##### Table of Contents



As filed with the Securities and Exchange Commission on September 30, 2003

(i) Audited financial statements of
Internet Initiative Japan Inc. required under Item 18, (ii) separate audited financial
statements of Crosswave Communications Inc. that may be required
under Rule 3-09 of Regulation S-X and summary financial information
regarding Crosswave that may be required under Rule 4-08 of
Regulation S-X, and (iii) certifications of the CEO and CFO of
Internet Initiative Japan Inc. under Sections 302 and 906 of the
Sarbanes Oxley Act of 2002 have been omitted from this Form 20-F.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 20-F

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

OR

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

For the fiscal year ended March 31, 2003

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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)

Japan
(Jurisdiction of incorporation or organization)

Jinbocho Mitsui Bldg.
1-105 Kanda Jinbo-cho
Chiyoda-ku, Tokyo 101-0051
Japan
(Address of principal executive offices)

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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|None                |  | None                                     

Securities registered or to be registered pursuant to Section 12(g) of the Act:Common Stock, no par value
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
(Title of Class)

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

As of March 31, 2003, 22,480 shares of common stock were outstanding,
including 6,093 shares represented by an aggregate of 12,186,000 American
Depositary 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  þ     No  o

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

Item 17  o     Item 18  þ



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TABLE OF CONTENTS



|                                                   |                                                                                        |  |  |  |  |  |  | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                   | Cautionary Note Regarding Forward-looking Statements                                  
|PART I                                            
|                                                   | Item 1. Identity of Directors, Senior Management and Advisers.                        
|                                                   | 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.                            
|                                                   | B. 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. Controls and Procedures                                                      
|                                                   | Item 16A. Audit Committee Financial Expert                                            
|                                                   | Item 16B. Code of Ethics                                                              
|                                                   | Item 16C. Principal Accountant Fees and Services                                      
|                                                   | Item 16D. Exemptions from the Listing Standards for Audit Committees                  
|PART III                                          
|                                                   | Item 17. Financial Statements.                                                        
|                                                   | Item 18. Financial Statements.                                                        
|                                                   | Item 19. Exhibits.                                                                    
|EX-1.1 Articles of Incorporation                  
|EX-1.2 Share Handling Regulations                 
|EX-1.3 Regulations of the Board of Directors      
|EX-2.3 Agents and Registrar Agreement             
|EX-4.15 Lease Agreement, Dated March 14, 2003     
|EX-4.16 Sublease Agreements, Dated March 15, 2003 
|EX-4.17 Pledge Agreement, Dated march 14, 2003    
|EX-4.18 Credit Facility Agreement, Dated May 29,03
|EX-4.19 Letter of Undertaking, Dated August 29, 03
|EX-4.20 Subscription Agreement, Dated Sep. 16, 03 
|EX-14.1 Selected Unaudited Financial Statement    



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TABLE OF CONTENTS

|                                                                                      |          |        |    |      |  | 
|------------------------------------------------------------------------------------- | -------- | ------ | -- | ---- |  | 
|                                                                                      |          |        |    | Page
|                                                                                      |          |        |    |     
|Cautionary Note Regarding Forward-looking Statements                                  |          |        | 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                                                    |          |        | 16 |     
|Item 5. Operating and Financial Review and Prospects                                  |          |        | 46 |     
|Item 6. Directors and Senior Management and Employees                                 |          |        | 67 |     
|Item 7. Major Shareholders and Related Party Transactions                             |          |        | 71 |     
|Item 8. Financial Information                                                         |          |        | 73 |     
|Item 9. The Offer and Listing                                                         |          |        | 73 |     
|Item 10. Additional Information                                                       |          |        | 75 |     
|Item 11. Quantitative and Qualitative Disclosures about Market Risk                   |          |        | 86 |     
|Item 12. Description of Securities Other than Equity Securities                       |          |        | 88 |     
|                                                                                      | PART II  |        |    |      | 
|Item 13. Defaults, Dividend Arrearages and Delinquencies                              |          |        | 89 |     
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds |          |        | 89 |     
|Item 15. Controls and Procedures                                                      |          |        | 89 |     
|Item 16A. Audit Committee Financial Expert                                            |          |        | 90 |     
|Item 16B. Code of Ethics                                                              |          |        | 90 |     
|Item 16C. Principal Accountant Fees and Services                                      |          |        | 90 |     
|Item 16D. Exemptions from the Listing Standards for Audit Committees                  |          |        | 90 |     
|                                                                                      | PART III |        |    |      | 
|Item 17. Financial Statements                                                         |          |        | 91 |     
|Item 18. Financial Statements                                                         |          |        | 91 |     
|Item 19. Exhibits                                                                     |          |        | 91 |     

i



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Cautionary Note Regarding Forward-looking Statements

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

We cannot promise that our expectations, projections, anticipated
estimates or other information expressed in these forward-looking statements
will turn out to be correct. We do not undertake any obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Important risks and factors that could cause our
actual results to differ materially from our expectations are generally
provided in Item 3.D. and include, without limitation:



| |  |  | that we may not be able to grow revenue and achieve or
sustain profitability in the near future,                                                                                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | that we may not be able to compete effectively against
competitors which have greater financial, marketing and other
resources,                                                                                                                                                                     
|
| |  |  | that our systems integration business faces fierce competition,                                                                                                                                                                                                                                     
|
| |  |  | that we may not be able to retain and acquire customers for our data centers, and                                                                                                                                                                                                                   
|
| |  |  | that we are currently highly dependent on Crosswaves network
and data centers and any disruption in our ability to use
Crosswaves network and data centers as a result of its corporate
reorganization proceedings or otherwise could adversely affect our
business and our results of operations.





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##### Table of Contents






PART I




Item 1. Identity of Directors, Senior Management and Advisers.

Not Applicable.




Item 2. Offer Statistics and Expected Timetable.

Not Applicable.




Item 3. Key Information.

A.     Selected financial data.

The selected consolidated financial data below should be read together
with our consolidated financial statements and the notes to the financial
statements beginning on page F-1 and with Item 5., Operating and Financial
Review and Prospects. The statement of operations data and per
share and ADS data below for the fiscal year ended March 31, 2003 and
the balance sheet data below as of March 31, 2003 are derived from
our unaudited financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States, or U.S. GAAP, but have not been audited. The statement of operations data and per share and ADS
data below for the fiscal years ended March 31, 1999, 2000, 2001
and 2002, the balance sheet data below as of March 31, 1999, 2000, 2001 and 2002
and the net cash provided by (used in) operating activities, investing
activities and financing activities for the years ended March 31, 1999, 2000,
2001 and 2002 under operating data below 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. Other operating data below
are not presented in accordance with U.S. GAAP and have not been audited by
Deloitte Touche Tohmatsu, independent auditors, but a reconciliation of these
financial measures to comparable U.S. GAAP financial measures is provided
below.

2



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|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |         |          |  
|-------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------- | ----------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------------------------------------ | ----------- | ------ | ------------------ | ------ | --------- | ------ | ------- | ------ | --------- | ------ | ------- | ------ | --------- | ------ | ------- | ------ | -------- | ----------------------- | ------- | ------- | -------- | -
|                                                         |                                                                         |                  |                                                             |                                                     |        | As of and for the year ended March 31,          
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                 
|                                                         |                                                                         |                  |                                                             |                                                     |        | 1999                                             |             | 2000   |                    | 2001   |           | 2002   |         | 2003   |           | 2003  
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |       
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  | (unaudited) |       
|                                                         |                                                                         |                  |                                                             |                                                     |        | (millions of yen, except per share and ADS data) |             |        | (thousands of U.S.
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          | dollars, except per    
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          | share and
ADS data) (1)
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                        
|Statement of Operations Data:                            |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                        
|REVENUES:                                                |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                        
|                                                         | Connectivity and value-added services
revenues:                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |        
|                                                         |                                                                         | Dedicated access |                                                             |                                                     | ¥7,798 |                                                  |             |        | ¥9,999             |        |           |        | ¥12,953 |        |           |        | ¥14,303 |        |           |        | ¥13,815 |        |          | $                       | 117,007 |        
|                                                         |                                                                         | Dial-up access   |                                                             |                                                     | 4,101  |                                                  |             |        | 4,496              |        |           |        | 4,423   |        |           |        | 3,644   |        |           |        | 3,155   |        |          |                         | 26,723  |        
|                                                         |                                                                         | Value-added      |                                                             |                                                     | 496    |                                                  |             |        | 884                |        |           |        | 1,962   |        |           |        | 3,100   |        |           |        | 3,603   |        |          |                         | 30,514  |        
|                                                         |                                                                         | Other            |                                                             |                                                     | 110    |                                                  |             |        | 408                |        |           |        | 592     |        |           |        | 1,668   |        |           |        | 1,726   |        |          |                         | 14,616  |        
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|                                                         |                                                                         |                  |                                                             | Total connectivity and
value-added services revenue |        |                                                  | 12,505      |        |                    |        | 15,787    |        |         |        | 19,930    |        |         |        | 22,715    |        |         |        | 22,299   |                         |         |         | 188,860  |  
|                                                         | Systems integration revenues, including
related equipment sales         |                  |                                                             | 1,179                                               |        |                                                  |             | 7,640  |                    |        |           | 10,556 |         |        |           | 14,356 |         |        |           | 15,013 |         |        |          | 127,150                 |        
|                                                         | Equipment sales                                                         |                  |                                                             | 1,085                                               |        |                                                  |             | 1,875  |                    |        |           | 1,390  |         |        |           | 2,834  |         |        |           | 6,706  |         |        |          | 56,799                  |        
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|                                                         |                                                                         |                  |                                                             | Total revenues                                      |        |                                                  | 14,769      |        |                    |        | 25,302    |        |         |        | 31,876    |        |         |        | 39,905    |        |         |        | 44,018   |                         |         |         | 372,809  |  
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|COST AND EXPENSES:                                       |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                        
|                                                         | Cost of connectivity and value-added
services revenues                  |                  |                                                             | 11,178                                              |        |                                                  |             | 15,091 |                    |        |           | 18,983 |         |        |           | 19,800 |         |        |           | 20,387 |         |        |          | 172,668                 |        
|                                                         | Cost of systems integration revenues,
including related equipment sales |                  |                                                             | 950                                                 |        |                                                  |             | 6,272  |                    |        |           | 9,117  |         |        |           | 12,314 |         |        |           | 13,090 |         |        |          | 110,868                 |        
|                                                         | Cost of equipment sales                                                 |                  |                                                             | 1,074                                               |        |                                                  |             | 1,807  |                    |        |           | 1,289  |         |        |           | 2,540  |         |        |           | 6,417  |         |        |          | 54,345                  |        
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|                                                         |                                                                         |                  |                                                             | Total cost of revenues                              |        |                                                  | 13,202      |        |                    |        | 23,170    |        |         |        | 29,389    |        |         |        | 34,654    |        |         |        | 39,894   |                         |         |         | 337,881  |  
|                                                         | Sales and marketing expenses                                            |                  |                                                             | 1,570                                               |        |                                                  |             | 2,604  |                    |        |           | 3,252  |         |        |           | 3,038  |         |        |           | 3,176  |         |        |          | 26,901                  |        
|                                                         | General and administrative expenses                                     |                  |                                                             | 1,065                                               |        |                                                  |             | 1,234  |                    |        |           | 1,618  |         |        |           | 1,840  |         |        |           | 2,205  |         |        |          | 18,671                  |        
|                                                         | Research and development expenses                                       |                  |                                                             | 243                                                 |        |                                                  |             | 364    |                    |        |           | 287    |         |        |           | 319    |         |        |           | 414    |         |        |          | 3,508                   |        
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|                                                         |                                                                         |                  |                                                             | Total cost and expenses                             |        |                                                  | 16,080      |        |                    |        | 27,372    |        |         |        | 34,546    |        |         |        | 39,851    |        |         |        | 45,689   |                         |         |         | 386,961  |  
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|OPERATING INCOME (LOSS)                                  |                                                                         |                  | (1,311                                                      | )                                                   |        |                                                  | (2,070      | )      |                    |        | (2,670    | )      |         |        | 54        |        |         |        | (1,671    | )      |         |        | (14,152  | )                      
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|OTHER INCOME (EXPENSES):                                 |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                        
|                                                         |                                                                         |                  | Interest income                                             |                                                     |        | 4                                                |             |        |                    | 362    |           |        |         | 454    |           |        |         | 122    |           |        |         | 68     |          |                         |         | 571     |         
|                                                         |                                                                         |                  | Interest expense                                            |                                                     |        | (219                                             | )           |        |                    | (277   | )         |        |         | (643   | )         |        |         | (659   | )         |        |         | (733   | )        |                         |         | (6,207  | )       
|                                                         |                                                                         |                  | Other  net                                                 |                                                     |        | 16                                               |             |        |                    | (830   | )         |        |         | 1,088  |           |        |         | (406   | )         |        |         | (604   | )        |                         |         | (5,115  | )       
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|                                                         |                                                                         |                  |                                                             | Other income (expenses)  net                       |        |                                                  | (199        | )      |                    |        | (745      | )      |         |        | 899       |        |         |        | (943      | )      |         |        | (1,269   | )                       |         |         | (10,751  | )
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|LOSS FROM OPERATIONS BEFORE INCOME TAX EXPENSE
(BENEFIT) |                                                                         |                  | (1,510                                                      | )                                                   |        |                                                  | (2,815      | )      |                    |        | (1,771    | )      |         |        | (889      | )      |         |        | (2,940    | )      |         |        | (24,903  | )                      
|INCOME TAX EXPENSE (BENEFIT)                             |                                                                         |                  | 16                                                          |                                                     |        |                                                  | (1,280      | )      |                    |        | (926      | )      |         |        | 1,099     |        |         |        | 912       |        |         |        | 7,719    |                        
|MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES          |                                                                         |                  | 123                                                         |                                                     |        |                                                  | (70         | )      |                    |        | 160       |        |         |        | 24        |        |         |        | 153       |        |         |        | 1,298    |                        
|EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES            |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                        
|                                                         |                                                                         |                  | Equity method net loss                                      |                                                     |        | (26                                              | )           |        |                    | (3,180 | )         |        |         | (4,015 | )         |        |         | (5,482 | )         |        |         | (5,626 | )        |                         |         | (47,644 | )       
|                                                         |                                                                         |                  | Impairment loss on investment in and
deposits for Crosswave |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         | (7,153 | )        |                         |         | (60,583 | )       
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|                                                         |                                                                         |                  |                                                             | Total                                               |        |                                                  | (26         | )      |                    |        | (3,180    | )      |         |        | (4,015    | )      |         |        | (5,482    | )      |         |        | (12,779  | )                       |         |         | (108,227 | )
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|NET LOSS                                                 |                                                                         |                  | ¥(1,429                                                     | )                                                   |        |                                                  | ¥(4,785     | )      |                    |        | ¥(4,700   | )      |         |        | ¥(7,446   | )      |         |        | ¥(16,477  | )      |         | $      | (139,551 | )                      
|                                                         |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                         |         |        
|Per Share and ADS Data:                                  |                                                                         |                  |                                                             |                                                     |        |                                                  |             |        |                    |        |           |        |         |        |           |        |         |        |           |        |         |        |          |                        
|Basic and diluted net loss per share                     |                                                                         |                  | ¥(75,720                                                    | )                                                   |        |                                                  | ¥(225,791   | )      |                    |        | ¥(209,085 | )      |         |        | ¥(331,234 | )      |         |        | ¥(732,955 | )      |         | $      | (6,208   | )                      
|Basis and diluted net loss per ADS equivalent            |                                                                         |                  | (37.86                                                      | )                                                   |        |                                                  | (112.89     | )      |                    |        | (104.54   | )      |         |        | (165.62   | )      |         |        | (366.48   | )      |         |        | (3.1     | )                      
|Weighted average number of shares                        |                                                                         |                  | 18,868                                                      |                                                     |        |                                                  | 21,190      |        |                    |        | 22,480    |        |         |        | 22,480    |        |         |        | 22,480    |        |         |        |          |                        
|Weighted average number of ADS equivalents
(thousands)   |                                                                         |                  | 37,736                                                      |                                                     |        |                                                  | 42,380      |        |                    |        | 44,960    |        |         |        | 44,960    |        |         |        | 44,960    |        |         |        |          |                        

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|                                                                             |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        |             |         |                     |         |           |  | 
|---------------------------------------------------------------------------- |  | -------------------- | ------ | -- | ------ | ------------------------------------------------ | ------- | ------------------ | ------ | ---- | ------- | ---- | ------ | ---- | ------- | ---- | ------ | - | ------- | -- | ------ | ----------- | ------- | ------------------- | ------- | --------- |  | 
|                                                                             |  |                      |        |    |        | As of and for the year ended March 31,          
|                                                                             |  |                      |        |    |        |                                                 
|                                                                             |  |                      |        |    |        | 1999                                             |         | 2000               |        | 2001 |         | 2002 |        | 2003 |         | 2003
|                                                                             |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |     
|                                                                             |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        | (unaudited) |         |                     |         |          
|                                                                             |  |                      |        |    |        | (millions of yen, except per share and ADS data) |         | (thousands of U.S.
|                                                                             |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        |             |         | dollars, except per
|                                                                             |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        |             |         | share and ADS      
|                                                                             |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        |             |         |                     |         | data) (1)
|Balance Sheet Data:                                                          |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        |             |         |                    
|Cash                                                                         |  |                      | ¥1,061 |    |        |                                                  | ¥16,158 |                    |        |      | ¥13,571 |      |        |      | ¥11,046 |      |        |   | ¥3,588  |    |        | $           | 30,392  |                    
|Total assets                                                                 |  |                      | 13,359 |    |        |                                                  | 39,001  |                    |        |      | 50,641  |      |        |      | 45,263  |      |        |   | 32,064  |    |        |             | 271,571 |                    
|Short-term borrowings                                                        |  |                      | 6,679  |    |        |                                                  | 13,690  |                    |        |      | 5,620   |      |        |      | 3,820   |      |        |   | 4,824   |    |        |             | 40,854  |                    
|Current portion of long-term borrowings,
including capital lease obligations |  |                      | 1,855  |    |        |                                                  | 2,255   |                    |        |      | 1,644   |      |        |      | 3,374   |      |        |   | 4,660   |    |        |             | 39,469  |                    
|Long-term borrowings, including capital lease
obligations                    |  |                      | 2,151  |    |        |                                                  | 2,300   |                    |        |      | 5,479   |      |        |      | 6,262   |      |        |   | 7,092   |    |        |             | 60,066  |                    
|Convertible notes (2)                                                        |  |                      |       |    |        |                                                  |        |                    |        |      | 15,000  |      |        |      | 15,000  |      |        |   | 15,000  |    |        |             | 127,043 |                    
|Shareholders equity (capital deficiency)                                    |  |                      | 485    |    |        |                                                  | 15,001  |                    |        |      | 16,928  |      |        |      | 7,725   |      |        |   | (10,004 | )  |        |             | (84,732 | )                  
|Operating Data:                                                              |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        |             |         |                    
|Capital expenditures, including
capitalized leases (3)                       |  |                      | ¥1,929 |    |        |                                                  | ¥3,465  |                    |        |      | ¥3,963  |      |        |      | ¥3,773  |      |        |   | ¥4,893  |    |        | $           | 41,446  |                    
|Adjusted EBITDA (4)                                                          |  |                      | 111    |    |        |                                                  | (37     | )                  |        |      | (72     | )    |        |      | 2,960   |      |        |   | 1,799   |    |        |             | 15,237  |                    
|Operating margin (5)                                                         |  |                      | (8.9   | )% |        |                                                  | (8.2    | )%                 |        |      | (8.4    | )%   |        |      | 0.1     | %    |        |   | (3.8    | )% |        |             |         |                    
|Adjusted
EBITDA margin (4)(6)                                                |  |                      | 0.7    | %  |        |                                                  | (0.1    | )%                 |        |      | (0.2    | )%   |        |      | 7.4     | %    |        |   | 4.1     | %  |        |             |         |                    
|Net cash provided by (used in):                                              |  |                      |        |    |        |                                                  |         |                    |        |      |         |      |        |      |         |      |        |   |         |    |        |             |         |                    
|                                                                             |  | Operating activities |        |    | ¥400   |                                                  |         |                    | ¥1,199 |      |         |      | ¥(271  | )    |         |      | ¥1,161 |   |         |    | ¥1,582 |             |         | $                   | 13,396  |          
|                                                                             |  | Investing activities |        |    | (3,695 | )                                                |         |                    | (7,135 | )    |         |      | (9,544 | )    |         |      | (2,457 | ) |         |    | (7,878 | )           |         |                     | (66,722 | )        
|                                                                             |  | Financing activities |        |    | 3,186  |                                                  |         |                    | 22,192 |      |         |      | 6,428  |      |         |      | (1,462 | ) |         |    | (872   | )           |         |                     | (7,386  | )        



---

|(1) |  | The U.S. dollar amounts represent translations of yen amounts
at the rate of ¥118.07, which was the noon buying rate in New York
City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York prevailing
as of March 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In April 2000, we issued 1.75 percent unsecured yen convertible
notes due March 2005 in the aggregate principal amount of ¥15,000
million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) |  | Further information regarding capital expenditures, including
capitalized leases and a reconciliation to the most directly
comparable GAAP financial measure can be found below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(4) |  | Adjusted EBITDA represents operating income (loss) plus
depreciation and amortization. Adjusted EBITDA is provided because
it is a measure commonly used by investors to analyze and compare
companies on the basis of operating performance. Adjusted 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 our operating performance, financial
position and cash flows. Our Adjusted EBITDA is not necessarily
comparable with similarly titled measures for other companies.
Further information regarding Adjusted EBITDA and Adjusted EBITDA
margin and a reconciliation to the most directly comparable GAAP
financial measure can be found below.
|   
|(5) |  | Operating income (loss) as a percentage of total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(6) |  | Adjusted EBITDA as a percentage of total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Reconciliations of the Disclosed Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA margin

We define Adjusted EBITDA as operating income (loss) plus depreciation and
amortization. We define Adjusted EBITDA margin as Adjusted EBITDA as a
percentage of our total operating revenues. We believe that both Adjusted
EBITDA and Adjusted EBITDA margin are relevant and useful information as these
are important measures used by our management to measure our operating profits
and losses. Our management uses Adjusted EBITDA and Adjusted EBITDA margin, in
combination with our other financial measures, because we believe that both
Adjusted EBITDA and Adjusted EBITDA margin are useful to investors as they are
measures commonly used by investors to analyze and compare companies on the
basis of operating performance. Adjusted EBITDA and Adjusted EBITDA margin, as
we have defined them, may not be comparable to a similarly titled measures used
by other companies.

4



---



##### Table of Contents



The following table summarizes the reconciliation of Adjusted EBITDA to
net loss as reported in our consolidated statements of operations prepared and
presented in accordance with U.S. generally accepted accounting principles.

|                                                |  |                   |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |             |         |  
|----------------------------------------------- |  | ----------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | - |  | ----------- | ------- | -
|                                                |  | 1999              |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                                |  |                   |        |      |  |      |        |      |  |     
|                                                |  |                   |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  | (unaudited)
|                                                |  | (millions of yen)
|Adjusted EBITDA                                 |  |                   | ¥111   |      |  |      | ¥(37   | )    |  |      | ¥(72   | ) |  |  | ¥2,960 |   |  |             | ¥1,799  |  
|Depreciation and amortization*                  |  |                   | (1,422 | )    |  |      | (2,033 | )    |  |      | (2,598 | ) |  |  | (2,906 | ) |  |             | (3,470  | )
|Operating loss                                  |  |                   | (1,311 | )    |  |      | (2,070 | )    |  |      | (2,670 | ) |  |  | 54     |   |  |             | (1,671  | )
|Other expenses                                  |  |                   | (199   | )    |  |      | (745   | )    |  |      | 899    |   |  |  | (943   | ) |  |             | (1,269  | )
|Income tax benefit (expense)                    |  |                   | (16    | )    |  |      | 1,280  |      |  |      | 926    |   |  |  | (1,099 | ) |  |             | (912    | )
|Minority interests in
consolidated subsidiaries |  |                   | 123    |      |  |      | (70    | )    |  |      | 160    |   |  |  | 24     |   |  |             | 153     |  
|Equity in net loss of equity
method investees   |  |                   | (26    | )    |  |      | (3,180 | )    |  |      | (4,015 | ) |  |  | (5,482 | ) |  |             | (12,779 | )
|Net loss                                        |  |                   | (1,429 | )    |  |      | (4,785 | )    |  |      | (4,700 | ) |  |  | (7,446 | ) |  |             | (16,477 | )

(*) Depreciation and amortization
excludes amortization of issuance cost of convertible notes and of
goodwill that were presented as other expenses.

Capital Expenditures

We define capital expenditures as purchases of property and equipment plus
payments on capitalized leases. We have included the information concerning
capital expenditures because our management uses this measure to manage our
capital expenditures and believes that it is useful to investors to analyze and
compare companies on the basis of such investments. Capital expenditures, as
we have defined it, may not be comparable to a similarly titled measure used by
other companies.

The following table summarizes the reconciliation of capital expenditures
to purchase of property and equipment as reported in our consolidated
statements of cash flows prepared and presented in accordance with the U.S.
generally accepted accounting principles.

|                                    |  |                   |        |             |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|----------------------------------- |  | ----------------- | ------ | ----------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                    |  | 1999              |        | 2000        |  | 2001 |        | 2002 |  | 2003
|                                    |  |                   |        |             |  |      |        |      |  |     
|                                    |  | (millions of yen) |        | (unaudited)
|Capital expenditures                |  |                   | ¥1,929 |             |  |      | ¥3,465 |      |  |      | ¥3,963 |  |  |  | ¥3,773 |  |  |  | ¥4,893 | 
|Payments on capitalized leases      |  |                   | 1,169  |             |  |      | 2,309  |      |  |      | 2,596  |  |  |  | 2,536  |  |  |  | 3,578  | 
|Purchases of property and equipment |  |                   | 760    |             |  |      | 1,156  |      |  |      | 1,367  |  |  |  | 1,237  |  |  |  | 1,315  | 

5



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##### Table of Contents



Exchange rates

Fluctuations in exchange rates between the Japanese yen and U.S. dollar
and other currencies will affect the U.S. dollar and other currency equivalent
of the yen price of our shares and the U.S. dollar amounts received on
conversion of any cash dividends, which in turn will affect the U.S. dollar
price of the ADSs. We have translated some Japanese yen amounts presented in
this annual report into U.S. dollars solely for your convenience. Unless
otherwise noted, the rate used for the translations was ¥118.07 per $1.00 which
was the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York prevailing as of March 31, 2003, the date of our most recent balance sheet
contained in this annual report. The noon buying rate on September 25, 2003
was ¥118.86 per $1.00. Translations do not imply that the yen amounts actually
represent, or have been or could be converted into, equivalent amounts in U.S.
dollars.

|                                       |  |      |         |     |  |             |         |            |  |  |         |  |  |  |         | 
|-------------------------------------- |  | ---- | ------- | --- |  | ----------- | ------- | ---------- |  |  | ------- |  |  |  | ------- | 
|Fiscal year ended March 31,            |  | High |         | Low |  | Average (1) |         | Period-end
|                                       |  |      |         |     |  |             |         |           
|1999                                   |  |      | ¥147.14 |     |  |             | ¥108.83 |            |  |  | ¥128.10 |  |  |  | ¥118.43 | 
|2000                                   |  |      | 124.45  |     |  |             | 101.53  |            |  |  | 110.02  |  |  |  | 102.73  | 
|2001                                   |  |      | 125.54  |     |  |             | 104.19  |            |  |  | 111.65  |  |  |  | 125.54  | 
|2002                                   |  |      | 134.77  |     |  |             | 115.89  |            |  |  | 125.64  |  |  |  | 132.70  | 
|2003                                   |  |      | 133.40  |     |  |             | 115.71  |            |  |  | 121.10  |  |  |  | 118.07  | 
|                                       |  |      |         |     |  |             |         |            |  |  |         |  |  |  |         | 
|Calendar year 2003                     |  |      |         |     |  |             |         |            |  |  |         |  |  |  |         | 
|March                                  |  |      | ¥121.42 |     |  |             | ¥116.47 |            |  |  | ¥118.69 |  |  |  | ¥118.07 | 
|April                                  |  |      | 120.55  |     |  |             | 118.25  |            |  |  | 119.90  |  |  |  | 119.07  | 
|May                                    |  |      | 119.50  |     |  |             | 115.94  |            |  |  | 117.26  |  |  |  | 119.50  | 
|June                                   |  |      | 119.87  |     |  |             | 117.46  |            |  |  | 118.33  |  |  |  | 119.87  | 
|July                                   |  |      | 119.87  |     |  |             | 117.46  |            |  |  | 118.39  |  |  |  | 118.63  | 
|August                                 |  |      | 120.55  |     |  |             | 117.24  |            |  |  | 118.66  |  |  |  | 120.42  | 
|September (through
September 25, 2003) |  |      | 117.41  |     |  |             | 111.65  |            |  |  | 115.37  |  |  |  | 118.86  | 



---

|(1) |  | For fiscal years, calculated from the average of the exchange rates on
the last day of each month during the period. For calendar year months,
calculated based on the average of daily exchange rates.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. In that event, the trading price of our securities could decline,
and you may lose all or part of your investment. Additional risks not
currently known to us or that we now deem immaterial may also harm us and
affect your investment.

We have experienced both operating losses and net losses in recent years and
may not be able to achieve or sustain profitability in the near future.

We incurred an operating loss of ¥1.7 billion and a net loss of ¥16.5
billion for the year ended March 31, 2003. We have incurred operating losses
and net losses in each of the past five fiscal years, with the exception of
operating income turning slightly positive for the year ended March 31, 2002.
Primarily as result of our equity in net loss from Crosswave and an
impairment loss taken in respect of our investment in Crosswave as a result of Crosswaves
financial condition, net loss for the year ended March 31, 2003 was the
highest net loss we have ever experienced. As a result, our accumulated
deficit at March 31, 2003 was ¥34.7 billion.

6



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##### Table of Contents



We expect to incur a net loss for the year ending March 31, 2004,
reflecting, among other things, the recognition of impairment loss on loans and
accounts receivable outstanding from Crosswave. Net losses and operating
losses may continue into the foreseeable future. If we are unable to decrease
our net losses or achieve net income, we may be forced to seek external sources
of financing to maintain our operations, which we may not be able to obtain on
favorable terms if at all.

We may continue to incur losses in the future due to a number of factors,
including:



| |  |  | Our revenues may be adversely affected by price reductions
caused by severe competition or by our failure to retain and/or
attract customers;                                                                                                                                                                                                                                                                          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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
market, could negatively impact our revenue;                                                                                                                                                                                    
|
| |  |  | We may need to make future costly investments in network
infrastructure, research and development and other investments which
would further hurt our profitability;                                                                                                                                                                                                                                                    
|
| |  |  | 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;                                                                                                                                                                                                                                                                                                 
|
| |  |  | Revenues and margins from our growing systems integration
business and Internet data center business, which have historically
been seasonally stronger toward the end of our second and fourth
fiscal quarters as companies in Japan typically make large
investments in or around September and March before they close their
semiannual and annual budgetary cycles, might not grow and/or be
profitable as expected;
|
| |  |  | Because of strong competition in the retail Internet Service
Provider, or ISP, market, we may lose ISP customers;                                                                                                                                                                                                                                                                                                      
|
| |  |  | As a result of Crosswaves corporate reorganization,                                                                                                                                                                                                                                                                                                                                                                   



| |  |  | we may lose revenues to the extent that existing
or potential customers switch to other services providers;                                                                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we may incur substantial costs to replace or
supplement Crosswave as a service provider in the event that
Crosswaves service becomes partly or wholly unavailable to
us;                                                      
|
| |  |  | it may become more difficult to market our
service offerings as total network solutions; and                                                                                                                                   
|
| |  |  | we expect to recognize an additional ¥1.7 billion
in further losses from our loans to Crosswave and
approximately ¥0.4 billion losses from our accounts receivable
from Crosswave during the fiscal year ending March 31, 2004.

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

7



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##### Table of Contents



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, Japan Telecom, PoweredCom and their affiliates. In the systems
integration business, our major competitors are large hardware vendors like
IBM, NEC and Hitachi and systems integrators like NTT Data. Our major
competitors have the financial resources to reduce prices in an effort to gain
market share or exert financial pressure on competitors like us. Even though
NTT and NTT Communications recently purchased shares in our company resulting
in the NTT Group becoming our largest shareholder, we plan to continue to
operate our company separately and independent from the NTT Group, and thus
continue to compete with the NTT Group. Our competitors have advantages over
us including:



| |  |  | substantially greater financial resources,                                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | more extensive and well-developed marketing and sales networks,                                                                                                               
|
| |  |  | higher brand recognition among consumers,                                                                                                                                     
|
| |  |  | larger customer bases, and                                                                                                                                                    
|
| |  |  | more diversified operations which allow profits from some
operations to offset operations with lower profitability, such as
the network services for which we are competitors.

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



| |  |  | sustain downward pricing pressure, including pressure on
lower-priced Internet access services offered to small- and
medium-sized companies and to larger corporations which are our
primary target markets,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | develop, market and sell their services,                                                                                                                                                                    
|
| |  |  | adapt quickly to new and changing technologies, and                                                                                                                                                         
|
| |  |  | obtain new customers.                                                                                                                                                                                       

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 extensive networks for Internet and data
transmission, further negatively affecting our ability to compete.

We may not be able to sufficiently maintain existing customers or acquire new
customers to sustain or increase our systems integration revenues in the face
of fierce competition.

A significant portion of our expected future revenue depends on our
ability to maintain our existing customers and acquire new customers for our
systems integration business. Our existing systems integration customer base
may not be large enough to provide us with a continuing high level of
dependable revenues, as the addition or cancellation of a single project can
result in significant fluctuations in revenues. Margins in the systems
integration business also tend to be more favorable for the provision of
additional services to existing customers than for the initial provision of
services to new customers. Competition in the systems integration business in
Japan has greatly intensified, with competitors expanding their sales forces
and offering more attractive products. We may not be able to attract as many
new customers as we need to maintain profitable systems integration operations
due to factors such as increased competition, negative publicity related to
Crosswaves corporate reorganization which may cause customers to seek service
providers which they believe are more stable, and weak economic conditions in
Japan which may cause companies to reduce their investments in technology.
Price competition may also hurt our profitability. If we are unable to
maintain our current systems integration customer base and acquire new systems
integration customers and contracts or if price competition becomes more
severe, our revenues may be lower, and
the profitability of our systems integration business and our results of
operations and financial condition could be materially adversely affected.

8



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##### Table of Contents



We may not be able to retain and acquire customers for our data centers.

In the field of Internet data center services, competition from other data
center operators may attract customers away from us or make it more difficult
for us to attract new customers. Other companies in the data center business
such as NTT Communications, KDDI, PoweredCom and Japan Telecom may become
strong competitors of ours, and if they are successful in the market we could
lose customers and it could become difficult for us to attract new customers.
Furthermore, once customers leave us and choose another service provider, it
may be difficult for us to reacquire those customers in the future.

In order to improve our competitiveness in the provision of total network
solutions, we started operations at two large-scale Internet data centers built
and owned by Crosswave in Saitama and Yokohama in early 2003. If we are unable
to attract new customers to these centers, we will not be able to achieve the
revenues initially anticipated, which could have an adverse effect on our
future revenues and results of operations. In addition, due to Crosswaves
reorganization proceedings, we may not be able to continue to use the Saitama
and Yokohama data centers in the future on favorable terms or at all, which
could seriously impair our ability to attract new customers and to provide
high-quality services to existing customers, both of which would have a
negative impact on our financial condition and results of operations.

We are currently highly dependent on Crosswaves network and data centers and
any disruption in our ability to use Crosswaves network and data centers as a
result of its corporate reorganization proceedings or otherwise could adversely
affect our results of operations.

We procure significant portions of our network backbone and data centers
from Crosswave. We also procure rack space and other essential elements of our
Internet data center services from Crosswave. As of March 2003, approximately
80% of our domestic backbone and 45% of our international backbone by cost was
attributable to Crosswave. Crosswaves data centers and backbone are important
network components in many of our systems integration projects. In addition,
we rely heavily on the Crosswave network in order to market and provide total
network solutions to our customers.

Crosswave is undergoing corporate reorganization proceedings in Japan. If
as a result of its corporate reorganization or otherwise we were to lose all or
some of our ability to use Crosswaves network, our business may be severely
negatively impacted as our ability to provide total network solutions may be
limited. If we are unable to continue to use Crosswaves network, we would be
forced to switch to an alternative network provider, but this could require
substantial lead time. Although some amount of redundancy is built into our
network through contracting with other providers, stoppage of all or some of
our key operations could inconvenience our customers through a slowdown in
network traffic or a reduction in network redundancy, all of which might cause
customers to consider using an alternative service provider. Furthermore, if
we are unable to use or are limited in our use of Crosswaves data centers, or
if we are forced to incur additional costs above normal rental fees in order to
ensure that the data centers are kept open and running, our business operations
and financial condition may be severely negatively affected. Crosswave may
also require significant additional funding to strengthen its network buildout,
but may choose not to do so.

In addition, as a result of Crosswaves corporate reorganization
proceedings, if Crosswave is taken over by a third party that is not inclined
to work with us, we may be unable to maintain our business relationship to the
same extent as at present, or at all, and may be forced to find another
suitable Type I provider to work with, which may be difficult, time consuming
and costly. Also, Crosswave or any third party potential acquiror of Crosswave
may request that we undertake certain activities because we are the largest
customer of Crosswave and the company most dependent on Crosswaves continuity
of network services. For example, we may be requested to enter into a
long-term commitment to use Crosswaves services. While we cannot be forced to
enter into an agreement that is not in our best interest, we may have to accept
some unfavorable terms in order to continue to avail ourselves of Crosswaves
services.

9



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##### Table of Contents



Crosswaves reorganization may make it increasingly difficult to acquire new
customers or retain existing ones.

Crosswaves commencement of reorganization proceedings may create concerns
among current and potential customers as to our ability to maintain the
reliability and quality of our services. Cancellations by existing customers
may increase in the future as a result of Crosswaves reorganization or other
factors. Crosswaves reorganization may also make it difficult for us to
acquire new customers. We have marketed ourselves to our customers as a
provider of total solutions, important components of which are Crosswaves
services, network and data centers. While we plan to continue to use
Crosswaves network and data centers following Crosswaves reorganization, we
may not be able to do so on reasonable terms or at all. If we are unable to do
so we would need to find alternative providers and this may have a negative
effect on our ability to continue to provide quality services. Loss of large
and important customers would have a serious adverse effect on our results of
operations, our financial position and our ability to continue to offer our
services.

We have substantial indebtedness and, due to Crosswaves commencement of
corporate reorganization proceedings and concerns as to our own financial
condition and business prospects, may find it increasingly difficult or
expensive to obtain future financing.

At March 31, 2003, we had significant indebtedness of ¥31.6 billion, a
working capital deficiency of ¥3.1 billion and shareholders capital deficiency
of ¥10.0 billion. Our total liabilities exceeded our total assets by ¥9.1
billion at March 31, 2003. At March 31, 2003, we had ¥3.6 billion in cash. We
depend substantially on obtaining financing from banks, the capital markets,
strategic investors and other sources to provide us with sufficient capital to
fund our losses and invest in the growth of our business.

Much of our current debt and our affiliated companies current debt
financing has been provided by the same Japanese banks which provided Crosswave
with much of its debt financing. We are dependent on continued good relations
with these and other banks in Japan to meet our current and future financing
needs. However, as a result of Crosswaves corporate reorganization and due to
increasing pressure from the Japanese government and Japanese bank regulatory
institutions on Japanese banks to improve the quality of their loan portfolios,
Japanese banks, including those with which we have traditionally had good
relations, may be increasingly reluctant to lend us money, or may only do so on
less favorable terms. Japanese banks with which we do business have already
required us to provide collateral for our borrowings, and we may be required to
offer large amounts of additional collateral to secure additional needed
financing. The continued operations of our business may be dependent on
obtaining future financing and therefore any reluctance on the part of banks to
provide such needed financing could have a serious negative impact on our
financial condition.

In light of Crosswaves commencement of corporate reorganization
proceedings and concerns as to our own financial condition and business
prospects, it may also be difficult for us to raise money from the capital
markets or from strategic investors. In June 2003, we raised approximately
¥1.4 billion in a private placement of our equity securities which we have
allocated for use as working capital. In addition, we recently received net
proceeds of approximately ¥12.0 billion in connection with a private placement
of our equity securities in September 2003, which we plan to use to repay our
outstanding 1.75% convertible notes due March 31, 2005 in the aggregate
principal amount of ¥15 billion. We may be unable to raise further funds for
working capital and other financial needs from investors in future issuances of
securities on terms favorable to us, or at all.

Increased difficulties or expenses in obtaining future financing may
prevent us from raising additional capital. If we are unable to do so, our
financial condition may become weaker and we may have to substantially curtail
our operations.

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We may experience increased difficulty in negotiating lease contracts as a
result of Crosswaves corporate reorganization and concerns as to our own
financial condition and business prospects.

Our provision of comprehensive Internet access and network solutions to
our customers depends substantially upon our ability to lease important
components such as routers, servers, network machines, high-capacity,
high-speed digital transmission lines, software and other items needed to
perform our operations. As a result of Crosswaves reorganization and concerns
as to our own financial condition and business prospects, one or
more component leasing companies may decide to cease doing business with
us and our affiliated companies, or only continue to do so on less favorable
terms. For example, we may be required to pay for leased goods and services in
advance or provide substantial additional cash deposits. If we are unable to
lease necessary components on favorable terms, we may be required to purchase
the components ourselves, which could add substantially to our operating costs.
If we are unable to continue to lease important components for our Internet
network, or are only able to do so on less favorable terms, our business
operations and financial condition may suffer, and we may have to curtail some
of our service offerings.

We depend on our ability to attract and retain qualified personnel.

If we fail to attract and retain qualified personnel, 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 will need to hire additional engineers and research and
development personnel. Competition for qualified engineers, research and
development personnel and employees in the telecommunications service industry
in Japan is intense and there are a limited number of persons with the
necessary knowledge and experience. In addition, we may find it difficult to
hire and retain key personnel in the future due to uncertainty regarding our
company as a result of the Crosswave corporate reorganization and its impact on
our financial condition and business prospects.

We depend on our executive officers and their reputation, and if we lose the
service of our executive officers or their reputations are damaged, our
business and relationship with customers, our major shareholders and those of
other IIJ Group companies and employees could suffer.

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

Some of our current key personnel, including Mr. Suzuki, were previously
also members of Crosswaves management. Mr. Suzuki was President and
representative director of Crosswave. As a result, any perception that
Crosswaves commencement of corporate reorganization proceedings reflected poor
management could have a negative impact on the image of IIJs management and
IIJ. If we are unable to retain the service of our executive officers, or
their reputations are damaged, it could have a negative impact on the company
and its relationship with its shareholders, business partners and employees and
as result our financial condition and results of operations.

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, as well as from 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. In addition, the reliability of our
network could be seriously damaged as a result of Crosswaves corporate
reorganization. During any period in which we are unable to provide service to
our customers, we may be required to forgo the right to payment for service,
potentially causing us to lose substantial amounts of revenue. 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.

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In addition to our dependence on Crosswave, we rely greatly on other
telecommunications providers and other suppliers, and could be affected by
disruptions in service or delays in the delivery of their products and
services.

In addition to Crosswave, we rely on other telecommunications carriers
such as NTT Communications, KDDI and Japan Telecom for a significant portion of
our network backbone and regional NTT companies and
electric power companies and their affiliates for local access lines for
our customers. We are subject to potential disruptions in these
telecommunications services and 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 whose quality of service may not be stable
or who are more susceptible to economic or political instability 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, typically 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 expand the capacity and reach of our network.

Any problems experienced by our telecommunications carriers and other
suppliers could have a material adverse effect on our business, financial
condition and results of operations.

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, such as the
transition from version four of Internet Protocol, or IP, to version six of IP,
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 of achieving technological advances. Additionally, this may
allow our competitors to respond more quickly to new and emerging technologies
and standards or invest more heavily in upgrading or replacing equipment to
take advantage of new technologies and standards.

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 the number of
our customers and their Internet use increases, as traffic patterns change and
as the volume of information transferred increases, we will need to increase
expenditures for our network and other facilities in order to adapt our
services and to maintain and improve the quality of our services. If we are
unable to manage our growth and expansion, the quality of our services could
deteriorate and our business may suffer.

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If we fail to execute our systems integration projects in a timely or
satisfactory manner or if we fail to manage customer data at our Internet data
centers in a professional manner we could be sued and our reputation could
suffer.

A significant portion of our future revenue depends on systems integration
projects which we, in cooperation with IIJ Technology, Net Care 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, if we lack a sufficient number of qualified engineers,
lack sufficient task-management capabilities for software-development vendors
or lack adequate management of customers data at our Internet data centers.
If we do not execute these services/projects as contracted or fail to manage
customer data at our Internet data centers in a professional manner, our
receipt of revenues may be delayed or lost altogether and we could be sued by
our counterparties, which could in turn have an impact on our reputation,
results of operation and financial condition.

Regulatory matters and new legislation could impact our ability to conduct our
business.

The licensing, construction and operation of telecommunications systems
and services in Japan are subject to regulation and supervision by the Ministry
of Public Management, Home Affairs, Posts and Telecommunications, or MPHPT. We
operate pursuant to licenses and approvals that have been granted by the MPHPT.
Our licenses are issued under the Telecommunications Business Law to provide
telecommunications services through networks owned by other companies, such as
Crosswave, which makes us a Type II Carrier. In contrast, Type I Carriers,
such as NTT Communications or Crosswave, own or have long-term leases for the
networks through which they offer telecommunication services.

Our Type II license has an unlimited duration. However, this license is
subject to revocation by the MPHPT if we violate telecommunications laws and
regulations in a manner that is deemed to harm the public interest, if we or
any of our directors are sentenced to a fine or any more severe penalty under
the telecommunications laws, if we employ a director who was previously
sentenced to a fine or more severe penalty thereunder or if we have had a
license revoked in the past. We believe our licenses and approvals are in good
standing and we expect to be able to continue to fulfill the terms of our
licenses and approvals to the satisfaction of the MPHPT. However, there can be
no assurance that we will be able to do so.

Existing and future governmental regulation may substantially affect the
way in which we conduct business. These regulations may increase the cost of
doing business or may restrict the way in which we offer products and services.
The Telecommunications Business Law was considerably amended in July 2003.
The amendment, which becomes effective in 2004, includes the elimination of the
classification of Type I Carriers and Type II Carriers. We cannot be certain
how this will affect us, but anticipate it may lead to increased competition.
Furthermore, we cannot predict the future regulatory framework changes of our
business. Any changes in laws, such as those described above, or regulations
or MPHPT policy affecting our business activities and those of our competitors
could adversely affect our financial condition or results of operations. For
more information, see Item 4., Business Overview  Regulation of the
Telecommunications Industry in Japan.

NTT, our largest shareholder, could exercise its influence over us in a manner
that may not be in the interests of our other shareholders.

NTT and its affiliates currently own 31.6% of our outstanding shares. In
addition, we have agreed in a subscription agreement with NTT to allow NTT to
nominate up to three persons as either directors or statutory auditors of us,
subject to approval by our shareholders at a shareholders meeting. Under the
subscription agreement, NTT also has preemptive rights to subscribe to its pro
rata portion of any future issuances of shares by us in order to maintain its
shareholding percentage in the event of future issuances. As a result, NTT may
be able to exercise substantial influence over us. In addition, as part of the
subscription agreement, we agreed to collaborate with NTT in various
businesses. While we intend to conduct our day-to-day operations independent
of NTT and its subsidiaries and group companies and believe that NTT similarly
plans for us to operate independently, NTT may decide to exercise its
substantial influence over us in a manner which could impair our ability to
operate independently. Furthermore, NTT could take actions that are in its
best interests, which may not be in the interests of our other shareholders.

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There are risks associated with our international business.

By operating our network internationally, we expose ourselves to the risks
of international markets and to other risks that do not exist or are less
significant in Japan. One of the components of our strategy is to continue to
expand our network reach through our network between the United States and
Japan to maintain our network quality. In addition, we have invested in a data
center business in Korea and one in the Philippines. Our international
business operations continue to require management attention and financial
resources, both of which are in limited supply. We face significant exposure
to risks in connection with our international operations, including:



| |  |  | the impact of economic conditions outside Japan,                                                                                        
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | unexpected changes in or delays resulting from regulatory requirements,                                                                 
|
| |  |  | the rate of the development of the Internet industry in countries in Asia,                                                              
|
| |  |  | political and economic instability, and                                                                                                 
|
| |  |  | potential unsatisfactory financial returns from the data
center businesses in which we have invested in South Korea and the
Philippines.

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

Our investments in affiliated and non-affiliated telecommunications and
technology companies may not produce the returns we expect and may require
additional funding.

As part of our business strategy and for maintaining various strategic
business relations, in the past years we have invested in a number of
companies, including Crosswave Communications Inc. There can be no assurance
that we will be able to maintain or enhance the value or performance of such
companies in which we have invested or may invest in the future, or that we
will achieve the returns or benefits sought from these investments. Our
substantial investment in Crosswave, for example, has become worthless due
to Crosswaves financial condition and commencement of corporate reorganization proceedings. In
addition, telecommunications companies and other technology companies have
experienced a variety of negative developments in recent years, including
increased competition and significant volatility in share prices, and have
experienced financial difficulties. To the extent that these investments are
accounted for by the equity method and to the extent that the investee
companies have net losses, our financial results will be adversely affected by
our pro rata portion of these losses. Furthermore, we may lose all or part of
our investment in these companies if their stock prices decline or these
companies go bankrupt.

We invested in affiliated companies, such as IIJ Technology and Net Care,
to expand the service offerings available to our customers. If our affiliated
companies need additional financing or are in a difficult financial condition,
we may need to provide additional financial support in the form of loans to or
additional equity investments in these affiliated companies to enhance or
maintain our business synergies with these affiliated companies.

In addition, we invest in other non-affiliated companies, such as Monex,
Inc., an online securities company, in order to further our business
relationships with such companies. Other investments on our balance sheet,
which includes among other items, investments in such companies were recorded
at a book value of ¥3.0 billion at March 31, 2003. This book value could
change significantly as a result of poor economic conditions in Japan or a
faltering Japanese stock market. Fluctuations in stock price of companies in
which we have invested will have an adverse effect on our financial results.

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We could be named as defendants in litigation, including in connection with
Crosswaves corporate reorganization, which could have an adverse impact on our
business, financial condition and results of operations.

We are involved in normal claims and other legal proceedings in the
ordinary course of our business. We believe that there are no cases currently
pending which will have a significant financial impact on us. To our
knowledge, no litigation relating to Crosswave in which we are a defendant has
been brought but we cannot be certain that we will not be named in a future
lawsuit. Any judgment against us in such a lawsuit could have an adverse
impact on our business, financial condition and results of operations.

In the likely event we need to raise capital, we may have to sell additional
shares of our common stock or securities convertible into our common stock
which may cause shareholders to incur substantial dilution.

In June and September, 2003, we completed private placements of an
aggregate of 15,880 shares of our common stock to investors in Japan in order
to raise funds for working capital and repayment of convertible notes. It is
likely that we will raise additional funds in the future to ensure that we
maintain an adequate level of working capital and for other financial needs.
If we choose to raise such funds from the issuance of equity shares of our
common stock or securities convertible into our common stock, existing
shareholders may incur substantial dilution.

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Item 4. Information on the Company

A.     History and Development of the Company.

We are incorporated in Japan as a joint stock corporation under the name
Internet Initiative Japan Inc. (IIJ). We were 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. In February 1994, we acquired a Type II Telecommunications
license, which enables us to operate our own international backbone networks.
We became a public company in August 1999 with our initial public offering of
ADSs on the Nasdaq National Market.

In October 1998, we established Crosswave Communications Inc. as a joint
venture with Sony Corporation and Toyota Motor Corporation with the goal of
providing advanced, high-speed, cost-effective, end-to-end data communications
services to customers in Japan and to take advantage of market growth and
demand for broadband data communications networks. Crosswave offers broadband
data communication services on Japans first nationwide fiber-optic network
specifically designed and dedicated to data traffic. ADSs representing
Crosswaves shares of common stock were quoted on the Nasdaq National Market
from the time of its August 2000 IPO until being removed by Nasdaq on August
29, 2003.

On August 20, 2003, Crosswave and two of its subsidiaries filed voluntary
petitions with the Tokyo District Court for the commencement of corporate
reorganization proceedings, which are proceedings to rehabilitate an insolvent
company similar in some respects to Chapter 11 bankruptcy proceedings in the
United States. On August 28, 2003, Crosswave and two of its subsidiaries
received an order for the commencement of corporate reorganization proceedings
from the Tokyo District Court. The Court appointed a preservative
administrator to succeed the prepetition management. Crosswave has indicated
in its public filings that as a result of severe price competition in the
Japanese data communications market and a depressed domestic economy, it has
been unable to achieve profitability and has experienced increasing funding
constraints. Although Crosswave has indicated in its public filings that it
continued to attempt to increase sales, limit capital investments, reduce
costs, rationalize the organization to operate more efficiently and find new
sources of financing, such measures were insufficient to meet Crosswaves
cash-flow requirements. We understand that Crosswave is currently seeking a
financial sponsor as part of its corporate reorganization.

During the pendency of the reorganization proceedings, we are unable to
exercise shareholder or managerial influence over Crosswave and expect our
equity interest to be eliminated upon the approval of a reorganization plan or,
alternatively if no sponsor is found, upon liquidation of Crosswave. We no
longer consider Crosswave to be an IIJ Group company, but regard Crosswave as
an important service provider. We are Crosswaves most important customer and
we rely heavily on Crosswaves network. We currently plan to continue to use
Crosswaves network and offer services with Crosswave jointly, although our
continued use of Crosswaves network depends on the outcome of Crosswaves
reorganization proceedings.

On June 26, 2003, we completed a private placement of 3,265 of our shares
of common stock to investors in Japan for an aggregate amount of
¥1,365,423,000. We plan to use the net proceeds for working capital.

On September 16, 2003, we completed a private placement of 12,615 shares
of our common stock to NTT, NTT Communications, Itochu Corporation, Sumitomo
Corporation and other investors in Japan for an aggregate amount of
¥12,000,649,500. As a result of this transaction, the total number of our
issued shares of common stock increased to 38,360 and NTT Group shareholdings
of us increased to 31.6%. We have also agreed with NTT that it has the right
to nominate three persons to serve as either directors or statutory auditors of
us, subject to shareholder approval of any nomination. In addition, we and NTT
agreed to undertake efforts to jointly engage in the development of broadband
and information technology and other related business, to expand the business
relationship between the two parties in connection with new business
opportunities of us and discuss secondment of employees to each other. We plan
to use these net proceeds to repay our outstanding 1.75% convertible notes due
on March 31, 2005 in the aggregate principal amount of ¥15 billion.

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Our head office is located at Jinbo-cho Mitsui Bldg., 1-105 Kanda
Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan, and our telephone number at that
location is 81-3-5259-6500. Our agent in the United States is IIJ
America Inc., 1211 Avenue of the Americas, Suite 2900, New York, New York
10036 and our telephone number at that location is 212-440-8080. We have a Web
site that you may access at http://www.iij.ad.jp/. Information contained on
our Web site does not constitute part of this annual report.

For a discussion of capital expenditures and divestitures currently in
progress and those for the past three years see Capital Expenditures in Item
4.B.

B. Business Overview.

We offer a comprehensive range of Internet 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. Our services are based upon
high-quality networking technology tailored to meet the specific needs and
demands of our customers.

We offer, together with other companies or independently, a variety of
services to our customers as part of our total network solutions. Our primary
services are our Internet access services, systems integration services and
value-added services, which includes Internet data center services. Our
Internet access services range from low-cost dial-up access to high-speed
access through dedicated lines for individual and corporate customers. Our
systems integrations services are tailored to our customers requirements,
which include consulting/project planning, systems design, construction of
network systems and systems outsourcing. We also sell a significant amount of
network-related equipment to our system integration customers as part of our
provision of total network solutions. Our value-added services include a
variety of data storage and management options for corporate customers as part
of our Internet data center services as well as network security and other
services.

Most of our revenues are generated in Japan and in Japanese yen. The
table below provides a breakdown of the percentage of total revenues for our
primary services over the past three years.

|                                                                                      |  |                              |      |      |  |      |      |   |  |  |      |  
|------------------------------------------------------------------------------------- |  | ---------------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                                                      |  | For the year ended March 31,
|                                                                                      |  |                             
|                                                                                      |  | 2001                         |      | 2002 |  | 2003
|                                                                                      |  |                              |      |      |  |     
|Connectivity services
(including Internet Data Center
Connectivity Service)           |  |                              | 54.5 | %    |  |      | 45.0 | % |  |  | 38.6 | %
|Systems integration services                                                          |  |                              | 33.1 | %    |  |      | 36.0 | % |  |  | 34.1 | %
|Value-added services (including
Internet Data Center facility and operation services) |  |                              | 6.2  | %    |  |      | 7.8  | % |  |  | 8.2  | %

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



| |  |  | security services, such as managed firewalls with VPN
function (Virtual private networks provide private capacity
transmission services), 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.                                                                                                                                                                

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This extensive variety of Internet access services, value-added services,
which include Internet data center services, and systems integration services
enables our customers to purchase all of their Internet-related services and
products through a single source. To support our services and for the
convenience of our customers, we 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 an Internet network that extends throughout Japan. Our
backbone is one of the highest capacity Internet backbones in Japan. Our
backbone network is formed by leasing lines from telecommunications carriers.
As of March 31, 2003, we operated 29 network operation centers, eleven Internet
data centers and 77 POPs, the main points at which our customers connect to our
backbone, throughout Japan, which are connected to our network backbone by two
STM-16c trunk lines (equivalent to 2.4 Gbps), STM-4c trunk lines (equivalent to
622 Mbps), STM-1 trunk lines (equivalent to 155 Mbps) and other lines. Our
backbone network also extends to the United States, with a total capacity of
3.6 Gbps (4 STM-4c trunk lines) as of March 31, 2003.

In addition to our network, we currently own 26.7% of Asia Internet
Holding, the company that operates the A-Bone network. The A-Bone is an
Internet network using leased lines that connects nine countries in the
Asia-Pacific region, including Japan, China, South Korea, 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 use the network of Crosswave, which is currently undergoing
corporate reorganization. Crosswave 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 now
extends to almost all prefectures nationwide.

We are Crosswaves largest customer and use Crosswaves network for a
significant portion of our domestic backbone. Currently approximately 80% of
our domestic backbone by cost is covered by Crosswaves fiber optic lines. We
currently plan to continue to use Crosswaves network, but are preparing
contingency plans in the event that Crosswaves network becomes partially or
wholly unavailable. We have also been utilizing Crosswaves Japan-US fiber
optic STM-4 trunk line (equivalent to 622 Mbps) in addition to the U.S.-Japan
lines of KDDI, Cable and Wireless and NTT Communications. However, we plan to
switch primarily to international carriers other than Crosswave which have
lines optimized for 2.4 Gbps data traffic.

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, we believe, the most efficient,
reliable and cost-effective solution for that customers particular needs.

The primary resources that we use to provide total network solutions to our customers include:



| |  |  | our Internet access services,                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our systems integration services including 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, and                                                                                   
|
| |  |  | other network and application services that our group companies provide.                                                 

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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 then draw upon our
extensive resources to address those needs.

Our Internet Access Services

Our Internet access services provide access to sites worldwide. 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 the
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
headquarters, data centers, branch offices and mobile personnel. Currently,
large telecommunications carriers such as regional NTTs and other providers are
rapidly increasing the variety of last-mile access with ADSL, fiber optic and
ethernet-based lines. Such new lines provide inexpensive high-speed,
high-capacity last mile access, and we continue to introduce new variations to
our Internet access service to accommodate such developments.

The following table shows the number of our Internet access service
subscribers as of the dates indicated:

|                                    |                                      |                                          |  |                 |        |      |  |        |         |      |  |        |         |  |  |         |         |  |  |         |         | 
|----------------------------------- | ------------------------------------ | ---------------------------------------- |  | --------------- | ------ | ---- |  | ------ | ------- | ---- |  | ------ | ------- |  |  | ------- | ------- |  |  | ------- | ------- | 
|                                    |                                      |                                          |  | As of March 31,
|                                    |                                      |                                          |  |                
|                                    |                                      |                                          |  | 1999            |        | 2000 |  | 2001   |         | 2002 |  | 2003  
|                                    |                                      |                                          |  |                 |        |      |  |        |         |      |  |       
|Dedicated access service contracts: |                                      |                                          |  |                 |        |      |  |        |         |      |  |        |         |  |  |         |         |  |  |        
|                                    | IP Service                           |                                          |  |                 |        |      |  |        |         |      |  |        |         |  |  |         |         |  |  |         |        
|                                    |                                      | 64 kbps  128 kbps                       |  |                 | 654    |      |  |        | 484     |      |  |        | 295     |  |  |         | 142     |  |  |         | 112     | 
|                                    |                                      | 192 kbps  768 kbps                      |  |                 | 171    |      |  |        | 155     |      |  |        | 80      |  |  |         | 42      |  |  |         | 35      | 
|                                    |                                      | 1 Mbps  2 Mbps                          |  |                 | 66     |      |  |        | 140     |      |  |        | 240     |  |  |         | 270     |  |  |         | 268     | 
|                                    |                                      | 3 Mbps  1.2 Gbps                        |  |                 | 57     |      |  |        | 71      |      |  |        | 111     |  |  |         | 156     |  |  |         | 248     | 
|                                    |                                      |                                          |  |                 |        |      |  |        |         |      |  |        |         |  |  |         |         |  |  |         |         | 
|                                    |                                      | Total IP Service                         |  |                 | 948    |      |  |        | 850     |      |  |        | 726     |  |  |         | 610     |  |  |         | 663     | 
|                                    | IIJ Data Center Connectivity Service |                                          |  |                |        |      |  |       |         |      |  | 56     |         |  |  | 110     |         |  |  | 156     |        
|                                    | Other dedicated access services      |                                          |  | 708             |        |      |  | 1,154  |         |      |  | 1,870  |         |  |  | 2,900   |         |  |  | 4,489   |        
|                                    |                                      |                                          |  |                 |        |      |  |        |         |      |  |        |         |  |  |         |         |  |  |         |         | 
|                                    |                                      | Total dedicated access service
contracts |  |                 | 1,656  |      |  |        | 2,004   |      |  |        | 2,652   |  |  |         | 3,620   |  |  |         | 5,308   | 
|Dial-up access service contracts:   |                                      |                                          |  |                 |        |      |  |        |         |      |  |        |         |  |  |         |         |  |  |        
|                                    | IIJ4U                                |                                          |  | 48,195          |        |      |  | 75,170 |         |      |  | 95,273 |         |  |  | 89,213  |         |  |  | 79,464  |        
|                                    | Others                               |                                          |  | 10,508          |        |      |  | 54,970 |         |      |  | 66,857 |         |  |  | 171,363 |         |  |  | 450,320 |        
|                                    |                                      |                                          |  |                 |        |      |  |        |         |      |  |        |         |  |  |         |         |  |  |         |         | 
|                                    |                                      | Total dial-up access service contracts   |  |                 | 58,703 |      |  |        | 130,140 |      |  |        | 162,130 |  |  |         | 260,576 |  |  |         | 529,784 | 

19



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As of August 31, 2003, 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 network
operators with
demanding
throughput
requirements.                                                                                                                                                                                                                                              |  | Setup and monthly fees vary
according to carrier, line
speed, line type and
distance involved.                                                                                                                                                                            
|                                    
|IIJ Data Center Connectivity Service |  | Full-scale
dedicated line
service for
customers hosted in
IIJ Data Centers,
with asymmetrical
speeds of upstream
(from the Internet
to Data Center) and
downstream (from
Data Center to the
Internet)
transmissions.
Upstream speed of
1 Mbps to 4 Mbps is
provided with
10 BASE-T interface
(downstream 10 Mbps)
and 6 Mbps to 48 Mbps
with 100 BASE-T
interface
(downstream
100 Mbps). |  | Initial setup fee of
¥100,000. Monthly fees from
¥400,000 to ¥100,000,000,
depending on the speeds of
upstream transmissions.                                                                                                                                             
|                                    
|IIJ FiberAccess/F                    |  | Service for
dedicated line
Internet access
using optical lines
at either 10 Mbps
or 100 Mbps
targeted primarily
at small- and
medium-sized
enterprise
requirements for
high-capacity,
high-speed
transmissions. SLA
(Service Level
Agreement), a
quality assurance
program, is
available.                                                                                                |  | Initial setup fee of
¥50,000. Monthly fees from
¥14,000 to ¥200,000,
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 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 is
¥117,000 for up to eight IP
addresses and ¥167,000 for
up to 16 IP addresses.                                                                                                                                     
|                                    
|IIJ DSL/F Service                    |  | Service for
dedicated-line
Internet access
using ADSL lines at
speeds up to 24
Mbps targeted
primarily at small-
and medium-sized
offices and home
offices. SLA is
available.                                                                                                                                                                                                            |  | Initial setup fee of
¥30,000. Monthly access
fees from ¥9,800 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
the customer to the ADSL
service provider.                      

20



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##### Table of Contents



|                              |  |                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                        
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Service Type                  |  | Summary Description                                                                                                                                                                                                         |  | Pricing                                                                                                                                                                                                                                
|                              |  |                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                        
|IIJ ISDN/F Service            |  | Service for
dedicated-line
Internet access
using ISDN lines at
speeds up to 128
kbps targeted
primarily at small-
and medium-sized
offices and home
offices where ADSL
lines are not
available.                             |  | Initial setup fee of ¥5,000
and monthly access fees from
¥4,800 to ¥6,800, depending
on the number of allocated
IP addresses. Monthly
charges do not include ISDN
charges which are to be paid
directly by customers to
ISDN providers.
|                             
|IIJ Economy                   |  | Service for
dedicated-line
access to the
Internet with
inexpensive monthly
fees primarily for
small- and
medium-sized
businesses and
local and regional
offices of
corporate groups.                                        |  | Initial setup fee of
¥40,000. Monthly access
fees of ¥38,000 for 64 kbps
service and ¥45,000 for 128
kbps service.                                                                                                                     
|                             
|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 e-mail
accounts including the first
two hours access per
account, plus ¥5 per minute
after two hours.                                                       
|                             
|Dial-up E-rate Service        |  | Service for
educational
institutions.
Service includes
Internet access,
e-mail and disk
space for home
pages.                                                                                                               |  | Initial setup fee of ¥5,000,
and a yearly fee of
¥30,000.                                                                                                                                                                              
|                             
|IIJ4U                         |  | Service for
individual users
which includes
Internet access and
5 megabytes of disk
space for personal
Web pages and
e-mail account
options for
multiple users.
Various access
options such as
ISDN and ADSL are
available. |  | Initial setup fee of ¥1,900.
Monthly service fee of ¥800
for the first eight hours
and a charge of ¥5 per
minute, with a ceiling of
¥4,900.                                                                                            
|                             
|IIJmioDSL/DF Service          |  | Service for
individual users
offering Internet
connectivity over
ADSL at up to 24
Mbps. ADSL access
is limited to
FLETS lines
provided by
regional NTTs. The
IP address is
changed every time
a connection is
made.      |  | This service does not charge
an initial setup fee.
Monthly charge is ¥1,400.
Monthly charges do not
include ADSL charges which
are to be paid directly by
the customer to the relevant
regional NTT.                                   

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|                             |  |                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                              
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Service Type                 |  | Summary Description                                                                                                                                                                                                                                      |  | Pricing                                                                                                                                                                                                                                                                      
|                             |  |                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                              
|IIJmioFiberAccess/DF Service |  | Service for
individual users
offering Internet
connectivity over
optical fiber
network at 10 Mbps
or 100 Mbps.
Optional fiber
access is limited
to BFLETS lines
provided by
regional NTTs. The
IP address is
changed every time
a connection is
made. |  | The service does not charge
an initial setup fee.
Monthly charge ranges from
¥2,000 to ¥7,000. Monthly
charges do not include
optical fiber access charges
which are to be paid
directly by the customer to
the regional NTTs.                                               
|                            
|IIJmioDSL/SF Service         |  | Service for
individual users
offering Internet
connectivity over
ADSL at up to 24
Mbps. ADSL access
is limited to
FLETS lines
provided by
regional NTTs. A
fixed IP address is
provided with this
service.                                            |  | The service does not charge
an initial setup fee.
The monthly charge is ¥4,800.
Monthly charges do not
include ADSL charges which
are to be paid directly by
the customer to the regional
NTTs.                                                                              
|                            
|IIJmioFiberAccess/SF Service |  | Service for
individual users
offering Internet
connectivity over
optical fiber
network at 10 Mbps
or 100 Mbps.
Optical fiber
access is limited
to BFLETS lines
provided by
regional NTTs. A
fixed IP address is
provided with this
service.           |  | The service does not charge
an initial setup fee. The
monthly charge ranges from
¥8,000 to ¥12,000, depending
on the type of access line.
The monthly charges do not
include optical fiber access
charges which are to be paid
directly by the customer to
the regional NTTs.
|                            
|IIJmio MobileAccess Service  |  | Service for
individual users
offering mobile
Internet
connectivity
through several
data communications
services provided
by mobile telecommunication
companies.                                                                                          |  | The service does not charge
an initial setup fee. The
monthly charge is ¥300.
The monthly charges do not
include service charges to
IIJs access points which
are paid directly by the
customer to the mobile
telecommunication companies.                                   

Dedicated Access Services

Our lineup of dedicated line access services includes: IP Service, IIJ
Data Center Connectivity Service, IIJ FiberAccess/F, IIJ T1 Standard, IIJ
DSL/F, IIJ ISDN/F and IIJ Economy. We have recently added ISDN/F (March 2003)
to accommodate new access lines. The total bandwidth allocated to our
dedicated access services has increased approximately 368% to 42.0 Gbps as of
March 31, 2003, from 11.4 Gbps a year earlier.

IP Service. Our IP Service is a full-scale, high-speed access service
that connects a customers network to our network and the Internet. This is
the core service we offer. As of March 31, 2003, we had 663 customers for our
IP Service compared to 610 for our IP Service as of March 31, 2002. The
customer chooses the level of service it needs based upon its bandwidth
requirements. As of March 31, 2003, we offered service at speeds from 64 kbps
to 1.2 Gbps.

Our IP Service revenues (including revenues of IIJ Data Center
Connectivity Service) represented 23.4% of our total revenues for the year
ended March 31, 2003 and 25.9% for the year ended March 31, 2002. We believe
that as businesses continue to develop Internet capabilities, this service will
continue to be the foundation of our total network solutions offerings.

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

Although fees are charged on a monthly basis, the minimum contract length
is one year. For contracts of at least three years, a 10% per month discount
is given. Of our IP Service contracts as of the end of March 2003, 17% were
for at least three years.

We have introduced ATM (Asynchronous Transfer Mode) access, a high speed
transmission technology, 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, 2003,
at rates comparable to our IP Service rates. In addition, we have introduced
Ethernet access, utilizing NTT or PoweredComs Ethernet local access to provide
speeds of 10 Mbps or 100 Mbps.

We also offer various IPv6-capable Internet access services, namely IPv6
Tunnel, IPv6 Native and IPv6/IPv4 Dual Stack Services. In addition to
corporate users, IPv6 Tunnel Service has been available to individual users as
well since December 2001. IPv6 is the next generation Internet Protocol which
allows IPv6 technology to overcome the problems, such as limited IP address
availability, of the protocol generally used, IPv4. Ipv6 technology enables
customers to hook-up a vast range of electronic appliances and equipment,
including 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. In an effort to promote the dissemination and use of IPv6, we are
not currently charging service fees for IPv6 Tunnel Service.

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

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



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

We are able to offer these service level agreements because of the high
quality and reliability of our network. Our service level agreements provide
customers credit against the amount invoiced for the services if our service
quality fails to meet the prescribed standards. In September 2001, we raised
the benchmark for an average round trip time across our entire domestic
backbone network by decreasing the time from 40 to 30 milliseconds.

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

IIJ Data Center Connectivity Service.We also provide connectivity
services with respect to our data centers. Our data center connectivity
services are an important part of being able to provide high-quality,
high-speed, seamless service to our customers. Our connectivity services are
asymmetric, meaning that transmission speeds 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 transmissions, we
offer either 10BASE-T connectivity (10 Mbps) and 100BASE-T Connectivity (100
Mbps). For upstream transmissions, we offer bandwidths from 1 Mbps to 4 Mbps
for 10BASE-T connectivity contracts, and 6 Mbps to 48 Mbps for 100BASE-T
Connectivity. As of March 31, 2003, we had 156 customers for IIJ Data Center
Connectivity Service. In addition to the above, we offer IPv6-capable data
center services, which offer the same services using Internet Protocol Version
6 (IPv6).

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IIJ FiberAccess/F Service.IIJ Fiber Access/F services is a dedicated
Internet access service that uses BFLETS fiber optic access lines provided
by regional NTT companies allowing service at 10 Mbps or 100 Mbps on a
best-efforts basis. We began offering this service in August 2001. The
service is available in four variations (Business, Basic, Family and Mansion),
optimizing each customers needs in speed and connection interface. Customers
also can choose the number of allocated IP addresses from: 1, 4, 8, 16, 32, 64
and 128. We support this service by providing guarantees of latency rates
under service level agreements. As of March 31, 2003, we had 4,489 customers
for IIJ FiberAccess/F Service, IIJ T1 Standard, IIJ DSL/F Service, IIJ ISDN/F
services and IIJ Economy.

IIJ T1 Standard. Our IIJ T1 Standard is a connectivity service at 1.5
Mbps that we introduced in October 1999. It is a packaged dedicated line
service limited to static routing and allocations of 16 IP addresses. Last
mile access must be through NTTs Digital Access 1500 or similar services from
other carriers.

IIJ DSL/F Service.IIJ DSL/F Service provides dedicated line Internet
connectivity via ADSL with speeds up to 24 Mbps. We began offering this
service in May 2001. IIJ DSL/F Service is primarily targeted at small- and
medium-sized offices and home offices that have access to ADSL lines provided
by regional NTT companies under the name of FLETS ADSL. We support this
service by providing guarantees of the maximum average latency between
designated POPs under service agreements.

IIJ ISDN/F Service.IIJ ISDN/F Service provides dedicated line Internet
access via ISDN lines with speeds up to 128 kbps. We began offering this
service in March 2003. IIJ ISDN/F Service is primarily targeted at small-and
medium-sized offices and home offices where ADSL lines are not available but
have access to ISDN lines provided by regional NTT companies under the name of
FLETS ISDN.

IIJ Economy. IIJ Economy is a packaged Internet connectivity service via
a dedicated line at 64 kbps or 128 kbps, targeting small- and medium-sized
businesses. We introduced IIJ Economy in November 1997. We currently
guarantee latency rates under service level agreements for IIJ Economy.

Dial-up Access Services

We offer a variety of dial-up access services. Our dial-up access
services are an important resource in offering total Internet solutions to
corporate customers. Our dial-up services allow 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 large corporate groups that will be linking many offices through our
network. Although these corporate groups use dedicated lines for the main
offices and their larger regional and local offices, they also typically use
our dial-up access services for their smaller branch offices or as a
remote-access tool for employees out of the office. We also offer traditional
dial-up access service for individuals and an OEM (where we provide services
for other companies which sell those services under their own name) service for
other network operators, such as Sharp, NTT East and NTT West.

Our main dial-up access services are our IIJ Dial-up Standard, Enterprise
Dial-up IP Service, IIJ Dial-up Advanced, Dial-up E-rate Service, IIJ4U, IIJmio
DSL/DF Service, IIJmioFiberAccess/DF Service, IIJmioDSL/SF Service, IIJmio
FiberAccess/SF Service and IIJmioMobileAccess 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 have expanded access to our network through roaming agreements that are
an important part of our dial-up access services. We offer global Internet
roaming service in 173 countries with over 33,000 access numbers as of August
31, 2003. 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 have also
expanded our provision of Content Delivery Network Platform, (IIJ CDN
Platform) on an OEM basis to major broadband service providers, such as Excite
Japan.

24



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##### Table of Contents



Our Systems Integration Services

We offer systems integrations services tailored to our customers
requirements, which include consulting/project planning, systems design,
construction of network systems and systems and operations outsourcing. Our
systems integration services mainly focus on Internet business systems and
corporate information systems such as Intranet and Extranet. 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, and                                              
|
| |  |  | outsourcing of mail and web security for large manufacturers.                                                      



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



| |  |  | online brokerage systems for 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, and                                       
|
| |  |  | systems for Internet CATV (Cable TV) infrastructure.                                            

The fee structure of our systems integration services is based upon the
complexity and scale of the project required by the customer. 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.

25



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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, 2003, we offered nine
main security services that protect customers internal networks
from unauthorized access and secure remote connections to internal
networks: IIJ Security Standard, IIJ Security Premium, IIJ Security
Lite, IIJ Security Scan Service, Network Intrusion Detection
Service, IIJ Secure Remote Access, IIJ Web Gateway Service, IIJ URL
Filtering Service and IIJ VPN Standard. We were the first ISP in
Japan to provide firewall services, which we first offered in 1994.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Security Standard In October 1999, we began offering
Security Standard Service pursuant to which we install and manage a
round-the-clock operation of firewall systems. The initial setup
fee is ¥120,000 and the monthly fee ranges from ¥60,000 to ¥120,000
depending on a number of factors including the number of users,
packet filtering performance and 3DES (VPN) (an encryption
technology) performance. Since February 2001, a VPN option is
available for this service with an initial cost of ¥20,000 and a
monthly fee of ¥10,000 per computer.



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Security Premium In July 2000, we began offering IIJ
Security Premium, a high value-added firewall operation and
management service based on Firewall-1, a product which we license
from Check Point Software Technologies.



| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Security Lite In December 2002, we began offering IIJ
Security Lite, an economical version of a managed firewall service
with limited features of operation and maintenance targeting small-
and medium-sized enterprises. The initial setup fee ranges from
¥30,000 to ¥50,000 and the monthly fee ranges from ¥19,800 to
¥35,800.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Security Scan Service In March 2002, we began IIJ
Security Scan Service, a package of scan services targeting small-
and medium-sized enterprises to identify security weaknesses in
order to prevent illicit access from external networks and to avert
virus infection of in-house servers. It is available in two forms:
regular monthly scans and one-time spot checks. The form of
service can be selected to meet the specific needs of the customer,
such as checks for protocol and network configuration or for
vulnerability to specific illegal network intrusion. The service
was developed with NRI Secure Technologies, a Japanese security
assessment and auditing solutions provider. For the regular
monthly scan service the initial charge is ¥5,000. The monthly
charge for scanning one IP address is between ¥9,000 and ¥25,000,
depending upon the type of items to be scanned. For the spot scan
service, the basic charge for scanning one IP address ranges from
¥12,000 to ¥30,000, again depending upon the type of items to be
scanned.



| |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Network
Intrusion Detection Service In April 2001, we began
Network Intrusion Detection Service, which offers around-the-clock,
non-stop network monitoring and intrusion-detection capabilities,
as well as packet information for analyzing detected illicit
accesses. The
initial cost for the service is ¥300,000, and the monthly fee
starts from ¥300,000 and depends on the customers traffic volume.

26



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| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ Web
Gateway Service IIJ Web Gateway Service is a service
which provides online detection and elimination of viruses and
which blocks access to inappropriate websites from companys
internal network. We started the service in May 2003 and the
service is provided based on the technology of Trend Micro and
Network Appliance.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ URL
Filtering Service IIJ URL Filtering Service is a
service which blocks access to inappropriate websites by use of
IIJs proxy server.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ VPN
Standard IIJ VPN Standard is a service which provides
Internet VPN connectivity among a companys branch and remote
offices based on encryption technology. IIJ rents encryption
equipment at customer sites, configurates the equipment for the
customer and provides remote monitoring of the encrypted sessions.
Initial cost for the service starts from ¥40,000 and monthly fees
start from ¥14,000 depending on the equipment features.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ Secure
Remote Access IIJ Secure Remote Access is a
packaged service combining the new IIJ Dial-up Advanced Service
with ID Gateway, which controls remote access to in-house servers
protected by firewalls. In addition to the 50 dial-up accounts
covered by the base rate, the service will ensure a secure remote
environment by controlling accessible servers and utilization
protocols for each dial-up account. In May 2002, IIJ Secure Remote
Access was upgraded by adding a remote VPN function. The upgrade
enables remote users to transmit and receive data with encryption,
offering a secure enterprise network environment with a greater
variety of access, such as connections from overseas via local
ISPs.



| |  |  | E-Mail related solutions.As of March 31, 2003, we offered
six main e-mail related services enabling customers to outsource
administrative tasks for e-mail server related functions: IIJ Post
Office Service, IIJ Mail Box Service, IIJ Mail Gateway Service, Mail
Operator Service, IIJmioPrime Mail Service and IIJmioSafety Mail
Service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ Post
Office Service IIJ Post Office Service is an e-mail
operation outsourcing service performed by our e-mail server,
enabling a customer to allocate and maintain a number of e-mail
accounts under its own domain name for its employees, members or
other relevant users. The customer can administer e-mail accounts
online through our customer support Web interface. In addition, in
December 2002, we added a virus checking option for incoming and
outgoing e-mails and an audit option to check the content of
outgoing e-mails and suspend the ones containing keywords specified
in advance.



| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ Mail
Box Service IIJ Mail Box Service is also an e-mail
operation outsourcing service performed by our e-mail server.
Unlike IIJ Post Office Service, customers do not have to obtain
their own domain names. A customer can administer e-mail accounts
online through our customer support Web interface.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ Mail
Gateway Service In November 2002, we renovated IIJ
Mail Gateway to expand the service from large corporate customers
to other corporate segments. The service has three options. The
first one is virus protection to check the viruses on incoming and
outgoing e-mails. The second one is audit to detect the keyword
set in advance on the outgoing e-mails. The third one is a
combination of the features above. The initial cost is ¥10,000 and
the monthly fee ranges from ¥30,000 to ¥50,000 for the first 50
e-mail accounts and an additional fee per account after the first
50 e-mail accounts ranges from ¥300 to ¥650.



| |                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mail
Operator Service Mail Operator Service is an outsourcing
service for e-mail magazine distribution launched in December 2001.
The new service enables users to ease the burden of distribution
tasks and prevent possible leaks of subscriber e-mail account
information.
The service charges ¥20,000 per operation, which includes
content distribution to up to 100,000 e-mail accounts.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJmio
Prime Mail Service IIJmioPrime Mail Service is a
deluxe e-mail account service for individuals, emphasizing
security, stability and reliability. To achieve tighter security,
we pioneered the use of POP/SMTP over SSL, together with SMTP
authentication to ensure a higher level of encryption and
authorization than currently available in general use. The service
places no restrictions on the number of incoming mail items or on
incoming mail size. It also offers e-mail backup storage for three
months, along with forwarding functions, Authenticated Post Office
Protocol (APOP) compatibility, and virus detection and elimination.
The basic monthly charge for this service is ¥10,000. In June
2002, we introduced the SLA program to provide quality assurance
for our subscribers. Under the SLA program, if the servers drop
service for more than 15 minutes, we will give its subscribers a
10% credit against the amount invoiced for the following months
services. The SLA covers only the availability of servers and not
value-added functions such as virus elimination.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJmio
Safety Mail Service IIJmioSafety Mail Service is a
standard e-mail service with an anti-virus function for individual
users launched in December 2001. The service employs the InterScan
VirusWall developed by Trend Micro Incorporated, and features POP/SMTP
over SSL, in addition to SMTP authentication, which ensures a
higher level of encryption and authorization than what is currently
available for general use. There is no initial charge and the
monthly charge is ¥500.



| |  |  | Value-added Hosting Solutions.As of March 31, 2003, we
offered five value-added hosting solutions enabling customers to
manage their web content: IIJ Hosting One, IIJ Web Standard, IIJ
Download Site Service, IIJ Document Exchange Service and IIJmio
Personal Domain Name Service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Hosting One IIJ Hosting One is a hosting service
providing users with web, e-mail and Domain Name System (DNS)
administration functions in a single package with one gigabyte of
disk space. It is mainly targeted at medium-sized enterprises.
The hosting servers for this service are managed by us, with a
highly reliable and robust data hosting environment with direct
connections to our network, one of the largest Internet backbone
networks in Japan. The monthly charge for the service is ¥30,000.
The service is expected to be terminated and we are not promoting
this service anymore.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ Web
Standard The IIJ Web Standard allows customers to use
their own domain names while providing them with up to 200
megabytes of web hosting space. By limiting specifications, the
pricing of the service is kept to a minimum ¥5,000 per month.
Additionally, through careful traffic management of the storage
space, a high-performance web-server environment for users is
ensured. This service mainly targets small- and medium-sized
enterprises.



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Document Exchange Service This service is an online
storage service with which customers can upload files onto IIJs
storage server and share them with authorized users. The initial
cost is ¥40,000 and the monthly fee is ¥20,000, which includes 1GB
of disk space and 50 accounts. The fee for each additional set of
10 accounts is ¥3,000, and each 1GB of additional disk space is
¥10,000 per month.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJ
Download Site Service IIJ Download Site Service is a
hosting service dedicated to high-volume content downloads from the
Internet. The service started on a trial basis in November 2001,
and the full-fledged service was launched in February 2002. A
dedicated hosting server and dedicated bandwidth are established
for each contract to ensure constant stable performance. With disk
capacity of 500 megabytes per contract on our hosting servers,
access is provided at a maximum transmission bandwidth per contract
of up to 80 Mbps. The initial charge
for the service is ¥50,000. The monthly charge ranges between
¥60,000 and ¥340,000, depending upon the bandwidth. In April 2003,
we added the option of 1 Gbps maximum transmission speed for an
additional fee.

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| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IIJmio
Personal Domain Name Service IIJmioPersonal Domain
Name Service is a service for individuals to build their own web
sites of up to 100 megabytes and use e-mail addresses under their
original domain names. The service was launched in March 2002.
The initial charge is ¥5,000 and the basic monthly fee is ¥3,800.



| |  |  | Our Streaming Solutions.We provide Internet streaming
services for live broadcasts over the Internet, as well as streaming
server hosting services with our Streaming-On-Demand Channel.                                                                                                                                                                                                                                                                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Network Management Solutions (Omnibus).Omnibus,
launched in February 2002, was developed specifically to enable
corporate customers to integrate their various network systems by
interconnecting them at our Internet data centers. The Omnibus
service also integrates customers security systems, including
firewalls and intrusion detective systems. The initial charge is
¥300,000. Monthly charges depend on the number of ports to be used
for the service, ranging from ¥180,000 (six ports) to ¥330,000 (12
ports).
|
| |  |  | Customer support and help desk solutions.We provide
comprehensive customer support and help desk solutions that include
network monitoring and trouble-shooting services. Most of our
customer support services are provided as an integral part of other
services we sell.                                                                                                                                                                                                                                                       
|
| |  |  | IIJ DNS Services.We offer domain name related services
which consist of domain name administration services and domain name
server outsourcing services. Domain names such as .jp, .com,
.net and .org are available.                                                                                                                                                                                                                                                                                                     
|
| |  |  | IIJmio Simple DNS Service.IIJmioSimple DNS Service is a
service for individuals that provides domain name registration and
DNS primary and secondary servers. By enabling customers to edit
the DNS records for themselves, customers can build web and mail
servers at customer sites more easily.                                                                                                                                                                                                                               
|
| |  |  | IIJ NetLightning.IIJ NetLightning is a service based on
Netli, Inc.s technology that improves web application performance.
By utilizing this service, end users can make faster access to the
customer website without any settings and customers can reduce the
cost to place mirror sites.                                                                                                                                                                                                                                     
|
| |  |  | IP Phone.In May 2003, we began IP Phone service for
individual users of IIJ4U and IIJmio. The telephone service is
provided via NTT FLETS network and customers can make telephone
calls with other users connected to NTT FLETS network or legacy
telephones by interconnection with Public Switched Telephone
Network.                                                                                                                                                                                                        

Network Equipment and Related Integration Service

In addition to the Internet access and value added services, we sell our
originally developed network equipment to connect to the Internet and provide
other features such as the following:

SEIL/neu Series. We started to sell our developed high-end routers
SEIL/neu Series in October 2001 through sales agents. The series includes
three types, SEIL/neu 128 for ISDN or 64k/128kbps leased line based Internet
connection, SEIL/neu T1 for T1 leased line based Internet connection and
SEIL/neu 2FE for broadband connection with NTT FLETS ADSL or BFLETS services.
In November 2002, we added SEIL/ATM for ATM based Internet connectivity and in
June 2003 added SEIL/TURBO with more throughput and enhanced VPN features. By
combining SEIL/TURBO and other SEIL/neu Series routers, we are able to provide
Internet-VPN solutions connecting corporate branches and remote offices of
medium and small enterprises. In addition, we are providing rental services
for these routers directly to customers.

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IIJ SMF. IIJ SMF (SEIL Management Framework) is a service which provides
remote configuration and monitoring features of SEIL/neu Series routers at
customer remote sites from central management servers at IIJ and customer main
office/data center (Patent Pending). When a customer at a remote site connects
the router (service adapter) to the circuit, the adapter is automatically
configured and connected to the network. If system integrators utilize this
technology, they can reduce the configuration work and maintenance costs at the
remote site.

Our Internet Data Center Services

As part of our value-added services, we offer Internet data center
services. Our Internet data center services comprise 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 one year and customers are billed monthly. We recognize
revenues for these services on a monthly-billed 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.

As of March 31, 2003, we had 156 Internet data center contracts, compared
with 110 as of March 31, 2002. Contracted bandwidth for Internet data center
connectivity service was 9.9 Gbps as of March 31, 2003.

Our Internet data center facility services are co-location services which
allow companies to house their servers and routers off-site on our premises.
Our Internet data center facilities are leased from Crosswave and the CRC
Solutions Corp. and are equipped with robust security systems, 24-hour-a-day
non-stop power supplies and fire extinguishing systems, and have
earthquake-resistant construction and high-speed Internet connectivity with IIJ
backbones. We also offer basic monitoring and maintenance services for the
equipment. This service enhances reliability because we provide 24-hours-a-day
monitoring and have specialized maintenance personnel and facilities. The
initial cost of our Internet data center services ranges from ¥180,000 to
¥250,000, plus from ¥208,000 to ¥300,000 per rack per month.

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

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

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 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.                                                              

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Backbone

Leased lines. Our network is anchored by our extensive Internet backbone
in Japan and between Japan and the United States. As of June 30, 2003, we had
a total capacity of 3.6 Gbps between Japan and the United States. We use our
expertise in developing and operating our network to organize and connect these
leased lines to form a backbone that has substantial transmission capacity.

We lease high-capacity, high-speed digital transmission lines in Japan
from various carriers, including Crosswave. As of March 31, 2003,
approximately 80% of our domestic backbone traffic on a cost basis was
attributable to Crosswave. We currently plan to continue to use Crosswaves
network, including their data center facilities, although our continued use of
Crosswaves network depends on the outcome of Crosswaves reorganization
proceedings.

With respect to our leased lines to the United States, we have contracts
with Crosswave, KDDI, Cable & Wireless IDC and NTT Communications. In the
future, we plan to rely primarily on carriers other than Crosswave which have
international lines optimized for 2.4 Gbps data traffic. The table below shows
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,
|                                       |  |                             
|                                       |  | 1999                         |           | 2000 |  | 2001 |           | 2002 |  | 2003
|                                       |  |                              |           |      |  |      |           |      |  |     
|Backbone cost (thousand yen)           |  |                              | 3,722,676 |      |  |      | 5,660,277 |      |  |      | 5,548,527 |  |  |  | 2,469,002 |  |  |  | 1,644,170 | 
|Average total capacity (Mbps)          |  |                              | 282.08    |      |  |      | 620.00    |      |  |      | 1,162.50  |  |  |  | 1,778.33  |  |  |  | 3,408.3   | 
|Average cost per 1 Mbps
(thousand yen) |  |                              | 13,197    |      |  |      | 9,129     |      |  |      | 4,773     |  |  |  | 1,388     |  |  |  | 482       | 

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



| |  |  | MAE West ATM in San Jose, California,                        
| | - |  | -------------------------------------------------------------
|
| |  |  | Equinix GigE Exchange in San Jose, California,               
|
| |  |  | PAIX (Palo Alto Internet Exchange) in Palo Alto, California, 
|
| |  |  | NYIIX (New York International Internet Exchange) in New York,
|
| |  |  | MAE East ATM in Ashburn, Virginia, and                       
|
| |  |  | Equinix GigE Exchange in Ashburn, Virginia.                  

Through these IX points we connect to many other ISPs in the United
States, including Verio and Sprint.

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 26.7%. Asia Internet
Holding commissioned us to design and build the A-Bone, and we currently manage
it.

Network upgrades.We have placed a high priority on the continued upgrade
of the capacity of our networks in order to maintain and improve quality. We
first will enhance the quality of our domestic network and our network between
Japan and the United States. We will also look to upgrade our network in the
Asia-Pacific region as opportunities arise.

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We believe that our total expenditures for additional capacity in the near
term will continue to decrease in absolute terms because we believe that the
per-unit costs of the lines between Japan and the United States will
continue to be reduced further due to the increase of available capacity
between Japan and the United States. If trans-Pacific leased line costs do not
decline further, we may not realize the cost savings we anticipate and/or we
may choose not to add as much capacity as we currently plan.

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

Points of Presence, or POPs, are the main points at which our customers
connect to our 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, 2003, we had 29
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 77 POPs for dial-up access. We also leverage 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 Communications, 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 and which can usually be
terminated by either party on three to six months notice. We maintain our
routers and other networking equipment at these POPs. The actual location of
our POPs in, or in close proximity to, the same buildings in which the switches
and routers of these carriers and ISPs are located offers us the ability to
quickly and easily interconnect our equipment with theirs.

Internet Data Centers

In addition to existing Internet data centers in Yokohama and Tokyo, in
the years ended March 31, 2000 and 2001, we set up operations at seven new
Internet data centers nationwide in Osaka, Sapporo, Sendai, Nagoya, Kyoto,
Fukuoka and a second data center in Tokyo which we use to offer our value-added
data center services. In February 2003, we added operations at two other large
scale data centers in Yokohama and in Kawaguchi, Saitama Prefecture. These
data centers are specifically designed for application hosting, co-location
services and high capacity access to our networks. We now have operations at
eleven Internet data centers throughout Japan available for services, of which
nine centers belong to Crosswave.

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

In addition, we have invested in data center development outside Japan.
We have entered into the i-Heart joint venture with
Samsung Corp. which
operates in Korea with a total investment by us of ¥89 million in May 2000.
Our other Internet data center venture, AyalaPort Makati, with the Ayala
Group in the Philippines, launched in October 2001 with a floor space of
approximately 1,800 square meters and a total investment by us of ¥142 million
in 2000 and 2001.

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.

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Our Group Companies

We offer our services directly and together with our group companies. Our
group companies and Crosswave 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 with
those of Crosswave as total Internet solutions. 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 and Crosswave to offer total Internet
solutions.

The chart below sets out our group companies, including our subsidiaries
and principal equity method investees and our ownership of each of them as of
September 1, 2003:

(IIJ CHART)

In addition, we own 37.9% of Crosswave. As we are unable to exercise
managerial or shareholder influence over Crosswave and expect our equity stake
to be reduced to zero by Crosswaves pending corporate reorganization
proceedings, we no longer consider Crosswave to be a group company. Under our
current business plan, however, Crosswave will remain an important service
provider as discussed below under Crosswave Communications Inc..

IIJ Technology Inc.

IIJ Technology Inc. is becoming an increasingly important element in our
providing total Internet solutions to our customers. IIJ Technology Inc. is
incorporated under the laws of Japan. IIJ Technology provides comprehensive
Internet network systems integration and consulting 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.

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As of
September 1, 2003, we owned 64.1% of IIJ Technology.

IIJ Technology had sales of approximately ¥16,722 million for the year
ended March 31, 2003. As of March 31, 2003, IIJ Technology had approximately
136 full-time employees, and 25 were seconded from us.

IIJ Media Communications Inc.

IIJ Media Communications Inc. provides expert services to help customers
exploit the potential of the Internet as a new communications medium. IIJ
Media Communications is incorporated under the laws of Japan. 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 September 1, 2003, we owned 50.1% of IIJ Media Communications.

IIJ Media Communications had sales of approximately ¥782 million for the
year ended March 31, 2003. As of March 31, 2003, IIJ Media Communications had
approximately 34 full-time employees, 34 of whom were seconded from us.

Net Care, Inc.

Net Care Inc. provides a broad array of support services, from monitoring
and troubleshooting to network operations and an end-user help desk. Net Care,
Inc. is incorporated under the laws of Japan.

As of September 1, 2003, we owned 52.5% of Net Care.

Net Care had sales of approximately ¥1,880 million for the year ended
March 31, 2003. As of March 31, 2003, Net Care had approximately 250
employees, and 13 were seconded from us.

IIJ America Inc.

IIJ America Inc. is a U.S.-based Internet access provider, catering mostly
to U.S.-based operations of Japanese companies. IIJ America is incorporated
under the laws of the state of California.

As of June 30, 2003, we owned 91.3% of IIJ America and IIJ Technology
owned 8.7%. To improve the capital situation of IIJ America, we made a capital
investment of $2,000,000 in December 2002.

IIJ America had revenues of $8,588 thousand for the year ended December
31, 2002. As of March 31, 2003, IIJ America had approximately 14 employees,
four of whom were seconded from us.

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Asia Internet Holding Co., Ltd.

Asia Internet Holding Co., Ltd. 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. Asia Internet Holding
is incorporated under the laws of Japan.

Currently, the A-Bone ties into networks in Japan and eight other
countries in the region: Singapore, Hong Kong, Malaysia, Indonesia, the Philippines, Thailand,
South Korea and China (PRC). Asia Internet Holding has network operations
centers in each of these countries. The A-Bone also connects to the United
States through our network. The primary customers of Asia Internet Holding are
telecom carriers and ISPs throughout Asia including Japan.

As of March 31, 2003, we own 26.7% of Asia Internet Holding. We operate
and manage the A-Bone pursuant to an agreement with Asia Internet Holding for
which we are paid ¥7 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 ¥1,448 million for the
year ended March 31, 2003. As of March 31, 2003, Asia Internet Holding had
approximately 12 employees, four of whom were seconded from us and three of
whom worked part time.

atom Co., Ltd.

atom Co., Ltd. is primarily a Web page design company that aims to define
new forms of design work using digital technology in all network-based aspects
of design from content production to graphic design. atom is incorporated
under the laws of Japan. As of March 31, 2003, we owned 40% of atom, which had
sales of approximately ¥763 million for the year ended March 31, 2003. As of
March 31, 2003, atom had 60 employees, three of whom worked part time.

Internet Multifeed Co.

Internet Multifeed Co. provides the location and facilities for directly
connecting high-speed Internet backbones with content servers to make
distribution on the Internet more efficient. Internet Multifeed is
incorporated under the laws of Japan. We developed their technology jointly
with NTT. Internet Multifeed launched new IX (Internet eXchange  where major
ISPs exchange network traffic) services named JPNAP in Tokyo in May 2001 and
expanded the service to Osaka in December 2001.

Through its multifeed connectivity and multifeed housing services,
Internet Multifeed has already connected major ISPs to its premises. Having
such an environment, Internet Multifeed provides multifeed housing services for
content providers, which allows them to distribute content more efficiently by
reducing the number of networks that data must travel through. Major news
company customers include Asahi Shimbun, Nikkei, Mainichi and Yomiuri. Matsui
Securities, one of Japans largest Internet security companies, is also one of
its customers.

As of March 31, 2003, we owned 26% of Internet Multifeed and IIJ
Technology and IIJ Media Communications each own 2%. Internet Multifeed had
sales of approximately ¥1,452 million for the year ended March 31, 2003. As of
March 2003, Internet Multifeed had approximately 14 full-time employees, two
part time employees and two employees seconded from us.

Crosswave Communications Inc.

Crosswave provides broadband data communications infrastructure and
services to businesses and telecommunications carriers in Japan through its
high-speed backbone, Wide-area Ethernet platform and data center services.
Crosswaves nationwide fiber optic network is specifically designed for the
high-speed transmission of data.

Crosswave is a Type I carrier, which allows it to provide
telecommunications services through its own telecommunications circuit
facilities. As a Type I carrier, Crosswave is required to make its
tariff-based services available on the same terms and conditions to all
customers.

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We have actively participated, as a contractor and through our seconded
employees, in the planning and design of Crosswaves 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.

On August 20, 2003, Crosswave and two of its subsidiaries filed voluntary
petitions with the Tokyo District Court for corporate reorganization
proceedings, which are proceedings to rehabilitate an insolvent company similar
in some respects to Chapter 11 bankruptcy proceedings in the United States.
Crosswave has indicated in its public filings that as a result of severe price
competition in the Japanese data communications market and a depressed domestic
economy, it has been unable to achieve profitability and has experienced
increasing funding constraints. Although Crosswave has indicated in its public
filings that it continued to attempt to increase sales, limit capital
investments, reduce costs, rationalize the organization to operate more
efficiently and find new sources of financing, such measures were insufficient
to meet Crosswaves cash-flow requirements. We understand that Crosswave is
currently seeking a financial sponsor as part of its corporate reorganization.
As a result of these proceedings, we expect our 37.9% ownership interest in Crosswave
to be eliminated upon the approval of a reorganization plan or liquidation of
Crosswave. Under our current business plan, however, Crosswave will remain an
important service provider and a key component of our total solutions, although
our continued use of Crosswaves network depends on the outcome of Crosswaves
reorganization proceedings.

Crosswaves primary services.We, together with Crosswave, are primarily
responsible for the sales and marketing of Crosswaves services, although
Crosswave also uses third party agents throughout Japan. In addition, we
market Crosswaves services as an agent and as part of the services offered by
the IIJ Group.

Crosswave offers two main types of services, Network services and Data
Center services. Network services include Wide-area Ethernet Platform Service,
Wide-area IP Platform Service, High-speed backbone service, International
backbone service and Dial-up port service.



| |  |  | Wide-area Ethernet Platform Service. Crosswave offers
Wide-area Ethernet Platform Service mainly for corporate customers,
particularly those with multiple offices, buildings, factories,
laboratories or shops. The service provides customers with a
seamless LAN environment over a large geographic area. The
service offers multi-point-to-multi-point architecture in which
LAN networks connect to each other seamlessly through our high-speed
network. This architecture, incorporating
multi-point-to-multi-point Ethernet switching, allows a customers
headquarters and branch offices, which may be separated by long
distances, to communicate with each other as if they were part of
the same LAN without the need for any additional equipment, thereby
realizing a seamless LAN environment over a wide area with higher
reliability at lower costs. Crosswave provides either a 10 base-T
or a faster 100 base-T interface depending on a customers access
speed and preference.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Wide-area IP Platform Service. This service is mainly for
corporate customers that have hundreds or thousands of locations
scattered throughout Japan, including gas stations, franchise retail
convenience stores and chain restaurants or shops. By utilizing
Crosswaves existing nationwide backbone and the installed user
authentication system, this service builds secure private broadband
networks for corporate customers at relatively reasonable costs.
This service provides solutions for customers with multiple
locations who previously lacked sufficient bandwidth at certain
local stations and suffered rising communications costs and
operational difficulty due to a large number of nationwide sites.
The Wide-area IP Platform Service is currently available in 11
cities and prefectures (Tokyo, Saitama, Chiba, Kanagawa, Hokkaido,
Miyagi, Aichi, Osaka, Hyogo, Fukuoka and Shizuoka). Fees for this
service consist of an initial setup charge and monthly fees.        
|
| |  |  | High-speed backbone service.The high-speed backbone service
is for telecommunications carriers, network operators such as ISPs
and companies with large data transmission requirements such as
cable television broadcasters and media organizations. This service
currently offer speeds of up to 9.6 Gbps (gigabits per second) using
DWDM, or Dense Wave-length Division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |   |  | Multiplexing, and SONET, or Synchronous Optical Network Technology,
transmission technologies. Furthermore, Crosswave offers
point-to-point dedicated backbone services with Ethernet interface
of 10 Base-T, 100 Base-TX and 1000 Base-LX. Crosswaves 1000 Base
L-X service, called Gigabit Ethernet Backbone Service, was launched
in April 2002. Gigabit Ethernet Backbone Service and 9.6 Gbps
items have initially been provided in the area between and
peripheral to our data centers located in Tokyo, Osaka and Nagoya.
The pricing structure for these services is primarily based on
bandwidth, not distance.                                                                                                                                                                                                                                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | International backbone service.Crosswaves international
backbone service conducts international telecommunications services
for data transmission and leased circuits. Pricing is based on
bandwidth and destination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Dial-up port service.Crosswave offers this service targeted
mainly at value-added network operators such as ISPs. This service
allows customers to offer nationwide dial-up access to their own
networks via our network. This service is offered nationwide
through Crosswaves access points located in 81 cities throughout
Japan. Authorized users who want to access a network supported
using this service call the telephone number of the closest access
point using a telephone or ISDN line. The call is then transmitted
over Crosswaves network to the remote access server of the
customers network located in Crosswaves data centers.                                                                                                                                                                                                                                               
|
| |  |  | Data center services.Crosswave currently has nine data
centers in operation in major metropolitan areas in Japan  Tokyo,
Yokohama, Osaka, Nagoya, Sapporo, Sendai, Fukuoka, Kyoto and
Saitama. This service is for a wide variety of customers, including
large companies and value-added network service providers, such as
application and digital content service providers, and new entrants
into the Japanese telecommunications market that require high-speed
access to networks and resources, co-location and operational
support for their systems. Crosswave personnel operate and manage
each of the data centers, and outsource certain support and
maintenance services to Net Care, an IIJ group company, and other
third-party providers. At the data centers, Crosswave provides
services that, together with services offered by IIJ, provide total
network solutions to end users.

Our contributions to Crosswave. We have invested heavily in Crosswave,
but as a result of Crosswaves commencement of corporate reorganization
proceedings, we have written off our equity investment in Crosswave as well as
a ¥5.0 billion security deposit advanced to four Japanese commercial banks on
behalf of Crosswave in connection with financing provided by these banks to
Crosswave. We also will write off ¥1.7 billion of outstandings loans and
approximately ¥0.4 billion of accounts receivable outstanding to Crosswave for
the fiscal year ending March 31, 2004.

Transactions
with Crosswave.Our transactions with Crosswave from April 1,
2002 through June 30, 2003, are as
follows:

From April 1, 2002 through June 30, 2003, we paid approximately ¥7,606
million to Crosswave for services. During this period, IIJ Technology paid
¥335 million for services that IIJ Technology purchased from Crosswave. We
received payments of approximately ¥779 million from Crosswave for network
equipment that we sold to Crosswave during this period. During this period,
IIJ Technology received ¥533 million for network systems that IIJ Technology
sold to Crosswave. We also received approximately ¥651 million in various
access services that we provided Crosswave during this period.

From April 1, 2002 through June 30, 2003, we seconded a number of
employees to Crosswave. For the services of these employees, we received
approximately ¥232 million from Crosswave. Additionally, Net Care received
approximately ¥1,153 million for services that were outsourced by Crosswave.

In May 2002, to assist Crosswave in securing loan financing, we entered
into a ¥5.0 billion Cash Deficiency Support Agreement with Crosswave and four
Japanese commercial banks. The security deposit of ¥5.0 billion which IIJ
provided was acquired by the banks when Crosswave filed of a petition for
commencement of corporate reorganization proceedings. Accordingly, we now hold
a claim [in subrogation] against Crosswave in the
amount of ¥5.0 billion. For further information on this agreement, see
Item 10.C. Material Contracts. In addition, IIJ has guaranteed ¥3.2 million
of annual rent payments of Crosswave.

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Capital Expenditures

The table below shows our capital expenditures, which we define as amounts
paid for purchases of property and equipment plus payments on capitalized
leases, for the last three years.

|                                                               |  |                              |       |      |                   |             |       |  |  |   |       | 
|-------------------------------------------------------------- |  | ---------------------------- | ----- | ---- | ----------------- | ----------- | ----- |  |  | - | ----- | 
|                                                               |  | For the year ended March 31,
|                                                               |  |                             
|                                                               |  | 2001                         |       | 2002 |                   | 2003       
|                                                               |  |                              |       |      |                   |            
|                                                               |  |                              |       |      | (millions of yen) | (unaudited)
|Capital expenditures, including
payments on capitalized leases |  | ¥                            | 3,963 |      |                   | ¥           | 3,773 |  |  | ¥ | 4,893 | 

Our future capital expenditures are difficult to predict given the rapid
changes and uncertainties in our business. 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 make capital expenditures, including payments on
capitalized leases, of approximately ¥4.0 to ¥5.0 billion in each of the next
few years to increase the access to our networks to maintain the current
network quality. In addition, we will continue to add equipment to our network
as we expand the capacity of our network.

We have not made any material divestitures in the current or past three
fiscal years, except the loss on disposal of property and equipment of ¥112
million occurred in March 2003 and was mainly due to our move to new headquarters.

Seasonality

See Item 5.D, Trend Information  Factors Affecting Our Future Financial
Results  System integration revenues including related equipment sales
revenues  Seasonality.

Sales and Marketing

Our sales headquarters is in Tokyo. We also have branches in Osaka,
Nagoya, Sapporo, Sendai, Toyota, Toyama, Hiroshima, Fukuoka and Okinawa in
order to cover the major metropolitan areas in which the majority of large
Japanese companies operate. As of March 31, 2003, we had approximately 207
people working in sales and marketing.

We organize our sales personnel into four distinct, separate divisions:
sales, sales planning, sales administration and new business promotion.

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



| |  |  | Two of the sections focus on our total network solutions and
work with large corporate clients, including telecommunications
carriers and ISPs, financial institutions, manufacturing, government
institutions, universities and other schools. In order to provide
total network solutions, personnel in our sales divisions work
closely with other IIJ group companies such as IIJ Technology as
well as with important service providers such as Crosswave.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | One of the sections focuses on sales outside of Tokyo.                                                                                                                                                                                                                                                                                                                                                                                                         

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In addition to the above, we have three divisions in our sales/marketing
organization: marketing, strategic sales division and business planning and
development division. The marketing division promotes marketing communications
through advertisement activities as well as organizes conferences and seminars
given for targeted customers in order to enhance awareness of our total network
solutions. The strategic sales division includes our
contact center, which promotes our various network services for small- and
medium-size businesses by making calls to potential customers. This contact
center works with our third party sales agents. We have around 10 sales agents
as of March 2003. The business planning and development division promotes new
business development including CDN (Content Delivery Network) business.

In April 2003, we reorganized the sales divisions and separated them into
the four sections:



| |  |  | One of the sections focuses on total network solutions and
works with government institutions and media organizations.                                                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | One of the sections focuses on our total network solutions
and works with large corporate clients, including telecommunications
carriers and ISPs, financial institutions, manufacturers,
universities and other schools. In order to provide our total
network solutions, personnel in our sales divisions work closely
with other IIJ group companies.
|
| |  |  | One of the sections focuses on our Internet connectivity and
value added services and works with large and medium sized
companies, or sales agents, to expand our services to other
corporate customers.                                                                                                                                                
|
| |  |  | One of the sections focuses on sales outside of Tokyo.                                                                                                                                                                                                                                                                                                  

Customers

We have approximately 6,000 business and other institutional customers and
approximately 530,000 individual subscribers which includes individuals through
OEM services as of March 31, 2003. Our main customers continue to be major
corporations including ISPs. We were awarded the best service provider of
year 2002 title in a major annual survey conducted by Nikkei Communications, a
leading telecom industry trade magazine. According to the survey, which
encompassed responses from 856 corporations in Japan and was released on
December 2, 2002, we were ranked number one in qualifying categories of
broadband services, dedicated access services and dialup access services.

Research and Development

We have always focused on advancing the use of networking technologies,
including the Internet in Japan. Many of our engineers regularly participate
in industry organizations and government-sponsored research projects such as
researching new Internet protocol standards, namely Internet Protocol Version 6
(IPv6). These engineers have continued to develop innovative services,
applications and products, many of which have set the standard for the Internet
industry in Japan. 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 averaged less than 1.0% of total revenues for the past two consecutive years.
For the years ended March 31, 2003, 2002 and 2001, our research and development
expenses were ¥414 million, ¥319 million and ¥287 million, respectively, most
of which was personnel expense. The level of research and development
expenditures is low in relation to our total costs primarily because we do not
engage in extensive research and development of new technologies and products
that require large investments. Rather, as noted above and as set forth in
more detail below, we are intensively engaged in daily research and development
activities. We focus on monitoring the developments in the industry and in
developing new and innovative services and applications by using and modifying
existing technologies and products.

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As of March 31, 2003, we had approximately 102 people working in our
research and development organization, all of whom also have additional
responsibilities in the Technology Department. Our research and development
staff works very closely with our sales and marketing personnel and technical
engineers to ensure that our research and development efforts are closely
aligned with the demands of our customers.

R&D Organization

We have organized our research and development staff to promptly and
effectively address the rapidly changing technological environment in the
Internet. Research and development 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, 2003, the Technology Department
comprised the following divisions:



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

Service administrative department.As of March 31, 2003, 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, etc.; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Internet Technology Division, which is responsible for
technological requirements of each IP services customer.                               

In April 2003, we established the Network Integration Division, which
develops network solutions and outsourcing projects for corporate users.

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In August 2003, we reorganized the Technology Department and the Service
Administrative Department into three departments, the Business Development
Department, the Development Department and the Operation Department, aiming to
establish a more efficient service development structure.

IIJ Research Lab.We established the IIJ Research Lab in April 1998 to
engage in R&D of new basic network technologies. For example, through the IIJ
Research Lab, we are participating in various research and development
activities in cooperation with organizations from the private and academic
sectors to promote the deployment and implementation of IPv6. For example, the
output of the joint undertaking with WIDE project is distributed freely in
order to promote the introduction of IPv6 on a worldwide scale. IPv6 is
designed to solve problems inherent in the current version of IP, which is
IPv4, such as IP address space depletion. In addition, IPv6 is expected to
provide new network features such as ubiquitous networking.

R&D Strategy

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



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

A second research and development objective is to continue participating
in or otherwise closely monitoring the new products, developments and
initiatives of manufacturers and standards-setting and research groups.
Through these efforts, we seek to ensure that we have timely and effective
access to new technologies and that we implement these technologies
effectively. Because the rate of change in technology relevant to our business
is so rapid, we believe that the sophistication and experience of our research
and development personnel is an important part of our success.

Proprietary Rights

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

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Licenses

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

Since June 1999, we are 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.

We have acquired a license from Trend Micro Incorporated which will allow
us to add the option of virus scanning to our e-mail hosting and e-mail
services.

We are also a licensee under an agreement with RSA Security Inc. which
enables us to provide advanced secure remote access service to our customers.

Additionally, we are a licensee under an agreement with NRI Secure
Technologies, Ltd. which enables us to provide service to investigate and
identify any security problems in our customers networks.

Trademarks

We have applied for trademark registrations of our corporate name,
Internet Initiative Japan Inc. and certain other corporate and product names
in Japan, the United States and certain European countries. As of June 30,
2003, there were six applications pending and 22 which have been granted.

Legal Proceedings

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

In December 2001, a class action complaint alleging violations of the
federal securities laws was filed against us in the United States District
Court for the Southern District of New York, naming as defendants IIJ, Koichi
Suzuki  our President, Chief Executive Officer and Representative Director,
Yasuhiro Nishi  our Director, Chief Financial Officer and Chief Accounting
Officer, and the Goldman Sachs Group Inc. and Morgan Stanley Dean Witter, Inc.
 both of which served as underwriters of our initial public offering. Similar
complaints have been filed against over 300 other issuers that have had initial
public offerings since 1998 and all such actions have been included in a single
coordinated proceeding in the Southern District of New York. An amended
complaint was filed on April 24, 2002. The amended complaint alleges, among
other things, that the underwriters of our initial public offering (i) entered
into certain alleged compensation arrangements with the underwriters clients,
such as undisclosed commissions or tie-in agreements to purchase stock in the
after-market, and (ii) engaged in manipulative practices to artificially
inflate the price of our stock in the after-market subsequent to the initial
public offering. The IIJ defendants are named in the amended complaint
pursuant to Sections 11 and 15 of the Securities Act of 1933, as amended, and
Sections 10(b) and 20(a), and Rule 10b-5 of the Securities Exchange Act of
1934, as amended, on the basis of an alleged failure to disclose the
underwriters alleged misconduct. The complaint seeks unspecified damages. On
July 15, 2002, we joined in an omnibus motion to dismiss the amended
complaint filed by the issuers and individuals named in the various coordinated
cases. In June 2003, we approved a settlement with the plaintiffs in this
matter. The settlement releases us and the individual defendants for liability
for the conduct alleged in the action. Under the settlement, we agreed to
assign away, not assert, or release certain potential claims we may have
against our underwriters. Approximately 260 defendant issuers participated in
this settlement. As to financial impact on us, the settlement provides that
the class members will be guaranteed $1 billion dollars in recoveries by the
insurers of the issuers. In addition to IIJs portion of the proposed
settlement, some of the defense costs incurred would be borne by our insurer in
another individual agreement. Consequently, we believe that there will be no
significant financial impact on us as a result of this matter. Final approval
of this settlement is required by the United States District Court for the
Southern District of New York.

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Regulation of the Telecommunications Industry in Japan

The MPHPT regulates the Japanese telecommunications industry. Type I
Carriers and Type II Carriers, including us, are regulated by the MPHPT
primarily under the Telecommunications Business Law.

The Telecommunications Business Law

The Telecommunications Business Law, which became effective in 1985,
authorizes the MPHPT to regulate two types of telecommunications companies,
Type I Carriers and Type II Carriers. Type I Carriers include NTT
Communications, NTT East, NTT West, KDDI, Japan Telecom and other new common
carriers, including Crosswave, as well as cellular or other mobile operators.
Type I Carriers provide telecommunications services by establishing their own
telecommunications circuit facilities. Type II Carriers 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
and NTT West.

Historically, the MPHPT required Type I Carriers to own the
telecommunication circuit facilities they used to provide telecommunications
services. As a result of deregulation, however, the MPHPT modified this
requirement in 1997. Type I Carriers may now lease telecommunications
circuit facilities on a long-term basis and under stable conditions from the
owner of the facilities. The MPHPT refers to such a lease as an indefeasible
right of use, or IRU. This modification in the regulations allowed Crosswave,
by virtue of its IRU agreement with KDDI, to obtain a Type I Carrier license.
In December 1999, the MPHPT released its Guidelines for Network Establishment
according to which in order to qualify as an IRU the following requirements
must be satisfied:



| |  |  | the agreement may not be unilaterally terminable by the owner of the facilities;       
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | a reasonable usage fee for the whole term of the agreement must be determined;         
|
| |  |  | the owner may not grant any security interest in the facilities to any third-party; and
|
| |  |  | the agreement must not be less than ten years.                                         

The fourth requirement was further relaxed in September 2001. Now,
instead of having a term of not less than ten years, a term of not less than
one year may be the basis of an IRU if the term can be renewed automatically
and the agreement cannot be terminated by the owner of the facilities without
the consent of the lessee.

In June 2001, the Telecommunications Business Law was amended to allow
Type I Carriers to engage in wholesale telecommunications services for other
Type I Carriers and Type II Carriers with prior notification to the MPHPT. The
amendment took effect on November 30, 2001. As a result of this amendment,
Type I Carriers may construct a partial segment of their network by purchasing
wholesale telecommunications services made available by other carriers.

Among Type I Carriers, a carrier which operates an essential local network
for the enhancement of user benefits and the general and rational development
of telecommunications, designated by the MPHPT as Category I Designated
Telecommunications Facilities, and a carrier which operates a mobile
telecommunications network exceeding the ratio criteria provided by the MPHPT
and ensures adequate and smooth interconnection with telecommunications
facilities of other carriers, designated by the MPHPT as a Category II
Designated Telecommunications Facilities, are subject to special regulation by
the MPHPT.

Type II Carriers are not allowed, in principle, to provide
telecommunications services through their own telecommunication circuit
facilities. Therefore, if a carrier wishes to provide telecommunications
services through its own circuit facilities, the carrier must obtain a Type I
license under the Telecommunications Business Law. A telecommunications
carrier may simultaneously hold a Type I license and a Type II license if the
services offered under each license are kept separate and distinct according to
the requirements of the Telecommunications Business Law. Alternatively, a
carrier of one type is permitted to own a carrier of the other type.

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The following table summarizes some of the major regulatory requirements
applicable to Type I and Type II Carriers:

|                                          |  |                                 |  |                                  |  |                               
|----------------------------------------- |  | ------------------------------- |  | -------------------------------- |  | ------------------------------
|                                          |  | Type I Carriers                 |  | Type II Carriers                
|                                          |  |                                 |  |                                 
|                                          |  |                                 |  | Special Type II                  |  | General Type II               
|                                          |  |                                 |  |                                  |  |                               
|Government Regulation:                    |  |                                 |  |                                  |  |                               
|a. Start-up of services                   |  | Permission from
MPHPT required  |  | Registration with
MPHPT required |  | Notification to
MPHPT required
|b. Rates and charges                      |  | Notification* to
MPHPT required |  | Notification to
MPHPT required   |  | Unregulated                   
|c. Share acquisition by foreign investors |  | Unregulated**                   |  | Unregulated                      |  | Unregulated                   



---

|*  |  | Type I Carriers which operate Category I Designated Telecommunications
Facilities are required to receive MPHPT approval for their
Interconnection charges.                                                                                                                          
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Prior notification is required under the Foreign Exchange and Foreign
Trade Law. This is not applicable to purchasers of ADSs. A one-third
foreign ownership restriction is applicable only to NTT (which was changed
from a 20% foreign ownership restriction on November 30, 2001).

Regulations of Special Type II Carriers

The following regulations apply to us 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. Our 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 harm 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 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.

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A telecommunications carrier that provides universal service, that is a
basic telecommunications service, and is designated an Eligible
Telecommunications Carrier, or ETC, must make an effort to provide its services
fairly, equitably and in a stable manner on a nationwide and non-discriminatory
basis. A carrier that provides universal service will be entitled to receive a
subsidy as an ETC upon application to MPHPT. The subsidy will be provided to
the ETC by the Universal Service Support Institution, which has been
established for the purpose of ensuring provision of universal services through
contributions. In order to support the Universal Service Support Institution,
contributions are collected from other carriers which have entered into
interconnection agreements with an ETC. We may be subject to the obligation of
paying a certain amount as a contribution to the Universal Service Support
Institution if we enter into an interconnection agreement with an ETC.

New Regulatory Framework under the Amended Telecommunications Business Law
Effective in 2004

The Telecommunications Business Law was considerably amended in July 2003.
The amendments to the Telecommunications Business Law, which become effective
within nine months from the date of promulgation in part and one year for the
rest, include, among other things,:



| |  |  | the elimination of the classification system of Type I
Carriers and Type II Carriers;              
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | deregulated regulations on charges and terms and conditions
for providing services by Carriers; and
|
| |  |  | the introduction of certain terminal-equipment-suppliers
declaration of system conformity.        

In line with the elimination of carriers classification, the approval
system for business entries and withdrawals will be replaced by a
registration/notification system, regulations pertaining to service offerings,
tariff setting and interconnection between carriers will be liberalized,
regulations to protect service users such as announcement of withdrawal,
explanation of important matters on services and swift processing of complaints
will be introduced, and an authorization system allowing priority usage of
public utilities conducive to facilitation of circuit facilities deployment
will be introduced.

After the Amended Telecommunications Business Law becomes effective in
2004, major regulatory requirements will be changed as follows:



|a. |  | Start-up of Services
|-- |  | --------------------



| |  |  | Registration with the MPHPT required for carriers which
exceed criteria to be established by MPHPTs ordinances in relation
to the size of circuit facilities and the size of geographic area
where the circuit facilities are installed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Notification to the MPHPT required for carriers other than
the above.                                                                                                                                                                    



|b. |  | Charges and Tariffs
|-- |  | -------------------



| |  |  | Unregulated, in general. The requirement that standard terms
and conditions be applied equally to all users was repealed.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Prior notification to the MPHPT required for basic
telecommunications services and designated telecommunications
services. Among the designated telecommunications services, the
telecommunications services to be specified by MPHPT annually will
be subject to price cap regulations, under which carriers will be
required to obtain approval from the MPHPT if a proposed change of
charge exceeds the price cap. Providing these telecommunications
services other than pursuant to the terms and conditions notified to
the MPHPT is prohibited, unless minor exceptions apply.

45



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|c. |  | Articles of Interconnection Agreements
|-- |  | --------------------------------------



| |  |  | Unregulated, in general.                                                                    
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | Approval from the MPHPT required for Category I Designated Telecommunications Facilities.   
|
| |  |  | Notification to the MPHPT required for Category II Designated Telecommunications Facilities.



|d. |  | Right of Way Privilege for Authorized Carriers
|-- |  | ----------------------------------------------



| |  |  | Authorization on the entire or a part of a carriers
telecommunications business by MPHPT for the privileged use of land
or other public utilities for circuit facilities deployment is
required.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|e. |  | Merger, Business Transfer or Divestiture of Carriers
|-- |  | ----------------------------------------------------



| |  |  | Post facto notification to MPHPT without delay is required.
| | - |  | -----------------------------------------------------------



|f. |  | Business Suspension, Abolition or Dissolution of Carriers
|-- |  | ---------------------------------------------------------



| |  |  | Post facto notification to MPHPT without delay is required.
Prior announcement of withdrawals to service users is required in
accordance with MPHPTs ministerial ordinance.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|g. |  | Foreign Capital Participation
|-- |  | -----------------------------



| |  |  | Unregulated. Prior notification is required under the
Foreign Exchange and Foreign Trade Law. This is not applicable to
purchasers of ADSs. The one-third foreign ownership restriction is
applicable only to NTT.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Implementation Ministerial Ordinances for the Amended
Telecommunications Business Law have not been stipulated by the MPHPT as of
September 19, 2003.

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 our financial condition and
results of operations together with our consolidated financial statements and
the notes to those financial statements beginning on page F-1 in response to
Item 8 and Item 18. This discussion and analysis contains forward-looking
statements and you should read the risk factors relating to forward-looking
statements appearing at the beginning of this annual report.

46



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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 connectivity services, comprised of
dedicated Internet access services and dial-up Internet access services,
systems integration services, equipment sales as part of our provision of total
network solutions and other value-added services such as Internet data center
services, security services, and mail server outsourcing services.
Substantially all of our revenues are from our customers in Japan.

We also provide various applications services and systems operation and
maintenance services, such as systems development and integration for
business-to-business and business-to-consumer networks, outsourcing projects,
Web design, content development and distribution, network monitoring and call
center support. We are the main point of contact for customers for these
various services as well as Crosswave.

In order to provide our customers with total network solutions, we provide
our services directly or by working together with the subsidiaries and
affiliates of the IIJ group or with Crosswave. 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 have consolidated
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.

We accounted for Crosswave under the equity method for the
years ended March 31, 2001, 2002 and 2003. As a
result of Crosswaves financial condition, we recognized an
impairment loss for the full value of our investment in Crosswave at March
31, 2003. As a result of Crosswaves
commencement of corporate reorganization proceedings in August 2003, we
also plan to write off additional loans extended to
Crosswave in May and June 2003 and accounts receivable owed to us by Crosswave in the year ending March 31, 2004 and no longer account for
Crosswave under the equity method. Crosswave remains, however, an important
service provider for our provision of total solutions to our customers.
Crosswave has indicated in its public filings that as a result of severe price
competition in the Japanese data communications market and a depressed domestic
economy, it has been unable to achieve profitability and has experienced
increasing funding constraints. Although Crosswave has indicated in its public
filings that it continued to attempt to increase sales, limit capital
investments, reduce costs, rationalize the organization to operate more
efficiently and find new sources of financing, such measures were insufficient
to meet Crosswaves cash-flow requirements. We understand that Crosswave is
currently seeking a financial sponsor as part of its corporate reorganization.

On June 26, 2003, we completed a private placement of 3,265 of our common
shares to investors in Japan for an aggregate amount of ¥1.4 billion. We plan
to use the net proceeds for working capital. On September 16, 2003, we
completed a private placement of 12,615 shares of our common stock to NTT, NTT
Communications, Itochu Corporation, Sumitomo Corporation and other investors in
Japan for an aggregate amount of ¥12.0 billion. As a result of this
transaction the total number of our issued common shares increased to 38,360
and NTT and its affiliates became a 31.6% owner of our company.

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.

For a discussion of factors affecting our future financial results, see
Item. 5.D. Trend Information.

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##### Table of Contents



Results of Operations

As an aid to understanding our operating results, the following tables
show items from our statement of operations for the periods indicated in
millions of yen amounts (or thousands of U.S. dollars) and as a percentage of
total revenues.

|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|------------------------ | --------------------------------------------------------------- |  | ------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | - | -------------------- | ------- | ---- | - | -------------------------------------------- | ----- | ------ | - | ----- | ------- | ------------- | - | ---- | ------ | ------ | - | ----------- | ------- | ---- | - | ---- | ------- | ------------- | - | ------ | ------- | -
|                         |                                                                 |  |                                                        |                                                                                                      |   | Year Ended March 31,
|                         |                                                                 |  |                                                        |                                                                                                      |   |                     
|                         |                                                                 |  |                                                        |                                                                                                      |   | 2001                 |         | 2002 |   | 2003                                        
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                             
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   | (unaudited)
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   | (millions of yen except for percentage data) |       |        |   |       |         | (thousands
of
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         | U.S. dollars)
|REVENUES:                |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |              
|                         | Connectivity and value-added services
revenues:                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |  
|                         |                                                                 |  | Dedicated access:                                      |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |        
|                         |                                                                 |  |                                                        | IP Service including Data Center
Connectivity Services                                               |   |                      | ¥10,193 |      |   |                                              | 32.0  | %      |   |       | ¥10,326 |               |   |      | 25.9   | %      |   |             | ¥10,298 |      |   |      | 23.4    | %             |   | $      | 87,216  |  
|                         |                                                                 |  |                                                        | Others (including IIJ FiberAccess/F,
IIJ Ethernet Standard, IIJ DSL/F,
IIJ T1 Standard, IIJ Economy) |   |                      | 2,760   |      |   |                                              | 8.6   |        |   |       | 3,977   |               |   |      | 9.9    |        |   |             | 3,517   |      |   |      | 8.0     |               |   |        | 29,791  |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total dedicated access                                                                               |   |                      | 12,953  |      |   |                                              | 40.6  |        |   |       | 14,303  |               |   |      | 35.8   |        |   |             | 13,815  |      |   |      | 31.4    |               |   |        | 117,007 |  
|                         |                                                                 |  | Dial-up access                                         |                                                                                                      |   | 4,423                |         |      |   | 13.9                                         |       |        |   | 3,644 |         |               |   | 9.1  |        |        |   | 3,155       |         |      |   | 7.2  |         |               |   | 26,723 |        
|                         |                                                                 |  | Value-added:                                           |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |        
|                         |                                                                 |  |                                                        | Data Center facility and operation
services                                                          |   |                      | 1,063   |      |   |                                              | 3.4   |        |   |       | 1,448   |               |   |      | 3.6    |        |   |             | 1,442   |      |   |      | 3.3     |               |   |        | 12,210  |  
|                         |                                                                 |  |                                                        | Other                                                                                                |   |                      | 899     |      |   |                                              | 2.8   |        |   |       | 1,652   |               |   |      | 4.2    |        |   |             | 2,161   |      |   |      | 4.9     |               |   |        | 18,304  |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total value-added                                                                                    |   |                      | 1,962   |      |   |                                              | 6.2   |        |   |       | 3,100   |               |   |      | 7.8    |        |   |             | 3,603   |      |   |      | 8.2     |               |   |        | 30,514  |  
|                         |                                                                 |  | Other                                                  |                                                                                                      |   | 592                  |         |      |   | 1.8                                          |       |        |   | 1,668 |         |               |   | 4.2  |        |        |   | 1,726       |         |      |   | 3.9  |         |               |   | 14,616 |        
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total connectivity and
value-added services                                                          |   |                      | 19,930  |      |   |                                              | 62.5  |        |   |       | 22,715  |               |   |      | 56.9   |        |   |             | 22,299  |      |   |      | 50.7    |               |   |        | 188,860 |  
|                         | Systems integration, including related
equipment sales          |  |                                                        | 10,556                                                                                               |   |                      |         | 33.1 |   |                                              |       | 14,356 |   |       |         | 36.0          |   |      |        | 15,013 |   |             |         | 34.1 |   |      |         | 127,150       |  
|                         | Equipment sales                                                 |  |                                                        | 1,390                                                                                                |   |                      |         | 4.4  |   |                                              |       | 2,834  |   |       |         | 7.1           |   |      |        | 6,706  |   |             |         | 15.2 |   |      |         | 56,799        |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total revenues                                                                                       |   |                      | 31,876  |      |   |                                              | 100.0 |        |   |       | 39,905  |               |   |      | 100.0  |        |   |             | 44,018  |      |   |      | 100.0   |               |   |        | 372,809 |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|COST AND EXPENSES:       |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |              
|                         | Cost of connectivity and value-added services:                  |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |  
|                         |                                                                 |  | International backbone cost                            |                                                                                                      |   | 5,549                |         |      |   | 17.4                                         |       |        |   | 2,469 |         |               |   | 6.2  |        |        |   | 1,644       |         |      |   | 3.7  |         |               |   | 13,925 |        
|                         |                                                                 |  | Domestic backbone cost                                 |                                                                                                      |   | 2,574                |         |      |   | 8.1                                          |       |        |   | 3,187 |         |               |   | 8.0  |        |        |   | 3,591       |         |      |   | 8.2  |         |               |   | 30,417 |        
|                         |                                                                 |  | Local access line cost                                 |                                                                                                      |   | 3,142                |         |      |   | 9.9                                          |       |        |   | 3,872 |         |               |   | 9.7  |        |        |   | 3,862       |         |      |   | 8.8  |         |               |   | 32,709 |        
|                         |                                                                 |  | Other connectivity cost                                |                                                                                                      |   | 1,366                |         |      |   | 4.3                                          |       |        |   | 1,375 |         |               |   | 3.4  |        |        |   | 1,532       |         |      |   | 3.5  |         |               |   | 12,977 |        
|                         |                                                                 |  | Depreciation and amortization                          |                                                                                                      |   | 2,192                |         |      |   | 6.9                                          |       |        |   | 2,474 |         |               |   | 6.2  |        |        |   | 2,957       |         |      |   | 6.7  |         |               |   | 25,041 |        
|                         |                                                                 |  | Other                                                  |                                                                                                      |   | 4,160                |         |      |   | 13.0                                         |       |        |   | 6,423 |         |               |   | 16.1 |        |        |   | 6,801       |         |      |   | 15.4 |         |               |   | 57,599 |        
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total cost of connectivity and
value-added services                                                  |   |                      | 18,983  |      |   |                                              | 59.6  |        |   |       | 19,800  |               |   |      | 49.6   |        |   |             | 20,387  |      |   |      | 46.3    |               |   |        | 172,668 |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         | Cost of systems integration, including related
equipment sales: |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |  
|                         |                                                                 |  | Cost of equipment sales related to systems
integration |                                                                                                      |   | 2,755                |         |      |   | 8.6                                          |       |        |   | 3,303 |         |               |   | 8.3  |        |        |   | 3,377       |         |      |   | 7.7  |         |               |   | 28,601 |        
|                         |                                                                 |  | Other                                                  |                                                                                                      |   | 6,362                |         |      |   | 20.0                                         |       |        |   | 9,011 |         |               |   | 22.6 |        |        |   | 9,713       |         |      |   | 22.0 |         |               |   | 82,267 |        
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total cost of systems integration                                                                    |   |                      | 9,117   |      |   |                                              | 28.6  |        |   |       | 12,314  |               |   |      | 30.9   |        |   |             | 13,090  |      |   |      | 29.7    |               |   |        | 110,868 |  
|                         | Cost of equipment sales                                         |  |                                                        | 1,289                                                                                                |   |                      |         | 4.0  |   |                                              |       | 2,540  |   |       |         | 6.4           |   |      |        | 6,417  |   |             |         | 14.6 |   |      |         | 54,345        |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total cost of revenues                                                                               |   |                      | 29,389  |      |   |                                              | 92.2  |        |   |       | 34,654  |               |   |      | 86.9   |        |   |             | 39,894  |      |   |      | 90.6    |               |   |        | 337,881 |  
|                         | Sales and marketing                                             |  |                                                        | 3,252                                                                                                |   |                      |         | 10.2 |   |                                              |       | 3,038  |   |       |         | 7.6           |   |      |        | 3,176  |   |             |         | 7.2  |   |      |         | 26,901        |  
|                         | General and administrative                                      |  |                                                        | 1,618                                                                                                |   |                      |         | 5.1  |   |                                              |       | 1,840  |   |       |         | 4.6           |   |      |        | 2,205  |   |             |         | 5.0  |   |      |         | 18,671        |  
|                         | Research and development                                        |  |                                                        | 287                                                                                                  |   |                      |         | 0.9  |   |                                              |       | 319    |   |       |         | 0.8           |   |      |        | 414    |   |             |         | 1.0  |   |      |         | 3,508         |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Total cost and expenses                                                                              |   |                      | 34,546  |      |   |                                              | 108.4 |        |   |       | 39,851  |               |   |      | 99.9   |        |   |             | 45,689  |      |   |      | 103.8   |               |   |        | 386,961 |  
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|OPERATING INCOME (LOSS)  |                                                                 |  | (2,670                                                 | )                                                                                                    |   |                      | (8.4    | )    |   |                                              | 54    |        |   |       | 0.1     |               |   |      | (1,671 | )      |   |             | (3.8    | )    |   |      | (14,152 | )            
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|OTHER INCOME (EXPENSES): |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |              
|                         | Interest income                                                 |  |                                                        | 454                                                                                                  |   |                      |         | 1.4  |   |                                              |       | 122    |   |       |         | 0.3           |   |      |        | 68     |   |             |         | 0.1  |   |      |         | 571           |  
|                         | Interest expense                                                |  |                                                        | (643                                                                                                 | ) |                      |         | (2.0 | ) |                                              |       | (659   | ) |       |         | (1.6          | ) |      |        | (733   | ) |             |         | (1.7 | ) |      |         | (6,207        | )
|                         | Foreign exchange gains (losses)                                 |  |                                                        | 1,132                                                                                                |   |                      |         | 3.6  |   |                                              |       | 255    |   |       |         | 0.6           |   |      |        | (280   | ) |             |         | (0.6 | ) |      |         | (2,369        | )
|                         | Other  net                                                     |  |                                                        | (44                                                                                                  | ) |                      |         | (0.2 | ) |                                              |       | (661   | ) |       |         | (1.6          | ) |      |        | (324   | ) |             |         | (0.7 | ) |      |         | (2,746        | )
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  
|                         |                                                                 |  |                                                        | Other income (expenses)  net                                                                        |   |                      | 899     |      |   |                                              | 2.8   |        |   |       | (943    | )             |   |      | (2.3   | )      |   |             | (1,269  | )    |   |      | (2.9    | )             |   |        | (10,751 | )
|                         |                                                                 |  |                                                        |                                                                                                      |   |                      |         |      |   |                                              |       |        |   |       |         |               |   |      |        |        |   |             |         |      |   |      |         |               |   |        |         |  

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|                                                         |                                                             |  |         |        |        |                      |       |       |       |                                              |         |        |        |   |       |               |       |   |          |        |         |   |       |       |       |   |          |               |          |   |  | 
|-------------------------------------------------------- | ----------------------------------------------------------- |  | ------- | ------ | ------ | -------------------- | ----- | ----- | ----- | -------------------------------------------- | ------- | ------ | ------ | - | ----- | ------------- | ----- | - | -------- | ------ | ------- | - | ----- | ----- | ----- | - | -------- | ------------- | -------- | - |  | 
|                                                         |                                                             |  |         |        |        | Year Ended March 31,
|                                                         |                                                             |  |         |        |        |                     
|                                                         |                                                             |  |         |        |        | 2001                 |       | 2002  |       | 2003                                        
|                                                         |                                                             |  |         |        |        |                      |       |       |       |                                             
|                                                         |                                                             |  |         |        |        |                      |       |       |       | (millions of yen except for percentage data) |         |        |        |   |       | (thousands of
|                                                         |                                                             |  |         |        |        |                      |       |       |       |                                              |         |        |        |   |       |               |       |   |          |        |         |   |       |       |       |   |          | U.S. dollars)
|LOSS FROM OPERATIONS BEFORE INCOME TAX EXPENSE
(BENEFIT) |                                                             |  | ¥(1,771 | )      |        |                      | (5.6  | )%    |       | ¥                                            | (889    | )      |        |   | (2.2  | )%            |       |   | ¥(2,940  | )      |         |   | (6.7  | )%    |       | $ | (24,903  | )            
|INCOME TAX EXPENSE (BENEFIT)                             |                                                             |  | (926    | )      |        |                      | (2.9  | )     |       |                                              | 1,099   |        |        |   | 2.8   |               |       |   | 912      |        |         |   | 2.1   |       |       |   | 7,719    |              
|MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES          |                                                             |  | 160     |        |        |                      | 0.5   |       |       |                                              | 24      |        |        |   | 0.1   |               |       |   | 153      |        |         |   | 0.4   |       |       |   | 1,298    |              
|EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES:           |                                                             |  |         |        |        |                      |       |       |       |                                              |         |        |        |   |       |               |       |   |          |        |         |   |       |       |       |   |          |              
|                                                         | Equity
method net loss                                      |  |         | (4,015 | )      |                      |       | (12.6 | )     |                                              |         | (5,482 | )      |   |       | (13.7         | )     |   |          | (5,625 | )       |   |       | (12.8 | )     |   |          | (47,644       | )       
|                                                         | Impairment
loss on investment in and deposits for Crosswave |  |         |        |        |                      |       |       |       |                                              |         |        |        |   |       |               |       |   |          | (7,153 | )       |   |       | (16.3 | )     |   |          | (60,583       | )       
|                                                         |                                                             |  | Total   |        | (4,015 | )                    |       |       | (12.6 | )                                            |         |        | (5,482 | ) |       |               | (13.7 | ) |          |        | (12,779 | ) |       |       | (29.0 | ) |          |               | (108,227 | )
|                                                         |                                                             |  |         |        |        |                      |       |       |       |                                              |         |        |        |   |       |               |       |   |          |        |         |   |       |       |       |   |          |               |          |   |  | 
|NET LOSS                                                 |                                                             |  | ¥(4,700 | )      |        |                      | (14.8 | )%    |       |                                              | ¥(7,446 | )      |        |   | (18.7 | )%            |       |   | ¥(16,477 | )      |         |   | (37.4 | )%    |       | $ | (139,551 | )            
|                                                         |                                                             |  |         |        |        |                      |       |       |       |                                              |         |        |        |   |       |               |       |   |          |        |         |   |       |       |       |   |          |               |          |   |  | 

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Year ended March 31, 2003
(unaudited) compared to the year ended March 31, 2002

Total Revenues.

Our total revenues increased 10.3% to ¥44.0 billion for the year ended
March 31, 2003 from ¥39.9 billion for the previous fiscal year. The primary
drivers of this growth were increases in equipment sales, which are closely
linked to our systems integration business, and increases in systems
integration revenues. Value added services revenues also increased.

Connectivity and value-added services revenues.Revenues from
connectivity services and value-added services, which comprise our dedicated
access, dial-up access and value-added services and other services, decreased
1.8% to ¥22.3 billion for the year ended March 31, 2003 from ¥22.7 billion for
the previous fiscal year.



| |  |  | Dedicated access. Revenues from dedicated access services
decreased 3.4% to ¥13.8 billion for the year ended March 31, 2003
from ¥14.3 billion for the previous fiscal year. This decrease was
the result of contract cancellations by ISPs affiliated with
regional electric power companies and decreasing unit prices as a
result of increased competition. Decreased revenues from IIJ T1
Standard, IP Service and IIJ economy service were partially offset
by increased revenue from our IIJ fiber access/F Service and IIJ
DSL/F service.                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Dial-up access. Revenues from dial-up access services
decreased 13.4% to ¥3.2 billion for the year ended March 31, 2003
from ¥3.6 billion for the previous fiscal year. This decrease was
the result of declining revenues from our conventional dial-up
access services and IIJ4U services. This decrease in IIJ4U revenues
was due not only to the decrease in the number of subscribers but
also to a shift to the lower-end IIJ4U fixed price service by users
of NTTs FLETS services. The decrease was offset partially by
growing demand for dial-up access services provided on an OEM basis.
|
| |  |  | Value-added services. Our value-added services revenues
increased 16.2% to ¥3.6 billion for the year ended March 31, 2003
from ¥3.1 billion for the previous fiscal year. This increase
reflected growth in security-related services and mail support
services, in part as a result of focusing sales efforts more on
these higher margin services. Internet data center services
amounted to ¥1.4 billion for the year ended March 31, 2003, the same
general level as the previous fiscal year.                                                                                                    
|
| |  |  | Other. Other revenues, which included rental fees for
network equipment, customer support service, and sale of Wide-area
Ethernet services, amounted to ¥1.7 billion for the year ended March
31, 2003, a slight increase from the previous fiscal year. The
increase reflected improved performance by Net Care and increased
sales of Wide-area Ethernet services, which offset the decrease in
rental fees for network equipment.                                                                                                                                                                  

Systems integration revenues.Our revenues from systems integration,
which include equipment sales related to systems integration, increased 4.6% to
¥15.0 billion for the year ended March 31, 2003 from ¥14.4 billion for the
previous fiscal year. Systems integration revenues accounted for 34.1% of our
total revenues during the period compared to 36.0% in the previous year. This
growth in our systems integration business reflected primarily the increase of
recurring fees from systems operation and monitoring services.

Equipment sales.Our equipment sales increased 136.6% to ¥6.7 billion for the year ended March 31, 2003 from ¥2.8
billion for the previous fiscal year, mainly as a result of a larger than
expected increase in sales of telecommunications equipment. Sales of our
original SEIL series of routers, which are expected to serve as a core of the
IIJ groups system management services, also increased.

Total Cost of Revenues.

Total cost of revenues increased 15.1% to ¥39.9 billion for the year ended
March 31, 2003 from ¥34.7 billion for the previous fiscal year. The increase
in total cost of revenues reflected primarily an increase in cost of systems
integration revenues and cost of equipment sales.

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Cost of connectivity and value-added services revenues. Cost of
connectivity and value-added services revenues increased 3.0% to ¥20.4 billion
for the year ended March 31, 2003 from ¥19.8 billion for the previous fiscal
year. The gross margin in connectivity and value-added services revenues
decreased to 8.6% for the year ended March 31, 2003 from 12.8% for the previous
fiscal year. This decrease is mainly a result of higher depreciation and
amortization cost and higher domestic backbone costs. Domestic backbone cost
increased 12.7% to ¥3.6 billion for the year ended March 31, 2003 from ¥3.2
billion for the previous fiscal year, attributable to an increase in connection
fees with NTTs regional access networks (FLETS). International backbone
costs decreased 33.4% to ¥1.6 billion for the year ended March 31, 2003 from
¥2.5 billion for the previous fiscal year. International yearly unit backbone
costs decreased 66%. Local access line costs remained at the level of ¥3.9
billion compared to the previous fiscal year.

Cost of systems integration revenues.Our cost of systems integration
revenues increased 6.3% to ¥13.1 billion for the year ended March 31, 2003 from
¥12.3 billion for the previous fiscal year. The gross margin in system
integration revenues decreased to 12.8% for the year ended March 31, 2003 from
14.2% for the previous fiscal year.

Cost of equipment sales.Our cost of equipment sales
increased 152.6% to ¥6.4 billion for the year ended March 31, 2003
from ¥2.5 billion for the previous fiscal year. The increase reflected
increased equipment sales to our systems integration customers. The gross
margin in equipment sales decreased to 4.3% for the year ended March 31, 2003
from 10.4% for the previous fiscal year as a result of higher sales of
lower-margin equipment.

Total Costs and Expenses.

Total costs and expenses, which includes total cost of revenues, sales and
marketing expenses, general and administrative expenses and research and
development expenses, increased 14.6% to ¥45.7 billion for the year ended March
31, 2003 from ¥39.9 billion for the previous year. The increase in total costs
and expenses was primarily a result of the increase in domestic backbone cost,
depreciation and amortization and cost of equipment sales.

Sales and marketing.Sales and marketing expenses increased 4.5% to ¥3.2
billion for the year ended March 31, 2003 from ¥3.0 billion for the previous
fiscal year. Increases in other sales and marketing expenses, including sales
personnel expenses were partially offset by decreases in advertising expenses.

General and administrative.General and administrative expenses increased
19.8% to ¥2.2 billion for the year ended March 31, 2003 from ¥1.8 billion for
the previous fiscal year. The increase in expenses was due mainly to our move
to a new headquarters building and an increase in our administrative staff as a
result of the growth of our operations.

Research and development.Research and development expenses increased
29.8% to ¥0.4 billion for the year ended March 31, 2003 from ¥0.3 billion for
the previous fiscal year. These expenses were mainly due to research and
development on IPv6 and our proprietary router SEIL.

Operating Income (Loss).

An operating loss of ¥1.7 billion was recorded for the year ended March
31, 2003 compared to operating income of ¥0.1 billion for the previous fiscal
year. The operating loss was primarily the result of a loss of connectivity
service revenues as a result of contract cancellations by ISPs affiliated with
regional electric power companies and by the shift of several smaller corporate
clients from the IIJ T1 Standard Service and the IIJ Economy Service to cheaper
services.

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Other Income (Expenses), Net.

Net
other expenses of ¥1.3 billion were recorded for the year ended March
31, 2003 compared to net other expenses of ¥0.9 billion for  the previous fiscal
year. The increase primarily reflected the recording of a foreign
exchange loss of ¥0.3 billion as compared with a
foreign exchange gain in the previous fiscal year.

Interest income.Interest income decreased to ¥0.1 billion for the year
ended March 31, 2003 compared to the previous fiscal year, as a substantial
portion of our U.S. dollar-denominated monetary assets were used to fund the
operations of our subsidiary IIJ America.

Interest expense.Interest expense, comprised of interest expense in
respect of outstanding loans, convertible bonds and capital lease obligations,
increased slightly to ¥0.7 billion for the year ended March 31, 2003 compared
to the previous fiscal year. The increase reflected primarily the
increase in capital lease obligations which amounted to
¥6.4 billion as of March 31, 2003 from
¥4.8 billion as of March 31, 2002.

Foreign exchange gains (losses).For the year ended March 31, 2003, we
recorded a foreign exchange loss of ¥0.3 billion compared to a gain of ¥0.3
billion for the previous fiscal year. The loss is due to a foreign exchange
loss on the U.S. dollar denominated monetary assets attributable to the
appreciation of the Japanese yen against the U.S. dollar.

Other-net.Other expenses for the year ended March 31, 2003 included
losses of ¥0.3 billion on the write down of investments in marketable and
nonmarketable securities to reflect the decline in value considered to be other
than temporary.

Loss from Operations before Income Tax Expense (Benefit).

Loss before income tax expense (benefit) for the year ended March 31, 2003
of ¥2.9 billion increased primarily as a result of an operating loss.

Income Tax Expense (Benefit).

Income tax expense decreased 17.1% to ¥0.9 billion for the year ended
March 31, 2003 from ¥1.1 billion for the previous fiscal year. This income tax
expense was a result of an increase in the valuation allowance for deferred tax
assets, attributable primarily to the income tax effect of unrealized gains
which decreased in this period on certain available-for-sale securities.

Minority Interests in Consolidated Subsidiaries.

Minority interests in consolidated subsidiaries amounted to income of ¥153
million for the year ended March 31, 2003 compared to income of ¥24 million for
the previous fiscal year. The increase resulted from a net loss by IIJ
Technology.

Equity in Net Loss of Equity Method Investees.

Our
equity in net loss of equity method investees increased to ¥12.8
billion for the year ended March 31, 2003 from ¥5.5 billion for the previous
fiscal year. This increase reflected the impairment loss on
investment in and deposits for Crosswave and our equity in the loss of
Crosswave.

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Net Loss.Net loss for the year ended March 31, 2003 increased to ¥16.5
billion from ¥7.4 billion for the previous fiscal year. The increase in net
loss primarily reflects equity in net loss of equity method
affiliates of ¥12.8 billion, comprised of equity method net loss and impairment losses on investments in and deposits for
Crosswave and a ¥1.7 billion operating loss.

Year ended March 31, 2002 compared to the year ended March 31, 2001

Total Revenues.

Our total revenues increased 25.2% to ¥39.9 billion for the year ended
March 31, 2002 from ¥31.9 billion for the previous fiscal year. The primary
drivers of this growth were the increases in revenues systems integration
revenues and value added services revenues, in particular, revenues from
Internet data center services and security related services.

Connectivity and value-added services revenues.Revenues from
connectivity services and value-added services, which comprise our dedicated
access, dial-up access and value-added services, increased 14.0% to ¥22.7
billion for the year ended March 31, 2002 from ¥19.9 billion for the previous
fiscal year.



| |  |  | Dedicated access. Revenues from dedicated access services
increased 10.4% to ¥14.3 billion for the year ended March 31, 2002
from ¥13.0 billion for the previous fiscal year. This increase was
the result of capturing broadband demand from CATV operators through
our HSMN (High Speed Media Network) structure and strong demand for
low-cost, higher-bandwidth service by small- and medium-sized
companies. Demand for IIJ T1 standard service and our new service,
IIJ DSL/F, also increased. The increase in demand for IIJ DSL/F
service offset decreased demand for IIJ economy service. Demand for
full-service IP service decreased slightly, mainly as a result of a
shift in demand to our Internet data center connectivity services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Dial-up access. Revenues from dial-up access services
decreased 17.6% to ¥3.6 billion for the year ended March 31, 2002
from ¥4.4 billion for the previous fiscal year. This decrease was
the result of declining revenues from our conventional dial-up
access services and IIJ4U services. This decrease in IIJ4U revenues
was due not only to the decrease in the number of subscribers but
also to a shift to the lower-end IIJ4U fixed price service by users
of NTTs FLETS services. We also introduced our new high-quality
service for individual users, IIJmio service, to offset the decrease
in IIJ4U revenues.                                                                                                                        
|
| |  |  | Value-added services. Our value-added services revenues
increased 58.0% to ¥3.1 billion for the year ended March 31, 2002
from ¥2.0 billion for the previous fiscal year. This increase was
due to the growth of Internet data center services and
security-related services. Internet data center services, increased
36.2% to ¥1.4 billion for the year ended March 31, 2002 from ¥1.1
billion for the previous fiscal year. Other revenues, which
included rental router service, customer support service, set up
fees of network equipment and resale of Wide-area Ethernet services,
increased 83.7% to ¥1.7 billion for the year ended March 31, 2002
from ¥0.9 billion for the previous fiscal year.                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Systems integration revenues. Our revenues from systems
integration, which include equipment sales related to systems
integration, increased 36.0% to ¥14.3 billion for the year ended March
31, 2002 from ¥10.6 billion for the previous fiscal year. Systems
integration revenues accounted for 36.0% of our total revenues during the
period compared to 33.1% in the previous year. This growth in our
systems integration business reflected the increase in large-scale
contracts, from the financial sector in particular, and the increase in
recurring fees from systems operation and monitoring services incurred by
our developing network systems.

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| |                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Equipment sales. Our equipment sales increased 103.8% to ¥2.8 billion for the year ended March 31, 2002 from
¥1.4 billion for the previous fiscal year, mainly as a result of the
increase in sales of telecommunications equipment to Crosswave and in
sales of our original router SEIL series, which is a core component of
the IIJ groups system management services.

Total Cost of Revenues.

Total cost of revenues increased 17.9% to ¥34.7 billion for the year ended
March 31, 2002 from ¥29.4 billion for the previous fiscal year. The increase
in total cost of revenues reflected primarily an increase in cost of systems
integration revenues.

Cost of connectivity and value-added services revenues.Cost of
connectivity and value-added services revenues increased 4.3% to ¥19.8 billion
for the year ended March 31, 2002 from ¥19.0 billion for the previous fiscal
year. The gross margin in connectivity and value-added services revenues
substantially improved to 12.8% for the year ended March 31, 2002 from 4.8% for
the previous fiscal year. This improvement is mainly a result of the
significant decrease in international backbone cost, which decreased 55.5% to
¥2.5 billion for the year ended March 31, 2002 from ¥5.5 billion for the
previous fiscal year. In addition, the yearly unit backbone cost declined by
approximately 70.9%. Depreciation and amortization cost increased 12.9% to
¥2.5 billion for the year ended March 31, 2002 from ¥2.2 billion the previous
fiscal year. Domestic backbone cost increased 23.8% to ¥3.2 billion for the
year ended March 31, 2002 from ¥2.6 billion for the previous fiscal year,
attributable to the expansion of our domestic backbone capacity, along with
rising Internet traffic in Japan. We also upgraded our U.S. domestic backbone
network for enhanced service redundancy and stability. Local access line costs
increased 23.2% to ¥3.9 billion for the year ended March 31, 2002 from ¥3.1
billion for the previous fiscal year as a result of an overall increase in the
number of our dedicated access service subscribers.

Cost of systems integration revenues.Our cost of systems integration
revenues, increased 35.1% to ¥12.3 billion for the year ended March 31, 2002
from ¥9.1 billion for the previous fiscal year. The gross margin in systems
integration revenues improved steadily to 14.2% for the year ended March 31,
2002 from 13.6% for the previous fiscal year. This steady increase was due to
the increase in recurring fees in system operations, which is generally more
profitable than systems development.

Cost of equipment sales.Our cost of equipment sales
increased 97.1% to ¥2.5 billion for the year ended March 31, 2002 from
¥1.3 billion for the previous fiscal year. The gross margin in equipment sales
improved to 10.4% for the year ended March 31, 2002 from 7.3% for the previous
fiscal year. The revenue increase in our original router SEIL contributed to
the improvement in equipment sales profitability.

Total Costs and Expenses.

Total costs and expenses, which includes total cost of revenues, sales and
marketing expenses, general and administrative expenses, and research and
development expenses, increased 15.4% to ¥39.9 billion for the year ended March
31, 2002 from ¥34.6 billion for the previous year. The increase in total costs
and expenses was primarily a result of the increase in total revenues.

Sales and marketing.Sales and marketing expenses decreased 6.6% to ¥3.0
billion for the year ended March 31, 2002 from ¥3.3 billion for the previous
fiscal year. This decrease was due to lower advertising costs, which decreased
47.2% to ¥0.4 billion from ¥0.8 billion, resulting from a cutback in the
promotion of IIJ4U. Corresponding with a growth in client demand for network
solution services, sales personnel expenses increased 12.9% in the year to year
comparison.

General and administrative.General and administrative expenses increased
13.7% to ¥1.8 billion for the year ended March 31, 2002 from ¥1.6 billion for
the previous fiscal year. The increase in expenses was due to an increase in
our administrative staff as a result of the growth of our operations.

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Research and development.Research and development expenses increased
11.3% to ¥0.3 billion for the year ended March 31, 2002 from the previous
fiscal year. These expenses were mainly due to research and development on
IPv6 and our proprietary router SEIL.

Operating Income (Loss).

Operating income of ¥0.1 billion was recorded for the year ended March 31,
2002 compared to an operating loss of ¥2.7 billion for the previous fiscal
year. Operating income turned positive largely as a result of a significant
reduction in cost of connectivity and value-added services revenues.

Other Income (Expenses), Net.

A loss
of ¥943 million was recorded for other income (expenses)
 net for
the year ended March 31, 2002 compared to a gain of ¥899 million for the
previous fiscal year.

Interest income.Interest income decreased to ¥0.1 billion for the year
ended March 31, 2002 from ¥0.5 billion for the previous fiscal year, as our
U.S. dollar-denominated monetary assets decreased due to payment in U.S.
dollars made for the equity investment in our subsidiary company, IIJ America,
and connectivity costs to IIJ Americas network.

Interest expense.Interest expense increased to ¥0.7 billion for the year
ended March 31, 2002 from ¥0.6 billion for the previous fiscal year, due to an
increase in interest expenses incurred on our capitalized leases.

Foreign exchange gains (losses).For the year ended March 31, 2002, we
recorded a foreign exchange gain of ¥0.3 billion compared to a gain of ¥1.1
billion for the previous fiscal year. The gains are 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. The decrease in
foreign exchange gain was due to a decrease in our U.S. dollar denominated
monetary assets and lower levels of depreciation of the Japanese yen against
the U.S. dollar compared to last year.

Other-net.Other expenses for the year ended March 31, 2002 included
losses of ¥433 million on the write down of investments in equity securities to
reflect the decline in value considered to be other than temporary.

Loss from Operations before Income Tax Expense (Benefit).

Loss from operations before income tax expense (benefit) for the year
ended March 31, 2002 was ¥889.5 million as compared to ¥1,771.0 million in the
previous fiscal year.

Income Tax Expense (Benefit).

Income tax expense was ¥1.1 billion for the year ended March 31, 2002
compared to a ¥0.9 billion income tax benefit for the previous fiscal year.
This income tax expense was a result of an increase in the valuation allowance
for deferred tax assets, attributable primarily to the income tax effect of
unrealized gains which decreased in this period on certain available-for-sale
securities.

Minority Interests in Consolidated Subsidiaries.

Minority interests in consolidated subsidiaries amounted to income of ¥24
million for the year ended March 31, 2002 compared to income of ¥160 million
for the previous fiscal year. This decrease was a result of the improvement in
net income of IIJ Technology.

Equity in Net Loss of Equity Method Investees.

Our equity in net loss of equity method investees increased substantially
to ¥5.5 billion for the year ended March 31, 2002 from ¥4.0 billion for the
previous fiscal year. This increase resulted primarily from our equity in
the 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 related depreciation expenses.

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Net Loss.Net loss for the year ended March 31, 2002 increased to ¥7,446
million from ¥4,700 million for the previous fiscal year. While operating
income turned positive, the increase in net loss primarily reflects an increase
in equity in net loss of equity method investees and the recording of a loss
for other income (expenses), net.

B. 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
current and former 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, issuances of our common shares,
capital lease arrangements and short-term and long-term borrowings.

Cash Flows

We had cash of ¥3.6 billion at March 31, 2003 compared to ¥11.0 billion at
March 31, 2002.

The following table presents information about our cash flows during the
years ended March 31, 2001, 2002 and 2003:

|                                                    |  |                      |              |      |  |                    |               |   |             |  |               |  
|--------------------------------------------------- |  | -------------------- | ------------ | ---- |  | ------------------ | ------------- | - | ----------- |  | ------------- | -
|                                                    |  | Year ended March 31,
|                                                    |  |                     
|                                                    |  | 2001                 |              | 2002 |  | 2003              
|                                                    |  |                      |              |      |  |                   
|                                                    |  |                      |              |      |  | (Thousands of Yen) |               |   | (unaudited) | 
|Net cash provided by (used in) operating
activities |  |                      | ¥   (270,586 | )    |  |                    | ¥   1,161,213 |   |             |  | ¥   1,581,692 |  
|Net cash used in investing activities               |  |                      | (9,544,214   | )    |  |                    | (2,457,198    | ) |             |  | (7,877,921    | )
|Net cash provided by (used in) financing
activities |  |                      | 6,427,791    |      |  |                    | (1,461,901    | ) |             |  | (872,066      | )
|Effect of exchange rate changes
on cash             |  |                      | 799,277      |      |  |                    | 233,098       |   |             |  | (289,272      | )
|                                                    |  |                      |              |      |  |                    |               |   |             |  |               |  
|Net decrease in cash and cash equivalents           |  |                      | (2,587,732   | )    |  |                    | (2,524,788    | ) |             |  | (7,457,567    | )
|Cash at beginning
of the year                       |  |                      | 16,158,439   |      |  |                    | 13,570,707    |   |             |  | 11,045,919    |  
|                                                    |  |                      |              |      |  |                    |               |   |             |  |               |  
|Cash at end of the
year                             |  |                      | ¥13,570,707  |      |  |                    | ¥11,045,919   |   |             |  | ¥   3,588,352 |  
|                                                    |  |                      |              |      |  |                    |               |   |             |  |               |  

Year ended March 31, 2003
(unaudited) as compared to the year ended March 31, 2002

Net cash provided by operating activities was ¥1.6 billion for the year
ended March 31, 2003 compared to ¥1.2 billion provided for the year ended March
31, 2002. The change primarily reflected the impact of depreciation and
amortization, net changes in operating assets and liabilities,
primarily relating to accounts receivable, accounts payable and
inventories partially offset
by an operating loss for the year ended March 31, 2003.

Net cash used in investing activities was ¥7.9 billion for the year ended
March 31, 2003 compared to ¥2.5 billion for the year ended March 31, 2002.
Cash used in investing activities for the year ended March 31, 2003 included a
deposit of restricted cash which amounted to ¥5.0 billion for a cash deficiency
support agreement and payment of guarantee deposits which amounted to ¥1.3
billion for leasing of a new head office space.

Net cash used in financing activities was ¥0.9 billion for the year ended
March 31, 2003 compared to ¥1.5 billion used in financing activities for the
year ended March 31, 2002. Cash used in financing activities for the year
ended March 31, 2003 consisted primarily of payments under capital leases
funded by short-term and long-term borrowings.

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Year ended March 31, 2002 as compared to the year ended March 31, 2001

Net cash provided by operating activities was ¥1.2 billion for the year
ended March 31, 2002 compared to ¥0.3 billion used for the year ended March 31,
2001. The change was primarily a result of the improvement of operating
income.

Net cash used in investing activities was ¥2.5 billion for the year ended
March 31, 2002 as compared to ¥9.5 billion for the year ended March 31, 2001.
Cash used in investing activities for the years ended March 31, 2002 and 2001
included investments in and advances to equity method investees, mainly
Crosswave, Asia Internet Holding and Net Care, respectively, purchases of
short-term and other investments and purchases of property and equipment.

Net cash used in financing activities was ¥1.5 billion for the year ended
March 31, 2002 as compared to ¥6.4 billion used in financing activities for the
year ended March 31, 2001. Cash used in financing activities for the year
ended March 31, 2002 consisted primarily of payments under capital leases. In
the year ended March 31, 2002, we converted ¥2.0 billion of short-term
borrowings into long-term borrowings.

Liquidity and Capital Requirements

Our principal capital and liquidity needs in recent years have been for
investment in equity method investees, purchase of property and equipment,
working capital expenditures, repayment of borrowings and payment of interest.

We have traditionally met our capital and liquidity requirements through
cash flows from operating activities, long-term and short-term borrowings, and
the proceeds from issuance of securities. We currently expect that cash from
operating activities, approximately ¥13.3 billion in proceeds from our private
placements in June and September 2003 and our other sources of liquidity will be
sufficient to meet our present requirements. However, we believe that we will
likely need to raise additional funds in the future through additional equity
issuances or otherwise in order to meet our working capital and other financial
needs.

Investment in Equity Method Investees. See Item 4.B,  Our Group
Companies for information on investment in equity method investees.

Long-term and Short-term Borrowings.As of March 31, 2003, our short-term
borrowings were bank overdrafts of ¥4.8 billion. The weighted average interest
rate of our short-term borrowings was 1.375%. We increased our short-term
borrowings by ¥1.0 billion in the year ended March 31, 2003 for the repayment
of ¥0.4 billion for long-term borrowings and to cover a temporary shortage in
working capital. We also had ¥1 billion borrowing further by September 2003
by bank over draft agreements, and do not expect the banks to extend additional
amounts under these agreements.

As of March 31, 2003, we had ¥4.4 billion of outstanding long-term loans
payable which consisted of unsecured, fixed rate loans of ¥1.4 billion with a
weighted average interest rate of 1.767%, and unsecured, variable rate loans of
¥3.0 billion with a weighted average interest rate of 0.916%. We entered into
interest rate swap contracts to manage our interest rate exposure resulting in
a fixed interest rate for a portion of our long-term debt. The effective
weighted average interest rates for ¥3.0 billion of the long-term loans
outstanding at March 31, 2003 after giving effect to such swap agreements were
1.79%. On March 14, 2003, we entered into a long-term installment loan
agreement with a leasing company to finance the payment of refundable rental deposits for
our new head office. The principal of the loan is ¥1.0 billion. These loans
have maturity dates ranging from April 2003 to March 2007. On April 11, 2000
we issued ¥15.0 billion of 1.75% unsecured convertible notes due 2005. The
notes are subject to conversion at ¥19,874,689 per share on or before March 15,
2005. The notes are currently redeemable at IIJs option at
any time before March 15, 2005, in whole or in part, at par with
unpaid and accrued interest provided that the closing for our shares
for a certain period prior to giving notice of redemption is at least
140% of the conversion price.

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Annual maturities of long-term borrowings and convertible notes
outstanding as of March 31, 2003, are as follows:

|            |      |                  |             |              |  |              |         |         | 
|----------- | ---- | ---------------- | ----------- | ------------ |  | ------------ | ------- | ------- | 
|Year Ending |      |                  |             |              |  | Thousands of
|March 31    |      | Thousands of Yen |             | U.S. Dollars
|            |      |                  |             |             
|            | 2004 |                  |             | ¥  1,943,735 |  |              | $       | 16,463  | 
|            | 2005 |                  |             | 16,548,246   |  |              |         | 140,156 | 
|            | 2006 |                  |             | 1,152,056    |  |              |         | 9,757   | 
|            | 2007 |                  |             | 755,963      |  |              |         | 6,403   | 
|            |      |                  |             |              |  |              |         |         | 
|Total       |      |                  | ¥20,400,000 |              |  | $            | 172,779 |        
|            |      |                  |             |              |  |              |         |         | 

Substantially all of our short- and long-term borrowings contain
conditions that allow the banks to require us to provide collateral or
guarantees with respect to the borrowings as is customary in Japan. Our
primary banks have asked us to provide them with collateral. Our primary
banking relationships are with Sumitomo Mitsui Banking Corporation, Mizuho
Corporate Bank and UFJ Bank. The banks are also shareholders and customers of
ours. Our loans from a leasing company were secured by the rental deposits of
¥1.7 billion.

Working Capital.Our principle working capital requirements are for
domestic and international backbone costs, local access line costs, personnel
expenses and office rents.

Property and Equipment.See Item 4.D, Information on the Company 
Property, Plants and Equipment.

Lease Obligations

Operating LeasesWe have 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 primarily
non-cancelable for a minimum one-year lease period. The leases for
international backbone available as of March 31, 2003, are entered into with
carriers for a lease period of one year and are substantially non-cancelable.
We also lease office premises and certain office equipment under non-cancelable
operating leases which expire on various dates through the year 2005 and also
lease network operation centers under non-cancelable operating leases.

Lease expenses related to backbone lines for the years ended March 31,
2001, 2002 and 2003, amounted to ¥8,122,256 thousand, ¥5,656,116 thousand and
¥5,235,517 thousand, respectively. Lease expenses for local access lines for
the years ended March 31, 2001, 2002 and 2003, which are only attributable to
dedicated access revenues, amounted to ¥3,142,392 thousand, ¥3,872,101 thousand
and ¥3,861,955 thousand, respectively. Other lease expenses for the years
ended March 31, 2001, 2002 and 2003, amounted to ¥1,858,987 thousand,
¥2,764,026 thousand and ¥3,551,006 thousand, respectively.

Capital Leases We conduct our connectivity and other services by using
data communications and other equipment leased under capital lease
arrangements. The fair values of the assets at the execution of the capital
lease agreements and accumulated depreciation, amounted to ¥8,493,003 thousand
and ¥3,772,937 thousand at March 31, 2002 and ¥10,810,872 thousand and
¥5,000,233 thousand at March 31, 2003, respectively.

Leases and Commitments

As of March 31, 2003, future lease payments under non-cancelable operating
leases, including the aforementioned cancelable connectivity lease agreements
(but excluding dedicated access lines which we charge outright to customers),
and capital leases were as follows:

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|                                   |                              |   |             |        |           |   |                       |       |        |   |           |       |  |   |     |     |  |  |     |     | 
|---------------------------------- | ---------------------------- | - | ----------- | ------ | --------- | - | --------------------- | ----- | ------ | - | --------- | ----- |  | - | --- | --- |  |  | --- | --- | 
|                                   |                              |   |             |        |           |   | Payment due by period
|                                   |                              |   |             |        |           |   |                      
|                                   |                              |   |             |        |           |   | (Millions of yen)    
|                                   |                              |   |            
|                                   |                              |   | Total       |        |           |   |                       |       |        |   |           |       |  |   |     |     |  |  |    
|                                   |                              |   | contractual |        | Less than |   | 1 to 3                |       | 4 to 5 |   | More than
|                                   |                              |   | amount      |        | 1 year    |   | years                 |       | years  |   | 5 years  
|                                   |                              |   |             |        |           |   |                       |       |        |   |          
|Connectivity line operating leases |                              | ¥ | 990         |        |           | ¥ | 677                   |       |        | ¥ | 282       |       |  | ¥ | 31  |     |  |  |     |    
|Other operating leases (1)         |                              |   | 4,692       |        |           |   | 1,362                 |       |        |   | 3,130     |       |  |   | 77  |     |  |  | 123 |    
|Capital leases                     |                              |   | 6,665       |        |           |   | 2,890                 |       |        |   | 3,274     |       |  |   | 472 |     |  |  | 29  |    
|                                   |                              |   |             |        |           |   |                       |       |        |   |           |       |  |   |     |     |  |  |     |    
|                                   | Total minimum lease payments |   | ¥           | 12,347 |           |   | ¥                     | 4,929 |        |   | ¥         | 6,686 |  |   | ¥   | 580 |  |  | ¥   | 152 | 
|                                   |                              |   |             |        |           |   |                       |       |        |   |           |       |  |   |     |     |  |  |     |    



---

|Notes: |  |                                                                                    
|------ |  | -----------------------------------------------------------------------------------
|      
|(1)    |  | See Note 8 to the consolidated financial statements included in this
annual report.

In addition to the above, we have contracted for connectivity lines with
Crosswave as of March 31, 2003, that, on aggregate, require monthly payment of
¥410,729 thousand.

Purchase commitments for network system equipment outstanding at March 31,
2003, amounted to ¥620 million.

Capital Expenditures.For more information, see Item 4.B., Business
Overview  Capital Expenditures.

Application of Critical Accounting Policies

In reviewing our financial statements, you should consider the sensitivity
of our reported financial condition and results of operations to changes in the
conditions and assumptions underlying the estimates and judgments made by our
management in applying critical accounting policies.

The preparation of financial statements requires the use of estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the periods presented. Actual results may differ
from these estimates, judgments and assumptions. Note 1 of the notes to our
financial statements includes a summary of the significant accounting policies
used in the preparation of our financial statements. Certain accounting
policies are particularly critical because of their significance to our
reported results and because of the possibility that future events may differ
significantly from the conditions and assumptions underlying the estimates used
and judgments made by our management in preparing our financial statements.

We have discussed the development and selection of critical accounting
policies and estimates with our board of directors and the board of directors
has reviewed the disclosure relating to these, which are included in this
Operating and Financial Review and Prospects. For all of these policies, we
caution that future events rarely develop exactly as forecast, and even the
best estimates may require adjustment.

Useful Lives of Property and Equipment

Property and equipment, net recorded on our balance sheet was ¥9,152
million at March 31, 2003, comprising 28.5% of our total assets. The values of
our property and equipment, including purchased software and property and
equipment under capital leases, are recorded in our financial statement at
acquisition cost, and are depreciated or amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the asset. Our
total depreciation and amortization expenses for the years ended March 31,
2001, 2002 and 2003 were ¥2,576 million, ¥2,906 million and ¥3,470 million,
respectively.

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We estimate the useful lives of property and equipment, in order to
determine the amount of depreciation and amortization expense to be recorded in
each fiscal year. We determine the useful lives of our assets at the time the
assets are acquired and base our determinations on expected use, experience
with similar assets, established laws
and regulations as well as taking into account anticipated technological
or other changes. Estimated useful lives at March 31, 2003, were as follows:

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

If technological or other changes were to occur more rapidly or in a
different form than anticipated or new laws or regulations are enacted or the
intended use changes, the useful lives assigned to these assets may need to be
shortened, or we may need to sell or write-off the assets, resulting in
recognition of increased depreciation and amortization or losses in future
periods. Our losses on disposal of property and equipment for the years ended
March 31, 2001, 2002, and 2003 were ¥24 million, ¥23 million and ¥112 million,
respectively.

Ordinary maintenance and repairs are charged to income as incurred. Major
replacements and improvements are capitalized. When properties are retired or
otherwise disposed of, the property and related accumulated depreciation
accounts are relieved of the applicable amounts and any differences are
included in operating cost and expenses.

Impairment of Long-lived Assets

Long-lived assets consist primarily of property and equipment. We perform
an impairment review for our long-lived assets, whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. This analysis is separate from our analysis of the useful lives
of our assets, but it is affected by some similar factors. Factors that we
consider important which could trigger an impairment review include, but are
not limited to, the impact of the following trends or conditions:



| |  |  | significant decline in the market value of an asset;              
| | - |  | ------------------------------------------------------------------
|
| |  |  | current period operating cash flow loss;                          
|
| |  |  | introduction of competing technologies or services;               
|
| |  |  | significant underperformance of expected or historical cash flows;
|
| |  |  | significant or continuing decline in subscribers;                 
|
| |  |  | changes in the manner or use of an asset; and                     
|
| |  |  | other negative industry or economic trends.                       

When we determine that the carrying amount of a specific assets may not be
recoverable based on the existence or occurrence of one or more of the above or
other factors, we estimate the future cash inflows and outflows expected to be
generated by the assets over their expected useful lives. We estimate the sum
of expected undiscounted future cash flows based upon historical trends
adjusted to reflect our best estimate of future market and operating
conditions. If the sum of the expected undiscounted future net cash flows is
less than the carrying value of the assets, we record an impairment loss based
on the fair values of the assets. Such fair values may be based on established
markets, independent appraisals and valuations or discounted cash flows. If
actual market and operating conditions under which assets are used are less
favorable or shorter than those projected by management, resulting in reduced
cash flows, additional impairment charges for assets not previously written-off
may be required. There was no impairment loss for long-lived assets for the
years ended March 31, 2001, 2002 and 2003.

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Allowance for Doubtful Accounts and
Uncollectible Contractual Prepayments

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. At
March 31, 2002 and 2003, we maintained allowances for doubtful accounts of ¥148
million and ¥125 million, respectively. Management specifically analyzes
accounts and loans receivable including historical bad debts, customer
concentrations, customer credit-worthiness and current economic trends when
evaluating the adequacy of the allowances for doubtful accounts. If the
financial condition of our customers or debtors were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may
be required.

Deferred Tax Assets

To date, our deferred tax assets have been offset by a valuation
allowance. We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event we
were to determine that we would be able to realize the deferred tax assets in
the future in excess of the net recorded amount, an adjustment to the valuation
allowance and deferred tax benefit would increase income in the period such
determination was made.

Valuation of Investments

The balance of our investments in securities is significant and the
valuation of such investments requires us to make judgments using information
that is generally uncertain at the time, such as assumptions regarding future
financial conditions and cash flows. As at March 31, 2003, we had investments
in securities classified as noncurrent assets in the amount of ¥3,040 million.
We routinely assess the impairment of our investments by considering whether
any decline in value is other than-temporary. The factors we consider are:



| |  |  | the length of time and the extent to which the market value
has been less than cost;                                                                                                                                                                                                                                             
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the financial condition and near-term prospects of the
issuer, including any specific events which may influence the
operations of the issuer such as changes in technology that may
impair the earnings potential of the investment; and                                                                                        
|
| |  |  | our intent and ability to retain the investment in the issuer
for a period of time sufficient to allow for any anticipated
recovery in market value. If a decline in value occurs and is
deemed to be other-than-temporary, an impairment loss will be
recorded to write-down the carrying value of the investment to fair
value.

If, after taking into account these considerations, the decline is judged
to be other than temporary, the cost basis of the individual security is
written down to a new cost basis and the amount of the write-down is accounted
for as a realized loss.

Losses on write-down of investments in marketable and nonmarketable
securities for the years ended March 31, 2002 and 2003 amounted to ¥433 million
and ¥191 million, respectively, and are included in other expenses.

New Accounting Standards

In June 2001, the FASB issued SFAS No. 143, Accounting for Assets
Retirement Obligation, which is effective for fiscal year beginning after June
15, 2002. The pronouncement addresses the recognition and remeasurement of
obligations associated with the retirement of tangible long-lived assets and
the associated assets retirement costs. We do not expect this pronouncement to
have a material impact on our consolidated financial position or results of
operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entitys commitment
to an exit plan, and
establishes that fair value is the objective for initial measurement of
the liability. SFAS No. 146 is effective for exit and disposal activities
initiated after December 31, 2002. We do not expect this pronouncement to have
a material impact on our consolidated financial position or results of
operations.

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In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, except for certain provisions, and for hedging
relationship designated after June 30, 2003. We do not expect this
pronouncement to have a material impact on our consolidated financial position
or results of operations.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities and how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The provisions of EITF Issue No. 00-21
apply to revenue arrangements entered into in fiscal periods beginning after
June 15, 2003. We are currently assessing the impact of the adoption of EITF
Issue No. 00-21 upon our financial position and results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements in this
interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN 45 did not have a
material effect upon our financial position or results of operations.

C. Research and Development, Patents and Licenses, etc.

See the information in Item 4.B, Business Overview  Research and
Development.

D. Trend Information.

Factors Affecting Our Future Financial Results

We expect that the following are the most significant factors likely to
affect our financial results and those of our consolidated subsidiaries. You
should also consult Item 3.D, Risk Factors and the other portions of this
Annual Report on Form 20-F for additional factors affecting our financial
results.

Revenues

We derive our revenues primarily from recurring monthly fees from our
Internet access services and our value-added services, as well as one-time
project fees and monthly operating fees from systems integration services.
We are seeking to increase our revenue growth by enhancing our
Internet-access services through the introduction of a greater variety of
access options and bandwidth options, by expanding our value-added services,
including data center services and systems integration 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.

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Connectivity and value-added services revenues.Our connectivity and
value-added services revenues accounted for 50.7% of our revenues for the year
ended March 31, 2003, 56.9% for the year ended March 31, 2002, and over 60% of
our revenues for the year ended March 31, 2001.

Dedicated access services.Dedicated access services accounted for 31.4%
of our revenues for the year ended March 31, 2003, 35.8% for the year ended
March 31, 2002, and 40.1% for the year ended March 31, 2001. Although the
significance of these services to the overall mix of total revenues has been
declining for the past several years, dedicated access services have been the
foundation of our total revenues.



| |  |  | Demand for Higher Bandwidth Services.Demand for higher
bandwidth services continues to increase. Average contracted
bandwidth for dedicated access services including Internet Data
Center Connectivity Services increased to 42.0 Gbps for the year
ended March 31, 2003 from 11.4 Gbps for the previous fiscal year.
In addition, average contracted bandwidth for our IP Service jumped
to approximately 20 Mbps for the year ended March 31, 2003 from 9.0
Mbps for the previous fiscal year. The number of IP Service
contracts for the highest range of bandwidth, 3 Mbps-1.2 Gbps,
increased to 248 for the year ended March 31, 2003 from 156 for the
year ended March 31, 2002, which were 37.4 % and 25.5% of our IP
revenues, respectively. Average revenues per contract has decreased
to approximately ¥1.1 million at the end of March 2003 from ¥1.3
million at the end of March 2002. As revenue per contract is
decreasing, we will try to acquire new customers and increase the
bandwidth of existing customers. If we fail to maintain the quality
of our services which our customers value and appreciate, and/or
fail to differentiate ourselves from our competitors, our revenues
may be adversely affected.                                                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Shift to Lower-Priced Services by Lower-Bandwidth Customers.
Lower-bandwidth subscribers have opted to shift to lower-cost
services such as our second-tier connectivity services and the
service offerings of other ISPs because these subscribers prefer
lower-priced services. To increase the number of subscribers to our
other dedicated access services, we continue to provide second-tier,
lower-priced new Internet access services in order to remain
competitive, though these lower-priced services generate lower total
revenues due to lower unit prices resulting from fierce price
competition. As a result, the number of dedicated access service
contracts increased to 5,308 for the year ended March 31, 2003 from
3,620 for the year ended March 31, 2002, despite the decrease in the
number of IP service contracts. We had a rapid increase in the
number of subscribers to our second-tier service that we refer to as
IIJ DSL/F, an access service over ADSL lines at maximum 1.5 Mbps
speed. In this second-tier category, IIJ Economy and IIJ T1
Standard used to be the growth driver, but due to the advent of
inexpensive DSL access lines subscribers have been switching from
IIJ Economy to IIJ DSL/F, which is faster and more inexpensive. If
we fail to introduce second-tier services accommodating inexpensive
access lines such as ADSL, FTTH (Fiber-to-The-Home) and
Ethernet-based lines in a timely manner, our customers may switch to
our competitors services and our revenues may be adversely affected
as this is one of the fastest growing segments of the Japanese
access market.

Dial-up access services.Dial-up access services, which include both
services for corporate customers and individual users, accounted for 7.2% of
our revenues for the year ended March 31, 2003, 9.1% for the year ended March
31, 2002, and 13.9% for the year ended March 31, 2001.



| |  |  | Popularity of OEM Services. A primary focus of our efforts
to increase our revenues from individual consumers is our range of
OEM services, which have gradually been increasing. For example,
Excite Japan markets and sells Internet access services to
individual customers under their own names but provide such services
through our Internet network infrastructure. Our ability
to introduce and expand these services successfully on an OEM basis
will affect our revenue growth from this source.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Attractiveness of Service Offerings. Our revenues from
dial-up access services will be affected primarily by the quality of
service provided to subscribers and our ability to attract new
customers by offering remote access solutions in combination with
dial-up access and security services.                                                                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Brand-Name Recognition. Our ability to capture market share
among individual consumers 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. As we
have reduced our advertising expenditures substantially and do not
expect our brand name recognition to substantially increase, we are
focusing on OEM services.

Systems integration revenues, including related equipment sales revenues.
We are currently targeting systems integration to drive growth in revenues and
operating income. For the year ended March 31, 2003, systems integration
revenues, including related equipment sales revenues increased by 4.6% from the
previous fiscal year.



| |  |  | Acceptance of Outsourcing Projects. The degree to which
Japanese corporations adopt the outsourcing of system integration
needs will have a significant impact on our system integration
revenues.                                                                                                                                                                                                                                                                                                                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Revenue Composition.Over the long term, we seek to improve
gross margins through systems integration sales. The gross margin
for systems integration services was 12.8% for the year ended March
31, 2003 in comparison with 14.2% for the year ended March 31, 2002.
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.                                                                                             
|
| |  |  | Synergies with connectivity services.Most of our systems
integration customers become Internet access service customers as
well, and we expect these relationships to continue. As with other
equipment sales, our revenues in any particular fiscal quarter may
vary substantially as a result of concentrated sales from large
projects.                                                                                                                                                                                                                                               
|
| |  |  | Seasonality.The primary seasonal variations in systems
integration revenues appear to relate to budgetary cycles of
Japanese companies 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. Also, lack
of large-scale contracts or deferred contracts in the business may
adversely affect our revenue growth in systems integration.

Value-Added Services Revenues.Our value-added services consist of
network security services, data center facility services and operation and
management services. For the year ended March 31, 2003, Internet data center
revenues decreased to ¥1,442 million from ¥1,448 million for the previous
fiscal year and increased from ¥1,063 million for the year ended March 31,
2001. We have seen an increase in the number of customers to 156 at the end of
March 2003, from 110 at the end of March 2002 and 56 at the end of March 2001.



| |  |  | Degree of Acceptance of Value-Added Services. The growth in
our revenues from value-added services will depend on whether and to
what extent Japanese corporations outsource network security
services, server and network management and operations as data
traffic grows. Although the Internet data center market is
experiencing strong price competition, we 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 our group companies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Other Equipment Sales Revenues. Our other equipment sales
revenues consist primarily of sales of networking and other related
equipment, other than that provide in connection with our systems
integration services. Other equipment sales revenues can fluctuate
significantly, in accordance with the absence or addition of a
single large order, and are accordingly difficult to forecast.                                                                                                                                                                     

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Other Revenues. As we no longer expect to provide support services to
Crosswave to the same extent in the future if at all, we expect this will have
a negative impact on other revenues.

Additional
Factors Affecting Revenues.



| |  |  | Increase in Business Usage. Our revenues will be affected by
the extent and speed with which businesses in Japan exploit the
Internet and network solutions to their full potential, including,
for example, electronic transactions between businesses and
expanding the range of devices that access the Internet. Such
services require high-quality and high-capacity connectivity
services for both businesses and individuals. Such services also
require provision of total network solutions including various
Internet access services, systems integration and other value-added
services which we believe we are well positioned to provide. The
degree of business usage will also depend upon a variety of factors
including:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | technological advances, reliability of security
systems and users familiarity with and confidence in new
technologies;                                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the rate at which Japanese companies in certain
industries significantly increase their Internet usage,
particularly the financial, manufacturing and retail segments;
and
|
| |  |  | corporate budgets for expenditures for
information technologies, including Internet-related items.                                                                        



| |  |  | Range of Service Offerings.To increase our revenues from
business users, we have increased the access and connectivity
options to include fiber optic lines and ADSL lines. We have also
completed our multi-site Internet data centers and expanded our
service offerings to include systems management and monitoring. We
believe these steps will allow us to sell a greater variety of
services to our high-end corporate users and to capture a greater
amount of the current growth and demand. However, we will still be
strongly dependent on increasing acceptance of our services by large
Japanese companies and by increases in their information technology
(IT) budgets. We expect Internet usage to continue to grow rapidly
in Japan and that businesses will continue to diversify their uses
of the Internet. Our ability to offer a broad range of services to
meet our customers demands will significantly influence our future
revenues.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs and Expenses

Cost of connectivity and value-added service revenues.Our primary cost
of connectivity services and value-added services revenues is the leasing fees
that we pay for the leased lines which comprise our network and for the
dedicated local access lines that our subscribers use to connect with our
network. Other primary components of our costs are depreciation and
amortization of capital leases for network equipment, 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; however, due to a rapid decrease in procurement prices for
international backbone lines, our costs have decreased as a result. For the
year ended March 31, 2003, our leased line and other connectivity costs were
equal to ¥10.6 billion or 24.2% of our revenues. For the previous fiscal year,
these costs were equal to ¥10.9 billion, or 27.3% of our revenues.



| |  |  | Domestic Backbone Cost.Domestic backbone cost increased to
¥3.6 billion for the fiscal year ended March 2003 from ¥3.2 billion
for the fiscal year ended March 2002. We expect domestic backbone
costs to continue to rise for fiscal year ending March 31, 2004. If
the rate of increase is much greater than we expect and if we do not
generate revenues from our connectivity services as traffic
increases, our earnings and results of operations will be adversely
affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | International Backbone Cost. As expected, our international
backbone costs have declined in absolute terms to ¥1.6 billion for
the fiscal year ended March 2003 from ¥2.5 billion for the fiscal
year ended March 2002. This was due to a rapid decrease in
procurement prices for international backbone lines as 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. These lower prices in the procurement market helped us
reduce our international backbone costs. As prices have already
dropped substantially, even if international backbone costs continue
to drop in the next fiscal year, we do not expect decreases to be
substantial. If trans-Pacific leased line costs were to rise
drastically in contrast with our expectation, our earnings and
results of operations would be adversely affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Dedicated Local Access Line Costs. Dedicated local access
line costs remained at the same level of ¥3.9 billion for the year
ended March 2003 as the previous fiscal year. Other connectivity
costs ¥1.5 billion for the fiscal year ended March 2003 and ¥1.4
billion for the fiscal year ended March 2002. We collect dedicated
local access line fees from the subscribers and pay these fees over
to the carriers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Costs of Systems Integration Revenues and Equipment Sales.Our cost of
systems integration revenues and equipment sales generally increases in tandem
with systems integration revenues and equipment revenues but we also incur
significant system integration costs up front in connection with the provision
of new types of system integration service or commencement of a systems
integration project. As a result, our margins tend to improve as the number of
our customers grow and to the extent we provide ongoing systems integration
work for existing customers. The main determinant of whether our costs will be
high relative to our revenues is whether we are able to generate significantly
higher margin systems integration work. To do so, we must generate systems
integration work that relies more heavily on our engineering and technological
expertise instead of systems integration work that primarily focuses on the
delivery of networking equipment. By doing more planning, designing and
engineering-related work rather than just equipment procurement, we believe
that not only will we be able to increase our margins, but we will also be able
to increase customer satisfaction and our subscriber retention 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 started to generate higher margins
for the year ended March 2003. Most of the time and expense required for this
service has been already incurred.

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. This increase will also 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.

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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 and impairment losses on available-for-sale
securities.



| |  |  | Interest Expense. 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 and for other investments, interest expenses will also
increase. Interest income and interest expenses are also affected
by the fluctuation of market interest rates.   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Foreign Exchange Gains Losses.As we no longer have
substantial amounts of dollar-denominated deposits or expenses, we
do not expect foreign exchange losses and gains to be significant in
the future.                                                                                                                                                                                                                                       
|
| |  |  | Impairment Losses.We also hold a large amount of other
investments, including available-for-sale securities. The book
value of other investments are affected by the fluctuation in the
market price or the decrease in fair values of non-marketable
investments. If the market price or fair value per share has an
other than temporary decline, lower than the book value per share,
we will have impairment losses on other investments.

Equity in Net Loss of Equity
Method Investees.
We recorded an aggregate equity in net loss of equity method investees
of ¥12.8 billion, comprised of equity method net loss and
impairment loss on investment in and deposits for Crosswave. As we
have written off our equity investment in Crosswave entirely and a
security deposit made to commerical banks on behalf of Crosswave, we
do not expect a recurrence of this charge in the fiscal year ending
March 31, 2004. We do, however, expect to write off in the year
ending March 31, 2004, loans in the amount of ¥1.7 billion extended to
Crosswave in May and June, 2003, and accounts receivable in the
amount of approximately ¥0.4 billion. We also may incur higher costs
of connectivity services if Crosswave charges higher fees or we are
required to switch to an alternative provider.




Item 6. Directors and Senior Management and Employees.

A.     Directors
and Senior Management.

Our directors, executive officers and statutory auditors as of September
1, 2003 were:

|                  |  |                                                                |  |                |  |                      |  |                     |  |                  |       | 
|----------------- |  | -------------------------------------------------------------- |  | -------------- |  | -------------------- |  | ------------------- |  | ---------------- | ----- | 
|                  |  |                                                                |  |                |  |                      |  | Initial Date of     |  |                  |       | 
|                  |  |                                                                |  |                |  |                      |  | Appointment as      |  | Number of IIJ   
|                  |  |                                                                |  |                |  |                      |  | Director, Executive |  | shares owned    
|                  |  |                                                                |  |                |  |                      |  | Officer or          |  | as of August 31,
|Name              |  | Position                                                       |  | Date of Birth  |  | Current Term Expires |  | Statutory Auditor   |  | 2003            
|                  |  |                                                                |  |                |  |                      |  |                     |  |                 
|Koichi Suzuki     |  | President, Chief
Executive Officer and
Representative Director |  | Sept. 3, 1946  |  | June 2005            |  | December 1992       |  |                  | 2,320 | 
|Toshiya Asaba     |  | Managing Director and
Co-chief Technology
Officer              |  | June 12, 1962  |  | June 2005            |  | June 1999           |  |                  | *     | 
|Hideshi Hojo      |  | Managing Director                                              |  | Dec. 22, 1957  |  | June 2005            |  | June 2000           |  |                  | *     | 
|Yasuhiro Nishi    |  | Director, Chief Financial
Officer and Chief
Accounting Officer |  | May 8, 1959    |  | June 2005            |  | June 1999           |  |                  | *     | 
|Kazumasa Utashiro |  | Director and Co-chief
Technology Officer                       |  | Sept. 23, 1960 |  | June 2005            |  | June 2001           |  |                  | *     | 
|Takamichi Miyoshi |  | Director                                                       |  | May 5, 1963    |  | June 2004            |  | June 2002           |  |                  | *     | 
|Hideki Matsushita |  | Standing Statutory Auditor                                     |  | Sept. 20, 1942 |  | June 2004            |  | June 1998           |  |                  |      | 
|Bumpei Katayama   |  | Statutory Auditor                                              |  | Feb. 16, 1954  |  | June 2004            |  | June 2002           |  |                  |      | 
|Yoshihiko Habe    |  | Statutory Auditor                                              |  | June 7, 1951   |  | June 2007            |  | June 2003           |  |                  |      | 



---

|*  |  | Owns less than 1% of outstanding shares of IIJs common stock.                                                                                                                                                                                                                                                 
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|1. |  | Pursuant to the Share Subscription Agreement between IIJ and NTT, NTT
will have the right to nominate up to three persons to serve as either directors or
statutory auditors, subject to approval at a meeting of
shareholders, and to appoint observers to the board prior to the
appointment of such persons.

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Koichi Suzukihas been our President and Representative Director since
April 1994, and has over 20 years of experience in the computer and
communication industry. In addition, Mr. Suzuki is the Representative Director
of IIJ Media Communications, IIJ Technology, Net Care, IIJ America, Internet
Multifeed, Asia Internet Holding, and AIH Korea. He also serves as a Chairman
of IIJ America and a Director of Atom, Asia Internet Holding
(Taiwan), i-Heart, Inc. and AyalaPort Makati, Inc. He has been appointed
as a council member of the Advanced Information and Telecommunications Network
Society Promotion Headquarter by the Japanese government since January 2001.
From October 1998 to August 2003, Mr. Suzuki was President and a Representative
Director of Crosswave Communications and its subsidiaries, and from September
2000 to August 2003, Mr. Suzuki was a Representative Director of Crosswave
Service Inc. and Crosswave facilities Inc. From December 1992 to April 1994,
Mr. Suzuki was a Director of IIJ. Prior to joining us, Mr. Suzuki was employed
at Japan Management Association where he served as a general manager.

Toshiya Asabahas served as a Managing Director of IIJ since June 2002, as
a Co-Chief Technology Officer since May 1999 and as a Division Director of the
Business Development Department since August 2003. Mr. Asaba is also a
Director of IIJ America, Internet Multifeed, Asia Internet Holding and Asia
Internet Holding (Taiwan). From October 1998 to May 2000, Mr. Asaba was a
Director of Crosswave and from May 2000 to August 2003. From 1995 to June
1999, Mr. Asaba was a General Manager, Network Engineering Division. Mr.
Asaba joined us in 1992. Mr. Asaba has over ten years of Internet experience
including three years of Internet-related research experience and seven years
of Internet backbone engineering experience, including network design, routing
and traffic management.

Hideshi Hojohas served as a Managing Director of IIJ since June 2002 and
as a Division Director of the Sales Department since August 2003. Mr. Hojo is
also a Director of Net Care and Asia Internet Holding. From February 1998 to
April 2001, Mr. Hojo acted as a General Manager of Sales Division, from April
2001 to June 2002, as a Deputy Division Director of the Sales & Marketing
Department and from June 2002 to August 2003, as a Division Director of the
Sales & Marketing Department. Mr. Hojo joined us in 1996. Prior to joining
us, Mr. Hojo had 16 years of experience in the field of sales working for the
Itochu Group.

Yasuhiro Nishihas served as a Director of IIJ since June 1999, as a Chief
Financial Officer and Chief Accounting Officer since May 1999 and as a Division
Director of Administrative Department. In addition, Mr. Nishi serves as
President of Asia Internet Holding (Taiwan), as a Director of Net Care, as
Statutory Auditor of Query Solutions Co., Ltd., Cyber Net Communications Inc.
and Financial System Service Provider Co., Ltd. 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.

Kazumasa Utashirohas served as a Director of IIJ since June 2001, as our
Co-Chief Technology Officer since May 1999 and as a General Manager of Service
Administration Division, Business Development Department. 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, Inc.

Takamichi Miyoshihas served as a Director of IIJ since June 2002 and as a
General Manager of Strategy Planning Division, Business Development
Department. He also serves as Chief Technical Adviser of IIJ Technology. Mr.
Miyoshi joined us in April 1993. From October 1994 to March 1998, he acted as
General Manager of Network Operations and Systems Administration Division, from
April 1998 to June 2001 as General Manager of Technology Planning Division and
from July 2001 to August 2002 as General Manager of Network Operations and
System Administration Division.

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.

Bumpei Katayamahas served as a Statutory Auditor of IIJ since June 2002.
Mr. Katayama has been General Manager of Information and Telecommunications
Division of Sumitomo Corporation since April 2001. He started working at
Sumitomo Corporation in April 1976.

Yoshihiko Habehas served as a Statutory Auditor of IIJ since June 2003.
Mr. Habe has been Deputy Chief Operating Officer of the Information Technology
& Telecommunication Division and General Manager of the IT & Telecommunication
Business Department, Aerospace, Electronics & Multimedia Company, Itochu
Corporation since April 2003. He started working at Itochu
Corporation in April 1975.

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B. Compensation.

For the year ended March 31, 2003, the aggregate compensation we paid or
accrued for all of our executive officers, directors and statutory auditors was
approximately ¥194 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 they have been granted options to
acquire a total of 295 shares, equivalent to 590,000 ADSs, or approximately
1.2% of our total outstanding shares on that date. Options to acquire an
aggregate of 100 shares were granted to the executive officers and directors 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 and has been
subsequently adjusted to ¥10,817,086 as a result of issuances of common
shares. The options vest over two years and will be exercisable at various
times from two years to ten 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 seven or eight years
from the date of grant at an exercise price of ¥300,000 and was purchased for
1% of the exercise price.

On August 2, 2001, options to purchase a total of 395 shares, equivalent
to 790,000 ADSs, or approximately 1.8% of our total outstanding shares on that
date, were granted to 44 directors and employees. The option exercise price
for the shares was determined by setting the price 5% above the 30-days average
of the closing market prices beginning 45 days prior to the date of the grant
which was ¥2,018,306 per share and has been adjusted to
¥1,672,239 as a result
of an issuance of common shares. The options are exercisable at various times
from two years to ten years from the date of grant.

C. Board Practices.

Information required by this item is set forth in Items 6.A. and 6.B. of
this annual report.

Board Resolutions. Our articles of incorporation provides that a
resolution of the board of directors is to be approved by the affirmative vote
of a majority of the directors present at a meeting of the board of directors
at which a majority of all directors are present.

There is no provision in our articles of incorporation as to a directors
authority to vote on a proposal, arrangement or contract in which the director
is materially interested, but the Commercial Code of Japan and our Regulations
of the Board of Directors provide that such a director is required to refrain
from voting on such matters at the board of directors meetings.

A meeting of the board of directors is to be convened and chaired by the
president/director. Should the president/director be unable to so act, another
director shall convene and chair such meeting in his/her place in the order
predetermined by a resolution of the board of directors.

The notice of convocation of a meeting of the board of directors shall be
given to each director and statutory auditor at least three (3) days prior to
the day set for such meeting; provided that this period may be shortened in
extraordinary circumstances.

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Exemption From Some Corporate Governance Requirements of Nasdaq. Pursuant
to home country practices exemptions granted to us by the Nasdaq National
Market, we are permitted to follow certain corporate governance practices
complying with relevant Japanese laws, which are different from those required
for U.S. domestic companies under Nasdaqs listing standards. Nasdaq rules and
our current practices relating to corporate governance have the following
significant differences:



| |  |  | Audit Committee. Nasdaq requires that a U.S. domestic company
registered with Nasdaq have an audit committee consisting of at
least three independent directors, and that the audit committee be
charged with the responsibility of selecting, monitoring and
communicating with the outside auditor of the company. We do not
have an audit committee with functions called for by Nasdaq rules.                                                                                                                                                                                                                                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Shareholder Approval Policy. Pursuant to the amendment to the
corporate governance standards that was approved by the Securities
and Exchange Commission on Jun 30, 2003, Nasdaq requires, with
limited exceptions, that shareholder approval be obtained with
respect to any stock option or purchase plan and any other
equity-compensation plan pursuant to which options or stock may be
acquired by officers, directors, employees or consultants. We
follow relevant Japanese laws which, as discussed in Rights of
Shareholders of our Common Stock under Item 10.B. of this annual
report, generally require us to obtain shareholder approval only if
stock options are to be issued with specially favorable
conditions.

Nasdaq also requires that, with certain exceptions specified in its rules,
in connection with acquisition of stock or assets of another company,
shareholder approval be obtained prior to issuance of common stock or
securities convertible into or exercisable for common stock (1) if any
director, and officer or substantial shareholder has a 5% interest, or all of
them collectively have a 10% interest, in the stock or assets and the issuance
would increase the outstanding common shares or voting power of these parties
by more than 5%, and (2) if due to the issuance, the voting power of the common
stock held by these parties equals or exceeds 20% of the voting power
outstanding before the issuance or if the number of shares of the common stock
held by these parties equals or exceeds 20% of the number of shares outstanding
before the issuance. We follow relevant Japanese laws which, as discussed in
Rights of Shareholders of our Common Stock under Item 10.B. of this annual
report, generally require us to obtain shareholder approval with respect to the
issuance of new shares at a specially favorable price or issuance of bond
with share acquisition rights with specially favorable terms or of
acquisition rights with specially favorable terms to person other than
shareholders.

Proposed Corporate Governance Standards of Nasdaq. On October 9, 2002,
the National Association of Securities Dealers, Inc., through its subsidiary,
The Nasdaq Stock Market, Inc., filed with the Securities and Exchange
Commission proposed changes to its corporate governance standards. The areas
of corporate governance covered by the proposed changes include the definition
and role of independent directors, the responsibilities of the audit committee
and codes of conduct. Subsequently, on March 11, 2003, Nasdaq filed with the
Securities and Exchange Commission Amendment No. 1 to its proposed rule
changes. Also, in April 2003, the Securities and Exchange Commission
promulgated Rule 10A-3 pursuant to Section 301 of the Sarbanes-Oxley Act,
requiring self-regulatory organizations and Nasdaq to implement the provisions
of that rule regarding listed company audit committees. In addition, on June
30, 2003, the Securities and Exchange Commission approved the amendment to
Nasdaqs corporate governance standards relating to shareholder approval of
equity compensation plans, which is described under Shareholder Approval
Policy above. Nasdaq may further amend its proposed rule changes in order to
reflect the requirements of Rule 10A-3. The proposed rule changes, as amended,
will become effective upon the Securities and Exchange Commissions approval.

Pursuant to the requirements of Rule 10A-3, those provisions of the
amended corporate governance standards that implement the requirements of Rule
10A-3 will also be applicable to listed non-U.S. companies. However, the
proposed rule changes, as amended, will generally continue to grant home
country practices exemptions to non-U.S. companies listed on Nasdaq, including
us. Among such requirements, a foreign private issuer listed on Nasdaq will be
required to have an audit committee consisting of at least three directors all
of whom must be independent under the standards set forth in paragraph (b) of
Rule 10A-3, and the audit committee will be required to be directly responsible
for the appointment, compensation, retention and oversight of the work of the
accounting firm engaged (including resolution of disagreements between
management and the auditor regarding financial reporting) for the purpose of
preparing or issuing an audit report or performing other audit, review or
attest services for the issuer, unless one or more of the exemptions set forth
in Rule 10A-3 apply. We expect that, pursuant to paragraph (a)(5) of Rule
10A-3, the amended corporate governance standards of Nasdaq implementing the
requirements of the rule will become applicable to foreign private issuers
listed on Nasdaq on July 31, 2005.

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As described in this Item 6.C, we have a board of corporate auditors which
examines our financial statements and business reports which are submitted by
the board of directors to the general meeting of shareholders and supervises
the administration of our affairs by the directors. We plan to take
appropriate steps with respect to
our corporate governance system by July 31, 2005 so that our board of
corporate auditors would satisfy the conditions set forth in paragraph (c)(3)
of Rule 10A-3 required to avail ourselves to the general exemption provided by
that paragraph from the amended corporate governance standards of Nasdaq
implementing the requirements of Rule 10A-3, including the requirements
relating to the independence of the audit committee members and
responsibilities of the audit committee.

The rights of ADR holders, including their rights relating to corporate
governance practices, are provided in the deposit agreement which is
incorporated by reference as an exhibit to this annual report.

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, 2003, we had 894 employees, including employees of our
consolidated subsidiaries. Approximately 609 of these employees were in our
engineering division, 207 in our sales division and 78 in our administrative
division. The average number of temporary/part-time staff for the year ended
March 31, 2003 was approximately 100. We had 469 employees as of March 31,
2001 and 775 employees as of March 31, 2002. Our employees are not members of
any union. Except for 14 employees in the United States, employed in our
subsidiary IIJ America, all of our employees work in Japan.

E. Share Ownership.

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

Stock Option Plan

In June 2001, we implemented a stock option plan under which options to
acquire a total of 395 shares or 790,000 ADS equivalents, or approximately 1.8%
of total outstanding shares on that date, were granted to 44 directors and
employees on August 2, 2001. The option exercise price for the shares was
determined by setting the price 5% above the 30-days average of the closing
market prices beginning 45 days prior to the date of the grant which was
¥2,018,306 per share and has been adjusted to ¥1,672,239 as
a result of issuances of common shares. The options are exercisable at various times from
two years to ten years from the date of grant.

Prior to the above stock option plan, in May 2000, we implemented a stock
option plan under which our directors and employees were granted options to
acquire a total of 295 shares or 590,000 ADS equivalents, or approximately 1.2%
of total outstanding shares on that date. The options were granted to 34
directors and employees on May 31, 2000. The option exercise price was
determined by selling 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 and has been subsequently adjusted to
¥10,817,086 as a
result of issuances of common shares. The options are exercisable at various
times from two years to ten years from the date of grant.




Item 7. Major Shareholders and Related Party Transactions.

A.     Major Shareholders.

The following table shows information regarding beneficial ownership of
our common stock as of September 17, 2003 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.

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|                                                              |  |                    |        |            |  |  |       | 
|------------------------------------------------------------- |  | ------------------ | ------ | ---------- |  |  | ----- | 
|                                                              |  | Shares of         
|                                                              |  | Common Stock      
|                                                              |  | Beneficially Owned
|                                                              |  |                   
|Name of Beneficial Owner                                      |  | Number             |        | Percentage
|                                                              |  |                    |        |           
|Nippon Telegraph and Telephone Corporation and affiliates (1) |  |                    | 12,135 |            |  |  | 31.63 | 
|Koichi Suzuki and affiliates                                  |  |                    | 2,320  |            |  |  | 6.05  | 
|Sumitomo Corporation                                          |  |                    | 2,107  |            |  |  | 5.49  | 
|Itochu Corporation                                            |  |                    | 2,032  |            |  |  | 5.44  | 
|Directors and executive officers as a group (2)               |  |                    | 2,554  |            |  |  | 6.66  | 



---

|(1) |  | Includes Nippon Telegraph and Telephone Corporation, which owns 10,095
shares, or 26.32%, and NTT Communication Corporation, which owns 2,040
shares, or 5.32%.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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%.       

On June 27, 2003, we issued 3,265 of our common shares to investors in
Japan for an aggregate amount of ¥1,365,423,000 in a private placement in
Japan. As a result of this transaction, the total number of issued common
shares after the private placement increased to 25,745.

On September 17, 2003, we issued 12,615 shares of our common stock for an
aggregate amount of ¥12,000,649,500 in a private placement in Japan. As a
result of the transaction the total number of issued common shares increased to
38,360, and Nippon Telegraph and Telephone Corporation and its affiliates
increased their ownership from 5.6% to 31.6%. The new shares were purchased by
Nippon Telegraph and Telephone Corporation, NTT Communications Corporation,
Itochu Corporation, Sumitomo Corporation and other existing shareholders in
Japan.

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 us.
Under our share subscription agreement with NTT, we have agreed that NTT has
the contractual right to nominate up to three persons to serve as either
directors or statutory auditors subject to approval by our shareholders at a
meeting of shareholders.

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, 2003, 6,093 shares were held in the
form of 12,186,000 ADSs.

According to The Bank of New York, depositary for our ADSs, as of March
31, 2003, there were six ADR holders of record in the United States. According
to our register of shareholders, as of March 31, 2003, there were 92 holders of
common stock of record worldwide. As of March 31, 2003, the Bank of New York
was the sole recordholder of our common stock in the United States and its
shareholdings represented approximately 27.1% 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.

We have an employee stock holding association which holds 268 shares of
common stock, or 1.19% of our outstanding shares, as of March 31, 2003. The
association provides designated employees with the opportunity to purchase
shares at market value. Shares are held in the name of the employee stock
purchase program until the employee resigns or retires.




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, 2003 are
presented as follows:

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|                    |  |                 |           | 
|------------------- |  | --------------- | --------- | 
|                    |  | Millions of Yen
|                    |  |                
|Accounts receivable |  |                 | ¥     219 | 
|Accounts payable    |  |                 | 62        | 
|Revenues            |  |                 | 1,460     | 
|Costs and expenses  |  |                 | 1,402     | 

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.

As of March 31, 2003, IIJ and IIJ Technology had loans to some equity
method investees of which the carrying amount was ¥165 million.

Since April 1, 2002 through March 31, 2003, IIJ has paid ¥2,536 million
for international and domestic backbone and local access line costs to NTT
affiliated companies such as NTT Communications, NTT East and NTT West. In
addition, we paid ¥456 million for co-location costs and telecommunication
expenses to NTT East and NTT West. We received payments of ¥263 million for
OEM services and Internet connectivity services from NTT Communications, NTT
East and NTT West. These transactions were based on their tariffs. We do not
have any outstanding loans between NTT and its affiliated companies and us.

For information regarding transactions with Crosswave, see Item 4.B.,
Business Overview  Crosswave Communications Inc. Transactions with
Crosswave.

C. Interests of Experts and Counsel.

Not applicable.




Item 8. Financial Information.

Financial Statements

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

Legal or Arbitration Proceedings

The information required by this item is set forth in Item 4.B.

Dividend Policy

Due to IIJs accumulated deficit and Shareholders capital deficiency, IIJ
is accordingly unable to legally make and currently has no plans for dividend
distributions.




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.

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

|                           |                                        |  |            |       |     |  |       |       | 
|-------------------------- | -------------------------------------- |  | ---------- | ----- | --- |  | ----- | ----- | 
|                           |                                        |  | NASDAQ ($)
|                           |                                        |  |           
|                           |                                        |  | High       |       | Low
|                           |                                        |  |            |       |    
|Year ended March 31, 2000* |                                        |  | 132.81     |       |     |  | 23.69 |      
|                           | Quarter ended June 30, 2000            |  |            | 73.00 |     |  |       | 28.50 | 
|                           | Quarter ended September 30, 2000       |  |            | 62.50 |     |  |       | 31.50 | 
|                           | Quarter ended December 31, 2000        |  |            | 43.44 |     |  |       | 8.25  | 
|                           | Quarter ended March 2001               |  |            | 14.94 |     |  |       | 6.75  | 
|Year ended March 31, 2001  |                                        |  | 73.00      |       |     |  | 6.75  |      
|                           | Quarter ended June 30, 2001            |  |            | 11.88 |     |  |       | 6.50  | 
|                           | Quarter ended September 30, 2001       |  |            | 8.40  |     |  |       | 4.25  | 
|                           | Quarter ended December 31, 2001        |  |            | 7.45  |     |  |       | 4.25  | 
|                           | Quarter ended March 2002               |  |            | 6.80  |     |  |       | 5.05  | 
|Year ended March 31, 2002  |                                        |  | 11.88      |       |     |  | 4.25  |      
|                           | Quarter ended June 2002                |  |            | 7.34  |     |  |       | 3.10  | 
|                           | Quarter ended September 2002           |  |            | 6.50  |     |  |       | 2.01  | 
|                           | Quarter ended December 2002            |  |            | 4.10  |     |  |       | 2.00  | 
|                           | Quarter ended March 2003               |  |            | 3.75  |     |  |       | 1.80  | 
|Year ended March 2003      |                                        |  | 7.34       |       |     |  | 1.80  |      
|                           | March 2003                             |  |            | 2.76  |     |  |       | 1.80  | 
|                           | April 2003                             |  |            | 2.00  |     |  |       | 1.41  | 
|                           | May 2003                               |  |            | 2.18  |     |  |       | 1.52  | 
|                           | June 2003                              |  |            | 5.35  |     |  |       | 1.65  | 
|                           | Quarter ended June 2003                |  |            | 5.35  |     |  |       | 1.41  | 
|                           | July 2003                              |  |            | 14.10 |     |  |       | 4.25  | 
|                           | August 2003                            |  |            | 8.54  |     |  |       | 3.58  | 
|                           | September (through September 25, 2003) |  |            | 9.45  |     |  |       | 4.21  | 



---

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

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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:



| |  |  | Telecommunications business,                                                                                                                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Telecommunications construction business,                                                                                                                                                               
|
| |  |  | Manufacture, construction, development, sale, purchase,
lease, export and import of telecommunications machinery and
equipment, telecommunications facilities, software and
telecommunications systems,
|
| |  |  | Administration, maintenance and operation of
telecommunications machinery and equipment, telecommunications
facilities, software and telecommunications systems,                                       
|
| |  |  | Consulting service related to the foregoing,                                                                                                                                                            
|
| |  |  | Research, study, education and training related to the foregoing,                                                                                                                                       
|
| |  |  | The sale and purchase of telephone subscribers rights, and                                                                                                                                             
|
| |  |  | Any and all businesses incidental or related 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 shareholders 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.

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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:



| |  |  | the right to receive dividends when the payment of dividends
has been approved at a shareholders 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 shareholders 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 shareholders
meeting at which shareholders having not less than one-third of the
total number of voting rights held by all shareholders are in
attendance.

A shareholder is generally entitled to one vote per one unit of our shares
at a shareholders meeting. In general, under the Japanese Commercial Code and
our Articles of Incorporation, a shareholders meeting may adopt a resolution
by a majority of the voting rights represented at the meeting. The Japanese
Commercial Code and our Articles of Incorporation require a quorum for the
election of directors and statutory auditors of not less than one-third of the
total number of voting rights held by all shareholders. A corporate
shareholder, having more than one-quarter of its voting rights directly or
indirectly held by us, does not have voting rights. We have no voting rights
with respect to our own common stock. Shareholders may exercise their voting
rights through proxies, provided that those proxies are also shareholders who
have voting rights. Our board of directors may entitle our shareholders to
cast their votes in writing. Our board of directors may also entitle our
shareholders to cast their votes by electrical devices.

The Japanese Commercial Code requires a quorum of the majority of voting
rights and approval of two-thirds of the voting rights presented at the meeting
of any material corporate actions. Following the April 1, 2003 amendments of
the Commercial Code, which allow a company to reduce the quorum for such
special resolutions by its articles of incorporation to not less than one-third
of the total number of voting rights held by all shareholders, we amended our
Articles of Incorporation to adopt a quorum of not less than one-third of the
total number of voting rights for special resolutions for material corporate
actions, such as:



| |  |  | a reduction of the stated capital,                                                                                                                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | amendment of the Articles of Incorporation (except amendments
that the board of directors are authorized to make under the
Commercial Code),                                                                 
|
| |  |  | the removal of a director or statutory auditor,                                                                                                                                                              
|
| |  |  | establishment of a 100% parent-subsidiary relationship
through a share exchange or share transfer requiring shareholders
approval,                                                                          
|
| |  |  | a dissolution, merger or consolidation requiring shareholders approval,                                                                                                                                     
|
| |  |  | a company split requiring shareholders approval,                                                                                                                                                            
|
| |  |  | a transfer of the whole or an important part of our business,                                                                                                                                                
|
| |  |  | the taking over of the whole of the business of any other
corporation requiring shareholders approval, and                                                                                                  
|
| |  |  | issuance of new shares at a specially favorable price, or
issuance of stock acquisition rights or bonds with stock acquisition
rights with specially favorable conditions to persons other than
shareholders.

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

Shareholders holding one sixth or more of the total number of the voting
rights of all shareholders have the right to oppose:



| |  |  | short-form share transfer (Kan-i
Kabushiki Kokan),                                                                                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | short-form company split into an existing company (Kan-i
Kyushu Bunkatsu) (only in respect of the shareholders of the exiting
company that takes over the target business of the split company), and
|
| |  |  | short-form merger (Kan-i Gappei).                                                                                                                                                                   

Shareholders holding 10% or more of the total number of voting rights of
all shareholders have the right to apply to a court of competent jurisdiction,
or competent court, for:



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

Shareholders who have held 3% or more of the total number of voting rights
of all shareholders 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 number of voting rights of
all shareholders 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
|
| |  |  | apply to a competent court for appointment of an inspector to
inspect our operation or financial condition.                     

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Shareholders who have held 1% or more of the total number of voting rights
of all shareholders for six months or more have the right to:



| |  |  | 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.

Shareholders who have held 300 voting rights 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 shareholders meeting at which
shareholders having not less than one-third of the voting rights held by all
shareholders are in attendance.

Annual general meetings and extraordinary general meetings of shareholders
are convened by a representative director based on the determination to convene
it by 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 shareholders 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 shareholders meeting.

Rights of Holders of Fractional Shares of our Common Stock

Under the Commercial Code of Japan, holders of fractional shares
representing 1/100th of a share (this ratio can be varied or fractional share
system can be abandoned by being provided in articles of incorporation) 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. Our Articles of Incorporation do
not contain a provision against such conversion, and
|
| |  |  | to receive dividend, interim dividend or preemptive rights,
unless otherwise provided for in articles of incorporation. Our
Articles of Incorporation do not contain a provision against such
receipt.                                               

Under the Commercial 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. Following the April 1, 2003 amendments of the Commercial Code, holders
of fractional shares are entitled to purchase fractional shares from the
company in such a number that will, when added to the number of fractional
shares originally held by such share holders, constitute a share, if a
provision allowing for additional purchases of fractional shares is stipulated
in its articles of incorporation. We did not adopt the system for additional
purchase of fractional shares in our Articles of Incorporation.

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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 Share Handling Regulations, a shareholder who does not
have an address or residence in Japan is required to file its temporary address
in Japan or that of a standing proxy having any address or residence in Japan
with our transfer agent.

There is no provision in our Articles 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.

Other than contracts entered into in the ordinary course of business, we
have entered into the following contracts which may be deemed material since
September 1, 2001.

Cash Deficiency Support Agreement, dated May 21, 2002, among Internet
Initiative Japan Inc., Crosswave Communications Inc., The Sumitomo Trust &
Banking Co., Ltd., UFJ Bank Limited, Mizuho Corporate Bank, Ltd. and Sumitomo
Mitsui Banking Corporation. On May 21, 2002, in order to assist Crosswave in
securing loan financing, we entered into a Cash Deficiency Support Agreement
with Crosswave and four Japanese commercial banks. In accordance with the
provisions of the CDS Agreement, we deposited ¥5.0 billion into a restricted
account with a participating bank at the end of May 2002. Under the terms of
the CDS Agreement, the deposited cash was to be restricted for the period in
which the Crosswave loans are outstanding and to be used for debt service
in the event Crosswave was otherwise unable to meet scheduled payments. We are
not liable under the terms of the CDS Agreement for any amounts in addition to
this ¥5 billion amount. Any restricted cash withdrawn under the agreement
results in a corresponding unsecured funding to Crosswave by us that will
be subordinate to the Crosswave loans outstanding under the agreement. The CDS
Agreement provides that any such funding between us and Crosswave may be
invested, based on the outcome of future negotiations as loans, bonds or equity
of Crosswave. The security deposit of ¥5.0 billion which we provided to the
banks which made the syndicated loan to Crosswave under the CDS Agreement was
acquired by the banks when Crosswave filed a petition for commencement of
corporate reorganization proceedings. Accordingly, IIJ now holds a claim in
subrogation against Crosswave in the amount of ¥5.0 billion, and plans to file
this ¥5.0 billion claim with the reorganization administrator of Crosswave as a
reorganization claim. However, as the banks are entitled under a subordination
agreement to claim an additional amount from IIJ in order to fully satisfy the
¥10.0 loan to Crosswave, if IIJ receives any payment in connection with this
claim under the reorganization plan or otherwise, IIJ will in turn have to
surrender such payment to the banks until the outstanding obligations of
Crosswave have been paid in full.

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Stock Acquisition Rights Placement Agreement, dated May 21, 2002, between
Internet Initiative Japan Inc. and Crosswave Communications Inc.On May 21,
2002, we entered into a Stock Acquisition Rights Placement
Agreement with Crosswave in which they granted stock acquisition rights to us.
These stock acquisition rights are exercisable from June 6, 2002 to May 31,
2009 at an exercise price of ¥38,595 per share, equivalent to $1.50 per ADS,
which represents a 50% premium over the closing market price of Crosswaves
ADSs as of May 9, 2002, for an aggregate of 30,000 common shares of Crosswaves
common stock, equivalent to 6,000,000 ADSs.

Lease Agreement, dated March 14, 2003, between Internet Initiative Japan
Inc. and Mitsui Fudosan Co., Ltd.On March 14, 2003, we entered into a lease
agreement with Mitsui Fudosan Co., Ltd. (Mitsui Fudosan), under which we
lease our headquarters office space from Mitsui Fudosan in the Jinbocho Mitsui
Building, located at 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo. The lease
period is from March 15, 2003 until March 14, 2006. In accordance with the
provisions of this lease agreement, we have deposited ¥1,705,036,213 with
Mitsui Fudosan as a security deposit, and pay Mitsui Fudosan ¥124,941,048 per
month in rent and ¥24,249,606 per month in common area maintenance charges,
both of which include consumption taxes.

Sublease Agreements, dated March 15, 2003, between Internet Initiative
Japan Inc. and Crosswave Communications Inc., Crosswave Facilities Inc., IIJ
Technology Inc., Net Care, Inc. and IIJ Media Communications, Inc.On March
15, 2003, we entered into sublease agreements with each of Crosswave
Communications Inc. Crosswave Facilities Inc., IIJ Technology Inc. and Net
Care, Inc. under which we sublease to each of these companies certain portions
of the office space in our headquarters that we lease from Mitsui Fudosan. The
sublease period is from March 15, 2003 until March 14, 2006. In accordance
with the provisions of each of the sublease agreements, we receive monthly rent
of ¥32,732,564 from Crosswave Communications Inc. and ¥786,500 from Crosswave
Facilities Inc., and a monthly fee which includes the common area maintenance
charges of ¥7,809,402 from Crosswave Communications Inc. and ¥179,434 from
Crosswave Facilities Inc., all of which exclude consumption taxes.

Pledge Agreement, dated March 14, 2003, among Internet Initiative Japan
Inc., IBJ Leasing Co., Ltd. and Nissay Leasing Company, Limited.On March 14,
2003, we entered into a pledge agreement with IBJ Leasing Co., Ltd. and Nissay
Leasing Company, Limited, as co-pledgees, under which we created a first
priority pledge on our claim against Mitsui Fudosan for a refund of our
security deposit, to secure our debt to the co-pledgees under an agreement for
entrustment of payment and repayment of debt dated March 14, 2003, under which
co-pledgees paid the security deposit to Mitsui Fudosan on our behalf.

Credit Facility Agreement, dated May 29, 2003, between Internet Initiative
Japan Inc. and Crosswave Communications Inc.On May 29, 2003, we entered into
a credit facility agreement with Crosswave Communications Inc., as amended on
July 29, 2003, under which we agreed to provide loans to Crosswave
Communications Inc. during the period from May 29, 2003 until July 31, 2003,
extended to September 30, 2003, up to ¥1,719,981,120. The interest rate on
this loan was 0.3% above the short-term prime rate as quoted by Sumitomo Mitsui
Banking Corporation. The loan was due to be repaid on September 30, 2003.

Letter of Undertaking, dated August 29, 2003, among Internet Initiative
Japan Inc., The Mitsubishi Trust and Banking Corporation and The Bank
of Tokyo-Mitsubishi, Ltd.On August 29, 2003, we executed a letter of
undertaking with The Mitsubishi Trust and Banking Corporation and a
letter of undertaking with The Bank
of Tokyo-Mitsubishi, Ltd., under which we agreed to cooperate with these banks
on the creation and perfection of a second priority pledge against our claim
for a refund of our security deposit of ¥1,705 million with Mitsui Fudosan, and
on the execution of an agreement with these banks for the creation of equitable
mortgage/pledge on receivables existing as of the end of July 2003 in the
amount of ¥3,794 million.

Subscription Agreement, dated September 16, 2003, between Internet
Initiative Japan and Nippon Telegraph and Telephone Corporation.On September
16, 2003, we entered into a Subscription Agreement with NTT under which NTT
agreed to purchase 10,883 shares of our common stock for ¥951,300 per share, or
approximately ¥10.4 billion. After the consummation of this agreement, NTT and
its affiliates owned a total of 12,315 shares of our common stock, or
approximately 31.6%. Under the terms of this agreement, we and NTT agreed to
undertake efforts to jointly engage in the development of broadband and
information technology and other related businesses, to expand the business
relationship between the two parties in connection with new business
opportunities of IIJ and to discuss secondment of employees between the us and
NTT. The agreement also provides
NTT with the right to maintain its current percentage ownership in our company
if we issue new shares and provides NTT with the right to request that we file
a registration statement to enable NTT to sell its shares in the United States
or Japanese markets. In addition, the agreement gives NTT the right to
nominate up to three persons to serve on either our board of
directors or our board of corporate auditors
subject to approval of any such nomination by our shareholders at a meeting of
shareholders.

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D. Exchange Controls.

There are no laws, decrees, regulations or other legislation in Japan
which affect our ability to import or export capital for our use or our ability
to pay dividends to non-resident holders of our securities.

E. Taxation.

Japanese Taxation

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



| |  |  | the overall tax consequences of the ownership and disposition
of shares or ADSs, including specifically the tax consequences under
Japanese law,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the laws of the jurisdiction of which they are resident, and                                                                                    
|
| |  |  | 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 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.

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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 you if you are a U.S.
holder, as defined below, and you hold your shares or ADSs as capital assets.
It does not address special classes of holders, some of whom may be subject to
other rules including:



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

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

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



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

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

In general, and taking into account the earlier assumptions, for United
States federal income tax purposes, if you hold ADRs evidencing ADSs, you will
be treated as the owner of the shares represented by those ADSs. Exchanges of
shares for 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 PFIC Rules below.

Taxation of Dividends

Under the United States federal income tax laws, if you are a U.S. holder,
the gross amount of any dividend we pay out of our current or accumulated
earnings and profits (as determined for United States federal income tax
purposes) is subject to United States federal income taxation. If you are a
noncorporate U.S. holder, dividends paid to you in taxable years beginning
after December 31, 2002 and before January 1, 2009 that constitute qualified
dividend income will be taxable to you at a maximum tax rate of 15% provided
that you hold the shares or ADSs for more than 60 days during the 120-day
period beginning 60 days before the ex-dividend date and meet other holding
period requirements. Dividends we pay with respect to the shares or ADSs
generally will be qualified dividend income.

You must include any Japanese tax withheld from the dividend payment in
this gross amount even though you do not in fact receive it. The dividend is
taxable to you when you, in the case of shares, or the Depositary, in the case
of ADSs, receive the dividend, actually or constructively. The dividend will
not be eligible for the dividends-received deduction generally allowed to
United States corporations in respect of dividends received from other United
States corporations. The amount of the dividend distribution that you must
include in your income as a U.S. holder will be the U.S. dollar value of the
Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar
rate on the date the dividend distribution is includible in your income,
regardless of whether the payment is in fact converted into U.S. dollars.
Generally, any gain or loss resulting from currency exchange fluctuations
during the period from the date you include the dividend payment in income to
the date you convert the payment into U.S. dollars will be treated as ordinary
income or loss and will not be eligible for the special tax rate applicable to
qualified dividend income. The gain or loss generally will be income or loss
from sources within the United States for foreign tax credit limitation
purposes.

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

Subject to certain limitations, the Japanese tax withheld in accordance
with the Treaty and paid over to Japan will be creditable against your United
States federal income tax liability. Special rules apply in determining the
foreign tax credit limitation with respect to dividends that are subject to the
maximum 15% tax rate. To the extent a refund of the tax withheld is available
to you under Japanese law or under the Treaty, the amount of tax withheld that
is refundable will not be eligible for credit against your United States
federal income tax liability.

Dividends constitute income from sources outside the United States, but
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.

Taxation of Capital Gains

If you sell or otherwise dispose of your shares or ADSs, you will
recognize capital gain or loss for United States federal income tax purposes
equal to the difference between the U.S. dollar value of the amount that you
realize and your tax basis, determined in U.S. dollars, in your shares or ADSs.
Capital gain of a noncorporate U.S. holder that is recognized on or after May
6, 2003 and before January 1, 2009 is generally taxed at a maximum rate of 15%
where the holder has a holding period greater than one year. Additionally,
gain or loss will generally be from sources within the United States for
foreign tax credit limitation purposes.

PFIC Rules

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

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



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

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

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



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

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Under these rules:



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

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

If your shares or ADSs are treated as stock of a PFIC, you may make a
mark-to-market election. If you make this election, you will not be subject to
the PFIC rules described above. Instead, in general, you will include as
ordinary income each year the excess, if any, of the fair market value of your
shares or ADSs at the end of the taxable year over your adjusted basis in your
shares or ADSs. These amounts of ordinary income will not be eligible for the
favorable tax rates applicable to qualified dividend income or long-term
capital gains. You will also be allowed to take an ordinary loss in respect of
the excess, if any, of the adjusted basis of your shares or ADSs over their
fair market value at the end of the taxable year or over their final sale or
disposition prices, but only to the extent of the net amount of previously
included income as a result of the mark-to-market election. Your basis in the
shares or ADSs will be adjusted to reflect any such income or loss amounts.

In addition, notwithstanding any election you make with regard to the
shares or ADSs, dividends that you receive from us will not constitute
qualified dividend income to you if we are a PFIC either in the taxable year of
the distribution or the preceding taxable year. Dividends that you receive
that do not constitute qualified dividend income are not eligible for taxation
at the 15% maximum rate applicable to qualified dividend income. Instead, you
must include the gross amount of any such dividend paid by us out of our
accumulated earnings and profits (as determined for United States federal
income tax purposes) in your gross income, and it will be subject to tax at
rates applicable to ordinary income.

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

F. Dividends and Paying Agents.

Not applicable.

G. Statement by Experts.

Not applicable.

H. Documents on Display.

We are subject to the information requirements of the Securities Exchange
Act of 1934 and, in accordance therewith, we file annual reports on Form 20-F
within six months of its fiscal year end and other reports and information on
Form 6-K with the Securities and Exchange Commission. These reports and other
information can be inspected at the public reference room at the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
also obtain copies of such material by mail from the public reference room of
the Securities and Exchange Commission at prescribed fees. You may obtain
information on the operation of the Securities and Exchange public reference
room by calling the Securities and Exchange Commission in the United
States at 1-800-SEC-0330. The Securities and Exchange Commission also
maintains a web site at www.sec.gov that contains reports, proxy statements and
other information regarding us and other registrants that file electronically
with the Securities and Exchange Commission.

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In addition, documents referred to in this 20-F filing may be inspected at
Internet Initiative Japans Tokyo headquarters, located at Jinbocho Mitsui
Bldg., 1-105 Kanda Jinbo-cho Chiyoda-ku, Tokyo 101-0051, Japan.

I. Subsidiary Information.

Not applicable.




Item 11. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk primarily from changes in foreign currency
exchange rates, interest rates and equity prices. Our earnings and cash flows
may be negatively impacted by fluctuating interest and foreign exchange rates
as well as equity prices associated with assets, liabilities or anticipated
transactions which may affect our operating results and financial condition.
We seek to minimize market risk through our regular operating and financing
activities and, following the evaluation of the exposures, selectively enter
into derivative hedging instruments. Interest rate swap agreements are used by
us primarily to reduce exposure to changes in interest rates that are
associated with long-term bank borrowings. We do not hold derivative
instruments for speculative purposes. Also, we do not hold or issue financial
instruments for trading purposes.

Foreign Currency Exchange Rate Risk

Translation Risk

Our reporting currency is the Japanese yen. We have assets and
liabilities outside Japan, primarily in the United States, that are subject to
fluctuations in foreign currency exchange rates. We prepare financial
statements of our foreign operations in their functional currencies prior to
consolidation in our financial statements. As a result, changes in the value
of yen relative to the functional currencies of the underlying operations
create translation gains and losses, which are recorded outside of our
statement of operations in other comprehensive income until we dispose of or
liquidate (which has not occurred in the past, nor do we expect it to occur in
the future) the relevant foreign operation.

Foreign Currency-Denominated Assets

The only significant assets held by us which are exposed to foreign
currency exchange risk are U.S. dollar denominated bank deposits. The carrying
value, which also represents fair value, amounted to $26,082 thousand (¥3,474
million) and $11,524 thousand (¥1,361 million) at March 31, 2002 and 2003,
respectively. The potential loss in fair value for such financial instruments
from a 10% adverse change in quoted foreign currency exchange rates would be
approximately ¥347 million and ¥136 million at March 31, 2002 and 2003,
respectively.

Interest Rate Risk

The table below provides information about financial instruments held by
us that are sensitive to changes in interest rates, including debt obligations
and interest rate swaps. For debt obligations, the table presents whether the
interest component is fixed or variable, the amount and timing of cash flows,
the expected weighted-average interest rates over the next five years, as well
as the fair value of each debt instrument. For interest rate swaps, the table
presents the notional amounts and weighted average interest rates by expected
maturity dates.

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|                               |                                                                            |                 |                        |       |      |  |      |        |      |  |      |       |       |  |            |       |   |  |  |  |  |  |  |        |   |  |  |        |  
|------------------------------ | -------------------------------------------------------------------------- | --------------- | ---------------------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ----- |  | ---------- | ----- | - |  |  |  |  |  |  | ------ | - |  |  | ------ | -
|March 31, 2003                 |                                                                            |                 |                        |       |      |  |      |        |      |  |      |       |       |  |            |       |   |  |  |  |  |  |  |        |   |  |  |       
|                               |                                                                            | Millions of Yen
|                               |                                                                            |                 |                       
|                               |                                                                            |                 | Expected Maturity Date |       |      |  |      |        |      |  |     
|                               |                                                                            |                 |                        |       |      |  |      |        |      |  |     
|                               |                                                                            |                 | 2004                   |       | 2005 |  | 2006 |        | 2007 |  | 2008 |       | Total |  | Fair Value
|                               |                                                                            |                 |                        |       |      |  |      |        |      |  |      |       |       |  |           
|Long-term Debt Obligations:    |                                                                            |                 |                        |       |      |  |      |        |      |  |      |       |       |  |            |       |   |  |  |  |  |  |  |        |   |  |  |       
|                               | Fixed rate long-term
borrowings,
installment payable
and convertible notes |                 |                        | 944   |      |  |      | 15,548 |      |  |      | 152   |       |  |            | 756   |   |  |  |  |  |  |  | 17,400 |   |  |  | 15,004 |  
|                               | Average interest rate                                                      |                 |                        | 2.304 | %    |  |      | 1.755  | %    |  |      | 2.550 | %     |  |            | 1.883 | % |  |  |  |  |  |  | 1.797  | % |  |  |        |  
|                               | Variable rate
long-term borrowings                                         |                 |                        | 1,000 |      |  |      | 1,000  |      |  |      | 1,000 |       |  |            |      |   |  |  |  |  |  |  | 3,000  |   |  |  | 3,000  |  
|                               | Average interest rate                                                      |                 |                        | 0.850 | %    |  |      | 0.789  | %    |  |      | 1.110 | %     |  |            |      |   |  |  |  |  |  |  | 0.916  | % |  |  |        |  
|Interest Rate Swap
Contracts  |                                                                            |                 |                        |       |      |  |      |        |      |  |      |       |       |  |            |       |   |  |  |  |  |  |  |        |   |  |  |       
|                               | Notional amount-
Variable to Fixed:                                        |                 |                        | 1,000 |      |  |      | 1,000  |      |  |      | 1,000 |       |  |            |      |   |  |  |  |  |  |  | 3,000  |   |  |  | (38    | )
|                               | Average pay rate                                                           |                 |                        | 1.960 | %    |  |      | 1.500  | %    |  |      | 1.900 | %     |  |            |      |   |  |  |  |  |  |  | 1.787  | % |  |  |        |  
|                               | Average receive rate                                                       |                 |                        | 0.840 | %    |  |      | 0.789  | %    |  |      | 1.110 | %     |  |            |      |   |  |  |  |  |  |  | 0.913  | % |  |  |        |  

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|                             |                                                       |                    |  |                        |   |      |  |       |       |      |  |        |       |       |  |            |   |  |  |       |   |  |  |        |       |  |  |        |     |  
|---------------------------- | ----------------------------------------------------- | ------------------ |  | ---------------------- | - | ---- |  | ----- | ----- | ---- |  | ------ | ----- | ----- |  | ---------- | - |  |  | ----- | - |  |  | ------ | ----- |  |  | ------ | --- | -
|March 31, 2003               |                                                       | Millions of Yen   
|                             |                                                       |                   
|                             |                                                       |                    |  | Expected Maturity Date |   |      |  |       |       |      |  |       
|                             |                                                       |                    |  |                        |   |      |  |       |       |      |  |       
|                             |                                                       |                    |  | 2003                   |   | 2004 |  | 2005  |       | 2006 |  | 2007   |       | Total |  | Fair Value
|                             |                                                       |                    |  |                        |   |      |  |       |       |      |  |        |       |       |  |           
|Long-Term Debt Obligations:  |                                                       |                    |  |                        |   |      |  |       |       |      |  |        |       |       |  |            |   |  |  |       |   |  |  |        |       |  |  |        |    
|                             | Fixed rate long-term
borrowings and
convertible notes |                    |  | 1,400                  |   |      |  | 400   |       |      |  | 15,000 |       |       |  |           |   |  |  | 600   |   |  |  | 17,400 |       |  |  | 14,704 |    
|                             | Average interest rate                                 |                    |  | 1.864                  | % |      |  | 1.250 | %     |      |  | 1.750  | %     |       |  |           |   |  |  | 1.710 | % |  |  | 1.746  | %     |  |  |        |    
|                             | Variable rate long-term
borrowings                    |                    |  |                       |   |      |  | 1,000 |       |      |  | 1,400  |       |       |  |           |   |  |  |       |   |  |  | 2,400  |       |  |  | 2,400  |    
|                             | Average interest rate                                 |                    |  |                       |   |      |  | 0.869 | %     |      |  | 1.009  | %     |       |  |           |   |  |  |       |   |  |  | 0.951  | %     |  |  |        |    
|Interest Rate Swap
Contracts |                                                       |                    |  |                        |   |      |  |       |       |      |  |        |       |       |  |            |   |  |  |       |   |  |  |        |       |  |  |       
|                             | Notional amount-                                      |                    |  |                        |   |      |  |       |       |      |  |        |       |       |  |            |   |  |  |       |   |  |  |        |       |  |  |        |    
|                             |                                                       | variable to fixed: |  |                        |  |      |  |       | 1,000 |      |  |        | 1,000 |       |  |            |  |  |  |       |   |  |  |        | 2,000 |  |  |        | (34 | )
|                             | Average pay rate                                      |                    |  |                       |   |      |  | 1.960 | %     |      |  | 1.500  | %     |       |  |           |   |  |  |       |   |  |  | 1.730  | %     |  |  |        |    
|                             | Average receive rate                                  |                    |  |                       |   |      |  | 0.869 | %     |      |  | 0.819  | %     |       |  |           |   |  |  |       |   |  |  | 0.844  | %     |  |  |        |    

Investment Price Risk

The fair value of certain of our investments, primarily in marketable
securities, exposes us to equity price risks. In general, we have invested in
highly liquid and low-risk instruments, which are not held for trading
purposes. These investments are subject to changes in the market prices of the
securities. As of March 31, 2002 and 2003, the fair value of such investments
was ¥3,385 million and ¥1,180 million, respectively. The potential loss in
fair value resulting from a 10% adverse change in equity prices would be
approximately ¥339 million and ¥118 million as of March 31, 2002 and 2003,
respectively.

Credit Risk

As of March 31, 2002, we did not have any significant concentration of
business transacted with an individual counterparty or group of counterparties
that could, if suddenly eliminated, severely impact our operations.




Item 12. Description of Securities Other than Equity Securities.

Not applicable.

88



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PART II




Item 13. Defaults, Dividend Arrearages and Delinquencies.

None.




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

None.

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. We have used all of the net proceeds from
our sale of ADSs in the initial public offering. Of the net proceeds, we have
used approximately ¥12.5 billion for our investment in Crosswave (including
¥4.5 billion of a ¥5.0 billion security deposit paid for the benefit of
Crosswave), ¥0.7 billion for our investment in IIJ Technology, ¥0.5 billion for
repayment of long-term borrowing, ¥3.5 billion for lease of plant and
equipment and ¥0.3 billion in August 2001 for our investment in Asia
Internet Holding.




Item 15. Controls and
Procedures.

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and
communicated to the management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding managements control objectives.

Management carried out an evaluation, with the participation of the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of March 31, 2003 pursuant to Exchange
Act rules. Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of March 31, 2003, in all material respects,
to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms.

89



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Management also carried out an evaluation, with the participation of the
Chief Executive Officer and the Chief Financial Officer, of changes in our
internal control over financial reporting during the year ended March 31, 2003.
Based upon that evaluation, there was no change that occurred during the
fiscal year ended March 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.




Item 16A. Audit Committee Financial Expert.

Not applicable.




Item 16B. Code of Ethics.

Not applicable.




Item 16C. Principal Accountant
Fees and Services.

Not applicable.




Item 16D. Exemptions from the
Listing Standards for Audit Committees.

Not applicable.

90



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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.

We hereby incorporate by reference the financial statements of Crosswave
Communications Inc. and subsidiaries, including the audit report of Asahi &
Co., as of and for the fiscal year ended March 31, 2001 and 2002, included in
our annual report on Form 20-F (File No. 0-30204) filed on July 30, 2002.
Although Crosswave announced condensed unaudited results for the year ended
March 31, 2003 in a press release furnished to the SEC under cover of Form 6-K
dated May 21, 2003, Crosswave has not made available full financial
statements (audited or otherwise) for the year ended March 31, 2003. Crosswaves Report on Form 6-K
dated May 21, 2003 does not constitute a part of this Annual Report on Form
20-F. We have reproduced certain of the financial statement information
submitted by Crosswave in that Form 6-K as Exhibit 14.1 to this Annual Report
on Form 20-F. Although we accounted for Crosswave under the equity method for the
year ended March 31, 2003, we no longer account for Crosswave under the equity
method.




Item 19. Exhibits.

|    |  |                                                                                                                                                                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1 |  | Articles of Incorporation, as amended (English translation)                                                                                                                                                                                                                                                              
|1.2 |  | Share Handling Regulations, as amended (English translation)                                                                                                                                                                                                                                                             
|1.3 |  | Regulations of the Board of Directors, as amended (English translation)                                                                                                                                                                                                                                                  
|1.4 |  | Regulations of the Board of Statutory Auditors, as amended (English translation)***                                                                                                                                                                                                                                      
|2.1 |  | Specimen Common Stock Certificate*                                                                                                                                                                                                                                                                                       
|2.2 |  | Bylaws of the IIJ Employee Shareholders Association (with English translation)*                                                                                                                                                                                                                                         
|2.3 |  | Paying Agent, Conversion Agent and Registrar Agreement, dated April 11, 2000, among
Internet Initiative Japan Inc., The Bank of New York and Banque Internationale à
Luxembourg relating to ¥15,000,000,000 1.75% convertible notes due 2005 (with exhibits)                                                             
|2.4 |  | Form of Deposit Agreement among IIJ, The Bank of New York as
depositary and all owners and holders from time to time of American
Depositary Receipts, including the form of American Depositary
Receipt (incorporated by reference to the Registration Statement on
Form F-6 (File No. 333-10582) filed on July 13, 1999)
|4.1 |  | Basic Agreement to Delegate Services, dated April 1, 1997, between Internet Initiative
Japan Inc. and IIJ Technology Inc. (with English translation)*                                                                                                                                                                    
|4.2 |  | Shareholders Agreement Relating to the Establishment of INTERNET MULTIFEED CO., dated
August 20, 1997, between Nippon Telegraph and Telephone Corporation and the Registrant
(with English translation)*                                                                                                                
|4.3 |  | Basic Agreement to Delegate Services, dated January 30, 1995, between Internet Initiative
Japan Inc. and IIJ Media Communications Inc. (with English translation)*                                                                                                                                                       
|4.4 |  | Memorandum of Understanding Regarding Technical Cooperation, dated April 1, 1997, between
Internet Initiative Japan Inc. and IIJ Media Communications Inc. (with English
translation)*                                                                                                                                   

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|     |  |                                                                                                                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.5  |  | Basic Agreement to Delegate Services, dated April 1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (with English translation)*                                                                                                                                                                                   
|4.6  |  | Purchase and Sales Agreement, dated January 8, 1999, between Internet Initiative Japan
Inc. and Crosswave Communications Inc. (with English translation)*                                                                                                                                                                          
|4.7  |  | Individual Agreement on Entrustment of Business between Internet Initiative Japan Inc. and
Asia Internet Holding Co., Ltd., dated July 1, 1998 (with English translation)*                                                                                                                                                         
|4.8  |  | 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)**
|4.9  |  | Sales Cooperation Agreement, dated August 20, 1999, between Crosswave Communications Inc.
and Internet Initiative Japan Inc. (with English translation)**                                                                                                                                                                          
|4.10 |  | Business Entrustment Agreement, dated April 1, 1999 between Crosswave Communications Inc.
and Internet Initiative Japan Inc. (with English translation)**                                                                                                                                                                          
|4.11 |  | Letter of Confirmation, dated November 16, 1999 between Crosswave Communications Inc. and
Internet Initiative Japan Inc. (with English translation)**                                                                                                                                                                              
|4.12 |  | Data Center Service Agency Agreement dated March 1, 2000 between Crosswave Communications
Inc. and Internet Initiative Japan Inc. (with English translation)**                                                                                                                                                                     
|4.13 |  | Cash Deficiency Support Agreement, dated May 21, 2002, among Internet Initiative Japan
Inc., Crosswave Communications Inc., The Sumitomo Trust & Banking Co., Ltd., UFJ Bank
Limited, Mizuho Corporate Bank, Ltd. and Sumitomo Mitsui Banking Corporation (English
translation)***                                                 
|4.14 |  | Stock Acquisition Rights Placement Agreement, dated May 21, 2002, between Internet
Initiative Japan Inc. and Crosswave Communications Inc. (English translation)***                                                                                                                                                                
|4.15 |  | Lease Agreement, dated March 14, 2003, between Internet Initiative Japan and Mitsui
Fudosan Co., Ltd. (English translation)                                                                                                                                                                                                        
|4.16 |  | Sublease Agreements, dated March 15, 2003, between Internet Initiative Japan Inc. and
Crosswave Communications Inc., Crosswave Facilities Inc., IIJ Technology Inc., Net Care,
Inc. and IIJ Media Communications, Inc. (English translations)                                                                                      
|4.17 |  | Pledge Agreement, dated March 14, 2003, among Internet Initiative Japan Inc., IBJ Leasing
Co., Ltd. and Nissay Leasing Company, Limited (English translation)                                                                                                                                                                      
|4.18 |  | Credit Facility Agreement, dated May 29, 2003, between Internet Initiative Japan Inc. and
Crosswave Communications Inc. (English translation)                                                                                                                                                                                      
|4.19 |  | Letter of Undertaking, dated August 29, 2003, among Internet Initiative Japan Inc. and
Mizuho Corporate Bank, Ltd., UFJ Bank Limited, Sumitomo Mitsui Banking Corporation, The
Mitsubishi Trust and Banking Corporation and The Bank of Tokyo-Mitsubishi, Ltd. (English
translation)                                               
|4.20 |  | Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan and
Nippon Telegraph and Telephone Corporation (English translation)                                                                                                                                                                           

92



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|     |  |                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|8.1  |  | List of Significant Subsidiaries (See Our Group Companies in Item 4.B. of this Form 20-F)                             
|14.1 |  | Selected unaudited financial statement data as of and for the year ended March 31, 2003 of
Crosswave Communications Inc.



---

|*   |  | Incorporated by reference to the corresponding exhibit to our 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, 2000.
|   
|*** |  | Incorporated by reference to the corresponding exhibit to our annual
report on Form 20-F (File No. 0-30204) filed on July 30, 2002.                                

Except
for Exhibit 2.3, we have not included as exhibits certain instruments with respect to our
long-term debt. Except for Exhibit 2.3, the amount of debt authorized under each
long-term debt instrument does not exceed 10% or our total assets. We agree to
furnish a copy of any long-term debt instrument to the Commission upon request.

93



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SIGNATURE

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

| |  |                                |  |                   |                                                               
| |  | ------------------------------ |  | ----------------- | --------------------------------------------------------------
| |  | Internet Initiative Japan Inc.
| |  |                                |  |                   |                                                               
| |  |                                |  |                   |                                                               
| |  | By:                            |  | /s/ Koichi Suzuki
| |  |                                |  |                  
| |  |                                |  | Name:             | Koichi Suzuki                                                 
| |  |                                |  | Title:            | President, Chief Executive Officer and
Representative Director

Date: September 30, 2003



---



##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries

Index to Consolidated Financial Statements

|                                                                                                                                    |  |      |      | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                                    |  | Page
|                                                                                                                                    |  |     
|Consolidated Balance Sheets as of March 31, 2002 and 2003                                                                           |  |      | F-4  | 
|Consolidated Statements of Operations for Each of the Three Years
in the Period Ended March 31, 2003                                |  |      | F-6  | 
|Consolidated Statements of Shareholders Equity (Capital Deficiency)
for Each of the Three Years in the Period Ended March 31, 2003 |  |      | F-8  | 
|Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended March 31, 2003                                |  |      | F-10 | 
|Notes to Consolidated Financial Statements                                                                                          |  |      | F-12 | 

F-1



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F-2



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Internet Initiative Japan Inc. and Subsidiaries

Consolidated Balance Sheets

March 31, 2002 and 2003

|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |          |             |             |            |   |         |              |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------- | ----------- | ---------------- | ---------- | -------- | ----------- | ----------- | ---------- | - | ------- | ------------ | ------- | 
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |          |             |             |            |   |         | Thousands of
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |          |             |             |            |   |         | U.S. Dollars
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             | Thousands of Yen |            | (Note 1)
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |         
|ASSETS                                                                                                                                                                    |                                                                                                                                                                                | 2002                 |             | 2003             |            | 2003    
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |         
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |          |             | (unaudited) |           
|CURRENT ASSETS:                                                                                                                                                           |                                                                                                                                                                                |                      |             |                  |            |          |             |             |            |   |         |             
|                                                                                                                                                                          | Cash (Note 14)                                                                                                                                                                 |                      |             | ¥11,045,919      |            |          |             | ¥3,588,352  |            |   | $       | 30,392       |        
|                                                                                                                                                                          | Accounts receivable, net of allowance for
doubtful accounts of ¥45,123 thousand and
¥ 34,712 thousand ($294 thousand) at
March 31, 2002 and 2003, respectively
(Notes 3 and 4) |                      |             | 8,981,912        |            |          |             | 10,253,096  |            |   |         | 86,839       |        
|                                                                                                                                                                          | Inventories                                                                                                                                                                    |                      |             | 620,409          |            |          |             | 417,666     |            |   |         | 3,537        |        
|                                                                                                                                                                          | Prepaid expenses                                                                                                                                                               |                      |             | 416,945          |            |          |             | 564,501     |            |   |         | 4,781        |        
|                                                                                                                                                                          | Other current assets (Note 9)                                                                                                                                                  |                      |             | 143,798          |            |          |             | 932,873     |            |   |         | 7,901        |        
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |          |             |             |            |   |         |             
|                                                                                                                                                                          |                                                                                                                                                                                | Total current assets |             |                  | 21,208,983 |          |             |             | 15,756,488 |   |         |              | 133,450 | 
|INVESTMENTS IN AND ADVANCES TO
EQUITY METHOD INVESTEES (Note 4)                                                                                                           |                                                                                                                                                                                |                      | 8,854,028   |                  |            |          | 1,116,020   |             |            |   | 9,452   |             
|OTHER
INVESTMENTS (Notes 2 and 14)                                                                                                                                        |                                                                                                                                                                                |                      | 5,406,065   |                  |            |          | 3,040,189   |             |            |   | 25,749  |             
|PROPERTY
AND EQUIPMENT, net (Notes 5 and 7)                                                                                                                               |                                                                                                                                                                                |                      | 7,755,426   |                  |            |          | 9,151,572   |             |            |   | 77,510  |             
|OTHER INTANGIBLE ASSETS, net (Note 6)                                                                                                                                     |                                                                                                                                                                                |                      | 189,872     |                  |            |          | 189,851     |             |            |   | 1,608   |             
|GUARANTEE
DEPOSITS (Note 7)                                                                                                                                               |                                                                                                                                                                                |                      | 1,266,055   |                  |            |          | 2,205,652   |             |            |   | 18,681  |             
|OTHER ASSETS, net of allowance for doubtful
accounts of ¥102,751 thousand and ¥ 90,642
thousand ($768 thousand) at March 31, 2002
and 2003, respectively
(Notes 3 and 14) |                                                                                                                                                                                |                      | 582,354     |                  |            |          | 604,604     |             |            |   | 5,121   |             
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |          |             |             |            |   |         |             
|TOTAL                                                                                                                                                                     |                                                                                                                                                                                |                      | ¥45,262,783 |                  |            |          | ¥32,064,376 |             |            | $ | 271,571 |             
|                                                                                                                                                                          |                                                                                                                                                                                |                      |             |                  |            |          |             |             |            |   |         |             

(Continued)

F-3



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Internet Initiative Japan Inc. and Subsidiaries

Consolidated Balance Sheets

March 31, 2002 and 2003

|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |              |         |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------- | ----------------------------------------------- | ---------- | ---------------- | ---------- | -------- |  | ---- |  | ---- | ---------- | ----------- | ----------- | - | ------- | ------------ | ------- | -
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         | Thousands of
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         | U.S. Dollars
|                                                             |                                                                                 |                                                 |            | Thousands of Yen |            | (Note 1)
|                                                             |                                                                                 |                                                 |            |                  |            |         
|LIABILITIES AND SHAREHOLDERS EQUITY                         |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|(CAPITAL DEFICIENCY)                                         |                                                                                 | 2002                                            |            |                  |            |          |  | 2003 |  | 2003
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |     
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            | (unaudited)
|CURRENT LIABILITIES:                                         |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|                                                             | Short-term borrowings (Note 8)                                                  |                                                 | ¥          | 3,820,232        |            |          |  |      |  |      | ¥          | 4,823,599   |             |   | $       | 40,854       |        
|                                                             | Accounts
payable (Notes 4)                                                      |                                                 |            | 7,085,579        |            |          |  |      |  |      |            | 8,406,170   |             |   |         | 71,196       |        
|                                                             | Accrued expenses                                                                |                                                 |            | 247,606          |            |          |  |      |  |      |            | 389,495     |             |   |         | 3,299        |        
|                                                             | Other current liabilities                                                       |                                                 |            | 506,797          |            |          |  |      |  |      |            | 551,985     |             |   |         | 4,675        |        
|                                                             | Long-term borrowings  current portion
(Notes 8 and 14)                         |                                                 |            | 1,400,000        |            |          |  |      |  |      |            | 1,943,735   |             |   |         | 16,462       |        
|                                                             | Capital lease obligations  current portion (Note 7)                            |                                                 |            | 1,973,769        |            |          |  |      |  |      |            | 2,716,386   |             |   |         | 23,007       |        
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|                                                             |                                                                                 | Total current liabilities                       |            |                  | 15,033,983 |          |  |      |  |      |            |             | 18,831,370  |   |         |              | 159,493 |  
|LONG-TERM
BORROWINGS (Notes 8 and 14)                        |                                                                                 |                                                 | 3,400,000  |                  |            |          |  |      |  |      | 3,456,265  |             |             |   | 29,273  |             
|CONVERTIBLE
NOTES (Notes 8 and 14)                           |                                                                                 |                                                 | 15,000,000 |                  |            |          |  |      |  |      | 15,000,000 |             |             |   | 127,043 |             
|CAPITAL LEASE OBLIGATIONS  Noncurrent (Note 7)              |                                                                                 |                                                 | 2,861,556  |                  |            |          |  |      |  |      | 3,635,780  |             |             |   | 30,793  |             
|ACCRUED RETIREMENT AND PENSION COSTS (Note 10)               |                                                                                 |                                                 | 100,841    |                  |            |          |  |      |  |      | 80,601     |             |             |   | 683     |             
|OTHER NONCURRENT LIABILITIES                                 |                                                                                 |                                                 | 108,376    |                  |            |          |  |      |  |      | 185,201    |             |             |   | 1,569   |             
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|                                                             |                                                                                 | Total liabilities                               |            |                  | 36,504,756 |          |  |      |  |      |            |             | 41,189,217  |   |         |              | 348,854 |  
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|MINORITY INTEREST                                            |                                                                                 |                                                 | 1,032,746  |                  |            |          |  |      |  |      | 879,495    |             |             |   | 7,449   |             
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|COMMITMENTS AND CONTINGENCIES                                |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|                                                             | (Notes 4 and 13)                                                                |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |              |        
|SHAREHOLDERS
EQUITY (CAPITAL DEFICIENCY) (Notes 11 and 12): |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|                                                             | Common stock  authorized, 75,520 shares;
issued and outstanding, 22,480 shares |                                                 |            | 7,082,336        |            |          |  |      |  |      |            | 7,082,336   |             |   |         | 59,984       |        
|                                                             | Additional paid-in capital                                                      |                                                 |            | 17,068,353       |            |          |  |      |  |      |            | 17,068,353  |             |   |         | 144,561      |        
|                                                             | Accumulated deficit                                                             |                                                 |            | (18,208,469      | )          |          |  |      |  |      |            | (34,685,291 | )           |   |         | (293,768     | )      
|                                                             | Accumulated other comprehensive income                                          |                                                 |            | 1,783,061        |            |          |  |      |  |      |            | 530,266     |             |   |         | 4,491        |        
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|                                                             |                                                                                 | Total shareholders equity (capital deficiency) |            |                  | 7,725,281  |          |  |      |  |      |            |             | (10,004,336 | ) |         |              | (84,732 | )
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             
|TOTAL                                                        |                                                                                 | ¥                                               | 45,262,783 |                  |            |          |  |      |  | ¥    | 32,064,376 |             |             | $ | 271,571 |             
|                                                             |                                                                                 |                                                 |            |                  |            |          |  |      |  |      |            |             |             |   |         |             

See notes to consolidated financial statements.

F-4



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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries

Consolidated Statements of Operations

Three Years in the Period Ended March 31, 2003

|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |   |         |              |          |  
|-------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------- | -------------------- | ----------------------------- | ---------- | ---------------- | ----------- | -------- | ---------- | ----------- | ------------ | ---- | ---------- | ----------- | ----------- | - | ------- | ------------ | -------- | -
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |   |         | Thousands of
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |   |         | U.S. Dollars
|                                                         |                                        |                                                               |                      |                               |            | Thousands of Yen |             | (Note 1)
|                                                         |                                        |                                                               |                      |                               |            |                  |             |         
|                                                         |                                        |                                                               |                      |                               |            | 2001             |             | 2002     |            | 2003        |              | 2003
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |     
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |   |        
|REVENUES (Notes 4):                                      |                                        |                                                               |                      |                               |            |                  |             |          |            | (unaudited)
|                                                         | Connectivity and value-added services: |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |   |        
|                                                         |                                        |                                                               | Dedicated access     |                               |            | ¥12,952,655      |             |          |            | ¥14,303,342 |              |      |            | ¥13,814,977 |             |   | $       | 117,007      |         
|                                                         |                                        |                                                               | Dial-up access       |                               |            | 4,422,884        |             |          |            | 3,644,091   |              |      |            | 3,155,137   |             |   |         | 26,723       |         
|                                                         |                                        |                                                               | Value-added services |                               |            | 1,962,149        |             |          |            | 3,099,791   |              |      |            | 3,602,847   |             |   |         | 30,514       |         
|                                                         |                                        |                                                               | Other                |                               |            | 591,819          |             |          |            | 1,667,986   |              |      |            | 1,725,736   |             |   |         | 14,616       |         
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        |                                                               |                      | Total                         |            |                  | 19,929,507  |          |            |             | 22,715,210   |      |            |             | 22,298,697  |   |         |              | 188,860  |  
|                                                         |                                        | Systems integration                                           |                      |                               | 10,555,675 |                  |             |          | 14,355,325 |             |              |      | 15,012,633 |             |             |   | 127,150 |             
|                                                         |                                        | Equipment sales                                               |                      |                               | 1,390,407  |                  |             |          | 2,834,078  |             |              |      | 6,706,231  |             |             |   | 56,799  |             
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        |                                                               |                      | Total revenues                |            |                  | 31,875,589  |          |            |             | 39,904,613   |      |            |             | 44,017,561  |   |         |              | 372,809  |  
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|COST AND EXPENSES:                                       |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        | Cost of connectivity and value-added
services (Notes 4 and 7) |                      |                               | 18,983,305 |                  |             |          | 19,799,402 |             |              |      | 20,386,887 |             |             |   | 172,668 |             
|                                                         |                                        | Cost of systems integration                                   |                      |                               | 9,117,410  |                  |             |          | 12,314,158 |             |              |      | 13,090,220 |             |             |   | 110,868 |             
|                                                         |                                        | Cost of equipment sales                                       |                      |                               | 1,288,530  |                  |             |          | 2,540,089  |             |              |      | 6,416,525  |             |             |   | 54,345  |             
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        |                                                               |                      | Total cost                    |            |                  | 29,389,245  |          |            |             | 34,653,649   |      |            |             | 39,893,632  |   |         |              | 337,881  |  
|                                                         |                                        | Sales and marketing (Note 15)                                 |                      |                               | 3,251,900  |                  |             |          | 3,038,412  |             |              |      | 3,176,165  |             |             |   | 26,901  |             
|                                                         |                                        | General and administrative                                    |                      |                               | 1,617,984  |                  |             |          | 1,839,525  |             |              |      | 2,204,504  |             |             |   | 18,671  |             
|                                                         |                                        | Research and development                                      |                      |                               | 286,850    |                  |             |          | 319,370    |             |              |      | 414,149    |             |             |   | 3,508   |             
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        |                                                               |                      | Total cost and expenses       |            |                  | 34,545,979  |          |            |             | 39,850,956   |      |            |             | 45,688,450  |   |         |              | 386,961  |  
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|OPERATING INCOME (LOSS)                                  |                                        |                                                               | (2,670,390           | )                             |            |                  | 53,657      |          |            |             | (1,670,889   | )    |            |             | (14,152     | )
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|OTHER INCOME (EXPENSES):                                 |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        | Interest income                                               |                      |                               | 454,527    |                  |             |          | 121,867    |             |              |      | 67,446     |             |             |   | 571     |             
|                                                         |                                        | Interest expense                                              |                      |                               | (643,266   | )                |             |          | (659,101   | )           |              |      | (732,831   | )           |             |   | (6,207  | )           
|                                                         |                                        | Foreign exchange gains (losses)                               |                      |                               | 1,132,083  |                  |             |          | 254,882    |             |              |      | (279,703   | )           |             |   | (2,369  | )           
|                                                         |                                        | Other  net (Note 2)                                          |                      |                               | (44,024    | )                |             |          | (660,790   | )           |              |      | (324,345   | )           |             |   | (2,746  | )           
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        |                                                               |                      | Other
income (expenses)  net |            |                  | 899,320     |          |            |             | (943,142     | )    |            |             | (1,269,433  | ) |         |              | (14,152  | )
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|LOSS FROM OPERATIONS BEFORE
INCOME TAX EXPENSE (BENEFIT) |                                        |                                                               | (1,771,070           | )                             |            |                  | (889,485    | )        |            |             | (2,940,322   | )    |            |             | (24,903     | )
|INCOME TAX EXPENSE (BENEFIT) (Note 9)                    |                                        |                                                               | (925,678             | )                             |            |                  | 1,099,035   |          |            |             | 911,365      |      |            |             | 7,719       |  
|MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES          |                                        |                                                               | 159,850              |                               |            |                  | 24,467      |          |            |             | 153,251      |      |            |             | 1,298       |  
|EQUITY IN NET LOSS OF EQUITY METHOD INVESTEES
(Note 4):  |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        | Equity
method net loss                                        |                      |                               | (4,014,680 | )                |             |          | (5,482,082 | )           |              |      | (5,625,299 | )           |             |   | (47,644 | )           
|                                                         |                                        | Impairment
loss on investment in and deposits for Crosswave   |                      |                               |            |                  |             |          |            |             |              |      | (7,153,087 | )           |             |   | (60,583 | )           
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|                                                         |                                        |                                                               |                      | Total                         |            |                  | (4,014,680  | )        |            |             | (5,482,082   | )    |            |             | (12,778,386 | ) |         |              | (108,227 | )
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |  
|NET LOSS                                                 |                                        |                                                               | ¥(4,700,222          | )                             |            |                  | ¥(7,446,135 | )        |            |             | ¥(16,476,822 | )    |            | $           | (139,551    | )
|                                                         |                                        |                                                               |                      |                               |            |                  |             |          |            |             |              |      |            |             |             |   |         |              |         

F-5



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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries

Consolidated Statements of Operations

Three Years in the Period Ended March 31, 2003

|                                                     |  |      |           |          |  |      |           |      |  |  |           |   |  |         |        |  
|---------------------------------------------------- |  | ---- | --------- | -------- |  | ---- | --------- | ---- |  |  | --------- | - |  | ------- | ------ | -
|                                                     |  |      |           | U.S.    
|                                                     |  |      |           |          |  |      |           |      |  |  |           |   |  | Dollars
|                                                     |  | Yen  |           | (Note 1)
|                                                     |  |      |           |         
|                                                     |  | 2001 |           | 2002     |  | 2003 |           | 2003
|                                                     |  |      |           |          |  |      |           |     
|WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING |  |      | 22,480    |          |  |      | 22,480    |      |  |  | 22,480    |   |  |         |        |  
|BASIC AND DILUTED NET LOSS PER
COMMON SHARE          |  |      | ¥(209,085 | )        |  |      | ¥(331,234 | )    |  |  | ¥(732,955 | ) |  | $       | (6,208 | )

See notes to consolidated financial statements.

(Concluded)

F-6



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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity (Capital Deficiency)
Three Years in the Period Ended March 31, 2003

|                                                               |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  |               |  
|-------------------------------------------------------------- |  | ----------- | ------ | ------ |  | ---------------- | ---------- | ----------- |  | ------------- | ----------- | ----- |  | ------------- | ------------- | ----- |  | ----------- | ------------ | - |  |  | ------------- | -
|                                                               |  |             |        |        |  | Thousands of Yen
|                                                               |  |             |        |        |  |                 
|                                                               |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  | Accumulated |              |   |  | 
|                                                               |  | Shares of   |        |        |  |                  |            |             |  |               |             |       |  |               |               | Other |  |             |              |  
|                                                               |  | Common      |        |        |  |                  |            | Additional  |  |               |             |       |  | Comprehensive |               |       |  |            
|                                                               |  | Stock       |        | Common |  | Paid-in          |            | Accumulated |  | Income (loss) |             |       |  |              
|                                                               |  | Outstanding |        | Stock  |  | Capital          |            | Deficit     |  | (Note 12)     |             | Total
|                                                               |  |             |        |        |  |                  |            |             |  |               |             |      
|                                                               |  |             |        |        |  | Thousands of Yen
|BALANCE, APRIL 1, 2000                                         |  |             | 22,480 |        |  |                  | ¥7,082,336 |             |  |               | ¥12,028,557 |       |  |               | ¥  (6,062,112 | )     |  |             | ¥ 1,952,359  |   |  |  | ¥  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                                       |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  | (2,842,782    | )
|Effect
of IPO by Crosswave, an equity method investee
(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    |   |  |  | 16,927,750    |  
|Net loss                                                       |  |             |        |        |  |                  |            |             |  |               |             |       |  |               | (7,446,135    | )     |  |             |              |   |  |  | (7,446,135    | )
|Other comprehensive income,
net of tax                         |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             | (1,756,334   | ) |  |  | (1,756,334    | )
|                                                               |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  |               |  
|Total comprehensive loss                                       |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  | (9,202,469    | )
|                                                               |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  |               |  
|BALANCE, MARCH 31, 2002                                        |  |             | 22,480 |        |  |                  | 7,082,336  |             |  |               | 17,068,353  |       |  |               | (18,208,469   | )     |  |             | 1,783,061    |   |  |  | 7,725,281     |  
|Net loss                                                       |  |             |        |        |  |                  |            |             |  |               |             |       |  |               | (16,476,822   | )     |  |             |              |   |  |  | (16,476,822   | )
|Other comprehensive loss,
net of tax                           |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             | (1,252,795   | ) |  |  | (1,252,795    | )
|                                                               |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  |               |  
|Total comprehensive loss                                       |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  | (17,729,617   | )
|                                                               |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  |               |  
|BALANCE, MARCH 31, 2003                                        |  |             | 22,480 |        |  |                  | ¥7,082,336 |             |  |               | ¥17,068,353 |       |  |               | ¥(34,685,291  | )     |  |             | ¥    530,266 |   |  |  | ¥(10,004,336  | )
|                                                               |  |             |        |        |  |                  |            |             |  |               |             |       |  |               |               |       |  |             |              |   |  |  |               |  

F-7



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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity (Capital Deficiency)
Three Years in the Period Ended March 31, 2003

|                                     |  |                                    |        |         |  |             |         |           |  |       |          |               |  |             |         |   |  |   |          |  
|------------------------------------ |  | ---------------------------------- | ------ | ------- |  | ----------- | ------- | --------- |  | ----- | -------- | ------------- |  | ----------- | ------- | - |  | - | -------- | -
|                                     |  | Thousands of U.S. Dollars (Note 1)
|                                     |  |                                   
|                                     |  |                                    |        |         |  |             |         |           |  |       |          |               |  | Accumulated |         |   |  |  
|                                     |  |                                    |        |         |  |             |         |           |  |       |          |               |  | Other       |         |   |  |  
|                                     |  |                                    |        |         |  | Additional  |         |           |  |       |          | Comprehensive |  |             |         |  
|                                     |  | Common                             |        | Paid-in |  | Accumulated |         | Income    |  |       |          |              
|                                     |  | Stock                              |        | Capital |  | Deficit     |         | (Note 12) |  | Total
|                                     |  |                                    |        |         |  |             |         |           |  |      
|BALANCE, MARCH 31, 2002              |  | $                                  | 59,984 |         |  | $           | 144,561 |           |  | $     | (154,217 | )             |  | $           | 15,102  |   |  | $ | 65,430   |  
|Net loss                             |  |                                    |        |         |  |             |         |           |  |       | (139,551 | )             |  |             |         |   |  |   | (139,551 | )
|Other comprehensive loss, net of tax |  |                                    |        |         |  |             |         |           |  |       |          |               |  |             | (10,611 | ) |  |   | (10,611  | )
|                                     |  |                                    |        |         |  |             |         |           |  |       |          |               |  |             |         |   |  |   |          |  
|Total comprehensive loss             |  |                                    |        |         |  |             |         |           |  |       |          |               |  |             |         |   |  |   | (150,162 | )
|                                     |  |                                    |        |         |  |             |         |           |  |       |          |               |  |             |         |   |  |   |          |  
|BALANCE, MARCH 31, 2003              |  | $                                  | 59,984 |         |  | $           | 144,561 |           |  | $     | (293,768 | )             |  | $           | 4,491   |   |  | $ | (84,732  | )
|                                     |  |                                    |        |         |  |             |         |           |  |       |          |               |  |             |         |   |  |   |          |  

See notes to consolidated financial statements.

F-8



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##### Table of Contents



Internet Initiative Japan Inc. and Subsidiaries

Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2003

|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |         |              |         |  
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------------------------------- | ----------- | ---------------- | ---------- | ----------- | ---------- | ----------- | ---------- | ------------ | ---------- | ---------- | ---------- | -------- | ------- | ------------ | ------- | -
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |         | Thousands of
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |         | U.S. Dollars
|                                                                                |                                                                                  |                                                                               |                                                     |             | Thousands of Yen |            | (Note 1)   
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |            
|                                                                                |                                                                                  |                                                                               |                                                     |             | 2001             |            | 2002        |            | 2003        |            | 2003        
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |             
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            | (Unaudited)
|OPERATING ACTIVITIES:                                                           |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        
|Net loss                                                                        |                                                                                  |                                                                               | ¥(4,700,222                                         | )           |                  |            | ¥(7,446,135 | )          |             |            | ¥(16,476,822 | )          |            | $          | (139,551 | )      
|Adjustments to reconcile net loss to net cash
provided by operating activities: |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        
|                                                                                | Depreciation and amortization                                                    |                                                                               |                                                     | 2,697,703   |                  |            |             | 3,027,587  |             |            |              | 3,580,212  |            |            |          | 30,323  |             
|                                                                                | Provision for retirement and pension costs,
less payments                        |                                                                               |                                                     | 10,414      |                  |            |             | (23,799    | )           |            |              | (20,240    | )          |            |          | (171    | )           
|                                                                                | Provision for doubtful accounts                                                  |                                                                               |                                                     | 82,526      |                  |            |             | 78,482     |             |            |              | 84,339     |            |            |          | 714     |             
|                                                                                | Loss on disposal of property and equipment                                       |                                                                               |                                                     | 23,614      |                  |            |             | 22,851     |             |            |              | 112,052    |            |            |          | 949     |             
|                                                                                | Loss on short-term and other investments                                         |                                                                               |                                                     | 183,460     |                  |            |             | 432,952    |             |            |              | 277,162    |            |            |          | 2,347   |             
|                                                                                | Foreign exchange losses (gains)                                                  |                                                                               |                                                     | (1,132,083  | )                |            |             | (219,524   | )           |            |              | 277,856    |            |            |          | 2,353   |             
|                                                                                | Equity in net loss of equity method investees                                    |                                                                               |                                                     | 4,014,680   |                  |            |             | 5,482,082  |             |            |              | 12,778,386 |            |            |          | 108,227 |             
|                                                                                | Minority interest in net loss of consolidated
subsidiaries                       |                                                                               |                                                     | (159,850    | )                |            |             | (24,467    | )           |            |              | (153,251   | )          |            |          | (1,298  | )           
|                                                                                | Deferred income taxes                                                            |                                                                               |                                                     | (965,418    | )                |            |             | 1,081,241  |             |            |              | 885,784    |            |            |          | 7,502   |             
|                                                                                | Others                                                                           |                                                                               |                                                     |             |                  |            |             | 11,913     |             |            |              | 5,256      |            |            |          | 45      |             
|                                                                                | Changes in operating assets and liabilities:                                     |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |         |             
|                                                                                |                                                                                  | Increase in accounts receivable                                               |                                                     |             | (999,291         | )          |             |            | (3,559,335  | )          |              |            | (1,351,380 | )          |          |         | (11,446      | )      
|                                                                                |                                                                                  | Decrease (increase) in inventories, prepaid
expenses and other current assets |                                                     |             | 551,753          |            |             |            | (671,177    | )          |              |            | 3,944      |            |          |         | 34           |        
|                                                                                |                                                                                  | Increase in accounts payable                                                  |                                                     |             | 650,495          |            |             |            | 2,808,704   |            |              |            | 1,245,431  |            |          |         | 10,548       |        
|                                                                                |                                                                                  | Increase
(decrease) in income taxes payable                                   |                                                     |             | (109,809         | )          |             |            | (8,433      | )          |              |            | 2,711      |            |          |         | 23           |        
|                                                                                |                                                                                  | Increase (decrease) in accrued expenses and
other current liabilities         |                                                     |             | (463,672         | )          |             |            | 168,271     |            |              |            | 330,252    |            |          |         | 2,797        |        
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        
|                                                                                |                                                                                  |                                                                               | Net cash provided by (used in) operating activities |             |                  | (270,586   | )           |            |             | 1,161,213  |              |            |            | 1,581,692  |          |         |              | 13,396  |  
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        
|INVESTING ACTIVITIES:                                                           |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        
|                                                                                | Purchases of property and equipment                                              |                                                                               |                                                     | (1,367,073  | )                |            |             | (1,237,434 | )           |            |              | (1,315,390 | )          |            |          | (11,141 | )           
|                                                                                | Proceeds from sale-leaseback                                                     |                                                                               |                                                     |             |                  |            |             |            |             |            |              | 66,940     |            |            |          | 567     |             
|                                                                                | Investments in and advances to equity method
investees                           |                                                                               |                                                     | (7,552,117  | )                |            |             | (362,714   | )           |            |              |            |            |            |          |         |             
|                                                                                | Purchases of short-term and other investments                                    |                                                                               |                                                     | (23,487,334 | )                |            |             | (399,600   | )           |            |              | (51,671    | )          |            |          | (438    | )           
|                                                                                | Proceeds from sale and redemption of short-term
and other investments            |                                                                               |                                                     | 23,053,058  |                  |            |             |            |             |            |              | 26,078     |            |            |          | 221     |             
|                                                                                | Deposit of restricted cash for and purchase of
stock purchase right of Crosswave |                                                                               |                                                     |             |                  |            |             |            |             |            |              | (5,056,250 | )          |            |          | (42,824 | )           
|                                                                                | Payments of guarantee deposits                                                   |                                                                               |                                                     | (171,793    | )                |            |             | (430,455   | )           |            |              | (1,519,264 | )          |            |          | (12,867 | )           
|                                                                                | Refund of guarantee deposits                                                     |                                                                               |                                                     | 36,739      |                  |            |             | 1,830      |             |            |              | 31,353     |            |            |          | 266     |             
|                                                                                | Refund from insurance policies                                                   |                                                                               |                                                     |             |                  |            |             | 6,115      |             |            |              | 8,392      |            |            |          | 71      |             
|                                                                                | Payment for refundable insurance policies                                        |                                                                               |                                                     | (11,442     | )                |            |             | (16,103    | )           |            |              | (19,096    | )          |            |          | (162    | )           
|                                                                                | Other                                                                            |                                                                               |                                                     | (44,252     | )                |            |             | (18,837    | )           |            |              | (49,013    | )          |            |          | (415    | )           
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        
|                                                                                |                                                                                  |                                                                               | Net cash used in investing activities               |             |                  | (9,544,214 | )           |            |             | (2,457,198 | )            |            |            | (7,877,921 | )        |         |              | (66,722 | )
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        
|FORWARD                                                                         |                                                                                  |                                                                               | ¥(9,814,800                                         | )           |                  |            | ¥(1,295,985 | )          |             |            | ¥(6,296,229  | )          |            | $          | (53,326  | )      
|                                                                                |                                                                                  |                                                                               |                                                     |             |                  |            |             |            |             |            |              |            |            |            |          |        

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Internet Initiative Japan Inc. and Subsidiaries

Consolidated Statements of Cash Flows
Three Years in the Period Ended March 31, 2003

|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |         |              |        |  
|------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------------- | --------------------------------------------------- | ------------- | ---------------- | --------- | ----------- | ------------- | ---- | ---------- | ----------- | ------------ | ------- | -------- | ------- | ------- | ------------ | ------ | -
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |         | Thousands of
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |         | U.S. Dollars
|                                            |                                                                                      |                                        |                                                     |               | Thousands of Yen |           | (Note 1)   
|                                            |                                                                                      |                                        |                                                     |               |                  |           |            
|                                            |                                                                                      |                                        |                                                     |               | 2001             |           | 2002        |               | 2003 |            | 2003       
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |            
|FORWARD                                     |                                                                                      |                                        | ¥(9,814,800                                         | )             |                  |           | ¥(1,295,985 | )             |      |            | ¥(6,296,229 | )            |         | $        | (53,326 | )      
|FINANCING ACTIVITIES:                       |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|                                            | Proceeds from issuance of long-term borrowings and
convertible notes                 |                                        |                                                     | 17,102,639    |                  |           |             | 2,000,000     |      |            |             | 2,000,000    |         |          |         | 16,939  |             
|                                            | Repayments of long-term borrowings                                                   |                                        |                                                     | (690,000      | )                |           |             |               |      |            |             | (1,400,000   | )       |          |         | (11,857 | )           
|                                            | Principal payments under capital leases                                              |                                        |                                                     | (1,914,472    | )                |           |             | (2,037,133    | )    |            |             | (2,475,433   | )       |          |         | (20,966 | )           
|                                            | Net increase (decrease) in short-term borrowings                                     |                                        |                                                     | (8,070,376    | )                |           |             | (1,799,768    | )    |            |             | 1,003,367    |         |          |         | 8,498   |             
|                                            | Proceeds from issuance of subsidiary stock to
minority shareholders                  |                                        |                                                     |               |                  |           |             | 375,000       |      |            |             |              |         |          |         |         |             
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|                                            |                                                                                      |                                        | Net cash provided by (used in) financing
activities |               |                  | 6,427,791 |             |               |      | (1,461,901 | )           |              |         | (872,066 | )       |         |              | (7,386 | )
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|EFFECT OF EXCHANGE RATE CHANGES ON CASH     |                                                                                      |                                        | 799,277                                             |               |                  |           | 233,098     |               |      |            | (289,272    | )            |         |          | (2,450  | )      
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|NET DECREASE IN CASH                        |                                                                                      |                                        | (2,587,732                                          | )             |                  |           | (2,524,788  | )             |      |            | (7,457,567  | )            |         |          | (63,162 | )      
|CASH, BEGINNING OF YEAR                     |                                                                                      |                                        | 16,158,439                                          |               |                  |           | 13,570,707  |               |      |            | 11,045,919  |              |         |          | 93,554  |        
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|CASH, END OF YEAR                           |                                                                                      |                                        | ¥13,570,707                                         |               |                  |           | ¥11,045,919 |               |      |            | ¥ 3,588,352 |              |         | $        | 30,392  |        
|                                            |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|ADDITIONAL CASH FLOW INFORMATION:           |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|                                            | Interest paid                                                                        |                                        |                                                     | ¥     526,850 |                  |           |             | ¥     563,557 |      |            |             | ¥    633,649 |         |          | $       | 5,367   |             
|                                            | Income taxes paid                                                                    |                                        |                                                     | 141,597       |                  |           |             | 26,227        |      |            |             | 22,650       |         |          |         | 192     |             
|NONCASH INVESTING AND FINANCING ACTIVITIES: |                                                                                      |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |        
|                                            | Acquisition of assets by entering into capital leases                                |                                        |                                                     | 2,595,626     |                  |           |             | 2,535,943     |      |            |             | 3,578,084    |         |          |         | 30,305  |             
|                                            | Exchange of common stock investment due to merger:                                   |                                        |                                                     |               |                  |           |             |               |      |            |             |              |         |          |         |         |             
|                                            |                                                                                      | Market value of common shares acquired |                                                     |               |                  |           |             |               |      |            |             |              | 55,448  |          |         |         | 469          |       
|                                            |                                                                                      | Cost of investment                     |                                                     |               |                  |           |             |               |      |            |             |              | 132,372 |          |         |         | 1,121        |       
|                                            | Effect
of IPO by Crosswave, an equity method
investee, on additional paid-in capital |                                        |                                                     | 5,039,796     |                  |           |             |               |      |            |             |              |         |          |         |         |             

See notes to consolidated financial statements.

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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 Asia Pacific region. The Company also provides Internet systems design
and integration representing principally sales of Internet network systems
and equipment and miscellaneous Internet access-related services.

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

The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has significant indebtedness of ¥31,575,765 thousand ($267,433 thousand),
working capital deficiency of ¥3,074,882 thousand ($26,043 thousand), and
shareholders capital deficiency of ¥10,004,336 thousand ($84,732 thousand)
as of March 31, 2003.

As discussed in Note 4, the
Companys former equity method investee accounted for under the
equity method as of and for the year ended March 31, 2003,
Crosswave Communications Inc. (Crosswave), filed a voluntary petition for
the commencement of corporate reorganization proceedings in Japan. The
Company is taking actions to address the commencement of corporate
reorganization proceedings by Crosswave and its financial performance such
as private placements to shareholders and third parties totaling
¥13,366,073 thousand ($113,207 thousand) on June 26, 2003 and September 16,
2003, as discussed in Note 16. Although no assurances can be given, the
Company expects that these actions will enable it to successfully fulfill
its near term liquidity requirements and continue operating as a going
concern.

Certain Significant Risks and Uncertainties As a result of Crosswaves
corporate reorganization, the Company believes that any of the following
areas could have a material adverse effect on the Companys future
financial position, results of operations or cash flows: the ability to
replace or supplement Crosswave as a service provider or use its network
and Internet data centers in the event that Crosswaves service becomes
partly or wholly unavailable; loss of existing or potential customers
switching to other services providers; difficulty in marketing service
offerings as a total network solution provider; the ability to obtain
future financing; strategic relationships with lease companies for routers,
servers, network machines, transmission lines, software and other items;
reliance on other telecommunications providers and other supplies; exercise
of significant influence by a major shareholder; any litigation or claims
brought in connection with Crosswaves reorganization.

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, results 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 and 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.

The Company relies on telecommunications carriers to provide long-distance
lines for backbone and local connections to customers, including Crosswave,
a former equity method investee, 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.

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

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

Summary of Significant
Accounting Policies

Translation into U.S. Dollars IIJ maintains its accounts in Japanese yen,
the currency of the country in which it is incorporated and principally
operates. The U.S. dollar amounts included herein represent a translation
using the noon buying rate in New York City for cable transfers in yen as
certified for customs purposes by the Federal Reserve Bank of New York at
March 31, 2003 of ¥118.07= $1 solely for the convenience of the reader.
The translation should not be construed as a representation that the yen
amounts have been, could have been, or could in the future be converted
into U.S. dollars.

Consolidation The consolidated financial statements include the accounts of
IIJ and all of its subsidiaries, Net Care, Inc. (Net Care), IIJ
Technology Inc. (IIJ Technology), IIJ Media Communications Inc. (MC)
and IIJ America, Inc. (IIJ America) which have fiscal years ending March
31, except for IIJ America. IIJ Americas fiscal year ends December 31 and
such date were used for purposes of preparing the consolidated financial
statements as it is not practicable for the subsidiary to report its
financial results as of March 31. All significant events that occurred
during the intervening period are appropriately reflected in the
accompanying consolidated financial statements. Significant intercompany
transactions and balances have been eliminated in consolidation.
Investments in companies over which IIJ has significant influence but not
control are accounted for by the equity method.

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

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  | 

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 a one year for
dedicated Internet access services and generally one month for dial-up
Internet access services. All these services are billed and recognized
monthly on a straight-line basis.

Value-added service revenues consist principally of sales of 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 housing, monitoring and security services. Other revenues under
connectivity and value-added services consist principally of call-center
customer support. The terms of these services are generally for one year
and revenues are recognized on a straight-line basis during the service
period.

Initial set up fees received in connection with connectivity services and
value-added services are deferred and recognized over the contract period.

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

Equipment sales represent revenues earned in which the Company acts as
principal in the transaction, takes title to the equipment and has risks
and rewards of ownership while in inventory. This category also includes
sales of
network systems to Crosswave, a former equity method
investee accounted for under the equity method as of and for the year
ended March 31, 2003, for the
three years in the period ended March 31, 2003.

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

The Company reviews the fair value of available-for-sale investments on a
regular basis to determine if the fair value of any individual investment
has declined below its cost and if such decline is other than temporary.
If the decline in value is judged to be other than temporary, the cost
basis of the investment is written down to fair value. Other than
temporary declines in value are judged taking into consideration the
guidance in Staff Accounting Bulletin (SAB) No. 59, Noncurrent
Marketable Equity Securities issued by the Securities and Exchange
Commission (SEC). The resulting realized loss is included in the
consolidated statements of operations in the period in which the decline
was deemed to be other than temporary.

Non-marketable equity securities are carried at cost, however, if the value
of a security has declined and is judged to be other than temporary, the
security is written down to the estimated fair value.

Inventories Inventories consist mainly of network equipment purchased for
resale and workinprocess for development of net work system,
and are stated at the lower of cost, which is determined principally
by the averagecost method, or market. Inventories are reviewed
periodically and items considered to be slowmoving or obsolete
are written down to their estimated net realizable value.

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 consist substantially of refundable
lease deposits for office premises.

Long-lived Assets Long-lived assets consist principally of property and
equipment, including those items leased under capital leases. On April 1,
2002, the Company adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The
adoption of SFAS No. 144 did not have a material effect on the Companys
consolidated financial position and results of operations. Prior to the
adoption SFAS No. 144, the Company accounted for long-lived assets in
accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets for Long-Lived Assets to Be Disposed
Of. 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 losses for long-lived
assets for the three years in the period ended March 31, 2003.

Goodwill and Other Intangible Assets On April 1, 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under the
statement, goodwill (including equity-method goodwill) and intangible
assets that are deemed to have indefinite useful lives are not amortized,
but are subject to impairment testing. The Company selected March 31 as
its annual impairment testing date. Impairment testing is required to be
performed at adoption and at least annually thereafter. Upon the adoption
of the statement, the Company ceased the amortization of goodwill recorded
in past business combinations and acquisitions. Additionally, the Company
ceased the amortization of intangible assets that are deemed to have
indefinite lives. As required by SFAS No. 142, the Company also reassessed
the useful lives and the classification of its identifiable intangible
assets and determined them to be appropriate. See Note 6 for further
discussion.

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.

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

Foreign Currency Transactions Foreign currency assets and liabilities,
which consist substantially of cash
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.

Derivative Financial Instruments On April 1, 2001, the Company adopted SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of SFAS No. 133. These new
standards require that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair
value. In accordance with these new standards, the Company designated
interest swap contracts as a hedge of the variability of cash flows to be
paid related to interest on floating rate borrowings (cash flow hedge) and
an effective portion of the derivatives gain or loss is initially reported
as a component of other comprehensive income and subsequently reclassified
into earnings when the underlying transaction affects earnings. An
ineffective portion of the gain or loss is reported in earning immediately.
The cumulative effect adjustment upon the adoption of SFAS No. 133 and
SFAS No. 138 resulted in a decrease to other comprehensive income of
¥25,594 thousand.

Prior to the adoption of SFAS No. 133 and SFAS No. 138, gains or losses on
foreign exchange forward contracts and on foreign currency denominated cash
and short-term investments which were designated to hedge identifiable
commitments for the payment of connectivity leases in U.S. dollars had been
deferred and included in the measurement of the related transactions.
Interest swap contracts were considered to effectively hedge interest to be
paid on floating rate borrowings thereby fair value of the swap contracts
was not remeasured, but the differential to be paid or received under the
swap contracts was accrued and included in interest expense.

Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and related
interpretations. Accordingly, the companies recognize compensation expense
in an amount equal to the excess of the quoted market price over the
exercise price of the option at the grant date. For options with a vesting
period, the compensation expense is charged to operations ratably over the
vesting period. The Company has not recognized any stock-based
compensation expense for the years ended March 31, 2001, 2002 and 2003.

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. All potential common shares, shares issuable
upon exercise of stock options or conversion of convertible notes, have
been excluded from the computation of diluted net loss per share for all
periods presented because the effect would be antidilutive. Diluted net
loss per share does not include the effects of the following potential
common shares:

|                                                                           |  |                       |     |      |  |      |     |  |  |  |     | 
|-------------------------------------------------------------------------- |  | --------------------- | --- | ---- |  | ---- | --- |  |  |  | --- | 
|                                                                           |  | Years ended March 31,
|                                                                           |  |                      
|                                                                           |  | 2001                  |     | 2002 |  | 2003
|                                                                           |  |                       |     |      |  |     
|Shares issuable under stock options                                        |  |                       | 290 |      |  |      | 685 |  |  |  | 675 | 
|Shares issuable related to convertible
notes on an as-if-converted basis |  |                       | 625 |      |  |      | 625 |  |  |  | 625 | 

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

New Accounting Standards In June 2001, the FASB issued SFAS No. 143,
Accounting for Assets Retirement Obligation, which is effective for
fiscal year beginning after June 15, 2002. The pronouncement addresses the
recognition and remeasurement of obligations associated with the retirement
of tangible long-lived assets and the associated assets retirement costs.
Management does not expect this pronouncement to have a material impact on
the Companys consolidated financial position or results of operations.

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In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than the date of an
entitys commitment to an exit plan, and establishes that fair value is the
objective for initial measurement of the liability. SFAS No. 146 is
effective for exit and disposal activities initiated after December 31,
2002. Management does not expect this pronouncement to have a material
impact on the Companys consolidated financial position or results of
operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, except for certain
provisions, and for hedging relationship designated after June 30, 2003.
Management does not expect this pronouncement to have a material impact on
the Companys consolidated financial position or results of operations.

In November 2002, the EITF reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities and how arrangement
consideration should be measured and allocated to the separate units
of accounting in the arrangement. The provisions of EITF Issue No.
00-21 apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is currently assessing the
impact of the adoption of EITF Issue No. 00-21 upon its financial
position and results of operations.

In November 2002, the FASB issued
Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements in this
interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a material effect upon the Companys financial position
or results of operations.

2. OTHER INVESTMENTS

Pursuant to SFAS No. 115, all of the Companys marketable equity
securities, principally marketable shares of common stock of Japanese
enterprises were classified as available-for-sale securities. Information
regarding the securities classified as available-for-sale at March 31, 2002
and 2003, is as follows:

|                                     |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|------------------------------------ |  | ---------------- | ------- | ----- |  | ---------- | --------- | ---------- |  | ---- | ------ |  |  | - | --------- | 
|                                     |  | Thousands of Yen
|                                     |  |                 
|                                     |  |                  |         |       |  | Unrealized |           | Unrealized |  | Fair
|                                     |  | Cost             |         | Gains |  | Losses     |           | Value     
|                                     |  |                  |         |       |  |            |           |           
|March 31, 2002                       |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|Available-for-saleEquity securities |  | ¥                | 356,669 |       |  | ¥          | 3,048,701 |            |  | ¥    | 19,944 |  |  | ¥ | 3,385,426 | 
|                                     |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|March 31, 2003                       |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 
|Available-for-saleEquity securities |  | ¥                | 265,730 |       |  | ¥          | 954,679   |            |  | ¥    | 40,493 |  |  | ¥ | 1,179,916 | 
|                                     |  |                  |         |       |  |            |           |            |  |      |        |  |  |   |           | 

|                                     |  |                           |       |       |  |            |       |            |  |      |     |  |  |   |       | 
|------------------------------------ |  | ------------------------- | ----- | ----- |  | ---------- | ----- | ---------- |  | ---- | --- |  |  | - | ----- | 
|                                     |  | Thousands of U.S. Dollars
|                                     |  |                          
|                                     |  |                           |       |       |  | Unrealized |       | Unrealized |  | Fair
|                                     |  | Cost                      |       | Gains |  | Losses     |       | Value     
|                                     |  |                           |       |       |  |            |       |           
|March 31, 2003                       |  |                           |       |       |  |            |       |            |  |      |     |  |  |   |       | 
|Available-for-saleEquity securities |  | $                         | 2,250 |       |  | $          | 8,086 |            |  | $    | 343 |  |  | $ | 9,993 | 
|                                     |  |                           |       |       |  |            |       |            |  |      |     |  |  |   |       | 

Other investments include non-marketable equity and debt securities
amounting to ¥2,020,639 thousand and ¥1,860,273 thousand ($15,756
thousand) at March 31, 2002 and 2003, respectively.

Losses on write-down of investments in certain marketable and nonmarketable
equity securities, included in other income (expense), were recognized to
reflect the decline in value considered to be other than temporary,
totaling ¥301,580 thousand and ¥131,372 thousand, respectively for the year
ended March 31, 2002, totaling ¥15,515 thousand ($131 thousand) and
¥175,442 thousand ($1,486 thousand), respectively for the year ended March
31, 2003.

Loss on exchange of securities of ¥76,924 thousand ($652 thousand),
included in other income (expense), for the year ended March 31, 2003,
represented a non-monetary loss upon the exchange of marketable common shares in a merger transaction.

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3. ALLOWANCE FOR DOUBTFUL ACCOUNTS

An analysis of allowance for doubtful accounts for the years ended March
31, 2001, 2002 and 2003, 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, 2001 |  | ¥                | 97,852  |             |  | ¥        | (41,157  | )             |  | ¥ | 82,526 |  |  | ¥ | 139,221 | 
|                          |  |                  |         |             |  |          |          |               |  |   |        |  |  |   |         | 
|Year ended March 31, 2002 |  | ¥                | 139,221 |             |  | ¥        | (69,829  | )             |  | ¥ | 78,482 |  |  | ¥ | 147,874 | 
|                          |  |                  |         |             |  |          |          |               |  |   |        |  |  |   |         | 
|Year ended March 31, 2003 |  | ¥                | 147,874 |             |  | ¥        | (106,859 | )             |  | ¥ | 84,339 |  |  | ¥ | 125,354 | 
|                          |  |                  |         |             |  |          |          |               |  |   |        |  |  |   |         | 

|                          |  |                           |       |             |  |          |      |               |  |   |     |  |  |   |       | 
|------------------------- |  | ------------------------- | ----- | ----------- |  | -------- | ---- | ------------- |  | - | --- |  |  | - | ----- | 
|                          |  | 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, 2003 |  | $                         | 1,252 |             |  | $        | (904 | )             |  | $ | 714 |  |  | $ | 1,062 | 
|                          |  |                           |       |             |  |          |      |              

4. INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTEES

IIJ utilizes various business units in Japan and neighboring countries to
form and operate its Internet business. Businesses operated by non-consolidated investees include dedicated high-speed data communication
services, data center 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 i-Heart Inc.) and network construction, consulting,
design and maintenance services (Net Chart Japan Corporation Net Chart).

IIJs ownership percentages of these equity method investees range from 20
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 equity method investees include
sales of network equipment to and cost of subcontracting services by Net
Chart, and Internet access cost and revenues with AIH.

The Company had neither guarantees nor commitments to the equity method
investees other than Crosswave as of March 31, 2003.

The aggregate amounts of balances and transactions of the Company with
these equity method investees other than Crosswave as of March 31, 2002 and
2003 and for each of the three years in the period ended March 31, 2003,
were summarized as follows:

Thousands ofThousands of Yen
    
    U.S. Dollars2001
    
    2002
    
    2003
    
    2003Accounts receivable
    
    
    
    
   
    

    ¥
    
    37,626
    
    ¥
    
    219,019
    
    $
    
    1,855Accounts payable
    
    
    
    
    
    
    
   

    149,832
    
    
    
    62,065
    
   
   
   526Revenues
    
    
    ¥
    
    1,178,973
    
    
    
    1,870,227
    
    
    
    1,460,123
    
    
  
    12,367Costs and expenses
    
    
    
    
    624,219
    
    
    
    1,036,359
    
    
    
    1,402,293
    
    
   
    11,877


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The Companys investments in and advances to these equity method investees
and respective ownership percentage at March 31, 2002 and 2003, consisted
of the following:

Thousands ofThousands of Yen
    
    U.S. Dollars2002
    
    
    
    
    
    


    2003
    

    2003AIH
    
    
    26.69
    
    
    ¥
    
    597,506
    
    
   26.69
    
    
    
    ¥
    
    588,452
    
    $
    
    4,984AyalaPort
    
    
    25.64
    
    
    
    
    209,410
    
    
    25.64
    
    
    
    
    
    43,109
    
    
    
    365Multifeed
    
    
    28.30
    
    
    
    
    145,095
    
    
    28.30
    
    
    
    
    
    180,647
    
    
   
    1,530Crosswave
    
    
    37.85
    
    
    
    
    7,612,573
    
    
    37.85Other
    
    
    
    
    
    
    
    289,444
    
    
    
    
    
    
    
   
    303,812
    
    
    
    2,573Total
    
    
    
   
    
    ¥
    
    8,854,028
    
    
    
    
    
    
    ¥
    
    1,116,020
    
    $
    
    9,452


The advances to the equity method investees, included in the above, as of
March 31, 2002 and 2003, were as follows:

Thousands ofThousands of Yen
    
    U.S. Dollars2002
    
    
    
    
    
    2003
    
    
    
    
    
    

    
    2003AIH Taiwan
    
    
    ¥
    
    73,595
    
    
    
    ¥
    
    
    
    75,689
    
    
    
    
    
    
    $
    641i-heart
    
    
    
    
    51,246
    
    
    
    
    
    
    
    51,246
    
    
    
    
    
    
    
    434AyalaPort
    
    
    
    
    42,610
    
    
    
    
    
    
    
    38,392
    
    
    
    
    
    
    
    325Total
    
    
    ¥
    
    167,451
    
    
    
    ¥
    
    
    
    165,327
    
    
    
    
    
    
    $
    1,400


Crosswave, was formed in October 1998
with ownership interests held by IIJ (40 percent), Toyota Motor
Corporation (Toyota) (30 percent) and Sony Corporation (Sony) (30
percent). On August 9, 2000, Crosswave completed an initial public
offering of 17,392,000 American Depository Shares (ADSs), representing
86,960 shares of common stock at an initial offering price of $14.00 per
ADSs 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 in the aggregate. Proceeds from these
transactions to Crosswave amounted to ¥31,032,546 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. 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. As a result of these
transactions, the ownership of IIJ, Sony, and Toyota at March 31, 2003 was
37.85 percent, 23.9 percent and 23.9 percent, respectively.

On May 21, 2002, in connection with the Crosswave Financing Facilities
Agreement (the Agreement), the Company entered into a Cash Deficiency
Support Agreement (CDS Agreement) with Crosswave and four Japanese
commercial banks. In accordance with the provisions of the CDS Agreement,
the Company deposited ¥ 5,000,000 thousand ($42,348 thousand) into a
restricted account with a participating bank in May 2002. Under the terms
of the CDS Agreement, the deposited cash was restricted over the period in
which the Crosswave loans were outstanding and could only be used for debt
service in the event Crosswave was otherwise unable to meet scheduled
payments under the CDS Agreement. Any such restricted cash used for debt
service would result in a corresponding unsecured funding to Crosswave by
the Company that would be subordinate to the Crosswave loans outstanding
under the CDS Agreement. As a result of the voluntary petition for the
commencement of corporate reorganization proceedings in Japan filed on
August 20, 2003, Crosswave is deemed to have made a loan to the Company.
Any recovery from Crosswave on this loan, however, is required to be paid
to the banks until such point as they have been paid in full. The Company
is not liable under the terms of the CDS Agreement for any amounts in
addition to this amount of ¥5 billion ($42,348 thousand).

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In May and June 2003, the Company made unsecured loans of ¥1,719,981
thousand ($14,567 thousand) in total
to Crosswave with interest at the short-term prime rate plus 0.3%
(1.675%) p.a. in order for Crosswave to meet its scheduled debt service
obligation. Original maturity of the loans was July 31, 2003, which was
extended to September 30, 2003.

On August 20, 2003, Crosswave filed a voluntary petition for the
commencement of corporate reorganization proceedings in Japan. On August
28, 2003, Crosswave received an order from the Tokyo District Court for the
commencement of corporate reorganization proceedings. Crosswaves ADSs
were removed from the NASDAQ National Market by NASDAQ effective August 29,
2003. As a result of the commencement of corporate reorganization
proceedings, the Company became unable to exercise shareholder voting
rights during the pendency of corporate reorganization and expects its
equity interest to be eliminated by operation of law upon approval of a
reorganization plan or liquidation of Crosswave. As such, the Company no
longer has had the ability to exercise significant influence over operating and
financial policies of Crosswave thereafter.

In addition to the equity method loss
of Crosswave of ¥5,514,383 thousand ($46,704 thousand) for the
year ended March 31, 2003, based on unaudited net loss information publicly
disclosed by Crosswave prior to the commencement of corporate
reorganization proceedings by Crosswave and not reflecting any
adjustments which may be required in respect thereof, the Company assessed the impairment of its investment in and deposits for
Crosswave considering an evaluation of the
recoverability of the equity investees underlying net assets through sale
or future operations upon emergence from bankruptcy and recognized
impairment loss on investment in and deposits for Crosswave of
¥7,153,087 thousand ($60,583 thousand) as of March 31, 2003 which
consisted of the carrying amount of the investment of ¥2,098,762 thousand
($17,776 thousand), the realized gain of related foreign currency
translation adjustments of ¥1,925 thousand
($16 thousand), stock purchase rights of ¥56,250 thousand ($476
thousand) and deposits of ¥5,000,000 thousand ($42,348 thousand) under the
CDS Agreement. The loan of ¥1,719,981 thousand ($14,567 thousand) made by
the Company in May and June 2003 to Crosswave and accounts receivable
from Crosswave of ¥344,708 thousand
($2,920 thousand) as of July 31, 2003, were not recorded as part
of the loss for the year ended March 31, 2003; such loan and
accounts receivable will be
written off during the first semiannual period of the year ending March 31, 2004.

The Company had total claims against Crosswave of an
aggregate ¥7,064,689 thousand ($59,835 thousand) for deposits under the CDS
Agreement of ¥5,000,000 thousand ($42,348 thousand), loan of ¥1,719,981
thousand ($14,567 thousand) as of August 20, 2003, and accounts receivable of ¥344,708 thousand
($2,920 thousand) as of July 31, 2003, respectively.

Transactions between the Company and Crosswave include IIJs sale of
network systems to Crosswave in the amount of ¥315,925 thousand, ¥1,078,863
thousand and ¥1,160,638 thousand ($9,830 thousand) for the years ended
March 31, 2001, 2002 and 2003, respectively, of which cost of purchased
equipment sold amounted to ¥305,039 thousand, ¥949,537 thousand and ¥
1,106,373 thousand ($9,370 thousand), respectively. In addition, other
transactions with Crosswave included the cost of dedicated high-speed data
communication services.

The amounts of balances and transactions of the Company with Crosswave as
of March 31, 2002 and 2003 and for each of the three years in the period
ended March 31, 2003, are summarized as follows:

|                    |  |                  |           |              |  |      |           |      |  |   |           |  |  |              |        | 
|------------------- |  | ---------------- | --------- | ------------ |  | ---- | --------- | ---- |  | - | --------- |  |  | ------------ | ------ | 
|                    |  | Thousands of Yen |           | Thousands of
|                    |  |                  |           |              |  |      |           |      |  |   |           |  |  | U.S. Dollars
|                    |  |                  |           |             
|                    |  | 2001             |           | 2002         |  | 2003 |           | 2003
|                    |  |                  |           |              |  |      |           |     
|Accounts receivable |  |                  |           |              |  | ¥    | 467,075   |      |  | ¥ | 493,694   |  |  | $            | 4,181  | 
|Accounts payable    |  |                  |           |              |  |      | 460,292   |      |  |   | 670,920   |  |  |              | 5,682  | 
|Guarantees          |  |                  |           |              |  |      | 3,200     |      |  |   | 3,200     |  |  |              | 27     | 
|Revenues            |  | ¥                | 822,119   |              |  |      | 2,641,976 |      |  |   | 2,641,438 |  |  |              | 22,372 | 
|Costs and expenses  |  |                  | 1,819,491 |              |  |      | 4,526,458 |      |  |   | 6,199,229 |  |  |              | 52,505 | 

The Company had guaranteed ¥3,200 thousand ($27 thousand) of annual rent
payments of Crosswave. The rent agreement had a term of one year with a
renewal option. The Company will be required to pay the guaranteed amount
if Crosswave is unable. No liability was recorded with respect to such
guarantee as of March 31, 2003.

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5. PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2002 and 2003 consisted of the
following:

|                                                            |       |   |                  |            |              |   |            |            |  |   |              |         | 
|----------------------------------------------------------- | ----- | - | ---------------- | ---------- | ------------ | - | ---------- | ---------- |  | - | ------------ | ------- | 
|                                                            |       |   |                  |            |              |   |            |            |  |   | Thousands of
|                                                            |       |   | Thousands of Yen |            | U.S. Dollars
|                                                            |       |   |                  |            |             
|                                                            |       |   | 2002             |            | 2003         |   | 2003      
|                                                            |       |   |                  |            |              |   |           
|Data communications equipment                               |       | ¥ | 698,158          |            |              | ¥ | 846,631    |            |  | $ | 7,171        |        
|Office and other equipment                                  |       |   | 508,993          |            |              |   | 480,941    |            |  |   | 4,073        |        
|Leasehold improvements                                      |       |   | 302,177          |            |              |   | 409,398    |            |  |   | 3,467        |        
|Purchased software                                          |       |   | 3,948,128        |            |              |   | 4,552,181  |            |  |   | 38,555       |        
|Capitalized leases, primarily data
communications equipment |       |   | 8,493,003        |            |              |   | 10,810,872 |            |  |   | 91,563       |        
|Construction in progress                                    |       |   |                  |            |              |   | 15,000     |            |  |   | 127          |        
|                                                            |       |   |                  |            |              |   |            |            |  |   |              |        
|                                                            | Total |   |                  | 13,950,459 |              |   |            | 17,115,023 |  |   |              | 144,956 | 
|Less accumulated depreciation and
amortization              |       |   | (6,195,033       | )          |              |   | (7,963,451 | )          |  |   | (67,447      | )      
|                                                            |       |   |                  |            |              |   |            |            |  |   |              |        
|Property and equipment  net                                |       | ¥ | 7,755,426        |            |              | ¥ | 9,151,572  |            |  | $ | 77,510       |        
|                                                            |       |   |                  |            |              |   |            |            |  |   |              |        

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company ceased amortizing goodwill and intangible assets with
indefinite lives upon adoption of SFAS No. 142 Goodwill and Other
Intangible Assets on April 1, 2002. The following table provides pro
forma results for the years ended March 31, 2002 and 2001, as if
non-amortization provisions of SFAS No. 142 had been applied in
2001 and 2002, compared with actual results for the year ended March 31, 2003:

|                                |                                     |    |                  |        |              |    |           |         |      |    |            |   |  |    |              |   | 
|------------------------------- | ----------------------------------- | -- | ---------------- | ------ | ------------ | -- | --------- | ------- | ---- | -- | ---------- | - |  | -- | ------------ | - | 
|                                |                                     |    |                  |        |              |    |           |         |      |    |            |   |  |    | Thousands of
|                                |                                     |    | Thousands of Yen |        | U.S. Dollars
|                                |                                     |    |                  |        |             
|                                |                                     |    | 2001             |        | 2002         |    | 2003      |         | 2003
|                                |                                     |    |                  |        |              |    |           |         |     
|Reported net loss               |                                     | ¥( | 4,700,222        | )      |              | ¥( | 7,446,135 | )       |      | ¥( | 16,476,822 | ) |  | $( | 139,551      | )
|Add back: Goodwill amortization |                                     |    | 21,324           |        |              |    | 21,324    |         |      |    |            |   |  |    |              |  
|                                | Equity method goodwill
amortization |    |                  | 91,127 |              |    |           | 356,734 |      |    |            |  |  |    |              |  | 
|                                | Telephone rights
amortization       |    |                  | 21,457 |              |    |           | 21,470  |      |    |            |  |  |    |              |  | 
|                                |                                     |    |                  |        |              |    |           |         |      |    |            |   |  |    |              |  
|Adjusted net loss               |                                     | ¥( | 4,566,314        | )      |              | ¥( | 7,046,607 | )       |      | ¥( | 16,476,822 | ) |  | $( | 139,551      | )
|                                |                                     |    |                  |        |              |    |           |         |      |    |            |   |  |    |              |  

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Basic and diluted earnings per common share:

|                                |                                     |                               |           |       |     |              |           |        |     |   |           |   |   |   |        |   |   | 
|------------------------------- | ----------------------------------- | ----------------------------- | --------- | ----- | --- | ------------ | --------- | ------ | --- | - | --------- | - | - | - | ------ | - | - | 
|                                |                                     |                               |           | Yen   |     | U.S. Dollars
|                                |                                     |                               |           |       |     |             
|For the years ended March 31,   |                                     | 2001                          |           | 2002  |     | 2003         |           | 2003  
|                                |                                     |                               |           |       |     |              |           |       
|Reported
net loss per share     |                                     | ¥                             | (209,085  | )     |     | ¥            | (331,234  | )      |     | ¥ | (732,955  | ) |   | $ | (6,208 | )
|Add back: Goodwill amortization |                                     |                               | 949       |       |     |              | 949       |        |     |   |           |   |   |   |        |  
|                                | Equity method goodwill amortization |                               |           | 4,054 |     |              |           | 15,869 |     |   |           |  |   |   |        |  |  
|                                |                                     | Telephone rights amortization |           |       | 954 |              |           |        | 955 |   |           |   |  |   |        |   |  | 
|                                |                                     |                               |           |       |     |              |           |        |     |   |           |   |   |   |        |  
|Adjusted
net loss per share     |                                     |                               | ¥(203,128 | )     |     |              | ¥(313,461 | )      |     |   | ¥(732,955 | ) |   | $ | (6,208 | )
|                                |                                     |                               |           |       |     |              |           |        |     |   |           |   |   |   |        |  

The components of intangible assets as of March 31, 2002 and 2003 are as
follows:

|                                 |                  |   |                  |         |              |   |         |         |  |   |              |       | 
|-------------------------------- | ---------------- | - | ---------------- | ------- | ------------ | - | ------- | ------- |  | - | ------------ | ----- | 
|                                 |                  |   |                  |         |              |   |         |         |  |   | Thousands of
|                                 |                  |   | Thousands of Yen |         | U.S. Dollars
|                                 |                  |   |                  |         |             
|                                 |                  |   | 2002             |         | 2003         |   | 2003   
|                                 |                  |   |                  |         |              |   |        
|Non-amortized intangible assets: |                  |   |                  |         |              |   |         |         |  |   |              |      
|                                 | Telephone rights |   | ¥                | 162,344 |              |   | ¥       | 162,323 |  |   | $            | 1,375 | 
|Goodwill                         |                  |   | 27,528           |         |              |   | 27,528  |         |  |   | 233          |      
|                                 |                  |   |                  |         |              |   |         |         |  |   |              |       | 
|Total intangible assets          |                  | ¥ | 189,872          |         |              | ¥ | 189,851 |         |  | $ | 1,608        |      
|                                 |                  |   |                  |         |              |   |         |         |  |   |              |       | 

No goodwill was acquired or impaired during the year ended March 31, 2003.

7. LEASES

The Company enters into, in the normal
course of business, operating and capital lease arrangements which
are accounted for in accordance with SFAS No. 13, Accounting for
leases.

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
and international backbone with Crosswave is for one-year period and cancelable. The
leases for international backbone other than Crosswave as of March 31, 2003, 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, for which refundable lease deposits are capitalized as
guarantee deposits, and certain office equipment under non-cancelable operating leases
which expire on various dates through the year 2006 and also leases its
network operation centers under non-cancelable operating leases.

Lease expenses related to backbone lines for the years ended March 31,
2001, 2002 and 2003, amounted to ¥8,122,256 thousand, ¥5,656,116 thousand
and ¥5,235,517 thousand ($44,342 thousand), respectively. Lease expenses
for local access lines for the years ended March 31, 2001, 2002 and 2003,
which are only attributable to dedicated access revenues, amounted to
¥3,142,392 thousand, ¥3,872,101 thousand and ¥3,861,955 thousand ($32,709
thousand), respectively. Other lease expenses for the years ended March
31, 2001, 2002 and 2003, amounted to ¥1,858,987 thousand, ¥2,764,026
thousand and ¥ 3,551,006 thousand ($30,075 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 ¥8,493,003
thousand and ¥3,772,937 thousand at March 31, 2002 and ¥10,810,872 thousand
($91,563 thousand) and ¥ 5,000,233 thousand ($42,350 thousand) at March 31,
2003, respectively.

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As of March 31, 2003, future lease payments under non-cancelable operating
leases, including the
aforementioned non-cancelable connectivity lease agreements (but excluding
dedicated access lines which the Company charges outright to customers),
and capital leases were as follows:

|                                                    |                     |   |                  |         |                           |   |           |           |           |   |            |           |              |   |       |       |  |   |        |        |  |   |         |        | 
|--------------------------------------------------- | ------------------- | - | ---------------- | ------- | ------------------------- | - | --------- | --------- | --------- | - | ---------- | --------- | ------------ | - | ----- | ----- |  | - | ------ | ------ |  | - | ------- | ------ | 
|                                                    |                     |   | Thousands of Yen |         | Thousands of U.S. Dollars
|                                                    |                     |   |                  |         |                          
|                                                    |                     |   | Connectivity     |         |                           |   |           |           |           |   |            |           | Connectivity |   |       |       |  |   |        |        | 
|                                                    |                     |   | Lines            |         | Other                     |   |           |           |           |   | Lines      |           | Other        |   |       |       | 
|                                                    |                     |   | Operating        |         | Operating                 |   | Capital   |           | Operating |   | Operating  |           | Capital     
|                                                    |                     |   | Leases           |         | Leases                    |   | Leases    |           | Leases    |   | Leases     |           | Leases      
|                                                    |                     |   |                  |         |                           |   |           |           |           |   |            |           |             
|Year ending March 31:                               |                     |   |                  |         |                           |   |           |           |           |   |            |           |              |   |       |       |  |   |        |        |  |   |         |       
|                                                    | 2004                |   | ¥                | 676,900 |                           |   | ¥         | 1,361,899 |           |   | ¥          | 2,889,725 |              |   | $     | 5,733 |  |   | $      | 11,535 |  |   | $       | 24,475 | 
|                                                    | 2005                |   |                  | 193,784 |                           |   |           | 1,622,617 |           |   |            | 2,048,011 |              |   |       | 1,641 |  |   |        | 13,743 |  |   |         | 17,346 | 
|                                                    | 2006                |   |                  | 88,569  |                           |   |           | 1,507,326 |           |   |            | 1,226,040 |              |   |       | 750   |  |   |        | 12,766 |  |   |         | 10,384 | 
|                                                    | 2007                |   |                  | 30,368  |                           |   |           | 58,384    |           |   |            | 452,557   |              |   |       | 257   |  |   |        | 494    |  |   |         | 3,833  | 
|                                                    | 2008                |   |                  |         |                           |   |           | 18,443    |           |   |            | 19,958    |              |   |       |       |  |   |        | 156    |  |   |         | 169    | 
|                                                    | 2009 and thereafter |   |                  |         |                           |   |           | 122,954   |           |   |            | 29,054    |              |   |       |       |  |   |        | 1,041  |  |   |         | 246    | 
|                                                    |                     |   |                  |         |                           |   |           |           |           |   |            |           |              |   |       |       |  |   |        |        |  |   |         |       
|Total minimum lease
payments                        |                     | ¥ | 989,621          |         |                           | ¥ | 4,691,623 |           |           |   | 6,665,345  |           |              | $ | 8,382 |       |  | $ | 39,735 |        |  |   | 56,453  |       
|                                                    |                     |   |                  |         |                           |   |           |           |           |   |            |           |              |   |       |       |  |   |        |        |  |   |         |       
|Less amounts representing
interest                  |                     |   |                  |         |                           |   |           |           |           |   | (313,179   | )         |              |   |       |       |  |   |        |        |  |   | (2,653  | )     
|                                                    |                     |   |                  |         |                           |   |           |           |           |   |            |           |              |   |       |       |  |   |        |        |  |   |         |       
|Present value of net
minimum capital lease
payments |                     |   |                  |         |                           |   |           |           |           |   | 6,352,166  |           |              |   |       |       |  |   |        |        |  |   | 53,800  |       
|Less current portion                                |                     |   |                  |         |                           |   |           |           |           |   | (2,716,386 | )         |              |   |       |       |  |   |        |        |  |   | (23,007 | )     
|                                                    |                     |   |                  |         |                           |   |           |           |           |   |            |           |              |   |       |       |  |   |        |        |  |   |         |       
|Noncurrent portion                                  |                     |   |                  |         |                           |   |           |           |           | ¥ | 3,635,780  |           |              |   |       |       |  |   |        |        |  | $ | 30,793  |       
|                                                    |                     |   |                  |         |                           |   |           |           |           |   |            |           |              |   |       |       |  |   |        |        |  |   |         |       

8. BORROWINGS AND CONVERTIBLE NOTES

Short-term borrowings at March 31, 2002 and 2003, consist of unsecured
notes payable to banks of ¥50,000 thousand at March 31, 2002 and bank
overdrafts of ¥3,770,232 thousand and ¥4,823,599 thousand ($40,854
thousand) at March 31, 2002 and 2003, respectively. Short-term borrowings bear fixed-rate interest
and their weighted average rates on the short-term borrowings at March 31,
2002 and 2003 were 1.393 percent and 1.375 percent, respectively.

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Long-term borrowings as of March 31, 2002 and 2003, consisted of the
following:

|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   |                  |   |              |   |            |           |  |   |              |       | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | - | ---------------- | - | ------------ | - | ---------- | --------- |  | - | ------------ | ----- | 
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   |                  |   |              |   |            |           |  |   | Thousands of
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   | Thousands of Yen |   | U.S. Dollars
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   |                  |   |             
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   | 2002             |   | 2003         |   | 2003      
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   |                  |   |              |   |           
|Unsecured long-term loans payable to
banks, maturing at various dates through
2007 (see Note 14). Weighted average
interest rates were 1.72% and 1.767% for
the years ended March 31, 2002 and 2003,
respectively.                                                                                                                              |                                                                            | ¥ | 2,400,000        |   |              | ¥ | 1,400,000  |           |  | $ | 11,857       |      
|Unsecured long-term loans payable to
banks, maturing at various dates through
2006 (see Note 14). Interest is payable
at a variable rate based on TIBOR which
was 0.12% and 0.08% as of March 31, 2002
and 2003, respectively. Weighted average
interest rates were 0.95% and 0.916% for
the years ended March 31, 2002 and 2003,
respectively. |                                                                            |   | 2,400,000        |   |              |   | 3,000,000  |           |  |   | 25,409       |      
|Long-term installments payable at various
dates through 2007.                                                                                                                                                                                                                                                                                   |                                                                            |   |                  |   |              |   |            |           |  |   |              |      
|                                                                                                                                                                                                                                                                                                                                                | Weighted average interest rate was 2.55% for
the year endedMarch 31, 2003. |   |                  |   |              |   |            | 1,000,000 |  |   | $            | 8,469 | 
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   |                  |   |              |   |            |           |  |   |              |      
|Less current portion                                                                                                                                                                                                                                                                                                                            |                                                                            |   | (1,400,000       | ) |              |   | (1,943,735 | )         |  |   | (16,462      | )    
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   |                  |   |              |   |            |           |  |   |              |      
|Long-term borrowings, less current portion                                                                                                                                                                                                                                                                                                      |                                                                            | ¥ | 3,400,000        |   |              | ¥ | 3,456,265  |           |  | $ | 29,273       |      
|                                                                                                                                                                                                                                                                                                                                                |                                                                            |   |                  |   |              |   |            |           |  |   |              |      

The Company entered into interest rate swap contracts to manage its
interest rate exposure resulting in a fixed interest rate for a portion of
its long-term debt. The effective weighted average interest rates for
¥2,000,000 thousand and ¥3,000,000 thousand ($25,409 thousand) of the
long-term loan outstanding at March 31, 2002 and 2003 after giving effect
to such swap agreements were 1.730 and 1.787 percent per annum,
respectively (Note 14).

On March 14, 2003, the Company entered into a long-term installment
loan agreement with a leasing company to finance the payment for rental
deposits for its new head office. The principal of the loan is ¥1,000,000
thousand ($8,469 thousand). The loan was secured by a rental deposit of
¥1,705,036 thousand ($8,469 thousand) at March 31, 2003.

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. In August 2003, the Company 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, 2003,
are as follows:

|            |  |                  |           |              |  |              |        | 
|----------- |  | ---------------- | --------- | ------------ |  | ------------ | ------ | 
|Year Ending |  |                  |           |              |  | Thousands of
|March 31    |  | Thousands of Yen |           | U.S. Dollars
|            |  |                  |           |             
|2004        |  | ¥                | 1,943,735 |              |  | $            | 16,462 | 
|2005        |  |                  | 1,548,246 |              |  |              | 13,113 | 
|2006        |  |                  | 1,152,056 |              |  |              | 9,757  | 
|2007        |  |                  | 755,963   |              |  |              | 6,403  | 
|            |  |                  |           |              |  |              |        | 
|Total       |  | ¥                | 5,400,000 |              |  | $            | 45,735 | 
|            |  |                  |           |              |  |              |        | 

The Company entered into bank overdraft agreements with certain Japanese
banks for which the unused balance outstanding as of March 31, 2003, was
¥1,996,401 thousand ($16,909 thousand).

The 1.750 percent unsecured yen convertible notes due March 2005 in the
aggregate principal amount of ¥15,000,000 thousand ($127,043 thousand) were
issued on April 11, 2000. The notes are convertible at the
option of the holders currently at ¥19,875 thousand ($168 thousand) per share at any time on or
before March 15, 2005, in whole or in part, at par with unpaid
and accrued interest; provided that the closing trading price for the
Companys shares for a certain period prior to giving notice of
redemption is of at least 140% of the conversion price.

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9. INCOME TAXES

Income taxes imposed by the national, prefectural and municipal governments
of Japan resulted in a normal statutory rate of approximately 42 percent
for the years ended March 31, 2001, 2002 and 2003, respectively. Total
income tax recognized for the years ended March 31, 2001, 2002 and 2003,
are applicable to the following:

|                              |                    |  |                  |          |              |  |            |           |      |  |          |         |  |   |              |       | 
|----------------------------- | ------------------ |  | ---------------- | -------- | ------------ |  | ---------- | --------- | ---- |  | -------- | ------- |  | - | ------------ | ----- | 
|                              |                    |  |                  |          |              |  |            |           |      |  |          |         |  |   | Thousands of
|                              |                    |  | Thousands of Yen |          | U.S. Dollars
|                              |                    |  |                  |          |             
|                              |                    |  | 2001             |          | 2002         |  | 2003       |           | 2003
|                              |                    |  |                  |          |              |  |            |           |     
|Income tax expense (benefit): |                    |  |                  |          |              |  |            |           |      |  |          |         |  |   |              |      
|                              | Current            |  | ¥                | 39,740   |              |  | ¥          | 17,794    |      |  | ¥        | 25,581  |  |   | $            | 217   | 
|                              | Deferred (benefit) |  |                  | (965,418 | )            |  |            | 1,081,241 |      |  |          | 885,784 |  |   |              | 7,502 | 
|Other comprehensive income    |                    |  | 1,150,014        |          |              |  | (1,266,877 | )         |      |  | (888,213 | )       |  |   | (7,523       | )    
|                              |                    |  |                  |          |              |  |            |           |      |  |          |         |  |   |              |       | 
|Total income tax              |                    |  | ¥224,336         |          |              |  | ¥(167,842  | )         |      |  | ¥23,152  |         |  | $ | 196          |      
|                              |                    |  |                  |          |              |  |            |           |      |  |          |         |  |   |              |       | 

Amendments to Japanese tax regulations were enacted into law on March 31,
2003. As a result, normal Japanese statutory rates will be reduced by 1.2%
to 40.8%, effective from the fiscal year beginning April 1, 2004. There
was no net effect of the income tax rate reduction on deferred tax balances as of
March 31, 2003.

Loss from operations before income tax expense (benefit) consists of the
following components:

|         |  |                  |            |              |  |      |          |      |  |   |             |   |  |              |          |  
|-------- |  | ---------------- | ---------- | ------------ |  | ---- | -------- | ---- |  | - | ----------- | - |  | ------------ | -------- | -
|         |  |                  |            |              |  |      |          |      |  |   |             |   |  | Thousands of
|         |  | Thousands of Yen |            | U.S. Dollars
|         |  |                  |            |             
|         |  | 2001             |            | 2002         |  | 2003 |          | 2003
|         |  |                  |            |              |  |      |          |     
|Domestic |  | ¥                | (1,523,117 | )            |  | ¥    | (735,359 | )    |  | ¥ | (15,491,756 | ) |  | $            | (131,209 | )
|Foreign  |  |                  | (247,953   | )            |  |      | (154,126 | )    |  |   | (116,036    | ) |  |              | (983     | )
|         |  |                  |            |              |  |      |          |      |  |   |             |   |  |              |          |  
|Total    |  | ¥                | (1,771,070 | )            |  | ¥    | (889,485 | )    |  | ¥ | (15,607,792 | ) |  | $            | (132,192 | )
|         |  |                  |            |              |  |      |          |      |  |   |             |   |  |              |          |  

Net deferred income tax assets and liabilities at March 31, 2003 are
reflected on the accompanying consolidated balance sheets under captions of
other current assets in the amount of ¥ 2,429 thousand ($21 thousand).

The approximate effect of temporary differences and carryforwards giving
rise to deferred tax balances at March 31, 2002 and 2003, was as follows:

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##### Table of Contents



|                                                             |       |   |                  |           |              |   |           |           |             |   |             |            |             |   |         |         |  |   |              |         |  |   |       |       | 
|------------------------------------------------------------ | ----- | - | ---------------- | --------- | ------------ | - | --------- | --------- | ----------- | - | ----------- | ---------- | ----------- | - | ------- | ------- |  | - | ------------ | ------- |  | - | ----- | ----- | 
|                                                             |       |   |                  |           |              |   |           |           |             |   |             |            |             |   |         |         |  |   | Thousands of
|                                                             |       |   | Thousands of Yen |           | U.S. Dollars
|                                                             |       |   |                  |           |             
|                                                             |       |   | 2002             |           | 2003         |   | 2003     
|                                                             |       |   |                  |           |              |   |          
|                                                             |       |   | 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            |       |   |                  |           |              | ¥ | 1,272,079 |           |             |   |             |            |             | ¥ | 372,988 |         |  |   |              |         |  | $ | 3,159 |      
|Valuation of limited partnership
investments for
tax purpose |       |   |                  |           |              |   | 21,919    |           |             |   |             |            |             |   | 34,667  |         |  |   |              |         |  |   | 294   |      
|Capitalized leases                                           |       | ¥ | 42,048           |           |              |   |           |           |             | ¥ | 69,197      |            |             |   |         |         |  |   | 586          |         |  |   |       |      
|Accrued expenses                                             |       |   | 100,069          |           |              |   |           |           |             |   | 152,253     |            |             |   |         |         |  |   | 1,290        |         |  |   |       |      
|Retirement and pension cost                                  |       |   | 42,353           |           |              |   |           |           |             |   | 32,886      |            |             |   |         |         |  |   | 279          |         |  |   |       |      
|Stock and notes issue cost                                   |       |   |                  |           |              |   | 54,526    |           |             |   |             |            |             |   | 80,669  |         |  |   |              |         |  |   | 683   |      
|Allowance for doubtful accounts                              |       |   | 38,234           |           |              |   |           |           |             |   | 21,617      |            |             |   |         |         |  |   | 183          |         |  |   |       |      
|Depreciation                                                 |       |   | 55,032           |           |              |   |           |           |             |   | 46,808      |            |             |   |         |         |  |   | 396          |         |  |   |       |      
|Impairment loss on investment in
and deposits for Crosswave  |       |   |                  |           |              |   |           |           |             |   | 3,748,580   |            |             |   |         |         |  |   | 31,748       |         |  |   |       |      
|Operating loss carryforward                                  |       |   | 3,258,292        |           |              |   |           |           |             |   | 8,800,850   |            |             |   |         |         |  |   | 74,539       |         |  |   |       |      
|Other                                                        |       |   | 65,631           |           |              |   | 1,241     |           |             |   | 136,701     |            |             |   | 13,629  |         |  |   | 1,158        |         |  |   | 115   |      
|                                                             |       |   |                  |           |              |   |           |           |             |   |             |            |             |   |         |         |  |   |              |         |  |   |       |      
|                                                             | Total |   |                  | 3,601,659 |              |   |           | 1,349,765 |             |   |             | 13,008,892 |             |   |         | 501,953 |  |   |              | 110,179 |  |   |       | 4,251 | 
|Valuation allowance                                          |       |   | (2,251,894       | )         |              |   |           |           |             |   | (12,504,510 | )          |             |   |         |         |  |   | (105,907     | )       |  |   |       |      
|                                                             |       |   |                  |           |              |   |           |           |             |   |             |            |             |   |         |         |  |   |              |         |  |   |       |      
|Total                                                        |       | ¥ | 1,349,765        |           |              | ¥ | 1,349,765 |           |             | ¥ | 504,382     |            |             | ¥ | 501,953 |         |  | $ | 4,272        |         |  | $ | 4,251 |      
|                                                             |       |   |                  |           |              |   |           |           |             |   |             |            |             |   |         |         |  |   |              |         |  |   |       |      

As of March 31, 2002 and 2003, the valuation allowance for deferred tax
assets has been provided amounts which are not considered more likely than
not to be realized. The net changes in the valuation allowance for
deferred tax assets were a decrease of ¥201,017 thousand, and
increases of
¥1,558,780 thousand and ¥ 10,252,616 thousand ($86,835 thousand) for the
years ended March 31, 2001, 2002 and 2003, respectively. As of March 31,
2003, IIJ, certain domestic subsidiaries and IIJ America, a U.S.
subsidiary, had tax operating loss carryforwards of ¥19,701,655 thousand
($166,864 thousand), ¥639,640 thousand ($5,417 thousand) and $9,524
thousand, respectively. These loss carryforwards are available to offset
future taxable income, and will expire in the period ending March 31, 2008
in Japan and December 31, 2022 in the United States of America,
respectively.

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, 2003, is as follows:

|                                                            |                                                                            |   |                  |          |              |   |           |           |      |   |            |            |   |   |              |         |  
|----------------------------------------------------------- | -------------------------------------------------------------------------- | - | ---------------- | -------- | ------------ | - | --------- | --------- | ---- | - | ---------- | ---------- | - | - | ------------ | ------- | -
|                                                            |                                                                            |   |                  |          |              |   |           |           |      |   |            |            |   |   | Thousands of
|                                                            |                                                                            |   | Thousands of Yen |          | U.S. Dollars
|                                                            |                                                                            |   |                  |          |             
|                                                            |                                                                            |   | 2001             |          | 2002         |   | 2003      |           | 2003
|                                                            |                                                                            |   |                  |          |              |   |           |           |     
|Amount computed by using normal Japanese
statutory tax rate |                                                                            | ¥ | (734,893         | )        |              | ¥ | (373,584  | )         |      | ¥ | (6,555,273 | )          |   | $ | (55,520      | )      
|Increase (decrease) in taxes resulting from:                |                                                                            |   |                  |          |              |   |           |           |      |   |            |            |   |   |              |        
|                                                            | Expenses not deductible for tax purpose                                    |   |                  | (33,725  | )            |   |           | (23,214   | )    |   |            | 37,324     |   |   |              | 316     |  
|                                                            | Increase (decrease) in valuation allowance                                 |   |                  | (186,905 | )            |   |           | 1,557,870 |      |   |            | 10,304,655 |   |   |              | 87,276  |  
|                                                            | Realization of tax benefit of operating
loss carryforwards of subsidiaries |   |                  | (1,821   | )            |   |           | (18,275   | )    |   |            | (28,091    | ) |   |              | (238    | )
|                                                            | Tax benefit on losses of Crosswave                                         |   |                  |          |              |   |           |           |      |   |            | (3,230,380 | ) |   |              | (27,360 | )
|                                                            |                                                                            |   |                  |          |              |   |           |           |      |   |            |            |   |   |              |        
|                                                            | Othernet                                                                  |   |                  | 31,666   |              |   |           | (43,762   | )    |   |            | 383,130    |   |   |              | 3,245   |  
|                                                            |                                                                            |   |                  |          |              |   |           |           |      |   |            |            |   |   |              |        
|Income tax expense (benefit) as reported                    |                                                                            | ¥ | (925,678         | )        |              | ¥ | 1,099,035 |           |      | ¥ | 911,365    |            |   | $ | 7,719        |        
|                                                            |                                                                            |   |                  |          |              |   |           |           |      |   |            |            |   |   |              |        

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##### Table of Contents



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

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

Net periodic pension cost for the years ended March 31, 2001, 2002 and
2003, included the following components:

|                                      |  |                  |          |              |  |      |          |      |  |  |          |   |  |              |       |  
|------------------------------------- |  | ---------------- | -------- | ------------ |  | ---- | -------- | ---- |  |  | -------- | - |  | ------------ | ----- | -
|                                      |  |                  |          |              |  |      |          |      |  |  |          |   |  | Thousands of
|                                      |  | Thousands of Yen |          | U.S. Dollars
|                                      |  |                  |          |             
|                                      |  | 2001             |          | 2002         |  | 2003 |          | 2003
|                                      |  |                  |          |              |  |      |          |     
|Service cost                          |  |                  | ¥109,473 |              |  |      | ¥115,258 |      |  |  | ¥142,432 |   |  | $            | 1,207 |  
|Interest cost                         |  |                  | 7,772    |              |  |      | 6,930    |      |  |  | 9,433    |   |  |              | 80    |  
|Expected return on plan assets        |  |                  | (4,877   | )            |  |      | (6,733   | )    |  |  | (8,499   | ) |  |              | (72   | )
|Amortization of transition obligation |  |                  | 402      |              |  |      | 402      |      |  |  | 402      |   |  |              | 3     |  
|Recognized net actuarial loss         |  |                  | 1,589    |              |  |      |          |      |  |  | 509      |   |  |              | 4     |  
|                                      |  |                  |          |              |  |      |          |      |  |  |          |   |  |              |       |  
|Net periodic pension cost             |  |                  | ¥114,359 |              |  |      | ¥115,857 |      |  |  | ¥144,277 |   |  | $            | 1,222 |  
|                                      |  |                  |          |              |  |      |          |      |  |  |          |   |  |              |       |  

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##### Table of Contents



The funded status as of March 31, 2002 and 2003, is as follows:

|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|------------------------------------- | ------------------------------------------------ | - | ---------------- | ------- | ------------ | - | -------- | ------- | - | - | ------------ | ----- | -
|                                      |                                                  |   |                  |         |              |   |          |         |   |   | Thousands of
|                                      |                                                  |   | Thousands of Yen |         | U.S. Dollars
|                                      |                                                  |   |                  |         |             
|                                      |                                                  |   | 2002             |         | 2003         |   | 2003    
|                                      |                                                  |   |                  |         |              |   |         
|Change in benefit obligation:         |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|                                      | Benefit obligation at beginning of year          |   | ¥                | 350,671 |              |   | ¥        | 471,656 |   |   | $            | 3,994 |  
|                                      | Service cost                                     |   |                  | 115,258 |              |   |          | 142,432 |   |   |              | 1,207 |  
|                                      | Interest cost                                    |   |                  | 6,930   |              |   |          | 9,433   |   |   |              | 80    |  
|                                      | Actuarial (gain) loss                            |   |                  | 9,156   |              |   |          | (23,635 | ) |   |              | (200  | )
|                                      | Benefit paid                                     |   |                  | (10,359 | )            |   |          | (12,669 | ) |   |              | (108  | )
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|Benefit obligation at end of year     |                                                  | ¥ | 471,656          |         |              | ¥ | 587,217  |         |   | $ | 4,973        |      
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|Change in plan assets:                |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|                                      | Fair value of plan assets at beginning of year   |   | ¥                | 216,840 |              |   | ¥        | 339,951 |   |   | $            | 2,879 |  
|                                      | Actual return on plan assets                     |   |                  | (6,186  | )            |   |          | (22,903 | ) |   |              | (194  | )
|                                      | Employer contribution                            |   |                  | 134,312 |              |   |          | 160,086 |   |   |              | 1,356 |  
|                                      | Benefits paid                                    |   |                  | (5,015  | )            |   |          | (8,238  | ) |   |              | (70   | )
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|                                      | Fair value of plan assets at end of year         |   |                  | 339,951 |              |   |          | 468,896 |   |   |              | 3,971 |  
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|Funded status                         |                                                  |   | (131,705         | )       |              |   | (118,321 | )       |   |   | (1,002       | )    
|Unrecognized actuarial loss           |                                                  |   | 25,240           |         |              |   | 32,498   |         |   |   | 275          |      
|Unrecognized transition obligation    |                                                  |   | 5,624            |         |              |   | 5,222    |         |   |   | 44           |      
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|Accrued pension cost                  |                                                  | ¥ | (100,841         | )       |              | ¥ | (80,601  | )       |   | $ | (683         | )    
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|Accumulated benefit obligation        |                                                  | ¥ | 285,096          |         |              | ¥ | 420,031  |         |   | $ | 3,557        |      
|                                      |                                                  |   |                  |         |              |   |          |         |   |   |              |       |  
|Actuarial assumptions as of March 31: |                                                  |   |                  |         |              |   |          |         |   |   |              |      
|                                      | Discount rate                                    |   |                  | 2.0     | %            |   |          | 1.5     | % |   |              |       |  
|                                      | Expected long-term rate of return on plan assets |   |                  | 2.5     |              |   |          | 2.5     |   |   |              |       |  
|                                      | Rate of compensation increase                    |   |                  | 3.0     |              |   |          | 2.0     |   |   |              |       |  

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, 2001, 2002 and
2003, under the Multi-Employer Plan, including its substitutional portion,
amounted to ¥178,053 thousand, ¥234,148 thousand and ¥309,787
thousand ($2,624 thousand).

Under the Japanese Commercial Code, the amount of retirement benefits for
retiring directors and statutory auditors are required to be approved by
the shareholders. IIJ accrued benefit at March 31, 2001 to a retiring
director of ¥35,770 thousand and the benefit was subsequently approved by
the shareholders at a general meeting of shareholders on June 27, 2001 and
paid. The benefit of ¥4,630 thousand to another retiring director was
approved by the shareholders at a general meeting of shareholders on June
26, 2002, and accrued and paid. There were no benefits determined or paid
to retired directors or corporate auditors for each of three years other
than above benefits.

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##### Table of Contents



11. SHAREHOLDERSS EQUITY (CAPITAL DEFICIENCY)

IIJ is subject to the Japanese Commercial Code (the Code) to which
certain amendments became effective on October 1, 2001.

Prior to October 1, 2001, the Code required at least 50% of the issue price
of new shares, with a minimum of the par value thereof, to be designated as
the common stock account as determined by resolution of the Board of
Directors. Proceeds in excess of amounts designated as the common stock
account were credited to capital surplus. Effective October 1, 2001, the
Code was revised and common stock par values were eliminated, resulting in
all shares being recorded with no par value.

Prior to October 1,2001, the Code imposed certain restrictions on the
repurchase and use of treasury stock. Effective October 1, 2001, the Code
eliminated these restrictions beginning April 1, 2002, there by allowing
IIJ to repurchase treasury stock by a resolution of the shareholders at the
general shareholders meeting and dispose of such treasury stock by
resolution of the Board of Directors. The repurchased amount of treasury
stock, cannot exceed the amount available for future dividend plus amount
of common stock, additional paid-in capital or legal reserve to be reduced
in the case where such reduction was resolved at the general shareholders
meeting.

The Code permits, upon approval of the Board of Directors, transfers of an
amount from capital surplus to the common stock account.

The Code also permits IIJ, upon approval by the Board of Directors, to
issue shares to existing shareholders without consideration to offset a
stock split. Such issuance of shares generally does not give rise to
changes within the shareholders accounts. Prior to October 1, 2001, the
amount calculated by dividing the total amount of shareholders equity by
the number of outstanding shares after the stock split could not be less
than ¥50,000. The revised Code eliminated this restriction.

Prior to October 1, 2001, the Code provided that an amount at least equal
to 10% of the aggregate amount of cash and certain other cash payments
which are made as an appropriation of retained earnings applicable to each
fiscal period shall be appropriated and set aside as a legal reserve until
such reserve equals 25% of the common stock account. Effective October 1,
2001, the revised Code allows for such appropriations to be set aside total
capital surplus and legal reserve equals 25% of the common stock account.
The amount of total capital surplus and legal reserve which exceeds 25% of
the common stock account can be transferred to retained earnings by
resolution of the shareholders, which may be available for dividends. In
addition, the Code permits to transfer a portion of legal reserve to the
common stock account by resolution of the Board of Directors.

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 cost, were
¥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, IIJ Technology issued bonds with 2,000
detachable warrants in the amount of ¥600,000 thousand. The bonds were
repurchased in April 2000 and warrants to purchase the subsidiarys 775
common shares at an exercise price of ¥300,000 per share based on fair
market value were immediately purchased by certain officers and employees
of the Company and the subsidiary. 1,000 warrants were purchased and
maintained by the Company. Warrants are exercisable upon issuance. All of
the warrants remain outstanding as of March 31, 2003.

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##### Table of Contents



The following table summarizes the transactions of IIJs stock option plans
for the three years in the period ended March 31, 2003:

|                                |                   |  |                  |     |                                     |  |                  |        | 
|------------------------------- | ----------------- |  | ---------------- | --- | ----------------------------------- |  | ---------------- | ------ | 
|                                |                   |  |                  |     |                                     |  | Weighted Average
|                                |                   |  |                  |     | Exercise Price                     
|                                |                   |  | Number of Shares |     | (Thousands of yenper common shares)
|                                |                   |  |                  |     |                                    
|Unexercised options
outstanding |                   |  |                  |     |                                     |  |                  |       
|                                |  April 1, 2000   |  |                  |     |                                     |  |                  |       | 
|                                | Options granted   |  |                  | 295 |                                     |  | ¥                | 13,056 | 
|                                | Options exercised |  |                  |    |                                     |  |                  |       | 
|                                | Options forfeited |  |                  | 5   |                                     |  |                  | 13,056 | 
|                                |                   |  |                  |     |                                     |  |                  |        | 
|Unexercised options
outstanding |                   |  |                  |     |                                     |  |                  |       
|                                |  March 31, 2001  |  |                  | 290 |                                     |  | ¥                | 13,056 | 
|                                | Options granted   |  |                  | 395 |                                     |  |                  | 2,018  | 
|                                | Options exercised |  |                  |    |                                     |  |                  |       | 
|                                | Options forfeited |  |                  |    |                                     |  |                  |       | 
|                                |                   |  |                  |     |                                     |  |                  |        | 
|Unexercised options
outstanding |                   |  |                  |     |                                     |  |                  |       
|                                |  March 31, 2002  |  |                  | 685 |                                     |  | ¥                | 6,691  | 
|                                | Options granted   |  |                  |    |                                     |  |                  |       | 
|                                | Options exercised |  |                  |    |                                     |  |                  |       | 
|                                | Options forfeited |  |                  | 10  |                                     |  |                  | 7,537  | 
|                                |                   |  |                  |     |                                     |  |                  |        | 
|Unexercised options outstanding |                   |  |                  |     |                                     |  |                  |       
|                                |  March 31, 2003  |  |                  | 675 |                                     |  | ¥                | 6,678  | 
|                                |                   |  |                  |     |                                     |  |                  |        | 

Summarized information about stock
options outstanding as of March 31, 2003 of which an exercise price
reflects subsequent adjustment as a result of issuance of common
shares in June and September 2003 is as follows:

|                  |  |             |     |                |  |           |     |  |  |  |     | 
|----------------- |  | ----------- | --- | -------------- |  | --------- | --- |  |  |  | --- | 
|                  |  | Outstanding |     | Exercisable   
|                  |  |             |     |               
|                  |  | Number of   |     | Remaining Life |  | Number of
|Exercise Price    |  | Options     |     | (in years)     |  | Options  
|                  |  |             |     |                |  |          
|(Thousand of Yen) |  |             |     |                |  |          
|¥10,817           |  |             | 285 |                |  |           | 7.0 |  |  |  | 285 | 
|1,672             |  |             | 390 |                |  |           | 8.3 |  |  |  | Nil | 

The fair value of IIJs options reported below has been estimated at the
date of grant using the Black-Scholes option pricing model with the
following assumptions:

|               |                                            |  |      |      |      |  |  |      |  
|-------------- | ------------------------------------------ |  | ---- | ---- | ---- |  |  | ---- | -
|               |                                            |  | 2001 |      | 2002
|               |                                            |  |      |      |     
|Stock Options: |                                            |  |      |      |      |  |  |     
|               | Expected life from vesting date (in years) |  |      | 4.0  |      |  |  | 4.0  |  
|               | Risk-free interest rates                   |  |      | 1.39 | %    |  |  | 0.72 | %
|               | Volatility                                 |  |      | 148  | %    |  |  | 51   | %
|               | 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 fair value of IIJs stock options granted during the
year ended March 31, 2001 and 2002 were ¥11,875 thousand per common share
and ¥621 thousand per common share, as compared to corresponding
original exercise price of ¥13,056 thousand and ¥2,018
thousand, respectively.

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##### Table of Contents



In accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure, the following pro forma net loss and loss per share
information for the years ended March 31, 2001, 2002 and 2003,
including the effects of fair values associated with the granted
stock options of IIJ technology is presented as if the Company
accounted for its stock options using the fair value method. Under
the fair value method, the estimated fair value of the stock options
is charged against income on a straight-line basis over the
options
vesting period.:

|          |                                                                                                                       |  |  |  |  |  |                  |           |              |  |      |           |      |  |    |            |   |  |    |         |  
|--------- | --------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | ---------------- | --------- | ------------ |  | ---- | --------- | ---- |  | -- | ---------- | - |  | -- | ------- | -
|          |                                                                                                                       |  |  |  |  |  |                  |           | Thousands of
|          |                                                                                                                       |  |  |  |  |  | Thousands of Yen |           | U.S. Dollars
|          |                                                                                                                       |  |  |  |  |  |                  |           |             
|          |                                                                                                                       |  |  |  |  |  | 2001             |           | 2002         |  | 2003 |           | 2003
|          |                                                                                                                       |  |  |  |  |  |                  |           |              |  |      |           |     
|Net loss: |                                                                                                                       |  |  |  |  |  |                  |           |              |  |      |           |      |  |    |            |   |  |    |        
|          | As reported                                                                                                           |  |  |  |  |  | ¥(               | 4,700,222 | )            |  | ¥(   | 7,446,135 | )    |  | ¥( | 16,476,822 | ) |  | $( | 139,551 | )
|          | Addition: Total stock-based employee
compensation determined under fair
value based method for all awards, net
of tax |  |  |  |  |  |                  | 1,740,026 |              |  |      | 1,757,087 |      |  |    | 267,387    |   |  |    | 2,265   |  
|          |                                                                                                                       |  |  |  |  |  |                  |           |              |  |      |           |      |  |    |            |   |  |    |        
|          | Pro forma                                                                                                             |  |  |  |  |  | ¥(               | 6,440,248 | )            |  | ¥(   | 9,203,222 | )    |  | ¥( | 16,744,209 | ) |  | $( | 141,816 | )
|          |                                                                                                                       |  |  |  |  |  |                  |           |              |  |      |           |      |  |    |            |   |  |    |        

|                                              |             |  |  |                  |  |              |  |          |  |      |  |          |  |  |   |       |  | 
|--------------------------------------------- | ----------- |  |  | ---------------- |  | ------------ |  | -------- |  | ---- |  | -------- |  |  | - | ----- |  | 
|                                              |             |  |  |                  |  | Thousands of
|                                              |             |  |  | Thousands of Yen |  | U.S. Dollars
|                                              |             |  |  |                  |  |             
|                                              |             |  |  | 2001             |  | 2002         |  | 2003     |  | 2003
|                                              |             |  |  |                  |  |              |  |          |  |     
|Basic and diluted net loss per common shares: |             |  |  |                  |  |              |  |          |  |      |  |          |  |  |   |      
|                                              | As reported |  |  | ¥209,085         |  |              |  | ¥331,234 |  |      |  | ¥732,955 |  |  | $ | 6,208 | 
|                                              | Pro forma   |  |  | ¥286,488         |  |              |  | ¥409,396 |  |      |  | ¥744,849 |  |  | $ | 6,309 | 

12. OTHER COMPREHENSIVE INCOME

The change in each component of other comprehensive income (loss) for the
years ended March 31, 2001, 2002 and 2003, is as follows:

|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |   |         |         |  
|---------------------------------------------- | --------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------ | ------ | - | --------- | ---------------- | ------ | ------------ | ---------- | ---------- | ------- | - | ---------- | ---------- | ---- | - | ------- | ------- | -
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        | Thousands of
|                                               |                                               |                                                  |                                                                    |        |   |           | Thousands of Yen |        | U.S. Dollars
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |       
|                                               |                                               |                                                  |                                                                    |        |   | 2001      |                  | 2002   |              | 2003       |            | 2003   
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |        
|Other comprehensive income (loss), before
tax: |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |     
|                                               | Foreign currency translation adjustments      |                                                  | ¥                                                                  | (1,141 | ) |           | ¥                | 26,933 |              |            | ¥          | (22,423 | ) |            | $          | (191 | )
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  
|                                               | Unrealized holding gain (loss) on
securities: |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  
|                                               |                                               |                                                  | Amount arising during the period                                   |        |   | 2,492,767 |                  |        |              | (3,318,017 | )          |         |   | (2,207,010 | )          |      |   | (18,692 | )      
|                                               |                                               |                                                  | Less: Reclassification adjustments
for losses included in net loss |        |   | (245,424  | )                |        |              | (301,580   | )          |         |   | (92,439    | )          |      |   | (783    | )      
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  
|                                               |                                               |                                                  | Net unrealized holding gain (loss)
during the period               |        |   | 2,738,191 |                  |        |              | (3,016,437 | )          |         |   | (2,114,571 | )          |      |   | (17,909 | )      
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  
|                                               |                                               | Loss on cash flow hedging derivative
instruments |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |   |        
|                                               |                                               |                                                  | Effect of adopting SFAS No. 133                                    |        |   |           |                  |        |              | (25,594    | )          |         |   |            |            |      |   |         |        
|                                               |                                               |                                                  | Amount arising during the period                                   |        |   |           |                  |        |              | (22,385    | )          |         |   | (30,452    | )          |      |   | (258    | )      
|                                               |                                               |                                                  | Less: Reclassification adjustments
for losses included in net loss |        |   |           |                  |        |              | 14,272     |            |         |   | 26,438     |            |      |   | 224     |        
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  
|                                               |                                               |                                                  | Net loss on cash flow hedging
derivative instruments               |        |   |           |                  |        |              | (33,707    | )          |         |   | (4,014     | )          |      |   | (34     | )      
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  
|                                               |                                               |                                                  |                                                                    | Total  |   |           | 2,737,050        |        |              |            | (3,023,211 | )       |   |            | (2,141,008 | )    |   |         | (18,134 | )
|Income tax effect                              |                                               |                                                  | (1,150,014                                                         | )      |   |           | 1,266,877        |        |              |            | 888,213    |         |   |            | 7,523      |     
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  
|Other comprehensive income (loss), net of tax  |                                               | ¥                                                | 1,587,036                                                          |        |   | ¥         | (1,756,334       | )      |              | ¥          | (1,252,795 | )       |   | $          | (10,611    | )   
|                                               |                                               |                                                  |                                                                    |        |   |           |                  |        |              |            |            |         |   |            |            |      |  

F-29



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##### Table of Contents



The components of accumulated other comprehensive income (loss) at March
31, 2002 and 2003 are as follows:

|                                                 |  |                  |           |              |  |      |         |   |  |   |       |  
|------------------------------------------------ |  | ---------------- | --------- | ------------ |  | ---- | ------- | - |  | - | ----- | -
|                                                 |  |                  |           | Thousands of
|                                                 |  | Thousands of Yen |           | U.S. Dollars
|                                                 |  |                  |           |             
|                                                 |  | 2002             |           | 2003         |  | 2003
|                                                 |  |                  |           |              |  |     
|Foreign currency translation adjustments         |  | ¥                | 60,115    |              |  | ¥    | 38,145  |   |  | $ | 323   |  
|Net unrealized holding gain on securities        |  |                  | 1,756,653 |              |  |      | 529,842 |   |  |   | 4,488 |  
|Loss on cash flow hedging derivative
instruments |  |                  | (33,707   | )            |  |      | (37,721 | ) |  |   | (320  | )
|                                                 |  |                  |           |              |  |      |         |   |  |   |       |  
|                                                 |  | ¥                | 1,783,061 |              |  | ¥    | 530,266 |   |  | $ | 4,491 |  
|                                                 |  |                  |           |              |  |      |         |   |  |   |       |  

13. COMMITMENTS AND CONTINGENT LIABILITIES

The Company has contracted for connectivity lines with Crosswave as of
March 31, 2003, that, in aggregate, require monthly payments of ¥410,729
thousand ($3,479 thousand).

The purchase commitments for network system equipment outstanding at March
31, 2003, amounted to ¥619,775 thousand ($5,249 thousand).

In December 2001, a class action
complaint alleging violations of the federal securities laws was
filed against the Company, naming IIJ and certain of its officers and
directors as defendants. An amended complaint was filed on
April 24, 2002 alleging, among other things, that the
underwriters of our initial public offering violated the securities
laws (i) by failing to disclose in the offering's registration
statement certain alleged compensation arrangements entered into
with the underwriters' clients, such as undisclosed commissions or
tie-in agreements to purchase stock in the after-market, and
(ii) by engaging in manipulative practices to artificially
inflate the price of IIJ's stock in the aftermarket subsequent to
the initial public offering. On July 15, 2002, the Company
joined in an 'omnibus' motion to dismiss the amended complaint filed
by the issuers and individuals named in the various coordinated
cases. In June 2003, the Company approved a settlement with the
plaintiffs in this matter. The settlement releases IIJ and the
individual defendants for liability for the conduct alleged in the
action. Under the settlement, the Company agreed to assign away, not
assert, or release certain potential claims the Company may have
against our underwriters. Approximately 260 defendant issuers
participated in this settlement. As to financial impact on the
Company, the settlement provides that the class members will be
guaranteed $1 billion in recoveries by the
insurers of the issuers. In addition to the proposed settlement, some
of the defense costs incurred would be borne by IIJ's insurer in a
separate agreement. Consequently, the Company believes that there
will be no significant financial impact on the Company as a result of
this matter. Final approval of this settlement is required by the
United States District Court.

In addition to the foregoing, the
Company is a party to other suits and claims that arise in the normal
course of business.

14. DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS

Interest Rate Swap
Agreement  The Company is exposed to changes in interest
rates that are associated with long-term bank borrowings. The Companys
policy on managing the interest rate risk is to hedge the exposure to
variability in future cash flows of floating rate interest payments on the
long-term bank borrowings. In order to reduce cash flow risk exposures on
floating rate borrowings, the Company utilizes interest rate swap
agreements to convert a floating rate borrowing to a fixed rate borrowing.

The Company is also exposed to credit-related losses in the event of
non-performance by counterparties to interest rate swaps, but it is not
expected that any counterparties will fail to meet their obligations,
because counterparties are internationally recognized financial
institution.

Changes in fair value of interest rate swaps designated as hedging
instrument is reported in accumulated other comprehensive income during the
year ended March 31, 2003. These amounts subsequently are reclassified
into interest expense as a yield adjustment in the same period in which the
hedged bank borrowings affect earnings. There was no ineffectiveness
recognized in earning for the years ended March 31, 2002, and 2003. For
the years ended March 31, 2002, and 2003, net derivative loss of ¥14,272
thousand and ¥26,438 thousand ($224 thousand) were reclassified to interest
expense, respectively.

During the year ending March 31, 2004, approximately ¥23,508 thousand ($199
thousand) of accumulated other comprehensive loss related to the interest
rate swaps are expected to be reclassified as an adjustment to interest
expense as a yield adjustment of the hedged bank borrowings.

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. Investment for which is not
practicable are investments in a number of unaffiliated and unlisted
smaller sized companies and the estimate of their fair values can not be
made without incurring excessive costs. The carrying amounts or notional
amounts and fair value of financial instruments are summarized below:

F-30



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##### Table of Contents



|                                                                                           |                                    |  |                  |           |              |  |            |           |            |  |            |           |        |  |            |           |          |  |              |        |  |  |         |       | 
|------------------------------------------------------------------------------------------ | ---------------------------------- |  | ---------------- | --------- | ------------ |  | ---------- | --------- | ---------- |  | ---------- | --------- | ------ |  | ---------- | --------- | -------- |  | ------------ | ------ |  |  | ------- | ----- | 
|                                                                                           |                                    |  |                  |           |              |  |            |           |            |  |            |           |        |  |            |           |          |  | Thousands of
|                                                                                           |                                    |  | Thousands of Yen |           | U.S. Dollars
|                                                                                           |                                    |  |                  |           |             
|                                                                                           |                                    |  | 2002             |           | 2003         |  | 2003      
|                                                                                           |                                    |  |                  |           |              |  |           
|                                                                                           |                                    |  | Carrying         |           |              |  |            |           | Carrying   |  |            |           |        |  | Carrying   |           | Fair    
|                                                                                           |                                    |  | Amount or        |           |              |  |            |           | Amount or  |  |            |           |        |  | Amount or  |           | Value or
|                                                                                           |                                    |  | Notional         |           |              |  |            |           | Notional   |  |            |           |        |  | Notional   |           | Gain    
|                                                                                           |                                    |  | Amount           |           | Fair Value   |  | Amount     |           | Fair Value |  | Amount     |           | (Loss)
|                                                                                           |                                    |  |                  |           |              |  |            |           |            |  |            |           |       
|Other investments for which
it is:                                                         |                                    |  |                  |           |              |  |            |           |            |  |            |           |        |  |            |           |          |  |              |        |  |  |         |      
|                                                                                           | Practicable to estimate
fair value |  | ¥                | 3,385,426 |              |  | ¥          | 3,385,426 |            |  | ¥          | 1,179,916 |        |  | ¥          | 1,179,916 |          |  | $            | 9,993  |  |  | $       | 9,993 | 
|                                                                                           | Not practicable                    |  |                  | 2,020,639 |              |  |            |           |            |  |            | 1,860,273 |        |  |            |           |          |  |              | 15,756 |  |  |         |       | 
|Noncurrent refundable
insurance policies (other
assets)                                    |                                    |  | 31,475           |           |              |  | 31,475     |           |            |  | 42,180     |           |        |  | 42,180     |           |          |  | 357          |        |  |  | 357     |      
|Long-term borrowings,
installment payable and
convertible notes,
including current portion |                                    |  | 19,800,000       |           |              |  | 17,104,110 |           |            |  | 20,400,000 |           |        |  | 18,004,239 |           |          |  | 172,779      |        |  |  | 152,488 |      
|Interest rate swap contracts                                                               |                                    |  | 2,000,000        |           |              |  | (33,707    | )         |            |  | 3,000,000  |           |        |  | (37,721    | )         |          |  | 25,409       |        |  |  | (319    | )    

Cash at March 31, 2002 and 2003, includes U.S. dollar denominated bank
deposits of ¥3,473,827 thousand and ¥1,360,644 thousand ($11,524 thousand),
respectively.

15. ADVERTISING EXPENSES

Advertising expenses incurred during the years ended March 31, 2001, 2002
and 2003, consist principally of advertisement within magazines, journals
and newspapers and amounted to ¥735,763 thousand, ¥397,263 thousand and ¥278,474 thousand ($2,359 thousand), respectively.

16. SUBSEQUENT EVENTS

On June 26, 2003, IIJ issued 3,265 new shares of common stock at ¥418,200
per share for ¥1,365,423 thousand ($11,565 thousand) by a private placement
to third parties in Japan. The proceeds from the private placement were
used to improve the financial position of the Company.

On September 16, 2003, mainly in order
to provide for the repayment of the
convertible notes due March 2005, IIJ issued 12,615 new shares of common
stock at ¥951,300 per share for ¥12,000,650 thousand ($101,640 thousand) by
a private placement in Japan to Nippon Telegraph and Telephone Corporation
(NTT) for ¥9,603,374 thousand ($81,336 thousand), NTT Communications for
¥749,624 thousand ($6,349 thousand), a wholly owned subsidiary of NTT,
Itochu Corporation and Sumitomo Corporation for each ¥499,432 thousand
($4,230 thousand) and three other companies for ¥648,787 thousand ($5,495
thousand). As a result, NTT and its subsidiary own 31.6% of IIJs
outstanding common shares. Concurrently, IIJ entered into a Subscription
Agreement with NTT under which IIJ allows NTT to nominate up to three
persons as directors or statutory auditors, subject to approval by IIJs
shareholders. The agreement also provides NTT with preemptive rights to
subscribe to any additional future issuances by IIJ in order to maintain
its shareholding. In addition, IIJ and NTT agreed to undertake efforts to
jointly engage in the development of broadband and information technology
and other related business, to expand the business relationship between the
two parties in connection with new business opportunities of IIJ and
discuss secondment of employees to each other. Had these shares from
both private placements noted above been issued as of the beginning
of the fiscal year ended March 31, 2003, basic and diluted loss per
share would have been decreased to ¥429,531 ($3,638).

* * * * * *

F-31



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##### Table of Contents



INDEX OF EXHIBITS

|     |  |                                                                                                                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  |  | Articles of Incorporation, as amended (English translation)                                                                                                                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                    
|1.2  |  | Share Handling Regulations, as amended (English translation)                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                    
|1.3  |  | Regulations of the Board of Directors, as amended (English translation)                                                                                                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                    
|1.4  |  | Regulations of the Board of Statutory Auditors, as amended (English translation)***                                                                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                    
|2.1  |  | Specimen Common Stock Certificate*                                                                                                                                                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                    
|2.2  |  | Bylaws of the IIJ Employee Shareholders Association (with English translation)*                                                                                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                    
|2.3  |  | Paying Agent, Conversion Agent and Registrar Agreement, dated April 11, 2000, among
Internet Initiative Japan Inc., The Bank of New York and Banque Internationale à
Luxembourg relating to ¥15,000,000,000 1.75% convertible notes due 2005 (with exhibits)                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                    
|2.4  |  | Form of Deposit Agreement among IIJ, The Bank of New York as
depositary and all owners and holders from time to time of American
Depositary Receipts, including the form of American Depositary
Receipt (incorporated by reference to the Registration Statement on
Form F-6 (File No. 333-10582) filed on July 13, 1999)          
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.1  |  | Basic Agreement to Delegate Services, dated April 1, 1997, between Internet Initiative
Japan Inc. and IIJ Technology Inc. (with English translation)*                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.2  |  | Shareholders Agreement Relating to the Establishment of INTERNET MULTIFEED CO., dated
August 20, 1997, between Nippon Telegraph and Telephone Corporation and the Registrant
(with English translation)*                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.3  |  | Basic Agreement to Delegate Services, dated January 30, 1995, between Internet Initiative
Japan Inc. and IIJ Media Communications Inc. (with English translation)*                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.4  |  | Memorandum of Understanding Regarding Technical Cooperation, dated April 1, 1997, between
Internet Initiative Japan Inc. and IIJ Media Communications Inc. (with English
translation)*                                                                                                                                             
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.5  |  | Basic Agreement to Delegate Services, dated April 1, 1998, between Internet Initiative
Japan Inc. and Net Care, Inc. (with English translation)*                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.6  |  | Purchase and Sales Agreement, dated January 8, 1999, between Internet Initiative Japan
Inc. and Crosswave Communications Inc. (with English translation)*                                                                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.7  |  | Individual Agreement on Entrustment of Business between Internet Initiative Japan Inc. and
Asia Internet Holding Co., Ltd., dated July 1, 1998 (with English translation)*                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.8  |  | 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)**
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.9  |  | Sales Cooperation Agreement, dated August 20, 1999, between Crosswave Communications Inc.
and Internet Initiative Japan Inc. (with English translation)**                                                                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.10 |  | Business Entrustment Agreement, dated April 1, 1999 between Crosswave Communications Inc.
and Internet Initiative Japan Inc. (with English translation)**                                                                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                    
|4.11 |  | Letter of Confirmation, dated November 16, 1999 between Crosswave Communications Inc. and
Internet Initiative Japan Inc. (with English translation)**                                                                                                                                                                              





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##### Table of Contents



|     |  |                                                                                                                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.12 |  | Data Center Service Agency Agreement dated March 1, 2000 between Crosswave Communications
Inc. and Internet Initiative Japan Inc. (with English translation)**                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                     
|4.13 |  | Cash Deficiency Support Agreement, dated May 21, 2002, among Internet Initiative Japan
Inc., Crosswave Communications Inc., The Sumitomo Trust & Banking Co., Ltd., UFJ Bank
Limited, Mizuho Corporate Bank, Ltd. and Sumitomo Mitsui Banking Corporation (English
translation)***  
|     |  |                                                                                                                                                                                                                                                                                     
|4.14 |  | Stock Acquisition Rights Placement Agreement, dated May 21, 2002, between Internet
Initiative Japan Inc. and Crosswave Communications Inc. (English translation)***                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                     
|4.15 |  | Lease Agreement, dated March 14, 2003, between Internet Initiative Japan and Mitsui
Fudosan Co., Ltd. (English translation)                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                     
|4.16 |  | Sublease Agreements, dated March 15, 2003, between Internet Initiative Japan Inc. and
Crosswave Communications Inc., Crosswave Facilities Inc., IIJ Technology Inc., Net Care,
Inc. and IIJ Media Communications, Inc. (English translations)                                       
|     |  |                                                                                                                                                                                                                                                                                     
|4.17 |  | Pledge Agreement, dated March 14, 2003, among Internet Initiative Japan Inc., IBJ Leasing
Co., Ltd. and Nissay Leasing Company, Limited (English translation)                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                     
|4.18 |  | Credit Facility Agreement, dated May 29, 2003, between Internet Initiative Japan Inc. and
Crosswave Communications Inc. (English translation)                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                     
|4.19 |  | Letter of Undertaking, dated August 29, 2003, among Internet Initiative Japan Inc. and
Mizuho Corporate Bank, Ltd., UFJ Bank Limited, Sumitomo Mitsui Banking Corporation, The
Mitsubishi Trust and Banking Corporation and The Bank of Tokyo-Mitsubishi, Ltd. (English
translation)
|     |  |                                                                                                                                                                                                                                                                                     
|4.20 |  | Subscription Agreement, dated September 16, 2003, between Internet Initiative Japan and
Nippon Telegraph and Telephone Corporation (English translation)                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                     
|8.1  |  | List of Significant Subsidiaries (See Our Group Companies in Item 4.B. of this Form 20-F)                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                     
|14.1 |  | Selected unaudited financial statement data as of and for the year ended March 31, 2003 of
Crosswave Communications Inc.                                                                                                                                                            



---

|*   |  | Incorporated by reference to the corresponding exhibit to our 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, 2000.
|   
|*** |  | Incorporated by reference to the corresponding exhibit to our annual
report on Form 20-F (File No. 0-30204) filed on July 30, 2002.                                

Except
for Exhibit 2.3, we have not included as exhibits certain instruments with respect to our
long-term debt. Except for Exhibit 2.3, the amount of debt authorized under each
long-term debt instrument does not exceed 10% or our total assets. We agree to
furnish a copy of any long-term instrument to the Commission upon
request.