   | )                |            |          | (277,274   | )         |            |      | (643,266   | )          |            |   | (5,124  | )           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Foreign exchange gains (losses)                               |                  |                             | 777        |                  |            |          | (1,127,921 | )         |            |      | 1,132,083  |            |            |   | 9,017   |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                        | Othernet (Note 2)                                            |                  |                             | 14,572     |                  |            |          | 297,591    |           |            |      | (44,024    | )          |            |   | (350    | )           
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|                                                                      |                                        |                                                               |                  | Other income (expenses)net |            |                  | (199,199   | )        |            |           | (745,119   | )    |            |            | 899,320    |   |         |              | 7,163   | 
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|LOSS FROM CONSOLIDATED OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT) |                                        |                                                               | (1,510,149       | )                           |            |                  | (2,814,671 | )        |            |           | (1,771,070 | )    |            |            | (14,108    | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|INCOME
TAX EXPENSE (BENEFIT) (Note 8)                                 |                                        |                                                               | 15,320           |                             |            |                  | (1,280,123 | )        |            |           | (925,678   | )    |            |            | (7,374     | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES                       |                                        |                                                               | 122,866          |                             |            |                  | (70,484    | )        |            |           | 159,850    |      |            |            | 1,273      |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|EQUITY IN NET LOSS OF AFFILIATED COMPANIES (Note 4)                   |                                        |                                                               | (26,089          | )                           |            |                  | (3,179,469 | )        |            |           | (4,014,680 | )    |            |            | (31,979    | )
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        
|NET LOSS                                                              |                                        | ¥                                                             | (1,428,692       | )                           |            | ¥                | (4,784,501 | )        |            | ¥         | (4,700,222 | )    |            | $          | (37,440    | )
|                                                                      |                                        |                                                               |                  |                             |            |                  |            |          |            |           |            |      |            |            |            |   |         |              |        

(Continued)

F-5



---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Operations
Three Years in the Period Ended March 31, 2001

---

|                                                     |  |      |         |          |  |      |          |      |  |   |          |   |  |              |        |  
|---------------------------------------------------- |  | ---- | ------- | -------- |  | ---- | -------- | ---- |  | - | -------- | - |  | ------------ | ------ | -
|                                                     |  |      |         |          |  |      |          |      |  |   |          |   |  | U.S. Dollars
|                                                     |  | Yen  |         | (Note 1)
|                                                     |  |      |         |         
|                                                     |  | 1999 |         | 2000     |  | 2001 |          | 2001
|                                                     |  |      |         |          |  |      |          |     
|WEIGHTED-AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING |  |      | 18,868  |          |  |      | 21,190   |      |  |   | 22,480   |   |  |              |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|BASIC AND DILUTED NET LOSS PER
COMMON SHARE          |  | ¥    | (75,720 | )        |  | ¥    | (225,791 | )    |  | ¥ | (209,085 | ) |  | $            | (1,665 | )

See notes to consolidated financial statements.

(Concluded)

F-6



---



##### Table of Contents






Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity
Three Years in the Period Ended March 31, 2001

---

|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  
|---------------------------------------------------------- |  | ----------- | ------ | ------ |  | ---------------- | --------- | ------------ |  | --------- | ---------- | ------------- |  | ----- | ----------- | ----------- |  | - | --------- |  |  | --- | ------ | - | ---------- | - | ---------- | -
|                                                           |  |             |        |        |  | Thousands of Yen
|                                                           |  |             |        |        |  |                 
|                                                           |  | Shares of   |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |  
|                                                           |  | Common      |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |  
|                                                           |  | Stock       |        |        |  |                  |           |              |  |           |            |               |  |       |             | Accumulated |  |   |           |  |  |     |        |  
|                                                           |  | Outstanding |        |        |  |                  |           |              |  |           |            | Retained      |  | Other |             |             |  |   |           |  |  |    
|                                                           |  | (including  |        |        |  |                  |           | Additional   |  | Earnings  |            | Comprehensive |  |       |             |             |  |   |           | 
|                                                           |  | treasury    |        | Common |  | Paid-in          |           | (Accumulated |  | Income    |            | Treasury      |  |       |             |            
|                                                           |  | stock)      |        | Stock  |  | Capital          |           | Deficit)     |  | (Note 11) |            | Stock         |  | Total
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |      
|BALANCE, April 1, 1998                                     |  |             | 18,880 |        |  | ¥                | 1,100,000 |              |  | ¥         | 619,118    |               |  | ¥     | 151,081     |             |  | ¥ | 7,668     |  |  | ¥   | (9,799 | ) |            | ¥ | 1,868,068  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Net loss                                                   |  |             |        |        |  |                  |           |              |  |           |            |               |  |       | (1,428,692  | )           |  |   |           |  |  |     |        |   |            |   | (1,428,692 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Other comprehensive income,
net of tax                     |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   | 2,972     |  |  |     |        |   |            |   | 2,972      |  
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  
|Total comprehensive loss                                   |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   | (1,425,720 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Sale of treasury stock                                     |  |             |        |        |  |                  |           |              |  |           | 32,788     |               |  |       |             |             |  |   |           |  |  |     | 9,799  |   |            |   | 42,587     |  
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  
|BALANCE, MARCH 31, 1999                                    |  |             | 18,880 |        |  |                  | 1,100,000 |              |  |           | 651,906    |               |  |       | (1,277,611  | )           |  |   | 10,640    |  |  | Nil |        |   | 484,935    |  
|                                                          
|                                                          
|                                                          
|                                                          
|Net loss                                                   |  |             |        |        |  |                  |           |              |  |           |            |               |  |       | (4,784,501  | )           |  |   |           |  |  |     |        |   |            |   | (4,784,501 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Other comprehensive income,
net of tax                     |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   | 1,941,719 |  |  |     |        |   |            |   | 1,941,719  |  
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  
|Total comprehensive loss                                   |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   | (2,842,782 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Initial public offering, net of
stock issue cost           |  |             | 3,600  |        |  |                  | 5,982,336 |              |  |           | 11,376,651 |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   | 17,358,987 |  
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  
|BALANCE, MARCH 31, 2000                                    |  |             | 22,480 |        |  |                  | 7,082,336 |              |  |           | 12,028,557 |               |  |       | (6,062,112  | )           |  |   | 1,952,359 |  |  | Nil |        |   | 15,001,140 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Net loss                                                   |  |             |        |        |  |                  |           |              |  |           |            |               |  |       | (4,700,222  | )           |  |   |           |  |  |     |        |   |            |   | (4,700,222 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Other comprehensive income,
net of tax                     |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   | 1,587,036 |  |  |     |        |   |            |   | 1,587,036  |  
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  
|Total comprehensive loss                                   |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   | (3,113,186 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Effect of IPO by Crosswave, an
affiliated company (Note 4) |  |             |        |        |  |                  |           |              |  |           | 5,039,796  |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   | 5,039,796  |  
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  
|BALANCE, MARCH 31, 2001                                    |  |             | 22,480 |        |  | ¥                | 7,082,336 |              |  | ¥         | 17,068,353 |               |  | ¥     | (10,762,334 | )           |  | ¥ | 3,539,395 |  |  | Nil |        | ¥ | 16,927,750 |  
|                                                           |  |             |        |        |  |                  |           |              |  |           |            |               |  |       |             |             |  |   |           |  |  |     |        |   |            |   |            |  

(Continued)

F-7



---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity
Three Years in the Period Ended March 31, 2001

---

|                                                           |  |                                    |        |         |  |              |         |           |  |          |         |               |  |             |        |  |  |     |  |   |         |  |         |  
|---------------------------------------------------------- |  | ---------------------------------- | ------ | ------- |  | ------------ | ------- | --------- |  | -------- | ------- | ------------- |  | ----------- | ------ |  |  | --- |  | - | ------- |  | ------- | -
|                                                           |  | Thousands of U.S. Dollars (Note 1)
|                                                           |  |                                   
|                                                           |  |                                    |        |         |  |              |         |           |  |          |         |               |  | Accumulated |        |  |  |     |  |   |         | 
|                                                           |  |                                    |        |         |  |              |         |           |  |          |         |               |  | Other       |        |  |  |     |  |   |         | 
|                                                           |  |                                    |        |         |  | Additional   |         |           |  |          |         | Comprehensive |  |             |        |  |  |     |  |  
|                                                           |  | Common                             |        | Paid-in |  | (Accumulated |         | Income    |  | Treasury |         |               |  |            
|                                                           |  | Stock                              |        | Capital |  | Deficit)     |         | (Note 11) |  | Stock    |         | Total        
|                                                           |  |                                    |        |         |  |              |         |           |  |          |         |              
|BALANCE, MARCH 31, 2000                                    |  | $                                  | 56,415 |         |  | $            | 95,814  |           |  | $        | (48,288 | )             |  | $           | 15,552 |  |  | Nil |  | $ | 119,493 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Net loss                                                   |  |                                    |        |         |  |              |         |           |  |          | (37,440 | )             |  |             |        |  |  |     |  |   |         |  | (37,440 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Other comprehensive
income, net of tax                     |  |                                    |        |         |  |              |         |           |  |          |         |               |  |             | 12,641 |  |  |     |  |   |         |  | 12,641  |  
|                                                           |  |                                    |        |         |  |              |         |           |  |          |         |               |  |             |        |  |  |     |  |   |         |  |         |  
|Total comprehensive income                                 |  |                                    |        |         |  |              |         |           |  |          |         |               |  |             |        |  |  |     |  |   |         |  | (24,799 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Effect of IPO by Crosswave, an
affiliated company (Note 4) |  |                                    |        |         |  |              | 40,145  |           |  |          |         |               |  |             |        |  |  |     |  |   |         |  | 40,145  |  
|                                                           |  |                                    |        |         |  |              |         |           |  |          |         |               |  |             |        |  |  |     |  |   |         |  |         |  
|BALANCE, MARCH 31, 2001                                    |  | $                                  | 56,415 |         |  | $            | 135,959 |           |  | $        | (85,728 | )             |  | $           | 28,193 |  |  | Nil |  | $ | 134,839 | 
|                                                           |  |                                    |        |         |  |              |         |           |  |          |         |               |  |             |        |  |  |     |  |   |         |  |         |  

See notes to consolidated financial statements.

(Concluded)

F-8



---



##### Table of Contents






Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2001

---



|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |          |              |         |  
|--------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------------------------------- |  |  | - | ---------- | ---------- | ---------------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ----------- | -------- | ---------- | ------- | -------- | ------------ | ------- | -
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |          | Thousands of
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |          | U.S. Dollars
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            | Thousands of Yen |            | (Note 1)  
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |           
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            | 1999             |            | 2000       |            | 2001       |            | 2001      
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |           
|OPERATING ACTIVITIES:                         |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |                                                                       |                                                                               |                                                     |  |  | ¥ | (1,428,692 | )          |                  | ¥          | (4,784,501 | )          |            | ¥          | (4,700,222 | )           |          | $          | (37,440 | )       
|                                             
|                                             
|                                             
|                                             
|Adjustments to reconcile net loss to net cash |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|                                             
|                                             
|                                             
|                                             
|provided by operating activities:             |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|                                             
|                                             
|                                             
|                                             
|                                              | Depreciation and amortization                                         |                                                                               |                                                     |  |  |   |            | 1,421,693  |                  |            |            | 2,032,498  |            |            |            | 2,697,703   |          |            |         | 21,489   |             
|                                             
|                                             
|                                             
|                                             
|                                              | Provision for retirement and pension costs, less
payments             |                                                                               |                                                     |  |  |   |            | 32,452     |                  |            |            | 31,957     |            |            |            | 10,414      |          |            |         | 83       |             
|                                             
|                                             
|                                             
|                                             
|                                              | Provision for doubtful accounts                                       |                                                                               |                                                     |  |  |   |            | 569        |                  |            |            | 80,088     |            |            |            | 82,526      |          |            |         | 657      |             
|                                             
|                                             
|                                             
|                                             
|                                              | Loss on disposal of property and equipment                            |                                                                               |                                                     |  |  |   |            | 1,574      |                  |            |            | 9,249      |            |            |            | 23,614      |          |            |         | 188      |             
|                                             
|                                             
|                                             
|                                             
|                                              | Loss (gain) on short-term and other investments                       |                                                                               |                                                     |  |  |   |            | 2,975      |                  |            |            | (204,565   | )          |            |            | 183,460     |          |            |         | 1,461    |             
|                                             
|                                             
|                                             
|                                             
|                                              | Foreign exchange losses (gains)                                       |                                                                               |                                                     |  |  |   |            | (777       | )                |            |            | 1,127,921  |            |            |            | (1,132,083  | )        |            |         | (9,017   | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Equity in net loss of affiliated companies                            |                                                                               |                                                     |  |  |   |            | 26,091     |                  |            |            | 3,179,469  |            |            |            | 4,014,680   |          |            |         | 31,979   |             
|                                             
|                                             
|                                             
|                                             
|                                              | Minority interest in net loss (income) of
consolidated subsidiaries   |                                                                               |                                                     |  |  |   |            | (122,866   | )                |            |            | 70,484     |            |            |            | (159,850    | )        |            |         | (1,273   | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Deferred income taxes                                                 |                                                                               |                                                     |  |  |   |            | 3,732      |                  |            |            | (1,420,965 | )          |            |            | (965,418    | )        |            |         | (7,690   | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Others                                                                |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            | 45,114      |          |            |         | 359      |             
|                                             
|                                             
|                                             
|                                             
|                                              | Changes in operating assets and liabilities:                          |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |          |             
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                       | Increase in accounts receivable                                               |                                                     |  |  |   |            |            | (824,870         | )          |            |            | (1,594,053 | )          |            |             | (999,291 | )          |         |          | (7,960       | )      
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                       | Decrease (increase) in inventories, prepaid
expenses and other current assets |                                                     |  |  |   |            |            | (50,488          | )          |            |            | (767,851   | )          |            |             | 551,753  |            |         |          | 4,395        |        
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                       | Increase in accounts payable                                                  |                                                     |  |  |   |            |            | 1,299,001        |            |            |            | 2,328,625  |            |            |             | 650,495  |            |         |          | 5,181        |        
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                       | Decrease in income taxes payable (increase in
refundable income taxes)        |                                                     |  |  |   |            |            | 97,163           |            |            |            | 134,406    |            |            |             | (109,809 | )          |         |          | (874         | )      
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                       | Increase (decrease) in accrued expenses and
other current liabilities         |                                                     |  |  |   |            |            | (57,487          | )          |            |            | 975,803    |            |            |             | (463,672 | )          |         |          | (3,693       | )      
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|                                              |                                                                       |                                                                               | Net cash provided by (used in) operating
activities |  |  |   |            |            |                  | 400,070    |            |            |            | 1,198,565  |            |             |          | (270,586   | )       |          |              | (2,155  | )
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|INVESTING ACTIVITIES:                         |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|                                             
|                                             
|                                             
|                                             
|                                              | Purchases of property and equipment                                   |                                                                               |                                                     |  |  |   |            | (759,750   | )                |            |            | (1,156,011 | )          |            |            | (1,367,073  | )        |            |         | (10,889  | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Investments in newly controlled companies, net of
cash acquired       |                                                                               |                                                     |  |  |   |            |            |                  |            |            | 292,710    |            |            |            |             |          |            |         |          |             
|                                             
|                                             
|                                             
|                                             
|                                              | Investments in and advances to affiliated companies                   |                                                                               |                                                     |  |  |   |            | (2,560,000 | )                |            |            | (5,440,000 | )          |            |            | (7,552,117  | )        |            |         | (60,157  | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Purchases of short-term and other investments                         |                                                                               |                                                     |  |  |   |            | (186,473   | )                |            |            | (7,647,120 | )          |            |            | (23,487,334 | )        |            |         | (187,090 | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Proceeds from sale and redemption of short-term
and other investments |                                                                               |                                                     |  |  |   |            | 59,260     |                  |            |            | 6,434,223  |            |            |            | 23,053,058  |          |            |         | 183,631  |             
|                                             
|                                             
|                                             
|                                             
|                                              | Payments of guarantee deposits                                        |                                                                               |                                                     |  |  |   |            | (83,596    | )                |            |            | (86,670    | )          |            |            | (171,793    | )        |            |         | (1,368   | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Refund of guarantee deposits                                          |                                                                               |                                                     |  |  |   |            | 1,972      |                  |            |            | 11,055     |            |            |            | 36,739      |          |            |         | 292      |             
|                                             
|                                             
|                                             
|                                             
|                                              | Refund of insurance policies                                          |                                                                               |                                                     |  |  |   |            | 95,802     |                  |            |            | 540,171    |            |            |            |             |          |            |         |          |             
|                                             
|                                             
|                                             
|                                             
|                                              | Payment for refundable insurance policies                             |                                                                               |                                                     |  |  |   |            | (230,878   | )                |            |            | (5,718     | )          |            |            | (11,442     | )        |            |         | (91      | )           
|                                             
|                                             
|                                             
|                                             
|                                              | Other                                                                 |                                                                               |                                                     |  |  |   |            | (31,345    | )                |            |            | (77,814    | )          |            |            | (44,252     | )        |            |         | (353     | )           
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|                                              |                                                                       |                                                                               | Net cash used in investing activities               |  |  |   |            |            |                  | (3,695,008 | )          |            |            | (7,135,174 | )          |             |          | (9,544,214 | )       |          |              | (76,025 | )
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         
|FORWARD                                       |                                                                       |                                                                               |                                                     |  |  | ¥ | (3,294,938 | )          |                  | ¥          | (5,936,609 | )          |            | ¥          | (9,814,800 | )           |          | $          | (78,180 | )       
|                                              |                                                                       |                                                                               |                                                     |  |  |   |            |            |                  |            |            |            |            |            |            |             |          |            |         |         

(Continued)

F-9



---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2001

---

|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |         |              |        | 
|------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------- | ----------------------------------------- | ---------- | ---------------- | --------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | - | --------- | ------- | ------- | ------------ | ------ | 
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |         | Thousands of
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |         | U.S. Dollars
|                                            |                                                                                  |                                        |                                           |            | Thousands of Yen |           | (Note 1)  
|                                            |                                                                                  |                                        |                                           |            |                  |           |           
|                                            |                                                                                  |                                        |                                           |            | 1999             |           | 2000       |            | 2001      |            | 2001      
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |           
|FORWARD                                     |                                                                                  | ¥                                      | (3,294,938                                | )          |                  | ¥         | (5,936,609 | )          |           | ¥          | (9,814,800 | )          |   | $         | (78,180 | )      
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|FINANCING ACTIVITIES:                       |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|                                           
|                                           
|                                           
|                                           
|                                            | Proceeds from issuance of long-term borrowings and
convertible notes             |                                        |                                           | 100,000    |                  |           |            | 200,000    |           |            |            | 17,102,639 |   |           |         | 136,232 |             
|                                           
|                                           
|                                           
|                                           
|                                            | Repayments of long-term borrowings                                               |                                        |                                           | (64,000    | )                |           |            | (572,000   | )         |            |            | (690,000   | ) |           |         | (5,496  | )           
|                                           
|                                           
|                                           
|                                           
|                                            | Principal payments under capital leases                                          |                                        |                                           | (1,260,813 | )                |           |            | (1,674,011 | )         |            |            | (1,914,472 | ) |           |         | (15,250 | )           
|                                           
|                                           
|                                           
|                                           
|                                            | Net increase (decrease) in short-term borrowings                                 |                                        |                                           | 4,238,717  |                  |           |            | 6,878,906  |           |            |            | (8,070,376 | ) |           |         | (64,285 | )           
|                                           
|                                           
|                                           
|                                           
|                                            | Proceeds from issuance of common stock                                           |                                        |                                           |            |                  |           |            | 17,358,987 |           |            |            |            |   |           |         |         |             
|                                           
|                                           
|                                           
|                                           
|                                            | Proceeds from sale of treasury stock                                             |                                        |                                           | 40,000     |                  |           |            |            |           |            |            |            |   |           |         |         |             
|                                           
|                                           
|                                           
|                                           
|                                            | Proceeds from issuance of subsidiary stock                                       |                                        |                                           | 132,100    |                  |           |            |            |           |            |            |            |   |           |         |         |             
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|                                            |                                                                                  |                                        | Net cash provided by financing activities |            |                  | 3,186,004 |            |            |           | 22,191,882 |            |            |   | 6,427,791 |         |         |              | 51,201 | 
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|EFFECT OF EXCHANGE RATE CHANGES ON CASH     |                                                                                  |                                        | 12,451                                    |            |                  |           | (1,158,322 | )          |           |            | 799,277    |            |   |           | 6,367   |        
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|NET INCREASE (DECREASE) IN CASH             |                                                                                  |                                        | (96,483                                   | )          |                  |           | 15,096,951 |            |           |            | (2,587,732 | )          |   |           | (20,612 | )      
|                                           
|                                           
|                                           
|                                           
|CASH, BEGINNING OF YEAR                     |                                                                                  |                                        | 1,157,971                                 |            |                  |           | 1,061,488  |            |           |            | 16,158,439 |            |   |           | 128,711 |        
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|CASH, END OF YEAR                           |                                                                                  | ¥                                      | 1,061,488                                 |            |                  | ¥         | 16,158,439 |            |           | ¥          | 13,570,707 |            |   | $         | 108,099 |        
|                                            |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|ADDITIONAL CASH FLOW INFORMATION:           |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|                                           
|                                           
|                                           
|                                           
|                                            | Interest paid                                                                    |                                        | ¥                                         | 225,571    |                  |           | ¥          | 290,682    |           |            | ¥          | 526,850    |   |           | $       | 4,197   |             
|                                           
|                                           
|                                           
|                                           
|                                            | Income taxes paid (refunded)                                                     |                                        |                                           | (97,702    | )                |           |            | 7,090      |           |            |            | 141,597    |   |           |         | 1,128   |             
|                                           
|                                           
|                                           
|                                           
|NONCASH INVESTING AND FINANCING ACTIVITIES: |                                                                                  |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |        
|                                           
|                                           
|                                           
|                                           
|                                            | Acquisition of assets by entering into capital leases                            |                                        |                                           | 1,169,150  |                  |           |            | 2,308,864  |           |            |            | 2,595,626  |   |           |         | 20,676  |             
|                                           
|                                           
|                                           
|                                           
|                                            | Exchange of common stock investment:                                             |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |         |             
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                  | Market value of common shares acquired |                                           |            |                  |           |            |            | 234,298   |            |            |            |   |           |         |         |              |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                  | Cost of investment                     |                                           |            |                  |           |            |            | 77,682    |            |            |            |   |           |         |         |              |       
|                                           
|                                           
|                                           
|                                           
|                                            | Investments in newly controlled companies:                                       |                                        |                                           |            |                  |           |            |            |           |            |            |            |   |           |         |         |             
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                  | Assets acquired                        |                                           |            |                  |           |            |            | 1,495,163 |            |            |            |   |           |         |         |              |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                  | Cash acquired, net of cash paid        |                                           |            |                  |           |            |            | 292,710   |            |            |            |   |           |         |         |              |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                  | Liabilities assumed                    |                                           |            |                  |           |            |            | 1,787,873 |            |            |            |   |           |         |         |              |       
|                                           
|                                           
|                                           
|                                           
|                                            | Effect of IPO by Crosswave, an affiliated company,
on additional paid-in capital |                                        |                                           |            |                  |           |            |            |           |            |            | 5,039,796  |   |           |         | 40,145  |             

See notes to consolidated financial statements.

(Concluded)

F-10



---



##### Table of Contents






Internet Initiative Japan Inc. and Subsidiaries

Notes to Consolidated Financial Statements

---

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Internet Initiative Japan Inc. (IIJ, a Japanese corporation ) was
founded in December 1992 to develop and operate Internet access services and
other Internet-related services in Japan. IIJ and subsidiaries (collectively,
the Company) provide Internet access services throughout Japan and into the
United States of America and into the rest of Asia through a direct connection
to the A-Bone, an Internet backbone connecting the countries in the
Asian-Pacific region. The Company also provides Internet systems design and
integration services representing principally sales of Internet network systems
and equipment and miscellaneous Internet access-related services.

The Company manages its business and measures results based on a single
Internet-related services industry segment, including systems integration
revenues. Substantially all revenues are from customers operating in Japan.

Certain reclassifications have been made to conform with the current year
presentation.

Translation into U.S. DollarsIIJ maintains its accounts in Japanese yen,
the currency of the country in which it is incorporated and principally
operates. The U.S. dollar amounts included herein represent a translation
using the approximate exchange rate at March 30, 2001 of ¥125.54 = $1 solely
for convenience. The translation should not be construed as a representation
that the yen amounts have been, could have been or could in the future be
converted into U.S. dollars.

ConsolidationThe consolidated financial statements include the accounts
of IIJ and four of its subsidiaries, Net Care, Inc. (Net Care), IIJ
Technology Inc. (Technology), IIJ Media Communications Inc. (MC) and IIJ
America, Inc. (IIJ America). IIJ obtained controlling equity interest over
MC and Technology by additional investments in May and June 1999, respectively.
The Companys investments had been previously accounted for by the equity
method. Significant intercompany transactions and balances have been
eliminated in consolidation. Investments in companies over which IIJ has
significant influence but not control are accounted for by the equity method.

The excess of cost of the Companys investments in subsidiaries and
affiliated companies over their equity in the net assets at dates of
acquisition is being amortized over a five year period (see new accounting
standards).

Certain Significant Risks and UncertaintiesFinancial instruments that
potentially subject the Company to concentrations of credit risk consist
principally of cash investments, accounts receivable and guarantee deposits.
The Companys management believes that the risks associated with accounts
receivable are mitigated by the large number of customers comprising its
customer base.

The Company participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a material
adverse effect on the Companys future financial position, result of operations
or cash flows: advances and trends in new technologies and industry standard;
competitive pressures in the form of new products or price reductions on
current products; change in product mix in changes in the overall demand for
products offered by the Company; changes in certain strategic relationship or
customer relationship, litigation or claims against the Company based on
intellectual property, product, regulatory or other factors; risk associated
with change in domestic and international economic and/or political conditions
or regulations; fluctuations in foreign currency exchange rates; availability
of necessary components; and the Companys ability to attract and retain
employees necessary to support its growth.

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Sources of SuppliesThe Company relies on telecommunications carriers to
provide long-distance lines for backbone and local connections to customers,
including Crosswave Communications Inc. (Crosswave), an affiliated company,
and third-party suppliers for the use of hardware components such as routers
and servers.

The Company believes that its use of multiple carriers, suppliers and
alternative facilities significantly mitigate concentrations of credit risk.
However, any disruption of telecommunication services or the inability of
suppliers to deliver hardware components on a timely basis or to develop
alternative sources of components could have an adverse effect on operating
results.

Use of EstimatesThe preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Significant estimates and assumptions used are primarily
in the areas of valuation allowances for deferred tax assets, allowance for
doubtful accounts and estimated lives of fixed assets. Actual results could
differ from those estimates.

Revenue RecognitionRevenues from customer connectivity services consist
principally of dedicated Internet access services and dial-up Internet access
services. Dedicated Internet access services represent full-line IP services
and standard-level IP services (T1 Standard and IIJ Economy). Dial-up Internet
access services are provided to both enterprises and individuals (IIJ4U). The
term of these contracts is for one- or three-year periods for dedicated
Internet access services and generally one month for dial-up Internet access
services. All these services are billed and recognized monthly on a
straight-line basis.

Value-added service revenues consist principally of sales of miscellaneous
Internet access related services such as firewalls and co-location services.
Value-added services also include monthly fees from data center services which
began during the fiscal year ended March 31, 2001 and include connectivity,
housing, monitoring and security services. The terms of these services are
generally for one year and revenues are recognized on a straight-line basis
during the service period.

Systems integration revenues consist principally of the development of
Internet network systems or design and related maintenance, monitoring and
other operating services. The period for the development of the systems or
designs is less than one year and revenues are recognized when network systems
and equipment are delivered and accepted by the customer.

Other revenues are principally sales of equipment in which the Company
acts as principal in the transaction, takes title to the equipment and has
risks and rewards of ownership and include sales of network systems to
Crosswave for the years ended March 31, 1999, 2000 and 2001.

Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements, identifies the following four essential criteria that must be met
before revenues can be recognized:

(1)  Persuasive evidence of an arrangement exists,

(2)  Delivery has occurred or services have been rendered,

(3)  The fee for the arrangement is fixed or determinable and,

(4)  Collectibility is reasonably assured.

In accordance with SAB 101, the Company, effective April 1, 2000, adopted
an accounting policy in which initial set up fees received in connection with
connectivity services and value-added services are deferred and recognized over
the contract period or estimable average period of service to

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customers. The
adoption of SAB 101 did not have a significant impact on the Companys
consolidated financial position, results of operations or cash flows.

Short-term and Other InvestmentsIn accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities, except for certain held-to-maturity debt
securities, all marketable equity securities are classified as
available-for-sale securities, which are accounted for at fair value with
unrealized gains and losses excluded from earnings and reported in accumulated
other comprehensive income (loss). The cost of securities sold is determined
based on average cost.

InventoriesInventories consist mainly of network equipment purchased for
development of network systems and are carried at the average cost, which
approximates market values.

Property and EquipmentProperty and equipment are recorded at cost.
Depreciation and amortization of property and equipment, including purchased
software and capitalized leases, are computed principally using the
straight-line method based on either the estimated useful lives of assets or
the lease period, whichever is shorter.

Guarantee DepositsGuarantee deposits substantially consist of refundable
base lease deposits for office premises.

Long-lived AssetsLong-lived assets consist principally of property and
equipment, including those items leased under capital leases. The Company
evaluates the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. There was no impairment loss for long-lived assets for the three
years in the period ended March 31, 2001.

Income TaxesThe provision for income taxes is based on earnings before
income taxes and includes the effects of temporary differences between assets
and liabilities recognized for financial reporting purposes and income tax
purposes and operating loss carryforward. Valuation allowances are provided
against assets that are not likely to be realized.

Retirement and Pension PlanPension costs have been determined in
accordance with the provisions of SFAS No. 87, Employers Accounting for
Pensions.

Stock-Based CompensationThe Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, and the Financial Accounting Standards Board
(FASB) Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB No. 25 for stock-based
compensation.

Foreign Currency TransactionsForeign currency assets and liabilities,
which consist substantially of cash and short-term investments denominated in
U.S. dollars and accounts payable for the payment of connectivity leases in
U.S. dollars to international carriers, are stated at the amount as computed by
using year-end exchange rates and the resulting transaction gain or loss is
recognized in earnings. Gain or losses on foreign exchange forward contracts
and on foreign currency denominated cash and short-term investments which are
designated to hedge identifiable commitments (see Note 12) are deferred and
included in the measurement of the related transactions.

AdvertisingAdvertising costs are expensed as incurred.

Basic and Diluted Net Loss per ShareBasic and diluted net loss per share
are computed using the weighted average number of shares of common stock
outstanding during the year. There were no significant dilutive securities
during the years presented.

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Other Comprehensive Income (Loss)Other comprehensive income (loss)
consists of translation adjustment resulting from the translation of financial
statements of a foreign subsidiary and unrealized gains or losses on
available-for-sale securities.

New Accounting StandardsIn June 1998, FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138. These statements establish accounting and reporting standards
for derivative instruments and for hedging activities. SFAS No. 133 requires
that an entity recognizes all derivatives as either assets or liabilities in
the balance sheet and measure those instruments at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or
losses or other comprehensive income (loss), depending on whether a derivative
is designated as part of a hedge transaction and the type of hedge transaction.
The ineffective portion of all hedges will be recognized in earnings. The
adoption of SFAS No. 133, as amended by SFAS No. 138, effective April 1, 2001,
did not have a significant impact on the Companys consolidated financial
statements.

In July 2001, FASB issued SFAS No.141, Business Combinations, and SFAS
No.142, Goodwill and Other Intangible Assets. These statements establish
accounting and reporting standards for business combinations and the treatment
of goodwill and other intangible assets. SFAS No. 141 requires that all
business combinations be accounted for using the purchase method of accounting
and requires tangible, intangible and goodwill assets to be separately
identified and recorded. This statement shall apply to all business
combinations initiated or completed after June 30, 2001. SFAS No. 142 no
longer allows goodwill to be amortized but requires goodwill to be tested for
impairment at least annually. Goodwill should be tested for impairment by
comparing the implied fair value of goodwill, as determined by similar methods
as in a business combination, to its carrying amount. If the carrying amount
of goodwill exceeds its implied fair value, an impairment loss is recognized
equal to that excess. This statement will be effective for fiscal years
beginning after December 15, 2001, with early adoption allowed. Goodwill and
intangible assets acquired after June 30, 2001 should not be amortized.

Upon adoption of SFAS No. 142 effective April 1, 2002, goodwill of
¥1,712,270 thousand ($13,639 thousand) as of March 31, 2001 which consist
substantially of equity method goodwill and is being amortized over a five year
period, will no longer be amortized, but will be subject to an annual
impairment test. Until this standard is adopted, such goodwill will continue
to be amortized.

2. SHORT-TERM AND OTHER INVESTMENTS

Pursuant to SFAS No. 115, all of the Companys marketable equity
securities and debt securities, principally marketable shares of common stock
of Japanese enterprises, were classified as available-for-sale securities.
Information regarding each category of the securities classified as
available-for-sale at March 31, 2000 and 2001, is as follows:

|                                     |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|------------------------------------ |  | ---------------- | ------- | ----- |  | ---------- | --------- | ---------- |  | ---- | ------ |  |  | - | --------- | 
|                                     |  | Thousands of Yen
|                                     |  |                 
|                                     |  |                  |         |       |  | Unrealized |           | Unrealized |  | Fair
|                                     |  | Cost             |         | Gains |  | Losses     |           | Value     
|                                     |  |                  |         |       |  |            |           |           
|March 31, 2000                       |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|Available-for-saleEquity securities |  | ¥                | 325,285 |       |  | ¥          | 3,314,954 |            |  | ¥    | 7,951  |  |  | ¥ | 3,632,288 | 
|                                     |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|March 31, 2001                       |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|Available-for-saleEquity securities |  | ¥                | 655,749 |       |  | ¥          | 6,093,732 |            |  | ¥    | 48,538 |  |  | ¥ | 6,700,943 | 
|                                     |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 

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|                                     |                           |      |       |            |  |            |        |       |  |   |     |  |  |   |        | 
|------------------------------------ | ------------------------- | ---- | ----- | ---------- |  | ---------- | ------ | ----- |  | - | --- |  |  | - | ------ | 
|                                     | Thousands of U.S. Dollars
|                                     |                          
|                                     |                           |      |       | Unrealized |  | Unrealized |        | Fair 
|                                     |                           | Cost |       | Gains      |  | Losses     |        | Value
|                                     |                           |      |       |            |  |            |        |      
|March 31, 2001                       |                           |      |       |            |  |            |        |       |  |   |     |  |  |   |        | 
|Available-for-saleEquity securities |                           | $    | 5,223 |            |  | $          | 48,540 |       |  | $ | 386 |  |  | $ | 53,377 | 
|                                     |                           |      |       |            |  |            |        |       |  |   |     |  |  |   |        | 

Other investments include non-marketable equity and debt securities
amounting to ¥1,054,701 thousand and ¥1,754,897 thousand ($13,979 thousand) at
March 31, 2000 and 2001, respectively.

For the year ended March 31, 2001, losses on write-down of investments in
equity securities, included in other income (expenses), were recognized to
reflect the decline in value considered to be other than temporary totaling
¥398,226 thousand ($3,172 thousand).

Gain on exchange of securities of ¥156,616 thousand, included in other
income (expenses), for the year ended March 31, 2000, represented a
non-monetary gain upon the exchange of non-marketable securities for marketable
common shares in a merger transaction.

3. ALLOWANCE FOR DOUBTFUL ACCOUNTS

An analysis of allowance for doubtful accounts for the years ended March
31, 1999, 2000 and 2001, is as follows:

|                          |  |                  |        |             |  |          |        |               |  |   |        |  |  |   |         | 
|------------------------- |  | ---------------- | ------ | ----------- |  | -------- | ------ | ------------- |  | - | ------ |  |  | - | ------- | 
|                          |  | Thousands of Yen
|                          |  |                 
|                          |  | Balance at       |        |             |  |          |        | Provision for |  |   |        | 
|                          |  | Beginning of     |        | Credits     |  | Doubtful |        | Balance at   
|                          |  | Year             |        | Charged Off |  | Accounts |        | End of Year  
|                          |  |                  |        |             |  |          |        |              
|Year ended March 31, 1999 |  | ¥                | 13,397 |             |  |          |        |               |  | ¥ | 569    |  |  | ¥ | 13,966  | 
|                          |  |                  |        |             |  |          |        |               |  |   |        |  |  |   |         | 
|Year ended March 31, 2000 |  | ¥                | 13,966 |             |  | ¥        | 20,789 |               |  | ¥ | 80,088 |  |  | ¥ | 73,265  | 
|                          |  |                  |        |             |  |          |        |               |  |   |        |  |  |   |         | 
|Year ended March 31, 2001 |  | ¥                | 73,265 |             |  | ¥        | 32,046 |               |  | ¥ | 82,526 |  |  | ¥ | 123,745 | 
|                          |  |                  |        |             |  |          |        |               |  |   |        |  |  |   |         | 

|                          |  |                           |     |             |  |          |     |               |  |   |     |  |  |   |     | 
|------------------------- |  | ------------------------- | --- | ----------- |  | -------- | --- | ------------- |  | - | --- |  |  | - | --- | 
|                          |  | Thousands of U.S. Dollars
|                          |  |                          
|                          |  | Balance at                |     |             |  |          |     | Provision for |  |   |     | 
|                          |  | Beginning of              |     | Credits     |  | Doubtful |     | Balance at   
|                          |  | Year                      |     | Charged Off |  | Accounts |     | End of Year  
|                          |  |                           |     |             |  |          |     |              
|Year ended March 31, 2001 |  | $                         | 584 |             |  | $        | 255 |               |  | $ | 657 |  |  | $ | 986 | 
|                          |  |                           |     |             |  |          |     |               |  |   |     |  |  |   |     | 

4. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES

IIJ utilizes various business units in Japan and neighboring countries to
form and operate its Internet business. Businesses operated by the
non-consolidated investees include dedicated high-speed, data communication
services (Crosswave), connectivity services in Asian countries (Asia Internet
Holding Co., Ltd., AIH), multifeed technology services and location
facilities for connecting high-speed Internet backbones (Internet Multifeed
Co., Multifeed), Web page design services (atom Co., Ltd.), data center
services in Asian countries (AyalaPort Makati Inc., Ayala, and iHeart Inc.)
and network construction, consulting, design and maintenance services (Net
Chart Japan Corporation).

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IIJs ownership percentages range from 21 to 50 percent. As the Company
has significant influence over the investees business planning and execution,
such investments are accounted for by the equity method.

Transactions between the Company and the affiliates include IIJs sale of
network systems to Crosswave in the amount of ¥1,080,083 thousand, ¥1,373,577
thousand and ¥315,925 thousand ($2,517 thousand) for the years ended March 31,
1999, 2000 and 2001, respectively, of which cost of purchased equipment sold
amounted to ¥1,069,282 thousand, ¥1,358,000 thousand and ¥305,039 thousand
($2,430 thousand), respectively. In addition, there are other transactions
with affiliated companies for cost of dedicated high-speed, data communication
services by Crosswave, cost of subcontracting services by Technology (prior to
becoming a majority-owned consolidated subsidiary) and Internet access cost and
revenues with AIH.

The aggregate amounts of balances and transactions of the Company with
these affiliated companies as of March 31, 2000 and 2001 and for each of the
three years in the period ended March 31, 2001, were summarized as follows:

|                    |  |                  |           |              |  |      |           |      |  |   |           |  |  |              |        | 
|------------------- |  | ---------------- | --------- | ------------ |  | ---- | --------- | ---- |  | - | --------- |  |  | ------------ | ------ | 
|                    |  |                  |           |              |  |      |           |      |  |   |           |  |  | Thousands of
|                    |  | Thousands of Yen |           | U.S. Dollars
|                    |  |                  |           |             
|                    |  | 1999             |           | 2000         |  | 2001 |           | 2001
|                    |  |                  |           |              |  |      |           |     
|Accounts receivable |  |                  |           |              |  | ¥    | 313,824   |      |  | ¥ | 267,957   |  |  | $            | 2,134  | 
|                   
|                   
|                   
|                   
|Accounts payable    |  |                  |           |              |  |      | 147,533   |      |  |   | 328,347   |  |  |              | 2,615  | 
|                   
|                   
|                   
|                   
|Guarantees          |  |                  |           |              |  |      | 28,599    |      |  |   | 12,400    |  |  |              | 99     | 
|                   
|                   
|                   
|                   
|Revenues            |  | ¥                | 1,470,196 |              |  |      | 2,649,717 |      |  |   | 2,001,092 |  |  |              | 15,940 | 
|                   
|                   
|                   
|                   
|Costs and expenses  |  |                  | 1,056,804 |              |  |      | 772,633   |      |  |   | 2,443,710 |  |  |              | 19,466 | 

The Companys investments in and advances to these affiliated companies
and respective ownership percentage at March 31, 2000 and 2001, consisted of
the following:

|          |  |                  |      |              |  |      |           |  |  |  |      |   |  |   |            |  |  |              |         | 
|--------- |  | ---------------- | ---- | ------------ |  | ---- | --------- |  |  |  | ---- | - |  | - | ---------- |  |  | ------------ | ------- | 
|          |  |                  |      |              |  |      |           |  |  |  |      |   |  |   |            |  |  | Thousands of
|          |  | Thousands of Yen |      | U.S. Dollars
|          |  |                  |      |             
|          |  | 2000             |      | 2001         |  | 2001
|          |  |                  |      |              |  |     
|Crosswave |  |                  | 40.0 | %            |  | ¥    | 4,826,948 |  |  |  | 37.9 | % |  | ¥ | 13,032,714 |  |  | $            | 103,813 | 
|         
|         
|         
|         
|AIH       |  |                  | 20.6 |              |  |      | 234,860   |  |  |  | 20.6 |   |  |   | 282,086    |  |  |              | 2,247   | 
|         
|         
|         
|         
|Multifeed |  |                  | 28.3 |              |  |      | 153,564   |  |  |  | 28.3 |   |  |   | 182,338    |  |  |              | 1,452   | 
|         
|         
|         
|         
|Ayala     |  |                  |      |              |  |      |           |  |  |  | 25.7 |   |  |   | 119,943    |  |  |              | 955     | 
|         
|         
|         
|         
|Other     |  |                  |      |              |  |      | 86,236    |  |  |  |      |   |  |   | 278,573    |  |  |              | 2,220   | 
|          |  |                  |      |              |  |      |           |  |  |  |      |   |  |   |            |  |  |              |         | 
|Total     |  |                  |      |              |  | ¥    | 5,301,608 |  |  |  |      |   |  | ¥ | 13,895,654 |  |  | $            | 110,687 | 
|          |  |                  |      |              |  |      |           |  |  |  |      |   |  |   |            |  |  |              |         | 

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A summary of financial information of these affiliated companies as of
March 31, 2000 and 2001 and for each of the three years in the period ended
March 31, 2001, in the aggregate, is as follows:

|                                  |                      |   |                  |            |              |   |            |            |  |   |              |         | 
|--------------------------------- | -------------------- | - | ---------------- | ---------- | ------------ | - | ---------- | ---------- |  | - | ------------ | ------- | 
|                                  |                      |   |                  |            |              |   |            |            |  |   | Thousands of
|                                  |                      |   | Thousands of Yen |            | U.S. Dollars
|                                  |                      |   |                  |            |             
|                                  |                      |   | 2000             |            | 2001         |   | 2001      
|                                  |                      |   |                  |            |              |   |           
|Current assets                    |                      | ¥ | 14,571,805       |            |              | ¥ | 29,360,935 |            |  | $ | 233,877      |        
|                                 
|                                 
|                                 
|                                 
|Noncurrent assets                 |                      |   | 15,826,241       |            |              |   | 33,924,868 |            |  |   | 270,232      |        
|                                  |                      |   |                  |            |              |   |            |            |  |   |              |        
|                                  | Total assets         |   |                  | 30,398,046 |              |   |            | 63,285,803 |  |   |              | 504,109 | 
|                                 
|                                 
|                                 
|                                 
|Current liabilities               |                      |   | 8,745,981        |            |              |   | 13,261,010 |            |  |   | 105,632      |        
|                                 
|                                 
|                                 
|                                 
|Noncurrent liabilities            |                      |   | 8,137,617        |            |              |   | 16,983,584 |            |  |   | 135,284      |        
|                                 
|                                 
|                                 
|                                 
|Minority interests other than IIJ |                      |   | 8,370,478        |            |              |   | 20,923,956 |            |  |   | 166,672      |        
|                                  |                      |   |                  |            |              |   |            |            |  |   |              |        
|                                  | Equity in net assets |   | ¥                | 5,143,970  |              |   | ¥          | 12,117,253 |  |   | $            | 96,521  | 
|                                  |                      |   |                  |            |              |   |            |            |  |   |              |        

|                                                                               |                         |          |            |                  |         |              |             |            |            |      |             |             |             |   |          |              |         |  
|------------------------------------------------------------------------------ | ----------------------- | -------- | ---------- | ---------------- | ------- | ------------ | ----------- | ---------- | ---------- | ---- | ----------- | ----------- | ----------- | - | -------- | ------------ | ------- | -
|                                                                               |                         |          |            |                  |         |              |             |            |            |      |             |             |             |   |          | Thousands of
|                                                                               |                         |          |            | Thousands of Yen |         | U.S. Dollars
|                                                                               |                         |          |            |                  |         |             
|                                                                               |                         |          |            | 1999             |         | 2000         |             | 2001       |            | 2001
|                                                                               |                         |          |            |                  |         |              |             |            |            |     
|Revenues                                                                       |                         | ¥        | 4,483,963  |                  |         | ¥            | 4,100,780   |            |            | ¥    | 7,319,490   |             |             | $ | 58,304   |             
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Cost and expenses                                                              |                         |          | (4,415,874 | )                |         |              | (11,837,556 | )          |            |      | (17,693,390 | )           |             |   | (140,938 | )           
|                                                                               |                         |          |            |                  |         |              |             |            |            |      |             |             |             |   |          |             
|                                                                               | Operating income (loss) |          |            | 68,089           |         |              |             | (7,736,776 | )          |      |             | (10,373,900 | )           |   |          | (82,634      | )      
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Other income (expense)net                                                     |                         |          | (45,821    | )                |         |              | (204,244    | )          |            |      | 138,932     |             |             |   | 1,106    |             
|                                                                               |                         |          |            |                  |         |              |             |            |            |      |             |             |             |   |          |             
|Income (loss) from consolidated
operations before income tax expense (benefit) |                         |          | 22,268     |                  |         |              | (7,941,020  | )          |            |      | (10,234,968 | )           |             |   | (81,528  | )           
|                                                                               |                         |          |            |                  |         |              |             |            |            |      |             |             |             |   |          |             
|Income tax expense                                                             |                         |          | 87,147     |                  |         |              | 41,219      |            |            |      | 176,294     |             |             |   | 1,404    |             
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Minority interests in
consolidated
subsidiaries                                |                         |          |           |                  |         |              |            |            |            |      | 15,302      |             |             |   | 122      |             
|                                                                               |                         |          |            |                  |         |              |             |            |            |      |             |             |             |   |          |             
|                                                                               |                         | Net loss |            | ¥                | (64,879 | )            |             | ¥          | (7,982,239 | )    |             | ¥           | (10,395,960 | ) |          | $            | (82,810 | )
|                                                                               |                         |          |            |                  |         |              |             |            |            |      |             |             |             |   |          |             

The excess of carrying value of investments in affiliated companies over
the companies equity in the underlying net assets at March 31, 2001 amounted
to ¥1,684,772 thousand ($13,420 thousand) , primarily related to Crosswave
amounting to ¥1,664,554 thousand ($13,259 thousand).

IIJs major non-consolidated business unit is Crosswave, a Japanese stock
corporation formed in October 1998 with ownership interests at March 31, 2000
held by IIJ (40 percent), Toyota Motor Corporation (Toyota) (30 percent) and
Sony Corporation (Sony) (30 percent). On August 9, 2000, Crosswave completed
an initial public offering of 17,392,000 American Depository Shares (ADSs),
representing 86,960 shares of common stock at an initial offering price of
$14.00 per ADS in the NASDAQ National Market in the United States of America.
Concurrently, IIJ purchased 15,000 newly issued Crosswave common shares
amounting to ¥4,565,400 thousand ($36,366 thousand) in the aggregate. Proceeds
from these transactions to Crosswave amounted to ¥31,032,546 thousand ($247,192
thousand). The effect of the increase in equity in net assets of Crosswave
resulting from such proceeds, net of IIJs additional investment, was accounted
for as a capital transaction and credited directly to additional paid-in
capital in the amount of ¥5,039,796 thousand ($40,145 thousand). On December
27, 2000, IIJ also purchased 3,000,000 ADSs, representing 15,000 shares of
Crosswave from the market in the aggregate amount of ¥2,737,200 thousand
($21,803 thousand). As a result of these transactions, the ownership of IIJ,
Sony, Toyota at March 31, 2001 was 37.85 percent, 23.9 percent and 23.9
percent, respectively.

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The carrying value of investment in Crosswave and corresponding quoted
market value at March 31, 2001 were ¥13,032,714 thousand ($103,813 thousand)
and ¥12,522,615 thousand ($99,750 thousand), respectively. Crosswave operates
a nationwide fiber optic network for high-speed, large-capacity data
communications.

The major financial accounts of Crosswave as of March 31, 2000 and 2001
and for the period from its inception to March 31, 1999 and for the years ended
March 31, 2000 and 2001, included in the above-summarized financial
information, were as follows:

|                                  |              |   |                  |            |              |   |            |            |  |   |              |         | 
|--------------------------------- | ------------ | - | ---------------- | ---------- | ------------ | - | ---------- | ---------- |  | - | ------------ | ------- | 
|                                  |              |   |                  |            |              |   |            |            |  |   | Thousands of
|                                  |              |   | Thousands of Yen |            | U.S. Dollars
|                                  |              |   |                  |            |             
|                                  |              |   | 2000             |            | 2001         |   | 2001      
|                                  |              |   |                  |            |              |   |           
|Current assets                    |              | ¥ | 12,647,004       |            |              | ¥ | 25,936,811 |            |  | $ | 206,602      |        
|                                 
|                                 
|                                 
|                                 
|Noncurrent assets                 |              |   | 15,444,477       |            |              |   | 33,265,631 |            |  |   | 264,980      |        
|                                  |              |   |                  |            |              |   |            |            |  |   |              |        
|                                  | Total assets |   |                  | 28,091,481 |              |   |            | 59,202,442 |  |   |              | 471,582 | 
|                                 
|                                 
|                                 
|                                 
|Current liabilities               |              |   | 8,039,698        |            |              |   | 12,189,498 |            |  |   | 97,096       |        
|                                 
|                                 
|                                 
|                                 
|Noncurrent liabilities            |              |   | 8,129,617        |            |              |   | 16,894,922 |            |  |   | 134,578      |        
|                                 
|                                 
|                                 
|                                 
|Minority interests other than IIJ |              |   | 7,153,300        |            |              |   | 18,749,862 |            |  |   | 149,354      |        
|                                  |              |   |                  |            |              |   |            |            |  |   |              |        
|Equity in net assets              |              | ¥ | 4,768,866        |            |              | ¥ | 11,368,160 |            |  | $ | 90,554       |        
|                                  |              |   |                  |            |              |   |            |            |  |   |              |        

|                                                |                |   |                  |        |              |   |           |           |      |   |            |            |  |   |              |        | 
|----------------------------------------------- | -------------- | - | ---------------- | ------ | ------------ | - | --------- | --------- | ---- | - | ---------- | ---------- |  | - | ------------ | ------ | 
|                                                |                |   |                  |        |              |   |           |           |      |   |            |            |  |   | Thousands of
|                                                |                |   | Thousands of Yen |        | U.S. Dollars
|                                                |                |   |                  |        |             
|                                                |                |   | 1999             |        | 2000         |   | 2001      |           | 2001
|                                                |                |   |                  |        |              |   |           |           |     
|Revenues                                        |                |   |                  |        |              | ¥ | 231,786   |           |      | ¥ | 2,628,655  |            |  | $ | 20,939       |       
|                                               
|                                               
|                                               
|                                               
|Costs and expenses                              |                |   | ¥82,007          |        |              |   | 7,891,703 |           |      |   | 13,592,033 |            |  |   | 108,269      |       
|                                                |                |   |                  |        |              |   |           |           |      |   |            |            |  |   |              |       
|                                                | Operating loss |   |                  | 82,007 |              |   |           | 7,659,917 |      |   |            | 10,963,378 |  |   |              | 87,330 | 
|                                               
|                                               
|                                               
|                                               
|Other expense (income)net                      |                |   | 1,089            |        |              |   | 189,377   |           |      |   | (101,235   | )          |  |   | (807         | )     
|                                                |                |   |                  |        |              |   |           |           |      |   |            |            |  |   |              |       
|Loss before minority
interests and income
taxes |                |   | 83,096           |        |              |   | 7,849,294 |           |      |   | 10,862,143 |            |  |   | 86,523       |       
|                                               
|                                               
|                                               
|                                               
|Minority interests in
consolidated subsidiaries |                |   |                 |        |              |   |          |           |      |   | (15,302    | )          |  |   | (122         | )     
|                                               
|                                               
|                                               
|                                               
|Income taxes                                    |                |   |                 |        |              |   |          |           |      |   |           |            |  |   |             |       
|                                                |                |   |                  |        |              |   |           |           |      |   |            |            |  |   |              |       
|Net loss                                        |                | ¥ | 83,096           |        |              | ¥ | 7,849,294 |           |      | ¥ | 10,846,841 |            |  | $ | 86,401       |       
|                                                |                |   |                  |        |              |   |           |           |      |   |            |            |  |   |              |       

Crosswaves revenue from IIJ and its subsidiaries and affiliates accounted
for 86.2% and 64.4% of its total revenue in the years ended March 31, 2000 and
2001, respectively.

Crosswave is obligated under various capital leases and non-cancelable
operating leases, which expire at various dates during the next nine years.

F-18



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##### Table of Contents



At March 31, 2000 and 2001, the gross amount of equipment and related
accumulated depreciation recorded under capital leases were as follows:

|                                                            |  |                  |            |              |  |      |            |   |  |              |         |  
|----------------------------------------------------------- |  | ---------------- | ---------- | ------------ |  | ---- | ---------- | - |  | ------------ | ------- | -
|                                                            |  |                  |            |              |  |      |            |   |  | Thousands of
|                                                            |  | Thousands of Yen |            | U.S. Dollars
|                                                            |  |                  |            |             
|                                                            |  | 2000             |            | 2001         |  | 2001
|                                                            |  |                  |            |              |  |     
|Capitalized leases, primarily data
communications equipment |  | ¥                | 12,758,224 |              |  | ¥    | 16,233,830 |   |  | $            | 129,312 |  
|                                                           
|                                                           
|                                                           
|                                                           
|Accumulated depreciation                                    |  |                  | (706,909   | )            |  |      | (2,816,321 | ) |  |              | (22,434 | )
|                                                            |  |                  |            |              |  |      |            |   |  |              |         |  
|Capitalized
leases  net                                    |  | ¥                | 12,051,315 |              |  | ¥    | 13,417,509 |   |  | $            | 106,878 |  
|                                                            |  |                  |            |              |  |      |            |   |  |              |         |  

Future minimum lease payments under capital leases as of March 31, 2001
are as follows:

|                                                                      |                     |                              |            |                  |            |              |         |              |         | 
|--------------------------------------------------------------------- | ------------------- | ---------------------------- | ---------- | ---------------- | ---------- | ------------ | ------- | ------------ | ------- | 
|                                                                      |                     |                              |            |                  |            |              |         | Thousands of
|                                                                      |                     |                              |            | Thousands of Yen |            | U.S. Dollars
|                                                                      |                     |                              |            |                  |            |             
|Year ending March 31:                                                 |                     |                              |            |                  |            |              |         |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2002                |                              | ¥          | 2,424,809        |            |              | $       | 19,315       |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2003                |                              |            | 2,424,602        |            |              |         | 19,313       |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2004                |                              |            | 2,405,990        |            |              |         | 19,165       |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2005                |                              |            | 2,368,262        |            |              |         | 18,865       |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2006                |                              |            | 2,539,317        |            |              |         | 20,227       |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2007 and thereafter |                              |            | 449,567          |            |              |         | 3,581        |        
|                                                                      |                     |                              |            |                  |            |              |         |             
|                                                                      |                     | Total minimum lease payments |            |                  | 12,612,547 |              |         |              | 100,466 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Less amount representing interest (rates
ranging from 1.90% to 5.14%) |                     |                              | (1,445,424 | )                |            |              | (11,513 | )           
|                                                                      |                     |                              |            |                  |            |              |         |             
|Present value of net minimum payments                                 |                     |                              | 11,167,123 |                  |            |              | 88,953  |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Less current portion                                                  |                     |                              | (1,935,208 | )                |            |              | (15,415 | )           
|                                                                      |                     |                              |            |                  |            |              |         |             
|Noncurrent                                                            |                     | ¥                            | 9,231,915  |                  |            | $            | 73,538  |             
|                                                                      |                     |                              |            |                  |            |              |         |              |        

On March 28, 2000, Crosswave entered into a contract with Global Crossing
to purchase an indefeasible right of use (IRU) in units of dedicated capacity
of an international data traffic connection on five optic fiber lines between
Japan and the United States for the period from March 2000 through December
2023, for the total contract price of $25,000 thousand. Crosswave paid the
initial contract fee of $6,250 thousand (25% of the total contract price) upon
signing of the contract in March 2000 and the remaining contract fee of $18,750
thousand in March 2001. The contract is accounted for as a capital lease based
on the criteria set forth in SFAS No. 13, and is recorded in property and
equipment as a capitalized lease. It is being depreciated on a straight-line
basis over the contract term. The contract requires Crosswave to pay an annual
maintenance fee of $150,000 per minimum capacity unit for the five units,
totaling $750,000.

Crosswave is also obligated under a non-cancelable IRU contract with KDDI
accounted for as an operating lease. As of March 31, 2001, future minimum
lease payments for the fixed portion of this operating lease contract and
maintenance fees under the related non-cancelable maintenance service contract
are as follows:

F-19



---



##### Table of Contents



|                       |  |                  |            |              |  |          |            |              |  |              |         |  |  |   |         | 
|---------------------- |  | ---------------- | ---------- | ------------ |  | -------- | ---------- | ------------ |  | ------------ | ------- |  |  | - | ------- | 
|                       |  |                  |            |              |  |          |            |              |  | Thousands of
|                       |  | Thousands of Yen |            | U.S. Dollars
|                       |  |                  |            |             
|Year Ending            |  | Lease (Fixed     |            |              |  |          |            | Lease (Fixed |  |              |         | 
|March 31               |  | Portion)         |            | Maintenance  |  | Portion) |            | Maintenance 
|                       |  |                  |            |              |  |          |            |             
|2002                   |  | ¥                | 2,000,000  |              |  | ¥        | 2,000,000  |              |  | $            | 15,931  |  |  | $ | 15,931  | 
|                      
|                      
|                      
|                      
|2003                   |  |                  | 4,000,000  |              |  |          | 2,500,000  |              |  |              | 31,862  |  |  |   | 19,914  | 
|                      
|                      
|                      
|                      
|2004                   |  |                  | 4,000,000  |              |  |          | 2,500,000  |              |  |              | 31,862  |  |  |   | 19,914  | 
|                      
|                      
|                      
|                      
|2005                   |  |                  | 4,000,000  |              |  |          | 2,500,000  |              |  |              | 31,862  |  |  |   | 19,914  | 
|                      
|                      
|                      
|                      
|2006                   |  |                  | 4,000,000  |              |  |          | 2,500,000  |              |  |              | 31,862  |  |  |   | 19,914  | 
|                      
|                      
|                      
|                      
|2007 and thereafter    |  |                  | 12,000,000 |              |  |          | 7,500,000  |              |  |              | 95,588  |  |  |   | 59,742  | 
|                       |  |                  |            |              |  |          |            |              |  |              |         |  |  |   |         | 
|Total minimum
payments |  | ¥                | 30,000,000 |              |  | ¥        | 19,500,000 |              |  | $            | 238,967 |  |  | $ | 155,329 | 
|                       |  |                  |            |              |  |          |            |              |  |              |         |  |  |   |         | 

In addition to the total minimum payments for the fixed portion presented
above, there are projected variable payments as set forth in the contract of
¥1,200,000 thousand ($9,559 thousand), ¥1,800,000 thousand ($14,338 thousand),
¥2,500,000 thousand ($19,914 thousand), ¥3,000,000 thousand ($23,897 thousand),
¥3,500,000 thousand ($27,880 thousand) and ¥13,500,000 thousand ($107,535
thousand) for the years ending March 31, 2002, 2003, 2004, 2005, 2006 and 2007
and thereafter. The actual variable payments made to date are less than the
projected amounts in the contract by approximately ¥390 million and ¥711
million ($5,660 thousand) in the years ended March 31, 2000 and 2001,
respectively, which may result in adjustment to the rates to be paid in later
years.

For the network construction, Crosswave has placed firm orders to purchase
related materials and equipment amounting to approximately ¥2.4 billion ($19.1
million) as of March 31, 2001.

5. PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2000 and 2001, consisted of the
following:

|                                                            |       |   |                  |           |              |   |            |            |  |   |              |        | 
|----------------------------------------------------------- | ----- | - | ---------------- | --------- | ------------ | - | ---------- | ---------- |  | - | ------------ | ------ | 
|                                                            |       |   |                  |           |              |   |            |            |  |   | Thousands of
|                                                            |       |   | Thousands of Yen |           | U.S. Dollars
|                                                            |       |   |                  |           |             
|                                                            |       |   | 2000             |           | 2001         |   | 2001      
|                                                            |       |   |                  |           |              |   |           
|Data communications equipment                               |       | ¥ | 313,072          |           |              | ¥ | 248,722    |            |  | $ | 1,981        |       
|                                                           
|                                                           
|                                                           
|                                                           
|Office and other equipment                                  |       |   | 196,864          |           |              |   | 395,666    |            |  |   | 3,152        |       
|                                                           
|                                                           
|                                                           
|                                                           
|Leasehold improvements                                      |       |   | 186,034          |           |              |   | 406,531    |            |  |   | 3,238        |       
|                                                           
|                                                           
|                                                           
|                                                           
|Purchased software                                          |       |   | 2,027,763        |           |              |   | 3,024,528  |            |  |   | 24,092       |       
|                                                           
|                                                           
|                                                           
|                                                           
|Capitalized leases, primarily data
communications equipment |       |   | 7,271,473        |           |              |   | 7,458,936  |            |  |   | 59,415       |       
|                                                            |       |   |                  |           |              |   |            |            |  |   |              |       
|                                                            | Total |   |                  | 9,995,206 |              |   |            | 11,534,383 |  |   |              | 91,878 | 
|                                                           
|                                                           
|                                                           
|                                                           
|Less accumulated depreciation and
amortization              |       |   | (4,452,343       | )         |              |   | (4,606,808 | )          |  |   | (36,696      | )     
|                                                            |       |   |                  |           |              |   |            |            |  |   |              |       
|Property and equipmentnet                                  |       | ¥ | 5,542,863        |           |              | ¥ | 6,927,575  |            |  | $ | 55,182       |       
|                                                            |       |   |                  |           |              |   |            |            |  |   |              |       

The useful lives for depreciation and amortization by major asset classes
are as follows:

|                                                |  |              
|----------------------------------------------- |  | -------------
|                                                |  | Range of     
|                                                |  | Useful Lives 
|                                                |  |              
|Data communications, office and other equipment |  | 2 to 15 years
|                                               
|                                               
|                                               
|                                               
|Leasehold improvements                          |  | 3 to 15 years
|                                               
|                                               
|                                               
|                                               
|Purchased software                              |  | 5 years      
|                                               
|                                               
|                                               
|                                               
|Capitalized leases                              |  | 4 to 7 years 

F-20



---



##### Table of Contents



6. LEASES AND COMMITMENTS

Operating LeasesThe Company has operating lease agreements with
telecommunications carriers and others, including Crosswave, for the use of
connectivity lines, including local access lines that customers use to connect
to IIJs network. The leases for domestic backbone are generally either
non-cancelable for a minimum one-year lease period or cancelable during a lease
period principally of six years, with a significant penalty for cancellation
(either 25 percent or 35 percent). The lease for domestic backbone with
Crosswave is for a one-year period and non-cancelable. The leases for
international backbone available as of March 31, 2001 are entered into with
carriers for lease periods ranging from one to five years and are substantially
non-cancelable. The Company also leases its office premises and certain office
equipment under non-cancelable operating leases which expire on various dates
through 2005 and also leases its network operation centers under non-cancelable
operating leases.

Lease expenses related to backbone lines for the years ended March 31,
1999, 2000 and 2001, amounted to ¥4,831,961 thousand, ¥7,192,864 thousand and
¥8,122,256 thousand ($64,699 thousand), respectively. Lease expenses for local
access lines for the years ended March 31, 1999, 2000 and 2001, which are only
attributable to dedicated access revenues, amounted to ¥1,884,472 thousand,
¥2,089,791 thousand and ¥3,142,392 thousand ($25,031 thousand), respectively.
Other lease expenses for the years ended March 31, 1999, 2000 and 2001,
amounted to ¥647,520 thousand, ¥1,288,271 thousand and ¥1,858,987 thousand
($14,808 thousand), respectively.

Capital LeasesThe Company conducts its connectivity and other services by
using data communications and other equipment leased under capital lease
arrangements. The fair values of the assets upon execution of the capital
lease agreements and accumulated depreciation amounted to ¥7,271,473 thousand
and ¥ 3,709,427 thousand at March 31, 2000 and ¥7,458,936 thousand ($59,415
thousand) and ¥3,221,325 thousand ($25,660 thousand) at March 31, 2001,
respectively.

As of March 31, 2001, future lease payments under non-cancelable operating
leases, including the aforementioned cancelable connectivity lease agreements
(but excluding dedicated access lines which the Company charges outright to
customers), and capital leases were as follows:

|                                                    |                     |   |                  |           |                           |   |           |           |           |   |            |           |              |   |        |        |  |   |        |       |  |   |         |        | 
|--------------------------------------------------- | ------------------- | - | ---------------- | --------- | ------------------------- | - | --------- | --------- | --------- | - | ---------- | --------- | ------------ | - | ------ | ------ |  | - | ------ | ----- |  | - | ------- | ------ | 
|                                                    |                     |   | Thousands of Yen |           | Thousands of U.S. Dollars
|                                                    |                     |   |                  |           |                          
|                                                    |                     |   | Connectivity     |           |                           |   |           |           |           |   |            |           | Connectivity |   |        |        |  |   |        |       | 
|                                                    |                     |   | Lines            |           | Other                     |   |           |           |           |   | Lines      |           | Other        |   |        |        | 
|                                                    |                     |   | Operating        |           | Operating                 |   | Capital   |           | Operating |   | Operating  |           | Capital     
|                                                    |                     |   | Leases           |           | Leases                    |   | Leases    |           | Leases    |   | Leases     |           | Leases      
|                                                    |                     |   |                  |           |                           |   |           |           |           |   |            |           |             
|Year ending March 31:                               |                     |   |                  |           |                           |   |           |           |           |   |            |           |              |   |        |        |  |   |        |       |  |   |         |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | 2002                |   | ¥                | 2,854,614 |                           |   | ¥         | 1,015,728 |           |   | ¥          | 1,764,586 |              |   | $      | 22,739 |  |   | $      | 8,091 |  |   | $       | 14,056 | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | 2003                |   |                  | 1,038,501 |                           |   |           | 727,120   |           |   |            | 1,421,543 |              |   |        | 8,272  |  |   |        | 5,792 |  |   |         | 11,323 | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | 2004                |   |                  | 310,919   |                           |   |           | 44,829    |           |   |            | 1,002,623 |              |   |        | 2,477  |  |   |        | 357   |  |   |         | 7,986  | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | 2005                |   |                  | 132,895   |                           |   |           | 18,530    |           |   |            | 307,557   |              |   |        | 1,059  |  |   |        | 148   |  |   |         | 2,450  | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | 2006                |   |                  | 126,709   |                           |   |           | 18,530    |           |   |            | 34,968    |              |   |        | 1,009  |  |   |        | 148   |  |   |         | 279    | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | 2007 and thereafter |   |                  | 67,725    |                           |   |           | 160,595   |           |   |            | 14,049    |              |   |        | 539    |  |   |        | 1,279 |  |   |         | 112    | 
|                                                    |                     |   |                  |           |                           |   |           |           |           |   |            |           |              |   |        |        |  |   |        |       |  |   |         |        | 
|Total minimum lease
payments                        |                     | ¥ | 4,531,363        |           |                           | ¥ | 1,985,332 |           |           |   | 4,545,326  |           |              | $ | 36,095 |        |  | $ | 15,815 |       |  |   | 36,206  |       
|                                                    |                     |   |                  |           |                           |   |           |           |           |   |            |           |              |   |        |        |  |   |        |       |  |   |         |        | 
|Less amounts
representing interest                  |                     |   |                  |           |                           |   |           |           |           |   | (221,748   | )         |              |   |        |        |  |   |        |       |  |   | (1,767  | )     
|                                                    |                     |   |                  |           |                           |   |           |           |           |   |            |           |              |   |        |        |  |   |        |       |  |   |         |       
|Present value of net
minimum capital lease
payments |                     |   |                  |           |                           |   |           |           |           |   | 4,323,578  |           |              |   |        |        |  |   |        |       |  |   | 34,439  |       
|                                                   
|                                                   
|                                                   
|                                                   
|Less current portion                                |                     |   |                  |           |                           |   |           |           |           |   | (1,644,354 | )         |              |   |        |        |  |   |        |       |  |   | (13,098 | )     
|                                                    |                     |   |                  |           |                           |   |           |           |           |   |            |           |              |   |        |        |  |   |        |       |  |   |         |       
|Noncurrent                                          |                     |   |                  |           |                           |   |           |           |           | ¥ | 2,679,224  |           |              |   |        |        |  |   |        |       |  | $ | 21,341  |       
|                                                    |                     |   |                  |           |                           |   |           |           |           |   |            |           |              |   |        |        |  |   |        |       |  |   |         |       

F-21



---



##### Table of Contents



CommitmentsThe Company has contracted for connectivity lines with
Crosswave as of March 31, 2001 that, in aggregate, provide for monthly payments
of ¥167,606 thousand ($1,335 thousand).

The fair value of equipment under purchase commitments with respect to
capital lease arrangements and purchase commitments for network system
equipment outstanding at March 31, 2001, amounted to ¥404,929 thousand ($3,225
thousand) and ¥3,611,158 thousand ($28,765 thousand), respectively.

7. BORROWINGS AND CONVERTIBLE NOTES

Short-term borrowings at March 31, 2000 and 2001, consisted of unsecured
notes payable to banks of ¥450,000 thousand and ¥50,000 thousand ($398
thousand) and bank overdrafts of ¥13,240,376 thousand and ¥5,570,000 thousand
($44,369 thousand), respectively. Stated annual interest rates on the
short-term borrowings ranged from 0.76 to 1.50 percent and from 1.375 to 1.50
percent at March 31, 2000 and 2001, respectively, and their weighted average
rates at March 31, 2000 and 2001 were 1.34 percent and 1.40 percent,
respectively.

Long-term borrowings as of March 31, 2000 and 2001, consisted of the
following:

|                                                                                                                                      |  |                  |          |              |  |      |           |  |  |              |        | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | ------------ |  | ---- | --------- |  |  | ------------ | ------ | 
|                                                                                                                                      |  |                  |          |              |  |      |           |  |  | Thousands of
|                                                                                                                                      |  | Thousands of Yen |          | U.S. Dollars
|                                                                                                                                      |  |                  |          |             
|                                                                                                                                      |  | 2000             |          | 2001         |  | 2001
|                                                                                                                                      |  |                  |          |              |  |     
|Unsecured long-term loans payable to
banks, maturing serially through 2002 
2004, annual interest 1.25 to 1.95
percent (see Note 12) |  | ¥                | 890,000  |              |  | ¥    | 2,800,000 |  |  | $            | 22,304 | 
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|Less current portion                                                                                                                  |  |                  | (690,000 | )            |  |      |          |  |  |              |       | 
|                                                                                                                                      |  |                  |          |              |  |      |           |  |  |              |        | 
|Long-term borrowings, less current portion                                                                                            |  | ¥                | 200,000  |              |  | ¥    | 2,800,000 |  |  | $            | 22,304 | 
|                                                                                                                                      |  |                  |          |              |  |      |           |  |  |              |        | 

The Company entered into an interest rate swap contract to manage its
interest rate exposure resulting in a fixed interest rate. The effective
interest rate for the long-term loan of ¥1,000,000 thousand ($7,966 thousand)
outstanding at March 31, 2001 after giving effect to such swap agreement was
1.96 percent per annum.

Substantially all short-term and long-term bank borrowings are made under
agreements which, as is customary in Japan, provide that under certain
conditions the bank may require the borrower to provide collateral or
guarantees with respect to the borrowings and that the bank may treat any
collateral, whether furnished as security for short-term or long-term loans or
otherwise, as collateral for all indebtedness to such bank. The Company has
never received requests to provide collateral or guarantees from its banks.
Also, provisions of certain loan agreements grant certain rights of possession
to the lenders in the event of default.

Annual maturities of long-term borrowings outstanding as of March 31,
2001, are as follows:

|            |       |                  |  |              |           |              |  |   |        | 
|----------- | ----- | ---------------- |  | ------------ | --------- | ------------ |  | - | ------ | 
|Year Ending |       |                  |  |              |           | Thousands of
|March 31    |       | Thousands of Yen |  | U.S. Dollars
|            |       |                  |  |             
|            | 2002  |                  |  |              |          |              |  |   |       | 
|           
|           
|           
|           
|            | 2003  |                  |  | ¥            | 1,400,000 |              |  | $ | 11,152 | 
|           
|           
|           
|           
|            | 2004  |                  |  |              | 1,400,000 |              |  |   | 11,152 | 
|            |       |                  |  |              |           |              |  |   |        | 
|            | Total |                  |  | ¥            | 2,800,000 |              |  | $ | 22,304 | 
|            |       |                  |  |              |           |              |  |   |        | 

F-22



---



##### Table of Contents



The Company entered into bank overdraft agreements with certain Japanese
banks for which the unused balance outstanding as of March 31, 2001, was
¥6,540,000 thousand ($52,095 thousand).

The 1.75 percent unsecured yen convertible notes due March 2005 in the
aggregate principal amount of ¥15,000,000 thousand ($119,484 thousand) were
issued on April 11, 2000. The notes are subject to conversion at ¥24,000
thousand ($191 thousand) per share at any time on or after July 3, 2000 and on
or before March 15, 2005.

8. INCOME TAXES

Income taxes imposed by the national, prefectural and municipal
governments of Japan resulted in a normal statutory rate of approximately 48
percent for the year ended March 31, 1999 and 42 percent for the years ended
March 31, 2000 and 2001, respectively. Total income tax recognized for the
years ended March 31, 1999, 2000 and 2001, are applicable to the following:

|                                                                       |                    |   |                  |        |              |   |           |            |      |   |           |          |   |   |              |        |  
|---------------------------------------------------------------------- | ------------------ | - | ---------------- | ------ | ------------ | - | --------- | ---------- | ---- | - | --------- | -------- | - | - | ------------ | ------ | -
|                                                                       |                    |   |                  |        |              |   |           |            |      |   |           |          |   |   | Thousands of
|                                                                       |                    |   | Thousands of Yen |        | U.S. Dollars
|                                                                       |                    |   |                  |        |             
|                                                                       |                    |   | 1999             |        | 2000         |   | 2001      |            | 2001
|                                                                       |                    |   |                  |        |              |   |           |            |     
|Loss from consolidated
operations before income
tax expense (benefit): |                    |   |                  |        |              |   |           |            |      |   |           |          |   |   |              |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Current            |   | ¥                | 11,588 |              |   | ¥         | 140,842    |      |   | ¥         | 39,740   |   |   | $            | 316    |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Deferred (benefit) |   |                  | 3,732  |              |   |           | (1,420,965 | )    |   |           | (965,418 | ) |   |              | (7,690 | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other comprehensive income                                             |                    |   | 1,520            |        |              |   | 1,389,143 |            |      |   | 1,150,014 |          |   |   | 9,161        |       
|                                                                       |                    |   |                  |        |              |   |           |            |      |   |           |          |   |   |              |        |  
|Total income tax                                                       |                    | ¥ | 16,840           |        |              | ¥ | 109,020   |            |      | ¥ | 224,336   |          |   | $ | 1,787        |       
|                                                                       |                    |   |                  |        |              |   |           |            |      |   |           |          |   |   |              |        |  

Income taxes-deferred for the year ended March 31, 1999 included ¥93,844
thousand credit to deferred tax assets resulting from the enacted changes in
the Japanese income tax rate on March 31, 1999. As a result, normal Japanese
statutory rates were reduced by 6 percent to 42 percent.

The approximate effect of temporary differences and carryforwards giving
rise to deferred tax balances at March 31, 2000 and 2001, was as follows:

|                                                  |       |   |                  |           |              |   |           |           |             |   |           |           |             |   |           |           |  |   |              |        |  |   |        |        | 
|------------------------------------------------- | ----- | - | ---------------- | --------- | ------------ | - | --------- | --------- | ----------- | - | --------- | --------- | ----------- | - | --------- | --------- |  | - | ------------ | ------ |  | - | ------ | ------ | 
|                                                  |       |   |                  |           |              |   |           |           |             |   |           |           |             |   |           |           |  |   | Thousands of
|                                                  |       |   | Thousands of Yen |           | U.S. Dollars
|                                                  |       |   |                  |           |             
|                                                  |       |   | 2000             |           | 2001         |   | 2001     
|                                                  |       |   |                  |           |              |   |          
|                                                  |       |   | Deferred         |           | Deferred     |   | Deferred  |           | Deferred    |   | Deferred  |           | Deferred   
|                                                  |       |   | Tax              |           | Tax          |   | Tax       |           | Tax         |   | Tax       |           | Tax        
|                                                  |       |   | Assets           |           | Liabilities  |   | Assets    |           | Liabilities |   | Assets    |           | Liabilities
|                                                  |       |   |                  |           |              |   |           |           |             |   |           |           |            
|Unrealized gains on
available-for-sale
securities |       |   |                  |           |              | ¥ | 1,388,941 |           |             |   |           |           |             | ¥ | 2,530,398 |           |  |   |              |        |  | $ | 20,156 |       
|                                                 
|                                                 
|                                                 
|                                                 
|Capitalized leases                                |       | ¥ | 37,483           |           |              |   |           |           |             | ¥ | 35,133    |           |             |   |           |           |  | $ | 280          |        |  |   |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|Foreign currency adjustment                       |       |   |                  |           |              |   | 24,421    |           |             |   |           |           |             |   |           |           |  |   |              |        |  |   |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|Accrued expenses                                  |       |   | 68,209           |           |              |   |           |           |             |   | 89,513    |           |             |   |           |           |  |   | 713          |        |  |   |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|Retirement and pension cost                       |       |   | 48,943           |           |              |   |           |           |             |   | 52,349    |           |             |   |           |           |  |   | 417          |        |  |   |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|Gains on non-monetary
exchange of securities      |       |   |                  |           |              |   | 65,779    |           |             |   |           |           |             |   |           |           |  |   |              |        |  |   |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|Stock issue cost                                  |       |   | 120,509          |           |              |   |           |           |             |   | 32,356    |           |             |   |           |           |  |   | 258          |        |  |   |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|Operating loss carryforward                       |       |   | 2,077,020        |           |              |   |           |           |             |   | 2,743,252 |           |             |   |           |           |  |   | 21,851       |        |  |   |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|Other                                             |       |   | 32,482           |           |              |   | 14,483    |           |             |   | 86,514    |           |             |   | 1,242     |           |  |   | 689          |        |  |   | 10     |       
|                                                  |       |   |                  |           |              |   |           |           |             |   |           |           |             |   |           |           |  |   |              |        |  |   |        |       
|                                                  | Total |   |                  | 2,384,646 |              |   |           | 1,493,624 |             |   |           | 3,039,117 |             |   |           | 2,531,640 |  |   |              | 24,208 |  |   |        | 20,166 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Valuation allowance                               |       |   | (894,131         | )         |              |   |           |           |             |   | (693,114  | )         |             |   |           |           |  |   | (5,521       | )      |  |   |        |       
|                                                  |       |   |                  |           |              |   |           |           |             |   |           |           |             |   |           |           |  |   |              |        |  |   |        |       
|Total                                             |       | ¥ | 1,490,515        |           |              | ¥ | 1,493,624 |           |             | ¥ | 2,346,003 |           |             | ¥ | 2,531,640 |           |  | $ | 18,687       |        |  | $ | 20,166 |       
|                                                  |       |   |                  |           |              |   |           |           |             |   |           |           |             |   |           |           |  |   |              |        |  |   |        |       

F-23



---



##### Table of Contents



As of March 31, 2000 and 2001, the valuation allowance for deferred tax
assets has been provided for in the accompanying financial statements because
of uncertainty regarding recovery of such amounts. The net changes in the
valuation allowance for deferred tax assets were an increase of ¥589,040
thousand for the year ended March 31, 1999, and decreases of ¥61,943 thousand
and ¥201,017 thousand ($1,601 thousand) for the years ended March 31, 2000 and
2001, respectively, resulting from the income tax effect of unrealized gains on
certain available-for-sale securities. As of March 31, 2001, IIJ, certain
domestic subsidiaries and IIJ America, a U.S. subsidiary, had tax operating
loss carryforwards of ¥5,029,199 thousand ($40,061 thousand), ¥578,612 thousand
($4,609 thousand) and $6,994 thousand, respectively. These loss carryforwards
are available to offset future taxable income, and will expire in the period
ending March 31, 2006 in Japan and December 31, 2020 in the United States of
America, respectively. Loss before income tax expense (benefit) and minority
interest for the years ended March 31, 1999, 2000 and 2001, included a loss
from the foreign subsidiary of ¥275,872 thousand, ¥342,620 thousand and
¥210,917 thousand ($1,680 thousand), respectively, and a valuation allowance
for deferred tax assets giving rise to operating loss carryforwards and
temporary differences of the subsidiary was fully provided in the periods.

A reconciliation between the amount of reported income taxes and the
amount of income taxes computed using the normal statutory rate for each of the
three years in the period ended March 31, 2001, is as follows:

|                                                            |                                                                             |   |                  |         |              |   |            |         |      |   |          |          |   |   |              |        |  
|----------------------------------------------------------- | --------------------------------------------------------------------------- | - | ---------------- | ------- | ------------ | - | ---------- | ------- | ---- | - | -------- | -------- | - | - | ------------ | ------ | -
|                                                            |                                                                             |   |                  |         |              |   |            |         |      |   |          |          |   |   | Thousands of
|                                                            |                                                                             |   | Thousands of Yen |         | U.S. Dollars
|                                                            |                                                                             |   |                  |         |             
|                                                            |                                                                             |   | 1999             |         | 2000         |   | 2001       |         | 2001
|                                                            |                                                                             |   |                  |         |              |   |            |         |     
|Amount computed by using normal Japanese
statutory tax rate |                                                                             | ¥ | (724,872         | )       |              | ¥ | (1,168,857 | )       |      | ¥ | (734,893 | )        |   | $ | (5,853       | )     
|                                                           
|                                                           
|                                                           
|                                                           
|Increase (decrease) in taxes resulting from:                |                                                                             |   |                  |         |              |   |            |         |      |   |          |          |   |   |              |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Expenses not deductible for tax purposes                                    |   |                  | 16,607  |              |   |            | (56,765 | )    |   |          | (33,725  | ) |   |              | (269   | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Increase (decrease) in valuation allowance                                  |   |                  | 608,764 |              |   |            | (52,187 | )    |   |          | (186,905 | ) |   |              | (1,489 | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Effect of effective income tax rate
changes                                 |   |                  | 93,844  |              |   |            |         |      |   |          |          |   |   |              |        |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Realization of tax benefits of operating
loss carryforwards of
subsidiaries |   |                  |         |              |   |            | (4,367  | )    |   |          | (1,821   | ) |   |              | (15    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Minimum income tax                                                          |   |                  | 9,549   |              |   |            | 12,464  |      |   |          | 15,233   |   |   |              | 121    |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Othernet                                                                   |   |                  | 11,428  |              |   |            | (10,411 | )    |   |          | 16,433   |   |   |              | 131    |  
|                                                            |                                                                             |   |                  |         |              |   |            |         |      |   |          |          |   |   |              |       
|Income tax expense (benefit) as reported                    |                                                                             | ¥ | 15,320           |         |              | ¥ | (1,280,123 | )       |      | ¥ | (925,678 | )        |   | $ | (7,374       | )     
|                                                            |                                                                             |   |                  |         |              |   |            |         |      |   |          |          |   |   |              |       

9. RETIREMENT AND PENSION PLANS

IIJ and certain subsidiaries have unfunded retirement benefits and
noncontributory defined benefit pension plans which together cover
substantially all of their employees who are not directors and also participate
in a contributory multi-employer pension plan, the Japan Computer Information
Service Employees Pension Fund (the Multi-Employer Plan), covering
substantially all of their employees.

Approximately 70 percent of the employees benefits from IIJs severance
indemnity plan was transferred in May 1997 to its newly established
noncontributory defined benefit pension plan. The following information
regarding net periodic pension cost and accrued pension cost also includes the
30 percent of severance benefits not transferred to the noncontributory plan.
Under the severance and pension plans, all of IIJs employees are entitled,
upon voluntary retirement with 15 years or more service, or upon mandatory
retirement at age 60, to a 10-year period of annuity payments (or lump-sum
severance indemnities) based on the rate of pay at the time of retirement,
length of service and certain other factors. IIJs employees who do not meet
these conditions are entitled to lump-sum severance indemnities.

F-24



---



##### Table of Contents



As stipulated by the Japanese Welfare Pension Insurance Law, the
Multi-Employer Plan is composed of a substitutional portion of Japanese Pension
Insurance and a multi-employers portion of a contributory defined benefit
pension plan. The benefits for the substitutional portion are based on a
standard remuneration schedule under the Welfare Pension Insurance Law and the
length of participation. The multi-employers portion of the benefits is based
on the employees length of service. However, assets contributed by an
employer are not segregated in a separate account or restricted to provide
benefits only to employees of that employer, including IIJ. The net pension
cost under the Multi-Employer Plan is recognized when contributions become due.

Net periodic pension cost for the years ended March 31, 1999, 2000 and
2001, included the following components:

|                                      |  |                  |        |              |  |      |        |      |  |   |         |   |  |              |     |  
|------------------------------------- |  | ---------------- | ------ | ------------ |  | ---- | ------ | ---- |  | - | ------- | - |  | ------------ | --- | -
|                                      |  |                  |        |              |  |      |        |      |  |   |         |   |  | Thousands of
|                                      |  | Thousands of Yen |        | U.S. Dollars
|                                      |  |                  |        |             
|                                      |  | 1999             |        | 2000         |  | 2001 |        | 2001
|                                      |  |                  |        |              |  |      |        |     
|Service cost                          |  | ¥                | 71,407 |              |  | ¥    | 87,225 |      |  | ¥ | 109,473 |   |  | $            | 872 |  
|                                     
|                                     
|                                     
|                                     
|Interest cost                         |  |                  | 3,510  |              |  |      | 5,371  |      |  |   | 7,772   |   |  |              | 62  |  
|                                     
|                                     
|                                     
|                                     
|Expected return on plan assets        |  |                  | (220   | )            |  |      | (1,064 | )    |  |   | (4,877  | ) |  |              | (39 | )
|                                     
|                                     
|                                     
|                                     
|Amortization of transition obligation |  |                  | 402    |              |  |      | 402    |      |  |   | 402     |   |  |              | 3   |  
|                                     
|                                     
|                                     
|                                     
|Recognized net actuarial loss         |  |                  | 2,608  |              |  |      | 1,607  |      |  |   | 1,589   |   |  |              | 13  |  
|                                      |  |                  |        |              |  |      |        |      |  |   |         |   |  |              |     |  
|Net periodic pension cost             |  | ¥                | 77,707 |              |  | ¥    | 93,541 |      |  | ¥ | 114,359 |   |  | $            | 911 |  
|                                      |  |                  |        |              |  |      |        |      |  |   |         |   |  |              |     |  

The funded status as of March 31, 2000 and 2001, is as follows:

|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|------------------------------------- | ------------------------------------------------ | - | ---------------- | ------- | ------------ | - | -------- | ------- | - | - | ------------ | ----- | -
|                                      |                                                  |   |                  |         |              |   |          |         |   |   | Thousands of
|                                      |                                                  |   | Thousands of Yen |         | U.S. Dollars
|                                      |                                                  |   |                  |         |             
|                                      |                                                  |   | 2000             |         | 2001         |   | 2001    
|                                      |                                                  |   |                  |         |              |   |         
|Change in benefit obligation:         |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|                                     
|                                     
|                                     
|                                     
|                                      | Benefit obligation at beginning of year          |   | ¥                | 209,349 |              |   | ¥        | 313,873 |   |   | $            | 2,500 |  
|                                     
|                                     
|                                     
|                                     
|                                      | Service cost                                     |   |                  | 87,225  |              |   |          | 109,473 |   |   |              | 872   |  
|                                     
|                                     
|                                     
|                                     
|                                      | Interest cost                                    |   |                  | 5,371   |              |   |          | 7,772   |   |   |              | 62    |  
|                                     
|                                     
|                                     
|                                     
|                                      | Actuarial (gain) loss                            |   |                  | 6,653   |              |   |          | (71,520 | ) |   |              | (570  | )
|                                     
|                                     
|                                     
|                                     
|                                      | Newly controlled subsidiary                      |   |                  | 14,131  |              |   |          |         |   |   |              |       |  
|                                     
|                                     
|                                     
|                                     
|                                      | Benefit paid                                     |   |                  | (8,856  | )            |   |          | (8,927  | ) |   |              | (71   | )
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|Benefit obligation at end of year     |                                                  | ¥ | 313,873          |         |              | ¥ | 350,671  |         |   | $ | 2,793        |      
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|Change in plan assets:                |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|                                     
|                                     
|                                     
|                                     
|                                      | Fair value of plan assets at beginning of year   |   | ¥                | 67,177  |              |   | ¥        | 130,059 |   |   | $            | 1,036 |  
|                                     
|                                     
|                                     
|                                     
|                                      | Actual return on plan assets                     |   |                  | 4,596   |              |   |          | (8,237  | ) |   |              | (66   | )
|                                     
|                                     
|                                     
|                                     
|                                      | Newly controlled subsidiary                      |   |                  | 4,856   |              |   |          |         |   |   |              |       |  
|                                     
|                                     
|                                     
|                                     
|                                      | Employer contribution                            |   |                  | 59,395  |              |   |          | 101,263 |   |   |              | 806   |  
|                                     
|                                     
|                                     
|                                     
|                                      | Benefits paid                                    |   |                  | (5,965  | )            |   |          | (6,245  | ) |   |              | (49   | )
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|                                      | Fair value of plan assets at end of year         |   |                  | 130,059 |              |   |          | 216,840 |   |   |              | 1,727 |  
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|Funded status                         |                                                  |   | (183,814         | )       |              |   | (133,831 | )       |   |   | (1,066       | )    
|                                     
|                                     
|                                     
|                                     
|Unrecognized actuarial loss           |                                                  |   | 63,160           |         |              |   | 3,165    |         |   |   | 25           |      
|                                     
|                                     
|                                     
|                                     
|Unrecognized transition obligation    |                                                  |   | 6,428            |         |              |   | 6,026    |         |   |   | 48           |      
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|Accrued pension cost                  |                                                  | ¥ | (114,226         | )       |              | ¥ | (124,640 | )       |   | $ | (993         | )    
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|Actuarial assumptions as of March 31: |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|                                     
|                                     
|                                     
|                                     
|                                      | Discount rate                                    |   |                  | 2.5     | %            |   |          | 2.0     | % |   |              |       |  
|                                     
|                                     
|                                     
|                                     
|                                      | Expected long-term rate of return on plan assets |   |                  | 3.0     |              |   |          | 2.5     |   |   |              |       |  
|                                     
|                                     
|                                     
|                                     
|                                      | Rate of compensation increase                    |   |                  | 3.5     |              |   |          | 3.0     |   |   |              |       |  

F-25



---



##### Table of Contents



IIJs funding policies with respect to the noncontributory plan are
generally to contribute amounts considered tax deductible under applicable
income tax regulations. Plan assets, including pension trust funds managed by
a certain trust bank and a life insurance company, consist of Japanese
Government bonds, other debt securities and marketable equity securities. Plan
assets managed by the insurance company are included in pooled investment
portfolios.

The unrecognized net loss and the unrecognized net obligation at the date
of initial application are being amortized over 14 years and 21 years,
respectively.

Contributions due and paid during the years ended March 31, 1999, 2000 and
2001, under the Multi-Employer Plan, including its substitutional portion,
amounted to ¥91,699 thousand, ¥121,818 thousand and ¥178,053 thousand ($1,418
thousand).

Under the Japanese Commercial Code (the Code), retirement benefits for
directors and statutory auditors are approved by the shareholders. The amount
of benefits to retiring directors and corporate auditors of IIJ are also
determined by the shareholders. Other than an estimated accrued benefit at
March 31, 2001 to a retiring director of ¥35,770 thousand ($285 thousand),
there were no benefits determined or paid to retired directors or statutory
auditors for each of the three years in the period ended March 31, 2001.

10. SHAREHOLDERS EQUITY

The Code requires IIJ to appropriate as a legal reserve portions of
retained earnings in amounts equal to at least 10 percent of cash payments,
including dividends and officers bonuses, in each financial period, until the
reserve equals 25 percent of the stated capital. The retained earnings so
appropriated may be used to eliminate or reduce a deficit by resolution of the
shareholders or may be transferred to capital stock by resolution of the Board
of Directors.

Under the Code, at least 50 percent of the issue price of new shares, with
a minimum of the par value thereof, is required to be designated as stated
capital. The portion which is to be designated as stated capital is determined
by resolution of the Board of Directors. Proceeds in excess of the amounts
designated as stated capital, as reduced by stock issue expenses less the
applicable tax benefit, are credited to additional paid-in capital. IIJ may
transfer portions of additional paid-in capital and legal reserve to stated
capital by resolution of the Board of Directors. IIJ may also transfer
portions of retained earnings, available for dividends, to the stated capital
by resolution of the shareholders.

Under the Code, IIJ may issue new common shares to the existing
shareholders without consideration by resolution of the Board of Directors as a
stock split to the extent that the aggregated par value of the shares
outstanding after the issuance does not exceed the stated capital. However,
the amount calculated by dividing the total amount of shareholders equity by
the number of outstanding shares after the issuance shall not be less than
¥50,000.

In August 1999, IIJ completed an initial public offering of 7,160,000 ADSs
representing 3,580 shares of common stock at an initial offering price of
$23.00 per ADS in the NASDAQ National Market in the United States of America.
The net proceeds to IIJ from the initial public offering, after deducting
applicable underwriting discounts and stock issue costs, was ¥17,358,987
thousand. Stock issue costs amounting to ¥1,751,253 thousand were deducted
from additional paid-in capital.

Stock Option PlansIn March 2000, Technology issued bonds with 2,000
detachable warrants in the amount of ¥600,000 thousand. The bonds were
repurchased in April 2000 and warrants to purchase the subsidiarys 775 common
shares at an exercise price of ¥300,000 per share based on fair market value
were immediately distributed to certain officers and employees of the Company
and the subsidiary, 13 persons in the aggregate and 1,000 warrants were
purchased by the Company.

F-26



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##### Table of Contents



In March 2000, IIJ adopted a stock option plan that provides for the
granting of stock options to certain directors and employees. In May 2000, IIJ
granted 295 options to its directors and employees, 34 persons in the
aggregate. The options vest 100 percent on April 8, 2002 and are exercisable
for eight years from that date. The exercise price was determined to be
¥13,055,664 ($103,996) per common share or ¥6,528 per ADS which was greater
than the market price on the day of grant. Accordingly, no compensation
expense has been recognized in the consolidated statements of operations
pursuant to APB No. 25.

The fair value of IIJs options for the year ended March 31, 2001 reported
below has been estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:

|                                        |  |  |      |  
|--------------------------------------- |  |  | ---- | -
|Stock Options:                          |  |  |      |  
|                                       
|                                       
|                                       
|                                       
|Expected life from vest date (in years) |  |  | 4.0  |  
|                                       
|                                       
|                                       
|                                       
|Risk-free interest rate                 |  |  | 1.39 | %
|                                       
|                                       
|                                       
|                                       
|Volatility                              |  |  | 148  | %
|                                       
|                                       
|                                       
|                                       
|Dividend yield                          |  |  |     |  

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
The Companys options have characteristics significantly different from those
of traded options, and changes in the subjective input assumptions can
materially affect the fair value estimate. Based upon the above assumptions,
the weighted average fair value of IIJs stock options granted during the year
ended March 31, 2001 was ¥11,875 thousand ($95 thousand) per common share or
¥5,938 ($47) per ADS, respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options vesting period. Had the Companys stock
options been accounted for under SFAS No. 123 Accounting for Stock-Based
Compensation, pro forma net loss and net loss per common share and per ADS for
the year ended March 31, 2001, including the effects of fair values associated
with the granted stock options of Technology are as follows:

|                                             |             |  |              |           |              |  |   |        | 
|-------------------------------------------- | ----------- |  | ------------ | --------- | ------------ |  | - | ------ | 
|                                             |             |  | Thousands of |           | Thousands of
|                                             |             |  | Yen          |           | U.S. Dollars
|                                             |             |  |              |           |             
|Net loss:                                    |             |  |              |           |              |  |   |       
|                                            
|                                            
|                                            
|                                            
|                                             | As reported |  | ¥            | 4,799,220 |              |  | $ | 37,440 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Pro forma   |  | ¥            | 6,440,248 |              |  | $ | 51,300 | 
|                                            
|                                            
|                                            
|                                            
|                                            
|                                             |             |  | Yen          |           | U.S. Dollars
|                                             |             |  |              |           |             
|Basic and diluted net loss per common share: |             |  |              |           |              |  |   |       
|                                            
|                                            
|                                            
|                                            
|                                             | As reported |  | ¥            | 209,085   |              |  | $ | 1,665  | 
|                                            
|                                            
|                                            
|                                            
|                                             | Pro forma   |  | ¥            | 286,488   |              |  | $ | 2,282  | 
|                                            
|Basic and diluted net loss per ADS:          |             |  |              |           |              |  |   |       
|                                            
|                                            
|                                            
|                                            
|                                             | As reported |  | ¥            | 105       |              |  | $ | 0.84   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Pro forma   |  | ¥            | 143       |              |  | $ | 1.14   | 

F-27



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##### Table of Contents



11. OTHER COMPREHENSIVE INCOME

The change in each component of other comprehensive income (loss) for the
years ended March 31, 1999, 2000 and 2001, is as follows:

|                                               |                                                                               |       |        |                  |       |              |            |           |           |      |            |           |           |   |        |              |        | 
|---------------------------------------------- | ----------------------------------------------------------------------------- | ----- | ------ | ---------------- | ----- | ------------ | ---------- | --------- | --------- | ---- | ---------- | --------- | --------- | - | ------ | ------------ | ------ | 
|                                               |                                                                               |       |        |                  |       |              |            |           |           |      |            |           |           |   |        | Thousands of
|                                               |                                                                               |       |        | Thousands of Yen |       | U.S. Dollars
|                                               |                                                                               |       |        |                  |       |             
|                                               |                                                                               |       |        | 1999             |       | 2000         |            | 2001      |           | 2001
|                                               |                                                                               |       |        |                  |       |              |            |           |           |     
|Other comprehensive income (loss), before tax: |                                                                               |       |        |                  |       |              |            |           |           |      |            |           |           |   |        |             
|                                              
|                                              
|                                              
|                                              
|                                               | Foreign currency translation adjustments                                      |       | ¥      | 1,325            |       |              | ¥          | 23,701    |           |      | ¥          | (1,141    | )         |   | $      | (9           | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Net unrealized holding gain on
securities, net of reclassification
adjustment |       |        | 3,167            |       |              |            | 3,307,161 |           |      |            | 2,738,191 |           |   |        | 21,811       |       
|                                               |                                                                               |       |        |                  |       |              |            |           |           |      |            |           |           |   |        |              |       
|                                               |                                                                               | Total |        |                  | 4,492 |              |            |           | 3,330,862 |      |            |           | 2,737,050 |   |        |              | 21,802 | 
|                                              
|                                              
|                                              
|                                              
|Income tax effect                              |                                                                               |       | (1,520 | )                |       |              | (1,389,143 | )         |           |      | (1,150,014 | )         |           |   | (9,161 | )           
|                                               |                                                                               |       |        |                  |       |              |            |           |           |      |            |           |           |   |        |              |       
|Other comprehensive income, net of tax         |                                                                               | ¥     | 2,972  |                  |       | ¥            | 1,941,719  |           |           | ¥    | 1,587,036  |           |           | $ | 12,641 |             
|                                               |                                                                               |       |        |                  |       |              |            |           |           |      |            |           |           |   |        |              |       

Net unrealized holding gain on securities for the years ended March 31,
1999 and 2001, included reclassification adjustment for realized gain of ¥1,205
thousand and valuation loss of ¥245,424 thousand ($1,955 thousand),
respectively. Accumulated other comprehensive income as of March 31, 2000 and
2001, consisted of translation adjustments in the amount of ¥34,323 thousand
and ¥33,182 thousand ($264 thousand) and net unrealized holding gain on
securities in the amount of ¥1,918,036 thousand and ¥3,506,213 thousand
($27,929 thousand), respectively.

12. FINANCIAL INSTRUMENTS

Fair ValueIn the normal course of business, the Company invests in
financial assets and incurs financial liabilities. To estimate the fair value
of those financial assets, liabilities and derivatives, the Company used quoted
market prices to the extent that they were available. Where a quoted market
price is not available, the Company estimates fair value using primarily the
discounted cash flow method. For certain financial assets and liabilities
which are expected to be collected and settled within one year, the Company
assumed that the carrying amount approximates fair value due to their short
maturities. The carrying amounts or notional amounts and fair value of
financial instruments are summarized below:

|                                                                      |                                    |  |                  |           |              |  |         |           |             |  |               |           |          |  |            |           |           |  |              |        |  |  |         |        | 
|--------------------------------------------------------------------- | ---------------------------------- |  | ---------------- | --------- | ------------ |  | ------- | --------- | ----------- |  | ------------- | --------- | -------- |  | ---------- | --------- | --------- |  | ------------ | ------ |  |  | ------- | ------ | 
|                                                                      |                                    |  |                  |           |              |  |         |           |             |  |               |           |          |  |            |           |           |  | Thousands of
|                                                                      |                                    |  | Thousands of Yen |           | U.S. Dollars
|                                                                      |                                    |  |                  |           |             
|                                                                      |                                    |  | 2000             |           | 2001         |  | 2001   
|                                                                      |                                    |  |                  |           |              |  |        
|                                                                      |                                    |  |                  |           |              |  |         |           |             |  | Carrying      |           |          |  |            |           | Carrying  |  |              |        | 
|                                                                      |                                    |  |                  |           |              |  |         |           |             |  | Amount or     |           |          |  |            |           | Amount or |  | Fair Value  
|                                                                      |                                    |  | Carrying         |           |              |  |         |           | Notional    |  | Fair Value or |           | Notional |  | or Gain   
|                                                                      |                                    |  | Amount           |           | Fair Value   |  | Amount  |           | Gain (Loss) |  | Amount        |           | (Loss)  
|                                                                      |                                    |  |                  |           |              |  |         |           |             |  |               |           |         
|Short-term and other investments
for which it is:                     |                                    |  |                  |           |              |  |         |           |             |  |               |           |          |  |            |           |           |  |              |        |  |  |         |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Practicable to estimate fair
value |  | ¥                | 4,015,489 |              |  | ¥       | 4,015,489 |             |  | ¥             | 6,700,943 |          |  | ¥          | 6,700,943 |           |  | $            | 53,377 |  |  | $       | 53,377 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Not practicable                    |  |                  | 1,054,701 |              |  |         |           |             |  |               | 1,754,897 |          |  |            |           |           |  |              | 13,979 |  |  |         |        | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Noncurrent refundable insurance
policies (other assets)               |                                    |  | 10,045           |           |              |  | 10,045  |           |             |  | 21,488        |           |          |  | 21,488     |           |           |  | 171          |        |  |  | 171     |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Long-term borrowings and
convertible notes, including
current portion |                                    |  | 890,000          |           |              |  | 892,774 |           |             |  | 17,800,000    |           |          |  | 14,570,363 |           |           |  | 141,788      |        |  |  | 116,062 |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Interest rate swap contracts                                          |                                    |  |                  |           |              |  |         |           |             |  | 1,000,000     |           |          |  | (25,594    | )         |           |  | 7,966        |        |  |  | (204    | )     

F-28



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##### Table of Contents



Cash at March 31, 2000 and 2001, includes U.S. dollar denominated bank
deposits of ¥11,552,088 thousand and ¥5,392,974 thousand ($42,958 thousand),
respectively.

13. ADVERTISING EXPENSES

Advertising expenses incurred during the years ended March 31, 1999, 2000
and 2001, consist principally of advertisement within magazines, journals and
newspapers and amounted to ¥227,629 thousand, ¥731,071 thousand and ¥735,763
thousand ($5,861 thousand), respectively.

14. SUBSEQUENT EVENTS

On June 27, 2001, shareholders of IIJ approved a stock option plan that
provides for the granting of stock options to certain directors and employees.
Under the plan, IIJ is authorized to grant options for 395 common shares at an
exercise price obtained by multiplying the average of the daily closing dollar
prices of ADS of IIJ in the NASDAQ National Market for the 30 consecutive
trading days commencing 45 trading days before the date of the grant by 2,000
or a market price of the common share at the date of grant, multiplied by 1.05
and applicable exchange rate, whichever is greater. The options vest 100% on
June 28, 2003 and are exercisable during the following eight years. On August
2, 2001, IIJ granted the 395 options to its directors and employees, 44 persons
in the aggregate. The exercise price was determined to be ¥2,018,306 ($16,077)
per common share or ¥1,009 ($8.04) per ADS.

* * * * * *

F-29



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

|                                                                                                                                                                                |  |      |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                                                                                |  | Page
|                                                                                                                                                                                |  |     
|Financial Statements                                                                                                                                                            |  |      |      | 
|Independent Auditors Report                                                                                                                                                    |  |      | F-2  | 
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Consolidated Balance Sheets as of March 31, 2000 and 2001                                                                                                                       |  |      | F-3  | 
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Consolidated Statements of Operations for the period from October 28,
1998 (date of inception) through March 31, 1999 and for the years
ended March 31, 2000 and 2001           |  |      | F-5  | 
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Consolidated Statements of Shareholders Equity for the period from
October 28, 1998 (date of inception) through March 31, 1999 and for
the years ended March 31, 2000 and 2001 |  |      | F-6  | 
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Consolidated statements of Cash Flows for the period from October 28,
1998 (date of inception) through March 31, 1999 and for the years
ended March 31, 2000 and 2001           |  |      | F-7  | 
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Notes to Consolidated Financial Statements                                                                                                                                      |  |      | F-9  | 
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|                                                                                                                                                                               
|Financial Statements Schedule                                                                                                                                                   |  |      |      | 
|Schedule II Valuation and Qualifying Accounts                                                                                                                                  |  |      | F-26 | 

F-1



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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Crosswave Communications Inc.:

We have audited the accompanying consolidated balance sheets of Crosswave
Communications Inc. and subsidiaries as of March 31, 2000 and 2001, and the
related consolidated statements of operations, shareholders equity and cash
flows for the period from October 28, 1998 (date of inception) through March
31, 1999, and for the years ended March 31, 2000 and 2001. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Crosswave
Communications Inc. and subsidiaries as of March 31, 2000 and 2001, and the
results of its operations and its cash flows for the period from October 28,
1998 through March 31, 1999, and for the years ended March 31, 2000 and 2001 in
conformity with accounting principles generally accepted in the United States
of America.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for the purpose of
complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material aspects, the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Our audit also comprehended the translation of Japanese yen amounts into U.S.
dollar amounts and, in our opinion, such translation has been made on the basis
set forth in Note 1.

(-s- Asahi & Co.)

Asahi & Co

Tokyo, Japan

May 31, 2001

F-2



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2000 and 2001

|                                                                                                                                                      |                                    |                                                     |                      |            |                  |            |              |            |           |            |         |         |              |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | --------------------------------------------------- | -------------------- | ---------- | ---------------- | ---------- | ------------ | ---------- | --------- | ---------- | ------- | ------- | ------------ | ------- | 
|                                                                                                                                                      |                                    |                                                     |                      |            |                  |            |              |            |           |            |         |         | Thousands of
|                                                                                                                                                      |                                    |                                                     |                      |            | Thousands of Yen |            | U.S. Dollars
|                                                                                                                                                      |                                    |                                                     |                      |            |                  |            |             
|                                                                                                                                                      |                                    |                                                     |                      |            | 2000             |            | 2001         |            | 2001     
|                                                                                                                                                      |                                    |                                                     |                      |            |                  |            |              |            |          
|CURRENT ASSETS:                                                                                                                                       |                                    |                                                     |                      |            |                  |            |              |            |           |            |         |        
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Cash and cash equivalents (Note 1) |                                                     | ¥                    | 12,239,362 |                  |            | ¥            | 24,039,851 |           |            | $       | 191,492 |             
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|Accounts receivable, less allowance for doubtful
accounts of ¥150 thousand and ¥1,848 thousand ($15
thousand) in 2000 and 2001 respectively (Note 4): |                                    |                                                     | 60,895               |            |                  |            | 834,717      |            |           |            | 6,649   |        
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      |                                    | Refundable consumption tax and other current assets |                      |            | 346,747          |            |              |            | 1,062,243 |            |         |         | 8,461        |        
|                                                                                                                                                      |                                    |                                                     |                      |            |                  |            |              |            |           |            |         |        
|                                                                                                                                                      |                                    |                                                     | Total current assets |            |                  | 12,647,004 |              |            |           | 25,936,811 |         |         |              | 206,602 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|PROPERTY AND EQUIPMENT, net (Notes 1, 2, 4 and 5):                                                                                                    |                                    |                                                     | 15,005,373           |            |                  |            | 31,368,009   |            |           |            | 249,864 |        
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|DEPOSITS AND OTHER ASSETS, net of allowance for
doubtful accounts of ¥160,574 thousand ($1,296
thousand) in 2001 (Note 2)                             |                                    |                                                     | 439,104              |            |                  |            | 1,897,622    |            |           |            | 15,116  |        
|                                                                                                                                                      |                                    |                                                     |                      |            |                  |            |              |            |           |            |         |        
|                                                                                                                                                      |                                    |                                                     | Total assets         |            | ¥                | 28,091,481 |              |            | ¥         | 59,202,442 |         |         | $            | 471,582 | 
|                                                                                                                                                      |                                    |                                                     |                      |            |                  |            |              |            |           |            |         |        

F-3



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS  (Continued)

March 31, 2000 and 2001

|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |          |              |         | 
|------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ---------- | ---------------- | ---------- | ------------ | ----------- | ---------- | ---------- | ------ | -------- | ------------ | ------- | 
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |          | Thousands of
|                                                                    |                                                                                                                                                                                       |                            |                                            |            | Thousands of Yen |            | U.S. Dollars
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |             
|                                                                    |                                                                                                                                                                                       |                            |                                            |            | 2000             |            | 2001         |             | 2001      
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |           
|CURRENT LIABILITIES:                                                |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Current portion of capital lease obligations
(Notes 1, 6 and 13)                                                                                                                      |                            | ¥                                          | 3,324,883  |                  |            | ¥            | 1,935,208   |            |            | $      | 15,415   |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Current portion of long-term debt (Notes 7 and 13)                                                                                                                                    |                            |                                            |           |                  |            |              | 236,028     |            |            |        | 1,880    |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accounts payable (Note 4)                                                                                                                                                             |                            |                                            | 1,905,927  |                  |            |              | 4,599,700   |            |            |        | 36,639   |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accrued expenses (Note 2)                                                                                                                                                             |                            |                                            | 2,803,665  |                  |            |              | 5,386,713   |            |            |        | 42,908   |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Other current liabilities                                                                                                                                                             |                            |                                            | 5,223      |                  |            |              | 31,849      |            |            |        | 254      |             
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|                                                                    |                                                                                                                                                                                       |                            | Total current liabilities                  |            |                  | 8,039,698  |              |             |            | 12,189,498 |        |          |              | 97,096  | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|CAPITAL LEASE OBLIGATIONS, less current portion
(Notes 1, 6 and 13) |                                                                                                                                                                                       |                            | 8,129,617                                  |            |                  |            | 9,231,915    |             |            |            | 73,538 |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|LONG-TERM DEBT, less current portion (Notes 7 and 13)               |                                                                                                                                                                                       |                            |                                           |            |                  |            | 7,648,127    |             |            |            | 60,922 |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|OTHER LIABILITIES (Notes 1 and 8)                                   |                                                                                                                                                                                       |                            |                                           |            |                  |            | 14,880       |             |            |            | 119    |         
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|                                                                    |                                                                                                                                                                                       |                            | Total liabilities                          |            |                  | 16,169,315 |              |             |            | 29,084,420 |        |          |              | 231,675 | 
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|COMMITMENTS AND CONTINGENCIES (Notes 2, 6 and 14)                   |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|MINORITY INTEREST                                                   |                                                                                                                                                                                       |                            |                                           |            |                  |            | 84,540       |             |            |            | 673    |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|SHAREHOLDERS EQUITY (Note 10):                                     |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Common stock of ¥50,000 par value; authorized
600,000 shares at March 31, 2000 and 2001; issued
and outstanding 400,000 shares at March 31, 2000
and 501,960 shares at March 31, 2001 |                            |                                            | 19,854,796 |                  |            |              | 30,494,526  |            |            |        | 242,907  |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Additional paid-in capital                                                                                                                                                            |                            |                                            |           |                  |            |              | 18,317,795  |            |            |        | 145,912  |             
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accumulated deficit                                                                                                                                                                   |                            |                                            | (7,932,630 | )                |            |              | (18,779,471 | )          |            |        | (149,590 | )           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accumulated other comprehensive income (Note 12)                                                                                                                                      |                            |                                            |           |                  |            |              | 632         |            |            |        | 5        |             
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|                                                                    |                                                                                                                                                                                       | Total shareholders equity |                                            |            | 11,922,166       |            |              |             | 30,033,482 |            |        |          | 239,234      |        
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         
|                                                                    |                                                                                                                                                                                       |                            | Total liabilities and shareholders equity |            | ¥                | 28,091,481 |              |             | ¥          | 59,202,442 |        |          | $            | 471,582 | 
|                                                                    |                                                                                                                                                                                       |                            |                                            |            |                  |            |              |             |            |            |        |         

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-4



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the period from October 28, 1998 (date of inception) through March 31, 1999 and
for the years ended March 31, 2000 and 2001

|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |              |         |  
|----------------------------------------------- | ----------------------------------- | ----------------------------------------------- | ------ | ---------------- | ------- | ------------ | --------- | --------- | ---------- | ---- | ---------- | --------- | ----------- | - | ------- | ------------ | ------- | -
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         | Thousands of
|                                                |                                     |                                                 |        | Thousands of Yen |         | U.S. Dollars
|                                                |                                     |                                                 |        |                  |         |             
|                                                |                                     |                                                 |        | 1999             |         | 2000         |           | 2001      |            | 2001
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |     
|REVENUE (Notes 1 and 4)                         |                                     | ¥                                               |       |                  |         | ¥            | 231,786   |           |            | ¥    | 2,628,655  |           |             | $ | 20,939  |             
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |          
|OPERATING COSTS AND EXPENSES (Note 4):          |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of data communication services |                                                 |        |                 |         |              |           | 6,098,725 |            |      |            | 9,513,127 |             |   |         | 75,778       |        
|                                               
|                                               
|                                               
|                                               
|                                                | Depreciation and amortization       |                                                 |        | 405              |         |              |           | 841,648   |            |      |            | 2,306,980 |             |   |         | 18,376       |        
|                                               
|                                               
|                                               
|                                               
|                                                | Sales and marketing                 |                                                 |        |                 |         |              |           | 431,019   |            |      |            | 632,983   |             |   |         | 5,042        |        
|                                               
|                                               
|                                               
|                                               
|                                                | General and administrative          |                                                 |        | 82,097           |         |              |           | 520,311   |            |      |            | 1,138,943 |             |   |         | 9,073        |        
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             
|                                                |                                     |                                                 | 82,502 |                  |         |              | 7,891,703 |           |            |      | 13,592,033 |           |             |   | 108,269 |             
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             
|                                                |                                     | Operating loss                                  |        |                  | (82,502 | )            |           |           | (7,659,917 | )    |            |           | (10,963,378 | ) |         |              | (87,330 | )
|                                               
|                                               
|                                               
|                                               
|OTHER INCOME (EXPENSE):                         |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             
|                                               
|                                               
|                                               
|                                               
|                                                | Interest expense, net (Note 7)      |                                                 |        | (22              | )       |              |           | (195,852  | )          |      |            | (280,835  | )           |   |         | (2,237       | )      
|                                               
|                                               
|                                               
|                                               
|                                                | Foreign exchange gain               |                                                 |        |                 |         |              |           | 10,121    |            |      |            | 553,001   |             |   |         | 4,405        |        
|                                               
|                                               
|                                               
|                                               
|                                                | Other, net (Note 2)                 |                                                 |        | (812             | )       |              |           | (3,646    | )          |      |            | (170,931  | )           |   |         | (1,361       | )      
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             
|                                                |                                     |                                                 | (834   | )                |         |              | (189,377  | )         |            |      | 101,235    |           |             |   | 807     |             
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             
|                                                |                                     | Loss before minority interests
and income taxes |        |                  | (83,336 | )            |           |           | (7,849,294 | )    |            |           | (10,862,143 | ) |         |              | (86,523 | )
|                                               
|                                               
|                                               
|                                               
|MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES |                                     |                                                 |       |                  |         |              |          |           |            |      | 15,302     |           |             |   | 122     |             
|                                               
|                                               
|                                               
|                                               
|INCOME TAXES (Notes 1 and 9)                    |                                     |                                                 |       |                  |         |              |          |           |            |      |           |           |             |   |        |             
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             
|                                                |                                     | Net loss                                        |        | ¥                | (83,336 | )            |           | ¥         | (7,849,294 | )    |            | ¥         | (10,846,841 | ) |         | $            | (86,401 | )
|                                                |                                     |                                                 |        |                  |         |              |           |           |            |      |            |           |             |   |         |             

|                |                                                      |  |              |        |              |  |   |         |   |  |   |         |   |  |   |         |  
|--------------- | ---------------------------------------------------- |  | ------------ | ------ | ------------ |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                |                                                      |  | Japanese Yen |        | U.S. dollars
|                |                                                      |  |              |        |             
|PER SHARE DATA: |                                                      |  |              |        |              |  |   |         |   |  |   |         |   |  |   |        
|               
|               
|               
|               
|                | Net loss per share                                   |  | ¥            | (8,569 | )            |  | ¥ | (46,643 | ) |  | ¥ | (23,308 | ) |  | $ | (186    | )
|                |                                                      |  |              |        |              |  |   |         |   |  |   |         |   |  |   |        
|                | Weighted average number of common shares outstanding |  |              | 9,725  |              |  |   | 168,285 |   |  |   | 465,366 |   |  |   | 465,366 |  
|                |                                                      |  |              |        |              |  |   |         |   |  |   |         |   |  |   |        

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-5



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the period from October 28, 1998 (date of inception) through March 31, 1999 and
for the years ended March 31, 2000 and 2001

|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |          |  
|--------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ------------ |  | ---- | ---------- | ---- |  | - | ----------- | - |  | ------------ | -------- | -
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  | Thousands of
|                                        |                                                                                                                                                                      |  | Thousands of Yen |           | U.S. Dollars
|                                        |                                                                                                                                                                      |  |                  |           |             
|                                        |                                                                                                                                                                      |  | 1999             |           | 2000         |  | 2001 |            | 2001
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |     
|COMMON STOCK:                           |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                       
|                                       
|                                       
|                                       
|                                        | Balance, beginning of period                                                                                                                                         |  | ¥                |          |              |  | ¥    | 6,353,934  |      |  | ¥ | 19,854,796  |   |  | $            | 158,155  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Common stock issued 128,000 shares,
272,000 shares and 101,960 shares for
the period ended March 31, 1999 and
the years ended March 31, 2000 and
2001, respectively. |  |                  | 6,353,934 |              |  |      | 13,500,862 |      |  |   | 10,639,730  |   |  |              | 84,752   |  
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                        | Balance, end of period                                                                                                                                               |  | ¥                | 6,353,934 |              |  | ¥    | 19,854,796 |      |  | ¥ | 30,494,526  |   |  | $            | 242,907  |  
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|ADDITIONAL PAID-IN CAPITAL              |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                       
|                                       
|                                       
|                                       
|                                        | Balance, beginning of period                                                                                                                                         |  | ¥                |          |              |  | ¥    |           |      |  | ¥ |            |   |  | $            |         |  
|                                       
|                                       
|                                       
|                                       
|                                        | Common stock issued 101,960 shares
for the year ended March 31, 2001,
net of stock offering expenses.                                                                |  |                  |          |              |  |      |           |      |  |   | 18,317,795  |   |  |              | 145,912  |  
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                        | Balance, end of period                                                                                                                                               |  | ¥                |          |              |  | ¥    |           |      |  | ¥ | 18,317,795  |   |  | $            | 145,912  |  
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|ACCUMULATED DEFICITS:                   |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                       
|                                       
|                                       
|                                       
|                                        | Balance, beginning of period                                                                                                                                         |  | ¥                |          |              |  | ¥    | (83,336    | )    |  | ¥ | (7,932,630  | ) |  | $            | (63,189  | )
|                                       
|                                       
|                                       
|                                       
|                                        | Net loss                                                                                                                                                             |  |                  | (83,336   | )            |  |      | (7,849,294 | )    |  |   | (10,846,841 | ) |  |              | (86,401  | )
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                        | Balance, end of period                                                                                                                                               |  | ¥                | (83,336   | )            |  | ¥    | (7,932,630 | )    |  | ¥ | (18,779,471 | ) |  | $            | (149,590 | )
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|ACCUMULATED OTHER COMPREHENSIVE INCOME: |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                       
|                                       
|                                       
|                                       
|                                        | Balance, beginning of period                                                                                                                                         |  | ¥                |          |              |  | ¥    |           |      |  | ¥ |            |   |  | $            |         |  
|                                       
|                                       
|                                       
|                                       
|                                        | Other comprehensive income, net of tax                                                                                                                               |  |                  |          |              |  |      |           |      |  |   | 632         |   |  |              | 5        |  
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         
|                                        | Balance, end of period                                                                                                                                               |  | ¥                |          |              |  | ¥    |           |      |  | ¥ | 632         |   |  | $            | 5        |  
|                                        |                                                                                                                                                                      |  |                  |           |              |  |      |            |      |  |   |             |   |  |              |         

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-6



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from October 28, 1998 (date of inception) through March 31, 1999 and
for the years ended March 31, 2000 and 2001

|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |         |         |              |  | 
|------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------------------- | ---------- | ---------- | ---------------- | ---------- | ------------ | ---------- | ---- | ----------- | ----------- | ---------- | - | ------- | ------- | ------- | ------------ |  | 
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |         |         | Thousands of
|                                      |                                                                             |                                                            |                                                                 |            |            | Thousands of Yen |            | U.S. Dollars
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |             
|                                      |                                                                             |                                                            |                                                                 |            |            | 1999             |            | 2000         |            | 2001 |             | 2001       
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |            
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Net loss                                                                    | ¥                                                          | (83,336                                                         | )          |            | ¥                | (7,849,294 | )            |            | ¥    | (10,846,841 | )           |            | $ | (86,401 | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Adjustments to reconcile net loss to net cash
used in operating activities: |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |         |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             | Depreciation and amortization                              |                                                                 |            | 405        |                  |            |              | 841,648    |      |             |             | 2,306,980  |   |         |         | 18,376  |             
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             | Unrealized foreign currency exchange gain                  |                                                                 |            |           |                  |            |              | (10,016    | )    |             |             | (641,051   | ) |         |         | (5,106  | )           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             | Minority interest in net loss of consolidated subsidiaries |                                                                 |            |           |                  |            |              |           |      |             |             | (15,302    | ) |         |         | (122    | )           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             | Changes in operating assets and liabilities:               |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |         |         |             
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             |                                                            | Increase in accounts receivable                                 |            |           |                  |            |              | (60,895    | )    |             |             | (583,734   | ) |         |         | (4,650  | )           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             |                                                            | Increase in refundable consumption tax and other
current assets |            | (72,660    | )                |            |              | (274,087   | )    |             |             | (823,162   | ) |         |         | (6,557  | )           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             |                                                            | Increase (decrease) in accounts payable                         |            | 77,923     |                  |            |              | 585,102    |      |             |             | (569,649   | ) |         |         | (4,538  | )           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             |                                                            | Increase in accrued expenses and other current liabilities      |            | 24,557     |                  |            |              | 2,784,331  |      |             |             | 2,624,055  |   |         |         | 20,902  |             
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                             |                                                            | Increase in other liabilities                                   |            |           |                  |            |              |           |      |             |             | 14,880     |   |         |         | 119     |             
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|                                      |                                                                             | Net cash used in operating activities                      |                                                                 |            | (53,111    | )                |            |              | (3,983,211 | )    |             |             | (8,533,824 | ) |         |         | (67,977 | )           
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Purchases of property and equipment                                         |                                                            |                                                                 | (1,187,762 | )          |                  |            | (6,858,941   | )          |      |             | (11,328,145 | )          |   |         | (90,235 | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Payments for deposits                                                       |                                                            |                                                                 | (41,037    | )          |                  |            | (295,927     | )          |      |             | (625,110    | )          |   |         | (4,979  | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Increase in other assets, net                                               |                                                            |                                                                 | (100       | )          |                  |            | (102,040     | )          |      |             | (137,077    | )          |   |         | (1,092  | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Proceeds from sale and lease back of equipment                              |                                                            |                                                                 |           |            |                  |            | 5,534,639    |            |      |             | 4,155,161   |            |   |         | 33,098  |        
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|                                      |                                                                             | Net cash used in investing activities                      |                                                                 |            | (1,228,899 | )                |            |              | (1,722,269 | )    |             |             | (7,935,171 | ) |         |         | (63,208 | )           
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Principal payments under capital lease obligations                          |                                                            |                                                                 | (185       | )          |                  |            | (627,759     | )          |      |             | (1,649,325  | )          |   |         | (13,138 | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Principal payments under installment loans                                  |                                                            |                                                                 |           |            |                  |            |             |            |      |             | (92,312     | )          |   |         | (735    | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Proceeds from issuance of common stock, net of underwriting
commissions     |                                                            |                                                                 | 6,353,934  |            |                  |            | 13,500,862   |            |      |             | 29,368,896  |            |   |         | 233,940 |        
|                                     
|                                     
|                                     
|                                     
|                                      | Proceeds from minority shareholders                                         |                                                            |                                                                 |           |            |                  |            |             |            |      |             | 100,000     |            |   |         | 797     |        
|                                     
|                                     
|                                     
|                                     
|                                      | Stock offering expenses                                                     |                                                            |                                                                 |           |            |                  |            |             |            |      |             | (404,357    | )          |   |         | (3,221  | )      
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        
|                                      |                                                                             | Net cash provided by financing activities                  |                                                                 |            | 6,353,749  |                  |            |              | 12,873,103 |      |             |             | 27,322,902 |   |         |         | 217,643 |             
|                                      |                                                                             |                                                            |                                                                 |            |            |                  |            |              |            |      |             |             |            |   |         |        

F-7



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)

|                                                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |       | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | - | ---------------- | -- | ------------ | - | ---------- | ------- | ---- | - | ---------- | ------- |  | - | ------------ | ----- | 
|                                                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   | Thousands of
|                                                                                                                                                |                   |   | Thousands of Yen |    | U.S. Dollars
|                                                                                                                                                |                   |   |                  |    |             
|                                                                                                                                                |                   |   | 1999             |    | 2000         |   | 2001       |         | 2001
|                                                                                                                                                |                   |   |                  |    |              |   |            |         |     
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                                                         |                   |   |                 |    |              |   |           |         |      |   | 946,582    |         |  |   | 7,540        |      
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|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                                                                       |                   |   | 5,071,739        |    |              |   | 7,167,623  |         |      | ¥ | 11,800,489 |         |  |   | 93,998       |      
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|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                                                                |                   |   |                 |    |              |   | 5,071,739  |         |      |   | 12,239,362 |         |  |   | 97,494       |      
|                                                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |      
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                                                      |                   | ¥ | 5,071,739        |    |              | ¥ | 12,239,362 |         |      | ¥ | 24,039,851 |         |  | $ | 191,492      |      
|                                                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |      
|SUPPLEMENTAL DISCLOSURES TO STATEMENT OF CASH FLOWS:                                                                                            |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |      
|                                                                                                                                               
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|Cash paid during the period for:                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |      
|                                                                                                                                               
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|                                                                                                                                                | Income taxes      |   |                  |   |              |   |            |        |      |   |            |        |  |   |              |      | 
|                                                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |      
|                                                                                                                                                | Interest expenses |   | ¥                | 21 |              |   | ¥          | 198,457 |      |   | ¥          | 517,073 |  |   | $            | 4,119 | 
|                                                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |      
|Non-cash transactions  additions to capital lease
obligation and installment loans for acquisition of
property and equipment during the period |                   | ¥ | 3,252            |    |              | ¥ | 12,089,208 |         |      | ¥ | 11,288,511 |         |  | $ | 89,920       |      
|                                                                                                                                                |                   |   |                  |    |              |   |            |         |      |   |            |         |  |   |              |      

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-8



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 1999, 2000 and 2001

1.      Description of Business, Basis of Financial Statements and Summary of Significant Accounting Policies

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| |  | Business and Organization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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| |  | Crosswave Communications Inc. (Crosswave) was established on October 28,
1998 as a joint venture among Internet Initiative Japan Inc. (IIJ), Sony
Corporation (Sony) and Toyota Motor Corporation (Toyota) for the purpose of
operating a nationwide fiber optic network for high-speed, large capacity
data communications. Under the joint venture agreement dated January 26,
1999, the ownership interest in Crosswave of IIJ, Sony and Toyota on March
31, 2000 was 40%, 30% and 30%, respectively. On August 4, 2000, Crosswave
issued an additional 86,960 shares of common stock, equivalent to 17,392,000
American Depository Shares (ADSs), through an initial public offering on
National Association of Securities Dealers Automated Quotations (NASDAQ) at
$14 per ADS for ¥26,467,146 thousand. Simultaneously with the IPO, Crosswave
made a private placement of 15,000 shares, which is equivalent to 3,000,000
ADSs, to IIJ at $14 per ADS for ¥4,565,400. In December 2000, IIJ purchased
an additional 3,000,000 outstanding ADSs of Crosswave. As a result, the
ownership interests of the original shareholders as of March 31, 2001 were
37.9% for IIJ, 23.9% for Sony and 23.9% for Toyota.
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| |  | During the fiscal year ended March 31, 2001, Crosswave established three
subsidiaries: Crosswave Facilities Inc. (CWF), Crosswave Services Inc. (CWS)
and Crosswave Communications America, Inc. (CWCA). The initial capital
investment in these subsidiaries are ¥150,000 thousand and ¥50,000
thousand in cash for CWF and CWS, respectively, and $233 thousand in cash
and in an IRU for network capacity valued at $767 thousand for CWCA.
Crosswave owns 60% of CWF, which mainly engages in maintenance of
telecommunication facilities. CWS, wholly owned by Crosswave, performs
customer service functions and other customer related administrative tasks
on behalf of Crosswave. CWCA, a US-based corporation, also wholly owned by
Crosswave, manages the US-side operations of the US-Japan international
fiber optic network.                                                                                                                                                                                                                                                                                                                                                                         
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| |  | Crosswave is a Type I Carrier as designated by Ministry of Public
Management, Home Affairs, Posts and Telecommunications of Japan, and is
licensed to provide telecommunication services through its own
telecommunication network facilities. The telecommunications industry in
Japan is highly regulated and therefore regulatory matters could impact the
ability of Crosswave and its subsidiaries (collectively the Company) to
conduct its business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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| |  | Crosswave was a development stage enterprise from its inception through
March 1999 and its activities during that period consisted of raising
capital, developing its business plan, procuring the Type I Carrier License,
designing and developing its network architecture and support system,
acquiring the related equipment and facilities and negotiating
interconnection agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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| |  | Crosswave has incurred net losses since inception as it continues to build
its network and customer base. The Company intends to fund its future
liquidity requirements through capital raising activities and/or funding
from other sources including its existing shareholders. If these efforts are not
successful, future operations of the Company will be adversely affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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| |  | Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-9



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Basis of Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|    |  | The Company maintains its books of accounts in conformity with financial
accounting standards of Japan. The financial statements presented herein
have been prepared in a manner and reflect certain adjustments which are
necessary to conform them with accounting principles generally accepted
in the United States of America. The major adjustments include those
related to accounting for leases, recognition of certain revenues,
depreciation and amortization and accruals for certain expenses.                                                
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|(b) |  | Consolidation Policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|    |  | The consolidated financial statements include the accounts of Crosswave
and three of its majority-owned subsidiaries, CWF, CWS and CWCA. All
significant intercompany balances and transactions are eliminated in
consolidation. Investments in which the Company has less than 20%
ownership interest and in which there is no significant influence are
accounted for under the cost method of accounting.                                                                                                                                               
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|(c) |  | Concentration of Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|    |  | The Company is highly dependent on IIJ, its 37.9 % shareholder, not only
as its main customer and its main sales agent but also for procurement of
equipment and as a source of managerial and technical personnel and
expertise. Revenue from IIJ and its subsidiaries and affiliates accounted
for 64.4% of total revenue in the year ended March 31,2001. See also Note
4 for disclosures of related party transactions.                                                                                                                                
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|(d) |  | Translation into U.S. Dollars                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|    |  | The Company maintains its accounts in Japanese yen, the currency of the
country in which it is incorporated and principally operates. The U.S.
dollar amounts included herein represent a translation using the noon
buying rate at Federal Reserve Bank of New York on March 30, 2001 of
¥125.54 to $1 solely for convenience of readers outside Japan. The
translation should not be construed as a representation that the yen
amounts have been, could have been, or could in the future be converted
into U.S. dollars at the above or any other rate.
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|(e) |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|    |  | Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United
States of America. Actual results could differ from those estimates.                                                                                                                                                                                             
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|(f) |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|    |  | The Company provides High-speed backbone service, Wide-area Ethernet
platform service, Dial-up port service, International backbone service,
Direct fiber access service, Fixed wireless access service, and Data
center service directly to its customers on a fixed monthly fee basis, as
well as through other carriers on a sales commission basis. Revenues
from these services are recognized as the services are provided to
customers.                                                                                                             
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|    |  | Initial set-up fee revenues are deferred and recognized over the
estimated average period that the customers are expected to remain
connected to the system which the Company provides.                                                                                                                                                                                                                                                                                                                                                                    

F-10



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) |  | Sources of Data Communication Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|    |  | As more fully described in Note 2, the Company relies on data
communication carriers through indefeasible right of use (IRU) contracts
in units of capacity of data traffic connections operated by these
carriers to provide data communication services to its customers. During
the fiscal year ended March 31, 2001, the Company participated in the
Information Box Project handled by the Ministry of Land, Infrastructure
and Transport, and commenced construction of its own nationwide network
by installing fiber optic lines into the conduits which were constructed
by the Ministry. The construction schedule is inseparable from the
overall schedule of Information Box Project which is scheduled to be
completed in the year 2005.
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|    |  | The Company believes that its anticipated use of multiple carriers and
its ability to use its own network developments will significantly
mitigate concentration of supplier risks in this respect.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|(h) |  | Loss Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|    |  | Diluted earning per share is computed using the weighted-average number
of common shares and dilutive potential common shares outstanding.
Dilutive potential common shares are additional common shares from
outstanding stock options that are assumed to be exercised. No dilution
has resulted from those shares as of March 31, 2000 and 2001.                                                                                                                                                                                                                                                                                                                                                                                                  
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|(i) |  | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|    |  | Cash and cash equivalents include all highly liquid debt instruments with
an initial maturity of three months or less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|(j) |  | Foreign Currency Translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|    |  | Purchases denominated in foreign currencies are recorded using the
exchange rates in effect as of the transaction dates. The related
foreign currency accounts payable balances are restated based on exchange
rates prevailing at each balance sheet date with the resulting gain/loss
charged to income.                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|    |  | Assets and liabilities of a foreign subsidiary are translated into
Japanese yen at the exchange rates in effect at the balance sheet date.
Revenue and expense accounts are translated at average exchange rates
during the current year. The resulting translation adjustments are
included in other comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                          
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|(k) |  | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|    |  | Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation and amortization of property and equipment, including
purchased software, is computed on a straight-line method using estimated
useful lives of 3 to 50 years.                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|Data communication equipment |  | 3-30 years
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|Purchased software           |  | 5          | 
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|Leasehold improvements       |  | 38 or 50  
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|Other equipment              |  | 3-15       | 

| |  |                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Property under capital lease, including certain IRUs, is depreciated on a
straight-line basis over the shorter of the lease term or estimated
useful life of the asset.

F-11



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | Ordinary maintenance and repairs are charged to income as incurred.
Major replacements and improvements are capitalized. When properties are
retired or otherwise disposed of, the property and related accumulated
depreciation accounts are relieved of the applicable amounts and any
differences are included in other income or expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|(l) |  | IRU Contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|    |  | The Company has entered into various IRU contracts with data
communication carriers for network data transmission capacity.
Accounting for each IRU is based on whether it is a service contract or a
lease under Statement of Financial Accounting Standards (SFAS) No.13
Accounting for Leases. The Company has determined based on current
industry practices and interpretations that each of its IRUs qualifies as
a lease. Further classifications have been made as either an operating
lease or a capital lease in accordance with established criteria.                                                                                                                                                                                                                              
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|    |  | As the accounting for IRUs is evolving, there are a number of issues,
some of which have already been referred to the Emerging Issues Task
Force of the Financial Accounting Standards Board (FASB), while others
are likely to be referred to standard setting bodies. As such, different
accounting might therefore be required for IRU contracts in the future.                                                                                                                                                                                                                                                                                                                                                                                                                              
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|(m) |  | Capital Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|    |  | All leased property, including certain IRUs, meeting specified criteria
under SFAS No. 13 are capitalized as property and equipment based on the
present value of the future minimum lease payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|(n) |  | Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|    |  | The Companys long-lived assets, primarily consisting of property and
equipment and IRUs, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows (undiscounted and without interest charges) expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
There was no impairment loss for long-lived assets for the period ended
March 31, 1999 and for the years ended March 31, 2000 and 2001.
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|(o) |  | Retirement and Pension Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|    |  | Crosswave has unfunded retirement benefits and non-contributory defined
benefit pension plans which together cover substantially all of its
employees who are not directors. These plans are accounted for in
accordance with SFAS No. 87, Employers Accounting for Pensions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|(p) |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|    |  | Income taxes are provided based on income for financial reporting
purposes. Deferred income taxes are recognized under the asset and
liability method for the estimated future tax consequences attributable
to temporary differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
Valuation allowances are provided against assets which are not likely to
be realized.                                                                                                                                                                                                                                                                                                                                                 

F-12



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(q) |  | Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|    |  | The Company accounts for its employee stock option plan under the
intrinsic value method prescribed by Accounting Principles Board (APB)
Opinion No. 25 Accounting for Stock Issued to Employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|(r) |  | Other Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|    |  | Other comprehensive income consists of translation adjustment resulting
from the translation of financial statements of a foreign subsidiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|(s) |  | Segment information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|    |  | To date, as presented in the accompanying consolidated financial
statements, the Company has managed its business and measured results
based on a single data communication services operating segment with
substantially all its facilities located in Japan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|(t) |  | Advertising expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|    |  | Advertising expense is charged to income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|(u) |  | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|    |  | Certain amounts for previous periods were reclassified to conform with
the year ended March 31, 2001 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|(v) |  | New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|    |  | In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which has been amended by SFAS No.
137, Accounting for Derivative Instruments and Hedging
ActivitiesDeferral for the Effective Date of FASB Statement No. 133,
and SFAS No. 138, Accounting for Certain Derivative Instrument and
Certain Hedging ActivitiesAn amendment of FASB Statement No. 133.
SFAS No. 133, as amended, will be effective for the fiscal years
beginning after June 15, 2000 and requires recognition of all derivatives
in the balance sheet and measurement of those instruments at fair value.
Changes in the fair value of derivatives are recorded in the current
earnings or other comprehensive income, depending on hedge designation
and type of the related hedge transaction. The hedge ineffectiveness
will all be recognized in earnings. The Company adopted SFAS No. 133 on
April 1, 2001, and the effect on the consolidated financial statements of
such adoption was not significant as there was no significant derivative
instrument employed.

2.      IRU Contracts With Carriers

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has the following three IRU contracts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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| |  | On November 30, 1998, the Company entered into a contract with KDDI to
purchase an IRU in units of capacity of a nationwide network of dark fiber
in Japan for 10 years commencing from May 1999 through April 2009. Under
this contract, the Company is obliged to make lease payments of variable and
fixed portions and maintenance fees to KDDI for the use of dark fiber. The
variable portion of the lease payments is set at 5% of total sales during a
fiscal year based on sales projections available at the time of the
contract,

F-13



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | subject to prospective adjustments by agreement of the parties in
the percentage in case of future deviations of 10% or more from the
projected amount of the variable portion on a cumulative basis from the
following business year after such deviation. The percentage was at 5% for
the years ended March 31, 2000 and 2001. The contract is accounted for as
an operating lease based on the criteria set forth in SFAS No. 13,
Accounting for Leases. The fixed portion of lease expenses and maintenance
expense is recognized on a straight-line basis over the term of the contract
and the differences between such expenses and actual cash payments that fluctuate
over the lease term are recorded as accrued expenses in the accompanying consolidated
balance sheets. Lease expense under this operating lease, including
variable and fixed portions, amounted to ¥3,137,787 thousand and ¥3,501,215
thousand ($27,889 thousand) for the years ended March 31, 2000 and 2001,
respectively. It was included in cost of data communications services in the
accompanying consolidated statements of operations.
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| |  | On October 8, 1999, the Company entered into a contract with Pacific Gateway
Exchange (PGE) to purchase an IRU in units of dedicated capacity of an
international data traffic connection on fiber optic lines between Japan and
the United States for 20 years for $25,920 thousand, and made a prepaid
contract fee of $1,296 thousand, which is included in deposits and other
assets in the accompanying consolidated balance sheets as of March 31, 2000.
During the current fiscal year, the Company canceled the contract and
negotiated with PGE for the refund of the contract prepayment. Subsequently
on December 29, 2000, PGE filed a voluntary petition under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court of
the Northern District of California. As a result, the Company fully
reserved the ¥160,574 thousand ($1,296 thousand) of the contract prepayment
as of March 31, 2001, and the related expenses are accrued and included in
other expenses in the accompanying consolidated statement of operations for
the year ended March 31, 2001.                      
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| |  | On March 28, 2000, the Company also entered into a contract with Global
Crossing to purchase an IRU in units of dedicated capacity of an
international data traffic connection on fiber optic lines between Japan and
the United States for the period from March, 2000 through December 2023, for
the total contract price of $25,000 thousand. The Company paid the initial
contract fee of $6,250 thousand (25% of the total contract price) upon
signing of the contract in March 2000 and the remaining contract fee of
$18,750 thousand in March 2001 in accordance with the payment schedule set
forth in the contract. The contract is accounted for as a capital lease
based on the criteria set forth in SFAS No. 13, and is recorded in property
and equipment as a capitalized lease in the accompanying consolidated
balance sheets. It is being depreciated on a straight-line basis over the
contract term. The contract requires the Company to pay an annual
maintenance fee of $150,000 per minimum capacity unit for the five units,
totaling $750,000.                                                       

3.      Investment in Joint Venture

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On February 29, 2000, the Company entered into a joint venture agreement
related to Skip City Corporation to participate in the management of
institutions of an area in Kawaguchi city in Saitama prefecture and
contributed ¥10,000 thousand ($80 thousand) in cash for a 14.29% interest
in the joint venture. Under the terms of the joint venture agreement,
certain other investors made an additional contribution in December 2000.
The ownership interest of the Company is 6.9% at March 31, 2001. Also, under
the agreement, additional two contributions are scheduled in January 2002
and February 2003, which will ultimately decrease the Companys share in the
joint venture to 2.02%

F-14



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On April 17, 2000, the Company entered into a joint venture agreement
related to i-Heart, Inc. to participate in data center business facility
development and operations in Seoul, Korea. On June 16, 2000, the Company
contributed ¥9,890 thousand ($79 thousand) in cash for a 3.33% interest in
the joint venture. IIJ and IIJ Technology Inc. (IIJ-Tech) also owns 26.67%
and 3.33% interest, respectively. Under the terms of the joint venture
agreement, IIJ, IIJ-Tech and the Company are to collectively own one third
of the joint venture, although their respective percentage of ownership may
vary.
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| |  | On October 20, 2000, the Company entered into a joint venture agreement
related to Ayalaport Makati, Inc. to participate in data center business
facility development and operations in Makati City in Metro Manila,
Philippines. On October 23, 2000, the Company contributed ¥67,130 thousand
($535 thousand) in cash for a 14% interest in the joint venture.                                                                                                                                                                                                                                                  
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| |  | These investments in joint ventures have been accounted for using the cost
method and included in deposits and other assets in the accompanying
consolidated balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                      

4.      Related
Party Transactions

| |  |                                                                                                                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Summarized below are significant transactions with related parities for the
period ended March 31, 1999 and for the years ended March 31, 2000 and 2001,
and the related transaction balances as of March 31, 2000 and 2001:

|                             |  |                  |           |               |  |                |        |  |  |  |   | 
|---------------------------- |  | ---------------- | --------- | ------------- |  | -------------- | ------ |  |  |  | - | 
|                             |  | Thousands of Yen
|                             |  |                 
|                             |  | IIJ and its      |           | Sony and its  |  | Toyota and its
|                             |  | subsidiaries/    |           | subsidiaries/ |  | subsidiaries/ 
|                             |  | Affiliates       |           | Affiliates    |  | Affiliates    
|                             |  |                  |           |               |  |               
|1999:                        |  |                  |           |               |  |                |        |  |  |  |   | 
|Transactions                 |  |                  |           |               |  |                |        |  |  |  |   | 
|Purchases of property        |  | ¥                | 1,080,082 |               |  |                |       |  |  |  |  | 
|                            
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|Operating costs and expenses |  |                  | 5,596     |               |  | ¥              | 17,524 |  |  |  |  | 

|                             |  |                  |           |               |  |                |         |  |  |   |        | 
|---------------------------- |  | ---------------- | --------- | ------------- |  | -------------- | ------- |  |  | - | ------ | 
|                             |  | Thousands of Yen
|                             |  |                 
|                             |  | IIJ and its      |           | Sony and its  |  | Toyota and its
|                             |  | subsidiaries/    |           | subsidiaries/ |  | subsidiaries/ 
|                             |  | Affiliates       |           | Affiliates    |  | Affiliates    
|                             |  |                  |           |               |  |               
|2000:                        |  |                  |           |               |  |                |         |  |  |   |        | 
|Transactions                 |  |                  |           |               |  |                |         |  |  |   |        | 
|Revenue                      |  | ¥                | 199,914   |               |  | ¥              | 12,555  |  |  | ¥ | 1,701  | 
|                            
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|Purchases of property        |  |                  | 1,378,677 |               |  |                |        |  |  |   |       | 
|                            
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|Operating costs and expenses |  |                  | 344,845   |               |  |                | 357,330 |  |  |   | 30,434 | 
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|Balances:                    |  |                  |           |               |  |                |         |  |  |   |        | 
|Accounts receivable          |  |                  | 53,651    |               |  |                | 6,237   |  |  |   |       | 
|                            
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|Accounts payable             |  |                  | 18,939    |               |  |                | 18,133  |  |  |   | 3,422  | 

F-15



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|                             |  |                  |           |               |  |                |         |  |  |   |        | 
|---------------------------- |  | ---------------- | --------- | ------------- |  | -------------- | ------- |  |  | - | ------ | 
|                             |  | Thousands of Yen
|                             |  |                 
|                             |  | IIJ and its      |           | Sony and its  |  | Toyota and its
|                             |  | subsidiaries/    |           | subsidiaries/ |  | subsidiaries/ 
|                             |  | Affiliates       |           | Affiliates    |  | Affiliates    
|                             |  |                  |           |               |  |               
|2001:                        |  |                  |           |               |  |                |         |  |  |   |        | 
|                            
|                            
|                            
|                            
|Transactions                 |  |                  |           |               |  |                |         |  |  |   |        | 
|                            
|                            
|                            
|                            
|Revenue                      |  | ¥                | 1,693,696 |               |  | ¥              | 273,396 |  |  | ¥ | 4,911  | 
|                            
|                            
|                            
|                            
|Purchases of property        |  |                  | 538,141   |               |  |                |        |  |  |   | 14,000 | 
|                            
|                            
|                            
|                            
|Operating costs and expenses |  |                  | 550,007   |               |  |                | 49,909  |  |  |   | 53,258 | 
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|Balances:                    |  |                  |           |               |  |                |         |  |  |   |        | 
|                            
|                            
|                            
|                            
|Accounts receivable          |  |                  | 326,528   |               |  |                | 54,097  |  |  |   | 1,411  | 
|                            
|                            
|                            
|                            
|Accounts payable             |  |                  | 230,242   |               |  |                | 2,991   |  |  |   | 4,094  | 

|                             |  |                           |        |               |  |                |       |  |  |   |     | 
|---------------------------- |  | ------------------------- | ------ | ------------- |  | -------------- | ----- |  |  | - | --- | 
|                             |  | Thousands of U.S. Dollars
|                             |  |                          
|                             |  | IIJ and its               |        | Sony and its  |  | Toyota and its
|                             |  | subsidiaries/             |        | subsidiaries/ |  | subsidiaries/ 
|                             |  | Affiliates                |        | Affiliates    |  | Affiliates    
|                             |  |                           |        |               |  |               
|2001:                        |  |                           |        |               |  |                |       |  |  |   |     | 
|                            
|                            
|                            
|                            
|Transactions                 |  |                           |        |               |  |                |       |  |  |   |     | 
|                            
|                            
|                            
|                            
|Revenue                      |  | $                         | 13,491 |               |  | $              | 2,178 |  |  | $ | 39  | 
|                            
|                            
|                            
|                            
|Purchases of property        |  |                           | 4,287  |               |  |                |      |  |  |   | 112 | 
|                            
|                            
|                            
|                            
|Operating costs and expenses |  |                           | 4,381  |               |  |                | 398   |  |  |   | 424 | 
|                            
|                            
|                            
|                            
|Balances:                    |  |                           |        |               |  |                |       |  |  |   |     | 
|                            
|                            
|                            
|                            
|Accounts receivable          |  |                           | 2,601  |               |  |                | 431   |  |  |   | 11  | 
|                            
|                            
|                            
|                            
|Accounts payable             |  |                           | 1,834  |               |  |                | 24    |  |  |   | 33  | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has management service agreements with IIJ, Sony and Toyota
under which directors, managerial and technical employees are seconded from
these shareholders to the Company, whose services are charged as service
fees to the Company based principally on their payroll costs. Operating
costs and expenses presented in the table above included service fees paid
for such services to IIJ, Sony and Toyota totaling ¥301,335 thousand,
¥27,653 thousand and ¥30,256 thousand, respectively, for the year ended
March 31, 2000 and ¥478,286 thousand ($3,810 thousand), ¥43,160 thousand
($344 thousand) and ¥52,145 thousand ($415 thousand), respectively, for the
year ended March 31, 2001.
|
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| |  | During the year ended March 31, 2000, the Company paid Intervision Inc., a
subsidiary of Sony, ¥317,852 thousand for advertising and promotion services
provided by Intervision Inc., which is included in operating costs and
expenses in the table above.                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-16



---



##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|   |  |                                                                              
|-- |  | -----------------------------------------------------------------------------
|5. |  | Property and Equipment                                                       
|  
|  
|  
|   |  | Property and equipment at March 31, 2000 and 2001 consisted of the
following:

|                                 |                                                             |                             |            |                  |            |         |            |            |            |  |         |           |         | 
|-------------------------------- | ----------------------------------------------------------- | --------------------------- | ---------- | ---------------- | ---------- | ------- | ---------- | ---------- | ---------- |  | ------- | --------- | ------- | 
|                                 |                                                             |                             |            |                  |            |         |            |            |            |  |         | Thousands
|                                 |                                                             |                             |            |                  |            |         |            |            |            |  |         | of U.S.  
|                                 |                                                             |                             |            | Thousands of Yen |            | Dollars
|                                 |                                                             |                             |            |                  |            |        
|                                 |                                                             |                             |            | 2000             |            | 2001    |            | 2001      
|                                 |                                                             |                             |            |                  |            |         |            |           
|Property and equipment, at cost: |                                                             |                             |            |                  |            |         |            |            |            |  |         |          
|                                
|                                
|                                
|                                
|                                 | Capitalized leases, primarily data
communications equipment |                             | ¥          | 12,758,224       |            |         | ¥          | 16,233,830 |            |  | $       | 129,312   |        
|                                
|                                
|                                
|                                
|                                 | Data communication equipment                                |                             |            | 885,883          |            |         |            | 3,452,584  |            |  |         | 27,502    |        
|                                
|                                
|                                
|                                
|                                 | Purchased software                                          |                             |            | 346,404          |            |         |            | 390,591    |            |  |         | 3,111     |        
|                                
|                                
|                                
|                                
|                                 | Land                                                        |                             |            |                 |            |         |            | 8,000,032  |            |  |         | 63,725    |        
|                                
|                                
|                                
|                                
|                                 | Leasehold improvements and other equipment                  |                             |            | 126,438          |            |         |            | 334,528    |            |  |         | 2,665     |        
|                                
|                                
|                                
|                                
|                                 | Construction in progress                                    |                             |            | 1,728,418        |            |         |            | 6,051,795  |            |  |         | 48,206    |        
|                                 |                                                             |                             |            |                  |            |         |            |            |            |  |         |          
|                                 |                                                             |                             | 15,845,367 |                  |            |         | 34,463,360 |            |            |  | 274,521 |          
|                                
|                                
|                                
|                                
|                                 | Less: accumulated depreciation                              |                             |            | (839,994         | )          |         |            | (3,095,351 | )          |  |         | (24,657   | )      
|                                 |                                                             |                             |            |                  |            |         |            |            |            |  |         |          
|                                 |                                                             | Property and equipment, net |            | ¥                | 15,005,373 |         |            | ¥          | 31,368,009 |  |         | $         | 249,864 | 
|                                 |                                                             |                             |            |                  |            |         |            |            |            |  |         |          

|   |  |                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|6. |  | Leases                                                                                                                                              
|  
|  
|  
|   |  | The Company is obligated under various capital leases and non-cancelable
operating leases, which expire at various dates during the next nine years.
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|   |  | At March 31, 2000 and 2001, the gross amount of equipment and related
accumulated depreciation recorded under capital leases were as follows:       

|                                                            |  |                  |            |              |  |      |            |   |  |              |         |  
|----------------------------------------------------------- |  | ---------------- | ---------- | ------------ |  | ---- | ---------- | - |  | ------------ | ------- | -
|                                                            |  |                  |            |              |  |      |            |   |  | Thousands of
|                                                            |  | Thousands of Yen |            | U.S. Dollars
|                                                            |  |                  |            |             
|                                                            |  | 2000             |            | 2001         |  | 2001
|                                                            |  |                  |            |              |  |     
|Capitalized leases, primarily data
communications equipment |  | ¥                | 12,758,224 |              |  | ¥    | 16,233,830 |   |  | $            | 129,312 |  
|                                                           
|                                                           
|                                                           
|                                                           
|Less accumulated depreciation                               |  |                  | (706,909   | )            |  |      | (2,816,321 | ) |  |              | (22,434 | )
|                                                            |  |                  |            |              |  |      |            |   |  |              |         |  
|                                                            |  | ¥                | 12,051,315 |              |  | ¥    | 13,417,509 |   |  | $            | 106,878 |  
|                                                            |  |                  |            |              |  |      |            |   |  |              |         |  

| |  |                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Depreciation of assets under capital leases is included in depreciation and
amortization expense in the accompanying consolidated statements of
operations.
|
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|
| |  | Future minimum lease payments under capital leases as of March 31, 2001 are
as follows:                                                                    

F-17



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|                                                                      |                     |     |              |              |              |   |         |        | 
|--------------------------------------------------------------------- | ------------------- | --- | ------------ | ------------ | ------------ | - | ------- | ------ | 
|                                                                      |                     |     | Thousands of |              | Thousands of
|Year ending March 31,                                                 |                     | Yen |              | U.S. Dollars
|                                                                      |                     |     |              |             
|                                                                      | 2002                |     | ¥            | 2,424,809    |              |   | $       | 19,315 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2003                |     |              | 2,424,602    |              |   |         | 19,313 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2004                |     |              | 2,405,990    |              |   |         | 19,165 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2005                |     |              | 2,368,262    |              |   |         | 18,865 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2006                |     |              | 2,539,317    |              |   |         | 20,227 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | 2007 and thereafter |     |              | 449,567      |              |   |         | 3,581  | 
|                                                                      |                     |     |              |              |              |   |         |       
|Total minimum lease payments                                          |                     |     | 12,612,547   |              |              |   | 100,466 |       
|                                                                      |                     |     |              |              |              |   |         |       
|Less amount representing interest (rates ranging from 1.90% to 5.14%) |                     |     | (1,445,424   | )            |              |   | (11,513 | )     
|                                                                      |                     |     |              |              |              |   |         |       
|Present value of net minimum payments                                 |                     |     | 11,167,123   |              |              |   | 88,953  |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Less Current potion                                                   |                     |     | (1,935,208   | )            |              |   | (15,415 | )     
|                                                                      |                     |     |              |              |              |   |         |       
|Noncurrent                                                            |                     | ¥   | 9,231,915    |              |              | $ | 73,538  |       
|                                                                      |                     |     |              |              |              |   |         |       

| |  |                                                                                                                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company purchased data communication equipment totaling ¥2,578,720
thousand ($20,541 thousand) which was in turn sold to leasing companies and
leased-back as a capital lease during the year ended March 31,2001. Such
equipment was included in capital leases above. There was no gain or loss
realized from these sale-leaseback transactions.
|
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|
| |  | As explained in Note 2, the Company is obliged under a non-cancelable IRU
contract with KDDI accounted for as an operating lease. As of March 31,
2001, future minimum lease payments for the fixed portion of this operating
lease contract and maintenance fees under the related non-cancelable
maintenance service contract are as follows:       

|                       |                     |          |                  |             |                           |          |            |             |              |   |         |        |  |   |         |        | 
|---------------------- | ------------------- | -------- | ---------------- | ----------- | ------------------------- | -------- | ---------- | ----------- | ------------ | - | ------- | ------ |  | - | ------- | ------ | 
|                       |                     |          | Thousands of Yen |             | Thousands of U.S. Dollars
|                       |                     |          |                  |             |                          
|                       |                     |          | Lease (fixed     |             |                           |          |            |             | Lease (fixed |   |         |        | 
|Year ending March 31,  |                     | portion) |                  | Maintenance |                           | portion) |            | Maintenance
|                       |                     |          |                  |             |                           |          |            |            
|                       | 2002                |          | ¥                | 2,000,000   |                           |          | ¥          | 2,000,000   |              |   | $       | 15,931 |  |   | $       | 15,931 | 
|                      
|                      
|                      
|                      
|                       | 2003                |          |                  | 4,000,000   |                           |          |            | 2,500,000   |              |   |         | 31,862 |  |   |         | 19,914 | 
|                      
|                      
|                      
|                      
|                       | 2004                |          |                  | 4,000,000   |                           |          |            | 2,500,000   |              |   |         | 31,862 |  |   |         | 19,914 | 
|                      
|                      
|                      
|                      
|                       | 2005                |          |                  | 4,000,000   |                           |          |            | 2,500,000   |              |   |         | 31,862 |  |   |         | 19,914 | 
|                      
|                      
|                      
|                      
|                       | 2006                |          |                  | 4,000,000   |                           |          |            | 2,500,000   |              |   |         | 31,862 |  |   |         | 19,914 | 
|                      
|                      
|                      
|                      
|                       | 2007 and thereafter |          |                  | 12,000,000  |                           |          |            | 7,500,000   |              |   |         | 95,588 |  |   |         | 59,742 | 
|                       |                     |          |                  |             |                           |          |            |             |              |   |         |        |  |   |         |       
|Total minimum payments |                     | ¥        | 30,000,000       |             |                           | ¥        | 19,500,000 |             |              | $ | 238,967 |        |  | $ | 155,329 |       
|                       |                     |          |                  |             |                           |          |            |             |              |   |         |        |  |   |         |       

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In addition to the total minimum payments for the fixed portion presented
above, there are projected variable payments as set forth in the contract of
¥1,200,000 thousand ($9,559 thousand), ¥1,800,000 thousand ($14,338
thousand), ¥2,500,000 thousand ($19,914 thousand), ¥3,000,000 thousand
($23,897 thousand), ¥3,500,000 thousand ($27,880 thousand) and ¥13,500,000
thousand ($107,535 thousand) for the years ending March 31, 2002, 2003,
2004, 2005, 2006 and 2007 and thereafter. The actual variable payments made
to date are less than the projected amounts in the contract by approximately
¥390 million and ¥711 million ($5,660 thousand) in the years
ended March 31, 2000 and 2001, respectively, which may result in adjustments
to the rates to be paid in later years according to the provisions of the
contract as described in Note 2.
|
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| |  | Annual maintenance fee under the IRU contract with Global Crossing is
estimated to be approximately ¥94,155 thousand ($750 thousand) per year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-18



---



##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

| |  |                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company occupies offices and other facilities and uses certain equipment
under cancelable lease arrangements. Rental expenses for such cancelable
leases for the period ended March 31, 1999 and for the year s ended March
31, 2000 and 2001 totaled ¥7,921 thousand, ¥336,510 thousand and ¥830,976
thousand ($6,619 thousand), respectively.

7.     Long-term
Debt

| |  |                                                          
| |  | ---------------------------------------------------------
| |  | Long-term debt at March 31, 2000 and 2001 are as follows:

|                                                                                                                                                                     |  |                  |   |              |  |      |           |   |  |              |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | - | ------------ |  | ---- | --------- | - |  | ------------ | ------ | -
|                                                                                                                                                                     |  |                  |   |              |  |      |           |   |  | Thousands of
|                                                                                                                                                                     |  | Thousands of Yen |   | U.S. Dollars
|                                                                                                                                                                     |  |                  |   |             
|                                                                                                                                                                     |  | 2000             |   | 2001         |  | 2001
|                                                                                                                                                                     |  |                  |   |              |  |     
|Long-term installments payable for the
purchases of data communication equipment,
with interest rate 4.36%, secured by the
equipment, due the years ending 2002-2007 |  | ¥                |  |              |  |      | 1,484,130 |   |  | $            | 11,822 |  
|                                                                                                                                                                    
|                                                                                                                                                                    
|                                                                                                                                                                    
|                                                                                                                                                                    
|Long-term installments payable for the
purchase of land with interest rate
2.85%, secured by the land, matures
in August 2010                                        |  |                  |  |              |  |      | 6,400,025 |   |  |              | 50,980 |  
|                                                                                                                                                                     |  |                  |   |              |  |      |           |   |  |              |        |  
|Total long-term debt                                                                                                                                                 |  |                  |  |              |  |      | 7,884,155 |   |  |              | 62,802 |  
|                                                                                                                                                                    
|                                                                                                                                                                    
|                                                                                                                                                                    
|                                                                                                                                                                    
|Less current portion                                                                                                                                                 |  |                  |  |              |  |      | (236,028  | ) |  |              | (1,880 | )
|                                                                                                                                                                     |  |                  |   |              |  |      |           |   |  |              |        |  
|                                                                                                                                                                     |  | ¥                |  |              |  | ¥    | 7,648,127 |   |  | $            | 60,922 |  
|                                                                                                                                                                     |  |                  |   |              |  |      |           |   |  |              |        |  

| |  |                                                            
| |  | -----------------------------------------------------------
| |  | The schedule of the future principal payment is as follows:

|                      |  |                  |           |         |  |                   |        | 
|--------------------- |  | ---------------- | --------- | ------- |  | ----------------- | ------ | 
|                      |  |                  |           |         |  | Thousands of U.S.
|Year ending March 31, |  | Thousands of Yen |           | Dollars
|                      |  |                  |           |        
|2002                  |  | ¥                | 236,028   |         |  | $                 | 1,880  | 
|                     
|                     
|                     
|                     
|2003                  |  |                  | 246,527   |         |  |                   | 1,964  | 
|                     
|                     
|                     
|                     
|2004                  |  |                  | 257,494   |         |  |                   | 2,051  | 
|                     
|                     
|                     
|                     
|2005                  |  |                  | 268,947   |         |  |                   | 2,142  | 
|                     
|                     
|                     
|                     
|2006                  |  |                  | 880,267   |         |  |                   | 7,012  | 
|                     
|                     
|                     
|                     
|2007                  |  |                  | 1,420,191 |         |  |                   | 11,313 | 
|                     
|                     
|                     
|                     
|Thereafter            |  |                  | 4,574,701 |         |  |                   | 36,440 | 
|                      |  |                  |           |         |  |                   |        | 
|Total                 |  | ¥                | 7,884,155 |         |  | $                 | 62,802 | 
|                      |  |                  |           |         |  |                   |        | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On September 29, 2000, the Company entered into a long-term installment loan
to purchase land located in Yokohama, Kanagawa prefecture, Japan. The total
principal of the loan is ¥8,000,032 thousand with interest rate of 2.85%,
¥1,600,006 thousand of which was paid as an initial down payment upon the
inception of the loan. The principal is payable in twenty semi-annual
installments commencing from February 2006 after interest only payments for
the first five years. The installment loan is secured by the land where the
construction of a data center is currently in progress.

F-19



---



##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

| |  |                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the year ended March 31, 2001, the Company incurred interest expense
totaling ¥669,013 thousand ($5,329 thousand), of which ¥91,591 thousand
($730 thousand) was capitalized as cost of the related construction.

8.     Employee Retirement and Pension Plans

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On April 1, 2000, the Company established a non-contributory defined
benefits pension plan and a severance indemnity plan. Under these plans,
all of the Companys employees are entitled, upon voluntary retirement after
15 years or more service, or upon mandatory retirement at age 60, to a
10-year-period of annuity payments (or lump-sum severance indemnities) based
on the rate of pay at the time of retirement, length of service and certain
other factors. The Companys employees who do not meet these conditions are
entitled to lump-sum severance indemnities.
|
|
|
|
| |  | Net periodic pension cost for the year ended March 31, 2001 included the following components:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                               |  |                 |        |                          |  |   |     | 
|------------------------------ |  | --------------- | ------ | ------------------------ |  | - | --- | 
|                               |  | Thousand of yen |        | Thousand of U.S. dollars
|                               |  | 2001            |        | 2001                    
|                               |  |                 |        |                         
|Service cost                   |  | ¥               | 14,759 |                          |  | $ | 118 | 
|                              
|                              
|                              
|                              
|Interest cost                  |  |                 | 121    |                          |  |   | 1   | 
|                              
|                              
|                              
|                              
|Expected return on plan assets |  |                 |       |                          |  |   |    | 
|                              
|                              
|                              
|                              
|Net amortization and deferral  |  |                 |       |                          |  |   |    | 
|                               |  |                 |        |                          |  |   |     | 
|Net periodic cost              |  | $               | 14,880 |                          |  | $ | 119 | 
|                               |  |                 |        |                          |  |   |     | 

| |  |                                                      
| |  | -----------------------------------------------------
| |  | The funded status as of March 31, 2001 is as follows:

|                              |                                       |  |                 |        |                          |  |   |     | 
|----------------------------- | ------------------------------------- |  | --------------- | ------ | ------------------------ |  | - | --- | 
|                              |                                       |  | Thousand of yen |        | Thousand of U.S. dollars
|                              |                                       |  | 2001            |        | 2001                    
|                              |                                       |  |                 |        |                         
|Change in benefit obligation: |                                       |  |                 |        |                          |  |   |    
|                             
|                             
|                             
|                             
|                              | Benefit obligation, beginning of year |  | ¥               |       |                          |  | $ |    | 
|                             
|                             
|                             
|                             
|                              | Service cost                          |  |                 | 14,759 |                          |  |   | 118 | 
|                             
|                             
|                             
|                             
|                              | Interest cost                         |  |                 | 121    |                          |  |   | 1   | 
|                             
|                             
|                             
|                             
|                              | Actuarial loss                        |  |                 | 7,228  |                          |  |   | 57  | 
|                             
|                             
|                             
|                             
|                              | Benefit paid                          |  |                 |       |                          |  |   |    | 
|                              |                                       |  |                 |        |                          |  |   |    
|                              | Benefit obligation, end of year       |  | ¥               | 22,108 |                          |  | $ | 176 | 
|                              |                                       |  |                 |        |                          |  |   |    

|                      |                                              |  |                 |         |                          |  |   |      |  
|--------------------- | -------------------------------------------- |  | --------------- | ------- | ------------------------ |  | - | ---- | -
|                      |                                              |  | Thousand of yen |         | Thousand of U.S. dollars
|                      |                                              |  | 2001            |         | 2001                    
|                      |                                              |  |                 |         |                         
|Change in plan assets |                                              |  |                 |         |                          |  |   |     
|                     
|                     
|                     
|                     
|                      | Fair value of plan assets, beginning of year |  | ¥               |        |                          |  | $ |     |  
|                      |                                              |  |                 |         |                          |  |   |     
|                      | Fair value of plan assets, end of year       |  | ¥               |        |                          |  | $ |     |  
|                      |                                              |  |                 |         |                          |  |   |     
|                      | Funded status                                |  | ¥               | (22,108 | )                        |  | $ | (176 | )
|                     
|                     
|                     
|                     
|                      | Unrecognized net loss                        |  |                 | 7,228   |                          |  |   | 57   |  
|                      |                                              |  |                 |         |                          |  |   |     
|                      | Net amount recognized                        |  | ¥               | (14,880 | )                        |  | $ | (119 | )
|                      |                                              |  |                 |         |                          |  |   |     

F-20



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|                                                 |  |  |   |  
|------------------------------------------------ |  |  | - | -
|Actuarial assumption as of March 31, 2001        |  |  |   |  
|                                                
|Weighted-average discount rate                   |  |  | 2 | %
|                                                
|                                                
|                                                
|                                                
|Rate of increase in future compensation levels   |  |  | 3 | %
|                                                
|                                                
|                                                
|                                                
|Expected long-term rate of return on plan assets |  |  |  |  

| |  | 
| |  | 

| |  |                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The accrued pension liability of ¥14,880 thousand ($119 thousand) is
included in other liabilities in the accompanying consolidated balance sheet
as of March 31, 2001.

9.     Income Taxes

| |  |                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is subject to national, municipal and local taxes in Japan based
on income. Due to enactment of a new tax law, the aggregate normal tax rate
was reduced from approximately 48% for the period ended March 31, 1999 to
42% for the years ended March 31, 2000 and 2001. Deferred income taxes were
principally calculated at the rate of 42%.

F-21



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | The effects of temporary differences that give rise to deferred tax assets
and liabilities at March 31, 2000 and 2001 are as follows:

|                          |                                      |  |                  |            |              |  |      |            |   |  |   |         |  
|------------------------- | ------------------------------------ |  | ---------------- | ---------- | ------------ |  | ---- | ---------- | - |  | - | ------- | -
|                          |                                      |  |                  |            | Thousands of
|                          |                                      |  | Thousands of Yen |            | U.S. Dollars
|                          |                                      |  |                  |            |             
|                          |                                      |  | 2000             |            | 2001         |  | 2001
|                          |                                      |  |                  |            |              |  |     
|Deferred tax assets:      |                                      |  |                  |            |              |  |      |            |   |  |   |        
|                         
|                         
|                         
|                         
|                          | Net operating loss carryforwards     |  | ¥                | 2,140,026  |              |  | ¥    | 5,542,131  |   |  | $ | 44,146  |  
|                         
|                         
|                         
|                         
|                          | Accrued expenses                     |  |                  | 1,164,705  |              |  |      | 2,229,758  |   |  |   | 17,762  |  
|                         
|                         
|                         
|                         
|                          | Lease obligation                     |  |                  | 33,632     |              |  |      | 134,084    |   |  |   | 1,068   |  
|                         
|                         
|                         
|                         
|                          | Depreciation                         |  |                  | 43,117     |              |  |      | 44,976     |   |  |   | 358     |  
|                         
|                         
|                         
|                         
|                          | Other                                |  |                  | 2,161      |              |  |      | 39,887     |   |  |   | 318     |  
|                         
|                         
|                         
|                         
|                          |                                      |  |                  |            |              |  |      |            |   |  |   |         |  
|                          | Total gross deferred tax assets      |  |                  | 3,383,641  |              |  |      | 7,990,836  |   |  |   | 63,652  |  
|                         
|                         
|                         
|                         
|                          | Less valuation allowance             |  |                  | (3,316,115 | )            |  |      | (7,833,293 | ) |  |   | (62,397 | )
|                         
|                         
|                         
|                         
|                          |                                      |  |                  |            |              |  |      |            |   |  |   |         |  
|                          | Deferred tax assets                  |  |                  | 67,526     |              |  |      | 157,543    |   |  |   | 1,255   |  
|                         
|                         
|                         
|                         
|                          |                                      |  |                  |            |              |  |      |            |   |  |   |         |  
|Deferred tax liabilities: |                                      |  |                  |            |              |  |      |            |   |  |   |        
|                         
|                         
|                         
|                         
|                          | Stock issuance cost                  |  |                  | 60,986     |              |  |      | 118,763    |   |  |   | 946     |  
|                         
|                         
|                         
|                         
|                          | Capitalized interest                 |  |                  |           |              |  |      | 38,468     |   |  |   | 306     |  
|                         
|                         
|                         
|                         
|                          | Other                                |  |                  | 6,540      |              |  |      | 312        |   |  |   | 3       |  
|                         
|                         
|                         
|                         
|                          |                                      |  |                  |            |              |  |      |            |   |  |   |         |  
|                          | Total gross deferred tax liabilities |  |                  | 67,526     |              |  |      | 157,543    |   |  |   | 1,255   |  
|                         
|                         
|                         
|                         
|                          |                                      |  |                  |            |              |  |      |            |   |  |   |         |  
|                          | Net deferred tax assets              |  | ¥                |           |              |  | ¥    |           |   |  | $ |        |  
|                          |                                      |  |                  |            |              |  |      |            |   |  |   |         |  

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | Because of the uncertainty in realization of the future tax benefits, the
net deferred tax assets at March 31, 2000 and 2001 are fully offset by a
valuation allowance.                                                                                                                                                                                                                                                                                                        
|   
|    |  | At March 31, 2001, the Company had net operating loss carryforwards for
income tax purposes of ¥13,195,550 thousand ($105,110 thousand) which
were available to offset future taxable income. Most of these
carryforwards will expire through 2006.                                                                                                                                                                                                                            
|   
|    |  | The Companys effective tax rate differs from the statutory tax rate of
42% due primarily to provisions for valuation allowances.                                                                                                                                                                                                                                                                                                                                              
|   
|10. |  | Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Under the Japanese Commercial Code (the Code), the amount available for
dividends is based on retained earnings as recorded on the books of
account maintained in conformity with financial accounting standards in
Japan. At March 31, 2001, the accumulated deficit recorded on Crosswaves
books of account was ¥13,285,837 thousand ($105,830 thousand), and
therefore no dividends may be paid at the present time.                                                     
|   
|    |  | The Code requires the Company to appropriate as a legal reserve a portion
of retained earnings in an amount equal to at least 10 % of cash payments,
including dividends and officers bonuses, in each financial period, until
the reserve equals 25 % of stated capital. The retained earnings so
appropriated may be used to eliminate or reduce a deficit by resolution of
the shareholders or may be transferred to capital stock by resolution of
the Board of Directors.
|   
|    |  | Under the Code, at least 50 percent of the issue price of new shares, with
a minimum of the par value thereof, is required to be designated as stated
capital. The portion which is to be designated as stated capital is                                                                                                                                                                                                                                                      

F-22



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|    |  |                                                                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|    |  | determined by resolution of the Board of Directors. Proceeds in excess of
the amounts designated as stated capital, as reduced by stock issuance
costs less the applicable tax benefits, are credited to additional paid-in
capital.                                                                          
|   
|    |  | On May 11, 2000, a decrease in the number of authorized shares from
1,600,000 to 600,000 was approved at the shareholders meeting.                                                                                                                                                                            
|   
|11. |  | Employee Stock Option                                                                                                                                                                                                                                                                                         
|   
|    |  | In August 2000, the Company established stock option plans under which
employees and directors may be granted options to purchase common stock.
Options are generally granted at not less than the fair market value at
grant date, vested over two-year period, and expire in ten years after the
grant date.
|   
|    |  | A summary of option transactions under the plans is as follows:                                                                                                                                                                                                                                               

|                            |  |                  |       |                  |  |   |         | 
|--------------------------- |  | ---------------- | ----- | ---------------- |  | - | ------- | 
|                            |  | Number of shares |       | Weighted Average
|                            |  |                  |       | Exercise Price  
|                            |  |                  |       |                 
|Outstanding, April 1, 2000  |  |                  |      |                  |  |   |        | 
|                           
|                           
|                           
|                           
|Granted                     |  |                  | 3,800 |                  |  | ¥ | 318,578 | 
|                           
|                           
|                           
|                           
|Outstanding, March 31, 2001 |  |                  | 3,800 |                  |  | ¥ | 318,578 | 
|                            |  |                  |       |                  |  |   |         | 

|    |  |                                                                                                                                                                                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | For the total 3,800 outstanding shares as of March 31, 2001, the weighted
average remaining contractual life is eight years, and no share is
reserved.                                                                                                             
|   
|    |  | The Company has accounted for these stock options granted under APB No.
25, Accounting for Certain Transactions Involving Stock Compensation.
There has been no compensation costs recorded, as there was no intrinsic
value to the options at the date of grant.
|   
|    |  | Impact of compensations costs, had the Company elected to recognize
compensation costs based on the fair value method according to the
provisions of SFAS No. 123, on the Companys net income and earnings per
common share would have been insignificant.        
|   
|12. |  | Other Comprehensive Income                                                                                                                                                                                                                                         
|   
|    |  | The changes in each component of other comprehensive income for the period
from October 28, 1998 (date of inception) through March 31, 1999, and the
years ended March 31, 2000 and 2001 are as follows:                                                           

|                                                                 |  |                 |   |            |  |      |   |      |  |   |     |  |  |   |   | 
|---------------------------------------------------------------- |  | --------------- | - | ---------- |  | ---- | - | ---- |  | - | --- |  |  | - | - | 
|                                                                 |  | Thousand of    
|                                                                 |  | Thousand of yen |   | US dollars
|                                                                 |  |                 |   |           
|                                                                 |  | 1999            |   | 2000       |  | 2001 |   | 2001
|                                                                 |  |                 |   |            |  |      |   |     
|Accumulated other comprehensive income,
beginning of the period: |  | ¥               |  |            |  | ¥    |  |      |  | ¥ |    |  |  | $ |  | 
|                                                                
|                                                                
|                                                                
|                                                                
|Foreign currency translation
adjustments, net of tax             |  |                 |  |            |  |      |  |      |  |   | 632 |  |  |   | 5 | 
|                                                                
|                                                                
|                                                                
|                                                                
|Accumulated other comprehensive income,
end of the period:       |  | ¥               |  |            |  | ¥    |  |      |  | ¥ | 632 |  |  | $ | 5 | 
|                                                                 |  |                 |   |            |  |      |   |      |  |   |     |  |  |   |  

F-23



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | Accumulated other comprehensive income as of March 31, 2001 represents
translation adjustments in the amount of ¥632 thousand ($5 thousand)                                                                                                                                                                                                                                                              
|   
|13. |  | Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | For financial instruments other than capital lease obligations and
installments payable, the carrying amount approximates fair value because
of the short maturity of these instruments. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, the fair value of capital lease obligations at March
31, 2000 and 2001 are as follows:

|                         |  |                  |            |              |  |      |            |  |  |              |        | 
|------------------------ |  | ---------------- | ---------- | ------------ |  | ---- | ---------- |  |  | ------------ | ------ | 
|                         |  |                  |            |              |  |      |            |  |  | Thousands of
|                         |  | Thousands of Yen |            | U.S. Dollars
|                         |  |                  |            |             
|                         |  | 2000             |            | 2001         |  | 2001
|                         |  |                  |            |              |  |     
|Capital lease obligation |  | ¥                | 11,581,367 |              |  | ¥    | 11,764,087 |  |  | $            | 93,708 | 
|                        
|                        
|                        
|                        
|Long-term debt           |  |                  |           |              |  |      | 9,450,043  |  |  |              | 75,275 | 

|    |  |                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14. |  | Commitments and contingency                                                                                                                                                               
|   
|    |  | For the network construction, the Company has placed firm orders to
purchase related materials and equipment amounting to approximately ¥2.4 billion ($19.1 million) as of March 31, 2001.

F-24



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

FINANCIAL STATEMENTS SCHEDULE

For the period from October 28, 1998 (date of inception) through March 31, 1999 and
for the years ended March 31, 2000 and 2001

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

|     |                                                |  |                 |     |           |  |            |         |                |  |   |     |  |  |   |         | 
|---- | ---------------------------------------------- |  | --------------- | --- | --------- |  | ---------- | ------- | -------------- |  | - | --- |  |  | - | ------- | 
|     |                                                |  | Thousand of yen
|     |                                                |  |                
|     |                                                |  | Balance at      |     |           |  |            |         |               
|     |                                                |  | Beginning of    |     |           |  |            |         | Balance at End
|     |                                                |  | Period          |     | Additions |  | Deductions |         | End of Period 
|     |                                                |  |                 |     |           |  |            |         |               
|1999 |                                                |  |                 |     |           |  |            |         |                |  |   |     |  |  |   |        
|    
|    
|    
|    
|     | Allowance for doubtful accounts                |  | ¥               |    |           |  | ¥          |        |                |  | ¥ |    |  |  | ¥ |       
|    
|2000 |                                                |  |                 |     |           |  |            |         |                |  |   |     |  |  |   |        
|    
|    
|    
|    
|     | Allowance for doubtful accounts                |  |                 |    |           |  |            | 150     |                |  |   |    |  |  |   | 150     | 
|    
|2001 |                                                |  |                 |     |           |  |            |         |                |  |   |     |  |  |   |        
|    
|    
|    
|    
|     | Allowance for doubtful accounts                |  |                 | 150 |           |  |            | 1,848   |                |  |   | 150 |  |  |   | 1,848   | 
|    
|    
|    
|    
|     | Allowance for uncollectible
contract repayment |  |                 |    |           |  |            | 160,574 |                |  |   |    |  |  |   | 160,574 | 

|     |                                                 |  |                          |   |           |  |            |       |                |  |   |   |  |  |   |       | 
|---- | ----------------------------------------------- |  | ------------------------ | - | --------- |  | ---------- | ----- | -------------- |  | - | - |  |  | - | ----- | 
|     |                                                 |  | Thousand of U.S. Dollars
|     |                                                 |  |                         
|     |                                                 |  | Balance at               |   |           |  |            |       | Balance at End
|     |                                                 |  | Beginning of             |   |           |  |            |       | Balance at End
|     |                                                 |  | Period                   |   | Additions |  | Deductions |       | End of Period 
|     |                                                 |  |                          |   |           |  |            |       |               
|2001 |                                                 |  |                          |   |           |  |            |       |                |  |   |   |  |  |   |      
|    
|    
|    
|    
|     | Allowance for doubtful accounts                 |  | $                        | 1 |           |  | $          | 15    |                |  | $ | 1 |  |  | $ | 15    | 
|    
|    
|    
|    
|     | Allowance for uncollectible contract prepayment |  |                          |  |           |  |            | 1,296 |                |  |   |  |  |  |   | 1,296 | 

F-25



---



##### Table of Contents



INDEX OF EXHIBITS

|        |  |                                                                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                             
|Number  |  | Description                                                                                                                                                                                                 
|       
|1.1     |  | Articles of Incorporation, as amended (with English translation)                                                                                                                                            
|       
|1.2     |  | Share Handling Regulations (with English translation)*                                                                                                                                                      
|       
|1.3     |  | Regulations of the Board of Directors (with English translation)*                                                                                                                                           
|       
|1.4     |  | Regulations of the Board of Statutory Auditors (with English translation)*                                                                                                                                  
|       
|2.1     |  | Specimen Common Stock Certificate*                                                                                                                                                                          
|       
|2.2     |  | Bylaws of the IIJ Employee Shareholders Association (with English
translation)*                                                                                                                            
|       
|4.1     |  | Right of Use Agreement for Transmission Network Facilities, dated
November 30, 1998, between Crosswave Communications Inc. and Teleway
Corporation (presently, KDD Corporation) (with English translation)**
|       
|4.2     |  | Memorandum on Amendments to the Original Agreement, dated November 30,
1998, between Crosswave Communications Inc. and Teleway Corporation
(presently, KDD Corporation) (with English translation)**        
|       
|4.3     |  | Confirmation of IRU Fees, dated November 30, 1998, between Crosswave
Communications Inc. and Teleway Corporation (presently, KDD Corporation)
(with English translation)**                                  
|       
|4.4     |  | Memorandum on Business Cooperation, dated November 30, 1998, between
Crosswave Communications Inc. and Teleway Corporation (presently, KDD
Corporation) (with English translation)*                         
|       
|4.5     |  | Basic Agreement to Delegate Services, dated April 1, 1997, between
Internet Initiative Japan Inc. and IIJ Technology Inc. (with English
translation)*                                                       
|       
|4.6     |  | Shareholders Agreement Relating to the Establishment of INTERNET
MULTIFEED CO., dated August 20, 1997, between Nippon Telegraph and
Telephone Corporation and the Registrant (with English translation)*   
|       
|4.7     |  | Basic Agreement to Delegate Services, dated January 30, 1995, between
Internet Initiative Japan Inc. and IIJ Media Communications Inc. (with
English translation)*                                          
|       
|4.8     |  | Memorandum of Understanding Regarding Technical Cooperation, dated April
1, 1997, between Internet Initiative Japan Inc. and IIJ Media
Communications Inc. (with English translation)*                      
|       
|4.9     |  | Basic Agreement to Delegate Services, dated April 1, 1998, between
Internet Initiative Japan Inc. and Net Care, Inc. (with English
translation)*                                                            



---



##### Table of Contents



|     |  |                                                                                                                                                                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.10 |  | Software License Agreement between Trusted Information Systems, Inc.
(TIS) and IIJ, dated November 9, 1994, including two amendment
agreements thereto, dated March 30, 1998 and February 17, 1999 (TIS
merged into Networks Associates, Inc. (NAI) on April 30, 1998, and NAI
acceded to the Agreement.)*                      
|    
|4.11 |  | Purchase and Sales Agreement, dated January 8, 1999, between Internet
Initiative Japan Inc. and Crosswave Communications Inc. (with English
translation)*                                                                                                                                                                           
|    
|4.12 |  | Individual Agreement on Entrustment of Business between Internet
Initiative Japan Inc. and Asia Internet Holding Co., Ltd., dated July 1,
1998 (with English translation)*                                                                                                                                                          
|    
|4.13 |  | Enforcement Rules with regard to the Payment of Fee for Right of Use of
Transmission Network Facilities, dated September 30, 1999, between
Crosswave Communications Inc. and KDD Corporation establishes rules with
regard to the payment of a fee by Crosswave Communications Inc. to KDD
Corporation (with English translation)***
|    
|4.14 |  | Sales Cooperation Agreement, dated August 20, 1999, between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                          
|    
|4.15 |  | Business Entrustment Agreement, dated April 1, 1999 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                          
|    
|4.16 |  | Letter of Confirmation, dated November 16, 1999 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                              
|    
|4.17 |  | Agreement On Trial Service Of the International Dedicated Line dated June
1, 2000 between Crosswave Communications Inc. and Internet Initiative
Japan Inc. (with English translation)***                                                                                                                                            
|    
|4.18 |  | Data Center Service Agency Agreement dated March 1, 2000 between
Crosswave Communications Inc. and Internet Initiative Japan Inc. (with
English translation)***                                                                                                                                                                     
|    
|4.19 |  | Shareholders Agreement, dated May 11, 2000, between Internet Initiative
Japan Inc., Toyota Motor Corporation and Sony Corporation ****                                                                                                                                                                                             
|    
|8.1  |  | List of Subsidiaries (see Organizational Structure in Item 4.C of
this Form 20-F/A)                                                                                                                                                                                                                                               



---

|*    |  | Incorporated by reference to the corresponding exhibit to our Form F-1
Registration Statement (File No. 333-10584) declared effective on August
3, 1999.                                                                                                                                                                                  
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|**   |  | Incorporated by reference to the corresponding exhibit to the Form F-1 of
Crosswave Communications Inc. (File No. 333-12264) declared effective on
August 3, 1999. Portions of the corresponding exhibit to our Form F-1
Registration Statement (File No. 333-10584) were previously omitted
pursuant to a confidential treatment request.
|    
|    
|    
|    
|***  |  | Incorporated by reference to the corresponding exhibit to the Form F-1 of
Crosswave Communications, Inc. (File No. 333-12264) declared effective on
August 3, 2000.                                                                                                                                                                       
|    
|    
|    
|    
|**** |  | Incorporated by reference to the corresponding exhibit to our annual
report on Form F-20/A (File No. 0-30204) filed on October 23, 2000.