Internet Initiative Japan

Internet Initiative Japan Inc.7,160,000

American Depositary SharesRepresenting

3,580 Shares of Common Stock

This is the initial public oÅering of Internet Initiative Japan Inc. This prospectus relates to anoÅering of 7,160,000 American Depositary Shares. Each ADS is equal to 1/2000

th of a share ofcommon stock of IIJ.

IIJ is oÅering 6,220,000 ADSs to be sold in the oÅering. The selling shareholders identiÑedon page 82 of this prospectus are oÅering 940,000 ADSs. IIJ will not receive any of the proceedsfrom the sale of ADSs by the selling shareholders.

There has been no public market for the shares or ADSs. IIJ will list the ADSs on theNasdaq National Market under the symbol ""IIJI''.

See ""Risk Factors'' beginning on page 8 to read about factors you should considerbefore buying the ADSs.

Neither the Securities and Exchange Commission nor any other regulatory body hasapproved or disapproved of these securities or passed upon the adequacy or accuracy of thisprospectus. Any representation to the contrary is a criminal oÅense.

Per ADS Total

Initial public oÅering price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $23.00 $164,680,000Underwriting discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.55 $ 11,098,000Proceeds, before expenses, to IIJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21.45 $133,419,000Proceeds, before expenses, to the selling shareholders ÏÏÏÏÏÏÏÏ $21.45 $ 20,163,000

The underwriters may, under the terms of the underwriting agreement, purchase up to anadditional 980,000 ADSs from IIJ at the initial public oÅering price less the underwriting discount.

The underwriters expect to deliver the ADSs in New York, New York on August 9, 1999.

Goldman, Sachs & Co. Morgan Stanley Dean Witter

Prospectus dated August 3, 1999.

IIJ’s interest in the A-Bone is approximately 20%.In addition, IIJ operates and manages the A-Bone.

A-Bone

PAIX

MAE-WEST

NY-NOC

NY-NAP

Thailand

Malaysia

Singapore

Philippines

China

HongKong

Indonesia

IIJ’s Network*

*

Korea

Taiwan

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information regardingour company and the ADSs being sold in the oÅering and our Ñnancial statements and notes tothose statements appearing elsewhere in this prospectus.

In this prospectus, you may encounter unfamiliar terms that describe concepts, technologiesand products relating to the Internet and the telecommunications industries. For your reference, aglossary that starts on page 102 of this prospectus provides deÑnitions of these terms.

Internet Initiative Japan Inc.

Our Business States which allows us to better serve usersthat require high-speed, high-capacity and

We oÅer a comprehensive range ofreliable services and provides us the ability to

Internet access services and Internet-relatedhandle large amounts of data traÇc.

services to our customers in Japan on one ofthe most advanced and reliable Internet In addition to our network, we havenetworks available in Japan and between signiÑcant interests in two other networks: theJapan and the United States. A-Bone and the Crosswave network. We

currently own 20.6% of Asia Internet Holding,Currently, our main services are our

the company that owns the A-Bone. TheInternet access or connectivity services,

A-Bone is an Internet network using leasedwhich accounted for approximately 80% of

lines to connect eight countries in the Asia-our revenue for the year ending March 31,

PaciÑc region. We believe, based on publicly1999. Our total Internet solutions consist of

available information, that our networkInternet connectivity and additional value-

backbone and the A-Bone together form theadded services we oÅer which include:

most extensive Internet backbone connecting‚ network consulting and systems the countries in the Asia-PaciÑc region to

integration services; each other and to the United States. Usingour network and engineering expertise and

‚ security for and support, maintenancepursuant to an agreement with Asia Internet

and monitoring of customers' InternetHolding, we operate and manage the A-Bone.

systems;We expect to increase our interest in Asia

‚ co-location services, which allow Internet Holding with a portion of thecustomers to house their servers and proceeds from this oÅering.routers at our facilities;

We also have a 40% interest in‚ Web hosting and content development Crosswave Communications Inc., a joint

and distribution services; and venture that we formed with Toyota andSony. Crosswave operates one of the Ñrst

‚ e-mail related services that allowhigh-speed telecommunications facilities and

companies to outsource their e-mailnetworks in Japan designed speciÑcally for

functions to us.data communications such as Internet traÇc,

Our extensive variety of services and computer-to-computer information and voiceproducts enables our customers to purchase and video transmissions in digital data form.all their Internet-related services and products

Crosswave uses advanced equipment tothrough a single source.

transport large amounts of data moreWe have created a high-quality, high- eÇciently and cheaply than traditional

capacity network that extends throughout telephone networks. Crosswave usesJapan and to the United States by leasing Synchronous Optical Network (SONET) Ì alines from telecommunications carriers. Our standard for multiple optical transmissionsnetwork backbone is one of the largest in that enables data to be transmitted at highJapan and between Japan and the United speeds over long distances with a high

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degree of reliability. Additionally, Crosswave The Internet access and other Internetuses a specialized multiplexing-transmission services markets in Japan are crowded andtechnology known as Dense Wavelength competitive. We compete directly withDivision Multiplexing (DWDM) to further telecommunications carriers like NTT, KDD,increase its capacity. DWDM is a means of Japan Telecom and AT&T and their aÇliates.increasing the capacity of Ñber-optic data We also compete with a number of both largetransmission systems by multiplexing several and small Internet service providers or ISPs,optical signals simultaneously on each optic including well-known new entrants in JapanÑber line. We believe that through like UUNET and PSINet.multiplexing and transmission equipment

To eÅectively compete, we mustupgrades Crosswave's network will have the

continue to emphasize the quality andcapacity to transmit 100 billion bits per

capacity of our services and network whichsecond, or 100 Gbps, across its network.

we believe are among our greatest strengths.Crosswave's network currently operates inthe Tokyo-Nagoya-Osaka-Hokuriku ring but

Our Competitive Strengthswill be extended to cover all of Japan exceptOkinawa by March 2000. Our High-Capacity IP Network. Our

network is extensive and provides us with aWe conduct our business directly and by strong presence in Japan and between Japan

working together with our subsidiaries and and the United States. In Japan, we haveaÇliates. We expect that part of our future large trunk lines that connect the majorgrowth will be through the growth of our metropolitan and business centers. We havegroup companies' operations, especially extensive capacity between Japan and thethose of Crosswave, IIJ Technology and Asia United States with four separate 155 millionInternet Holding. To the extent we are not bits per second, or 155 Mbps, leased trunkable to control or signiÑcantly inÖuence their lines. We also connect directly to the A-Boneoperations, our business plans may be which we operate and manage and we havefrustrated. However, our relationships with also recently started adding leased lines fromour group companies are good and we Crosswave to our network.consider our group companies to be

Our Strength in Network Technology.important parts of our business.One of our greatest strengths is the

Our Market engineering expertise we have amassed. Thisengineering expertise is a result of a high

We believe that the Internet industry inpercentage of employees with engineering

Japan is poised for rapid growth. Althoughdegrees, over 30%, and a result of signiÑcant

Japan is the second-largest Internet market inexperience managing and operating large

terms of numbers of users and devices,capacity, high volume networks. Our

Japan's Internet penetration rate at year-endexperience, our personnel and our

1998 of 10.8% is considerably lower than thecommitment to research and development

United States which is approximately 24%. Inprovide us with the capability and resources

addition, business usage is low as businessesnecessary to keep up with the rapid changes

have not exploited the Internet to its fullin Internet and networking technology.

potential. We also believe that Internet usage,particularly among business users, has been We are particularly strong in largenegatively aÅected by the adverse economic network traÇc management, routing controlconditions in Japan. However, we believe that and facilities operation. We have operated thebusinesses in Japan are now beginning to largest or one of the largest Internet networksuse and rely on the Internet for wider in Japan and between Japan and the Unitedpurposes. As businesses increase their States since we began operations. We ratedInternet usage, they will demand advanced, as the top ISP for satisfaction in terms ofhighly reliable, high-quality connectivity and through-put and network managementvalue-added services. We are well-positioned capability in a survey of Japanese companiesto meet their demands. by Nikkei Communications. Our engineering

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leader in promoting and facilitating the growthexpertise and strength in network technologyof the Internet in Japan and we willallow us to provide speciÑcally tailored,strengthen our presence in this rapidlyadvanced Internet solutions to our Internetexpanding market. The principal elements ofusers.our business strategy are:

Our Strong Customer Base and High Expand Our Network. Expanding ourReputation. Our customers include valuable network is one of our most importantleading-edge Internet users, such as large objectives. Although our network is alreadycorporations, major Internet service providers extensive and fully capable of handling our(ISPs), telecommunications carriers, cable current traÇc, we will continue to expand our

network as network traÇc and demandoperators, portal sites, e-commercerequire. Our domestic network developmentbusinesses and publishers. We haveplan is to increase capacity on our busiestestablished a strong reputation for qualitytraÇc routes, such as between Tokyo andInternet service. Our customer satisfactionOsaka, and to expand our geographic reachlevels are high as evidenced by being ratedby extending our network into new areas to

as the top ISP in through-put and networkaccomodate growth in our customer base. We

management capability and receiving high expect that we will accomplish most of ourrankings for overall service and capacity and geographic expansion in Japantroubleshooting in the Nikkei Communications using Crosswave's network.survey.

Internationally, we have a similarnetwork development plan. We will increaseOur Wide Range of Resources. Ourcapacity on our main routes between Japanresources are extensive and include ourand the United States and we will explorestrong technological capabilities, our high-opportunities to expand our network to reachquality network, our group companies,into new areas in the United States, Asia andincluding IIJ Technology, and our broadEurope as network traÇc and demand

variety of Internet access services and relatedrequire.

value-added services.We will strengthen the capability and

Our Ability to Draw on the Strength of robustness of our network and will becomeOur Shareholders. Our shareholders include less reliant on the incumbentlarge, well-known companies in Japan such telecommunications carriers by utilizing

Crosswave's infrastructure. We will developas Sumitomo Corp., Itochu Corp., NTTand construct our own data centers toCommunications, Toyota, Dai-ichi Life,capture the demand for better InternetSumitomo Bank, Fuji Bank and Sanwa Bank.environments and business networking and to

BeneÑts of our strong shareholder base support e-commerce and contentinclude: development. We will also connect directly to

Crosswave's network at these data centers.‚ Having leading institutions like these as

Enhance Our Internet Accessshareholders is viewed by the JapaneseServices. We will introduce a greater varietybusiness community as a sign ofof connectivity and bandwidth options andconÑdence.diversify our pricing structures to meet the

‚ IIJ and its shareholders have combined needs and requirements of our customers.their strengths in a number of business We will increase access to and geographicventures such as Crosswave (with coverage of our network by increasing the

number of our points of presence (POPs),Toyota), Lycos Japan (with Sumitomowhich is where our customers access ourCorp.) and DLJdirect SFG (with Sumitomonetwork, and we will increase remote accessBank).and roaming options. Currently, we have 23POPs. By leveraging oÅ of Crosswave'sOur Strategynetwork, we plan to have approximately 80

Our name encapsulates our mission: POPs by March 2000. We oÅer service levelInternet Initiative Japan from its beginning has agreements which guarantee servicetaken the initiative in developing the Internet performance levels and distinguish the qualitymarket in Japan. We will continue to be a of our services from that of our competitors.

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Enrich Our Value-Added Services and Capture Our Share in the AttractiveProducts through Increased R&D Growing Internet Markets. We will focus ourCommitment. We have been pioneers in the eÅorts to capture market share in the InternetInternet industry in Japan, including the markets that are most attractive to us. Bydevelopment of high-bandwidth dedicated introducing a greater variety of competitiveInternet access services and Internet network Internet access and value-added services, wesecurity. We will continue to take a leading believe we are well-positioned to serveposition in the development of Internet access businesses' new and rapidly growing uses ofand high value-added services and products the Internet. We seek to encourage new andand in the research and development of new existing customers to expand their use of ourInternet services. services and to use more value-added

services.Provide Total Internet Solutions to

Our head oÇce is located at TakebashiAddress Our Clients' Needs. We provideYasuda Bldg., 3-13 Kanda Nishiki-cho,total Internet solutions for our clients' speciÑcChiyoda-ku, Tokyo 101-0054 Japan and ourneeds for Internet Protocol (IP) networktelephone number at that address is 81-3-systems development and the operation and5259-6500. IIJ America has oÇces at 399maintenance of their IP networks. We do thisPark Avenue, 23rd Floor, New York, Newby consulting with our clients to design andYork 10022 and the telephone number at thatdevelop tailored systems and speciÑcaddress is (212) 350-1300. We also maintainapplications that will allow them to optimizean Internet site that you may access attheir Internet usage. In providing total Internethttp://www.iij.ad.jp/. Information contained atsolutions we draw on our wide range ofour Web site is not part of this prospectus.resources including our extensive network,

our strong technological capabilities, ourgroup companies and our variety of services.We are targeting our network consulting andsystems integration businesses for growth.

The OÅering

The following information assumes that the underwriters do not exercise the option grantedby IIJ to purchase additional ADSs in the oÅering. See ""Underwriting''.

ADSs oÅered by IIJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,220,000 ADSsADSs oÅered by the

selling shareholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 940,000 ADSsADS/share ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,000/1ADS equivalents to be outstanding

after the oÅeringÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,980,000 ADS equivalentsNasdaq National Market symbol ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ""IIJI''Depositary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Bank of New YorkUse of proceedsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ To further develop our network, including

international expansion and the building ofadditional data centers, for investments inaÇliates, including Crosswave, IIJ Technologyand Asia Internet Holding, to pay the currentportion of long-term borrowings and forgeneral corporate purposes.

6

Summary Consolidated Financial Data and Operating Data

YearEnded

Year Ended March 31, March 31,

1997 1998 1999 1999

(thousands of yen, except per ADS data) (thousandsof U.S.$,

except perADS data)

Statement of Operations Data:Connectivity services and other revenues:

Dedicated access service revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 4,291,502 Í 6,755,402 Í 7,797,457 $ 65,840Dial-up access service revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,477,528 4,474,333 4,101,291 34,630Other revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 764,427 1,093,183 2,870,102 24,235

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,533,457 12,322,918 14,768,850 124,705

Cost and expenses:Cost of connectivity services and other revenues ÏÏ 5,526,662 9,403,385 13,202,375 111,478Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,211,192 1,508,201 1,569,731 13,255General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 891,821 938,936 1,065,119 8,994Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 103,549 152,362 242,575 2,048

Total cost and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,733,224 12,002,884 16,079,800 135,775

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 800,233 320,034 (1,310,950) (11,070)

Interest expense and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (144,986) (243,829) (199,199) (1,681)

Income (loss) before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 655,247 76,205 (1,510,149) (12,751)Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 376,969 289,453 15,320 129Minority interest in consolidated subsidiaries ÏÏÏÏÏÏÏÏÏ (31,334) (41,657) 122,866 1,037Equity in net income (loss) of aÇliated companies ÏÏÏ (43,665) (105,312) (26,089) (220)

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 203,279 Í (360,217) Í(1,428,692) $(12,063)

Basic and diluted net income (loss) per ADSequivalent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 6.78 Í (11.78) Í (37.86) $ (0.32)

Weighted average number of ADS equivalents ÏÏÏÏÏÏÏ 30,000,000 30,572,000 37,736,000

As ofAs of March 31, March 31,

1997 1998 1999 1999

(thousands of yen) (thousandsof U.S.$)

Balance Sheet Data:Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 375,825 Í1,157,971 Í 1,061,488 $ 8,963Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,615,202 9,339,165 13,359,038 112,801Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,880,000 2,440,000 6,678,717 56,394Current portion of long-term debt, including

capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 812,326 1,141,644 1,855,298 15,666Long-term debt, including capital lease

obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,393,736 2,928,806 2,150,763 18,160Shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,361,113 1,868,068 484,935 4,095

Operating Data:Capital expenditures, including capitalized leases Í 2,501,275 Í1,695,974 Í 1,928,900 $ 16,287EBITDA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,356,062 1,447,641 110,743 935Operating marginÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.4% 2.6% (8.9)%EBITDA margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.9% 11.7% 0.7%Net cash provided by (used in):

Operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 219,228 Í 291,606 Í 400,070 $ 3,378Investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,694,814) (300,036) (3,695,008) (31,200)Financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,273,646 784,828 3,186,004 26,902

Number of employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151 222 266Number of POPs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 20 23

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RISK FACTORS

You should carefully consider the risks described below before making an investmentdecision. If any of the risks described below actually occurs, our business, Ñnancial condition orresults of operations could be adversely aÅected. The trading price of our ADSs could decline, andyou may lose all or part of your investment.

We May Not Be Able to Compete EÅectively, investment in equity of Japan Telecom.Especially Against Established Competitors PSINet and UUNET have extensive ÑnancialWhich Have Greater Financial, Marketing and resources and already have extensive globalOther Resources networks and they have substantial

resources, including the capability to developSome of our major competitors in Japan and operate high-quality backbones in Japan.

are major telecommunications carriers like AT&T and BT have announced that theyNTT, KDD, Japan Telecom and AT&T and would consider consolidating their Internettheir aÇliates and ISPs who are aÇliated with and data transmission businesses in Japanlarge corporations like NEC, Fujitsu, Sony and into those of Japan Telecom. These newMatsushita Electric. These competitors have foreign entrants may be strong competitors ofcertain advantages over us including: ours and if they are successful in the market

we could lose subscribers or grow less‚ substantially greater Ñnancial resources,rapidly.

‚ more extensive and well developedmarketing and sales networks, We will also compete with new ISPs that

emerge as the Internet market continues to‚ higher brand recognition amonggrow. For example, many of the major cableconsumers, andcompanies and wireless communications

‚ large customer bases. companies have announced that they areexploring the possibility of oÅering Internet

With these advantages, our competitors access services. New ISPs may also aÅectmay be better able to our growth.

‚ develop, market and sell their services,

Our Competitors' Decisions Can Strongly‚ adapt more quickly to new and changingInÖuence Our Markets and We May Betechnologies, andVulnerable to Decisions Resulting in

‚ more easily obtain new subscribers. Downward Pricing Pressure

In addition, if telecommunicationsThe marketing and pricing decisions ofcarriers replace their existing switches and

our competitors can strongly inÖuence ourequipment with more advanced switches andmarkets. Increased competition in the industryequipment, this may increase their ability tohas caused signiÑcant downward pricinguse their existing extensive networks forpressure including lower-priced InternetInternet and data transmission.access services oÅered to small- andmedium-sized companies and to largerNew Competitors May Attract Customerscorporations which are our primary targetAway From Usmarkets. To the extent that potential and

New competitors, both foreign and existing customers make decisions solely ordomestic, may attract customers away from primarily on price, we may be unable to retainus. Recently, a number of major foreign ISPs existing or attract new customers or we mayhave entered or increased their presence in be forced to reduce our prices to keepthe Japanese market, including PSINet and existing customers. Price satisfaction was ourUUNET, an aÇliate of WorldCom, and, AT&T only real weakness in the Nikkeiand BT through their signiÑcant minority Communications survey of customers.

8

Our Customers That are Also Our We Depend on the Continued Use of TCP/IPCompetitors May Terminate Our Services if Which Could Be Replaced By NewThey are Able to Do So Without SacriÑcing Transmission TechnologiesQuality

The core of IIJ's business relies on theCurrently, because of the high quality of continued widespread commercial use of

our services and the large capacity of our Transmission Control Protocol/Internetworknetwork, many of the major telecommunications Protocol, commonly known as TCP/IP, whichcarriers and their affiliated ISPs are our is an industry standard to facilitate thecustomers. To the extent these customers/ transfer of data. Alternative open protocol andcompetitors are able to increase their ability to proprietary protocol standards could emergeuse their own networks, they may terminate or and become widely adopted. The resultingreduce our services. They may also terminate reduction in the use of TCP/IP could renderor reduce our services when lower cost our services obsolete and unmarketable.services of reasonably good quality areavailable from other providers.

We Had Operating Losses Last Year WhichWill Continue For an Uncertain PeriodIf We Fail to Keep Up With the Rapid

Technological Changes in Our IndustryWe incurred net losses of Í360 millionServices May Become Obsolete and We May

for the year ended March 31, 1998 andLose CustomersÍ1,428 million for the year ended March 31,

Our markets are characterized by: 1999. We expect to continue to incur netlosses for at least the next several quarters.‚ rapid technological change,We expect that our losses in the current Ñscal

‚ frequent new product and service year will be larger than in the year endedintroductions, March 31, 1999 although we do not know by

how much. Our results of operations and,‚ changes in customer requirements and

therefore, the magnitude of our losses andthe extent to which they continue, will be‚ evolving industry standards.aÅected by a number of factors. For example:

The introduction of services using newtechnologies and the emergence of new ‚ Our revenues may be adversely aÅected byindustry standards could render our existing price reductions, or failure to retain ourservices obsolete. customers or to attract new customers.

If we fail to obtain access to new or‚ Our costs of revenues may adversely aÅectimportant technologies or to develop and

our Ñnancial results if we contract for moreintroduce new services and enhancementsbackbone capacity than we need, or if wethat are compatible with changing industryare unable to reduce our leased line coststechnologies and standards and customeras we intend.requirements, we may lose customers.

Our pursuit of necessary technological ‚ Increased expenses resulting from ouradvances may require substantial time and leasing of additional equipment willexpense. Many of our competitors have increase our overall cost structure.greater Ñnancial and other resources than wedo and, therefore, may be better able to meet ‚ Our growing systems integration businessthe time and expense demands. Additionally, might not be proÑtable.this may allow our competitors to respondmore quickly to new and emerging Please see ""Management's Discussiontechnologies and standards or invest more and Analysis of Financial Condition andheavily in upgrading or replacing equipment to Results of Operations'' for more detailedtake advantage of new technologies and information concerning our losses and otherstandards. operating results.

9

Our Operating Results are Likely to Fluctuate We currently expect that we will needSigniÑcantly and May DiÅer From Market capital for our backbone, our data centers,Expectations our investments in Crosswave, strengthening

and consolidating our group companies andOur annual and quarterly operating pursuing attractive business opportunities

results may vary signiÑcantly in the future due such as joint ventures and alliances. Weto a number of factors, many of which are believe that we will have suÇcient funds uponbeyond our control. As a result, we believe completion of the oÅering to meet ourthat quarter-to-quarter comparisons of our anticipated needs for working capital andoperating results are not a good indication of capital expenditures in connection with theour future performance. It is likely that in plans that we have formulated as described insome future quarter, our operating results ""Use of Proceeds''. However, some of thosemay be below the expectations of public uses of proceeds may not be feasible sincemarket analysts and investors. In this event, they require the agreement of other parties. Inthe trading price of our ADSs may fall. addition, future market or other developments

may make those uses less feasible orFactors which may cause Öuctuation attractive than they currently appear to us.

include: Consequently we may substantially modify orabandon some or all of those plans, and we

‚ the rate at which we add new customers, may decide to use the proceeds of theparticularly high-end business customers oÅering for diÅerent purposes. We may alsoand increase the bandwidth used by these decide to expand the scope of some of ourhigh-end customers; plans, or we may formulate entirely new

plans.‚ our ability to generate signiÑcant revenues

from systems integration and sales ofIf we need additional funds, our inability

equipment in providing total Internetto raise them may prevent us from

solutions and the timing of the recognitionimplementing our plans and may have an

of such revenues; andadverse eÅect on our operations. In addition,there can be no assurance that additional

‚ the rate at which we will be able to convertÑnancing will be available on terms favorable

the leased lines we currently have to leasedto us, or at all.

lines from Crosswave.

We Depend on Key Personnel and OurWe May Need Additional Capital and We MayBusiness May SuÅer if We Cannot Attract orNot Be Able to Obtain ItRetain QualiÑed Personnel or if We Lose theServices of Our Executive OÇcersOur capital requirements are diÇcult to

plan in our rapidly changing industry.If we fail to attract or retain the qualiÑedConsequently, we may need more capital than

personnel we need, our business may beis currently available to us to implement ouradversely aÅected. Because our network,strategies, and our use of the proceeds ofservices, products and technologies arethis oÅering may diÅer substantially from thecomplex, we depend on the continued serviceuses we describe in ""Use of Proceeds''.of our existing engineering and other

Since our industry is growing so strongly personnel and we will need to hire additionaland since technology and market engineers and research and developmentdevelopments are producing such rapid personnel. Competition for qualiÑedchanges, we cannot be certain now about the engineers, research and developmentbest uses of capital even for the current Ñscal personnel and employees in the Internetyear. Our capital investment plans have services industry in Japan is intense andchanged dramatically in the past and it is there are a limited number of persons withhighly likely that they will do so in the future. the necessary knowledge and experience.

10

Our future success also depends on the Part of Our Business is Supported by Severalcontinued service of our executive oÇcers, Minority-Owned AÇliates Which Limits Theirparticularly Mr. Koichi Suzuki, who is the Contribution to Our Results and Limits OurPresident of IIJ and also serves as the Ability to Control These CompaniesPresident of Crosswave and most of the

We conduct our business directly and byother IIJ group companies. We rely on hisworking together with a number ofexpertise in the operations of our businessessubsidiaries and aÇliates. While we haveand on his personal relationships with ourinvested heavily in and exercise signiÑcantshareholders and the shareholders of the IIJinÖuence over these companies, we do notgroup companies and with our businessown a majority of some of these subsidiariespartners. None of our oÇcers or keyand aÇliates. There are risks associated withemployees, including Mr. Suzuki, is bound bythis group structure:an employment or noncompetition agreement.

‚ We may not be able to control theseRapid Growth and Rapidly Changing companies in the future, and our interestsOperating Environment Strain Our Limited may diverge from those of one or more ofResources these companies or their other

shareholders.We have limited operational,administrative and Ñnancial resources, which ‚ These aÇliated companies' Ñnancialcould be inadequate to sustain the growth we contributions to our results of operationswant to achieve. As our customers and their are limited even though we oÅer ourInternet use increase, as traÇc patterns services and operate as a group.change and as the volume of information

Throughout this prospectus we use thetransferred increases, we will need toterms ""we'' and ""IIJ'' to mean both the legalincrease our investment in our network andentity, Internet Initiative Japan Inc., and the IIJother facilities in order to adapt our servicesgroup but the distinction between the two isand to maintain and improve the quality of ourgenerally clear from the context. Where it isservices. If we are unable to manage ourimportant that you understand which membersgrowth and expansion, the quality of ourof the IIJ group we are talking about, we giveservices could deteriorate and our businessyou their names or otherwise refer to themmay suÅer.more speciÑcally.

Our Business May Be Adversely AÅected IfWe Fail to Maintain the Reliability and Our Large Capital Investment in CrosswaveSecurity of Our Network. May Not Produce ProÑts

The reliability of our network could be We recently formed CrosswaveaÅected by damage from Ñre, earthquakes Communications Inc. to build and operate anand other natural disasters, power loss, optical Ñber network for high-speed datatelecommunications failures and similar communications throughout Japan. We ownevents. Much of our computer and networking 40% of Crosswave and our investment inequipment and the lines that make up our Crosswave to date is Í2.56 billion. We expectnetwork backbone are concentrated in a few to invest an additional Í0.64 billion bylocations that are in earthquake-prone areas. August 31, 1999. We plan to make a furtherComputer viruses and interruptions in service investment in Crosswave. Our joint ventureas a result of the accidental or intentional agreement with Sony and Toyotaactions of Internet users and others may also contemplates that the shareholders willprevent us from providing service to our discuss and agree, by September 26, 1999,customers. Any problems that cause as to additional investments of up tointerruptions in the services we provide could Í12 billion in debt or equity, of which ourhave a material adverse eÅect on our pro rata share would be up to Í4.8 billion.business, Ñnancial condition and results of Such decision, however, may depend upon aoperations. number of variables and uncertainties. Our

11

investment in Crosswave is substantial and connection with our international operations.we are not certain that this investment will Among these risks are the following:produce proÑts.

‚ the impact of recessions in economiesoutside Japan like the current recessions in

We expect that Crosswave will loseSoutheast Asian economies;

money for at least the next few Ñscal years.These losses will have a direct impact on our ‚ unexpected changes in or delays resultingÑnancial performance as a portion of these from regulatory requirements;losses will be included in our Ñnancial resultsunder the equity method of accounting that ‚ the rate of the development of the Internetwe will use to account for our investment in industry in countries in Asia; andCrosswave; however, we are not directly

‚ political and economic instability.responsible for any of the expenses ofCrosswave beyond our equity investment.

These factors could adversely aÅect ourfuture international operations and,

Because Crosswave started operating consequently, our business, Ñnancialonly in April 1999, it has no operating history. condition and results of operations.Crosswave could have problems operatingand managing its nationwide optical Ñber Foreign Exchange Fluctuations Couldnetwork or attracting customers to its Negatively AÅect Our Results of Operationsservices. The data communications market is Because of Committed U.S. Dollara new market in Japan, and Japan's Obligationsrecession has led companies to limit spendingon information technology. Although Our reporting currency and most of ourCrosswave will operate the Ñrst nationwide revenues are in yen. However, a substantialoptical Ñber network dedicated to high-speed amount of our lease payments fordata communications in Japan, competitors of international lines are payable in U.S. dollars.Crosswave including Japan Telecom and KDD As we expand our international network, wehave announced they will develop their own expect the total amount of these payments tooptical Ñber networks that may be strong increase. Future Öuctuations in currencycompetitors of Crosswave. exchange rates may adversely aÅect our

Ñnancial results.

Crosswave is discussed in more detailWe Depend on Telecommunications Carriersunder ""Business Ì Crosswaveand Other Suppliers and We Could BeCommunications Inc.'' below.AÅected by Disruptions in Service or Delaysin the Delivery of Their Products and

There are Risks Associated With Our ServicesContinued International Expansion

We rely on telecommunications carrierslike KDD, Japan Telecom and AT&T for ourBy operating and rapidly expanding ournetwork backbone and NTT for ournetwork internationally, we expose ourselvescustomers' local access lines and in theto the risks of those markets and other risksfuture we will also rely on Crosswave tothat do not exist or are less signiÑcant inprovide telecommunications services that weJapan.need. We are subject to potential disruptionsin these telecommunications services and we

A key component of our strategy is tomay have no means of replacing these

continue to expand our trans-PaciÑc, Asianservices, on a timely basis or at all, in the

and other international networks and capacity.event of such disruption.

This will require signiÑcant managementattention and Ñnancial resources. We may In the Asia-PaciÑc region and for thehave signiÑcant exposure to risks in operation of the A-Bone by Asia Internet

12

Holding, we depend on telecommunications be materially diÅerent from our expectationscarriers in various countries including lesser are generally set forth in this ""Risk Factors''developed countries in regions whose quality section and also include, without limitation:of service may not be stable or who are more

‚ that we will not continue to increasesusceptible to economic or political instabilitysubscribers to our connectivity services,in regions where they conduct business.particularly subscribers at higher

We also depend on third-party suppliers bandwidths, andof hardware components like routers that are

‚ that we will not generate signiÑcantused in our network. We acquire somerevenues from, among others, our value-components from only one or two sources,added services such as systems integrationincluding Cisco Systems and Ascendor from OEM arrangements such as thoseCommunications. A failure by one of ourwith Sharp.suppliers to deliver quality products on a

timely basis, or the inability to developalternative sources if and as required, could We May Be Adversely AÅected by the Yeardelay our ability to increase the number of our 2000 ProblemPOPs or to expand the capacity of ournetwork. The Year 2000 (""Y2K'') problem results

from the fact that many existing computerprograms and systems use only two digits toThis Prospectus Contains Forward-Lookingidentify the year in the date Ñeld. If notStatements which are Inherentlycorrected, computer applications that use aUncertaintwo-digit format could fail or create erroneous

This prospectus contains forward- results in any computer calculation or otherlooking statements that are based on our processing involving the Year 2000 or a latercurrent expectations, assumptions, estimates date.and projections about us and our industry.These forward-looking statements are subject We have detailed plans for making andto various risks and uncertainties. Generally, testing modiÑcations to our key computerthese forward-looking statements can be systems and equipment to ensure that theyidentiÑed by the use of forward-looking are Y2K-compliant. See ""Management'sterminology such as ""may'', ""will'', ""expect'', Discussion and Analysis of Financial""anticipate'', ""estimate'', ""plan'' or other Condition and Results ofsimilar words. These statements discuss Operations Ì Impact of the Year 2000future expectations, identify strategies, Problem'', which describes these plans. Wecontain projections of results of operations or believe that with these detailed plans andof Ñnancial condition of ours or our group completed modiÑcations, the Y2K problem willcompanies or state other ""forward-looking'' not pose signiÑcant operational problems forinformation. Known and unknown risks, us. However, if the modiÑcations anduncertainties and other factors could cause conversions are not made, or not completedthe actual results to diÅer materially from in a timely fashion, the Y2K problem couldthose contained in any forward-looking have a material impact on our operations. Instatement. addition, if any of our material third parties

are not Y2K-ready, our business could beAlthough we believe that our materially adversely aÅected.

expectations that are expressed in theseforward-looking statements are reasonable, The major risks we see in connectionwe cannot promise that our expectations will with the Y2K problem are as follows:turn out to be correct. Our actual resultscould be materially diÅerent from and worse ‚ due to outages or disruptions in our ownthan our expectations. Important risks and computer system and/or infrastructuresfactors that could cause our actual results to outside our company, such as electricity,

13

we would become unable to conduct Our Business May Continue to Be Adverselynormal business operations; AÅected by the Economic Situation in Japan

Our business, particularly our dedicated‚ due to network disruptions caused byaccess services designed for businesses andexternal factors or by our own hardwareother institutions, is aÅected by the economicand software, which we believe would besituation in Japan.unlikely if our current Y2K compliance plans

proceed as scheduled, we would becomeThe Japanese economy experienced a

unable to provide our services, includingsigniÑcant downturn during the early to mid-

connectivity to and from the Internet for our1990s. Although from 1995 to early 1997 the

customers; andeconomy showed signs of a mild recovery,during 1997 and thereafter the recession

‚ our inability to provide our connectivity Japan has been experiencing for most of theservices would adversely aÅect our decade grew increasingly serious. Thiscustomers' own infrastructure, such as renewed decline has been attributed to atheir own local area networks, as well as number of factors including sluggishother ISPs. consumer spending, decreases in corporate

capital expenditures, strains in the JapaneseÑnancial system caused by the failure ofWe will continue to evaluate the natureseveral major Ñnancial institutions, economicof these risks, but at this time we cannotdiÇculties in other Asian and other emergingdetermine the probability that any of theseeconomies and the uncertain domesticrisks will occur. We also cannot determine theeconomic outlook in general.nature, duration or severity of any problems

that would arise if any of these risks doWe believe that as a result of theoccur. If a signiÑcant number of our material

economic conditions in Japan, businessesthird parties experience failures in theirhave not increased, and in many instancescomputer systems or operations due to Y2Khave decreased, their budgets for Internetnon-compliance, it could aÅect our ability toand computer spending. This has resulted inprocess transactions or otherwise engage inpenetration and utilization rates for oursimilar normal business activities.primary markets that are lower than weprojected. As a signiÑcant portion of our

While we believe that we are adequatelyrevenues is generated by our high-end

addressing the Y2K problem, we cannotdedicated access services that are primarily

assure that our Y2K analyses will be designed for businesses, our customer basecompleted on a timely basis or that the cost and our revenues have not increased asand liabilities associated with the Y2K much as we anticipated. If the economicproblem will not materially adversely impact situation in Japan does not improveour business. We are developing a signiÑcantly, our results will continue to becontingency plan to handle our most adversely aÅected.reasonably likely worst case Y2K scenarioand expect to Ñnalize it by September 30,

There Has Been No Prior Market for Our1999. See ""Management's Discussion and

Shares or the ADSs and a Liquid TradingAnalysis of Financial Condition and Results of

Market May Not DevelopOperations Ì Impact of the Year 2000Problem'' for a description of our contingency There is no public market for our sharesplan. We cannot assure that the various in Japan. Our ADSs will be listed on theassumptions we used in creating this plan will Nasdaq National Market. However, beinghold in the event of the Y2K problem's actual listed on the Nasdaq National Market doesoccurrence, and thus that the measures set not guarantee that a liquid trading market willforth in the plan will be adequate in such develop. If no liquid trading market develops,event. you may have diÇculty reselling your ADSs.

14

The Price of Our ADSs May Be Volatile and completion of the oÅering, we will haveInvestors May Not Be Able to Resell Their outstanding 43,980,000 ADS equivalentsADSs At or Above the Initial, Public OÅering (based upon ADS equivalents outstanding asPrice of June 30, 1999), assuming no exercise of

the Underwriters' over-allotment option. OfThe market price of our ADSs is likely to

these, the 36,820,000 ADS equivalents whichÖuctuate after the oÅering. In addition, the

will continue to be held by existingsecurities markets have experienced

shareholders following completion of thesigniÑcant price and volume Öuctuations and

oÅering may be sold at any time or in anythe market prices of the securities of Internet-

manner, subject to compliance with applicablerelated companies have been especially

securities laws and, in the case of certainvolatile. Investors may be unable to resell

shareholders, observance of the lock-uptheir ADSs at or above the initial public

period agreed with the underwriters. ThisoÅering price. In the past, companies that

subject is discussed in more detail underhave experienced volatility in the market price

""Shares Eligible for Future Sale'' andof their stock have been the object of

""Underwriting''.securities class action litigation. If we werethe object of securities class action litigation,it could result in substantial costs and a You Will Incur Immediate and Substantialdiversion of management's attention and Dilutionresources.

The initial public oÅering price of theThere are a Number of ADSs Eligible for

ADSs is substantially higher than the netFuture Sales and Sales of Additional ADSs to

tangible book value per share of thethe Public May Cause the Price of the ADSs

outstanding common stock. As a result, if youto Fall

purchase the ADSs in this oÅering, you willIf our shareholders sell substantial suÅer an immediate and substantial dilution of

amounts of our ADSs in the public market Í2,294 per ADS in the net tangible book valuefollowing the oÅering, the market price of our per ADS based upon an initial public oÅeringADSs could fall. Such sales also might make price of Í2,647 per ADS. In the event weit more diÇcult for us to sell equity or equity- issue additional shares of Common Stock inrelated securities in the future at a time and the future, you may experience furtherprice that we deem appropriate. Upon dilution. See ""Dilution''.

15

USE OF PROCEEDS

We estimate we will receive net Asia Internet Holding to approximately 30%.proceeds from the sale of the ADSs oÅered We would like to further increase ourby us of approximately Í15.1 billion, or ownership in Asia Internet Holding andÍ17.5 billion if the Underwriters' over- other aÇliates and will use additionalallotment option is exercised in full, after proceeds as the opportunities arise, anddeducting the estimated underwriting discount subject to discussion with the otherand oÅering expenses payable by us. These shareholders.estimates are based on an initial public

‚ In addition to the repayment of short-termoÅering price of Í2,647 per ADS. We will notbank loans as noted above, we will usereceive any of the proceeds from the sale ofÍ0.6 billion to repay the current portion ofADSs by the selling shareholders.long-term borrowings. The interest rates on

We intend to use the net proceeds to us the loans to be repaid vary from 1.58% tofrom the oÅering as follows: 2.00% per annum.

‚ We will use approximately Í4.5 billion for ‚ We will use the rest for general corporatefurther development of our network, purposes, including increasing our salesincluding expanding the capacity of our and marketing expenditures.networks, particularly our international

We may use a portion of the netcapacity, expanding our data centerproceeds to acquire or invest infacilities, and facilitating access to ourcomplementary businesses, technologies,networks by increasing our POPs.services or products; however, we currently

‚ We will use approximately Í8.0 billion for have no commitments or agreements and areour investment in Crosswave, including not involved in any negotiations with respectÍ2.56 billion to prepay the short-term bank to any such transactions.loans that Ñnanced our initial equity

Notwithstanding our current intentions,investment in Crosswave. The interest ratesmanagement will retain a signiÑcant amounton the loans to be repaid vary from 1.375%of discretion over the application of the netto 1.5% per annum and the loans mature inproceeds of the oÅering. Because of theDecember 1999.number and variability of factors that

‚ We will use Í0.7 billion to prepay the short- determine our use of the net proceeds, ourterm bank loan we used to increase our actual application of the net proceeds couldequity ownership of IIJ Technology to vary substantially from our current intentions.64.1%. The interest rate on the loan to be

Pending such uses, we intend to investrepaid is 1.375% and the maturity date isthe net proceeds in short-term, investmentDecember 1999.grade instruments, certiÑcates of deposit or

‚ We intend to use approximately Í0.75 direct or guaranteed obligations of Japan orbillion to increase our ownership interest in the United States.

DIVIDEND POLICY

We have never declared or paid any any, to Ñnance our business and to fundcash dividends on our capital stock. We growth and, therefore, do not expect to paycurrently intend to retain future earnings, if any cash dividends for the foreseeable future.

16

EXCHANGE RATES

In certain parts of this prospectus, we buying rates for Japanese yen expressed inhave translated Japanese yen amounts into Japanese yen per $1.00. The noon buyingU.S. dollars for the convenience of investors. rate on August 3, 1999 was $1 • Í115.10. NoThe rate we used for the translations was representation is made that the Japanese yenÍ118.43 equal to $1.00, which was the noon or U.S. dollar amounts referred to hereinbuying rate announced by the Federal could have been or could be converted intoReserve Bank of New York on March 31, U.S. dollars or Japanese yen, as the case1999. The following table sets forth the noon may be, at any particular rate or at all.

Year Ended March 31,

1995 1996 1997 1998 1999

Yen exchange rates per U.S. dollar:High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í105.38 Í107.29 Í124.54 Í133.99 Í147.14Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86.85 81.12 104.49 111.42 108.83Average (of month-end rates) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98.48 96.95 113.20 123.57 128.10At period-endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86.85 107.00 123.72 133.29 118.43

17

CAPITALIZATION

The following table sets forth our ‚ the issuance of the shares; andconsolidated capitalization as of March 31,

‚ the receipt and application of the estimated1999 on an actual basis and on an as

net proceeds we will receive after deductionadjusted basis to give eÅect to

of the underwriting discounts and estimated‚ an increase of the authorized shares to expenses payable by us in the offering from

75,520 at the shareholders meeting on the sale of 6,220,000 ADSs oÅered by us atJune 15, 1999; an initial public oÅering price of Í2,647 per

ADS:

AsActual Adjusted

(in thousands)

Long-term debt, including capital lease obligations,less current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 2,150,763 Í 2,150,763

Shareholders' equity:Common stock: Í50,000 par valueAuthorized: 52,000 shares, as adjusted 75,520Issued and outstanding: 18,880 actual, 21,990 as adjusted ÏÏÏÏÏÏÏ 1,100,000 8,778,263

Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 651,906 8,047,929DeÑcitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,277,611) (1,277,611)Accumulated other comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,640 10,640

Total shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 484,935 15,559,221

Total capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 2,635,698 ÍÍ17,709,984

18

DILUTION

As of March 31, 1999, our net tangible deducting the estimated underwritingbook value was approximately Í459.6 million, discounts and expenses payable by us, theor approximately Í12 per ADS. Net tangible net tangible book value at March 31, 1999book value per ADS represents the amount of would have been Í15,533.9 million, orour total tangible assets minus total liabilities, approximately Í353 per ADS. This representsdivided by the number of ADS equivalents an immediate increase in net tangible bookoutstanding. Dilution in the net tangible book value of Í341 per ADS equivalent to existingvalue per ADS represents the diÅerence shareholders and an immediate dilution in netbetween the amount per ADS paid by tangible book value of Í2,294 per ADS to newpurchasers of ADSs in the oÅering and the investors purchasing ADSs at the initial publicnet tangible book value per ADS immediately oÅering price.after the completion of the oÅering. After

The following table illustrates thisgiving eÅect to the sale by us of 6,220,000

dilution on a per ADS basis:ADSs oÅered by us hereby at an initial publicoÅering price of Í2,647 per ADS, and after

Initial public oÅering price per ADS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í2,647Net tangible book value per ADS before giving eÅect to the oÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12Increase in net tangible book value per ADS attributable to the sale of ADSs in the

oÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 341

Net tangible book value per ADS after giving eÅect to the oÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 353

Dilution per ADS to new investorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í2,294

The following table sets forth, as of deducting the estimated underwritingMarch 31, 1999, the diÅerences between the discounts and oÅering expenses payable bynumber of ADSs purchased from us, the total us, at the initial public oÅering price ofconsideration paid and the average price per Í2,647 per ADS, excluding any ADSs issuedADS or ADS equivalent paid by existing in connection with the underwriters' over-shareholders and by new investors, before allotment option.

ADSs or ADS Equivalents Total Consideration Average PricePurchased Amount per ADS or

Number Percentage (in thousands) Percentage ADS Equivalent

Existing shareholdersÏÏÏÏÏÏÏÏÏ 37,760,000 85.86% Í 1,751,906 9.62% Í 46New investorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,220,000 14.14 16,466,206 90.38 2,647

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,980,000 100.00% Í18,218,112 100.00%

19

SELECTED CONSOLIDATED FINANCIAL DATA AND OPERATING DATA

The selected consolidated Ñnancial data for the Ñscal years ended March 31, 1995 andset forth below should be read in conjunction 1996 and the balance sheet data as ofwith the consolidated Ñnancial statements of March 31, 1995, 1996 and 1997 are derivedIIJ and the notes thereto and ""Management's from the unaudited Ñnancial statement data.Discussion and Analysis of Financial The unaudited data reÖect all adjustments,Condition and Results of Operations'' consisting of normal recurring adjustments,included elsewhere in this prospectus. The that, in the opinion of management, arestatement of operations data set forth below necessary for a fair presentation of thefor the Ñscal years ended March 31, 1997, amount involved, on a basis consistent with1998 and 1999 and the balance sheet data as selected consolidated Ñnancial data derivedof March 31, 1998 and 1999 are derived from from the audited Ñnancial statements. Thethe audited Ñnancial statements of IIJ historical results are not necessarily indicativeincluded elsewhere in this prospectus, which of results to be expected for any futurehave been prepared in accordance with U.S. period. See ""Management's Discussion andGAAP and audited by Deloitte Touche Analysis of Financial Condition and Results ofTohmatsu, independent auditors. The Operations''.statement of operations data set forth below

YearEnded

Year Ended March 31, March 31,

1995 1996 1997 1998 1999 1999

(thousands of yen, except per share and ADS data) (thousandsof U.S.$,

except pershare andADS data)

Statement of Operations Data:Connectivity services and other revenues:

Dedicated access service revenues ÏÏÏÏÏÏÏÏÏ Í 580,865 Í1,881,127 Í4,291,502 Í 6,755,402 Í 7,797,457 $ 65,840Dial-up access service revenues ÏÏÏÏÏÏÏÏÏÏÏÏ 366,999 1,631,730 3,477,528 4,474,333 4,101,291 34,630Other revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151,040 544,979 764,427 1,093,183 2,870,102 24,235

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,098,904 4,057,836 8,533,457 12,322,918 14,768,850 124,705

Cost and expenses:Cost of connectivity services and other

revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 574,310 2,368,162 5,526,662 9,403,385 13,202,375 111,478Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 135,029 510,697 1,211,192 1,508,201 1,569,731 13,255General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185,108 400,662 891,821 938,936 1,065,119 8,994Research and developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,788 96,785 103,549 152,362 242,575 2,048

Total cost and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 934,235 3,376,306 7,733,224 12,002,884 16,079,800 135,775

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 164,669 681,530 800,233 320,034 (1,310,950) (11,070)

Other income (expenses):Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,993 4,833 4,972 6,834 4,035 34Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20,874) (47,672) (119,859) (215,909) (218,583) (1,845)Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,473 11,272 (30,099) (34,754) 15,349 130

Other expenses Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,408) (31,567) (144,986) (243,829) (199,199) (1,681)

Income (loss) before income taxes, minorityinterest in consolidated subsidiaries andequity in net income (loss) of aÇliatedcompanies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150,261 649,963 655,247 76,205 (1,510,149) (12,751)

Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91,348 365,604 376,969 289,453 15,320 129Minority interest in consolidated subsidiariesÏÏÏ 12,871 24,031 (31,334) (41,657) 122,866 1,037Equity in net income (loss) of aÇliated

companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (236) 10,313 (43,665) (105,312) (26,089) (220)

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 71,548 Í 318,703 Í 203,279 Í (360,217)Í(1,428,692) $(12,063)

Per Share and ADS Data:Basic and diluted net income (loss) per

share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,104 24,251 13,552 (23,565) (75,720) (639.37)Basic and diluted net income (loss) per ADS

equivalentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.55 12.13 6.78 (11.78) (37.86) (0.32)Weighted average number of shares ÏÏÏÏÏÏÏÏÏÏ 10,071 13,142 15,000 15,286 18,868Weighted average number of ADS equivalents 20,142,000 26,284,000 30,000,000 30,572,000 37,736,000

20

As ofAs of March 31, March 31,

1995 1996 1997 1998 1999 1999

(thousands of yen) (thousandsof U.S.$)

Balance Sheet Data:Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 511,014 Í 577,383 Í 375,825 Í1,157,971 Í 1,061,488 $ 8,963Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,476,763 3,638,094 7,615,502 9,339,165 13,359,038 112,801Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 375,000 700,000 1,880,000 2,440,000 6,678,717 56,394Current portion of long-term debt,

including capital lease obligations ÏÏÏÏÏ 103,090 224,345 812,326 1,141,644 1,855,298 15,666Long-term debt, including capital lease

obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 274,374 634,950 2,393,736 2,928,806 2,150,763 18,160Shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 588,411 1,164,048 1,361,113 1,868,068 484,935 4,095

Operating Data:Capital expenditures, including

capitalized leasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 343,233 884,390 2,501,275 1,695,974 1,928,900 16,287EBITDA(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230,755 901,621 1,356,062 1,447,641 110,743 935Operating margin(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.0% 16.8% 9.4% 2.6% (8.9%)EBITDA margin(1)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.0% 22.2% 15.9% 11.7% 0.7%Net cash provided by (used in):

Operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í (25,331) Í 502,447 Í 219,228 Í 291,606 Í 400,070 $ 3,378Investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (178,401) (717,025) (1,694,814) (300,036) (3,695,008) (31,200)Financing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 595,387 280,948 1,273,646 784,828 3,186,004 26,902

Number of employeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 89 151 222 266Number of POPs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 9 16 20 23

(1) EBITDA represents operating income (loss) plus depreciation and amortization. EBITDA is providedbecause it is a measure commonly used by investors to analyze and compare companies on the basisof operating performance. EBITDA is not a measurement of Ñnancial performance under generallyaccepted accounting principles and should not be construed as a substitute for operating income, netincome or cash Öows from operating activities for purposes of analyzing IIJ's operating performance,Ñnancial position and cash Öows. EBITDA is not necessarily comparable with similarly titled measuresfor other companies.

(2) Operating income (loss) as a percentage of total revenues.

(3) EBITDA as a percentage of total revenues.

21

MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of the Ñnancial condition and results of operations ofIIJ together with the consolidated Ñnancial statements and the notes to such statements includedelsewhere in this prospectus. The discussion in this section contains forward-looking statementsand you should read the risk factor relating to forward-looking statements in the section titled ""RiskFactors'' in this prospectus.

Overview America and Net Care. Beginning with thequarter ending June 30, 1999, IIJ Technology

We are a leading provider of a and IIJ Media Communications will also becomprehensive range of Internet access included in the consolidation as a result of theservices and Internet-related services in increase of our ownership in these companiesJapan. We were founded in December 1992 to a majority during the quarter. We accountand began oÅering Internet access services for our non-consolidated group companies oncommercially in July 1993. We were one of the equity method. The primary companiesthe Ñrst commercial ISPs in Japan. that we consider to be in the IIJ group are

discussed in ""Internet Initiative Japan Inc.''We manage our business and measureand ""Business Ì Our Group Companies''our results based on a single Internet-relatedbelow. In this MD&A, ""we'' and ""our'' whenservices industry segment. Our primaryused in relation to Ñnancial results andsources of revenues are our Internet accessinformation refers to the consolidatedor connectivity services. We also generateÑnancial results and information of Internetrevenues from our value-added services, fromInitiative Japan Inc. and its consolidatedsystems integration and from sales ofsubsidiaries only.purchased equipment which are components

of our total Internet solutions. Substantially allFactors AÅecting Our Futureof our revenues are from our customers in

Financial ResultsJapan.

We expect that the following are theWe provide our services directly or bymost signiÑcant factors likely to aÅect theworking together with the subsidiaries andÑnancial results of IIJ and its consolidatedaÇliates in the IIJ group. IIJ provides Internetsubsidiaries.access and Internet access-related services,

such as Internet systems design andConnectivity Services and Other Revenuesintegration, security services, co-location

services and mail box services. The IIJ group We derive our revenues primarily fromalso provides value-added and systems recurring monthly fees from our Internetintegration services, such as systems access services and our value-added servicesdevelopment and integration, Web hosting, and non-recurring fees for initial InternetWeb design, content development and access setup, systems integration and salesdistribution and call center support. Our of equipment. Our Internet access servicescustomers' main point of contact for our revenues accounted for over 80% of ourservices is IIJ. We draw upon our group revenues for the year ended March 31, 1999companies to provide the resources and accounted for over 90% of our revenuesnecessary to provide total Internet solutions for each of the years ended March 31, 1998to our customers. and 1997.

Although we refer to our subsidiaries Growth in revenues for the year endedand certain aÇliates as our group companies, March 31, 1999 was limited, except forand although we have invested heavily in and equipment sales related to systemsexercise signiÑcant inÖuence over these integration and other equipment sales.companies, until now we have consolidated Revenues were adversely aÅected by priceonly two of our group companies Ì IIJ competition in the market for Internet access,

22

adverse general economic conditions in Japan oÅered by other ISPs because theseand limited growth in our customer base. subscribers had lower bandwidth needs and

preferred lower-priced services and toWe are seeking to increase the rate of subscribers who terminated services

our revenue growth by enhancing our Internet altogether. Of the subscribers that haveaccess services through the introduction of a continued their IP Service, however, manygreater variety of access services and have migrated to higher bandwidth service.bandwidth options, by expanding our value- As a result, while IP Service prices and theadded services, network consulting, systems number of IP Service subscribers declined,integration and OEM businesses and by we have seen an overall increase in ourfocusing our eÅorts on capturing market revenues from our IP Service. Although priceshare in the Internet markets that are most competition is increasing, we expect marketattractive to us. demand for high-end services from business

customers to grow further. Our success willDedicated Access Services. Dedicated depend in large part on our ability to continue

access services are services that connect our to shift existing IP Service subscribers tocustomers directly to one of our POPs by a higher bandwidth levels and to increase thededicated line. Our two dedicated access number of subscribers to our IP Service.services are our IP Service and IIJ Economy. Further increase in our revenues from IPDedicated access services have been the Service will also depend on the degree tolargest source of revenues for us over the which our customers value and appreciate thepast few years accounting for 52.8% of our high quality of our services, which we haverevenues for the year ended March 31, 1999, emphasized and will further deÑne and54.8% for the year ended March 31, 1998 and diÅerentiate from our competitors by the50.3% for the year ended March 31, 1997. service level agreements we have recentlyDedicated access service revenues include introduced. We are not seeking to compete bythe monthly fees paid by subscribers for underpricing our competitors but we maydedicated local access lines from the have to reduce our prices in order to meetsubscribers' locations to our POPs. We the competition.collect these fees from the subscribers and

We have had a sharp increase in thepay them over to the carriers.number of subscribers to our economy-type

Our dedicated access service dedicated access service that we refer to assubscribers typically enter into contracts with IIJ Economy. IIJ Economy costs less andus that have no Ñxed period but have includes more limited support than IP Service.penalties for cancellation in the Ñrst year. For Our future revenues will be aÅected by ourIP Service subscribers who enter into three- ability to continue to attract subscribers to IIJyear contracts, we provide a 10% discount on Economy, as this is the fastest growingthe monthly fees. Approximately 19% of our segment of the Japanese dedicated lineIP Service contracts at March 31, 1999 were access market. It is also a market in whichthree-year contracts. In light of the relatively there is signiÑcant price competition.short-term nature of the customer contracts,

Dial-up Access Services. The secondif customers Ñnd our competitors' serviceslargest source of our revenues is our dial-upmore attractive than ours, they may switch toaccess services. Dial-up access is access toour competitors' services and our revenuesone of our POPs by making a local call. Dial-may be adversely aÅected.up access services, which include services for

Our revenues will be aÅected by our corporate customers and individual users,ability to retain our existing business accounted for 27.8% of our revenues in thecustomers and to attract new business year ended March 31, 1999, 36.3% for thecustomers. Recently, we have had a decline year ended March 31, 1998 and 40.8% for thein the number of subscribers to our IP year ended March 31, 1997.Service. Most of this decline was attributableto subscribers who opted to shift to services

23

Our revenues from dial-up access sales were sales of telecommunicationsservices will be aÅected primarily by our equipment, servers and other equipment that weability to attract new subscribers to our dial- acquired from third parties and sold to ourup access services, to retain our existing customers with a low markup. Crosswave wassubscribers, and to shift existing corporate the largest purchaser of this equipment buyingsubscribers to our dedicated access services approximately Í1.1 billion of telecommunicationsand by the eÅect of price competition on our equipment. Other revenues on a quarterly anddial-up access services. Our dial-up access annual basis will be substantially affected by theservice revenues will also be aÅected by the timing of future equipment sales.continued expansion and development of our

Other revenues will also be substantiallyhigh-quality network, the rate at which we areaÅected by our ability to increase growth inable to increase our POPs and the number ofsystems integration revenues. We aresubscribers we are able to add in the newtargeting systems integration to be a driver ofcoverage areas. We seek to increasegrowth in revenues and income. As ourrevenues from dial-up subscribers by addingsystems integration business is in the earlyPOPs in locations where we have notstages of development, most of our activitypreviously had POPs.has involved sales of equipment. Because the

Our ability to capture market share margins on these sales are low, theseamong individual customers has been projects have generated little or no proÑt.somewhat limited due to our relatively low Over the long term, however, we seek tobrand-name recognition among consumers improve revenues and margins throughnot familiar with the Internet and our limited systems integration sales. We seek to retainmarketing budget to date. A primary focus of our systems integration customers as ourour eÅorts to increase our revenues from customers for higher-margin consulting, co-individual customers will be our OEM location services, operation and maintenance,services, in which our OEM services business software development, and upgrades includedpartner markets and sells Internet access in systems integration. Systems integrationservices to individual customers under its own sales also provide other beneÑts to us. Mostname, and such services are provided of our systems integration customers alsothrough our Internet network infrastructure. become Internet access service customers,Our ability to introduce and expand these and we expect those relationships toservices successfully will aÅect our revenue continue. In addition, these projects enable usgrowth from this source. For a more complete to accumulate experience and build on ourdiscussion of our OEM services, please refer reputation in systems integration, which weto ""Business Ì Sales and Marketing Ì Sales believe will give us the opportunity to share inand Marketing Strategy Ì Large Companies the growth of the market for such services.and General Sales''. As with other equipment sales, our revenues

in any particular Ñscal quarter may varyOther Revenues. Other revenues substantially as a result of concentrated sales

include sales of value-added services to from large projects.support and enhance Internet access,systems integration sales and sales of Other revenues will also be aÅected bypurchased equipment. Systems integration our ability to develop new value-addedconsisted of systems and contents services and to increase our sales of ourdevelopment, maintenance and operation of value added services. The two primary factorsnetworks and equipment sales related to that will inÖuence value-added servicessystems integration. revenue will be the increase in the numbers

of our dedicated access service subscribersAlthough growth in other revenues was and the increasing variety of uses of our

significant for the year ended March 31, 1999, existing and new subscribers.most of the growth was attributable toequipment sales related to systems integration Additional Factors AÅecting Revenues.and other equipment sales. These equipment Our revenues will be aÅected by the extent to

24

which businesses in Japan exploit the Internet Our revenues will be aÅected by theto its full potential on a commercial basis, addition of IIJ Technology and IIJ Mediaincluding, for example, creating Internet sites Communications to the consolidated group.for advertisements, e-commerce between IIJ Technology had revenues of Í1.6 billionbusiness and consumers or between and IIJ Media Communications had Í0.5businesses and businesses and expansion of billion for the year ended March 31, 1999. Athe range of devices that access the Internet. portion of these revenues reÖected sales toThe active commercial application of the IIJ.Internet will require high-quality and high-capacity connectivity services for both Costs of Connectivity Services and Otherbusinesses and individuals. It will also require Revenuestotal Internet solutions provision including

We provide our Internet access servicesvarious Internet access services, systemson a high-quality network that we haveintegration and other value-added servicesdeveloped and operate. Our backbone iswhich we are well positioned to provide.constructed by using leased lines. Our

The degree of business usage will also primary costs of connectivity services anddepend upon a variety of factors including other revenues are the leasing fees that wetechnological advances, reliability of security pay for these lines and for the dedicated localsystems and users' familiarity with and access lines that our subscribers use toconÑdence in new technologies. The connect with our network. Other primaryadvancement of business usage will also components of our costs of Internet accessdepend upon the rate at which Japanese services and other revenues are depreciationcompanies in certain industries begin or and amortization of capital leases for networksigniÑcantly increase their Internet usage, equipment, cost of equipment sold, personnelparticularly the Ñnancial, manufacturing or and other expenses for technical andretail segments. We believe Japanese customer support staÅ and network operationcompanies in these and other industries have center costs. Most of our network equipmentnot yet embraced the Internet to the extent is leased rather than purchased to taketheir counterparts in the United States have. advantage of the Ñnancing provided by aHowever, several Ñnancial institutions have capital lease arrangement.begun oÅering on-line securities trading and

We have invested heavily in the last fewother companies are developing portal sitesyears in developing and expanding ourand on-line shopping sites for Internet usersnetwork. Our costs have increasedin Japan.substantially as a result. In the year ended

Our revenues have suÅered from the March 31, 1999, our leased line and othereconomic situation in Japan. Although Internet connectivity costs were equal to Í7.4 billion, oruse has continued to grow rapidly in Japan 50.2% of our revenues. Of this Í7.4 billion, ourover the last few years, many businesses international backbone cost was Í3.7 billion,have limited their expenditures for information domestic backbone cost was Í1.1 billion,technologies, including Internet-related items. dedicated local access line cost wasAs a result, our revenues have not increased Í1.9 billion and other connectivity cost wasas much as we anticipated. If the economic Í0.7 billion. We collect dedicated local accesssituation continues to decline or does not line fees from the subscribers and pay themimprove, our revenues will continue to be over to the carriers.adversely aÅected.

We expect our leased line costs toWe expect Internet usage to continue to continue to rise in absolute terms in the near

grow rapidly in Japan and that businesses will term as we continue to add capacity,continue to diversify their uses of the Internet. particularly international capacity, to handleOur ability to oÅer a broad range of services the additional traÇc on our network. It is hardto meet our customers' demands will to predict the trend beyond the near term withsigniÑcantly inÖuence our future revenues. any certainty. While we expect unit prices for

25

transmission lines to decline, our overall prior to December 2001. Approximately 30%network capacity will continue to increase, extend into 2002 and approximately 20% intoand thus the trend will depend upon the rate 2003 and thereafter. Our future minimumat which our capacity will grow, the degree to lease payments under non-cancelablewhich the unit prices of the lines will decline, domestic backbone line leases arethe particular manner in which we procure Í0.8 billion, Í0.7 billion and Í0.7 billion for theand contract for the lines, and other factors. years ending March 31, 2000, 2001 and 2002

and Í0.6 billion thereafter. Our existing long-We expect that the per unit cost ofterm leases could cause us to have higherleased transmission lines in Japan, andcosts than competing ISPs who do notbetween Japan and the United States, willcurrently have as much bandwidth underdecline. Existing carriers and new carriers likelong-term leases.Crosswave are expanding available bandwidth

in Japan through installation of new Ñber and If domestic and trans-PaciÑc leased linethrough technology that expands bandwidth costs do not decline as we expect, ourof existing Ñber. We also expect signiÑcant earnings will be adversely aÅected.additional capacity between Japan and the

We plan to substantially expand our dataUnited States to come on to the market uponcenter operations through the purchase orthe completion of a number of undersealease of facilities to house equipment and thecables expected later this year and in thepurchase or lease of supporting equipment.year 2000. We believe the additional trans-We also plan to increase signiÑcantly thePaciÑc capacity will be less expensive thannumber of our POPs by using Crosswave'scapacity obtained from traditional leasedPOPs or by other means. As a consequence,lines. These lower prices will help us reduceour cost of connectivity services and otherour costs. Additionally, as we continue torevenues will increase, principally as a resultincrease our capacity between Japan and theof associated depreciation and amortizationUnited States to meet increasing volumes ofof facilities and equipment and leasetraÇc, we expect to be able to obtain largerexpenses under any leases accounted for asbulk discounts as we lease larger capacityoperating leases.lines.

Our ability to beneÑt from any declines in We categorize our Internet accesstrans-PaciÑc line lease prices will depend in services revenues into dedicated accesspart on the expiration of commitments under services and dial-up access services;our existing trans-PaciÑc leased lines. Our however, there is no reasonable means to,future minimum lease payments under non- and accordingly we do not, allocate thecancelable trans-PaciÑc line leases are leasing fees for leased lines, other thanÍ4.3 billion, Í3.6 billion and Í3.1 billion for the customers' local access lines, and the leaseyears ending March 31, 2000, 2001 and 2002 payments, depreciation and other charges forand Í1.0 billion thereafter. network equipment to each such category of

our Internet access service revenues.As we add new capacity and replaceportions of our existing domestic backbonewith leased lines from Crosswave, our Sales and Marketingmargins may increase. Crosswave's lines willbe signiÑcantly less expensive than our Our sales and marketing expensescurrent leased lines. Our ability to replace our consist primarily of costs related to marketingdomestic backbone lines with Crosswave and general advertising and sales andlines will depend in part on the expiration of marketing personnel expenses. Our sales andmandatory lease periods under our existing marketing expenses will increase as weleases. As of March 31, 1999, approximately expand our operations signiÑcantly and as we55.5% of our domestic backbone as increase our sales and marketing activities.measured by bandwidth was covered by These increases will include increases incontracts with Ñxed periods. Approximately sales personnel expenses and in expenseshalf of those have expiration periods at or payable to sales agents.

26

General and Administrative of Crosswave. Our results of operations willbe aÅected by the results of operations of

Our general and administrative expensesCrosswave because we account for

include primarily expenses associated withCrosswave using the equity method.

our management, accounting, Ñnance andadministrative functions, including personnel Crosswave will operate a nationwideexpenses. We believe that these expenses network dedicated to data transmission.will increase as we grow our business and as Crosswave began operations at the end ofwe add additional staÅ as a result of April 1999 with service in the Tokyo-Nagoya-becoming a public company. Osaka-Hokuriku ring. We expect that

Crosswave will be operating in all majorResearch and Development prefectures by October 1999 and all

prefectures other than Okinawa byOur research and development

March 2000. We expect Crosswave willexpenses include primarily expenses relating

generate three types of revenues:to our research and development activitiesand research and development personnel and ‚ fees from leasing its lines as dedicatedwill depend in the future upon many factors, lines to customers, including IIJ;including our business strategy, technological

‚ fees from its network platform service,changes in the Internet and telecommuni-which will allow customers to leasecations industry and our available resources.dedicated networks from Crosswavethereby using the Crosswave network asOther Income and Expensestheir own network infrastructure; and

Our other income and expenses include,‚ fees from its dial-up port service, which willamong other things, interest income and

allow customers to use Crosswave's dial-interest expenses. Most of our interestup ports as access points for their ownexpense is under capital leases. As wenetworking purposes.increase capital leases or borrowing in order

to Ñnance further development of ourCrosswave's primary expenses as it

backbone and data centers and for otherstarts its operations will be related to the

investments, interest expenses will alsodevelopment of its domestic network,

increase. However, to the extent we use theincluding primarily the fees that it will pay to

proceeds of this oÅering to repay debt,KDD for dark Ñber and maintenance of the

interest expenses will decrease. Interestlines as well as the costs of networking

income and interest expenses are alsoequipment. Other signiÑcant expenses will

aÅected by the Öuctuation of market interestinclude sales and marketing expenses.

rates.

We expect that Crosswave's totalIncome Taxes expenses to implement its current business

plan will be approximately Í10.0 billion for theFor the years ended March 31, 1999 andyear ending March 31, 2000, approximately1998, a valuation allowance was providedÍ20.0 billion for the year ending March 31,with respect to the then outstanding deferred2001 and approximately Í26.5 billion for thetax assets since future realization or recoveryyear ending March 31, 2002. However, ifof tax beneÑts corresponding to such assetsCrosswave takes initiatives not contemplatedis uncertain. If in the future we provide forby its current business plan, such assimilar valuation allowance or fail to recognizeexpansion of its network to include domesticdeferred tax assets our after-tax income willlocal lines, expanding its business to includebe adversely aÅected.local access through Ñxed wireless access orentering into arrangements or long-term

Crosswave Communications Inc.contracts to obtain rights to international lines

Another important factor that will aÅect or any other businesses, Crosswave's totalour future Ñnancial results is the performance expenses would increase.

27

The contract with KDD for dark Ñber is the scope of its current business plan).treated as an operating lease. Under the Consequently Crosswave's total annualcontract, which is through April 2009, expenses could be larger than we anticipate,payments consist of variable and Ñxed or its revenues could be smaller than weportions. The amount of the variable portions anticipate; however, we are not directlywill vary depending upon the level of responsible for any of the expenses ofCrosswave's gross revenue but will increase Crosswave beyond our equity investment.annually. The amount of the Ñxed portions will

Crosswave will require funds in order tobe Öat, except that the amount will increase inmeet its operating expenses, including itsApril 2002. The maintenance fee will alsoobligations under its contract with KDD, andincrease annually until the year endingto absorb operating losses. We expect thatMarch 31, 2003 and will stay Öat thereafter.Crosswave will meet its funding requirementsAccordingly, Crosswave's cash paymentswith revenues from operations and with theunder the lease in later years of the contractcurrent and planned capital contributions bywill be larger than those in earlier years. Theits shareholders. However, Crosswave mightÑxed portions of the lease payment and therequire contributions from its shareholdersmaintenance fee will be averaged over thehigher than those currently contemplated byentire term of the lease so that in the earlyits current business plan which has beenyears Crosswave will recognize expensesapproved by its shareholders or it may needwhich will be greater than cash payments.to seek additional capital from the equity or

We expect that Crosswave will operate debt markets. We expect, but are notat a loss for at least the next few Ñscal years. required, to pay our pro rata share, which isHowever, Crosswave has no operating 40%, of any contributions that may be madehistory, the business environment surrounding to Crosswave.Crosswave is uncertain and the manner inwhich Crosswave conducts its business may Results of Operationschange signiÑcantly depending upon anumber of considerations (e.g., networking As an aid to understanding our operatingequipment can be leased or purchased, or results, the following table sets forth certainCrosswave may engage in the domestic local items from our statement of operations forline business, the international leased line the periods indicated in yen amounts and asbusiness or other businesses that are beyond a percentage of total revenues.

28

Year Ended March 31,

1997 1998 1999

(millions of yen)Statement of Operations Data:

Connectivity services and otherrevenues:Dedicated access service revenues:

IP Service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í4,291 50.3% Í 6,703 54.4% Í 7,272 49.2%IIJ EconomyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 53 0.4 526 3.6

Total dedicated access servicerevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,291 50.3 6,756 54.8 7,798 52.8

Dial-up access service revenues ÏÏÏÏÏÏ 3,478 40.8 4,474 36.3 4,101 27.8Other revenues:

Value-added services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 202 2.4 368 3.0 496 3.3Systems integration, including

related equipment sales ÏÏÏÏÏÏÏÏÏÏ 455 5.3 527 4.3 1,179 8.0Other equipment sales ÏÏÏÏÏÏÏÏÏÏÏÏÏ 63 0.7 66 0.5 1,085 7.3Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44 0.5 132 1.1 110 0.8

Total other revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏ 764 8.9 1,093 8.9 2,870 19.4

Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,533 100.0 12,323 100.0 14,769 100.0

Cost and expenses:Cost of connectivity services and other

revenues:International backbone costÏÏÏÏÏÏÏÏÏ 1,372 16.1 3,095 25.1 3,723 25.2Domestic backbone cost ÏÏÏÏÏÏÏÏÏÏÏ 322 3.8 595 4.8 1,109 7.5Local access line costÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 908 10.6 1,569 12.7 1,884 12.7Other connectivity cost ÏÏÏÏÏÏÏÏÏÏÏÏÏ 240 2.8 535 4.3 703 4.8Depreciation and amortization ÏÏÏÏÏÏ 556 6.5 1,008 8.2 1,249 8.4Cost of equipment sales related to

systems integration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151 1.8 44 0.4 410 2.8Cost of other equipment sales ÏÏÏÏÏÏ 62 0.7 60 0.5 1,074 7.3Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,916 22.5 2,498 20.3 3,050 20.7

Total cost of connectivity servicesand other revenues ÏÏÏÏÏÏÏÏÏÏÏÏ 5,527 64.8 9,404 76.3 13,202 89.4

Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,211 14.2 1,508 12.3 1,570 10.6General and administrative ÏÏÏÏÏÏÏÏÏÏÏ 892 10.4 939 7.6 1,065 7.2Research and development ÏÏÏÏÏÏÏÏÏÏÏ 103 1.2 152 1.2 243 1.7

Total cost and expenses ÏÏÏÏÏÏÏ 7,733 90.6 12,003 97.4 16,080 108.9

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 800 9.4 320 2.6 (1,311) (8.9)

Other income (expenses):Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 0.1 7 0.1 4 *Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (120) (1.4) (216) (1.8) (218) (1.4)OtherÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (30) (0.4) (35) (0.3) 15 0.1

Other expensesÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (145) (1.7) (244) (2.0) (199) (1.3)

Income (loss) before income taxes,minority interests and equity inaÇliated companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 655 7.7 76 0.6 (1,510) (10.2)

Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 377 4.4 289 2.3 16 0.1Minority interests in consolidated

subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31) (0.4) (42) (0.3) 123 0.8Equity in net income (loss) of aÇliated

companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (44) (0.5) (105) (0.9) (26) (0.2)

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 203 2.4% Í (360) (2.9)% Í(1,429) (9.7)%

29

Year Ended March 31, 1999 Compared to the increase was not large enough to oÅset theYear Ended March 31, 1998 decrease of approximately Í0.8 billion in

traditional dial-up access service revenuesConnectivity Services and Other from the other services in part due to the fact

Revenues. Revenues increased 19.8% to that the monthly revenues per subscriber ofÍ14.8 billion in the year ended March 31, IIJ4U was lower than the monthly revenues1999 from Í12.3 billion in the year ended per subscriber of our traditional dial-upMarch 31, 1998. This revenue growth access services and as a result of priceincluded increases in both revenues from reductions for IIJ4U. Revenues fromInternet access services and other revenues. Enterprise Dial-up Standard increased by

Í0.1 billion in the year ended March 31, 1999Revenues from dedicated accessprimarily because of an increase inservices increased 15.4% to Í7.8 billion in thesubscribers and the fact that this year was itsyear ended March 31, 1999 from Í6.8 billionÑrst full year of operations.in the year ended March 31, 1998. The

growth rate declined compared to the 57.4%Other revenues increased 162.5% to

growth rate in the year ended March 31,Í2.9 billion in the year ended March 31, 1999

1998. This reduced growth rate reÖected thefrom Í1.1 billion in the year ended March 31,

continued sluggish economy in Japan and1998. This signiÑcant increase was

price competition from other ISPs, primarily inattributable to increases in sales of equipment

lower bandwidth segments.(to Í1.5 billion from Í0.1 billion), includingsales of approximately Í0.4 billion ofThe number of overall IP Serviceequipment relating to large systemssubscribers declined from March 31, 1998 tointegration projects and sales ofMarch 31, 1999. We oÅered price reductionsapproximately Í1.1 billion ofincluding discounts for three-year contracts.telecommunications equipment to Crosswave.However, in the year ended March 31, 1999,

our IP Service revenues increased byCost of Connectivity Services and Other

approximately Í0.6 billion due to increasedRevenues. Cost of revenues increased 40.4%

sales of higher bandwidth services, includingto Í13.2 billion in the year ended March 31,

to IP Service subscribers of ours that1999 from Í9.4 billion in the year ended

migrated to these higher bandwidth services.March 31, 1998. This increase includedmaterial increases in our international andRevenues from IIJ Economy increaseddomestic backbone costs due to increases inby approximately Í0.5 billion due to signiÑcantleased capacity. Although our per unit pricesgrowth in the number of subscribers of thisdeclined, international backbone costservice, which was introduced in Novemberincreased 20.3% to Í3.7 billion in the year1997.ended March 31, 1999 from Í3.1 billion in the

Revenues from dial-up access services year ended March 31, 1998 as wedeclined 8.3% to Í4.1 billion in the year ended signiÑcantly upgraded our capacity betweenMarch 31, 1999 from Í4.5 billion in the year Japan and the United States. Domesticended March 31, 1998. The decline was due backbone cost increased 86.4% to Í1.1 billionprimarily to a signiÑcant decrease in the from Í0.6 billion as we continued thenumber of subscribers to our traditional dial- expansion of our domestic backbone.up access services such as Network-type Dedicated local access line cost increasedDial-up IP and Terminal-type Dial-up IP 20.1% to Í1.9 billion from Í1.6 billion as aservices that we no longer promote. This result of an overall increase in the number ofsubscriber decrease was also attributable to our dedicated access service subscribers.price competition from other ISPs and, to alesser extent, to the prolonged adverse Cost of equipment sold constituted aeconomic situation in Japan. The total number substantial portion of cost of revenues for theof IIJ4U subscribers continued to increase year ended March 31, 1999. Cost ofand IIJ4U revenues grew by approximately equipment sold consisted primarily of the costÍ0.4 billion as a result. However, this revenue of equipment sold by our systems integration

30

business (approximately Í0.4 billion) and the the year ended March 31, 1999 from the yearcost of equipment sold to Crosswave ended March 31, 1998 primarily due to(approximately Í1.1 billion). Cost of increases in research and developmentequipment sold increased signiÑcantly to activities and staÅ. Research andÍ1.5 billion in the year ended March 31, 1999 development costs increased as a percentagefrom Í0.1 billion in the year ended March 31, of revenues to 1.7% from 1.2%. The increase1998. reÖected increases in the number of research

and development staÅ and costs associatedOur costs of revenues increased as a

with the establishment of IIJ Research Lab inpercentage of revenue to 89.4% in the year

April 1998.ended March 31, 1999 from 76.3% in the yearended March 31, 1998. The predominant Interest Income. There was noreason for this substantial increase was signiÑcant interest income in either the yearmaterial increases in cost of equipment sales ended March 31, 1999 or 1998.related to systems integration projects and

Interest Expense. Interest expensecosts of equipment sales to Crosswave, as

remained at Í0.2 billion in the year endedgross margins for those revenues are

March 31, 1999. As a percentage ofgenerally substantially lower than that of

revenues, interest expense decreased to 1.4%Internet access services. Aside from these

from 1.8%.equipment sales, our costs of revenues stillincreased as a percentage of revenue in the Other Expenses. There were noyear ended March 31, 1999 if compared to signiÑcant changes in other expenses in thethe year ended March 31, 1998. The principal year ended March 31, 1999 from the yearreasons for the increase were price ended March 31, 1998.reductions that we oÅered during the period

Income Taxes. In the year endedand signiÑcant expansion of the leased line

March 31, 1999, we had pre-tax loss ofcapacity which was not accompanied by a

Í1.5 billion. Nevertheless, we recordedcorresponding increase in revenues.

income tax expenses of Í15 million. ValuationSales and Marketing. Sales and allowance of Í0.8 billion was provided for with

marketing costs increased slightly to respect to the entire operating loss carryÍ1.6 billion in the year ended March 31, 1999 forward and other items that would havefrom Í1.5 billion in the year ended March 31, given rise to deferred tax assets for the year1998. However, as a percentage of revenue, because of the uncertainty as to the futuresales and marketing expenses decreased to realization or recovery of tax beneÑt10.6% from 12.3%. A signiÑcant increase in corresponding to such assets. For morecosts of sales and marketing staÅ to Í0.7 information about income tax expenses, seebillion from Í0.5 billion was partially oÅset by Note 8 of the notes to the consolidatedreductions in other marketing expenses, Ñnancial statements included elsewhere inparticularly advertising expenses which this prospectus.decreased to Í0.2 billion from Í0.3 billion.

Minority Interests in ConsolidatedGeneral and Administrative. General and Subsidiaries. The amount of minority interest

administrative expenses increased 13.4% to in losses of consolidated subsidiaries wasÍ1.1 billion in the year ended March 31, 1999 Í0.1 billion for the year ended March 31,from Í0.9 billion in the year ended March 31, 1999, primarily as a result of start-up cost1998. General and administrative costs and expenses at Net Care and operatingdecreased slightly, as a percentage of losses at IIJ America.revenues to 7.2% from 7.6%. During this

Equity in Net Income (Loss) ofperiod, we enhanced our administrative

AÇliated Companies. In the year endedfunctions and increased our administrative

March 31, 1999, combined revenues for thestaÅ, as our operations grew rapidly.

aÇliated companies were Í4.5 billion andResearch and Development. Research combined costs and expenses were

and development costs increased 59.2% in Í4.4 billion. This represented an improvement

31

of revenues from Í2.6 billion for the year with the successful introduction andended March 31, 1998, but costs and expansion of IIJ4U for individual subscribers.expenses also increased from Í3.0 billion.

Other revenues increased to Í1.1 billionMany of these aÇliates showed improvedfrom Í0.8 billion as sales of our value-addedperformance in the year ended March 31,services and systems integration services1999, notably Internet Multifeed and IIJ Mediaincreased.Communications, whereas Crosswave

recorded material start-up losses. Overall, Cost of Connectivity Services and Otherthese aÇliated companies incurred a net loss Revenues. Cost of revenues increased 70.1%on a combined basis. to Í9.4 billion in the year ended March 31,

1998 from Í5.5 billion in the year endedYear Ended March 31, 1998 Compared to the March 31, 1997. This was primarily due toYear Ended March 31, 1997 signiÑcant increases in our international and

domestic backbone costs. InternationalConnectivity Services and Otherbackbone cost increased 125.5% toRevenues. Revenues increased 44.4% toÍ3.1 billion from Í1.4 billion as we upgradedÍ12.3 billion in the year ended March 31,signiÑcantly our capacity between Japan and1998 from Í8.5 billion in the year endedthe United States. Domestic backbone costMarch 31, 1997. The increase was primarilyincreased 85.1% to Í0.6 billion fromattributable to increases in revenues fromÍ0.3 billion due to increases in leasedInternet access services. Despite pricecapacity. Dedicated local access line costreductions in certain segments of ourincreased 72.8% to Í1.6 billion from Í0.9services, revenues from overall Internetbillion as a result of an increase in theaccess services increased, primarily due to annumber of our dedicated access serviceincrease in the number of business and ISPsubscribers. Depreciation and amortizationcustomers with higher bandwidthnearly doubled in the year ended March 31,requirements and individual users.1998 from the year ended March 31, 1997,and increased as a percentage of revenueOur dedicated access service revenuesbecause of the signiÑcant expansion of ourincreased 57.4% to Í6.8 billion in the yearbackbone. Personnel expenses alsoended March 31, 1998 from Í4.3 billion in theincreased signiÑcantly to Í0.6 billion from Í0.3year ended March 31, 1997. During thisbillion due to increases in staÅ for operationperiod, we oÅered unit price reductions forof our network and serving customers.middle to low bandwidth users of our IP

Service. We also introduced IIJ Economy.Costs of connectivity services and otherDespite the price reductions, overall dedicated

revenues increased as a percentage ofaccess service revenues increasedrevenue to 76.3% in the year ended March 31,signiÑcantly because of a signiÑcant increase1998 from 64.8% in the year ended March 31,in the number of our subscribers, particularly1997. This was primarily because leased lineIP Service subscribers, and migration of IPcosts increased more rapidly than ourservice customers to higher bandwidthcustomer base grew. There were a number ofservices.reasons for this. First, we reduced prices for

Dial-up access service revenues our dedicated access services, and weincreased 28.7% from Í3.5 billion in the year introduced less expensive llJ Economy toended March 31, 1997 to Í4.5 billion in the which some of our IP Service subscribersyear ended March 31, 1998. This increase migrated. Second, we expanded the capacitywas due primarily to an increase in number of of our network substantially in order toour dial-up subscribers, while there was no accomodate a signiÑcant increase in traÇc atmaterial price change during the period. night, primarily by individual users. However,Despite the migration of some of the dial-up the traÇc of our daytime users, which arebusiness subscribers to IIJ Economy, the primarily businesses, did not increase asoverall number of our dial-up access service rapidly and the additional capacity did notsubscribers increased substantially, notably produce a proportionate increase in revenue.

32

Third, we added additional capacity to handle an increase in the amount of capital leaseincreased traÇc from existing customers. obligations entered into during the latter halfHowever, there was no corresponding of the year ended March 31, 1997.increase in revenue associated with much ofthe increased traÇc as customers on average Other Expenses. There was noused a higher percentage of the bandwidth signiÑcant change in other expenses in thethey had contracted for. Fourth, we added year ended March 31, 1998 from the yearadditional capacity in expectation of ended March 31, 1997.signiÑcant increases in the number ofsubscribers. However, the economic Income Taxes. In the year endeddownturn in Japan resulted in slower growth March 31, 1998, we recorded income tax ofof our subscriber base than we anticipated. Í0.3 billion, despite the fact that we recordedFifth, we aggressively expanded the pre-tax income of only Í76 million. We arebandwidth and geographic coverage of our subject to a number of diÅerent taxes innetwork in anticipation of future growth. Japan which, in the aggregate, indicate a

normal statutory tax rate of approximatelySales and Marketing. Sales and 51% for the year ended March 31, 1998.

marketing costs increased 24.5% to Í1.5 Income tax consists, for the year endedbillion in the year ended March 31, 1998 from March 31, 1998 primarily of valuationÍ1.2 billion in the year ended March 31, 1997. allowance of Í0.2 billion which was providedAs a percentage of revenue, sales and for with respect to deferred tax assets. Themarketing costs declined to 12.3% from valuation allowance reÖects the uncertainty as14.2%. We limited the growth in marketing to the future realization or recovery of taxstaÅ and reduced advertising expenses. beneÑt corresponding to such assets. For

more information about income tax, seeGeneral and Administrative. General andNote 8 of Notes to the consolidated Ñnancialadministrative costs increased slightly in thestatements included elsewhere in thisyear ended March 31, 1998 from the yearprospectus.ended March 31, 1997. Such costs decreased

as a percentage of revenue to 7.6% fromMinority Interests in Consolidated10.4%. This decrease in part reÖects

Subsidiaries. The amount of minority interestsexpenses for the year ended March 31, 1997was insigniÑcant for each of the years endedassociated with the relocation of ourMarch 31, 1998 and 1997.headquarters and a decrease in cost of life

insurance.Equity in Net Loss of AÇliated

Research and Development. Research Companies. In the year ended March 31,and development costs increased 47.1% to 1998, combined revenues for the aÇliatedÍ0.2 billion in the year ended March 31, 1998 companies were Í2.6 billion and combinedfrom Í0.1 billion in the year ended March 31, costs and expenses were Í3.0 billion. This1997. As a percentage of revenue, research represented an increase in revenues fromand development costs remained at 1.2%. Í1.6 billion for the year ended March 31,

1997, while costs and expenses alsoInterest Income. There was noincreased from Í1.8 billion. Because many ofsigniÑcant interest income in either the yearthese aÇliates were start-ups, they operatedended March 31, 1998 or 1997.at a net loss for the year ended March 31,

Interest Expense. Interest expense 1997. The aÇliated companies experiencedincreased to Í0.2 billion in the year ended an overall increase in combined net lossesMarch 31, 1998 from Í0.1 billion in the year due primarily to increased losses from severalended March 31, 1997 reÖecting the eÅect of of the aÇliated companies.

33

statements and in the opinion of managementQuarterly Results of Operationsincludes all adjustments, consisting only ofThe following table sets forth certainnormal recurring adjustments, necessary tounaudited quarterly Ñnancial data, includingpresent fairly the information set forth therein.data expressed as a percentage of totalThe operating results presented for anyrevenues, for each of the four quarters in thequarter are not necessarily indicative ofyear ended March 31, 1999. This unauditedresults for any future period.information has been prepared on the same

basis as the audited consolidated ÑnancialQuarter Ended

June 30, Sept. 30, Dec. 31, Mar. 31,1998 1998 1998 1999Statement of Operations Data:

(in millions)Connectivity services and other revenues:

Dedicated access service revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í1,855 Í1,906 Í1,957 Í2,080Dial-up access service revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,041 1,042 1,004 1,014Other revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 156 271 278 2,165

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,052 3,219 3,239 5,259

Cost and expenses:Cost of connectivity services and other revenues ÏÏÏÏÏÏ 2,737 2,857 2,772 4,836Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 389 411 379 391General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315 235 251 264Research and developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 81 56 56

Total cost and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,491 3,584 3,458 5,547

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (439) (365) (219) (288)

Interest expense and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (60) (25) (31) (83)

Income (loss) before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (499) (390) (250) (371)Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 18 10 (31)Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏ 20 33 46 24Equity in net income (loss) of aÇliated companiesÏÏÏÏÏÏÏ (19) (15) 3 5

Net income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í(517) Í(390) Í(211) Í(311)

Quarter Ended

June 30, Sept. 30, Dec. 31, Mar. 31,1998 1998 1998 1999

As a Percentage of Total Revenues:Connectivity services and other revenues:

Dedicated access service revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60.8% 59.2% 60.4% 39.5%Dial-up access service revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34.1 32.4 31.0 19.3Other revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.1 8.4 8.6 41.2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0 100.0 100.0 100.0

Cost and expenses:Cost of connectivity services and other revenues ÏÏÏÏÏÏ 89.7 88.7 85.6 92.0Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12.7 12.8 11.7 7.4General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.3 7.3 7.8 5.0Research and developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.6 2.5 1.7 1.1

Total cost and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114.3 111.3 106.8 105.5

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14.3) (11.3) (6.8) (5.5)

Interest expense and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.0) (0.8) (0.9) (1.6)

Income (loss) before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16.3) (12.1) (7.7) (7.1)Income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.7 0.5 0.3 (0.6)Minority interests in consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏ 0.7 1.0 1.4 0.5Equity in net income (loss) of aÇliated companiesÏÏÏÏÏÏÏ (0.6) (0.5) 0.1 0.1

Net income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16.9)% (12.1)% (6.5)% (5.9)%

34

Apart from the quarter ended March 31, companies, purchases of property and1999, we have not experienced signiÑcant equipment, purchases of other investmentsÖuctuations in our results of operations from and payments for refundable insurancequarter to quarter. In the future, however, our policies.quarterly operating results may vary

Net cash provided by Ñnancing activitiessigniÑcantly due to a number of factors

was Í3.2 billion for the year ended March 31,beyond our control. We discuss these factors

1999 and Í0.8 billion for the year endedin ""Risk Factors'' and you should refer to our

March 31, 1998. Cash provided by Ñnancingdiscussion under the risk ""Our Operating

activities for the year ended March 31, 1999Results are Likely to Fluctuate SigniÑcantly

consisted primarily of net increases in short-and May DiÅer from Market Expectations.'' In

term borrowing.the quarter ended March 31, 1999, wereceived substantial revenue from sales of the As of March 31, 1999, our short-termtelecommunications equipment to Crosswave borrowings consisted primarily of unsecured(Í1.1 billion) and large systems equipment notes payable to banks and bank overdraftssales revenues from DLJ (Í0.2 billion) and of Í6.7 billion. The interest rates of the short-systems integration revenues from Sharp term borrowings varied from 0.82% to 1.63%.(Í0.2 billion). These sales are not necessarily

As of March 31, 1999, we had Í1.3indicative of sales that will occur in the future

billion of outstanding long-term borrowingsbut as we diversify our revenue sources,

(including the current portion of long-termincluding increasing our revenues from large

borrowings) which were all unsecured, Ñxedsystems integration projects, we may see

rate loans from banks and other Ñnancialmore Öuctuation like this.

institutions with interest rates that vary from1.52% to 2.0%. Most of these loans mature

Liquidity and Capital Resources before March 2001.

Our principal capital and liquidity needs Substantially all of our short- and long-historically have related to the development term bank borrowings contain conditions thatand expansion of our network infrastructure, would allow the banks to require us toour investments in our group companies, provide collateral or guarantees with respectincluding Crosswave, sales and marketing to the borrowings. However, we have neveractivities and general working capital needs. received a request to provide collateral orWe have met these capital needs primarily guarantees to any bank. Our primary bankingfrom cash Öow from operations, issuance of relationships are with Sumitomo Bank, Sanwaour shares, capital lease arrangements and Bank and Fuji Bank. The banks are alsoshort-term and long-term borrowing. shareholders and customers of ours.

Net cash provided by operating activities In general, we procure datawas Í0.4 billion for the year ended March 31, communication equipment for our network1999 and Í0.3 billion for the year ended under capital lease arrangements. The termsMarch 31, 1998. Despite sizable net loss for of the lease are generally set based upon ourthe year ended March 31, 1999, we had cash estimate of the useful life of particular itemsprovided by operating activities primarily due of equipment, typically four years. As ofto a large amount of depreciation and March 31, 1999, the current portion and theamortization and a signiÑcant increase in non-current portion of capital leaseaccounts payable, which were partially oÅset obligations amounted to Í1.3 billion and Í1.5by an increase in accounts receivable. billion, respectively, compared with Í1.1 billion

and Í1.8 billion as of March 31, 1998.Net cash used in investing activities was

Í3.7 billion for the year ended March 31, 1999 Our network backbone is comprised ofand Í0.3 billion for the year ended March 31, dedicated lines that we have leased from1998. Cash used in investing activities for the telecommunications carriers and others.year ended March 31, 1999 included Under these operating lease agreements, ourinvestments in and advances to aÇliated future lease payments under non-cancelable

35

operating leases as of March 31, 1999 were other shareholders agree on furtherÍ5.1 billion for the year ending March 31, investments in large amounts, we might need2000, Í4.3 billion for the year ending to identify new sources of funds in addition toMarch 31, 2001, Í3.7 billion for the year applying a portion of the proceeds from thisending March 31, 2002 and Í1.4 billion for the oÅering.year ending March 31, 2003. In addition, weexpect to use approximately Í4.0 billion for The proceeds from this oÅering arethe further development of our network, and important in order for us to implement ourfor rapid international capacity expansion current capital investment plan and to meetthrough March 2001. our capital and operating lease obligations as

discussed above. We believe that theDue to the rapid change and proceeds from this oÅering, together with

uncertainties in market conditions and the existing capital resources and credit availablebusiness environment in which we conduct through our existing short-term creditour business, it is diÇcult for us to establish facilities, under which as of April 30, 1999 wecapital expenditure and investment plans far had approximately Í1.5 billion available, willin advance. Therefore, our plans are generally be suÇcient to make our additional plannedfor short-term periods and are subject to investments and meet our materialconstant review and adjustment. Under commitments while still allowing us to meetcurrent plans, we plan to: our current working capital needs.

Additionally, we expect that our current ‚ invest approximately Í1.0 billion in each ofcapital resources will be suÇcient forthe next few years for capitalized leasesoperations for approximately the next 15-18relating to our data centers;months under current plans.

‚ invest approximately Í0.5 billion in each ofthe next few years for increased access to However, we may need to obtainour networks by adding more POPs; additional Ñnancing for a variety of reasons.

For example, in order to meet with a growing‚ make additional investments in Crosswave demand for our services, we may need to

including investing an additional Í0.64 expand and enhance our network on a largerbillion by August 31, 1999 and up to an scale or quicker, or make available additionaladditional Í4.8 billion thereafter; and working capital in amounts greater, than we

currently anticipate. In order to enhance our‚ increase our share ownership in our otherprovision of total internet solutions we mayaÇliates, including Asia Internet Holding, asneed to increase capital expenditures orthe opportunities arise.make investments in aÇliated companies

With respect to the Crosswave which we do not currently contemplate.investment, our joint venture agreement with Crosswave may require additional capital inSony and Toyota contemplates that the amounts greater than or at times earlier thanshareholders will discuss and agree, by we currently anticipate. We may need to makeSeptember 26, 1999, as to additional cash infusion in any aÇliated company if itinvestments of up to Í12 billion in debt or faces Ñnancial diÇculties and we make aequity, of which our pro rata share would be strategic or other decision to address suchup to Í4.8 billion. Such decision, however, problem. We may be unsuccessful in raisingwill depend upon a number of variables and suÇcient additional capital. In particular, weuncertainties, including how Crosswave will may be unable to secure additional loansprocure network equipment or whether and from our banks on terms that we considerwhen it will commence trans-PaciÑc or other acceptable or at all. If we fail to raiseinternational leased line business or domestic suÇcient funds, we may need to modify,local lines or any other businesses that are delay or abandon some of our futurebeyond the scope of its current business investment plans which could have a materialplan which has been approved by adverse eÅect on our business, prospects,Crosswave's shareholders. If we and the Ñnancial conditions and results of operations.

36

Market Risks Our exposure to Öuctuations in interestrates relates primarily to short-term and long-

Our primary market risk exposures are term borrowings and lease obligations relatedto foreign exchange rate and interest rate to capitalized equipment. Presently, theseÖuctuations. borrowings and obligations are payable at a

Ñxed interest rate except for a portion ofOur periodic payment obligations underlong-term borrowings which have variablecertain trans-PaciÑc dedicated line leases,interest rates hedged by interest rate swapincluding approximately 60% of our leaseinstruments. Please see Note 11 to theobligations for international lines, areÑnancial statements for additional discussion.denominated in U.S. dollars. We do not have

any material periodic U.S. dollar revenue toWe will continue to obtain Ñxed rate

match the dollar payments, and thus we areborrowings and capital lease obligations to

exposed to Öuctuations in the yen-dollarthe extent that current favorable interest rate

exchange rate to the extent the dollarconditions continue. However, we may

denominated payments are not hedged. Inreconsider this policy if these conditions

order to manage the exposure associatedchange.

with certain of the dollar-denominatedpayments, we entered into a foreign We hold no material equity price-riskexchange contract early in the year ended instruments.March 31, 1999 to hedge anticipatedpayments of dollar-denominated line lease The following table provides informationobligations covering periods extending into about our major market risk-sensitive1999, anticipating a continuing weak yen. instruments related to foreign currencyOutstanding forward exchange contracts as exchange transactions existing at March 31,of March 31, 1999 amounted to $8.2 million. 1999.

Thousands of Yen

Expected Payment Date

2000 2001 2002 2003 Total Fair Value

Foreign currency operating leasecommitment and related forwardcontracts

U.S. dollar-denominated internationalline lease commitment (as computedby approximate exchange rate atMarch 31, 1999 of Í118.43 •$1.00)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í2,919,155 Í2,351,364 Í2,351,364 Í783,768 Í8,405,651 Ì

Forward exchange contractsÌ(payyen, receive U.S. dollar)

Notional amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 972,784 Ì Ì Ì 972,784 Ì

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Í(93,556)

Average contractual exchange rate(single yen) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 131.29 Ì Ì Ì Í 131.29 Ì

(1) For each one yen change in the exchange rate total yen payments for lease paymentsdenominated in U.S. dollars will change by Í69,968 thousand.

Impact of the Year 2000 Problem identify the year in the date field. If notcorrected, computer applications that use aWhat is the Year 2000 Problem?two-digit format could fail or create erroneous

The Year 2000 (""Y2K'') problem results results in any computer calculation or otherfrom the fact that many existing computer processing involving the year 2000 or a laterprograms and systems use only two digits to date.

37

While, as discussed below, we believe implementing our Y2K compliance plans, thethat we are adequately addressing the Y2K task force has prioritized such subcategoriesproblem and that we are almost Y2K-ready, we on the basis of importance to the relevantcannot assure that our Y2K analyses will be system and to the IIJ group's businesscompleted on a timely basis or that the cost operation as a whole, and monitors theand liabilities associated with the Y2K problem implementation of the plans for each suchwill not materially adversely impact our subcategory.business, prospects, revenues or financial Through the task force, we have beenposition. closely monitoring the implementation of the

modiÑcation and testing phases of our Y2KOur State of Y2K Readiness compliance plans with respect to each

subcategory under the three categoriesThe Y2K problem, if not properlydiscussed above. We have Ñnished bothaddressed, would have material adversephases in all material respects, with onlyeÅects on our business in terms ofminor additional work to be performed. As ainformation technology systems that we use.result, many of our high-priority systems andWe do not expect that any disruptions that weequipment that are material to our businessmay experience in non-information technologyhave already passed the testing phase andsystems (such as elevators) would haveare now Y2K compliant. The remaining high-material adverse eÅects on our business,priority systems and equipment, such asalthough we are taking appropriate steps tothose that we have set up at customers'identify and address potential Y2K problemspremises, have not yet gone through thewith such systems.modiÑcation and testing phases, but weOur ""Year 2000 Task Force'', which weexpect to complete this modiÑcation andset up in October 1998, is spearheading thetesting by the end of September 30, 1999.IIJ group's eÅorts to take appropriateAlso, we are now undertaking the Y2Kmeasures to ensure the IIJ group's Y2Kremediation and testing of low-prioritycompliance. Currently this task force has 45systems and equipment, which are notmembers, 36 of whom are IIJ employees thatessential to our business operations. Wecome from various departments, including theexpect to complete all this Y2K-related workTechnical Planning Division. The task forceby September 30, 1999.exchanges information with our company's

In addition, we have beendepartments and with the IIJ groupcommunicating with our material suppliers,companies, and supervises and coordinatesvendors, lenders and other material thirdthe IIJ group's Y2K compliance eÅorts.parties to determine their Y2K status and anyThe task force has developed detailedprobable impact on us. We have received aplans for making and testing modifications toresponse from, and have otherwise obtainedour key computer systems and equipment withinformation from other sources concerning,embedded chips to ensure that they are Y2K-each material third party, which have notcompliant. Under these plans, we divided ourrevealed any signiÑcant Y2K compliance issuecomputer systems and equipment into threeaÅecting these parties. However, we cannotcategories: the business operation system,independently verify the state of their Y2Kwhich includes routers and servers that arecompliance. We will continue to track andused by us in our network and by ourevaluate our long-term relationships with ourcustomers for their own networks, formaterial third parties based on suchconnections to our network and for theresponses and other information.provision of Internet-related services; the

operational support system, which includesOur Y2K-Related Costs and Expensescustomer management, accounting software

and payroll systems; and the internal system, The costs and expenses that we havewhich includes various servers that we use incurred so far in connection with theinternally. Each of these three categories has implementation of our Y2K compliance plansvarious subcategories within it. For purposes of have not been material to our business. We

38

estimate such costs and expenses on a reasonably likely worst case Y2K scenarios.consolidated basis for the year ended Our eÅort to devise such a plan is consistentMarch 31, 1999 to be around Í2.3 million. with the recommendation of the Ministry ofThis amount consists principally of the Posts and Telecommunications toreplacement costs of routers and servers telecommunications companies, including ourused in the business operation system under company, that they should prepare Y2Kcapital lease arrangements. There has not contingency plans under a proposed timetablebeen a material diÅerence between the that calls for completion of such plans byanticipated and actual amounts of our Y2K- September 30, 1999. In line with thatrelated costs and expenses so far. timetable, we have formulated an outline of

our contingency plan, and we expect toThese costs and expenses do not

Ñnalize its details by September 30, 1999.include the operating costs associated withtime spent by our employees, because our We are preparing our contingency planY2K compliance plans involve these in part by referring to our current operatingemployees in the course of their regular practice manual for dealing with systembusiness activities. Also, many types of outages or disruptions, which our Internetsoftware we use in our business are subject Technology Division is using with respect toto maintenance services provided by their our dedicated access services.makers, for which we pay regular

Our contingency plan will discuss ourmaintenance fees. If there were any Y2Kmost reasonably likely worst case Y2Kproblem, the maker of the relevant softwarescenario, which we currently believe will entailwould solve it by upgrading the softwarethe following major adverse events:under such maintenance arrangement. These

costs and expenses do include the cost of‚ due to outages or disruptions in our own

replacing equipment except when thecomputer system and/or infrastructures

replacement is part of a total systemoutside our company, such as electricity,

overhaul. Some non-Y2K compliantwe would become unable to conduct

equipment has been replaced in connectionnormal business operations;

with such broader system overhauls.

‚ due to network disruptions caused byBased upon our review to date, we

external factors, or by our own hardwareanticipate future costs and expenses related

and software, which we believe would beto our Y2K compliance plans, on a

unlikely if our current Y2K-compliance plansconsolidated basis, to be around Í60.7

proceed as scheduled, we would becomemillion, which will not be material to our

unable to provide our services, includingbusiness. We estimate the breakdown of this

connectivity to and from the Internet for ouramount to be as follows: Í40.4 million relating

customers; andto the business operation system, consistingprincipally of the aforementioned routers and ‚ our inability to provide our connectivityservers we use under capital lease services would adversely aÅect ourarrangements; Í8.8 million relating to the customers' own infrastructure (such asoperational support system; and Í11.5 million their own local area networks) as well asrelating to the internal system. However, we other ISPs.cannot assure you that these costs and

Our contingency plan will: identify those ofexpenses will be at levels we currentlyour systems and equipment that requireanticipate. If they are not, this could have acontingency planning; define, categorize andmaterial adverse eÅect on our business,analyze various Y2K problem-related risks toresults of operations and Ñnancial condition.our business; establish measures intended toalleviate such risks in advance of the

Our Y2K Contingency Planoccurrence of the Y2K problem; and establish

We are in the process of developing a procedures for initial response in the event ofcontingency plan to handle the most such occurrence.

39

INTERNET INITIATIVE JAPAN INC.

We were incorporated as a limited France Telecom, GTE, IBM, MCIliability company in Japan in December 1992. Communications Corporation, Microsoft,We were one of the Ñrst commercial Internet Oracle and Telstra.service providers in Japan oÅering Internet

We applied for and received a Specialaccess beginning in July 1993.

Type II telecommunications license for theMinister of Posts and Telecommunications in

We were founded by, among others,February 1994. As a Special Type II carrier,

engineers who were participants in the WIDEgenerally we cannot own our own

project in Japan, which was a pioneeringtransmissions lines.

project for the advancement of the Internet inJapan. We were also a founding member of We operate our business and oÅer ourthe Internet Society in 1992 and have been a services directly by working with our groupsustaining gold member since 1998. The only companies. The chart below sets out ourother members who were founding members group companies and our current ownershipand are currently sustaining gold members of each of them:are Advanced Network and Services, AT&TLabs, Defense Information Systems Agency,

IIJ

64.1%(1)26% 71.4%(1) 50% 40%

CrosswaveNet CareIIJTechnology

IIJ MediaCommunications

40%20.6%50.1%(1)

2% 2%28.6%

InternetMultifeed

IIJAmerica

Asia InternetHolding atom

(1) Our ownership at March 31, 1999 of IIJ Media Communications was 50.0%, IIJ Technologywas 39.0% and IIJ America was 50.0%.

Mr. Suzuki, our President, is also the Chiyoda-ku, Tokyo 101-0054, Japan, and oursole Representative Director of each of the telephone number at that location isgroup companies except atom where he 81-3-5259-6500. We have a Web site that youserves as a director. Therefore, although we may access at http://www.iij.ad.jp/.don't consolidate all of the group companies, Information contained on our Web site doeswe do exercise signiÑcant inÖuence over not constitute part of this prospectus and isseveral of them. However, there can be no not intended to be used by anyoneassurance that we will be able to continue to considering an investment in the ADSs inexercise inÖuence over these companies. making their investment decision.

Our head oÇce is located at TakebashiYasuda Bldg., 3-13, Kanda Nishiki-cho,

40

BUSINESS

Overview project for the advancement of the Internet inJapan. One of our greatest strengths is theWe oÅer a comprehensive range ofengineering expertise we have amassed. WeInternet access services and Internet-relatedhave continued to hire highly qualiÑedservices to our customers in Japan. We oÅerengineers to support our growth andour services on one of the most advancedstrengthen the quality of services we provide.and reliable Internet networks available in

Japan and between Japan and the United We have created a high-quality networkStates. Our services are based upon high- that extends throughout Japan. Our backbonequality networking technology tailored to meet is one of the highest capacity Internetthe speciÑc needs and demands of our backbones in Japan and to the United Statescustomers. by leasing lines from telecommunications

carriers. Our domestic backbone is anchoredWe manage our business and measureby two 155 Mbps lines between Tokyoour results based on a single Internet-related(Otemachi) and Tokyo (Ariake) and betweenservices industry segment. We oÅer a varietyTokyo and Osaka and has large connectionsof services to our customers as part of ourto the other major business regions in Japan.total Internet solutions. Our primary servicesOur backbone is also one of the largestare our Internet access services which rangebetween Japan and the United States with afrom low-cost dial-up access to high-speedtotal capacity of 620 Mbps as of June 1999.continuous access through dedicated lines.This allows us to better serve users thatWe also oÅer through IIJ, or togetherrequire high-speed, high-capacity and reliablewith our IIJ group companies, a variety ofservices and provides us with the ability toother value-added Internet services andgather and transmit large amounts of dataproducts, including:traÇc.

‚ network consulting and systems integrationIn addition to our network, we haveservices;

signiÑcant interests in two other networks: the‚ security services, such as basic Ñrewalls A-Bone and the Crosswave network. We

and complete network security services; currently own 20.6% of Asia Internet Holding,‚ co-location services which allow companies the company that owns the A-Bone. We

to house their servers and routers in our expect to increase our interest in Asiafacilities; Internet Holding to approximately 30% with a

portion of the proceeds from this oÅering.‚ support, maintenance and monitoring;The A-Bone is an Internet network using‚ Web hosting and content development andleased lines that connects countries in thedistribution services;Asia-PaciÑc region, including Japan, China,

‚ remote user access and roaming; and Singapore, Hong Kong, Malaysia, Philippines,‚ hardware, software and other products, Indonesia and Thailand. We believe, based on

such as network equipment, which are publicly available information, our networkmostly sourced from third-party vendors. backbone and the A-Bone together form the

most extensive Internet backbone connectingThis extensive variety of Internet accessthe countries in the Asia-PaciÑc region toservices, value-added services and productseach other and to the United States. Usingenables our customers to purchase Internet-our network and engineering expertise andrelated services and products, includingpursuant to an agreement with Asia Internetintegration services, through a single source.Holding, we operate and manage the A-Bone.We aim to be the leading supplier of total

Internet solutions in Japan. We also own 40% of Crosswave, whichOur founders include engineers who operates one of the Ñrst high-speed

were among the pioneers of commercial telecommunications facilities and networks inInternet services in Japan and who Japan designed speciÑcally for dataparticipated in the WIDE project, a pioneering communications. Through DWDM and

41

SONET, advanced multiplexing and Although many focus on the increasingtransmission technologies, we believe that use of the Internet by consumers, businessCrosswave's network will have the capacity to and professional organizations areprovide over 100 Gbps of bandwidth with increasingly exploring opportunities to providemultiplexing and transmission equipment IP based applications and services within theirupgrades. Crosswave's network currently organizations and to their customers andoperates primarily in the Tokyo-Nagoya- business partners and to otherwise take fullOsaka-Hokuriku ring but will be extended to advantage of the Internet.cover all of Japan except Okinawa with One of the rapidly expanding Internetapproximately 85 POPs by March 2000. applications is E-commerce, which refers to

the purchase of goods and services over theCrosswave will provide its customersWorld Wide Web. The United States is by farwith access to dedicated lines at prices thatthe largest E-commerce market in the world.will be signiÑcantly lower than are currentlyIDC estimates that global Internet commerceavailable. We will be one of Crosswave'srevenues in 1998 were $50 billion, of whichlargest customers as we plan to usethe United States accounted for $37 billionCrosswave's lines for our domestic backbone.(74% of total). Global E-commerce marketThis will allow us to signiÑcantly expand ourrevenue is projected by IDC to reachnetwork by adding additional capacity to$734 billion by 2002, growing at 96% perhandle increasing traÇc volume and byannum on average between 1998 and 2002.increasing the number of our POPs. It will

also allow us to reduce our cost structure.The Internet in Japan

We also expect that we will lease signiÑcantThe Internet has experienced rapidamounts of our international capacity from

growth in Japan since commercial applicationCrosswave in the future.of the Internet began in the early 1990s.

Industry Overview Japan is currently the second largestInternet market in the world in terms of theThe Internetnumber of Internet devices and users. IDC

The Internet is a global network of projects that the number of devices in Japaninterconnected public and private computer with Internet access will increase fromsystems and networks that enables approximately 12 million at year-end 1998 tocommercial organizations, educational over 46 million by year-end 2002. The Internetinstitutions, government agencies and White Paper, 1999 and Access Mediaindividuals to communicate, access and share International estimated the number of Internetinformation, provide entertainment and users in Japan at year-end 1998 at 14 millionconduct business. and project that there will be 30 million

Internet users at year-end 2002, representingThe Internet has experienced rapid21% average annual growth over four years.growth since its commercialization began inFor the Asia-PaciÑc region, they estimatedthe early 1990s. International Data28.5 million users at year-end 1998 andCorporation (IDC), a private researchproject 97 million users at year-end 2002,organization, projects that the number ofone-third of which they estimate will be fromdevices accessing the World Wide Web willJapan. According to the Internet White Paper,grow from approximately 150 million at year-Japan's user penetration rate at year-endend 1998 to more than 537 million by year-1998 was 10.8%, considerably below that ofend 2002, and that the number of usersapproximately 24% for the United States.associated with those devices will grow from

approximately 142 million at year-end 1998 to IDC estimated that ISPs at the end ofapproximately 399 million by year-end 2002. 1998 in Japan had over 12.4 million contractsIn a report issued in April 1998, the U.S. for service, representing a 20% increase fromDepartment of Commerce estimated that the previous year. IDC estimates that theretraÇc on the Internet was doubling every will be approximately 24 million contracts by100 days. the end of 2003. Of the contracts as of the

42

end of 1998, approximately 37,000 were for For a discussion of competition in thededicated-line Internet access. Internet Internet industry in Japan, please refer toaccess services referred to by IDC as ""Business Ì Competition'' included in this""economy-type'' services, which oÅer lower prospectus.prices but provide less support, account for

Our Competitive Strengthsapproximately 25,500 or 68.9% of dedicated-

We Have a High-Capacity IP Networkline contracts and this segment is the fastestgrowing segment of the dedicated-line Our network is one of our mostservice, increasing by over 180% in 1998. IDC important assets. Our network is extensive. Inestimates that there will be over 242,000 Japan, we have large trunk lines that connectdedicated-line contracts by the end of 2003. major metropolitan and business centers in

Japan, which included, as of June 30, 1999,Businesses in Japan have not exploiteddedicated capacity of:the Internet to its full potential on a

commercial basis, primarily due to their ‚ 2 lines of 155 Mbps each betweenunfamiliarity with the new technology and Otemachi and Ariake, two of our largesttheir concern with security. Currently, many POPs that are both located in TokyoJapanese companies, to the extent they use ‚ 2 lines of 155 Mbps each between Tokyothe Internet, use it mainly for e-mail. and Osaka,

We believe that businesses in Japan are ‚ 45 Mbps or more between Osaka andnow beginning to use and rely on the Internet Nagoya, Tokyo and Yokohama, Osaka andfor wider purposes, including establishing Fukuoka, and Tokyo and Kashiwa, andcorporate Internet sites as a means to

‚ 45 Mbps between our current data centerexpand customer reach and improveand each of Otemachi and Ariake.communications eÇciency and creating

As of June 30, 1999, our network alsointranets or virtual private networks.had four 155 Mbps trunk lines between JapanE-commerce is still in its infancy in Japan byand the United States for a total of 620 Mbpscomparison to the level of development inof capacity.other advanced economies. According to IDC,

the estimated number of purchasers of goodsOur network directly connects to A-

and services over the WWW in Japan was 1.8Bone, which is owned by an IIJ group

million in 1998, compared to 21 million in thecompany, Asia Internet Holding, and is

United States and 4.6 million in Westernoperated and managed by us pursuant to an

Europe. IDC estimated the total Japanese E-agreement with Asia Internet Holding. This

commerce market to be $2.0 billion in 1998,provides us with a strong presence in the

compared to $37 billion in the United StatesAsia-PaciÑc region as we believe, based on

and $5.6 billion in Western Europe. The totalpublicly available information, that when

Japanese E-commerce market is estimated bycombined with the A-Bone we have the most

IDC to grow at 95% per annum to $29 billionextensive Internet backbone in the region and

in 2002. As usage by businesses increases,we believe it positions us to be the primary

we expect an increase in the demand forconduit to gather and exchange Internet

advanced, highly reliable, high-capacitytraÇc in this region.

connectivity services and a full-range ofvalue-added services to meet their particular We are Strong in Network Technologynetworking and other needs. In other words, Internet technology changes rapidly. Ourwe expect businesses will increasingly seek engineering expertise provides us with thereliable total Internet solutions. capability and resources necessary to take

For a description of the regulatory advantage of the rapid changes. Thisenvironment of the telecommunications engineering expertise is a result of the highindustry, please refer to ""Business Ì percentage of our employees withRegulation of the Telecommunications engineering degrees, over 30%, and of ourIndustry in Japan'' included in this signiÑcant experience managing andprospectus. operating large capacity, high volume

43

networks. Additionally, our experience, our network coverage in the Asia-PaciÑc region.personnel and commitment to research and We have access to a new robustdevelopment support our ability to keep up infrastructure for nationwide datawith the rapid changes in Internet and communications through Crosswave. Ournetworking technology. group resources provide us with more

Öexibility and freedom to develop newOur engineers are at the forefront of the

services and decrease our reliance on thedevelopment of new network services,

incumbent telecommunications carriers.security services and other Internet-relatedservices, as they have been since we began We Draw on the Strength of Shareholdersoperations. We are particularly strong in large Our shareholders include large, well-network traÇc management, routing control known companies in Japan such asand facilities operation. We have operated the Sumitomo Corp., Itochu Corp., NTTlargest or one of the largest Internet networks Communications, Toyota, Dai-ichi Life,in Japan and between Japan and the United Sumitomo Bank, Fuji Bank and Sanwa Bank.States since we began operations. We rated BeneÑts of our shareholder base include:as the top ISP for satisfaction in terms ofthrough-put and network management ‚ Having leading institutions like these ascapability in a survey of Japanese companies shareholders is viewed by the Japaneseby Nikkei Communications. Our engineering business community as a sign ofexpertise and strength in network technology conÑdence.allows us to provide speciÑcally tailored,

‚ IIJ and its shareholders have combinedadvanced Internet solutions to our Internettheir strengths in a number of businessusers.ventures such as Crosswave (with

We Have a Strong Customer Base and a High Toyota), Lycos Japan (with SumitomoReputation Corp.) and DLJdirect SFG (with Sumitomo

Bank).Our core customers are valuable leadingedge Internet users, such as large Our Strategycorporations, major ISPs, telecommunications

Our name encapsulates our mission:carriers, cable operators, portal sites,Internet Initiative Japan from its beginning hase-commerce businesses and publishers. Wetaken the initiative in developing the Internetwork closely with our major customers tomarket in Japan. We will continue to be aprovide services that stimulate and developleader in promoting and facilitating the growththe Internet market in Japan. We haveof the Internet in Japan and we willestablished a strong brand name andstrengthen our presence in this rapidlyreputation for quality Internet service amongexpanding market. The Internet market inthe professional communities which hasJapan is currently under-developed andresulted in our strong customer base.under-utilized for various reasons such as theSatisfaction levels are high among oureconomic situation and the industry andcustomers especially in terms of the qualityregulatory environment in Japan. However,and reliability of our services.the potential of the market is high and the

Our Extensive Resources Allow Us to OÅer a growth of the market has strong momentum.Full Range of Services and Infrastructure We believe that the Japanese market isExpansion poised for substantial growth. Businesses are

Our resources are extensive and include just now beginning to take advantage ofour strong technological capabilities, our high- Internet applications to develop newquality network, our group companies, businesses, increase eÇciency andincluding IIJ Technology, and our broad productivity and to reduce costs. Our primaryvariety of Internet access services and related business strategy is to capture our share invalue-added services. Working together with this growing market by responding to theour group companies we oÅer systems demands and requirements of corporate andintegration, help desk functions, hosting, and individual users.

44

The principal elements of our business Enhance Our Internet Access Servicesstrategy are summarized below: We will introduce a greater variety of

connectivity and bandwidth options to meetExpand Our Network

the diversifying needs and requirements ofExpanding our network is one of our our customers. As we increase the options

most important objectives. We currently have available and diversify the pricing of thesean extensive network that is fully capable of services, we will increase our ability to retainhandling our current traÇc but we will existing customers and attract new customerscontinue to expand our network to meet our and to promote higher levels of services tocustomer and traÇc demands. these customers. Among the options that we

oÅer or will soon introduce are:In Japan, our network development plan

‚ Bandwidth options: a customer will be ableis to increase our capacity on our busiest

to select Ñxed or burstable service, anroutes, such as between Tokyo and Osaka, to

increasing variety of bandwidth options andcontinue to be able to meet the quality of

levels of guarantees under the service levelservice our customers have come to expect.

agreements.We will expand our geographic reach by

‚ Access line type: a customer is able toexpanding our POPs so that a greaterchoose from diÅerent transmissionpercentage of the population will have localtechnologies and line types which nowaccess to our network. Crosswave will beinclude ATM.important to us as we expand our domestic

network as we will utilize Crosswave's We will increase access to andnetwork for both our capacity and geographic geographic coverage of our network. We willexpansion. increase the number of our POPs in Japan

from 23 POPs to approximately 80 POPs byInternationally, we will continue to March 2000. We will also continue to increase

expand our network in much the same way. roaming options through interconnection withWe will increase our international capacity other ISPs and alliances such as the roamingbetween the United States and Japan. We will alliance between Asia Internet Holding andalso continue to explore opportunities to Eunet.expand our geographic coverage into new

We oÅer quality guarantees tolocations in the United Sates, Asia and

distinguish our service from our competitors.Europe. We will also add additional capacity

We will oÅer service level agreements to ourthrough the A-Bone to transfer data traÇc in

IP Service customers, becoming the Ñrst ISPthe Asia-PaciÑc region.

in Japan to provide these agreements. We willguarantee 100% availability of our network;We will strengthen the capability andmaximum average latencies, or timerobustness of our network and will becomenecessary to transmit a signal, betweenless reliant on the incumbentPOPs; and prompt notiÑcation of outage ortelecommunications carriers by utilizingdisruption.Crosswave's network infrastructure, which is

speciÑcally designed (by us) to Enrich Our Value-Added Services andaccommodate data communications traÇc. Products through Increased Commitment to

Research and DevelopmentTo capture the demand for betterInternet environments and business We will continue to take a leadingnetworking and to support growing position in the development of Internet accesse-commerce and contents business, we will and high value-added services and productsdevelop additional data centers which will and in the research and development of newallow our customers to house their network Internet services. Currently, we are focusingsystems at our own facilities and which will on expanding our security-related servicealso allow direct connectivity to our backbone. line-up by introducing security consulting,We will also connect directly to Crosswave's managed Ñrewall services and virtual privatenetwork at these data centers. network (VPN) services. We will continue to

45

improve our bandwidth management and expand their use of our services and to usetraÇc control technologies which will be the more value-added services.key elements toward implementing our quality To deliver these strong products to aof service (QoS) standards. We are also growing number of customers, we will expandactively researching and developing software our sales and marketing capability byand services on the IPv6 platform which is a increasing our sales forces and salesnext generation Internet protocol. channels, including agents. We will allocate

more resources to sales force developmentProvide Total Internet Solutions to Addressand indirect sales channel development andOur Clients' Needsto the deployment of active marketing eÅorts

We solve our clients' speciÑc needs forand campaigns.

IP network systems development and theWith the combination of our expandedoperation and maintenance of their IP

product line and our enhanced salesnetworks. We help our clients design andcapability, we seek to increase thedevelop tailored IP network systems andpenetration of our high quality InternetspeciÑc applications that allow them toservices into more market segments in theoptimize use of the Internet. We arecorporate market and strengthen our positioncapitalizing on our advanced networkin lucrative segments of the market.environment and our network engineering

experience and knowledge in our network Our Networkconsulting and systems integration

Our network is one of our mostbusinesses. We will operate and manage IP

important assets. We have developed andnetwork systems for clients. We will also

operate a high-capacity network that hasincrease our support to customers by

been designed to provide reliable, high-speed,increasing our help desk capability and

high-quality Internet access services. Ournetwork maintenance services.

network has also been designed to minimizeOne total Internet solution we oÅer is our costs through eÇcient use of our

OEM services. OEM services provide the IIJ backbone or bandwidth and use of a scalablenetwork infrastructure and services to third infrastructure.parties which then acquire individual

Our network is reliable. We achievecustomers through their own distribution and

reliability in two primary ways. First, oursales networks. This provides a unique

network has been designed by our engineerscombination where our partners gain the

using leading edge routing and otherability to oÅer their customers high-quality

networking technologies and advanced, high-Internet services and we gain revenue from

quality routers and other network equipment.individual users that would not be cost-

The combination of our accumulatedeÅective for us to acquire independently. For

engineering experience and advanceda more complete discussion of our OEM

technology makes our network highly reliable.services, please refer to ""BusinessÌSales

Second, we achieve reliability throughand MarketingÌSales and Marketing

redundancy. Our network is speciÑcallyStrategyÌLarge Companies and General

designed to minimize the number of pointsSales''.

where the failure of a single component of theWe Seek to Capture Our Share in the network could interrupt network operations.Attractive Growing Internet Markets Our network is a high-speed network.

We will focus our eÅorts to capture Our network is speciÑcally constructed formarket share in the Internet markets that are Internet usage. We are able to achieve andmost attractive to us. By introducing a greater maintain high speeds through our advancedvariety of competitive Internet access and network architecture, routing technology andvalue-added services, we believe we are well- aggressive load balancing that optimize traÇcpositioned to serve businesses' new and through our multiple Internet connections. Werapidly growing uses of the Internet. We seek believe that few other ISPs in Japan have asto encourage new and existing customers to much experience as we do in managing high-

46

bandwidth networks. The ability to deliver We have planned for future growth byconsistent high-speed services is one of the ensuring that our network is scalable andprimary reasons that we are able to oÅer our Öexible and that it can easily be adapted tocustomers service level agreements. We meet new technological standards. Webelieve some carrier-related ISPs are using monitor usage and evaluate the network'slines with lower eÇciency and reliability that capacity on an ongoing basis. We continue touse ATM or frame relay for their backbone upgrade and expand the network as ourwhich, we believe, ultimately prevent them customers' usage increases and as thefrom achieving the speed, quality and number of our customers increases. Becausereliability that our Internet-dedicated network of the scalable nature of our network, weis able to achieve. anticipate having few, if any, problems

integrating Crosswave's networks with ours.Our network is secure. We monitor ourOne of the primary means to grow ournetwork at all times. Although in the past wenetwork in terms of capacity and geographichave discovered an apparent attempt atcoverage in the coming years will be throughhacking of the network system by a thirdour use of Crosswave's network.party, we do not believe that there have been

repeated attempts and no damage was The primary components of our networkcaused by this incident. We have not had any consist of:material damage caused by computer viruses

‚ our backbone, which includes leased linesentering into our network system. We haveand network equipment such as advancedbeen, and are, implementing appropriateInternet routers;hardware and software protections to

minimize hacking and computer virus ‚ POPs in major metropolitan areas in Japan;inÑltration. We believe that our current

‚ data centers; andmeasures are adequate and reasonable.

‚ a network operations center or NOC.Our network is cost-eÇcient. There area number of ways we achieve eÇciency. First,our network has been designed and BackboneconÑgured to maximize eÇcient use of

Leased Lines. Our network is anchoredbandwidth. Our routing technology andby our backbone that we have developed andaggressive load balancing increase ouroperate. We have an extensive InterneteÇciency. Second, the high volume of ourbackbone in Japan and between Japan andtraÇc and the concentration of our clients inthe United States (620 Mbps). We use ourthe major business areas in Japan allow us toexpertise in developing and operating ourlease larger capacity lines which have lowernetwork to organize and connect these leasedper unit costs than smaller capacity lines.lines to form a backbone that has substantialFurthermore, since we are one of the largertransmission capacity.users of international leased lines in terms of

capacity, we can use our bargaining power to Currently, we lease high-capacity, high-negotiate favorable pricing. Third, because of speed digital transmission lines from variousour mix of customers Ì high-end business carriers. Standard practice in Japan is for theusers that use our services more during the leases to have no specific term but to haveday and ISPs and individuals that use our penalty clauses for cancellation of leases inservices more at night Ì we believe we are the first year. However, we have a number ofable to use our capacity more eÇciently than leases with fixed lengths. As of March 31,many other ISPs. We will be adding to and 1999, approximately 55.5% of the leased linesreplacing our existing lines in Japan with lines comprising our domestic backbone measuredleased from Crosswave. We plan to use by bandwidth were under contracts with fixedCrosswave's SONET technology to further termination periods. Approximately half ofimprove the eÇciency of our network. these have less than two years remaining. In

anticipation of Crosswave beginning itsoperations, we have intentionally decreased

47

the number of contracts that we have entered we reach the agreed minimum level if wethat have fixed lengths as it is our current plan choose to do so.to convert our existing leases to leases from

The graph below shows the growth inCrosswave as soon as the existing leasescapacity of IIJ's backbone between Japanexpire.and the United States over the Ñve-year

With respect to our leased lines to the period from 1994 to 1999.United States, IIJ has long-term contractswith KDD, IDC, WorldCom and AT&T. The

U.S.ÓJapan Backbonecontract with KDD for the Japan-half of a155 Mbps circuit will expire in August 2002.The contract with IDC for the Japan-half ofanother 155 Mbps circuit will expire inJanuary 2001. The contract with WorldComfor the U.S.-half of the 155 Mbps circuit willexpire in February 2000. Our largest contractin terms of total bandwidth is a master leaseagreement with AT&T. The contract is as ofMay 1999 for the U.S.-half of a 155 Mbpscircuit and two full 155 Mbps circuits. Thisagreement was most recently amended inMay 1999 and currently has a stated termextending to August 2002. However, thecontract may be terminated when thecumulative payments of fees have reached anagreed minimum level. If we keep our currentcircuits, we will be in a position to terminatethe contract in April 2001 if we choose to doso. We can shorten the contract term byadding more AT&T circuits. We are also ableto continue leasing under the contract after

1994 1995 1996 1997 1998 1999

445Mbps

245Mbps

135Mbps

90Mbps

45Mbps

4.5Mbps1.5Mbps

465Mbps

192kbps

620Mbps

290Mbps

768kbps

700M

600M

500M

400M

300M

200M

100M

(bps)

The table below sets out our international backbone capacity and cost. Average totalcapacity is calculated by averaging the international capacity at the end of each month.

International Backbone Capacity and Cost

Year ended March 31,

1996 1997 1998 1999

Backbone cost (thousand yen)ÏÏÏÏÏÏÏÏ 233,174 1,372,452 3,095,149 3,722,676

Average total capacity (Mbps) ÏÏÏÏÏÏÏÏ 12.17 78.75 204.58 282.08

Average cost per 1 Mbps(thousand yen) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,165 17,428 15,129 13,197

In the United States, our network Through these IX points we connect tobackbone connects to the following major many other ISPs in the United States,interexchange points (IX): including Sprint, C&W (Internet MCI) and

MCI WorldCom (UUNET).‚ MAE West in San Jose, California;

In Asia, we have established a backbone‚ PAIX (Palo Alto Internet Exchange) in Palo

connection through A-Bone, the InternetAlto, California; and

backbone network covering the Asia-PaciÑc‚ the Sprint Network Access Point in region. The A-Bone is operated by Asia

Pennsauken, New Jersey. Internet Holding, of which we own 20.6%.

48

Asia Internet Holding commissioned IIJ to choose not to add as much capacity as wedesign and build the A-Bone and IIJ currently currently plan to.manages the A-Bone. Network Equipment. We use advanced

equipment in our network. Our primaryIn Europe, Asia Internet Holding hasrouters for our dedicated lines are Ciscoestablished a roaming alliance with EUnetrouters. Our primary dial-up routers arethrough the A-Bone that allows us to oÅerAscend MAX routers. The size of our routersroaming to our customers.varies depending on the number of customersand volume of traÇc served by our POPs. AtWith the large-capacity of domestic andeach POP we connect our dedicated line andinternational backbone networks of IIJ anddial-up access routers to Cisco backboneAsia Internet Holding, we seek to provide therouters which then transmit and receivebest quality of services in connectivity, speedinformation throughout our network.and reliability to customers among ISPs in

Japan.POPs

Expansion Plans. We have placed a highPOPs are the main points at which ourpriority on the continued expansion of the

customers connect to the IIJ backbone. Wecapacity and geographic reach of ourprovide Internet access from our POPs tonetworks. We will look Ñrst at increasing ourcommercial and residential customers throughdomestic network and our network betweenleased lines and dial-up connections overJapan and the United States. We will alsolocal exchange facilities. We currently have 23look at expanding our network in thePOPs which cover most of the majorAsia-PaciÑc region, into Europe and in themetropolitan areas in Japan. As we expandUnited States as opportunities arise.our network by integrating it with the

With respect to our domestic expansion, Crosswave network, we plan to increase thewe expect to extend our geographic coverage number of our POPs to over 80 byand our capacity by leasing lines from March 2000.Crosswave, particularly in areas where we do

Many of our POPs are located in, or innot currently have POPs. We will also replaceclose physical proximity to, ""carrier hotels.''our existing lines with new lines of the sameCarrier hotels are facilities where we andor higher capacity from Crosswave.other major carriers and ISPs have POPs.

Between Japan and the United States, These are mainly located at facilities ofwe will look primarily to increase our capacity various carriers in Japan like NTT, KDD,by securing long-term committed capacity Japan Telecom and IDC. We lease theeither directly or through Crosswave, who physical space from these carriers underwould then lease all or a substantial portion leases or use such space under otherof the international capacity to us on a long- arrangements with terms ranging from one toterm basis. two years most of which can be terminated

by either party on three to six months' notice.Although we believe that our totalWe maintain our routers and other networkingexpenditures for additional capacity in theequipment at these POPs. Our actual locationnear term will increase in absolute terms, wein, or in close proximity to, the same buildingbelieve that the per unit costs will bein which the switches and routers of thesesigniÑcantly reduced because of thecarriers and ISPs are located oÅers us theavailability of lower-cost lines fromability to quickly and easily interconnect ourCrosswave and because of the anticipatedequipment to theirs.increase of available capacity between Japan

and the United States from the expected Although we do not have any of ourcompletion later this year of a number of personnel on these sites, the equipment isundersea cables. To the extent that domestic well protected on premises that are fullyand trans-PaciÑc leased line costs do not staÅed and have uninterrupted powerdecline as anticipated, we may not realize the supplies, anti-seismic damage precautions, aircost savings we anticipate and/or we may conditioning, Ñre suppression equipment and

49

rigorous security systems. We monitor traÇc Our POPs are linked to each other byon our networks and the equipment at our our backbone. The following diagramPOPs on a 24-hour-a-day, seven-day-a-week illustrates our POPs and backbone as ofbasis, which allows us to rapidly identify and June 1999.resolve any service interruptions.

TokyoOsaka To A-Bone

45 Mbps1.5 Mbps4.5Mbps x 2

3 Mbps

45 Mbps

6 Mbps

50 Mbps+

6 Mbps

1.5 Mbps

3 Mbps

50 Mbps

6 Mbps6 Mbps

3 Mbps

3 Mbps

3 Mbps

3 Mbps6 Mbps

3 Mbps

6 Mbps

6 Mbps x 2

3 Mbps

155 Mbps x 2

45 Mbps x 210 Mbps

45 Mbps

6Mbps

6 Mbps x 2

155 Mbps x 2155 Mbps

155 Mbps x 2

155 Mbps

Japan

U.S.A.

6 Mbps x 2

100 Mbps

45 Mbps

Hiroshima

KyotoOkayamaKita

kyushu

Fukuoka

Kumamoto

Kobe

Takamatsu

NY-NAPPennsauken

NYCNew York

WestTokyo

Kanazawa

Toyama

Nagoya

Hamamatsu

Okazaki

Yokohama DATA

Center

PAIXPalo Alto

MAE-WestSan Jose

Ariake

Chiba

Sendai

Sapporo

UrawaKashiwa

45 Mbps

Data Centers Our data centers will have 24-hour-a-day, seven-day-a-week operations and

We currently have a data center insecurity and will be equipped with

Yokohama, Japan. Our current data center isuninterruptible power supply and backup

in space that we lease. We plan to developgenerators, anti-seismic damage precautions,

and construct our own additional data centersÑre suppression equipment and other

in order to better serve our customers. At ourfeatures to optimize our ability to oÅer high-

data center, we currently oÅer basic co-quality services through our data centers.

location services. Our planned data centerswill be speciÑcally designed for application

Network Operations Center and Technicalhosting, co-location services and high

and Customer Supportcapacity access to our network. Our datacenters will also support the growing Our network operations center or NOCe-commerce and contents businesses. We in Tokyo operates 24 hours a day, sevenwill also connect directly to Crosswave's days a week. From our NOC we monitor thenetwork at our data centers. status of our network, the traÇc on the

network, the network equipment and

50

components and many other aspects of our problems, our service administrativenetwork including our customers' dedicated department answers customer registrationaccess lines leased from carriers. From our and other post-sale questions.NOC, we will monitor our networks to ensurethat we meet our commitments under our

Our Internet Access Servicesservice level agreements.

We are a leading provider of InternetWe strive for full customer satisfaction inaccess services in Japan, including a varietyour eÅorts to retain customers and achieveof dedicated and dial-up access services andsubscriber growth. We believe that networkcustomized wide area networking solutions,performance (primarily the availability,which provide high-speed continuous accessreliability and speed of the Internet accessto the Internet and other networks for ourservice), customer technical support and thecustomers. We provide turnkey conÑgurationrange and quality of our products andsolutions encompassing such services asservices are key factors contributing todomain name registration, leased-linecustomer satisfaction in our existing markets.ordering and installation assistance, IPWe are committed to providing the bestaddress assignment, router conÑguration,technical support available in the industry,installation and management, and technicalincluding the ability to resolve the mostconsultation services.diÇcult problems that a sophisticated user

may present. High-quality customer support isprovided as it is necessary to meet the We oÅer two categories of accessdiÅering needs of consumers and corporate services: dedicated access services and dial-customers. We will stand behind our up access services. Dedicated accesscommitments with our service level services are based on dedicated local-lineagreements. connections provided by carriers between our

backbone and the customer. Dial-up accessTechnical Support. Our technical support services require the customer to connect to

group is staÅed with knowledgeable and IIJ through public-switched telephone networkexperienced support technicians able to or ISDN. The Internet access part of our totaldiagnose customer problems and prescribe Internet solutions ranges from cost-eÅective,corrective measures. Technical support is entry-level dial-up connections from homeavailable to customers 24 hours a day, seven personal computers to customized wide-areadays a week. network solutions deploying a range of the

dedicated and dial-up services listed below toCustomer Support. In addition to connect the headquarters, data centers,

diagnosing and resolving customers' technical branch oÇces and mobile personnel.

51

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

As of March 31,

1996 1997 1998 1999

Dedicated access service contracts:IP Service

64kbps Ó 128kbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320 711 794 654192kbps Ó 768kbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 122 169 1711Mbps Ó 1.5Mbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 52 51 663Mbps Ó 45MbpsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 12 34 57

Total IP Service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 391 897 1,048 948IIJ Economy

64kbps Ó 128kbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 156 708

Total dedicated access service contracts ÏÏÏÏÏÏ 391 897 1,204 1,656

Dial-up access service contracts:IIJ4U ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 10,766 21,422 48,195Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,706 17,929 14,534 10,508

Total dial-up access service contractsÏÏÏÏÏÏÏÏÏ 17,706 28,695 35,956 58,703

We currently oÅer the following Internet access services:

Service Type Summary Description Pricing

Dedicated Access ServicesIP Service Full-scale dedicated line The fees include various setup

service with high-speed fees and monthly fees thataccess for businesses and vary according to carrier, lineother ISPs with demanding speed, line type and distancethroughput requirements. involved. See the additional

details and chart below.

IIJ Economy Service for dedicated-line Initial setup fee of Í40,000access to the Internet with and Í15,000 for an IP addressinexpensive monthly fees application. Monthly accessprimarily for medium and small fees of Í38,000 for 64 kbpsbusinesses and local and service and Í45,000 for 128regional oÇces of corporate kbps service.groups.

Dial-up Access ServicesIIJ Dial-up Standard Service for corporate users Initial setup fee of Í20,000.

permitting simultaneous Monthly basic fee of Í2,000Internet access from several plus access charges of Í10dial-up lines under a single per minute.contract.

Enterprise Dial-up IP Service Service for businesses Initial setup fee of Í50,000.oÅering multiple dial-up Monthly basic fees fromaccounts at a Ñxed monthly Í3,000 to Í4,900 per accountfee. depending on the number of

accounts.

52

Service Type Summary Description Pricing

IIJ4U Service for individual users Initial setup fee of Í1,900.which includes Internet access Monthly service fee of Í1,900and 5 megabytes of disk for the Ñrst 10 hours plus Í5space for personal Web pages per minute for next 10 hours.and e-mail account options for Usage over 20 hours is at amultiple users. Ñxed additional fee of Í3,000

(for a total of Í4,900 permonth).

Dial-up E-rate Service Service for educational Initial setup fee of Í5,000.institutions. Services include Í30,000 per year.Internet access, e-mail anddisk space for home pages.

UUCP Service Connects customer's network Initial setup fee of Í30,000.to the Internet with UUCP Monthly basic fee of Í2,000protocol over public-switched plus usage charges of Í30 pertelephone network or ISDN. minute.

Dedicated Access Services increased from approximately 410 Mbps atMarch 1998 to 550 Mbps at March 1999.

Our dedicated line access services, IPEach of these trends is continuing.

Service and IIJ Economy, are currently ourmost important Internet access options. The subscriber must pay a monthly fee

for the leased local access line from theIP Service. Our IP Service is a full-scale,

customer's location to one of our POPs. Thehigh-speed access service that connects the

amount of this fee varies depending on thecustomer's network to our network and the

carrier used and the distance between theInternet and is the most important service we

customer's site and our POP. We collect thisoÅer. Our IP Service allows unlimited, two-

fee from the customer and pay this feeway communications not only with sites in

amount over to the carrier.Japan, but also with any organizationconnected to the Internet worldwide. The Although fees are charged on a monthlycustomer chooses the level of service it basis, the minimum contract length is oneneeds based upon its throughput year. For contracts of three years, a 10% perrequirements. Currently we oÅer service from month discount is given. Approximately 19%64 kbps to 45 Mbps. We are prepared to of our IP Service contracts as of the end ofintroduce service at 150 Mbps if demand March 1999 are for at least three years.warrants.

We have also recently introduced ATMOur IP Service represented 49.2% of our access to our IP Service in the Tokyo and

total revenue for the year ended March 31, Nagoya areas. A subscriber may now connect1999. We believe that, as businesses continue to our network using NTT's ATM MegaLinkto develop Internet capabilities, this service service or the equivalent service from otherwill continue to be the central focus of our carriers. ATM service will be for speeds frombusiness. 2Mbps to 24 Mbps and will have rates that

are comparable to our current IP ServiceAs of March 1999, we had 948

rates.subscribers to our IP Service which hasdeclined from 1,048 at March 1998. However For our IP Service, we recently beganthe number of subscribers who had oÅering service level agreements to oursubscribed for service at 1 Mbps or higher customers and we were the Ñrst ISP in Japanincreased to 123 as of March 1999 from 85 to do so. OÅering service level agreementsas of March 1998. In addition, the total will allow us to better deÑne the high qualitybandwidth allocated to IP Service has of the services we oÅer to our customers.

53

This will also diÅerentiate our services from IIJ Economy. Our IIJ Economy is Internetthe services of other ISPs who are unable to access via a dedicated line at 64 kbps or 128match our service quality. kbps. IIJ Economy represented approximately

3.6% of our total revenue for Ñscal 1999. Wehad 708 subscribers for IIJ Economy as ofWe will guarantee the performance ofMarch 1999 compared to only 156 customersthe following elements under our service levelin March 1998. We introduced IIJ Economy inagreements:November, 1997.

‚ 100% availability of our network; IIJ Economy is speciÑcally designed forusers such as medium and small businesses

‚ maximum average latencies, or time who don't have large throughputnecessary to transmit a signal, between requirements and don't require the higherdesignated POPs; and levels of support available to IP Service

subscribers. IIJ Economy allows them to‚ prompt notiÑcation of outage or disruption. access the IIJ network at either 64 kbps or

128 kbps at aÅordable rates but limits theWe are able to oÅer these service level amount of IP addresses a customer may

agreements because of the high quality and have. In addition to medium and smallreliability of our network. Our service level businesses, another important group ofagreements will be backed by credit to subscribers to this service is regional andcustomers if our service quality fails to meet local oÇces of large corporations. The headthe prescribed standards. oÇce and other larger oÇces would use our

IP Service to handle the larger numbers ofSubscribers to our IP Service receive employees and higher throughput

24-hour-a-day, seven-day-a-week technical requirements while the local and regionalsupport. oÇces would use our IIJ Economy.

The monthly fee and the initial setup fee to IIJ for dedicated access services as of May 1999 areas follows:

InitialAccess Speed Monthly Fee Setup Fee

IIJ Economy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 kbps Í 38,000 Í 40,000128 kbps 45,000 40,000

IP Service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64 kbps 120,000 60,000128 kbps 240,000 60,000192 kbps 320,000 100,000256 kbps 450,000 100,000384 kbps 590,000 100,000512 kbps 730,000 100,000768 kbps 810,000 100,000

1 Mbps 1,020,000 100,0001.5 Mbps 1,350,000 100,000

3 Mbps 2,600,000 100,0006 Mbps 3,800,000 100,000

45 Mbps 26,000,000 200,000

54

Dial-up Access Services We have also expanded access to ournetwork through roaming agreements that are

We oÅer a variety of dial-up access an important part of our dial-up accessservices. Our dial-up access services provide services. Currently, we oÅer global Internetessentially the same high-quality services on roaming areas in 30 countries with over 320the same high-quality network as our POPs. Additionally, in the United States anddedicated access services but do not have Canada through IIJ America, we havesame variety of options for bandwidth and roaming access through an 800 number forlevels of customer service and support. We areas where we don't already have localconsider our dial-up services to be primarily POPs through roaming agreements orcost-eÅective, entry-level Internet access otherwise. We will continue to expand ourservices for businesses and individuals. roaming areas through these arrangements.

Our dial-up access services are also, Our Value-Added Serviceshowever, an important resource in oÅering

Although our primary service to ourtotal Internet solutions to corporatecustomers has been Internet access, ourcustomers. It is our dial-up services forcustomers are increasingly seeking additionalexample that allow frequent travelers toservices. We provide our customers with aaccess our network or their own corporatebroad range of Internet related, high-qualitynetworks through one of our POPs or throughservices and products which allowsour roaming agreements. Our dial-up accesscustomers to purchase access, applicationsservices are also an important option for ourand services, in other words total Internetlarge corporate groups that will be linkingsolutions, directly from us.many oÇces through our network. Although

these corporate groups would use dedicated We believe that business customers willlines for the main oÇces and their larger continue to increase their use of the Internetregional and local oÇces, they would also as a business tool and will increasingly relylikely use our dial-up access services for their on an expanding range of value-addedsmaller branch oÇces. services to enhance productivity, reduce

costs and improve service reliability.Our main dial-up access services are

our IIJ Dial-up Standard, Enterprise Dial-up Value-Added Services to Support InternetIP Service, IIJ4U, Dial-up E-rate Service and AccessUUCP Service all as described in the table

We oÅer a variety of value-addedabove. We also provide Network-type Dial-upservices that complement and enhance ourIP Service and Terminal-type Dial-up IPInternet access services. These access-Service to customers but we are no longerrelated services are primarily provided directlypromoting these services. Our new IIJ Dial-upby IIJ. These access-related services include:Standard has essentially the same features

and options as the Network-type Dial-up IP‚ Security Solutions. We oÅer two main

Service and the Terminal-type Dial-up IPsecurity services that protect customers'

Service and costs less per month to use.internal networks from unauthorizedaccess: Ñrewalls and comprehensive

We will be expanding dial-up access tonetwork security services.

our network by increasing the number of ourPOPs. We will do this primarily by leveraging Firewalls. We sell and install ÑrewalloÅ of Crosswave and its nationwide network hardware and software. A Ñrewall is aof POPs. We believe that increasing our POPs system placed between the customer'swill be the key to increasing our revenues internal network and external networks. Afrom individuals and other dial-up customers. Ñrewall stands as a barrier between theIt will also be one of the key elements in areas of a customer's network that aresuccessfully introducing and implementing our open to the public, such as a Web site, andOEM services. those that a customer wants to protect

55

from public access, such as databases. eÇciency of many networks, particularlyFirewalls also Ñlter data passing through where the customer's routers and serversthe Ñrewall removing unauthorized traÇc. are servicing multiple locations. Our co-We were the Ñrst ISP in Japan to provide location services will be enhanced by theÑrewalls which we Ñrst oÅered in 1994. Our completion of our new data center.primary Ñrewall product is an integratedhardware and software product we ‚ IIJ Post OÇce Service. IIJ Post OÇcedeveloped based on the Gauntlet system Service essentially outsources to us the jobdeveloped in the United States and well performed by an e-mail server Ì an easy,recognized in the industry for its reliability. inexpensive way for a customer to allocateWe are the primary provider of Guantlet- and maintain a number of e-mail accountsbased systems in Japan. under its own domain name for its

employees, members or other relevantNetwork Security Services. We oÅer or users. We do all the necessary work to set

will oÅer a series of services which up a mail server so the customer does notcollectively add up to total security have to incur trouble and expense ofsolutions for a customer's corporate setting up its own mail server. Thenetwork. Our network security services will customer can administer e-mail accountsinclude: on-line through our customer support Web

interface. IIJ Post OÇce Service is available‚ Consultation. We analyze the security

to customers subscribing to our IP Service,level of a customer's network and

IIJ Economy, Enterprise Dial-Up IP service,suggest measures for security

IIJ Dial-up Standard and to Internetenhancement.

connection services of other ISPs.

‚ Integration. We develop and implement‚ IIJ Mail Box Service. IIJ Mail Box Service issecurity measures based upon the

essentially the same as IIJ Post OÇceresults of our consultation review.Service. However, customers do not have

‚ Monitoring. We will monitor traÇc over to obtain their own domain names. IIJthe customer's network and report serves as the mail box for the customers.statistics and security events. As with IIJ Post OÇce Service, the

customer can administer the e-mail‚ Operation. We will operate a customer's accounts on-line through IIJ's Customer

network Ñrewall system, including Support Website.conÑguration, installation of softwareupgrades, the handling of alerts, the ‚ ID Gateway Service. ID Gateway Service isdetection and deÖection of attacks on a an access control service available tosystem's security and the modiÑcation of complement our Enterprise Dial-up IPnetwork settings. Service. When used in combination with our

Enterprise Dial-up IP Service, ID GatewayWe plan to oÅer year-round, 24-hour-a-Service provides customer's employeesday monitoring and Ñrewall operation inand associates the ability to access theorder to provide total network securitycustomer's networks through any of ourservices.POPs. A customer that buys our ID

‚ Co-location. Our co-location services allow Gateway Service is spared the trouble ofcompanies to house their servers and authenticating users. ID Gateway systemsrouters oÅ-site in our facilities at our data placed at the entry to the customer'scenter. We monitor and maintain the network identify the accessing user byequipment as necessary for our customers. interacting with the ID servers at our sitesThis service enhances reliability, since we which keep the information relating to userprovide 24-hour monitoring and have accounts and IP addresses. ID Gatewayspecialized maintenance personnel and provides access control functions based onfacilities. This service also increases the this user account information.

56

Value-Added Services to Enhance Our news groups or to other simultaneousCustomers' Use of the Internet distribution services.

We provide a broad range a value-added Our Total Internet Solutionsservices that allow customers to enhance

We are a provider of total Internettheir use of the Internet. We oÅer thesesolutions. We provide our customers withservices in working with the IIJ grouptailored, end-to-end Internet and privatecompanies. These value-added servicesnetwork solutions. The diversity of servicesinclude:we oÅer permits each customer to purchase

‚ Network Consulting and Systems individual services or a bundle of servicesIntegration Services. We oÅer network that provide the most eÇcient, reliable andconsulting and systems integration cost-eÅective solution for that customer'sservices. We plan and design server and particular needs.network conÑgurations, design and

The primary resources that we use toimplement intranets or virtual privateprovide total Internet solutions to ournetworks and maintenance and operationcustomers and the primary reasons that ourof network systems using our advancedcustomers choose us to provide them totalnetwork and provide other advice with aInternet solutions include:particular focus on helping customers make

eÅective use of the Internet. For our more ‚ Our extensive network. sophisticated client projects, network

‚ Our Internet access services. consulting and systems integration is thedesign platform on which we provide total

‚ Our line-up of value-added services,Internet solutions that incorporate many of

including systems integration. our other access and value-added services.

‚ Our network technology and personnel.‚ Customer Support. We provide our

‚ Our group companies.customers with comprehensive service andsupport that includes network service and

Our total Internet solutions for businesssupport as well as training seminars to

users is one of the main focuses of oureducate new and existing customers about

business. We consult with businesses andvarious Internet uses and applications.

other customers to identify their particularMost of our customer support services are

situations and needs. We draw upon ourprovided as an integral part of other

extensive resources to address those needs.services we sell, such as Internet access. Aportion of our customer support services The following examples illustrate ourare provided for a fee, or without success in providing total Internet solutions tocompensation as part of our marketing address the needs of our customers.eÅorts.

Tokyu Cable Television‚ Web Hosting and Contents Development

and Distribution. We provide Web hosting Challenge: Tokyu Cable is the largestand contents development and distribution independent cable company in Japan and hasservices. These services help our approximately 200,000 CATV subscribers.customers to market their own products Tokyu Cable wanted to use its high-and services on the Internet without having bandwidth cable connections to provide itsto invest in technology infrastructure and customers with high-speed Internetoperations staÅ. We help customers design connectivity. However, Tokyu Cable had notheir Web pages which they place on our experience in oÅering Internet services andWWW servers that are linked directly to our needed assistance to construct anetwork. We will also manage the posting comprehensive system which would allow itof content on the Web page and the to capitalize on cable connections to providedistribution of content to mailing lists, to high-speed connectivity to the Internet.

57

Solution: In response, we designed and We design and develop the systems thatconÑgured a 612 Mbps ATM network which will be used to provide the ""Sharp Spaceconnects the CATV center to each of six Town'' services and set up Sharp's own Webbroadcasting sub-centers. We also designed site through which it will distribute contentsand conÑgured a 14 Mbps high-bandwidth and software applications and receive feeInternet connectivity network using cable payments from Sharp for our services. Wemodems. We also provide our IP Service to also provide co-location services for contentsTokyu Cable with Internet access at 20 Mbps. servers of Sharp for this Web site.These connections (between the CATVcenter and our network, between the CATV DLJdirect SFG Securitiescenter and broadcasting sub-centers and

Challenge: DLJdirect is expanding itsbetween Tokyu Cable and its subscribers)

successful on-line trading business into theenable Tokyu Cable to provide its CATV

Japanese market through DLJdirect SFG.subscribers with high-speed access to the

DLJdirect SFG needs a computer system andInternet via cable modems, allowing for

an Internet platform to oÅer such services toInternet connection which is considerably

Japanese investors.faster than that available via ISDN lines. Wealso continue to provide consulting services Solution: We are primarily responsibleto Tokyu Cable. for building and developing and will maintain

a comprehensive computer system includingSharp software and hardware for the web servers,

security systems and databases. We willChallenge: Sharp has a successful

provide the necessary Internet connectivitypersonal digital assistant (PDA), Zaurus, that

through our backbone. We will also providehas been very popular in Japan and has

co-location of the servers in our data center.captured approximately two-thirds of the PDA

On an ongoing basis, we will monitor andmarket. However, the current trend for

repair the hardware and software used inpersonal digital assistants is to provide direct

DLJdirect SFG's operations.Internet connectivity through them. Sharpwants to oÅer a new Zaurus that includes

JAFCOInternet access but Sharp does not own orhave an aÇliated ISP. Additionally, because of Challenge: JAFCO is a venture capitalthe anticipated popularity of the new Internet- Ñrm that has made equity investments in overcapable Zaurus, the cost and expense of 1,500 unlisted companies in Japan. In orderbuilding a satisfactory nationwide network to help its portfolio companies, JAFCOfrom scratch would be prohibitive. wanted to operate an integrated network

system that allowed private communicationsSolution: Beginning in April, we began

between JAFCO and the companies in whichoÅering with Sharp Internet connectivity

it invested in Japan and which served as athrough the new Zaurus and through other

member-to-member communications anddevices including home computers by

information exchange system. This would alsoproviding our Internet network to Sharp on an

allow JAFCO to provide its memberOEM basis. Sharp gains access to our

companies with consultation services andInternet network to oÅer Internet access to

other important market information.the new Zaurus customers. Sharp's usersthen use services designed based on Solution: We designed and conÑguredour IIJ4U. Sharp's customer pay Sharp a set- the JAFCONet, a virtual private network,up fee of Í1,200, a monthly basic fee of Í980 including backbones, access points andwhich includes 3 hours of free use and a Í10 security measures. We designed andper minute fee for use above 3 hours per conÑgured the JAFCONet servers which aremonth. Under our agreements with Sharp, we co-located in our housing center and wereceive the majority of the fees described continue to operate and monitor theseabove for operating and managing Sharp's servers. We provide the IP connectivityInternet access service on an OEM basis. services to eight access points of JAFCONet

58

in main metropolitan areas in Japan. We devices and routers, and softwarecontinue to consult on and design services for development aimed at enhancing networkJAFCONet such as e-mail systems and online monitoring and traffic management;accounting and consulting systems. We also

‚ Applied Technology Division, which developsprovide customer support and help desk

Internet security technology such as firewalls;services to JAFCO personnel.

‚ Media Technology Division, which developsResearch and Development multimedia distribution systems such as IP

multicast and Internet broadcasting;We have always focused on advancingthe use of the Internet in Japan. Many of our ‚ Planning and Development Division, whichengineers were among the participants in the plans and develops various new services;WIDE project and continue to regularly andparticipate in industry organizations and

‚ Project Promotion Division, which developsgovernment sponsored research projectsbackoÇce technologies such as customersuch as researching new Internet protocoldatabases, billing systems and servicestandards such as Internet Protocol Version 6management systems.(IPv6). These engineers have continued to

develop innovative services, applications and Service Administrative Department. Weproducts many of which have set the have an Internet Technology Division in thisstandard for the Internet industry in Japan. department which is responsible for closelyWe continue to strive to develop new monitoring new products, developments andservices, applications and products. Our initiatives of manufacturers and standards-research and development eÅorts are a setting research groups.fundamental part of that eÅort.

A substantial number of signiÑcantAs of June 1999, we had approximatelytechnological developments relevant to our61 people working on our R&D staÅ, althoughcore Internet access business come fromnot all of these are devoted full time to R&D.manufacturers of routers and servers andOf these, 4 have Ph.D.s and 21 have mastersother equipment and from standards-settingof engineering. Our R&D staÅ works veryand research groups. Our Internet Technologyclosely with our sales and marketingDivision monitors developments and alsopersonnel and technical engineers to ensureworks closely with manufacturers, vendorsthat our research and development eÅorts areand others in the development of theseclosely aligned with the demands of ourproducts and technologies.customers.

IIJ Research Lab. We established the IIJR&D Organization Research Lab in April 1998 to engage in R&D

of new basic Internet technologies. ForWe have organized our research andexample, through the IIJ Research Lab, wedevelopment (R&D) staÅ to cope promptlyare participating in a joint undertaking amongand eÅectively with the rapidly changingWIDE Project and organizations from privatetechnological environment in the Internet.and academic sectors to promote theR&D on practical applications of new anddeployment and implementation of IPv6. Thedeveloping technologies is the responsibilityoutput of this joint undertaking will beof the Technology Department, the Servicedistributed freely in order to promote theAdministrative Department and of the IIJtransition to IPv6 on a world-wide scale. IPv6Research Lab.is designed to solve problems inherent in the

Technology Department. We have current version of IP, IPv4, such as IPorganized the Technology Department into address space depletion. In addition, IPv6 willthe following divisions: provide features necessary to sustain‚ Network Engineering Division, which continuous growth of the Internet as

develops network infrastructure, network- information infrastructure for business andrelated products, such as network monitoring private uses.

59

R&D Strategy approximately 100 people working in salesand marketing.Our primary R&D objective is to continue

to develop innovative services, applications Our sales headquarters is in Tokyo. Weand products that will meet the current and also have branches in Osaka, Nagoya,future demands of our customers and that will Sapporo, Sendai, Toyama, Hiroshima andcontinue to be at the forefront of the Internet Fukuoka in order to cover the majorindustry in Japan. In furtherance of this metropolitan areas in which the majority ofobjective, our R&D eÅorts currently are large Japanese companies operate.focused on a variety of projects, including:

‚ continued improvement of our SEIL router, Sales and Marketing Organizationa router we developed speciÑcally to be

Prior to this year, our sales force wasintegrated into IIJ's Internet-relatedintegrated as one group, with the sameservices, including R&D in data packetemployees handling marketing, service andqueuing technologies to implement our QoSnew business development and thestandards;administration of our sales department. We

‚ research relating to the methodology ofhave recently reorganized our sales personnel

conÑguration of routers and other servers;into three distinct, separate divisions: sales,

‚ research relating to behavior of Internet marketing, which is responsible for newrouting systems. business and new service development as

well as sales promotion, and sales‚ software development for management ofadministration.border gateway protocol or BGP which is

protocol that allows routers to exchangeOur sales division is further separated

routing information on the TCP/IP network;into three sections:

‚ research for Internet traÇc monitoring and‚ A section that focuses on large companies,management;

governmental institutions, universities and‚ development of software and evaluation of other schools and general sales. This

hardware relating to improving the section sells the full range of our servicesoperations of routers located on our and focuses mainly on large companies.customer's premises; and

‚ A section that sells primarily Internet‚ R&D of IPSec which is a secure version of

access, focusing on sales of our IIJIP that provides secure communication

Economy, and applications to enhancechannels over the Internet.

Internet access for small and mediumbusinesses.A second R&D objective is to continue

participating in or otherwise closely ‚ A section that focuses on carriers andmonitoring the new products, developments ISPs. This section primarily promotes andand initiatives of manufacturers and sells our network infrastructure.standards-setting and research groups.Through these eÅorts we seek to ensure that Sales and Marketing Strategywe have timely and eÅective access to new

We will increase our sales and marketingtechnologies and that we implement theseof our Internet access and value-addedtechnologies eÅectively. Because the rate ofservices as well as our total Internetchange in technology relevant to our businesssolutions. Our three sales division sectionsis so rapid, we believe that the sophisticationwill focus their eÅorts as follows:and experience of our R&D personnel is an

important part of our success.Large Companies and General Sales.

Our large company section is primarily theSales and Marketing

group that is focused on creating totalAnother group of personnel critical to Internet solutions for business and other

our success are our sales and marketing customers. We create solutions both forpersonnel. As of June 1999, we had customers who approach us because of our

60

reputation and brand name and for customers conferences and lectures to increase thethat our sales personnel target as customers awareness of small and medium businesseswho are in need of or would substantially of the opportunities available to them throughbeneÑt by our services. the Internet.

Additionally, this group targets large We are also focusing on increasing ourcorporate groups, including Ñnancial brand name recognition by these customers.institutions, manufacturing companies and We have a well-recognized brand name andretail sales operations, that plan on reputation for quality among large companies.introducing eÇcient and comprehensive To the extent we are successful in exposingcommunication networks through the Internet small and medium businesses to our brandto all of their group companies. If secured as name and to our high quality services, wea customer, each corporate group would believe our market share of these customerssimultaneously bring to us contracts for will increase.several large and small capacity lines.

Carriers and ISP Sales. We believe ourWe are also targeting our current heavyquality and reputation sells itself to theseusers of our IIJ Economy, IIJ Dial-upcustomers and our strong customer base inStandard and our other dial-up accessthis area supports our belief. However, weservices as they are likely candidates to bewill continue to aggressively market ourshifted to our IP Service.network infrastructure to these customers.

Our large company section also markets We will also continue to expand and enhanceour OEM services to potential strategic our network, including our large-capacitypartners. OEM services are designed to be overseas backbone, as this is one importantjoint services which combine our network reason that carriers and ISPs select ourinfrastructure with the customer base of our services. As we do so, and as Internet usagepartners. Our partners will gain access to our continues to grow rapidly, we believe carriershigh-quality network infrastructure to provide and ISPs will increasingly seek high-quality,their customers with quality Internet access high-capacity network infrastructures. As aservices. We, in turn, will increase result, we believe our market share amongsigniÑcantly the number of individual users of these customers will increase.our network which will generate consistentrevenues that will increase as the customers Individuals. We don't have a salesto our strategic partners increase. division that speciÑcally targets individuals but

rather sales to individuals are included in ourWe currently have an OEM arrangementmain section. We market to individuals mainlywith Sharp, a leading electronicsthrough magazine and newspapermanufacturing company in Japan. We believeadvertisements, particularly publications withthat there are substantial opportunities for uscomputer-related content. A large proportionto expand this type of OEM marketing and weof our individual customers are high-usageare currently negotiating with other potentialcustomers who we believe are technologicallypartners in this regard.oriented. Among this customer group, we

Small and Medium Business Sales. We believe that our brand recognition is high. Wewill increase our sales and marketing to small also believe that these customers value theand medium businesses by expanding the quality of services more than othernumber of agents oÅering IIJ Economy and individuals, and that our reputation for theIIJ Dial-up Standard. We currently have quality of services has been an importantapproximately 38 agents throughout Japan reason for our success with these customers.that promote our services. We will continue to Customers can sign up for IIJ4U by signingenter agreements to expand the number of up directly online. However, in order toour sales agents. We will increase our continue attracting these individuals, we willadvertising in business publications. We will focus on enhancing features of IIJ4U in orderalso participate in trade shows and host to diÅerentiate it from the standard Internet

61

access services for individuals provided by major ISPs and electronics companies. Theseother ISPs. companies all oÅer and/or operate directly or

indirectly internet access services of their ownCustomers and would therefore be our competitors.

However, they are also important customersWe had over 5,500 business and other

of ours. We believe these competitors are ourinstitutional customers and 52,800 individual

customers primarily because of our largesubscribers to our Internet access and value-

capacity and high level of technology. As aadded services as of March 31, 1999. Our

result, even as our competitors becomemain customers are major corporations and

stronger, we beneÑt directly through theISPs. These customers place a premium on

increase of usage and revenues we derive asstable and reliable service. Of 1,176 listed

these customers/competitors increase theircompanies in Japan with over 1,000

use of our network.employees, 371 were subscribers to eitherour Internet access services or our value- The following is a representative list ofadded services as of March 31, 1999. No our business customers from selectedsingle Internet access service customer industry groups to which we provided Internetaccounted for more than three percent of our access and related services for as oftotal revenues in the year ended March 1999. March 31, 1999:

Many of our major competitors areamong our core customers, including carriers,

Carriers Government Organizations OthersNTT Ministry of Transport Nippon Television NetworkJapan Telecom Prime Minister OÇce Fuji XeroxNTT DoCoMo Imperial Household Agency Mitsubishi MotorKDD Toyota (via ToyotaDDI Financial Institutions Digital Cruise)Tokyu Cable Network Fuji Bank Yamaha

Sumitomo Bank Suzuki MotorElectronics/Computer Sanwa Bank NintendoCompanies Dai-ichi Life Sumitomo Corporation (viaHitachi Meiji Life SC Telecom)Sharp Industrial Bank of Japan Itochu CorporationDell Computer IBJ-DL Financial Technology (via CRC)Nihon Cisco Systems JAFCORicoh

Research InstitutionsNomura Research InstituteDaiwa Research InstituteMitsubishi Research Institute

Customer Satisfaction network management capability for bothdedicated line connections and economy-type

We believe that our customers begin services according to a Nikkeiusing our services and continue using our Communications survey dated December 7,services due, in large part, to our strong 1998. The Nikkei Communications surveybrand name and reputation for quality, results were based upon questionnairesparticularly among businesses, including ISPs, provided to 2,085 listed and non-listedand leading edge Internet users. companies in Japan to which 842 companies

responded.In terms of customer satisfaction, we

rated as the top Internet service provider for We also ranked as the 3rd best providersatisfaction in terms of through-put and of dedicated line connections behind NTT and

62

Japan Telecom, the 2nd in terms of overall As this investment is signiÑcant, we havesatisfaction for economy type services and provided a full discussion of Crosswavethe 4th for overall satisfaction of dial-up immediately after this subsection under theservices. We were able to achieve our 3rd heading ""Crosswave Communications Inc.''place ranking for best provider in dedicated that you should read.line connections, according to the survey,primarily because we were the only provider IIJ America, Inc.to earn satisfactory rates for networkmanagement capability and trouble shooting IIJ America is a U.S.-based Internetand support system which oÅset our low access provider. Most of IIJ America'srates with respect to our pricing policy. customers are U.S.-based operations of

Japanese companies that use IIJ's services inWe believe that we will be able to further Japan. These customers use IIJ America's

deÑne the quality of our services and services to link directly to our seamless high-diÅerentiate ourselves from our competitors capacity backbone network connecting thethrough our service level agreements. We U.S., Japan, and the countries of Asia.believe that as our customers' Internet usageincreases, they will further appreciate the We currently own 71.4% of IIJ Americavalue the receive by getting our high quality and IIJ Technology owns 28.6% as a result ofservices. a recent issuance of 15,000 new shares to IIJ.

At the end of the Ñscal year ended March 31,1999, we each owned 50%.Our Group Companies

IIJ America had revenues of $918,751We oÅer our services directly andfor the year ended December 31, 1998.together with our group companies. Our

group companies work closely together inAs of April 1999, IIJ America had 4 full-providing total Internet solutions to our

time employees all of whom were assigned,customers. We collaborate on theor seconded, from IIJ.development of various services and products

and we market our services and productstogether as a group. However, our group Net Care, Inc.companies specialize in diÅerent aspects of

Net Care provides a broad array ofthe Internet. Our customers' main point ofsupport services, from monitoring andcontact is IIJ itself. We then draw upon thetroubleshooting network operations to anresources and specialization of the groupend-user help desk. Currently, Net Carecompanies to oÅer total Internet solutions.services are provided exclusively to IIJ.

Our group companies are not all However, we expect that Net Care will beginmajority-owned subsidiaries. Only IIJ America oÅering its services to third parties in the nearand Net Care are subsidiaries that we future.currently account for on a consolidated basis.

We own 50% of Net Care. Other majorBeginning with the quarter ending June 30,shareholders of Net Care include Sumitomo1999, we will also consolidate IIJ TechnologyCorp., Itochu Corp., Toyota and Intelligence,and IIJ Media Communications.each of which owns 10%.

Among the other shareholders of theNet Care had sales of approximatelygroup companies, are shareholders who are

Í292 million for the year ended March 31,also shareholders of ours. We identify key1999.shareholders of our group companies in the

discussion of each of our group companiesAs of April 1999, Net Care hadbelow.

approximately 47 employees, 3 of whom wereOur most signiÑcant investment in our seconded from IIJ. 34 of the 47 are part-time

group companies will be made in Crosswave. staÅ.

63

IIJ Technology Inc. Communications engages in research anddevelopment of the newest technologies for

In June 1999 we increased ourmedia communications, such as streaming

ownership of IIJ Technology from 39% totechnologies including multicast and portal

64.1%. One of the primary reasons that weservice applications, and incorporates the

increased our percentage of IIJ Technology istechnologies into various applications.

because it is becoming an increasinglyimportant element in our providing total IIJ Media Communications also providesInternet solutions to our customers. total support for customers' contents and

systems, particularly those customers whoIIJ Technology provides comprehensive

engage in e-commerce related activities. IIJInternet network systems integration and

Media Communications provides consultation,consulting services, focusing on design,

planning, conÑguration (including selection ofoperation, and consulting for corporate

hardware and choices of applications),networks (LANs, enterprise networks,

content production and ongoing support forintranets) and their security systems. IIJ

its customers.Technology assists customers in creatingprivate IP networks, such as intranets or Other basic media services oÅered by IIJvirtual private networks, that securely isolate Media Communications include informationinternal network traÇc from public Internet management services related to the Internet.traÇc and provide each site on the private IP IIJ Media Communications also oÅers serversnetwork access to other sites as well as to to manage mailing lists, to providethe Internet. IIJ Technology can integrate an simultaneous distribution services and toorganization's multiple sites in diÅerent operate IIJ Net News services.locations in Japan and diÅerent countries

We own approximately 50.1% of IIJthroughout the world.Media Communications. Other major

We own 64.1% of IIJ Technology. Other shareholders of IIJ Media Communicationsmajor shareholders of IIJ Technology include include Sumitomo Corp. (12.9%), ItochuSumitomo Corp., Itochu Corp., Sumitomo Corp. (11%) and Tokyu Corp. (10%).Electric Industries, Ltd. and Hitachi Software

IIJ Media Communications had sales ofEngineering Co., Ltd., each of which ownsapproximately Í538 million for the year ended5.9% and Sun Microsystems, Inc., Toyota,March 31, 1999.Hewlett Packard Japan and Itochu

Techno-Science, each of which owns 2.9%. As of April 1999, IIJ MediaCommunications had approximately 24 full-IIJ Technology had sales oftime employees, 10 of whom were secondedapproximately Í1,602 million for the yearfrom IIJ.ended March 31, 1999.

As of April 1999, IIJ Technology had Asia Internet Holding Co., Ltd.approximately 28 full-time employees, 18 of

Asia Internet Holding was created towhom were seconded from IIJ.own and manage the A-Bone, which is ahigh-speed Internet backbone network thatIIJ Media Communications Inc.connects countries in the Asia PaciÑc region

In May 1999, we increased ourto a common network infrastructure.

ownership of IIJ Media Communications from50.0% to 50.1%. IIJ Media Communications Currently, the A-Bone ties into networksprovides expert services to help customers in Japan and seven other countries in theexploit the potential of Internet commerce and region: Singapore, Hong Kong, Malaysia,the World Wide Web. IIJ Media Indonesia, Philippines, Thailand and China.Communications' core business is providing Asia Internet Holding has network operationsvarious hosting and home page development centers in each of these countries. Theservices and total Internet solutions based on A-Bone also connects to the United Statesthe WWW. For this purpose, IIJ Media through IIJ. Asia Internet Holding is

64

considering establishing connections to connecting high-speed Internet backbonesTaiwan, South Korea, Vietnam, India, with content servers to make distribution onAustralia and Europe in the near future. the Internet more eÇcient. MFEED's

technology was jointly developed by IIJ andThe primary customers of Asia Internet

NTT.Holding are carriers and ISPs throughout Asiaincluding Japan. However, as Internet usage MFEED combines two services,increases in the rest of Asia, ISPs and Multifeed housing and Multifeed connectivity,customers from other countries in the Asia- for customers receiving and publishing largePaciÑc region have started using the A-Bone. volumes of data on the Internet. With

Multifeed housing, customers can place theirWe own 20.6% of Asia Internet Holding.

routers, servers and other equipment inWe would like to increase our ownership of

MFEED's centrally located premises, whereAsia Internet Holding to have majority control

maintenance and management are provided.and have initiated discussions with other

With Multifeed connectivity, customershareholders to that end. We expect to be

equipment connects directly to the backbonesable to increase our ownership to

of IIJ and other ISPs at the Multifeed housingapproximately 30% after the completion of

site. This central siting of content andthis oÅering. Our ability to increase our

connectivity makes the distribution of contentinterests further will depend on the outcome

more eÇcient by reducing the number ofof discussions with the other shareholders.

networks that data must travel through toWe operate and manage the A-Bone pursuant

connect content providers with end users.to an agreement with Asia Internet Holding for

CNN's and CNNfn's Web sites have launchedwhich we are paid Í10 million per month. The

mirrored sites in Japan using MFEEDagreement is a yearly contract that renews

(Japan.CNN.com and Japan.CNNfn.com).automatically although it may be terminatedby either party upon two months prior notice We own 26% of MFEED and IIJin writing. We operate the A-Bone from our Technology and IIJ Media Communicationsnetwork operations center in Tokyo. Other each own 2%. Other major shareholders of

MFEED include NTT Communications, whichmajor shareholders of Asia Internet Holdingowns 26%, and NTT PC Communications,include:NEC Corporation, Fujitsu Ltd. and ItochuCorp., each of which owns 5%. NTT also‚ Sumitomo Corp., which owns 25.6%owns indirectly another 6% through NTT-

‚ NTT Communications, which owns 14.8%aÇliated companies.

‚ Sembawang Ventures Pte Ltd., which ownsMFEED had sales of approximately Í87512.1%

million for the year ended March 31, 1999.‚ Itochu Corp., which owns 10.8%

‚ Matsushita Electric Industrial Co., Ltd., As of April 1999, MFEED hadToyota and Telekom Malaysia Berhad, each approximately 12 full-time employees, 2 ofof which owns 3.1%. whom were seconded from IIJ.

Asia Internet Holding had sales ofatom, Co., Ltd.approximately Í969 million for the year ended

March 31, 1999.atom is primarily a Web page design

As of April 1999, Asia Internet Holding company. atom aims to deÑne new forms ofcurrently had approximately 9 full-time design work using digital technology in allemployees, 4 of whom were seconded from network-based aspects, including fromIIJ. content production to graphic design.

We own 40% of atom. The otherInternet Multifeed Co.shareholders of atom include two individuals

Internet Multifeed, known as MFEED, that own 25% each and Sumitomo Corp.,provides a location and facilities for which owns 10%.

65

atom had sales of approximately Í260 seeks to capitalize on both the increasingmillion for the six-months ended March 31, data traÇc levels and the demand for1999. additional bandwidth by providing a high-

capacity nationwide network dedicated toAs of April 1999, atom had

data transmission.approximately 36 employees.

Crosswave's NetworkCrosswave Communications Inc.

Crosswave's primary asset is itsOn October 28, 1998, IIJ, Toyota and

network. Crosswave has secured the rights toSony formed Crosswave Communications Inc.

a nationwide network of dark Ñber through afor the purpose of operating a nationwide

contract with KDD that runs through Apriloptical Ñber network for high-speed data

2009. (Leases of dark Ñber include installedcommunications. IIJ, Toyota and Sony

Ñber strands but do not include the equipmentcontributed 40%, 30% and 30%, respectively,

necessary to transmit data through the Ñber.)of Crosswave's equity.

Crosswave's primary expenses will be relatedto the development of its domestic network.Crosswave's joint venture agreementCrosswave is obligated to make monthlyprovides that IIJ, Toyota and Sony have thelease payments, which consist of Ñxed andright to appoint three, two and two directors,variable portions, to KDD for the dark Ñber.respectively. Koichi Suzuki, IIJ's presidentCrosswave has also contracted with KDD toand representative director, currently alsoreceive from KDD maintenance servicesserves as Crosswave's president andcovering the leased dark Ñber. For arepresentative director. As of May 1, 1999,discussion of Crosswave's expenses and theCrosswave had six full-time employees, all ofcontract with KDD, please seewhom were being seconded from the three""Management's Discussion and Analysis ofshareholders. They included three employeesFinancial Condition and Results ofseconded from IIJ. In addition, pursuant to aOperations Ì Factors AÅecting Our Futureservice arrangement between IIJ andFinancial Results Ì CrosswaveCrosswave, a director and three employees ofCommunications Inc.''.IIJ are devoting part of their time to work for

Crosswave. These four individuals head fourThe contract also states that Crosswave

of the six departments set up at Crosswave,will not engage in the voice transmission

and an employee seconded from IIJ co-headsbusiness using circuit switching and that

another department.Crosswave will Ñrst discuss with KDD before

Crosswave is a Type I carrier, which engaging in the voice transmission businessallows it to provide telecommunications as deÑned in the Telecommunicationsservices through its own telecommunications Business Law. IIJ believes that Crosswavecircuit facilities. has no intention to engage in the voice

transmission business through circuitswitching. Crosswave, however, may seek toIndustry Overviewdo other voice transmission businesses, such

As in the United States, the level of data as voice over Internet services, in a mannertraÇc is rapidly increasing in Japan. In order consistent with the provisions in the contractto handle this increasing data traÇc, with KDD, if an opportunity that it views asincumbent telecommunications carriers are potentially proÑtable is available in the future.increasing their bandwidth capacity by addingadditional optical Ñber and by applying The dark Ñber leased from KDD is laidadvanced equipment and transmission along major highways that run throughouttechnologies to increase the capacity of their Japan. Currently, Crosswave's networkexisting network. However, the rate of connects Tokyo, Nagoya, Osaka and severalincrease of bandwidth has not been as rapid cities in the Hokuriku area. Crosswave plansin Japan as it has been in the United States to expand its network to all prefectures otherand other western countries. Crosswave than Okinawa by March 2000.

66

Crosswave's Planned NetworkÌMarch 2000

Fukushima

Takasaki

Musashino/Mitaka

Kawagoe

Urawa

Akita

Nigata

HakodateSapporo

Asahikawa

Maebashi

Tokorozawa

Hachioji

Kofu

AomoriYamagata

Morioka

Koriyama

Utsunomiya

SendaiKashiwa

Mito

Hitachi

Tsukuba

Otemachi

Ichikawa

Chiba

Ariake

Kunitachi/Fuchu

Shinjuku

Hirakawacho

Shinagawa

Yokohama

Kawasaki

AtsugiNumazu

GifuOtsuHirakataKyotoOsaka

YonagoMatsueKurashiki

Kobe

Okayama

Takamatsu

Fukuyama

Yamaguchi

Kitakyushu

Fukuoka

Saga

Himeji

KanazawaFukui

Nagano

Matsumoto

Toyama

Wako

MachidaToyohashi

Hiroshima

Nagasaki

KumamotoKagoshima

Miyazaki

Oita

MatsuyamaTokushimaKochiNara

Sakai

Tsu

WakayamaNagoya

Hamamatsu

Shizuoka

Toyota

67

Through this optical Ñber network, entering into long-term contracts withCrosswave will be able to oÅer data undersea cable operators or othertransmission rates at speeds faster than international telecommunications carriers. Wecurrently available in Japan and at would anticipate securing leases for a largesigniÑcantly lower prices than currently amount of our international capacity fromavailable. Crosswave will initially oÅer Crosswave in this event. As with domestictransmission at speeds of up to 600 Mbps but leased lines that Crosswave oÅers, we expectthis can be increased as necessary to meet that this international capacity would beincreasing traÇc requirements. available at signiÑcantly lower per unit costs

than we are currently paying.We have been primarily responsible for

and have actively participated, as a third party Crosswave's Technologycontractor or through our secondedemployees, in the planning and design of the Crosswave is able to provide this dataCrosswave network. We worked closely with transmission capability by using variousCrosswave to ensure that its network is well networking technologies, including Densesuited, in terms of quality of technology and Wavelength Division Multiplexing or DWDMotherwise, to integrate with our network and and Synchronous Optical Network or SONET.the services we currently oÅer and will oÅer in DWDM is a format for multiplex use of opticalthe future. In addition, we plan to assist Ñber by splitting the frequency spectrum intoCrosswave in the operation and maintenance multiple channels. SONET is the Northof its optical Ñber network as a third-party American standard for telecommunicationscontractor. multiplexing and transmission using optical

Ñber. These technologies make it possible toIn addition to its optical Ñber network in send multiple light pulses of diÅerent

Japan, Crosswave may, upon agreement of wavelengths, each carrying a diÅerent set ofall the shareholders, seek to expand its data, through a single strand of optical Ñber.network internationally by securing Because a single strand of optical Ñber cancontractual rights from third parties to carry a high volume of data, fewer Ñber opticdedicated capacity between Japan and the strands are needed to construct largeUnited States, in Asia and elsewhere. This capacity networks as compared to networkswould depend upon a number of factors without DWDM technology. Using the DWDMincluding the price at which dedicated and SONET advanced multiplexing andcapacity Ñber is available, the competitive transmission technologies, we believeenvironment in the trans-PaciÑc and other Crosswave will be able to increase itsdata transmission markets, its customers' capacity on its optical Ñber network to overpotential requirements and its performance in 100 Gbps through transmission equipmentthe domestic network business. We upgrades.understand Crosswave is currently negotiatingto obtain substantial international capacity by

68

Crosswave's Services

Crosswave will oÅer three primary services on its network:

High-Speed

Backbone

Service

POP

Internet

POP User

AccessLine

User

Crosswave

UserUser

User

User

Crosswave

TEL

TEL

TEL

TEL

PSTN

ISDN

POP

POP

Network

PlatformService

Dial-up Port

Service

• Point to point high-speedbackbone service up to 600Mbps.

• For large network operators such as ISPs, value-addednetworks, cable television andmedia organizations.

• Point to multi-point platformservice.

• Distance-free tariff system basedon number of access points,bandwidth etc.

• For corporations, ISPs andvalue-added network operators.

• Approximately 85 POPs fornationwide service.

• Functions as network gatewayfrom telephone terminal.

• For service providers such asvalue-added network operatorsand corporations needingnationwide networks.

Crosswave

Crosswave currently oÅers only high- and Telecommunications (MPT) in Japan;speed leased line service, and it plans to Crosswave recently received preliminarycommence oÅering network platform service permission from the MPT to pursue Ñxedand dial-up port service in October 1999. wireless access service.Crosswave may also seek to exploit otheropportunities available based upon its Crosswave's Pricingnetwork infrastructure, which may include

We believe that Crosswave's prices for ‚ trans-PaciÑc lines in the event that itleased lines are signiÑcantly lower thanprocures the right to dedicated capacitycomparable leased lines oÅered by itsbetween Japan and the United States andcompetitor carriers. Crosswave's monthly

‚ local access through Ñxed wireless access charges for its high-speed backbone service,service that uses radio frequency allocated excluding charges for local access lines, arefor that purpose by the Ministry of Posts as follows:

High-Speed Backbone Service

1.5Mbps 45Mbps 150Mbps 600Mbps

Up to 200km ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í200,000 Í2,400,000 Í4,800,000 Í12,000,000Up to 600km ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 300,000 3,600,000 7,200,000 18,000,000Above 600km ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 400,000 4,800,000 9,600,000 24,000,000

69

To illustrate Crosswave's competitive Crosswave, KDD and NTT charge for theirpricing, the following table shows as of May leased lines between Tokyo and Osaka for1999 end-to-end monthly prices that the respective bandwidths indicated.

Carrier

Bandwidth Crosswave(1) KDD(1) NTT

(thousands of yen)

1.5 Mbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 624 Í 1,097 Í 1,54645 MbpsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,600 11,394(2) 12,180(2)150 Mbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,200 27,100 28,748

(1) Neither Crosswave nor KDD has local access lines operations of its own. For the purpose ofthis comparison, for 1.5 Mbps, we assumed that NTT's digital access (DA) services at 1.5Mbps and for 15 km was used and, for 45 Mbps and 150 Mbps, we assumed that Í1.0million per month is charged for local access services at each end.

(2) Neither KDD nor NTT oÅers comparable services for 45Mbps. For the purpose of thiscomparison, we used KDD's and NTT's prices for 50 Mbps leased lines.

Crosswave's Sales and Marketing Second, we will be able to add additionalcapacity to our current network in a more

Crosswave's sales and marketing willcost eÅective manner. As the volume of traÇc

primarily be done by third-party agentsacross our network continues to increase, we

throughout Japan. In addition, IIJ will marketneed to add additional capacity. Crosswave

Crosswave's services as an agent and asallows us to add signiÑcant capacity to our

part of the services oÅered by the IIJ group.existing networks at lower rates than we arecurrently paying.

Crosswave's CustomersThird, we will be able to leverage oÅ of

Crosswave's main target customers Crosswave's network infrastructure to expandinclude large corporations, ISPs, such as IIJ, the geographic coverage of our network.VAN operators and broadcasting companies Crosswave will have approximately 85 POPsthat have needs for high-volume, high-speed by March 2000. We will be able to use thosedata communications. As a Type I carrier, POPs if we purchase Crosswave's leased lineCrosswave is required to make its tariÅ-based service or network platform service. We canservices available on the same terms and also use Crosswave's dial-up ports as dial-upconditions to all customers, without special access points for our own dial-up accesstreatment to its shareholders, including IIJ. services, including IIJ4U and OEM services.

Fourth, we will perform joint service andOur Plan to Increase Our Use of Crosswave's

product development with Crosswave toServices

produce advanced and Öexible carrierWe will beneÑt from Crosswave's services which are designed primarily for us.

network in four primary ways. First, we will be Through this joint development, we should beable over time to replace existing leased lines able to provide unique services usingwith Crosswave's leased lines. As the lease Crosswave's advanced services prior to theperiods of our current leased lines expire, we introduction of comparable services by ourwill be able to switch to a Crosswave line if competitors. This will also allow us to reduceone is available. This will reduce our domestic our dependence on the incumbentbackbone cost (which was Í1.1 billion in the telecommunications carriers.year ended March 31, 1999) as Crosswave'sleased line rates will be signiÑcantly lowerthan rates we currently pay.

70

Our Additional Contributions to Crosswave Financial Results Ì CrosswaveCommunications Inc.''

In order to complete a nationwidenetwork, Crosswave requires substantial Crosswave's Competitioninvestments. The joint venture agreement

The market for large bandwidth dataprovides that the three joint venture partnerstransmission, although competitive, is not asmust provide Í8 billion of capital contributionswell developed in Japan as it is in the Unitedon a pro rata basis no later than August 31,States. Currently, there is no other nationwide1999. Currently, we have contributeddata-dedicated network. Crosswave is alsoÍ2.56 billion of our pro rata contribution ofone of the few carriers in Japan using theÍ3.2 billion.DWDM and SONET technology.

The joint venture agreement furtherCrosswave's major current competitor isprovides that, no later than September 26,

NTT, which has an advanced wavelength1999, the three investors will discuss anddivision multiplexing technology and aagree on the amount and timing of additionalnationwide network of optical Ñber.investment in Crosswave in a total amountAdditionally, Crosswave's expects to competenot to exceed Í12 billion. Once the threewith other existing telecommunicationsparties agree on the amount of additionalcarriers, including Japan Telecom, many ofinvestment, Crosswave will request that theywhich have announced plans to increase theirprovide such investment in the form ofdata transmission capacities through next-additional capital contributions, purchase ofgeneration networks. Japan Telecom maycorporate debentures issued by Crosswave orbecome a stronger competitor due to itsshareholder loans to Crosswave. The decisionalliance with AT&T and British Telecom.on additional investment may depend upon a

number of factors, such as how Crosswave KDD is also a competitor as it also has awill procure network equipment or whether nationwide network of optical Ñber that is notand when it will commence an international the subject of KDD's contract withleased line business or any other businesses Crosswave.that are beyond the scope of its current

Crosswave's primary competitivebusiness plan.advantages are its advanced technology, its

We plan to use a portion of the light organization, the fact that it has alreadyproceeds of this oÅering to reÑnance short- started its operations in the Tokyo-Nagoya-term borrowings for our investment already Osaka-Hokuriku ring, and the fact that itsmade and to Ñnance our future investments in recent establishment means that it is notCrosswave. If IIJ and the other shareholders burdened with aged equipment or outdatedagree on further investments in a large business methods. This should positionamount, IIJ might need to identify sources of Crosswave well to capture signiÑcant marketfunds in addition to the proceeds from this shares in the large bandwidth data traÇcoÅering. markets.

Our Ñnancial results will be aÅected byPartnershipsCrosswave's performance because we

account for Crosswave on the equity method. As with our investment in CrosswaveHowever, we are not directly responsible for and our group companies, we will continue toany of the expenses of Crosswave beyond invest in Internet-related businesses withour equity investment. strategic partners.

For more detailed Ñnancial information We have recently announced theon Crosswave including its anticipated formation of a strategic and commercialexpenses, and its Ñnancial consequences for alliance with GTE Internetworking, a divisionIIJ, see Management's Discussion and of GTE Corporation, to oÅer expandedAnalysis of Financial Conditions and Results Internet services on a global basis. At thisof Operations Ì Factors AÅecting Our Future point we have entered into a memorandum of

71

understanding to interconnect our networks ‚ technological sophistication of services.and to start discussions regarding joint

However, we believe that speed andmarketing and services development.

reliability of the network and support andIn April 1998, we formed Lycos Japan, in consulting services oÅered are the most

a joint venture. We own 10% of this joint important of these factors for largeventure, Sumitomo Corp. and an aÇliate own corporations, which are our primary target50% and Lycos owns the remaining 40%. market.Sumitomo and Lycos will manage the daily

Our success in this market will dependoperation of the site. We intend to bring ournot just on our ability to provide high-qualityInternet expertise and advanced technologiesservices to large corporations, but on ourto bear on the design, implementation,ability to provide high-quality Internet accessoperation and maintenance of the server andservices and related value-added services atconnectivity infrastructure.competitive prices to all of our target markets.

On March 23, 1999, we entered into aOur current primary competitors arejoint venture agreement with DLJdirect Japan

Type I telecommunications carriers and otherHoldings, DLJdirect Holdings and Sumitomomajor ISPs. While we believe that our networkBank. The purpose for the joint venture is toand customer service distinguish us fromestablish an online discount brokerage aimedthese competitors, some of these competitorsat Japanese individual investors. We will plan,have a signiÑcantly greater market presence,develop and set up the Internet tradingbrand recognition, and Ñnancial, technical andsystem for this joint venture. We own 5% ofpersonnel resources than we have.the shares of the joint venture company.

Telecommunications CarriersCompetition

We compete for business directly withThe market for Internet access andtelecommunications carriers who have Type Irelated services is extremely competitive incarrier licenses. Most of the majorJapan. There are no particular substantialtelecommunications carriers oÅer Internetbarriers to entry into the market in Japan,access services. These include:although there are regulatory requirements

that must be met to become carriers and/or Telecommunications Internet accessmajor Internet access providers. We carrier serviceanticipate that competition will continue to

NTT Communications OCNintensify as the use of the Internet in Japan

Japan Telecom ODNgrows. The tremendous growth and potentialKDD NEWEBsize of the Internet access market has

attracted many new start-ups as well as DDI DIONexisting businesses from diÅerent industries.

Only Type I carriers are allowed to ownWe believe that the ability to compete lines in Japan. However, it is usually diÇcult

successfully depends on a number of factors. to apply for an approval from the MPT toGenerally, these include: become a new carrier, primarily because of

the large expenditures required to meet the‚ speed and reliability of the network;standards for approval as a Type I carrier. As

‚ price of the services oÅered; Type I carriers have their own lines, it is easyfor them to begin oÅering Internet access‚ value-added services available;service and expand those services.

‚ support services provided;Generally, ISPs operated by carriers,

‚ ease and availability of dial-up connections; such as OCN operated by NTTCommunications, oÅer connectivity services

‚ number of POPs;of lesser quality but at lower prices. In the

‚ consulting services oÅered; and high-end corporate market, which is our

72

primary target, these lesser quality, lower- Our main competitors among the primarypriced services do not directly compete with providers listed above are Biglobe andour main IP Service. However, currently the Infoweb as their focus, as ours, is primarilyfastest growing market segment for business on businesses in Japan. However, as ourusers has been such low-end services. We revenues from all segments continue toview this market segment as one of the other increase, we expect to compete withimportant segments for us. In order to providers in all segments.address any actual or potential adverse

In addition to these primary providers,impacts from competition from these discountwe have recently seen a signiÑcant increaseservices of NTT Communications and others,in foreign providers including PSINet andwe launched IIJ Economy in 1998 whichUUNET. PSINet has recently acquire threeoÅers our quality services at competitiveJapanese ISPs: RIMNET, TWICS and Tokyoprices.Internet. With these acquisitions, PSINet isnow the second largest ISP in Japan in terms

ISPs of numbers of contracts. PSINet and UUNETare large ISPs in the United States andOther major ISPs are competitors ofthroughout the world. They have sizableours. ISPs are generally considered as eitherglobal networks and have signiÑcant Ñnancialprimary or secondary providers, althoughand other resources available to them. Theythere are other lower tier providers. Wewill be strong competitors of ours.compete primarily with primary and secondary

providers. Although our primary competition fromISPs is from primary providers, we alsoWe are considered a primary provider.compete with secondary providers. SecondaryPrimary providers lease backbones from theproviders typically obtain services fromcarriers and also serve as POPs forprimary providers and resell the lines to theirsecondary providers and corporate users. Inown customers. The start-up costs for aorder to lease suÇcient lines for a backbonesecondary providers are low. Secondaryand to establish enough POPs to become aproviders oÅer their services primarily toprimary provider, it requires large initialindividual customers.investments and requires signiÑcant ongoing

operating capital.Cable Companies and Wireless

The primary providers that we compete Communications Companieswith in Japan are generally aÇliated with

Many of the major cable companies andlarge companies in Japan:wireless communications companies have

Internet access service Major aÇliate announced that they are exploring theBiglobe NEC possibility of oÅering Internet access.Infoweb FujitsuSo-net Sony Communication On-line Service Providers

NetworkDream Train Internet Dream Train On-line service providers have not been

Internet, an signiÑcant competitors of ours to date.aÇliate of However, many on-line service providers haveMitsubishi Electric entered the Internet access business by

SANNET Sanyo Electric engineering their current proprietary networksSoftware to include Internet access capabilities. We

Panasonic Hi-HO Matsushita Electric expect to compete to a limited extent withIndustrial these service providers, which currently are

MSN Microsoft primarily focused on the consumerJustNet Justsystem marketplace. However, many of these on-lineDream Net MediaBank service providers are entering alliances whichPlala GrR HomeNet will allow them to oÅer a broader array of IP-

73

based services and products that could telecommunications companies, Type Iincrease their competitiveness. Carriers and Type II Carriers. Type I Carriers

include NTT, KDD and other NCCs (newWe believe that we are in a good

common carriers), including Crosswave, asposition to compete with each of these

well as cellular operators. Type I Carrierscategories of competitors in many respects.

provide telecommunications services byWe believe that we have competitive

establishing their own telecommunicationsadvantages in our technology, network,

circuit facilities. Type II Carriers, such as IIJ,backbone, customer base, brand name,

are telecommunications carriers other thansupport capability and ability to oÅer Internet-

Type I Carriers. Type II Carriers includerelated services. As to price competition, our

telecommunications circuit resale carriers andfees for our IP Service are generally higher

Internet service providers. Type II Carriersthan those of our competitors. We continue to

provide telecommunications services tofocus, however, on high-end users who pay

customers by using the telecommunicationspremium prices for our high-quality IP Service

facilities of Type I Carriers, typically NTT.and support. With respect to our otherservices, we have expanded the variety of Historically, the MPT required Type Iservices available to provide quality services Carriers to own the telecommunicationsat competitive prices in all our target market circuit facilities they used to providesegments. Also, as our services become telecommunications services. As a result ofmore closely integrated with those of deregulation, however, this requirement wasCrosswave, our price structure should beneÑt modiÑed in 1997. Type I Carriers may nowfrom the low data communication cost of lease telecommunications circuit facilities on aaccessing Crosswave's network. long-term basis and under stable conditions

from the owner of the facilities. ThisCompetition in Total Solutions Businesses deregulation allowed Crosswave, whichand in Network Consulting and Systems leases Ñber-optic lines from KDD, to obtain aIntegration Type I Carrier license.

As we increase our revenues from the Type II Carriers are not allowed, inprovision of total Internet solutions, network principle, to provide telecommunicationsconsulting and systems integration and other services through their ownvalue-added services, we compete with a telecommunications circuit facilities.number of other companies in addition to the Therefore, if a carrier wishes to providemajor ISPs. Our primary competition in this telecommunications services through its ownarea from non-ISPs is from NTT Data circuit facilities, the carrier has to apply for aCorporation. Among the carriers and ISPs, Type I permit under the TBL. Aour primary competitors are NTT, Japan telecommunications carrier cannotTelecom, DDI, PSINet and UUNET. simultaneously hold a Type I Permit and a

Type II registration. However, a carrier of oneRegulation of the Telecommunications type is permitted to own a carrier of the other

Industry in Japan type.

The Ministry of Posts and EÅective November 1, 1998, the TBLTelecommunications (MPT) regulates the was revised to provide that even Type IIJapanese telecommunications industry. IIJ, Carriers could own telecommunicationsCrosswave and other Type I and Type II facilities if such facilities are connected to oneCarriers are regulated by the MPT primarily speciÑc customer.under the Telecommunications Business Law.

Type II Carriers are subdivided intoSpecial Type II Carriers and General Type II

The Telecommunications Business LawCarriers. The deÑnitions for Special Type II

The Telecommunications Business Law Carriers and General Type II Carriers were(TBL), which became eÅective in 1985, also amended eÅective on November 1, 1998.authorizes the MPT to regulate two types of Before the revision, Special Type II Carriers

74

were deÑned as carriers which provided dedicated for transmitting signals or imagestelecommunications facilities that exceeded in as provided for in the applicable ordinancescale the standards stipulated in the are excluded from this deÑnition. IIJ fallsapplicable ordinances or provided under the category of Special Type IItelecommunications facilities designed for Carriers.communications between Japan and foreignpoints of contact. General Type II Carriers Type I Carriers may oÅer the same kindswere deÑned as carriers which provided other and categories of services provided byservices. The revised law abolished this scale Type II Carriers. Therefore, Type I Carriersstandard. Under the revised law, Special Type and Type II Carriers, especially SpecialII Carriers are limited to Type II Carriers Type II Carriers, may be competitors. As ofwhich provide telecommunications facilities February 1, 1999, there were 174 Type Idesigned for communications between Japan Carriers and 6,496 Type II Carriers. Type IIand foreign points or provide Carriers included 86 Special Type II Carrierstelecommunication services to many and 6,410 General Type II Carriers.unspeciÑed members of the public throughinterconnections of public switched networks The following table summarizes certainand leased circuits at each end. of the major regulatory requirementsTelecommunications services mainly 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 MPT Registration with MPT NotiÑcation to MPT

required required requiredb. Rates and Charges NotiÑcation* to MPT NotiÑcation to MPT Unregulated

required requiredc. Share acquisition by Unregulated** Unregulated Unregulated

foreign investors

* NTT is required to receive MPT approval for interconnection charges.

** Prior notiÑcation is required under the Foreign Exchange and Foreign Trade Law. A 20 %foreign ownership restriction is applicable only to NTT.

Regulation of Special Type II Carriers Examples of disqualifying conditions include,among other things, not having adequate

The following regulations apply to IIJ as Ñnancial basis and technical capability toa Special Type II Carrier. properly operate a telecommunications

business and having been sentenced to a ÑneRegistration. Special Type II Carriersor more severe criminal penalty pursuant tomust obtain registration from the MPT beforethe TBL. Following initial registration, withcommencing Special Type II business. Theminor exceptions, changes in the categories,applicant must specify the categories ofof service to be provided or the facilities to beservice to be provided and the facilities to beused by the carrier require additionalused by the carrier. The applicant must alsoregistrations. Currently, IIJ's registration as aspecify the terms and conditions of service,Special Type II Carrier is made under theincluding tariÅs, that will initially be oÅered byservice category of ""data transmission''. Thisthe carrier, as well as the carrier'sservice category does not encompass ""voiceadministrative rules (as described below).and sound transmission'' or dedicated lineMPT is required to accept the registration ifservice under the TBL.the necessary information is furnished and if

no disqualifying conditions are found.

75

Terms and Conditions for the Provision they oÅer. The terms and conditions, and anyof Services. Special Type II Carriers must amendments to them, are subject to MPTestablish terms and conditions for the approval. Type I Carriers are prohibited fromprovision of telecommunications services that providing telecommunications services otherthey oÅer. The terms and conditions may be than pursuant to the terms and conditionsestablished and changed simply by prior approved by the MPT, except for the non-notiÑcation to the MPT and without any need tariÅ based services for which MPT approvalfor MPT approval. Special Type II Carriers are is separately required.prohibited from providing telecommunications

TariÅ Regulation. Type I Carriers mustservices other than pursuant to the terms and

establish tariÅs for the telecommunicationsconditions notiÑed to the MPT.

services that they oÅer. Since November 1,Revocation of Registration. If a Special 1998, tariÅs may be established and changed

Type II Carrier has violated the provisions of simply by prior notiÑcation to the MPT with nothe TBL or any orders or administrative approval necessary. Prior to November 1,decisions, and is determined to impair the 1998, tariÅs had to be approved by the MPTpublic interest, its registration may be revoked before they took eÅect. The MPT may order aby the MPT. change to the tariÅs if it determines that the

tariÅs are unfair and unreasonable, are notWithdrawal from Special Type II Carrier

calculated according to a properly and clearlybusiness. If a Special Type II Carrier has

stipulated method or include any provisionterminated its business or has determined to

that unfairly discriminates against any person.dissolve, the Special Type II Carrier must sonotify the MPT. Approval by the MPT is not Type I Carriers are prohibited fromrequired. providing their telecommunications services

other than pursuant to the tariÅs notiÑed toRegulation of Type I Carriers the MPT. Thus, Type I Carriers are not able

to negotiate their tariÅs with customers.The following regulations apply to

Crosswave as a Type I Carrier. Interconnection Regulation.Interconnection tariÅs, terms and conditions

Permit of MPT. A Type I Carrier mustare subject to special regulation by the MPT.

obtain a permit from the MPT beforeNTT, which is designated by the MPT as a

commencing Type I business, by submittingdominant Type I Carrier, must establish

an application to the MPT. The applicationuniform interconnection tariÅs, terms and

must set forth, among other things, theconditions which must be applied equally to

categories of service, descriptions of theall other carriers who wish to have access.

services, service areas andThe MPT only grants approval if it determines

telecommunications facilities. If any of thesethat such tariÅs and terms are fair and

matters included in the application is to bereasonable, considering costs incurred under

changed, with minor exceptions, the Type IeÇcient management and properly allocable.

Carrier must obtain prior permission from theThe terms must not be disadvantageous to

MPT. A Type I Carrier must obtain approvalother carriers who wish to have access

from the MPT before it enters into ancompared to the terms applicable to the

entrustment agreement with any otherinterconnection with the telecommunications

telecommunications carriers.facilities by NTT itself. The tariÅs and terms

Obligation to Provide Services. Type I must not include any provisions that unfairlyCarriers must not, without due reason, refuse discriminate against any telecommunicationsto provide telecommunications services within carrier.their service areas.

In the case of other telecommunicationsTerms and Conditions for the Provision carriers (i.e., those not designated as a

of Services. Type I Carriers must establish dominant Type I Carrier), carriers may setstandard terms and conditions for the interconnection charges and terms byprovision of telecommunications services that negotiation and agreement. Such

76

interconnection rates and terms, however, are etc. Such administrative rules must bealso subject to MPT approval. submitted to the MPT prior to the

commencement of operations, and changesRevocation of Permit. A permit may be must be submitted to the MPT after they are

revoked by the MPT if a Special Type I implemented without delay.Carrier has failed to commencetelecommunications business within the time Proprietary Rightsperiod designated by the MPT or contravenedthe provisions of the TBL or any orders or Although the Company believes that itsadministrative decisions and is determined to success is more dependent upon itsimpair the public interest. technical, marketing and customer service

expertise than its proprietary rights, theWithdrawal from Type I Carrier Company relies on a combination of

Business. If a Type I Carrier intends to trademark and contractual restrictions toabolish or dissolve its business, the Type I establish and protect its technology.Carrier must obtain MPT approval. Abusiness transfer of the going-concern or a Licencesmerger of a Type I Carrier is also subject toMPT prior approval. IIJ is a licensee under a software

agreement for the Gauntlet Internet Firewallsoftware and source code that we use toTechnical Standard for Type I Carrier andprovide our Ñrewalls. The licence expires nextType II Carrieryear and it could be diÇcult to renew oncommercially reasonable terms or at all. WeType I Carriers and Special Type IIbelieve that it will be possible, althoughCarriers must maintain theirdiÇcult, to move to a diÅerent style of Ñrewalltelecommunications facilities in conformityservice if necessary without Gauntlet.with the technical standards provided in the

applicable ordinances of the MPT. If the MPT As of June 1999, IIJ is also a licenseedetermines that the telecommunications under an agreement with WatchGuardfacilities fail to meet the technical standards, Technologies, Inc. for the right to usethe MPT may order the Type I Carrier or the WatchGuard's managed Ñrewall serviceSpecial Type II Carrier to improve or repair its products which provide the ability to manage,telecommunications facilities. The technical update and conÑgure Ñrewalls remotely.standards are speciÑed to avoid damage orfailure of or interference to

Trademarkstelecommunications facilities, keep properquality of the telecommunications service, IIJ has applied for trademarkmaintain the secrecy of communications and registrations of its corporate name ""Internetshow clearly the demarcation of responsibility Initiative Japan Inc.'' and certain otherbetween the telecommunications facilities of corporate and product names in Japan, thetelecommunications carriers. United States and certain European countries.

Currently, there are 15 applications pendingIn addition, Type I Carriers and Special and 2 which have been completed.

Type II Carriers must establish their ownadministrative rules in accordance with MPT

Legal Proceedingsordinances, in order to secure the reliable andstable provision of telecommunications We are not a party to any material legalservices. Such administrative rules cover such proceedings.matters as rules of operation andmanipulation of telecommunications facilities, To our knowledge, there is no materialrules of safeguarding, inspection and testing litigation or other legal proceeding, or threatregarding the construction, maintenance and of any such proceeding, involving or againstadministration of telecommunications facilities, any of the companies in the IIJ group.

77

Enforceability of Certain Civil Liabilities against us or these persons judgmentsobtained in United States courts predicated

We are a limited liability, joint-stockupon the civil liability provisions of the federal

company incorporated under the laws ofsecurities laws of the United States. We have

Japan. All of our directors and executivebeen advised by our Japanese counsel, Asahi

oÇcers (and certain experts named herein)Law OÇces, that there is doubt as to the

reside in Japan. Substantially all of our assetsenforceability in Japan, in original actions or

and the assets of these persons are locatedin actions for enforcement of judgments of

outside the United States. It may not beUnited States courts, of liabilities predicated

possible, therefore, for investors to eÅectsolely upon the federal securities laws of the

service of process within the United StatesUnited States.

upon us or these persons or to enforce

78

MANAGEMENT

Directors and Executive OÇcers

The following table sets forth information oÇcers and certain other oÇcers of IIJ as ofwith respect to the directors and executive July 1, 1999.

Name Age Position

Koichi Suzuki 52 President, Chief Executive OÇcer andRepresentative Director

Hiroyuki Fukase 47 DirectorAkio Onishi 40 Director and Chief Strategic OÇcerYasuhiro Nishi 40 Director, Chief Financial OÇcer and

Chief Accounting OÇcerToshiya Asaba 37 Director and Co-chief Technology OÇcerShunichi Kozasa 50 DirectorKazumasa Utashiro 38 Co-chief Technology OÇcerHideki Matsushita 56 Standing Statutory AuditorYukihiro Yoshida 53 Statutory AuditorEizou Kobayashi 50 Statutory Auditor

Koichi Suzuki has been the President Internet Multifeed, Net Care and DLJdirectand Representative Director of IIJ since SFG Securities Inc. Prior to joining IIJ,April 1994, and has over 20 years of Mr. Onishi worked at the Organization forexperience in the computer and Economic Cooperation and Development fromcommunication industry. From December February 1995 to April 1997 at McKinsey and1992 to April 1994, Mr. Suzuki was a Director Company Japan as a consultant fromof IIJ. In addition, Mr. Suzuki is the October 1989 to February 1995, and at theRepresentative Director of Crosswave, IIJ Ministry of International Trade and Industry ofAmerica, IIJ Media Communications, IIJ Japan from April 1982 to July 1989.Technology, Internet Multifeed, Net Care, Asia

Yasuhiro Nishi has served as a DirectorInternet Holding, Asia Internet Holding Taiwanof IIJ since June 1999 and as Chief Financialand AIH Korea. He also serves as a DirectorOÇcer and Chief Accounting OÇcer of IIJof Atom and Xing Technology Japan. Prior tosince May 1999. From March 1999 tojoining IIJ, Mr. Suzuki was employed at JapanJune 1999, Mr. Nishi was the Manager of theManagement Association where he served asCorporate Planning Department and thegeneral manager.General Manager, Strategic Sales Division.

Hiroyuki Fukase has been the Chairman Prior to joining IIJ, Mr. Nishi had 17 years ofand a Director of IIJ since April 1994 and has experience in the Ñnance industry working atover 20 years experience in the software The Industrial Bank of Japan, Limited whereindustry. From December 1992 to April 1994, he had been since 1982.Mr. Fukase was the Representative Director

Toshiya Asaba has served as a Directorof IIJ. Mr. Fukase is also a Director of Asiaof IIJ since June 1999 and as Co-ChiefInternet Holding, IIJ America, AIH Korea, AsiaTechnology OÇcer of IIJ since May 1999.Internet Holding Taiwan, IIJ Technology andFrom 1995 to June 1999, Mr. Asaba wasNet Care. Prior to joining IIJ, Mr. Fukase wasGeneral Manager, Network Engineeringemployed at ASCII Corporation where heDivision. Mr. Asaba is also a Director of Asiaserved as general manager.Internet Holding, Asia Internet Holding

Akio Onishi has been the Chief Strategic Taiwan, IIJ America and Internet Multifeed.OÇcer of IIJ since May 1999 and a Director Mr. Asaba joined IIJ in 1992. Mr. Asaba hadof IIJ since June 1998. Mr. Onishi joined IIJ in 10 years of internet experience includingApril 1997. Mr. Onishi is also a Director of three years of Internet-related research

79

experience and seven years of Internet Eizou Kobayashi has served as abackbone engineering experience, including Statutory Auditor of IIJ since June 1999.network design, routing and traÇc Mr. Kobayashi has been chief operatingmanagement. oÇcer, Information Technology

& Telecommunication Division of ItochuShunichi Kozasa has served as a

Corporation. He started working at Itochu inDirector of IIJ since June 1999. Mr. Kozasa

April 1972.joined IIJ in April 1998 as the head of ourregional oÇce in Osaka. Prior to joining IIJ,

Compensation of Executive OÇcersMr. Kozasa worked at NTT for over 20 years,

and Directorsmost recently as a general manager of thecorporate sales division. For the year ended March 31, 1999, the

aggregate compensation paid by IIJ to all ofKazumasa Utashiro has served as Co-

its executive oÇcers and directors wasChief Technology OÇcer of IIJ since

approximately Í83 million.May 1999 and has 16 years of Unix softwaredevelopment and Internet-related research

Stock Option Plansexperiences. From April 1995 to June 1999,Mr. Utashiro was General Manager, Applied We currently have no stock options orTechnology Division. Mr. Utashiro joined IIJ in warrant options outstanding. We amended1994. Prior to joining IIJ, Mr. Utashiro worked our Articles of Incorporation by shareholders'at Software Research Associates. resolution at the shareholders' meeting held

on March 2, 1998 so that we may grantHideki Matsushita has been the Standing

warrant options to our directors orStatutory Auditor of IIJ since June 1998.

employees. We can, from time to time, grantMr. Matsushita had been seconded from Dai-

warrant options to directors or employees ifIchi Life Insurance, a leading life insurance

we obtain approval by special resolutions ofcompany in Japan, since April 1997.

the shareholders' meeting.Yukihiro Yoshida has served as a

Statutory Auditor of IIJ since June 1999.Mr. Yoshida has been a deputy generalmanager, of Sumitomo Corporation sinceApril 1999. He started working at Sumitomo inApril 1968.

80

RELATED PARTY TRANSACTIONS

Transactions between IIJ and its directors, Since April 1, 1998, IIJ received fromstatutory auditors or companies with whom NTT Í124.7 million as revenues from IIJ's

they have a relationship Internet business and paid Í1991.2 million forits leased lines, INS lines and other lines from

Since April 1, 1998, there have been noNTT and Í63.7 million for NTT's engineering

transactions between IIJ and its directors orwork.

statutory auditors.

Since April 1, 1998, IIJ received fromTransactions between IIJ and The Dai-Ichi Mutual Life Insurance Company

its principal shareholders Í22.2 million as revenues from IIJ's Internetbusiness, paid insurance premiums to Dai-IchiSince April 1, 1998, IIJ received fromMutual Life in the amount of Í298.0 millionSumitomo Corp. Í22.8 million as revenuesand paid Í15.5 million to Dai-Ichi Mutual Lifefrom IIJ's Internet business, and paid Í30for employees of Dai-Ichi Mutual Lifemillion to Sumitomo Corp. for employees ofseconded to IIJ.Sumitomo Corp. that had been assigned, or

seconded, to IIJ.Since April 1, 1998, IIJ received from

Since April 1, 1998, IIJ received from Software Research Í19.8 million as revenuesItochu Corp. Í14.4 million as revenues from from IIJ's Internet business and paid Í8.6IIJ's Internet business and paid Í32.7 million million to Software Research Associates forto Itochu Corp. for employees of Itochu Corp. employees of Software Research Associatesseconded to IIJ. seconded to IIJ.

81

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information option, by (i) each shareholder known by usknown to us with respect to the beneÑcial to own beneÑcially more than 5% of ourownership of our common stock as of common stock, (ii) all directors and executiveMarch 31, 1999, and as adjusted to reÖect the oÇcers as a group, and (iii) all other sellingsale of ADSs oÅered hereby, assuming no shareholders.exercise of the underwriters' over-allotment

Shares of Common Shares of CommonStock BeneÑcially Stock to be

Owned Before BeneÑcially Ownedthe OÅering After the OÅering

Shares toName of BeneÑcial Owner Number Percentage be Sold Number Percentage

Koichi Suzuki ÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,264 11.99 0 2,264 10.30Itochu Corp. and aÇliates 1,611 8.53 0 1,611 7.33Sumitomo Corp. and

aÇliatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,582 8.38 0 1,582 7.19NTT Communications(1) ÏÏ 1,132 6.00 0 1,132 5.15The Dai-ichi Mutual Life

Insurance Company ÏÏÏÏÏ 1,025 5.43 0 1,025 4.66Software Research

Associates ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,006 5.33 0 1,006 4.57ASCII Corporation ÏÏÏÏÏÏÏÏ 300 1.59 300 0 0.00JAFCOÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 800 4.24 80 720 3.27Nikko Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏ 240 1.27 40 200 0.91ORIX Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏ 300 1.59 30 270 1.23Sanwa Capital ÏÏÏÏÏÏÏÏÏÏÏÏ 240 1.27 20 220 1.00Directors and executiveoÇcers as a group(2) ÏÏÏÏ 2,891 15.31 0 2,891 13.15

(1) As of March 31, 1999, NTT was the shareholder but as a result of NTT's reorganization,NTT's shares are now owned by NTT Communications.

(2) Includes Koichi Suzuki's holding which is also separately set forth above.

82

DESCRIPTION OF CAPITAL STOCK

The following description of our capital interim dividends in cash from our retainedstock is a summary of the material earnings to shareholders of record as atinformation concerning our shares. For September 30 in each year by resolution ofadditional information, you should read our our Board of Directors. Our Articles ofArticles of Incorporation and Share Handling Incorporation provide that we are relieved ofRegulations, which are included as exhibits to our obligation to pay any annual dividends orthe Registration Statement of which this interim dividends unclaimed for three yearsprospectus forms a part. Additional after the date they Ñrst become payable.information is also contained in the

The Commercial Code provides that weCommercial Code of Japan, but not all of that

may not make any distribution of proÑts byinformation is summarized here.

way of annual cash dividends or interimdividends unless we set aside in our legal

Generalreserve an amount equal to at least one-tenth

Our shares are not listed on any of any amount paid out by us as anJapanese stock exchange or traded on the appropriation of retained earnings, includingover-the-counter market in Japan. any payment by way of annual dividend and

bonuses to Directors and Auditors, until ourAt present, our authorized share capital

legal reserve is at least one-quarter of ouris 75,520 shares, par value Í50,000 per

stated capital. The Commercial Code permitsshare, of which 18,880 shares have been

us to distribute proÑts by way of dividendsissued. All issued shares are fully paid and

out of the excess of our net assets, on a non-non-assessable. Under the Commercial Code,

consolidated basis, over the aggregate of:the transfer of shares is made by delivery ofshare certiÑcates. However, in order to assert ‚ our stated capital;shareholders' rights against us, the transferee

‚ our additional paid-in capital;must have his name and address registeredon our register of shareholders. Shareholders ‚ our accumulated legal reserve;are required to Ñle their names, addresses

‚ the legal reserve to be set aside in respectand seal impressions with The Sumitomo

of the dividends concerned and proposedTrust and Banking Company, Limited which is

payment by way of appropriation ofthe transfer agent for our shares. Foreign

retained earnings; andshareholders may Ñle a specimen signature inlieu of a seal impression. Non-resident ‚ the excess, if any, of unamortizedshareholders are required to appoint a expenses incurred in preparation forstanding proxy in Japan or Ñle a mailing commencement of business and inaddress in Japan. Japanese securities Ñrms connection with research and developmentand commercial banks customarily oÅer the over the aggregate of the amounts listedservice of standing proxy, and provide related above, other than our stated capital.services on payment of their standard fee.

In the case of interim dividends, the netassets are calculated by reference to the

Dividendsbalance sheet as at the last closing of our

We have never declared or paid any accounts, but adjusted to reÖect anycash dividends on our capital stock. We subsequent payment by way of appropriationcurrently do not expect to pay any cash of retained earnings and the related transferdividends for the foreseeable future. If we to legal reserve, any subsequent transfer ofpaid annual cash dividends, they would be retained earnings to stated capital and thedistributed in cash on a pro rata basis to aggregate purchase price of sharesshareholders of record as at March 31 in determined by a resolution of the ordinaryeach year, following approval by resolution of general meeting of shareholders authorizingordinary general meeting of shareholders. In us to acquire our shares pursuant to theaddition to annual dividends, we may also pay below-mentioned amendments to the

83

Commercial Code. Interim dividends may not certiÑcates representing the additional sharesbe paid where there is a risk that at the end resulting from the stock split will be issued toof the Ñnancial year net assets might be less shareholders. If exchange of sharethan the aggregate of the amounts listed certiÑcates is not required, we must giveabove. public notice of the stock split and the record

date, not less than two weeks prior to suchIf we have on our balance sheet a

record date. In addition, promptly after thenumber of shares acquired for the purpose of

stock split takes eÅect, we must give noticetransferring these shares to our Directors or

to each shareholder of the number of sharesemployees but these shares are yet to be

to be issued to such shareholder by virtue oftransferred, the book value of these shares

the stock split. If exchange of shareshall be deducted from the amount available

certiÑcates is required, we must give publicfor payment of annual dividends and interim

notice and in addition, notice to eachdividends.

shareholder that, within a period of not lessIn Japan, the ""ex-dividend'' date and the than one month speciÑed in such notice,

record date for any dividends come before share certiÑcates must be submitted to us forthe date the issuer decides the amount of the exchange.dividends to be paid.

For information as to the treatmentFor information as to Japanese taxes on under Japanese tax law of a stock split,

dividends, please refer to the section ""Certain please refer to the section ""Certain TaxTax Considerations Ì Japanese Taxation''. Considerations Ì Japanese Taxation''.

Stock SplitsGeneral Meeting of Shareholders

When we issue new shares, the entireamount of the issue price of the new shares The ordinary general meeting of ouris required to be accounted for as stated shareholders is held within three months fromcapital, although we may account for an the last day of each Ñscal year in Tokyo. Inamount not exceeding one-half of the issue addition, we may hold an extraordinaryprice as additional paid-in capital. We may at general meeting of shareholders wheneverany time transfer the whole or any part of our necessary. We must give notice of aadditional paid-in capital and legal reserve to shareholders' meeting stating the place, thestated capital by resolution of our Board of time and the purpose thereof and a summaryDirectors. We may also transfer the whole or of the matters to be acted upon at least twoany part of retained earnings which are weeks prior to the date set for the meeting.distributable as annual dividends or interim We must send such notice to eachdividends to stated capital by resolution of an shareholder having voting rights or, in theordinary general meeting of shareholders. case of a non-resident shareholder, to his

mailing address or proxy in Japan. Since weWe may at any time split our shares insuspend the entry of changes into the registerissue into a greater number of shares byof shareholders from April 1 to the date whenresolution of the Board of Directors if:an ordinary general meeting of shareholders

‚ the total par value of the shares in issue is held each year, shareholders having votingafter the stock split does not exceed the rights at an ordinary general meeting ofstated capital; and shareholders are Ñxed on March 31 each

year.‚ our net assets divided by the number of theshares in issue after the stock split is at

Any shareholder holding 300 shares orleast Í50,000.

one percent of the total number of theGenerally, unless a stock split involves a outstanding shares for six months or longer

change in the par value of the shares, may propose a matter to be considered at ashareholders will not be required to surrender general meeting of shareholders. A proposalshare certiÑcates for exchange, but is made by submitting a written request to the

84

Board of Directors at least six weeks prior to A special resolution requires thethe date of such meeting. approval of the holders of at least two-thirds

of the shares represented at a meeting wherea quorum is present. A quorum exists when aVoting Rightsmajority of the total number of outstanding

A shareholder of record is entitled to shares having voting rights is represented.one vote per share. Except as otherwiseprovided by law or by the Articles of

Liquidation RightsIncorporation, a resolution can be adopted ata general meeting of shareholders by a If we are liquidated, the assetsmajority of the shares having voting rights remaining after payment of all taxes,represented at the meeting. Shareholders liquidation expenses and debts will bemay also exercise their voting rights through distributed among the shareholders inproxies, provided that the proxy is one of our proportion to the number of shares they hold.shareholders. The Commercial Code providesthat the quorum for election of Directors and Issue of Additional Shares andStatutory Auditors is one-third of the total Pre-emptive Rightsnumber of issued shares having voting rights.

Holders of our shares have no pre-Our Articles of Incorporation provide thatemptive rights. Authorized but unissuedshares may not be voted cumulatively for theshares may be issued at the times and on theelection of Directors.terms as our Board of Directors determines,

Shareholders of a company having 1,000 as long as the limitations on the oÅering ofor more shareholders may exercise voting new shares at a ""specially favorable'' pricerights by sending the voting rights exercise mentioned above are observed. Our Board ofform, indicating consent or dissent to the Directors may, however, give shareholdersitems on the agenda. As of June 15, 1999, we subscription rights to new shares. Any rightshave 125 shareholders of record and the must be given on uniform terms to allexercise of voting rights in an exercise form shareholders as of a record date. Notice ofdoes not apply to us. that record date must be given at least two

weeks' in advance. Each shareholder mustThe Commercial Code provides that aalso be given at least two weeks' prior noticespecial resolution of shareholders' meeting isof the date on which the rights expire.required in order to amend the Articles of

Incorporation and in certain other instances, The issue price of new shares with a parincluding value may not be less than the par value and

must be paid in full. We may, however, make‚ any reduction of the stated capital,a rights issue to shareholders at a

‚ any removal of a Director or a Statutory subscription price per share which is lessAuditor, than the par value thereof if:

‚ dissolution or merger, ‚ the diÅerence between the subscriptionprice and the par value does not exceed

‚ transfer of the whole or an important partthe sum of the amount accounted for as

of the business,stated capital in excess of par value inconnection with previous issues and the‚ taking over the whole of the business ofamount of additional paid-in capital, legalany other company, orreserve and retained earnings transferred

‚ any oÅering of new shares at a ""speciallyto stated capital, divided by the number of

favorable'' price, or any oÅering ofthe new shares;

convertible bonds with ""specially favorable''conversion conditions or of bonds with ‚ the sum of the net assets of IIJ and thewarrants or rights to subscribe for new total subscription price, divided by theshares with ""specially favorable'' number of the shares in issue thereafter, isconditions. at least Í50,000; and

85

‚ the subscription rights to the new shares The Commercial Code permits us toare made transferable. acquire shares, pursuant to a resolution at an

ordinary general meeting of shareholders,only for the purpose of transferring shares toDilutionour Directors or employees or to cancel

It is possible that, in the future, market shares.conditions and other factors might make

We can only acquire shares to transferrights issues to shareholders desirable at ato our Directors or employees if:subscription price substantially below their

then current market price. In that case‚ the number of shares to be acquired does

shareholders who do not exercise and arenot exceed 10 percent of total issued

unable otherwise to realize the full value ofshares; and

their subscription rights will suÅer dilution oftheir equity interest in IIJ. ‚ the aggregate amount of the purchase price

does not exceed the amount of the retainedearnings available for annual dividendReports to Shareholderspayment less the sum of any amount paid

We currently furnish our shareholders or to be paid by way of appropriation ofnotices of shareholders' meetings, annual retained earnings and any transfer ofbusiness reports, including Ñnancial retained earnings to stated capital.statements, and notices of resolutions

We can only acquire shares to cancel if:adopted at the shareholders' meetings, all ofwhich are in Japanese.

‚ the aggregate amount of the purchase pricedoes not exceed the amount of the retainedUpon completion of the oÅering, we willearnings available for annual dividendbe subject to the information requirements ofpayment less the sum of any amount paidthe Exchange Act and, in accordanceor to be paid by way of appropriation oftherewith, we will Ñle reports and otherretained earnings and any transfer ofinformation in English with the SEC. Forretained earnings to stated capital; andinformation on how to obtain these reports

and other information, please refer to the‚ there is not a concern that there would be

""Additional Information'' section of thisno retained earnings available for annual

prospectus.dividend payment at the close of thecurrent business year.

Record Date and Close ofRegister of Shareholders We can also issue to our Directors or

employees warrant options to subscribe forThe record date for annual dividends is

new shares. For information about stockMarch 31 and the record date for interim

options, please refer to ""Management Ìdividends is September 30. In addition, we

Stock Option Plans'' in this prospectus.may set a record date for determining theshareholders entitled to other rights and for

Stock Optionsother purposes by giving at least two weeks'prior public notice. We may close the register The Commercial Code of Japan permitsof shareholders for a period not to exceed two types of stock option plans: options bythree months. means of repurchase of treasury stock and

options by means of issue of warrants.Repurchase of Shares by Us

In order to adopt treasury-stock options,Neither IIJ nor any of its subsidiaries can we need to obtain a resolution of the ordinary

acquire shares except by means of a shareholders which authorizes the optionsreduction of capital in the manner provided in and sets out the identity of directors orthe Commercial Code and except as employees to be granted the options, as wellotherwise permitted by the Commercial Code as the kind and number of treasury-stocks toas summarized below. be transferred on exercise and the price,

86

exercise period and other terms of the Foreign investors are:options. The number of shares to be

‚ individuals who do not reside in Japan;purchased by the directors or employeesupon exercise of the options may not exceed ‚ corporations which are organized under theone-tenth of the total number of shares in laws of foreign countries or whose principalissue of the corporation. oÇces are located outside Japan; and

In order to adopt a warrant option plan, ‚ corporations in which more than 50% of thewe needed to amend our Articles of shares are held by individuals who do notIncorporation to allow it. In addition, a special reside in Japan and/or corporations whichresolution of shareholders at the are organized under the laws of foreignshareholders' meeting is required to grant countries or whose principal oÇces arewarrant options. The extraordinary resolution located outside Japan or a majority of themust authorize the identity of directors or oÇcers (or oÇcers having the power ofemployees to be granted the options, and the representation) are persons who do notkind and number of shares to be newly reside in Japan.issued on exercise and the price, exercise

The Foreign Exchange Law wasperiod and other terms of the options. Theamended eÅective April 1, 1998. Pursuant tospecial resolution for this purpose requires athis amendment all aspects of foreignquorum of shareholders representing one halfexchange and foreign trade transactions thatof the total number of shares issued andwere previously subject to licensing or otheroutstanding and a resolution adopted byprior notiÑcations or approvals, with minorshareholder representing two thirds or moreexceptions, were changed to require onlyof the voting rights present at the meeting.post-transaction reporting. However, theThe number of shares issuable upon exerciseMinister of Finance of Japan will have theof the warrant options shall not exceed one-power to impose licensing requirements fortenth of the number of shares in issue andtransactions in limited circumstances.the exercise period shall be not more than ten

years.Potential Consequences Resulting fromDividends and Proceeds of SalesExchange Controls and Other Regulations

Under the current Foreign ExchangeJapanese Foreign Exchange Regulations Law, dividends paid on, and the proceeds of

The Foreign Exchange and Foreign sales in Japan of, shares held by exchangeTrade Law of Japan, frequently referred to as non-residents may, in general, be convertedthe Foreign Exchange Law, and the cabinet into foreign currency and repatriated abroad.orders and ministerial ordinances thereunder The acquisition of shares by exchange non-govern the issuance of shares by companies residents of stock splits is not subject to anyand the acquisition and holding of shares by of the foregoing requirements.""exchange non-residents'' and ""foreigninvestors'' under the Foreign Exchange Law. Potential Consequences Resulting from Sale

of Securities to Exchange Non-ResidentExchange non-residents are:

A Japanese resident is required to Ñle a‚ individuals who do not reside in Japan; andreport with the Minister of Finance concerning

‚ corporations whose principal oÇces are not the transfer of the securities for valuein Japan. exceeding Í100,000,000 to an exchange non-

Generally, branches and other oÇces resident within 20 days of the date of thelocated within Japan of non-resident transfer. If an exchange resident issues orcorporations are regarded as exchange oÅers its securities for value ofresidents of Japan and branches and other Í1,000,000,000 or more outside Japan, theoÇces of Japanese corporations located exchange resident must Ñle a report of theoutside Japan are regarded as exchange issuance or oÅering of securities with Ministernon-residents of Japan. of Finance.

87

DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS

American Depositary Receipts Share Dividends And Other Distributions

How will you receive dividends and otherThe Bank of New York will issue thedistributions on the shares?ADRs. Each ADR is a certiÑcate evidencing a

speciÑc number of ADSs. Each ADS willThe Bank of New York has agreed torepresent ownership interests in 1/2000th of

pay to you the cash dividends or othera share or the right to receive shares. Thedistributions it or the custodian receives onshares will be deposited by IIJ with the Tokyoshares or other deposited securities afterbranch oÇce of The Bank of New York, itsdeducting its fees and expenses. You willcustodian in Tokyo, Japan. Each ADS willreceive these distributions in proportion to thealso represent securities, cash or othernumber of shares your ADRs represent.property deposited with The Bank of New

York but not distributed to ADS holders. TheCash. The Bank of New York will

Bank of New York's Corporate Trust oÇce isconvert any cash dividend or other cash

located at 101 Barclay Street, New York, NYdistribution we pay on the shares into U.S.

10286.dollars, if it can do so on a reasonable basisand can transfer the U.S. dollars to the UnitedYou may hold ADSs either directly (byStates. If that is not possible or if anyhaving an ADR registered in your name) orapproval from the Japanese government isindirectly through your broker or otherneeded and can not be obtained, theÑnancial institution. If you hold ADSs directly,agreement allows The Bank of New York toyou are an ADR holder. This descriptiondistribute the Japanese yen only to thoseassumes you hold your ADSs directly. If youADR holders to whom it is possible to do so.hold the ADSs indirectly, you must rely on theIt will hold the Japanese yen it can notprocedures of your broker or other Ñnancialconvert for the account of the ADR holdersinstitution to assert the rights of ADR holderswho have not been paid. It will not invest thedescribed in this section. You should consultJapanese yen and it will not be liable for anywith your broker or Ñnancial institution to Ñndinterest.out what those procedures are.

Before making a distribution, theAs an ADR holder, you will not becustodian will deduct any withholding taxestreated as one of our shareholders and youthat must be paid under Japanese law. Seewill not have shareholder rights which are""Certain Tax Considerations Ì Japanesegoverned by Japanese law. The Bank of NewTaxation''. It will distribute only whole U.S.York will be the legal owner of the sharesdollars and cents and will round fractionalunderlying your ADRs, and you must rely on itcents to the nearest whole cent. If theto exercise the rights of a shareholder. Youexchange rates Öuctuate during a time whenwill have ADR holder rights. Those rights andThe Bank of New York cannot convert thethe obligations of The Bank of New York areJapanese yen currency, you may lose some orset out in an agreement among IIJ, The Bankall of the value of the distribution.of New York and you, as an ADR holder. The

agreement and the ADRs are generallyShares. The Bank of New York maygoverned by New York law.

distribute new ADSs representing any sharesThe following is a summary of the we may distribute as a dividend or free

agreement. Because it is a summary, it does distribution, if we furnish it promptly withnot contain all the information that may be satisfactory evidence that it is legal to do so.important to you. For more complete The Bank of New York will only distributeinformation, you should read the entire whole ADRs. It will sell shares which wouldagreement and the ADR. Directions on how to require it to use a fractional ADS andobtain copies of these are provided in the distribute the net proceeds in the same waysection entitled ""Additional Information.'' as it does with cash. If The Bank of New York

88

does not distribute additional ADRs, each The Bank of New York is notADS will also represent the new shares. responsible if it decides that it is unlawful or

impractical to make a distribution available toRights to receive additional shares. If any ADR holders. We have no obligation to

we oÅer holders of our shares any rights to register ADSs, shares, rights or othersubscribe for additional shares or an other securities under the Securities Act. We alsorights, The Bank of New York may make have no obligation to take any other action tothese rights available to you. We must Ñrst permit the distribution of ADRs, shares, rightsinstruct The Bank of New York to do so and or anything else to ADR holders.furnish it with satisfactory evidence that it is

This means that you may not receive thelegal to do so. If we don't furnish thisdistributions we make on our shares or anyevidence and/or give these instructions, andvalue for them if it is illegal or impractical forThe Bank of New York decides it is practicalus to make them available to you.to sell the rights, The Bank of New York will

sell the rights and distribute the proceeds, inDeposit, Withdrawal and Cancellationthe same way as it does with cash. The Bank

of New York may allow rights that are not How are ADRs issued?distributed or sold to lapse. In that case, youwill receive no value for them. The Bank of New York will issue ADSs if

you or your broker deposit shares orIf The Bank of New York makes rights evidence of rights to receive shares with the

available to you, it will exercise the rights and custodian. Upon payment of its fees andpurchase the shares on your behalf. The expenses and of any taxes or charges, suchBank of New York will then deposit the as stamp taxes or stock transfer taxes orshares and issue ADRs to you. It will only fees, The Bank of New York will register theexercise rights if you pay it the exercise price appropriate number of ADRs in the namesand any other charges the rights require you you request and will deliver the ADRs at itsto pay. oÇce to the persons you request.

U.S. securities laws may restrict the How do ADS holders cancel an ADR andsale, deposit, cancellation and transfer of the obtain shares?ADSs issued after exercise of rights. Forexample, you may not be able to trade the You may turn in your ADRs at The BankADSs freely in the United States. In this case, of New York's oÇce. Upon payment of itsThe Bank of New York may issue the ADRs fees and expenses and of any taxes orunder a separate restricted deposit charges, such as stamp taxes or stockagreement which will contain the same transfer taxes or fees, The Bank of New Yorkprovisions as the agreement, except for the will deliver (1) the underlying shares to anchanges needed to put the restrictions in account designated by you and (2) any otherplace. deposited securities underlying the ADR at

the oÇce of the custodian. Or, at yourOther Distributions. The Bank of New request, risk and expense, The Bank of New

York will send to you anything else we York will deliver the deposited securities at itsdistribute on deposited securities by any oÇce.means it thinks is legal, fair and practical. If itcannot make the distribution in that way, The Voting RightsBank of New York has a choice. It maydecide to sell what we distributed and You may instruct The Bank of New Yorkdistribute the net proceeds in the same way to vote the shares underlying your ADRs butas it does with cash. Or it may decide to hold only if we ask The Bank of New York to askwhat we distributed, in which case the ADSs for your instructions. Otherwise, you won't bewill also represent the newly distributed able to exercise your right to vote unless youproperty. cancel your ADRs and withdraw the shares.

89

However, you may not know about the meeting you have instructed them to give aenough in advance to withdraw the shares. discretionary proxy to a person designated by

us to vote such deposited securities, unlessIf we ask for your instructions, The Bank substantial opposition exists or the matter

of New York will notify you of the upcoming materially and adversely aÅects your rights.vote and arrange to deliver IIJ's voting No votes will be cast as to fractional shares,materials to you. The materials will which shall be rounded down to the nearest(1) describe the matters to be voted on and whole share.(2) explain how you, on a certain date, mayinstruct The Bank of New York to vote the We and The Bank of New York cannotshares or other deposited securities assure you that you will receive the votingunderlying your ADSs as you direct. For materials in time to ensure that you caninstructions to be valid, The Bank of New instruct The Bank of New York to vote yourYork must receive them on or before the date shares. In addition, The Bank of New YorkspeciÑed. The Bank of New York will try, as and its agents are not responsible for failingfar as practical, subject to Japanese law and to carry out voting instructions or for thethe provisions of IIJ's Articles of manner of carrying out voting instructions.Incorporation, to vote or to have its agents This means that you may not be able tovote the shares or other deposited securities exercise your right to vote and there may beas you instruct. If you do not validly instruct nothing you can do if your shares are notThe Bank of New York, they will deem that voted as you requested.

Fees and Expenses

ADR holders must pay: For:

$5.00 (or less) per 100 ADSs Each issuance of an ADR, including as aresult of a distribution of shares or rights orother property

Each cancellation of an ADR, including if theagreement terminates

$.02 (or less) per ADS Any cash payment

Registration or Transfer Fees Transfer and registration of shares on theshare register of the custodian from yourname to the name of The Bank of New Yorkor its agent when you deposit or withdrawshares

Expenses of The Bank of New York Conversion of Japanese yen to U.S. dollars

Cable, telex and facsimile transmissionexpenses

Taxes and other governmental charges The As necessaryBank of New York or the custodian have topay on any ADR or share underlying anADR, for example, stock transfer taxes,stamp duty or withholding taxes

Any charges payable for The Bank of New As incurredYork or its agents in connection withservicing the deposited securities

90

Payment of Taxes the taxes. If The Bank of New York sellsdeposited securities, it will, if appropriate,

The Bank of New York may deduct thereduce the number of ADRs to reÖect the sale

amount of any taxes owed from anyand pay to you any proceeds, or send to you

payments to you. It may also sell depositedany property, remaining after it has paid the

securities, by public or private sale, to paytaxes.

any taxes owed. You will remain liable if theproceeds of the sale are not enough to pay

ReclassiÑcations, Recapitalizations and Mergers

If IIJ: Then:

Changes the nominal or par value of its The cash, shares or other securitiesshares received by The Bank of New York will

become deposited securities.ReclassiÑes, splits up or consolidates any of

the deposited securities Each ADR will automatically represent itsequal share of the new deposited securities.

Distributes securities on the shares thatare not distributed to you The Bank of New York may, and will if IIJ

asks it to, distribute some or all of the cash,Recapitalizes, reorganizes, merges,

shares or other securities it received. It mayliquidate, sells all or substantially all of its

also issue new ADRs or ask you toassets, or takes any similar action

surrender your outstanding ADRs inexchange for new ADRs, identifying the newdeposited securities.

Amendment and Termination if The Bank of New York has told us that itwould like to resign and IIJ has not appointedHow may the deposit agreement bea new depositary bank within 90 days. In bothamended?cases, The Bank of New York must notify you

We may agree with The Bank of New at least 90 days before termination.York to amend the agreement and the ADRs

After termination, The Bank of New Yorkwithout your consent for any reason. If theand its agents will be required to do only theamendment adds or increases fees orfollowing under the agreement: (1) advisecharges, except for taxes and otheryou that the agreement is terminated, andgovernmental charges or certain expenses of(2) collect distributions on the depositedThe Bank of New York, or prejudices ansecurities and deliver shares and otherimportant right of ADR holders, it will onlydeposited securities upon cancellation ofbecome eÅective 30 days after The Bank ofADRs. One year after termination, The BankNew York notiÑes you of the amendment. Atof New York may, if practical, sell anythe time an amendment becomes eÅective, youremaining deposited securities by public orare considered, by continuing to hold yourprivate sale. After that, The Bank of NewADR, to agree to the amendment and to beYork will hold the proceeds of the sale, asbound by the ADRs and the agreement iswell as any other cash it is holding under theamended.agreement, for the pro rata beneÑt of theADR holders that have not surrendered theirHow may the deposit agreement beADRs. It will not invest the money and willterminated?have no liability for interest. The Bank of New

The Bank of New York will terminate the York's only obligations will be to account foragreement if we ask it to do so. The Bank of the proceeds of the sale and other cash. AfterNew York may also terminate the agreement termination, our only obligation will be with

91

respect to indemniÑcation and to pay certain or other information it deems necessary;amounts to The Bank of New York. and

‚ compliance with regulations it mayLimitations on Obligations and

establish, from time to time, consistent withLiability to ADR Holders

the agreement, including presentation ofLimits on Our Obligations and the transfer documents.Obligations of the Depositary; Limits on the

The Bank of New York may refuse toLiability to Holders of ADRsdeliver, transfer, or register transfers of ADRs

The agreement expressly limits IIJ's generally when the books of The Bank ofobligations and the obligations of The Bank of New York or we are closed, or at any time ifNew York, and it limits IIJ's liability and the The Bank of New York or we think itliability of The Bank of New York. IIJ and The advisable to do so.Bank of New York:

Your Right to Receive the Shares Underlying‚ are only obligated to take the actions

your ADRsspeciÑcally set forth in the agreementwithout negligence or bad faith; You have the right to cancel your ADRs

and withdraw the underlying shares at any‚ are not liable if either is prevented or

time except:delayed by law or circumstances beyond

‚ when temporary delays arise because:their control from performing their(1) The Bank of New York or IIJ hasobligations under the agreement;closed its transfer books; (2) the transfer

‚ are not liable if either exercises discretion of shares is blocked to permit voting at apermitted under the agreement; shareholders' meeting; or (3) we are

paying a dividend on the shares;‚ have no obligation to become involved in alawsuit or other proceeding related to the ‚ when you or other ADR holders seeking toADRs or the agreement on your behalf or withdraw shares owe money to pay fees,on behalf of any other party; and taxes and similar charges; or

‚ may rely upon any documents they believe ‚ when it is necessary to prohibit withdrawalsin good faith to be genuine and to have in order to comply with any laws orbeen signed or presented by the proper governmental regulations that apply toparty. ADRs or to the withdrawal of shares or

other deposited securities.In the agreement, we and The Bank ofNew York agree to indemnify each other This right of withdrawal may not beunder certain circumstances. limited by any other provision of the

agreement.Requirements for Depositary Actions

As the ADS/share ratio is 2000/1, youBefore The Bank of New York will issue will need to have 2000 ADSs or any integral

or register transfer of an ADR, make a multiple thereof in order to withdraw anydistribution on an ADR, or permit withdrawal shares.of shares, The Bank of New York mayrequire: Information about the Company

‚ payment of stock transfer or other taxes or We are subject to the periodic reportingother governmental charges and transfer or requirements of the Securities Exchange Actregistration fees charged by third parties of 1934 and, accordingly, Ñle certain reportsfor the transfer of any shares or other with the SEC.deposited securities;

The Bank of New York will make‚ production of satisfactory proof of the available for inspection by you at its

identity and genuineness of any signature Corporate Trust OÇce any reports and

92

communications, including any proxy soliciting New York may issue ADRs before deposit ofmaterial, received from us. The Bank of New the underlying shares. This is called a pre-York will also, upon written request, send you release of the ADR. The Bank of New Yorkcopies of any reports furnished by us may also deliver shares upon cancellation ofpursuant to the deposit agreement. These pre-released ADRs, even if the ADRs arereports and communications, including any canceled before the pre-release transactionsuch proxy soliciting material, furnished to the has been closed out. A pre-release is closedBank of New York by us will be furnished in out as soon as the underlying shares areEnglish to the extent such materials are delivered to The Bank of New York. The Bankrequired to be translated into English of New York may receive ADRs instead ofpursuant to any regulations of the SEC. shares to close out a pre-release. The Bank

of New York may pre-release ADRs onlyDisclosure of Interests under the following conditions: (1) before or

at the time of the pre-release, the person toWe may from time to time request you to

whom the pre-release is being made mustprovide information as to the capacity in

represent to The Bank of New York in writingwhich you own or owned ADRs and regarding

that it or its customer owns the shares orthe identity of any other persons then or

ADRs to be deposited; (2) the pre-releasepreviously interested in such ADRs and the

must be fully collateralized with cash or othernature of such interest.

collateral that The Bank of New YorkYou agree to provide any information considers appropriate; and (3) The Bank of

requested by us or The Bank of New York New York must be able to close out the pre-pursuant to the deposit agreement. The Bank release on not more than Ñve business days'of New York has agreed to comply with notice. In addition, The Bank of New York willreasonable written instructions received from limit the number of ADRs that may beus requesting that The Bank of New York outstanding at any time as a result of pre-forward any such requests to you and to release, although The Bank of New York mayforward to us any such responses to such disregard the limit from time to time, if itrequests received by The Bank of New York. thinks it is appropriate to do so.

Pre-Release of ADRs

In certain circumstances, subject to theprovisions of the agreement, The Bank of

93

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the oÅering, there has been no they will not oÅer, sell, contract to sell ormarket for the shares or ADSs of IIJ, and otherwise dispose of any securities of IIJ thatthere can be no assurance that a signiÑcant are substantially similar to the common stock,public market for the ADSs will develop or be including but not limited to any securities thatsustained after the oÅering. Future sales of are convertible into or exchangeable for, orsubstantial amounts of shares following the that represent the right to receive, commonoÅering could adversely aÅect market prices stock or any such substantially similarprevailing from time to time and could impair securities for a period of 180 days after theIIJ's ability to raise capital through sale of its date of this prospectus without the priorequity securities. written consent of Goldman, Sachs & Co.

Upon completion of this oÅering, IIJ will In general, under Rule 144 as currentlyhave outstanding 21,990 shares of common in eÅect, a person, or persons whose sharesstock assuming no exercise of the are aggregated who has beneÑcially ownedUnderwriters' over-allotment option. Of these restricted shares for at least one year wouldshares, the 3,580 shares sold in this oÅering be entitled to sell within any three-monthwill be freely tradable without restriction under period commencing 90 days after the eÅectivethe Securities Act except for any shares date of this oÅering, a number of shares thatpurchased by ""aÇliates'' of IIJ as that term is does not exceed the greater of:deÑned in Rule 144 under the Securities Act.In addition, there are 13,983 shares that are

‚ 1% of the number of shares offreely tradable except for shares held by

common stock then outstanding, equalaÇliates.

to approximately 220 sharesimmediately after this oÅering; or

The remaining 4,427 shares of commonstock held by existing shareholders are

‚ the average weekly trading volume of""restricted shares'' as that term is deÑned inthe common stock during the fourRule 144 and may not be sold publicly unlesscalendar weeks preceding the Ñling ofthey are registered under the Securities Acta Form 144 with respect to such sale.or are sold pursuant to Rule 144 or another

exemption from registration. Of theseremaining 4,427 shares, all but the shares Sales under Rule 144 must also complyheld by aÇliates will become eligible for sale with some restrictions regarding the manneron or prior to July 31, 2000 subject in some of sale, notice requirements and availability ofcases to the volume and manner of sale current public information about IIJ. Underlimitations under Rule 144. Rule 144(k), a person who is not deemed to

have been an aÇliate of IIJ at any time duringThe Company, its directors and the three months preceding a sale, and who

executive oÇcers and certain other has beneÑcially owned the shares proposedshareholders and the Underwriters entered to be sold for at least two years, is entitled tointo lock-up agreements in connection with sell such shares without complying with thethis oÅering. These lock-up agreements manner of sale, public information, volumeprovide that, with certain limited exceptions, limitation or notice provisions of Rule 144.

94

TAX CONSIDERATIONS

Japanese Taxation The Convention Between the UnitedStates of America and Japan for the

The following is a discussion, prepared Avoidance of Double Taxation and theby Asahi Law OÇces, summarizing material Prevention of Fiscal Evasion with Respect toJapanese tax consequences to an owner of Taxes on Income (the ""Treaty''), establishesshares or ADSs who is a non-resident of the maximum rate of Japanese withholdingJapan or a non-Japanese corporation without tax which may be imposed on dividends paida permanent establishment in Japan to which to a United States resident or corporation notthe relevant income is attributable. The having a ""permanent establishment'' instatements regarding Japanese tax laws set Japan. A ""permanent establishment'' in Japanforth below are based on the laws in force is generally a Ñxed place of business forand as interpreted by the Japanese taxation industrial or commercial activity in Japan.authorities as at the date hereof. These Under the Treaty, the maximum withholdingstatements are subject to changes in the rate for most shareholders is limited to 15%applicable Japanese laws or double taxation of the gross amount actually distributed.conventions occurring after that date. This However, the maximum rate is 10% of thesummary is not exhaustive of all possible tax gross amount actually distributed, if theconsiderations which may apply to a recipient is a corporation andparticular investor. Potential investors should

‚ during the part of the paying corporation'ssatisfy themselves as totaxable year which precedes the date of

‚ the overall tax consequences of the payment of the dividend and during theacquisition, ownership and disposition of whole of its prior taxable year if any, atshares or ADSs, including speciÑcally the least 10% of the voting shares of thetax consequences under Japanese law, paying corporation were owned by the

recipient corporation, and‚ the laws of the jurisdiction of which theyare resident, and ‚ not more than 25% of the gross income of

the paying corporation for such prior‚ any tax treaty between Japan and theirtaxable year, if any, consists of interest orcountry of residence, by consulting theirdividends as deÑned in the Treaty.own tax advisers.

For purposes of the Treaty andGenerally, a non-resident of Japan or a

Japanese tax law, U.S. holders of ADRs willnon-Japanese corporation is subject to

be treated as the owners of the sharesJapanese withholding tax on dividends paid

underlying the ADSs evidenced by the ADRs.by Japanese corporations. Stock splits,subject to the following, are not subject to Unless an applicable tax treaty,Japanese income tax. However, a transfer of convention or agreement reduces theretained earnings or legal reserve to stated maximum rate of withholding tax, the rate ofcapital is treated as a dividend payment to Japanese withholding tax applicable toshareholders for Japanese tax purposes and dividends paid by Japanese corporations to ais, in general, subject to Japanese income non-resident or non-Japanese corporation istax. This is true whether or not the transfer is 20%. Japan has entered into income taxmade in connection with a stock split or treaties, conventions or agreements, reducingotherwise. In general a transfer of additional the above-mentioned withholding tax rate topaid-in capital to stated capital is not treated 15% for investors with a number of countries.as a dividend. No transfer of retained These countries include, among others,earnings or legal reserve to stated capital Australia, Belgium, Canada, Denmark,would be necessary in connection with a Finland, France, Germany, Ireland, Italy,stock split if the total par value of shares in Luxembourg, The Netherlands, New Zealand,issue after the stock split does not exceed Norway, Singapore, Spain, Sweden,the stated capital. Switzerland, the United Kingdom and the

95

United States of America. The withholding tax or ADSs as a distributee, legatee or doneerate is further reduced if investors and IIJ may have to pay Japanese inheritance andhave some capital relationship as provided for gift taxes at progressive rates.in an applicable tax treaty.

IIJ has paid or will pay any stamp,Non-resident holders who are entitled to registration or similar tax imposed by Japan

a reduced rate of Japanese withholding tax in connection with the issue of the shares,on payment of dividends by IIJ must submit except that IIJ will not pay any tax payable inthe required form in advance through IIJ to connection with the transfer or sale of thethe relevant tax authority before payment of shares by a holder thereof.dividends. The required form is theApplication Form for Income Tax Convention United States Taxationregarding Relief from Japanese Income Tax

The following discusses United Stateson Dividends. A standing proxy for non-federal income tax consequences of theresident holders may provide such applicationownership of shares or ADSs. It only appliesservice. See ""Description of Capital Stock Ìto you if you purchase your shares or ADSsGeneral''. With respect to ADSs, the reducedthrough this oÅering and hold your shares orrate is applicable if The Bank of New York, asADSs as capital assets. It does not addressdepositary, or its agent submits twospecial classes of holders, some of whomApplication Forms for Income Taxmay be subject to other rules including:Convention Ì one form must be submitted

before payment of dividends, and the other ‚ tax-exempt entities,form must be submitted within eight months ‚ certain insurance companies,after our Ñscal year-end. To claim the

‚ broker-dealers,reduced rate, a non-resident holder of ADSswill be required to Ñle proof of taxpayer ‚ traders in securities that elect to mark tostatus, residence and beneÑcial ownership, market,as applicable. The non-resident holder will ‚ investors liable for alternative minimum tax,also be required to provide information or

‚ investors that actually or constructively owndocuments clarifying its entitlement to the tax10% or more of the voting stock of IIJ,reduction as may be required by the

depositary. ‚ investors that hold shares or ADSs as partof a straddle or a hedging or conversionA non-resident holder of shares or ADSstransaction, orwho does not submit an application in

‚ investors whose functional currency is notadvance will be entitled to claim from thethe U.S. dollar.relevant Japanese tax authority a refund of

withholding taxes withheld in excess of theThis discussion is based on the tax laws

rate of an applicable tax treaty.of the United States, including the Internal

Gains derived from the sale outside Revenue Code of 1986, as amended, itsJapan of the shares or ADSs by a non- legislative history, existing and proposedresident of Japan or a non-Japanese regulations, and administrative and judicialcorporation are in general not subject to interpretations, as currently in eÅect, as wellJapanese income or corporation taxes. as on the Treaty. These laws are subject toIn addition, gains derived from the sale of change, possibly on a retroactive basis. Inshares or ADSs within Japan by a non- addition, this discussion is based in part uponresident of Japan or a non-Japanese the representations of the depositary and thecorporation not having a permanent assumption that each obligation in the depositestablishment in Japan are in general not agreement relating to the ADRs and anysubject to Japanese income or corporation related agreement will be performed intaxes. An individual who has acquired shares accordance with its terms.

96

For purposes of this discussion, a include any Japanese tax withheld from the""U.S. holder'' is a beneÑcial owner of shares dividend payment in this gross amount evenor ADSs that is: though you do not in fact receive it.

‚ a citizen or resident of the United States, The dividend is ordinary income that you‚ a domestic corporation, must include in income when you, in the case

of shares, or the depositary, in the case of‚ an estate whose income is subject toADSs, receive the dividend, actually orUnited States federal income tax regardlessconstructively. The dividend will not be eligibleof its source, orfor the dividends-received deduction.

‚ a trust if a United States court can exerciseprimary supervision over the trust's The amount of the dividend distributionadministration and one or more United that you must include in your income as aStates persons are authorized to control all U.S. holder will be the U.S. dollar value of thesubstantial decisions of the trust. Japanese yen payments made, determined at

the spot Japanese yen/U.S. dollar rate on theA ""non-U.S. holder'' is a beneÑcial

date the dividend distribution is includible inowner of shares or ADSs that is not a United

your income, regardless of whether theStates person for United States federal

payment is in fact converted into U.S. dollars.income tax purposes.

Generally, any gain or loss resulting fromcurrency exchange Öuctuations during theThis discussion addresses only Unitedperiod from the date you include the dividendStates federal income taxation. You shouldpayment in income to the date you convertconsult your own tax advisor regarding thethe payment into U.S. dollars will be treatedUnited States federal, state and local andas ordinary income or loss. The gain or lossother tax consequences of owning andgenerally will be from sources within thedisposing of shares and ADSs in yourUnited States for foreign tax credit limitationparticular circumstances.purposes.

In general, and taking into account theDistributions in excess of current andearlier assumptions, for United States federal

accumulated earnings and proÑts, asincome tax purposes, if you hold ADRsdetermined for United States federal incomeevidencing ADSs, you will be treated as thetax purposes, will be treated as a return ofowner of the shares represented by thosecapital to the extent of your basis in theADSs. Exchanges of shares for ADSs, andshares or ADSs and thereafter as capitalADSs for shares, generally will not be subjectgain.to United States federal income tax.

The discussion under the headings Subject to certain limitations, theTaxation of Dividends and Taxation of Capital Japanese tax withheld in accordance with theGains assumes that we will not be treated as Treaty and paid over to Japan will bea Passive Foreign Investment Company creditable against your United States federal(PFIC) for U.S. federal income tax purposes. income tax liability. To the extent a refund ofFor a discussion of the rules that apply if we the tax withheld is available to you underare treated as a PFIC, see the discussion Japanese law or under the Treaty, theunder the heading below ""PFIC Rules.'' amount of tax withheld that is refundable will

not be eligible for credit against your UnitedStates federal income tax liability. Please seeTaxation of Dividends""Japanese Taxation'', above, for the

U.S. Holders. Under the United States procedures for obtaining a tax refund.federal income tax laws if you are a U.S.holder, you must include in your gross income Dividends constitute income fromthe gross amount of any dividend paid by IIJ sources outside the United States, butout of its current or accumulated earnings generally will be ""passive income'' or, ifand proÑts, as determined for United States received by Ñnancial institutions, ""Ñnancialfederal income tax purposes. You must services income''. Passive income or Ñnancial

97

services income must be treated separately on the sale or other disposition of yourfrom other types of income for purposes of shares or ADSs unless:computing the foreign tax credit allowable to ‚ the gain is ""eÅectively connected'' withyou. your conduct of a trade or business in the

United States, and the gain is attributableDistributions of additional shares to you to a permanent establishment that you

with respect to shares or ADSs that are made maintain in the United States, if that isas part of a pro rata distribution to all required by an applicable income tax treatyshareholders of IIJ generally will not be as a condition for subjecting you to Unitedsubject to United States federal income tax. States taxation on a net income basis, or

‚ you are an individual, you are present inNon-U.S. Holders. If you are a non-U.S. the United States for 183 or more days in

holder, dividends paid to you in respect of the taxable year of the sale and certainshares or ADSs will not be subject to United other conditions exist.States federal income tax unless ""eÅectively

If you are a corporate non-U.S. holder,connected'' with your conduct of a trade or""eÅectively connected'' gains, that youbusiness within the United States, and therecognize may also, under certaindividends are attributable to a permanentcircumstances, be subject to an additionalestablishment that you maintain in the United""branch proÑts tax'' at a 30% rate or at aStates, if that is required by an applicablelower rate if you are eligible for the beneÑtsincome tax treaty as a condition forof an income tax treaty that provides for asubjecting you to United States taxation on alower rate.net income basis. In such cases you will be

taxed in the same manner as a U.S. holder. IfPFIC Rulesyou are a corporate non-U.S. holder,

""eÅectively connected'' dividends may, under We do not believe that we will be treatedcertain circumstances, be subject to an as a PFIC for United States federal incomeadditional ""branch proÑts tax'' at a 30% rate tax purposes for our most recent taxableor at a lower rate if you are eligible for the year. However, this conclusion is a factualbeneÑts of an income tax treaty that provides determination made annually and thus may befor a lower rate. subject to change. Because of the nature of

our income and assets, including our use ofthe proceeds of this oÅering, we could beTaxation of Capital Gainsdetermined to be a PFIC for our current andsubsequent taxable years.U.S. Holders. If you are a U.S. holder

and sell or otherwise dispose of your shares In general, if you are a U.S. holder, weor ADSs, you will recognize capital gain or will be a PFIC with respect to you if for any ofloss for United States federal income tax our taxable years in which you held our ADSspurposes equal to the diÅerence between the or shares:U.S. dollar value of the amount that you ‚ at least 75% of our gross income for therealize and your tax basis, determined in U.S. taxable year is passive income ordollars, in your shares or ADSs. Capital gain

‚ at least 50% of the value, determined onof a noncorporate U.S. holder is generallythe basis of a quarterly average, of ourtaxed at a maximum rate of 20% for propertyassets are attributable to assets thatheld more than one year. Additionally, gain orproduce or are held for the production ofloss will generally be from sources within thepassive income.United States for foreign tax credit limitation

purposes. Passive income generally includesdividends, interest, royalties, rents, other than

Non-U.S. Holders. If you are a non-U.S. certain rents and royalties derived in theholder, you will not be subject to United active conduct of a trade or business,States federal income tax on gain recognized annuities and gains from assets that produce

98

passive income. If a foreign corporation owns basis in your shares or ADSs, and you willat least 25% by value of the stock of another recognize the additional gain, if any, on salecorporation, the foreign corporation is treated or other disposition of your shares or ADSsfor purposes of the PFIC tests as owning its as ordinary income for that taxable year. Youproportionate share of the assets of the other will also be allowed to take an ordinary losscorporation, and as receiving directly its in respect of the excess, if any, of theproportionate share of the other corporation's adjusted basis of your shares or ADSs overincome. their fair market value at the end of the

taxable year or over their Ñnal sale orIf we are treated as a PFIC, and you are

disposition prices, but only to the extent ofa U.S. holder that did not make a mark-to-

the net amount of previously included incomemarket election, as described below, you will

as a result of the mark-to-market election.be subject to special rules with respect to:

Your basis in the shares or ADSs will be‚ any gain you realize on the sale or other adjusted to reÖect any such income or loss

disposition of your shares or ADSs and amounts. For purposes of this election, if theADSs are regularly traded on Nasdaq, the‚ any ""excess distribution'' that we make toADSs should be considered as marketableyou, generally, any distributions to youstock.during a single taxable year that are greater

than 125% of the average annual If you own shares or ADSs during anydistributions received by you in respect of year that IIJ is a PFIC you must Ñle Internalthe shares or ADSs during the three Revenue Service Form 8621.preceding taxable years or, if shorter, yourholding period for the shares or ADSs. Backup Withholding and Information

ReportingUnder these rules:

‚ the gain or excess distribution will be In general, dividend payments, or otherallocated ratably over your holding period taxable distributions, made within the Unitedfor the shares or ADSs, States to a non-corporate United States

person, will be subject to information‚ the amount allocated to the taxable year inreporting requirements and ""backupwhich you realized the gain or excesswithholding'' tax at the rate of 31% if you:distribution will be taxed as ordinary

income, ‚ fail to provide an accurate taxpayeridentiÑcation number,‚ the amount allocated to each prior year,

with certain exceptions, will be taxed at the ‚ are notiÑed by the Internal Revenue Servicehighest tax rate in eÅect for that year, and that you have failed to report all interest or

dividends required to be shown on your‚ the interest charge generally applicable tofederal income tax returns, orunderpayments of tax will be imposed in

respect of the tax attributable to each such ‚ in certain circumstances, if you fail toyear. comply with applicable certiÑcation

requirements.Special rules apply for calculating the

amount of the foreign tax credit with respect Persons that are not United Statesto excess distributions by a PFIC. persons may be required to establish their

exemption from information reporting andIf you own shares or ADSs in a PFIC

backup withholding by certifying their statusthat are treated as ""marketable stock,'' you

on Internal Revenue Service Forms W-8.may also make a mark-to-market election. Ifyou make this election, you will not be subject If you sell your shares or ADSs to orto the PFIC rules described above. Instead, in through a United States oÇce of a broker, thegeneral, you will include as ordinary income payment of the proceeds is subject to botheach year the excess, if any, of the fair United States backup withholding andmarket value of your shares or ADSs at the information reporting unless you certify thatend of the taxable year over your adjusted you are a non-U.S. person, under penalties of

99

perjury, or you otherwise establish an partnership, if at any time during its taxexemption. If you sell your shares or ADS year,through a non-U.S. oÇce of a non-U.S. ‚ one or more of its partners are U.S.broker and the sale proceeds are paid to you persons, as deÑned in U.S. Treasuryoutside the United States then information regulations, who in the aggregate holdreporting and backup withholding generally more than 50% of the income or capitalwill not apply to that payment. However, interest in the partnership, orUnited States information reporting

‚ such foreign partnership is engaged inrequirements, but not backup withholding, will

a United States trade or business,apply to a payment of sales proceeds, even if

unless the broker has documentarythat payment is made to you outside the

evidence in its records that the holderUnited States, if you sell your shares or ADSs

is a non-United States person orthrough a non-U.S. oÇce of a broker that:

otherwise establishes an exemption.‚ is a United States person,

You generally may obtain a refund of‚ derives 50% or more of its gross income

any amounts withheld under the backupfor a speciÑed three-year period from the

withholding rules that exceed your income taxconduct of a trade or business in the

liability by Ñling a refund claim with the UnitedUnited States,

States Internal Revenue Service.‚ is a ""controlled foreign corporation'' as to

the United States, or

‚ with respect to payments made afterDecember 31, 2000, is a foreign

100

WHERE YOU CAN FIND MORE INFORMATION

We have Ñled with the SEC a Registration Statement from the publicRegistration Statement on Form F-1 under the reference room, the regional oÇces or bySecurities Act with respect to the securities calling the SEC at 1-800-SEC-0330 or byoÅered hereby. This prospectus does not writing the SEC upon payment of acontain all the information set forth in that prescribed fee.Registration Statement and the exhibits and

Upon completion of the oÅering, we willschedules thereto. For further informationbe subject to the informational requirementswith respect to IIJ and the ADSs to be sold inof the Exchange Act and, in accordancethe oÅering, please refer to the Registrationtherewith, we will Ñle annual reports onStatement and to the exhibits and schedulesForm 20-F within six months of our ÑscalÑled therewith. In addition, wherever ayear-end and other reports and informationreference is made in this prospectus to aon Form 6-K with the SEC. These othercontract or other document of IIJ, please bereports will include quarterly reports that areaware that such reference is not necessarilynot required by the SEC but which we willcomplete and that you should refer to thefurnish to the SEC on a voluntary basis,exhibits and schedules that are a part of thealthough we could discontinue this practice atRegistration Statement for a copy of theany time. These reports and other informationcontract or other document.can be inspected at the public reference room

You may review a copy of the at the SEC and at the SEC regional oÇcesRegistration Statement without charge at the listed above. You can also obtain copies ofSEC's public reference room at 450 Fifth such material from the public reference room,Street, N.W., Washington, D.C. 20549 and at the regional oÇces or by calling or writing thethe SEC's regional oÇces located at 7 World SEC upon payment of a prescribed fee. As aTrade Center, Suite 1300, New York, New foreign private issuer, we are exempt fromYork 10048 and 500 West Madison Street, the rules under the Securities Exchange ActSuite 1400, Chicago, Illinois 60661. You may of 1934 prescribing the furnishing and contentalso get copies of all or any portion of the of proxy statements to shareholders.

VALIDITY OF SECURITIES

The validity of the ADSs oÅered hereby passed upon for IIJ by Asahi Law OÇces.will be passed upon for IIJ by Sullivan & Certain legal matters will be passed upon forCromwell. The validity of the shares of the Underwriters by Davis Polk & Wardwellcommon stock underlying the ADSs will be and Mitsui, Yasuda, Wani & Maeda.

EXPERTS

The consolidated Ñnancial statements of appearing herein, given upon their authorityIIJ included in this prospectus have been and included in reliance upon the report ofaudited by Deloitte Touche Tohmatsu, such Ñrm as experts in accounting andindependent auditors, as stated in their report auditing.

101

GLOSSARY

Set forth below are deÑnitions of some of the terms used in this prospectus.

ATM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asynchronous Transfer Mode. ATM is a high bandwidth, low-delay, high speed transmission technology. ATM is acommunications standard that provides for information transferin the form of Ñxed-length cells of 53 bytes each. The ATMformat can be used to deliver voice, video and data traÇc atvarying rates.

Backbone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A centralized high-speed network that interconnects smaller,independent networks.

BandwidthÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The number of bits of information which can move over acommunications medium in a given amount of time. Typicallymeasured in kbps and Mbps.

Bit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bit stands for binary digit. A bit is the smallest unit ofinformation a computer can process. A single bit can have avalue of ""0'' or ""1'' and normally, seven or eight bits are usedto represent an alpha-numeric character on computers. The bitis the basic unit of data communications.

bps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bits per second. A measure of digital information transmissionrates. A rate of one bps can transmit one bit in a second.

Co-locationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A service whereby a service provider placed customers' serversand/or network equipment on its premises.

CSU/DSUÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Channel Service Unit/Digital Service Unit. A device used indigital transmission for connecting data terminal equipment,such as a router, to a digital transmission circuit or service.

Dedicated line ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Telecommunications lines dedicated or reserved for use byparticular customers along predetermined routes.

Dial-up line ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Communications circuit that is established on demand by aswitched-circuit connection using the telephone network.

DNS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Domain Name System. A distributed database system fortranslating computer names into IP addresses and vice-versa.

DWDMÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ See WDM.

Electronic mail or e-mail ÏÏÏÏÏÏ An application that allows a user to send or receive multimediamessages to or from any other user with an Internet address,commonly termed an e-mail address.

Frame relay ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A communications standard that is optimized for eÇcientswitching of variable-length data packets.

Gbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gigabits per second. A measure of digital informationtransmission rates. One Gbps equals 1,000 Mbps or one billionbps. At a transmission rate of 1 Gbps, you could receive thisentire prospectus in less than one second.

Host ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A computer with direct access to the Internet.

HTMLÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hyper Text Markup Language. An authoring software languageused on the World Wide Web.

102

Internet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The open global network of interconnected commercial,educational and governmental computer networks which utilizeTCP/IP, a common communications protocol.

Intranet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A TCP/IP based network and Web site which is securelyisolated from the Internet and serves the internal needs of acompany or institution.

IP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Internet protocol.

ISDNÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Integrated Services Digital Network. An integrated networkservice that provides digital voice, fax and data services througha single medium.

ISP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Internet service provider.

kbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kilobits per second. A measure of digital informationtransmission rates. One kbps equals 1,000 bps or one thousandbps.

LAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Local Area Network. A data communications network designedto interconnect personal computers, workstations,minicomputers, Ñle servers and other communications andcomputing devices within a localized environment.

Mbps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Megabits per second. A measure of digital informationtransmission rates. One Mbps equals 1,000 kbps or one millionbps.

NetworkÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A collection of distributed computers which share data andinformation through inter-connected lines of communication.

NOC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Network operation center. Serves as a focal point for monitoringnetwork traÇc, quality of service and security.

On-line services ÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial information services that oÅer a computer useraccess to a speciÑed slate of information, entertainment andcommunications menus. These services are generally closedsystems, although many are now oÅering full Internet access.

Peering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The commercial practice under which nationwide ISPs exchangeeach other's traÇc.

POPs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Points-of-presence. An interlinked group of modems, routersand other computer equipment, located in a particular city ormetropolitan area, that allows a nearby subscriber to access theInternet through a local telephone call or using a short-distancepermanent data circuit. Essentially, a POP is where customersenter our network.

ProtocolÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A formal description of message formats and the rules two ormore machines must follow in order to communicate.

Router ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A device that forwards data packets between interconnectednetwork segments.

SDH ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Synchronous Digital Hierarchy. A set of standard Ñber-optic-based serial standards planned for use with SONET and ATM inEurope. Some of the SDH and SONET standards are identical.Standardized by the ITU.

103

Server ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Software that allows a computer to oÅer a service to anothercomputer. Other computers contact the server program bymeans of matching client software. The term also refers to thecomputer on which server software runs.

SONET ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Synchronous Optical Network. The North AmericanSynchronous Optical Network standard for telecommunicationstransmission using Ñber-optic cables. It provides a uniform setof protocols for the management of high bandwidth services,including a multiplexing structure.

TCP/IP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transmission Control Protocol/Internet Protocol. A compilationof network and transport-level protocols that allow computerswith diÅerent architectures and operating system software tocommunicate with other computers on the Internet.

UNIXÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A computer operating system mainly for workstations andpersonal computers and noted for its portability andcommunications functionality.

UUCPÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unix-to-Unix copy mechanism. It is usually used for deliveringe-mail and Netnews on the Internet.

VoIP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Voice over internet protocol.

WANÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wide Area Network. A network spanning a wide geographicarea.

WDM, DWDM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wavelength Division Multiplexing. A transmission technologywhich multiplexes several optical signals with diÅeringwavelengths into a single optical Ñber medium. This technologyenables signiÑcant increases in the volume of informationconveyed via an optical cable. DWDM is Dense WDM.

Web or World Wide Web(WWW) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A network of computer servers that uses a special

communications protocol to link diÅerent servers throughout theInternet and permits communication of graphics, video andsound.

Web serverÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The computer system that runs Web software, used to createcustom Web sites, Web pages, and home pages.

Web sites or Web pages ÏÏÏÏÏ A site located on the Web, written in the HTML.

xDSL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A term referring to a variety of new Digital Subscriber Linetechnologies such as SDSL/ADSL/HDSL/VDSL. Some of thesevarieties are asymmetric with diÅerent data rates in thedownstream and upstream directions. Others are symmetric.Downstream speeds range: from 160 kbps to 2 Mbps (SDSL);from 1.5 Mbps to 9 Mbps (ADSL).

104

INTERNET INITIATIVE JAPAN INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Independent Auditors' ReportÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-3Consolidated Balance Sheets as of March 31, 1998 and 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-4Consolidated Statements of Operations for each of the three years

in the period ended March 31, 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-6Consolidated Statements of Shareholders' Equity for each of the three years

in the period ended March 31, 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-7Consolidated Statements of Cash Flows for each of the three years

in the period ended March 31, 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-8Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-10

F-1

(This page intentionally left blank)

F-2

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Internet Initiative Japan Inc.as of March 31, 1998 and 1999, and the related consolidated statements of operations,shareholders' equity, and cash Öows for each of the three years in the period ended March 31,1999 (all expressed in Japanese yen). These Ñnancial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on these Ñnancialstatements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the UnitedStates of America. These standards require that we plan and perform the audit to obtainreasonable assurance about whether the Ñnancial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe Ñnancial statements. An audit also includes assessing the accounting principles used andsigniÑcant estimates made by management, as well as evaluating the overall Ñnancial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated Ñnancial statements present fairly, in all material aspects, theÑnancial position of the Company as of March 31, 1998 and 1999, and the results of itsoperations and its cash Öows for each of the three years in the period ended March 31, 1999, inconformity with accounting principles generally accepted in the United States of America.

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

DELOITTE TOUCHE TOHMATSU

Tokyo, JapanMay 21, 1999

F-3

INTERNET INITIATIVE JAPAN INC.

Consolidated Balance SheetsMarch 31, 1998 and 1999

Thousands ofU.S. Dollars

Thousands of Yen (Note 1)

ASSETS 1998 1999 1999

Current Assets:CashÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í1,157,971 Í 1,061,488 $ 8,963Accounts receivable, net of allowance for

doubtful accounts of Í13,397 thousandand Í13,966 thousand ($118 thousand) atMarch 31, 1998 and 1999, respectively(Notes 2 and 3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,075,537 2,899,838 24,486

Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,081 118,766 1,003Prepaid expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105,184 145,304 1,227Refundable income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104,974 5,162 43Refundable insurance policiesÌcurrent ÏÏÏÏÏ 540,171 4,561Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 309,626 181,180 1,530

Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,781,373 4,951,909 41,813

Investments in and Advances to AÇliatedCompanies (Note 3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 887,915 3,429,124 28,955

Other Investments (Note 4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 308,854 458,467 3,871

Property and Equipment (Notes 5 and 6) ÏÏ 3,269,532 3,720,173 31,412

Guarantee Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 544,491 626,115 5,287

Refundable Insurance Policies ÏÏÏÏÏÏÏÏÏÏÏÏ 409,422 4,327 37

Other Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,578 168,923 1,426

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í9,339,165 Í13,359,038 $112,801

See notes to consolidated Ñnancial statements.

F-4

Thousands ofU.S. Dollars

Thousands of Yen (Note 1)LIABILITIES ANDSHAREHOLDERS' EQUITY 1998 1999 1999

Current Liabilities:Short-term borrowings (Note 7) ÏÏÏÏÏÏÏÏÏÏÏ Í2,440,000 Í 6,678,717 $ 56,394Accounts payable (Note 3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 367,316 1,666,317 14,070Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146,142 145,261 1,226Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 187,068 122,728 1,036Long-term borrowingsÌcurrent portion

(Note 7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64,000 572,000 4,830Capital lease obligationsÌcurrent portion

(Note 6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,077,644 1,283,298 10,836

Total current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,282,170 10,468,321 88,392

Long-Term Borrowings (Note 7) ÏÏÏÏÏÏÏÏÏÏ 1,162,000 690,000 5,826

Capital Lease ObligationsÌNoncurrent(Note 6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,766,806 1,460,763 12,334

Accrued Retirement and Pension Costs(Note 9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,817 82,269 695

Deferred Tax LiabilitiesÌNoncurrent(Note 8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,977 932 8

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,292,770 12,702,285 107,255

Minority InterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 178,327 171,818 1,451

Commitments and Contingencies(Notes 3 and 6)

Shareholders' Equity (Notes 10 and 11):Common stock, Í50,000 par valueÌ

authorized, 52,000 shares; issued andoutstanding, 18,880 shares (including 100shares held as treasury shares atMarch 31, 1998)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,100,000 1,100,000 9,288

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 619,118 651,906 5,505Retained earnings (deÑcit) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151,081 (1,277,611) (10,788)Accumulated other comprehensive incomeÏÏ 7,668 10,640 90Treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,799)

Total shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,868,068 484,935 4,095

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í9,339,165 Í13,359,038 $112,801

F-5

INTERNET INITIATIVE JAPAN INC.

Consolidated Statements of OperationsThree Years in the Period Ended March 31, 1999

Thousands ofU.S. Dollars

Thousands of Yen (Note 1)

1997 1998 1999 1999

Connectivity Services and OtherRevenues (Notes 3 and 13):

Dedicated access revenuesÏÏÏÏÏÏÏÏÏÏÏÏ Í4,291,502 Í 6,755,402 Í 7,797,457 $ 65,840Dial-up access revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,477,528 4,474,333 4,101,291 34,630Other revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 764,427 1,093,183 2,870,102 24,235

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,533,457 12,322,918 14,768,850 124,705

Cost and Expenses:Cost of connectivity services and other

revenues (Notes 3, 6 and 13) ÏÏÏÏÏÏÏ 5,526,662 9,403,385 13,202,375 111,478Sales and marketing (Note 13) ÏÏÏÏÏÏÏÏ 1,211,192 1,508,201 1,569,731 13,255General administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 891,821 938,936 1,065,119 8,994Research and developmentÏÏÏÏÏÏÏÏÏÏÏÏ 103,549 152,362 242,575 2,048

Total cost and expenses ÏÏÏÏÏÏÏÏÏÏÏÏ 7,733,224 12,002,884 16,079,800 135,775

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏ 800,233 320,034 (1,310,950) (11,070)

Other Income (Expenses):Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,972 6,834 4,035 34Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (119,859) (215,909) (218,583) (1,845)OtherÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (30,099) (34,754) 15,349 130

Other expensesÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (144,986) (243,829) (199,199) (1,681)

Income (Loss) before Income Taxes,Minority Interests in ConsolidatedSubsidiaries and Equity in Net Lossof AÇliated CompaniesÏÏÏÏÏÏÏÏÏÏÏÏÏ 655,247 76,205 (1,510,149) (12,751)

Income Taxes (Note 8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 376,969 289,453 15,320 129Minority Interests in Consolidated

Subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31,334) (41,657) 122,866 1,037Equity in Net Loss of AÇliated

Companies (Note 3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (43,665) (105,312) (26,089) (220)

Net Income (Loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 203,279 Í (360,217) Í(1,428,692) $(12,063)

Weighted-Average Common SharesOutstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,000 15,286 18,868

Yen U.S. Dollars

Basic and Diluted Net Income (Loss)per Common ShareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í13,552 Í(23,565) Í(75,720) $(639)

See notes to consolidated Ñnancial statements.

F-6

INTERNET INITIATIVE JAPAN INC.

Consolidated Statements of Shareholders' EquityThree Years in the Period Ended March 31, 1999

Thousands of YenShares ofCommon Stock Accumulated

Outstanding Other(including Retained Comprehensivetreasury Common Paid-in Earnings Income (Loss) Treasurystock) Stock Capital (DeÑcit) (Note 11) Stock Total

Balance, April 1, 1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,000 Í 750,000 Í102,000 Í 308,019 Í 4,029 Í1,164,048Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 203,279 203,279Other comprehensive income,

net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,214) (6,214)

Total comprehensive income ÏÏÏÏÏÏÏ 197,065

Balance, March 31, 1997ÏÏÏÏÏÏÏÏÏÏÏ 15,000 750,000 102,000 511,298 (2,185) 1,361,113Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (360,217) (360,217)Other comprehensive income,

net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,853 9,853

Total comprehensive income ÏÏÏÏÏÏÏ (350,364)

Common stock issued to minorityshareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,840 92,000 114,925 Í(58,500) 148,425

Sale of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,548 48,701 122,249Exercise of detachable warrants ÏÏÏÏ 1,000 50,000 50,000 100,000Private placement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,040 208,000 208,000 416,000Increase in paid-in capital, upon the

purchase of new shares of asubsidiary by minorityshareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70,645 70,645

Balance, March 31, 1998ÏÏÏÏÏÏÏÏÏÏÏ 18,880 1,100,000 619,118 151,081 7,668 (9,799) 1,868,068

Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,428,692) (1,428,692)

Other comprehensive income,net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,972 2,972

Total comprehensive income ÏÏÏÏÏÏÏ (1,425,720)

Sale of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,788 9,799 42,587

Balance, March 31, 1999ÏÏÏÏÏÏÏÏÏÏÏ 18,880 Í1,100,000 Í651,906 Í(1,277,611) Í10,640 Nil Í 484,935

Thousands of U.S. Dollars (Note 1)

AccumulatedOther

Retained ComprehensiveCommon Paid-in Earnings Income Treasury

Stock Capital (DeÑcit) (Note 11) Stock Total

Balance, March 31, 1998ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,288 $5,228 $ 1,275 $65 $(83) $ 15,773Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,063) (12,063)Other comprehensive income,

net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 25

Total comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,038)Sale of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 277 83 360

Balance, March 31, 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,288 $5,505 $(10,788) $90 Nil $ 4,095

See notes to consolidated Ñnancial statements.

F-7

INTERNET INITIATIVE JAPAN INC.

Consolidated Statements of Cash FlowsThree Years in the Period Ended March 31, 1999

Thousands ofU.S. Dollars

Thousands of Yen (Note 1)

1997 1998 1999 1999

Operating Activities:Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 203,279 Í(360,217) Í(1,428,692) $(12,063)Adjustment to reconcile net income

(loss) to net cash provided byoperating activities:Depreciation and amortization ÏÏÏÏÏÏÏ 555,829 1,127,607 1,421,693 12,005Provision for retirement and pension

costs, less paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,175 24,382 32,452 274Loss on disposal of property and

equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,235 30,820 1,574 13Write-down of marketable securitiesÏÏ 14,625 7,157Gain on sale of investments ÏÏÏÏÏÏÏÏÏ 2,975 25Equity in net loss of aÇliated

companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,665 105,312 26,091 220Minority interest in net income of

consolidated subsidiariesÏÏÏÏÏÏÏÏÏÏ 31,334 41,657 (122,866) (1,037)Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (179,039) 123,113 3,732 31Increase in accounts receivable ÏÏÏÏÏÏ (538,891) (521,408) (824,301) (6,960)Decrease (increase) in

inventories, prepaid expensesand other current assets ÏÏÏÏÏÏÏÏÏÏ (164,376) 153,041 (50,488) (426)

Increase in accounts payable ÏÏÏÏÏÏÏÏ 14,191 1,536 1,299,001 10,968Decrease in income taxes

payable (increase inrefundable income taxes) ÏÏÏÏÏÏÏÏÏ 46,937 (476,966) 97,163 820

Increase (decease) in accruedexpenses and other currentliabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 170,264 35,572 (58,264) (492)

Net cash provided by operatingactivities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 219,228 291,606 400,070 3,378

Investing Activities:Purchases of property and equipment ÏÏ (248,154) (353,250) (759,750) (6,415)Investments in and advances to

aÇliated companiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (422,761) (222,050) (2,560,000) (21,616)Purchases of other investmentsÏÏÏÏÏÏÏÏ (35,000) (197,329) (186,473) (1,575)Proceeds from sale of investmentsÏÏÏÏÏ 59,260 500Payments of guarantee deposits ÏÏÏÏÏÏÏ (583,957) (41,052) (83,596) (706)Refund of guarantee deposits ÏÏÏÏÏÏÏÏÏ 27,535 257,671 1,972 17Refund of insurance policiesÏÏÏÏÏÏÏÏÏÏÏ 5,113 318,043 95,802 809Payment for refundable insurance

policies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (363,694) (218,097) (230,878) (1,949)

F-8

Thousands ofU.S. Dollars

Thousands of Yen (Note 1)

1997 1998 1999 1999

Cash in a new subsidiary contributed byminority shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 180,000

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (73,896) (23,972) (31,345) (265)

Net cash used in investingactivities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,694,814) (300,036) (3,695,008) (31,200)

Financing Activities:Proceeds from issuance of

long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 700,000 590,000 100,000 844Repayments of long-term

borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (64,000) (64,000) (540)Redemption of bond ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (100,000)Principal payments under capital leases (506,354) (1,015,972) (1,260,813) (10,646)Net increase in short-term borrowings ÏÏÏ 1,180,000 560,000 4,238,717 35,791Proceeds from issuance of

common stock, includingexercise of warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 516,000

Proceeds from sale of treasurystock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 198,800 40,000 338

Proceeds from issuance ofsubsidiary stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 132,100 1,115

Net cash provided by Ñnancingactivities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,273,646 784,828 3,186,004 26,902

EÅect of Exchange Rate Changeson Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 382 5,748 12,451 105

Net Increase (Decrease) in Cash ÏÏÏÏÏ (201,558) 782,146 (96,483) (815)

Cash, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 577,383 375,825 1,157,971 9,778

Cash, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 375,825 Í1,157,971 Í 1,061,488 $ 8,963

Additional Cash Flow Information:Interest paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 112,931 Í 217,021 Í 225,571 $ 1,905Income taxes paid (refund) ÏÏÏÏÏÏÏÏÏÏÏ 508,949 642,846 (97,702) (825)

Noncash Investing and FinancingActivities:

Acquisition of assets by entering intocapital leasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,253,121 1,342,724 1,169,150 9,872

Net assets acquired from minorityshareholders by issuance of commonstock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148,425

See notes to consolidated Ñnancial statements.

F-9

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Internet Initiative Japan Inc. (""IIJ'') was founded in December 1992 to develop and operateInternet access services and other Internet-related services in Japan. IIJ and its subsidiaries(collectively the ""Company'') provide Internet access services throughout Japan and into theUnited States of America and into the rest of Asia through a direct connection to the A-Bone, anInternet backbone connecting the countries in the Asian PaciÑc region. The Company alsoprovides Internet systems design and integration representing principally sales of Internetnetwork systems and equipment and miscellaneous Internet access-related services.

The Company manages its business and measurers results based on a single Internet-relatedservices industry segment which generates substantially all of its revenues from its customersoperating in Japan.

The Company has incurred net losses for the last two years as it built its customer base andnetwork and at March 31, 1999 has a negative working capital position. The Company intends tofund its future cash Öow requirements through capital raising activities, continuing bank Ñnancingand/or funding from other sources, including its existing shareholders. If these eÅorts are notsuccessful, future operations of the Company will be adversely aÅected.

Basis of Financial StatementsÌThe consolidated Ñnancial statements, stated in Japanese yen,reÖect certain adjustments not recorded on the accounting books of IIJ. Such adjustments areincluded to present the statements in accordance with accounting principles generally accepted inthe United States of America (""US GAAP''). The principal adjustments relate to: (1) accountingfor leases, (2) accounting for treasury stock transactions, (3) accrual of certain expenses,(4) recognition of deferred income taxes on temporary diÅerences and operating loss carry-forward and related valuation allowance, (5) refundable insurance policies and (6) foreigncurrency transactions.

Translation into U.S. DollarsÌIIJ maintains their accounts in Japanese yen, the currency of thecountry in which it is incorporated and principally operates. The U.S. dollar amounts includedherein represent a translation using the approximate exchange rate at March 31, 1999 ofÍ118.43 • $1 solely for convenience. The translation should not be construed as a representationthat the yen amounts have been, could have been, or could in the future be converted into U.S.dollars.

ConsolidationÌThe consolidated Ñnancial statements include the accounts of IIJ and two of itssubsidiaries, Net Care, Inc. and IIJ America, Inc. Although IIJ does not have a direct majorityvoting interest in these subsidiaries, it exercises control through a signiÑcant minority interest,a majority of directors and additional indirect ownership. EÅective February 2, 1998, IIJ acquiredthe remaining minority ownership interest of Ñve of its local marketing subsidiaries, by issuingnew shares, which have been consolidated for all periods presented. The increase in equity innet assets of subsidiaries resulting from purchase of its new shares by minority shareholders areincluded in additional paid-in capital. SigniÑcant intercompany transactions and balances havebeen eliminated in consolidation. Investments in companies over which IIJ has signiÑcantinÖuence but not control are accounted for under the equity method.

Concentrations of Credit RiskÌFinancial instruments that potentially subject the Company toconcentrations of credit risk consist principally of cash investments, accounts receivable,guarantee deposits and refundable insurance policies. The Company management believes thatthe risks associated with accounts receivable is mitigated by the large number of customerscomprising its customer base.

Sources of SuppliesÌThe Company relies on telecommunications carriers to provide long-distance lines for backbone and local connections to customers and third-party suppliers for theuse of hardware components like routers and servers.

F-10

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

The Company believes that its use of multiple carriers, suppliers and alternative facilitiessigniÑcantly mitigate concentrations of credit risk.

However, any disruption of telecommunication services or the inability of suppliers to deliverhardware components on a timely basis or to develop alternative sources of components couldhave an adverse eÅect on operating results.

Use of EstimatesÌThe preparation of Ñnancial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions that aÅect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the Ñnancial statements and reported amounts of revenues and expenses during thereporting period. SigniÑcant estimates and assumptions used are primarily in the areas ofvaluation allowances for deferred tax assets and allowance for doubtful accounts. Actual resultscould diÅer from those estimates.

Revenue RecognitionÌRevenues from customer connectivity services consist principally ofdedicated Internet access services and dial-up Internet access services. Dedicated Internetaccess services represent full-line IP services and standard-level IP services (IIJ Economy).Dial-up Internet access services are provided to both enterprises and individuals (IIJ4U). Theterm of these contracts is for one or three year periods for dedicated Internet access servicesand generally one month for dial-up Internet access services. All these services are billed andrecognized monthly on a straight-line basis. Setup fees in connection with these connectivityservices are recognized when the setup is completed.

Other revenues consist principally of sales of Internet network systems and equipment, and othermiscellaneous Internet access related services such as Firewalls and co-location services.Revenues are recognized when network systems and equipment are delivered and accepted bythe customer. Other services are recognized as completed or on a straight-line basis during theservice period. Also included in other revenues are sales of network systems to CrosswaveCommunications Inc. (""Crosswave''), an aÇliated company, for the year ended March 31, 1999.

InventoriesÌInventories consist of routers held for resale and for marketing purposes and arecarried at the average cost, which approximate market values.

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

Guarantee Deposits and Refundable Insurance PoliciesÌGuarantee deposits substantially consistof refundable base lease deposits for oÇce premises.

Refundable insurance policies represent a refundable portion of life insurance policies for oÇcersand employees and are recorded on a cash-surrender basis. During April 1999 the Companycanceled several policies and received Í540,171 thousand ($4,561 thousand) as refunds.

Long-Lived AssetsÌLong-lived assets consist principally of property and equipment, includingthose items leased under capital leases. The Company evaluates the impairment of long-livedassets whenever events or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. There was no impairment loss for long-lived assets for the threeyears in the period ended March 31, 1999.

Income TaxesÌThe provision for income taxes is based on earnings before income taxes andincludes the eÅects of temporary diÅerences between assets and liabilities recognized forÑnancial reporting purposes and income tax purposes. Valuation allowances are provided againstassets which are not likely to be realized.

F-11

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

Retirement and Pension PlansÌIIJ has unfunded retirement beneÑts and noncontributory deÑnedbeneÑt pension plans which together cover substantially all of its employees who are notdirectors. The cost of the employees' beneÑts plans is accrued based on actuarially determinedamounts. IIJ also participates in a contributory multi-employer pension plan, the Japan ComputerInformation Service Employee's Pension Fund (the ""Multi-Employer Plan''), coveringsubstantially all of its employees, under which the net pension cost is recognized whencontributions become due.

Foreign Currency TransactionsÌForeign currency assets and liabilities, which consistsubstantially of accounts payable for the payment of connectivity leases to international carriers,are stated at the amount as computed by using year-end exchange rates and the resultingtransaction gain or loss is recognized in earnings. Gain or losses on foreign exchange forwardcontracts which are designated and eÅective as hedges of identiÑable commitments (seeNote 12) are deferred and included in the measurement of the related transactions.

AdvertisingÌAdvertising costs are expensed as incurred.

Basic and Diluted Net Income (Loss) per ShareÌIn February 1997, the Financial AccountingStandards Board (""FASB'') issued Statement of Financial Accounting Standards (""SFAS'')No. 128, ""Earnings Per Share'' which replaced the calculation of primary and fully dilutedearnings per share with basic and diluted earnings per share. Basic and diluted net income(loss) per share is computed using the weighted average number of shares of common stockoutstanding during the year. There were no signiÑcant dilutive securities during the yearspresented.

Other Comprehensive IncomeÌOther comprehensive income consists of translation adjustmentresulting from the translation of Ñnancial statements of a foreign subsidiary and unrealized gainsor losses on available-for-sale marketable securities.

New Accounting StandardsÌIn June 1998, FASB issued SFAS No. 133, ""Accounting forDerivative Instruments and Hedging Activities.'' SFAS No. 133 establishes accounting andreporting standards for derivative instruments and for hedging activities. SFAS No. 133 requiresthat an entity recognize all derivatives as either assets or liabilities in the balance sheet andmeasure those instruments at fair value. Changes in the fair value of derivatives are recordedeach period in current earnings or losses or other comprehensive income (loss), depending onwhether a derivative is designated as part of a hedge transaction and the type of hedgetransaction. The ineÅective portion of all hedges will be recognized in earnings. The Company willadopt SFAS No. 133 during the Ñscal year in which the statement becomes eÅective. Currently,the eÅect on the Company's consolidated Ñnancial statements of adopting SFAS No. 133 has notbeen determined.

2. ALLOWANCE FOR DOUBTFUL ACCOUNTS

An analysis of allowance for doubtful accounts for the years ended March 31, 1997, 1998 and1999, is as follows:

Thousands of Yen

Balance at Provision forBeginning of Doubtful Balance at

Year Accounts End of Year

Year ended March 31, 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 7,295 Í3,099 Í10,394

Year ended March 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í10,394 Í3,003 Í13,397

Year ended March 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í13,397 Í 569 Í13,966

Year ended March 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $113 $5 $118

F-12

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

3. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES

IIJ utilizes various business units in Japan and neighboring countries to form and operate itsInternet business. Businesses operated by the non-consolidated investees include Internetconnectivity services in Asian countries (Asia Internet Holding Co., Ltd., ""AIH''), networkintegration services (IIJ Technology Inc., ""Technology''), www server conÑguration, Webhosting, content production and home page services (IIJ Media Communications Inc.), Web pagedesign services (atom Co., Ltd.), multifeed technology services and providing a location andfacilities for connecting high-speed Internet backbones (Internet Multifeed Co., ""Multifeed'') andproviding dedicated high-speed, data communication services (Crosswave).

These entities have various minority shareholders with individual ownership percentages rangingfrom 21% to 50%. As the Company has signiÑcant inÖuence over the investees' businessplanning and execution, such investments are accounted for under the equity method.Transactions between the Company and the aÇliates include IIJ's sale of network systems toCrosswave in the amount of Í1,080,083 thousand ($9,120 thousand) for the year endedMarch 31, 1999, of which cost of purchased equipment sold amounted to Í1,069,282 thousand($9,029 thousand). In addition, there are other transactions with aÇliated companies for cost ofsubcontracting services by IIJ Technology Inc., and Internet access cost and revenues with AIH.

The aggregate amounts of balances and transactions of the Company with these aÇliatedcompanies as of March 31, 1998 and 1999 and for each of the three years in the period endedMarch 31, 1999, were summarized as follows:

Thousands ofThousands of Yen U.S. Dollars

1997 1998 1999 1999

Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 57,359 Í 45,835 $ 387Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45,351 748,599 6,321RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 16,466 135,778 1,470,196 12,414Costs and expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 193,520 406,951 1,056,804 8,923Guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80,000 54,608 461

The Company's investments in and advances to these aÇliated companies and respectiveownership percentage at March 31, 1998 and 1999, consisted of the following:

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

CrosswaveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40.0% Í2,526,762 $21,336Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39.0% Í381,325 39.0 380,041 3,209AIHÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.2 256,456 20.6 262,125 2,213Multifeed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.0 110,017 26.0 123,923 1,046other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 140,117 136,273 1,151

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í887,915 Í3,429,124 $28,955

F-13

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

A summary of Ñnancial information of these companies as of March 31, 1998 and 1999, and foreach of the three years in the period ended March 31, 1999, in the aggregate, is as follows:

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í2,815,416 Í 8,549,836 $ 72,193Noncurrent assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 525,769 3,404,683 28,749

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,341,185 11,954,519 100,942

Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 631,133 2,912,664 24,594Noncurrent liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,000 22,400 189Minority interests other than IIJ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,877,375 5,704,592 48,169

Equity in net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 788,677 Í 3,314,863 $ 27,990

Thousands ofThousands of Yen U.S. Dollars

1997 1998 1999 1999

Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í1,564,871 Í2,599,421 Í4,483,963 $37,862Costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,797,498) (2,977,362) (4,415,874) (37,287)

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏ (232,627) (377,941) 68,089 575Other expenseÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,563) (36,772) (45,821) (387)

Income (loss) before income taxes ÏÏ (245,190) (414,713) 22,268 188Income taxes (beneÑts)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,509 (41,878) 87,147 736

Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í (256,699) Í(372,835) Í (64,879) $ (548)

IIJ's major non-consolidated business unit is Crosswave. IIJ, Toyota Motor Corporation(""Toyota'') and Sony Corporation (""Sony'') incorporated Crosswave, a Japanese stockcorporation, in October 1998, to develop a new platform-type high speed network based onlarge-capacity, ultra-fast infrastructure designed specially for data communications. Under a jointventure agreement dated January 26, 1999, the ownership interest in Crosswave of IIJ, Toyotaand Sony is 40%, 30% and 30%, respectively. The accumulated capital infusion and IIJ'sinvestment in Crosswave at March 31, 1999, were Í6,400,000 thousand ($54,040 thousand) andÍ2,560,000 thousand ($21,616 thousand), respectively. An additional Í1,600,000 thousand($13,510 thousand) of capital infusion will be made by these shareholders by August 31, 1999.Crosswave's activities as a development stage company for the period from inception(October 28, 1998) to March 31, 1999, included developing a business plan, procuringgovernment authorization in the form of a Type I Telecommunications Carrier License, raisingcapital, working on the design and development of its network architecture and operation supportsystem, acquiring equipment and facilities and negotiating interconnection agreements.

F-14

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

The major Ñnancial accounts of Crosswave as of and for the period from its inception toMarch 31, 1999, included in the above-summarized Ñnancial information, were as follows:

Thousands ofThousands of Yen U.S. Dollars

Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í5,078,193 $42,879Noncurrent assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,852,552 24,087

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,930,745 66,966

Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,659,907 14,016Noncurrent liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌMinority interests other than IIJÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,762,503 31,770

Equity in net assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í2,508,335 $21,180

Marketing expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 22,010 $ 186General and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,997 507

Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82,007 693

Other expenseÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,089 9

Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 83,096 $ 702

Crosswave has entered into a long-term lease with KDD through the year 2009 for the right touse dark Ñber strands and related maintenance contracts. The lease arrangement, which consistsof variable and Ñxed portions, became eÅective April 1, 1999 and will be accounted for as anoperating lease.

4. OTHER INVESTMENTS

Other investments at March 31, 1998 and 1999 represent available-for-sale marketable shares ofcommon stock of Japanese banks and other enterprises of Í41,804 thousand and Í42,810thousand ($361 thousand) and non-marketable equity and other investments of Í267,050thousand and Í415,657 thousand ($3,510 thousand). Non-marketable securities include variousinvestments in which IIJ's equity ownership is less than 12%.

5. PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 1998 and 1999:

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

Data communications equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 157,184 Í 225,515 $ 1,904OÇce and other equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,928 42,545 359Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101,896 137,467 1,160Purchased software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 420,023 1,027,930 8,680Capitalized leases, primarily data communications

equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,356,955 5,248,545 44,318

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,058,986 6,682,002 56,421Less accumulated depreciation and amortization ÏÏÏÏÏÏ (1,789,454) (2,961,829) (25,009)

Property and equipmentÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í3,269,532 Í3,720,173 $31,412

F-15

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

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

Range ofUseful Lives

Data communications, oÇce and other equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 to 10 yearsLeasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 to 15 yearsPurchased software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 yearsCapitalized leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 to 12 years

6. LEASES

Operating LeasesÌThe Company has operating lease agreements with telecommunicationscarriers and others for the use of its connectivity lines, including local access lines that itscustomers use to connect to IIJ's network. The leases for domestic backbone are generallyeither non-cancelable for a minimum one-year lease period or cancelable during a lease periodprincipally of six years, with a signiÑcant penalty for cancellation (either 25% or 35%). Non-cancelable leases for international backbone available as of March 31, 1999 are entered into withcarriers for lease periods ranging from one to Ñve years. The Company also leases its oÇcepremises and certain oÇce equipment under non-cancelable operating leases which expire onvarious dates through the year 2004.

Lease expenses related to backbone and local access lines for the years ended March 31, 1997,1998 and 1999 and amounted to Í2,602,209 thousand, Í5,259,347 thousand and Í6,716,433thousand ($56,712 thousand), respectively. Included therein are lease expenses for local accesslines for the years ended March 31, 1997, 1998 and 1999, amounting to Í908,174 thousand,Í1,569,051 thousand and Í1,884,472 thousand ($15,912 thousand), respectively, which are onlyattributable to dedicated access revenues. Also, lease expenses for other than backbone andlocal access lines for the years ended March 31, 1997, 1998 and 1999, amounted to Í413,649thousand, Í627,180 thousand and Í647,520 thousand ($5,468 thousand), respectively.

Capital LeasesÌThe Company conducts its connectivity and other services by using datacommunications and other equipment leased under capital lease arrangements. The fair values ofthe assets upon execution of the capital lease agreements and accumulated depreciation atMarch 31, 1998 and 1999, amounted to Í4,356,955 thousand, Í1,610,861 thousand, Í5,248,545thousand ($44,318 thousand) and Í2,611,270 thousand ($22,049 thousand), respectively.

F-16

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

As of March 31, 1999, future lease payments under non-cancelable operating leases, includingthe aforementioned cancelable connectivity lease agreements (but excluding dedicated accesslines which the Company charges outright to customers), and capital leases were as follows:

Thousands of Yen Thousands of U.S. Dollars

Connectivity ConnectivityLines Other Lines Other

Operating Operating Capital Operating Operating CapitalLeases Leases Leases Leases Leases Leases

Year ending March 31:2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 5,092,419 Í 556,757 Í1,386,074 $ 42,999 $4,701 $11,7032001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,290,855 418,191 973,140 36,231 3,531 8,2172002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,746,281 414,358 31,633 3,4992003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,426,088 129,350 12,042 1,0922004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 134,988 708 1,140 6Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,405 358

Total minimum lease paymentsÏÏ Í14,733,036 Í 974,948 2,903,630 $124,403 $8,232 24,517

Less: Amounts representinginterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 159,569 1,347

Present value of net minimumcapital lease payments ÏÏÏÏÏÏÏ 2,744,061 23,170

Less: Current portion (1,283,298) (10,836)

Noncurrent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í1,460,763 $12,334

The fair value of equipment under purchase commitments with respect to capital leasearrangements outstanding at March 31, 1999, amounted to Í75,262 thousand ($635 thousand).

7. SHORT-TERM AND LONG-TERM BORROWINGS

Short-term borrowings at March 31, 1998 and 1999, consist of unsecured notes payable to banksof Í1,250,000 thousand and Í1,930,000 thousand ($16,297 thousand) and bank overdrafts(borrowings) of Í1,190,000 thousand and Í4,748,717 thousand ($40,097 thousand),respectively. Stated annual interest rates on the short-term borrowings ranged from 1.15% to1.70% and from 0.82% to 1.63% at March 31, 1998 and 1999, respectively, and their weightedaverage rates at March 31, 1998 and 1999, were 1.47% and 1.37%, respectively.

Long-term borrowings as of March 31, 1998 and 1999, consisted of the following:

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

Unsecured long-term loans payable to banks andinsurance companies, maturing serially through1999Ó2001 annual interest 1.52% to 2.00% at a Ñxedrate, except for a portion hedged by interest rateswap contracts (see Note 12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í1,226,000 Í1,262,000 $10,656

Less current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (64,000) (572,000) (4,830)

Long-term debt, less current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í1,162,000 Í 690,000 $ 5,826

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

F-17

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

borrower to provide collateral or guarantees with respect to the borrowings and that the bankmay treat any collateral, whether furnished as security for short-term or long-term loans orotherwise, as collateral for all indebtedness to such bank. The Company has never receivedrequests to provide collateral or guarantees from its banks. Also, provisions of certain loanagreements grant certain rights of possession to the lenders in the event of default.

Annual maturities of long-term debt outstanding as of March 31, 1999, were as follows:

Thousands ofYear Ending March 31 Thousands of Yen U.S. Dollars

2000 Í 572,000 $ 4,8302001 690,000 5,826

Total Í1,262,000 $10,656

The Company entered into bank overdraft (borrowing) agreements with certain Japanese banksfor which the unused balance outstanding as of March 31, 1999 was Í1,351,283 thousand($11,410 thousand).

8. INCOME TAXES

Income taxes imposed by the national, prefectural and municipal governments of Japan resultedin a normal statutory rate of approximately 51% for the years ended March 31, 1997 and 1998and 48% for the year ended March 31, 1999. The provision for income taxes consists of thefollowing components:

Thousands ofThousands of Yen U.S. Dollars

1997 1998 1999 1999

CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 556,008 Í166,340 Í11,588 $ 98Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (179,039) 123,113 3,732 31

Provision for income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 376,969 Í289,453 Í15,320 $129

Income taxesÌdeferred for the years ended March 31, 1998 and 1999 included Í11,535thousand and Í93,844 thousand ($792 thousand) credit to deferred tax assets, respectively,resulting from the enacted changes in the Japanese income tax rate on March 31, 1998 and1999. As a result, normal Japanese statutory rates have been and will be reduced by 3% to 48%and by 6% to 42%, respectively, eÅective from the beginning of the respective next Ñscal years.

F-18

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

The approximate eÅect of temporary diÅerences and carryforwards giving rise to deferred taxbalances at March 31, 1998 and 1999, was as follows:

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

Deferred Deferred Deferred Deferred Deferred DeferredTax Tax Tax Tax Tax Tax

Assets Liabilities Assets Liabilities Assets Liabilities

Refundable insurancepolicies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í30,822 Í55,816 $471

Capitalized leasesÏÏÏÏÏÏÏÏÏÏ Í 46,011 Í 44,425 $ 375Free rent adjustment ÏÏÏÏÏÏÏ 41,584Accrual of expenses ÏÏÏÏÏÏÏ 131,224 53,424 451Retirement and pension cost 23,911 34,553 292Operating loss carryforward 20,816 735,793 6,213Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,849 31,402 11,169 28,590 94 242

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 273,395 62,224 879,364 84,406 7,425 713Valuation allowance ÏÏÏÏÏÏÏÏ (243,148) (832,188) (7,027)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 30,247 Í62,224 Í 47,176 Í84,406 $ 398 $713

As of March 31, 1998 and 1999, the allowance for deferred tax assets has been provided for inthe accompanying Ñnancial statements because of uncertainty regarding recovery of suchamounts. The net changes in the valuation allowance for deferred tax assets during the yearsended March 31, 1997, 1998 and 1999, were an increase of Í19,683 thousand, Í188,215 thousandand Í589,040 thousand ($4,974 thousand), respectively. As of March 31, 1999, IIJ, Net Care,Inc., a domestic subsidiary, and IIJ America, Inc., a U.S. subsidiary, had tax operating losscarryforwards of Í1,339,791 thousand ($11,313 thousand), Í106,320 ($898 thousand) and$2,280 thousand, respectively. These loss carryforwards are available to oÅset future taxableincome, and will expire in the period ending March 31, 2004 in Japan and December 31, 2013 inthe United States of America, respectively.

A reconciliation between the amount of reported income taxes and the amount of income taxescomputed using the normal statutory rate for the years ended March 31, 1997, 1998 and 1999, isas follows:

Thousands ofThousands of Yen U.S Dollars

1997 1998 1999 1999

Amount computed by using normal Japanesestatutory tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í334,176 Í 38,865 Í(724,872) $(6,121)

Increase (decrease) in taxes resulting from:Expenses not deductible for tax purpose ÏÏ 11,363 21,373 16,607 140Increase in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏ 19,683 243,148 608,764 5,141EÅect of eÅective income tax rate changes 11,535 93,844 792Realization of tax beneÑts of operating loss

carryforwards of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏ (7,284) (17,935)Minimum income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,078 6,019 9,549 81OtherÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,953 (13,552) 11,428 96

Income taxes as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í376,969 Í289,453 Í 15,320 $ 129

F-19

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

9. RETIREMENT AND PENSION PLANS

Approximately 70% of the employees' beneÑts from IIJ's severance indemnity plan wastransferred in May 1997 to its newly established noncontributory deÑned beneÑts pension plan.The following information regarding net periodic pension cost and accrued pension cost includesthe 30% of severance beneÑts not transferred to the noncontributory plan. Under the severanceand pension plans, all of IIJ's employees are entitled, upon voluntary retirement with 15 years ormore 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, lengthof service and certain other factors. IIJ's employees who do not meet these conditions areentitled to lump-sum severance indemnities.

As stipulated by the Japanese Welfare Pension Insurance Law, the Multi-Employer Plan iscomposed of a substitutional portion of Japanese Pension Insurance and a multi-employers'portion of a contributory deÑned beneÑt pension plan. The beneÑts for the substitutional portionare based on a standard remuneration schedule under the Welfare Pension Insurance Law andthe length of participation. The multi-employers' portion of the beneÑts is based on theemployee's length of service. However, assets contributed by an employer are not segregated ina separate account or restricted to provide beneÑts only to employees of that employer, includingIIJ.

IIJ applies SFAS No. 87 ""Employer's Accounting for Pensions,'' to these plans. EÅective April 1,1998, the Company also retroactively adopted SFAS No. 132 ""Employers' Disclosures aboutPensions and Other Postretirement BeneÑts,'' which enhances existing disclosures for pensionsand other postretirement beneÑts.

Net periodic pension cost for the years ended March 31, 1997, 1998 and 1999 included thefollowing components:

Thousands ofThousands of Yen U.S. Dollars

1997 1998 1999 1999

Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í17,793 Í43,317 Í71,407 $603Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 824 1,722 3,510 30Net amortization and deferral ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 708 1,785 2,790 23

Net periodic pension cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í19,325 Í46,824 Í77,707 $656

The funded status as of March 31, 1998 and 1999 is as follows:

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

Change in beneÑt obligation:BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 69,013 Í140,884 $1,190Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43,317 71,407 603Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,722 3,510 30Actuarial (gain) lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,832 (5,063) (43)BeneÑt paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,389) (12)

BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 140,884 209,349 1,768

F-20

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

Change in plan assets:Fair value of plan assets at beginning of yearÏÏÏÏÏÏÏÏÏÏÏ 21,982 185Actual return on plan assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,329 11Employer contributionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,982 44,838 379BeneÑts paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (972) (8)

Fair value of plan assets at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,982 67,177 567

Funded statusÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (118,902) (142,172) (1,201)Unrecognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,853 53,073 448Unrecognized transition amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,232 6,830 58

Accrued pension costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í(49,817) Í(82,269) $ (695)

Actuarial assumption as of March 31:Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.5% 2.5%Expected long-term rate of return on plan assets ÏÏÏÏÏÏÏ 0.75 1.0Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.0 3.5

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

The unrecognized net loss and the unrecognized net obligation at the date of initial applicationare being amortized over 20 years and 21 years, respectively.

Contributions due and paid during the years ended March 31, 1997, 1998 and 1999, under theMulti-Employer Plan, including its substitutional portion, amounted to Í43,992 thousand, Í66,536thousand and Í91,699 thousand ($774 thousand).

Under the Japanese Commercial Code (the ""Code''), retirement beneÑts for directors andcorporate auditors are approved by the shareholders. The amount of beneÑts to retiring directorsand corporate auditors of IIJ are also determined by the shareholders. There were no beneÑtsdetermined or paid to retired directors or corporate auditors for each of the three years in theperiod ended March 31, 1999.

10. SHAREHOLDERS' EQUITY

Under the Code, the amount available for dividends is based on retained earnings as recordedon the books of IIJ. Certain adjustments not recorded on IIJ's books are reÖected in theconsolidated Ñnancial statements for reasons described in Note 1. At March 31, 1999, the deÑcitrecorded on IIJ's books of account was Í475,015 thousand ($4,011 thousand).

The Code requires IIJ to appropriate as a legal reserve portions of retained earnings in amountsequal to at least 10% of cash payments, including dividends and oÇcer's bonuses, in eachÑnancial period, until the reserve equals 25% of the stated capital. The retained earnings soappropriated may be used to eliminate or reduce a deÑcit by resolution of the shareholders ormay be transferred to capital stock by resolution of the Board of Directors.

Under the Code, at least 50% of the issue price of new shares, with a minimum of the par valuethereof, is required to be designated as stated capital. The portion which is to be designated as

F-21

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

stated capital is determined by resolution of the Board of Directors. Proceeds in excess of theamounts designated as stated capital, as reduced by stock issue expenses less the applicabletax beneÑt, are credited to additional paid-in capital. IIJ may transfer portions of additional paid-incapital and legal reserve to stated capital by resolution of the Board of Directors. IIJ may alsotransfer portions of retained earnings, available for dividends, to the stated capital by resolutionof the shareholders.

Under the Code, IIJ may issue new common shares to the existing shareholders withoutconsideration by resolution of the Board of Directors as a stock split to the extent that theaggregated par value of the shares outstanding after the issuance does not exceed the statedcapital. However, the amount calculated by dividing the total amount of shareholders' equity bythe number of outstanding shares after the issuance shall not be less than Í50,000.

As described in Note 1, on February 2, 1998 IIJ acquired the minority interest of Ñve domesticlocal marketing companies which were controlled by IIJ by issuing 1,840 new shares, including597 shares issued to IIJ and held as treasury stock, in exchange for all outstanding shares ofthese companies. IIJ subsequently sold 497 shares of treasury stock in March 1998 for Í198,800thousand and 100 shares in April and July 1998 for Í40,000 thousand ($338 thousand). Theacquisition of the minority shares was accounted for as a purchase transaction based on the fairvalue of assets acquired of Í148,425 thousand. The purchase price was allocated to the fairvalue of monetary assets acquired and monetary liabilities assumed. The Ñve domestic localmarketing companies had operated exclusively as sales agents for IIJ services and werecontrolled by IIJ prior to acquisition of the minority interest. Operations of these companies havebeen consolidated for all periods presented and their revenues (commissions from IIJ) wereeliminated in consolidation.

The pro forma eÅect on the results of consolidated operations of the acquisition of the minorityinterests, as if acquired at the beginning of the Ñscal years, is as follows:

Thousand of Yen

1997 1998

Connectivity services and other revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,533,457 12,322,918Net income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 234,613 (316,887)Basic and diluted net income (loss) per common share Ì a single

yen ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,444 (19,407)

In March 1998, 1,000 and 1,040 additional common shares were issued upon the exercise ofdetachable warrants which were issued in March 1996 in a private placement resulting inÍ100,000 thousand and Í416,000 thousand of net proceeds, respectively. In March 1998, IIJAmerica, Inc., a U.S.-based Internet access provider and a wholly-owned subsidiary, issued10,000 shares at $100 per share to IIJ Technology Inc., an aÇliated company owned 39% by theCompany. This transaction resulted in an increase in the Company's equity interest in thesubsidiary in the amount of Í70,645 thousand and decreased the Company's ownership interestfrom 100% to 69.5%.

F-22

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

11. OTHER COMPREHENSIVE INCOME

The change in each component of other comprehensive income for the years ended March 31,1997, 1998 and 1999 is as follows:

Thousands ofU.S. DollarsThousands of Yen

1997 1998 1999 1999

Other comprehensive income, before tax:Foreign currency translation adjustmentsÏÏÏÏÏÏÏ Í 1,300 Í 7,997 Í 1,325 $ 11Net unrealized holding gain (loss) on securities,

net of reclassiÑcation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏ (15,335) 3,787 3,167 27

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,035) 11,784 4,492 38Income tax eÅectÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,821 (1,931) (1,520) (13)

Other comprehensive income, net of tax ÏÏÏÏÏÏÏÏÏ Í (6,214) Í 9,853 Í 2,972 $ 25

Net unrealized holding gain on securities for the year ended March 31, 1999 includedreclassiÑcation adjustment for realized gain in the amount of Í1,205 thousand ($10 thousand).Accumulated other comprehensive income as of March 31, 1998 and 1999, consisted oftranslation adjustments in the amount of Í9,297 thousand and Í10,622 thousand ($90 thousand),and net unrealized holding gain or loss on securities in the amount of Í1,629 thousand (loss)and Í18 thousand, respectively.

12. FINANCIAL INSTRUMENTS

DerivativesÌCompany transactions associated with risks that arise from exchange rateÖuctuation relate to international connectivity charges from carriers. The Company entered intoforward exchange contracts with Japanese banks to hedge a portion of anticipated connectivitylease payments.

With respect to the unsecured long-term loans payable to a bank bearing a Öoating interest rateat March 31, 1998 and 1999 of Í136,000 thousand and Í72,000 thousand ($608 thousand),respectively, in order to manage its exposure to possible interest rate Öuctuation the Companyentered into interest rate swap contracts with a Japanese bank resulting in a Ñxed interest rateof 1.58% per annum.

The following table provides information regarding the above-mentioned derivative instruments asof March 31, 1999, which was translated into Japanese yen at the year-end spot rate.

Thousands ofThousands of Yen U.S. Dollars

Forward Exchange ContractÌbuy U.S. dollar, sell yenÌexpiring through 2000:Receive ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í 972,784 $8,214Pay ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,078,386 9,106

F-23

INTERNET INITIATIVE JAPAN INC.

Notes to Consolidated Financial StatementsÌ(Continued)

WeightedAverage Rate Notional Amount

Thousands Thousands ofof Yen U.S. Dollars

Interest Rate SwapÌexpiring through 2000:Receive (Öoating rate interest) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.00% Í72,000 $608Pay (Ñxed rate interest) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.58 72,000 608

Fair ValueÌIn the normal course of business, the Company invests in Ñnancial assets and incursÑnancial liabilities. To estimate the fair value of those Ñnancial assets, liabilities and derivatives,the Company used quoted market prices to the extent that they were available. Where a quotedmarket price is not available, the Company estimates fair value using primarily the discountedcash Öow method. For certain Ñnancial assets and liabilities which are expected to be collectedand settled within one year, the Company assumed that the carrying amount approximates fairvalue due to their short maturities. The carrying amounts or notional amounts and fair value ofÑnancial instruments are summarized as below:

Thousands ofThousands of Yen U.S. Dollars

1998 1999 1999

Carrying Carrying CarryingAmount or Amount or Amount orNotional Fair Notional Fair Notional FairAmount Value Amount Value Amount Value

Other investments ÏÏÏÏÏÏ Í 308,854 Í 308,854 Í 458,467 Í 458,467 $ 3,871 $ 3,871Refundable insurance

policies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 409,422 409,422 544,498 544,498 4,598 4,598Long-term borrowings,

including currentportion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,226,000 1,230,108 1,262,000 1,271,525 10,656 10,737

Forward exchangecontracts ÏÏÏÏÏÏÏÏÏÏÏÏÏ (93,556) (790)

Interest rate swapcontracts ÏÏÏÏÏÏÏÏÏÏÏÏÏ 136,000 358 72,000 342 608 3

13. SUPPLEMENTAL REVENUE AND EXPENSE INFORMATION

Revenues derived in the United States of America were Í20,181 thousand ($170 thousand) forthe year ended March 31, 1999.

Other revenues and cost of other revenues for the years ended March 31, 1997, 1998 and 1999include equipment sales and purchased equipment cost as follows:

Thousands ofThousands of Yen U.S. Dollars

1997 1998 1999 1999

SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Í221,920 Í108,288 Í1,494,650 $12,621Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 212,884 103,586 1,483,835 12,529

Advertising expenses incurred during the years ended March 31, 1997, 1998 and 1999, consistprincipally of advertisement within magazines, journals and newspapers and amounted toÍ351,761 thousand, Í315,387 thousand and Í227,629 thousand ($1,922 thousand), respectively.

F-24

UNDERWRITING

IIJ, the selling shareholders and the Underwriter has severally agreed to purchaseUnderwriters for the oÅering named below the number of ADSs indicated in the followinghave entered into an underwriting agreement table. Goldman, Sachs & Co., and Morganwith respect to the ADSs being oÅered. Stanley & Co. Incorporated are theSubject to certain conditions, each representatives of the Underwriters.

Number ofUnderwriters ADSs

Goldman, Sachs & Co. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,510,000Morgan Stanley & Co. Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,510,000Banc of America Securities LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 286,000A.G. Edwards & Sons, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 286,000EVEREN Securities, Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 286,000Wasserstein Perella Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 286,000J.C. Bradford & Co.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,000Gruntal & Co., L.L.C.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,000Legg Mason Wood Walker, Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,000U.S. Bancorp Piper JaÅray Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,000C.E. Unterberg, Towbin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,000Wit Capital Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166,000

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,160,000

A portion of the oÅering outside the ADSs sold by the Underwriters to theUnited States may be in the form of shares public will initially be oÅered at the initialrather than ADSs, at an equivalent price per public oÅering price set forth on the cover ofADS equivalent. this prospectus. Any ADSs sold by the

Underwriters to securities dealers may beIf the Underwriters sell more ADSs than sold at a discount of up to $0.93 per ADS

the total number set forth in the table above, from the initial public oÅering price. Any suchthe Underwriters have an option to buy up to securities dealers may resell any ADSsan additional 980,000 ADSs from IIJ to cover purchased from the Underwriters to certainsuch sales. They may exercise that option for other brokers or dealers at a discount of up14 days. If any ADSs are purchased pursuant to $0.10 per ADS from the initial publicto this option, the Underwriters will severally oÅering price. If all the ADSs are not sold atpurchase ADSs in approximately the same the initial public oÅering price, theproportion as set forth in the table above. representatives may change the oÅering price

and the other selling terms.The following table shows the per ADS

and total underwriting discounts and IIJ, the selling shareholders and certaincommissions to be paid to the Underwriters other shareholders have agreed with theby IIJ. Such amounts are shown assuming Underwriters not to dispose of or hedge anyboth no exercise and full exercise of the of their common stock or securitiesUnderwriters' option to purchase 980,000 convertible into or exchangeable for shares ofadditional ADSs. common stock during the period from the

date of this prospectus continuing through thePaid by IIJdate 180 days after the date of this

No Exercise Full Exerciseprospectus, except with the prior written

Per ADSÏÏÏÏÏÏÏÏ $ 1.55 $ 1.55 consent of Goldman, Sachs & Co. on behalfTotal ÏÏÏÏÏÏÏÏÏÏÏ $ 9,641,000 $ 11,160,000 of the Underwriters. See ""Shares Eligible for

U-1

Future Sale'' for a discussion of certain The Underwriters also may impose atransfer restrictions. penalty bid. This occurs when a particular

Underwriter repays to the Underwriters aPrior to the oÅering, there has been no

portion of the underwriting discounts andpublic market for the ADSs. The initial public

commissions received by it because theoÅering price will be negotiated among IIJ

representatives have repurchased ADSs soldand the representatives. Among the factors to

by or for the account of such Underwriter inbe considered in determining the initial public

stabilizing or short covering transactions.oÅering price of the ADSs, in addition toprevailing market conditions, will be IIJ's These activities by the Underwriters mayhistorical performance, estimates of the stabilize, maintain or otherwise aÅect thebusiness potential and earnings prospects of market price of the ADSs. As a result, theIIJ, an assessment of IIJ's management and price of the ADSs may be higher than thethe consideration of the above factors in price that otherwise might exist in the openrelation to market valuation of companies in market. If these activities are commenced,related businesses. they may be discontinued by the Underwriters

at any time. These transactions may beIIJ will list the ADSs on the NasdaqeÅected on the Nasdaq National Market, inNational Market under the symbol ""IIJI''.the over-the-counter market or otherwise.

In connection with the oÅering, theUnderwriters may purchase and sell ADSs in The Underwriters do not expect sales tothe open market. These transactions may discretionary accounts to exceed Ñve percentinclude short sales, stabilizing transactions of the total number of ADSs oÅered.and purchases to cover positions created byshort sales. Short sales involve the sale by IIJ estimates that the total expenses ofthe Underwriters of a greater number of the oÅering, excluding underwriting discountsADSs than they are required to purchase in and commissions, will be approximately $2.5the oÅering. Stabilizing transactions consist of million.certain bids or purchases made for thepurpose of preventing or retarding a decline IIJ and the selling shareholders havein the market price of the ADSs while the agreed to indemnify the several UnderwritersoÅering is in progress. The Underwriters may against certain liabilities, including liabilitiesalso eÅect transactions in the shares of IIJ. under the Securities Act of 1933.

U-2

No dealer, salesperson or other person isauthorized to give any information or to representanything not contained in this prospectus. Youmust not rely on any unauthorized information orrepresentations. This prospectus is an oÅer tosell only the securities oÅered hereby, but onlyunder circumstances and in jurisdictions where itis lawful to do so. The information contained in Internet Initiative Japan Inc.this prospectus is current only as of its date.

7,160,000TABLE OF CONTENTS

American Depositary SharesPage

Prospectus Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3RepresentingRisk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8

Use of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 3,580 Shares of Common StockDividend Policy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16Exchange Rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17CapitalizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18Dilution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19Selected Consolidated Financial Data and

Operating Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20Management's Discussion and Analysis of

Financial Condition and Results ofOperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22

Internet Initiative Japan Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏ 40BusinessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79Related Party Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81Principal and Selling Shareholders ÏÏÏÏÏÏÏ 82Description of Capital Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ 83 Internet Initiative Japan

Description of American DepositaryReceipts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88

Shares Eligible for Future SaleÏÏÏÏÏÏÏÏÏÏÏ 94Tax Considerations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95Where You Can Find More Information ÏÏÏ 101Validity of Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101Glossary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 102Index to Consolidated Financial

StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-1 Goldman, Sachs & Co.Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ U-1

Morgan Stanley Dean WitterThrough and including August 28, 1999 (the

25th day after the date of this prospectus), allRepresentatives of the Underwritersdealers eÅecting transactions in these securities,

whether or not participating in this oÅering, maybe required to deliver a prospectus. This is inaddition to the dealers' obligation to deliver aprospectus when acting as underwriters and withrespect to their unsold allotments orsubscriptions.