As filed with the Securities and Exchange Commission on July 23, 2004

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

     (Mark One)

OR

For the fiscal year ended March 31, 2004

OR

For the transition period from _______ to _______

Commission file number: 0-30204

Kabushiki Kaisha Internet Initiative

Internet Initiative Japan Inc.

Japan
(Jurisdiction of incorporation or organization)

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

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

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

Common Stock, no par value
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

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

As of March 31, 2004, 38,360 shares of common stock were outstanding, including 7,263 shares represented by an aggregate of 14,526,000 American Depositary Shares.

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

Yes o  No þ

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

Item 17 o  Item 18 þ

TABLE OF CONTENTS

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Cautionary Note Regarding Forward-Looking Statements

This annual report contains forward-looking statements about us and our industry that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements are subject to various risks and uncertainties. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of our operations and our financial condition, and state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual results to differ materially from those contained in or suggested by any forward-looking statement. We cannot provide any assurance that our expectations, projections, anticipated estimates or other information expressed in these forward-looking statements will turn out to be correct. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

     Important risks and factors that could cause our actual results to differ materially from our forward-looking statements are generally provided in Item 3.D. and elsewhere in this annual report on Form 20-F and include, without limitation:

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PART I

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

Not required.

Item 2. Offer Statistics and Expected Timetable.

Not applicable.

Item 3. Key Information.

A. Selected Financial Data.

     You should read the selected consolidated financial data below together with Item 5. “Operating and Financial Review and Prospects”, of this annual report on Form 20-F and our consolidated financial statements and the notes to the financial statements beginning on page F-1. The consolidated statement of operations data and per share and ADS data below for the fiscal years ended March 31, 2000, 2001, 2002, 2003 and 2004, the consolidated balance sheet data below as of March 31, 2000, 2001, 2002, 2003 and 2004 and consolidated statements of cash flows for the fiscal years ended March 31, 2000, 2001, 2002, 2003 and 2004 under operating data below are derived from our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and audited by Deloitte Touche Tohmatsu, independent auditors.

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

Capital expenditures

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

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

Exchange Rates

     Fluctuations in exchange rates between the Japanese yen and U.S. dollar and other currencies will affect the U.S. dollar and other currency equivalent of the yen price of our shares and the U.S. dollar amounts received on conversion of any cash dividends, which in turn will affect the U.S. dollar price of our ADSs. We have translated some Japanese yen amounts presented in this annual report into U.S. dollars solely for your convenience. Unless otherwise noted, the rate used for the translations was ¥104.18 per $1.00 which was the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York prevailing as of March 31, 2004, the date of our most recent consolidated balance sheet contained in this annual report. Translations do not imply that the yen amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars.

     The following table presents the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York;

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     The noon buying rate on July 19, 2004 was ¥108.28 per $1.00.

B. Capitalization and Indebtedness.

     Not required.

C. Reasons for the Offer and Use of Proceeds.

     Not applicable.

D. Risk Factors

     You should carefully consider the following information, together with the other information contained in this annual report on Form 20-F, including our financial statements and the related notes, before making an investment decision. Any risks described below could result in a material adverse effect on our business, financial condition or results of operations.

We have experienced operating and net losses in recent years and may be unable to achieve or sustain profitability in the near future.

     We incurred an operating loss of ¥1.4 billion and a net loss of ¥0.1 billion for the fiscal year ended March 31, 2004. We have incurred operating losses and net losses in each of the past six fiscal years, with the exception of operating income turning slightly positive for the fiscal year ended March 31, 2002. In August 2003, Crosswave Communications Inc., our former equity method investee, filed a voluntary petition for the commencement of corporate reorganization proceedings in Japan, and as a result of our equity method net loss and an impairment loss taken in respect of our investment in Crosswave, our net loss for the fiscal year ended March 31, 2003 was ¥16.5 billion, the highest net loss that we have ever experienced. We also wrote off ¥2.1 billion of loans and accounts receivable outstanding from Crosswave for the fiscal year ended March 31, 2004. We had unaudited operating income of ¥0.2 billion and net income of ¥2.0 billion for the third quarter of the fiscal year ended March 31, 2004 and unaudited operating income of ¥0.3 billion and net income of ¥0.7 billion for the fourth quarter of the fiscal year ended March 31, 2004. Our accumulated deficit as of March 31, 2004 was ¥34.8 billion.

     Operating and net losses may continue into the foreseeable future due to a number of factors, including, but not limited to:

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     Please see Item 5., “Operating and Financial Review and Prospects”, for more detailed information concerning our operations and net losses and other results.

We may not be able to compete effectively, especially against competitors with greater financial, marketing and other resources.

     Our major competitors for the connectivity and value-added services business are major telecommunications carriers like NTT Communications, KDDI, Japan Telecom, PoweredCom and their affiliates. Recently, there has been a significant amount of consolidation in the telecommunications industry in Japan. For example, Softbank Group, an operator of Yahoo! BB, a low-price ADSL service for individual customers, announced that it is planning to buy Japan Telecom, which is one of the largest telecommunications carriers in Japan. This trend may result in increased pressure from corporate customers to reduce our prices, and our revenues in connectivity services may be adversely affected. For the Internet data center services business, our major competitors are the providers like NTT Communications, KDDI, PoweredCom and Japan Telecom. Once we lose customers for such services to another service provider, it is generally difficult to reacquire those customers in the future. For the systems integration business, our major competitors are large hardware vendors like IBM, NEC and Hitachi and systems integrators like NTT Data. Our major competitors have the financial resources to reduce prices in an effort to gain market share. Even though NTT and NTT Communications purchased shares in our company in September 2003, which resulted in the NTT Group becoming our largest shareholder, we plan to continue to operate our company separately and independently from the NTT Group, and will therefore continue to compete with the NTT Group. Our competitors have advantages over us, including, but not limited to:

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

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

     A significant portion of our expected future revenue depends on our ability to maintain our existing customers and acquire new customers for our systems integration business. Our existing systems integration customer base may not be large enough to provide us with a desirable level of dependable revenues, as the addition or cancellation of a single project can result in significant fluctuations in our revenues. Margins with respect to the systems integration business also tend to be more favorable for the provision of additional services to existing customers than for the initial provision of services to new customers. Competition in the systems integration business in Japan has greatly intensified, with competitors expanding their sales forces and offering more attractive products. We may not be able to attract as many new customers as we need to maintain profitable systems integration operations due to factors such as increased competition and weak corporate investments in technology in Japan despite some recent signs of improvement in the Japanese economy. Price competition may also hurt our profitability. If we are unable to maintain our current systems integration customer base and acquire new systems integration customers and contracts or if price competition becomes more severe, our revenues may decline, and the profitability of our systems integration business and our results of operations and financial condition could be materially and adversely affected.

NTT, our largest shareholder, could exercise influence over us.

     NTT and its affiliates currently own 31.6% of our outstanding shares. In September 2003, we entered into a subscription agreement with NTT in which we granted to NTT pre-emptive rights to subscribe to its pro rata portion of any future issuances of shares by us in order to maintain its shareholding percentage. In addition, under this subscription agreement, we have agreed to allow NTT to nominate up to three persons as either directors or statutory auditors, subject to approval by our shareholders at our general shareholders’ meeting. At our general shareholders’ meeting on June 24, 2004, two directors nominated from NTT Group were appointed, one of which was nominated as an executive vice president. As a result, NTT may be able to exercise substantial influence over us. In addition, as part of this subscription agreement, we have agreed to collaborate with NTT in various businesses. While we intend to conduct our day-to-day operations independently of NTT and its group companies and believe that NTT also plans for us to operate independently, NTT may decide to exercise substantial influence over us in a manner which could impair our ability to operate independently. Furthermore, NTT may take actions that are in its best interests, which may not be in the interests of us or our other shareholders.

We have indebtedness and any difficulties we may have in dealing with financial institutions may have a negative impact on our financial condition.

     At March 31, 2004, we had indebtedness of ¥27.5 billion, including ¥11.8 billion of 1.75% convertible notes due in March 2005, and we had ¥12.3 billion in cash and cash equivalent and ¥6.6 billion in available-for-sale securities. We repurchased and cancelled ¥0.7 billion of 1.75% convertible notes in June 2004, and we plan to redeem or may repurchase the remaining ¥11.1 billion of 1.75% convertible notes using our cash and cash equivalent as well as available-for-sale securities. A declining fluctuation in the stock price of such available-for-sale securities may have a negative impact on our ability to repurchase or redeem the notes.

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     The continued operation of our business is dependent on our ability to obtain continuous financing from banks in Japan. Although we currently have good relationships with our banks, due to increasing pressure from the Japanese government and Japanese bank regulatory institutions to improve the quality of their loan portfolios, Japanese banks, including those with which we have traditionally had good relations, may become reluctant to lend us money, or may only do so on less favorable terms. We provided banks with collateral for outstanding loans by means of establishing a second priority pledge against the refundable guarantee of ¥1.7 billion at March 31, 2004.We may be required to offer additional collateral to secure our borrowings. Any reluctance on the part of banks to provide needed financing may have a negative impact on our financial condition.

     To offer Internet-access services and network solutions to our customers, we typically lease important components such as routers, servers, network machines, high-capacity and high-speed digital transmission lines, software and other items needed to perform our operations. Although we currently have good relationships with our leasing companies, if we are unable to lease necessary components, or are only able to do so on less favorable terms, we may be required to purchase the components ourselves, which could negatively impact on our cash flow.

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

     Our network, services, products and technologies are complex, and as a result, we depend heavily on the continued service of our engineering, research and development, and other personnel and, as our business grows, we may need to hire additional engineers, research and development and other personnel. Competition for qualified engineers, research and development personnel and employees in the telecommunications service industry in Japan is intense, and there is a limited number of persons with the necessary knowledge and experience. The realization of any or all of these risks may result in material adverse effects on our business, financial condition and result of operations.

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

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

Our business may be adversely affected if our network suffers interruptions, errors or delays.

     Interruptions, errors or delays with respect to our network may be caused by a number of factors, many of which are beyond our control, including, but not limited to, damage from fire, earthquakes or other natural disasters, power loss, sabotage, computer hackers, human error, computer viruses and other similar events. Much of our computer and networking equipment and the lines that make up our network backbones are concentrated in a few locations that are in earthquake-prone areas. Any disruption, outages, or delays or other difficulties experienced by any of our technological and information systems and networks could result in a decrease in new accounts, loss or exposure of confidential information, reduction in revenues, delay in repayment of outstanding borrowings, costly repairs or upgrades, reputational damage and decreased consumer confidence in our business, any or all of which could have a material adverse effect on our business, financial condition and results of operations.

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The confidential customer information that we keep and manage may be leaked.

     We keep and manage confidential information and trade secrets obtained from our customers. We exercise care in protection the confidentiality of such information and take steps to ensure the security of our network, however, our network, like all Information Technology systems, is vulnerable to external attack from computer viruses, hackers or other such sources. In addition, despite internal controls, misconduct by an employee could result in the improper use or disclosure of confidential information. If any material leak of such information were to occur, we could be subject to lawsuits for damages from our customers, incur expenses associated with repairing or upgrading our security systems and suffer damages to our reputation that could result in a severe decline in new customers as well as an increase in service cancellations. The realization of these or similar risks may have a material adverse effect on our business, financial condition and result of operations.

We rely greatly on other telecommunications providers and other suppliers, and could be affected by disruptions in service or delays in the delivery of their products and services.

     We rely on telecommunications carriers such as NTT Communications, KDDI and Japan Telecom for a significant portion of our network backbone and regional NTT companies and electric power companies and their affiliates for local access lines for our customers. Prior to Crosswave filing a voluntary petition for the commencement of corporate reorganization proceedings in Japan in August 2003, we procured significant portions of our network backbone and data centers from Crosswave under operating lease arrangements. Most of Crosswave’s business operation were transferred to NTT Communications in December 2003. Currently, NTT Communications is our largest provider of network infrastructure. We are subject to potential disruptions in these telecommunications services and, in the event of such disruption, we may have no means of replacing these services, on a timely basis or at all.

     In the Asia-Pacific region, we depend on telecommunications carriers in various countries including less-developed countries whose quality of service may not be stable or who are more susceptible to economic or political instability.

     We also depend on third-party suppliers of hardware components like routers that are used in our network. We acquire certain components from limited sources, typically from Cisco Systems. A failure by one of our suppliers to deliver quality products on a timely basis, or the inability to develop alternative sources if and as required, may delay our ability to expand the capacity and scope of our network.

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

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

     Our markets are characterized by:

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     The introduction of services using new technologies, such as the transition from version four of Internet Protocol, or IP, to version six, and the emergence of new industry standards could render our existing services obsolete.

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

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

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

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

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

     A significant portion of our future revenue depends on systems integration projects which we, in cooperation with IIJ Technology, Net Care and IIJ Media Communications, have been contracted to perform. We may not be able to perform our responsibilities under these contracts to the satisfaction of our customers, or at all, if we lack a sufficient number of qualified engineers, lack sufficient task-management capabilities for software-development vendors or fail to manage customer data adequately. If we do not execute these services/projects as contracted or fail to manage customer data in a professional manner, our receipt of revenues may be delayed or lost altogether and we could be sued by our counterparties, which could in turn have an adverse impact on our reputation, results of operation and financial condition.

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

     The licensing, construction and operation of telecommunications systems and services in Japan are subject to regulation and supervision by the Ministry of Public Management, Home Affairs, Posts and Telecommunications, or MPHPT. We operate pursuant to licenses and approvals that have been granted by the MPHPT.

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

     Existing and future governmental regulation may substantially affect the way in which we conduct business. These regulations may increase the cost of doing business or may restrict the way in which we offer

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products and services. As a result of the amendment in April 2004 of the Telecommunication Business Law and deregulation including elimination of the regulatory distinction between carriers providing telecommunications services through networks owned by other telecommunication carriers and carriers which own or have long-term leases for the networks through which they offer telecommunication services, competition may increase. Furthermore, we cannot predict future regulatory changes which may affect our business. Any changes in laws, such as those described above, or regulations or MPHPT policy affecting our business activities and those of our competitors could adversely affect our financial condition or results of operations. For more information, see Item 4., “Business Overview — Regulation of the Telecommunications Industry in Japan”.

There are risks associated with our international business.

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

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

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

     As part of our business strategy and for the purpose of maintaining various strategic business relations, we have, in the past, invested in a number of companies, including Crosswave. There can be no assurance that we will be able to maintain or enhance the value or performance of such companies in which we have invested or may invest in the future, or that we will achieve the returns or benefits sought from these investments. Our substantial investment in Crosswave, for example, became worthless due to Crosswave’s financial condition and commencement of corporate reorganization proceedings. We also had an impairment loss relating to our investment in Asia Internet Holding for the fiscal year ended March 2004. In addition, telecommunications companies and other technology companies have experienced a variety of negative developments in recent years, including increased competition and significant volatility in share prices, and have experienced financial difficulties. To the extent that these investments are accounted for by the equity-method and to the extent that the investee companies have net losses, our financial results will be adversely affected to the extent of our pro rata portion of these losses. Furthermore, we may lose all or part of our investment in these companies if their value decreases as a result of their financial performance or if these companies go bankrupt.

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     We have invested in affiliated companies, such as IIJ Technology and Net Care, to expand the service offerings available to our customers. If our affiliated companies need additional financing, we may need to provide additional financial support in the form of loans to or additional equity investments in these affiliated companies to enhance or maintain our business synergies with these affiliated companies. We may consider reorganization of IIJ Group companies in the future and it may require additional investments by cash, equity or others.

Fluctuation in stock price of companies in which we have invested may significantly influence our financial condition.

     We have invested in non-affiliated companies in order to further our business relationships with these companies. Other investments on our balance sheet, which includes among other items, investments in these non-affiliated companies, were recorded at a book value of ¥7.9 billion at March 31, 2004, which is relatively large in relation to other items on our balance sheet. We also had a significant positive income tax effect due to increases in unrealized gains from these available-for-sale securities during the fiscal year ended on March 31, 2004. However, the book value can change significantly due to changes in the financial condition of non-affiliated companies, general economic conditions in Japan or fluctuations in the Japanese stock markets. Fluctuations in the stock price of companies in which we have invested will have a significant effect on our financial results. In addition, should we choose to dispose of all or a portion of these shares to fulfill our cash flow needs, it is not certain that we will be able to do so on favorable terms.

We may be named as defendants in litigation, which could have an adverse impact on our business, financial condition and results of operations.

     We are involved in normal claims and other legal proceedings in the ordinary course of our business. We believe that there are no cases currently pending which will have a significant financial impact on us, but we cannot be certain that we will not be named in a future lawsuit. Any judgment against us in such a lawsuit, or in any future legal proceeding, could have an adverse effect on our business, financial condition and results of operations.

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

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

Item 4. Information on the Company

A. History and Development of the Company.

     We are incorporated in Japan as a joint stock corporation under the name of Internet Initiative Japan Inc., or IIJ. We were incorporated in December 1992 and operate under the laws of Japan. We began operations in July 1993, making us one of the first commercial Internet service providers in Japan to offer Internet-access services. In February 1994, we acquired a Type II Telecommunications license, which enables us to operate our own international backbone networks. We became a public company in August 1999 with our initial public offering of ADSs on the Nasdaq National Market, or Nasdaq.

     In October 1998, we established Crosswave Communications Inc. as a joint venture with Sony Corporation and Toyota Motor Corporation with the goal of providing advanced, high-speed, cost-effective,

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end-to-end data communications services to customers in Japan and to take advantage of market growth and demand for broadband data communications networks. Crosswave offered broadband data communication services on Japan’s first nationwide fiber-optic network specifically designed and dedicated to data traffic. ADSs representing Crosswave’s shares of common stock were quoted on Nasdaq from the time of its August 2000 IPO until being removed by Nasdaq on August 29, 2003.

     On August 20, 2003, Crosswave and two of its subsidiaries filed voluntary petitions with the Tokyo District Court for the commencement of corporate reorganization proceedings, which are proceedings to rehabilitate an insolvent company similar in some respects to Chapter 11 bankruptcy proceedings in the United States. As a result, we have written-off our investment in Crosswave and no longer consider Crosswave to be an IIJ Group company. On December 15, 2003, the business operations of Crosswave were transferred to NTT Communications. Due to the transfer, the operation of Crosswave’s network that we relied on for our network was also transferred to NTT Communications and we have contracted with NTT Communications for its continued use.

     On June 26 and September 16, 2003, we completed private placements of a total of 15,880 shares of our common stock to investors in Japan for an aggregate amount of ¥13.3 billion for working capital and repayment of our outstanding 1.75% convertible notes due on March 31, 2005. As a result of these transactions, the total number of our issued shares of common stock increased to 38,360 and shareholding of NTT Group increased to 31.6%. We have also agreed with NTT that it has the right to nominate three persons to serve as either our directors or statutory auditors, subject to shareholder approval of any nomination. In addition, we and NTT agreed to undertake efforts to jointly engage in the development of broadband and Information Technology and other related business, to expand the business relationship between IIJ and NTT in connection with new business opportunities and to discuss secondment of employees to each other.

     Our head office is located at Jinbo-cho Mitsui Bldg., 1-105 Kanda Jinbo-cho, Chiyoda-ku, Tokyo 101-0051, Japan, and our telephone number at that location is (813) 5259-6500. Our agent in the United States is IIJ America Inc., 1211 Avenue of the Americas, Suite 2900, New York, New York 10036 and the telephone number at that location is (212) 440-8080. We have a web site that you may access at http://www.iij.ad.jp/. Information contained on our web site does not constitute part of this annual report on Form 20-F.

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

B. Business Overview.

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

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

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

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

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

     We have created an Internet network that extends throughout Japan. Our backbone is one of the highest capacity Internet backbones in Japan. Our backbone network is formed by leasing lines from telecommunications carriers. As of June 30, 2004, we operated 27 network operation centers, eleven Internet data centers and 17 POPs, the main points at which our customers connect to our backbone, throughout Japan. Our policy on the management of backbone is that we upgrade the bandwidth depending flexibly on the demand and with cost effectiveness. Our backbone network also extends to the United States, with a total capacity of 4.8 Gbps (2 STM-16 trunk lines) and to China, with a capacity of 600 Mbps (STM-4 trunk line) as of June 30, 2004.

     In addition to our network, we currently own 26.7% of Asia Internet Holding, the company that operates the A-Bone network. The A-Bone is an Internet network using leased lines that connects several Asian regions including China, Hong Kong and South Korea. Using our network and engineering expertise pursuant to an agreement with Asia Internet Holding, we operate and manage the A-Bone.

Our total network solutions

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

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

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

Our Internet Access Services

     We offer two categories of Internet-access services: dedicated access services and dial-up access services. Dedicated access services are based on dedicated local-line connections provided by carriers between our backbone and customers. Dial-up access services require customers to connect to our POPs through the public-switched telephone network. The Internet-access part of our total network solutions ranges from cost-effective, entry-level dial-up connections from home personal computers to customized Wide-area network solutions deploying a range of the dedicated and dial-up services listed below to connect headquarters, data centers, branch offices and mobile personnel. Currently, large telecommunications carriers such as regional NTTs and other providers are rapidly increasing the variety of last-mile access with ADSL, fiber optic and ethernet-based lines. Such new lines provide inexpensive high-speed, high-capacity last mile access, and we continue to introduce new variations to our Internet-access service to accommodate such developments.

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

     As of June 30, 2004, we offered the following Internet-access services.

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Our Dedicated Access Services

     Our lineup of dedicated line access services includes: IP Service, IIJ Data Center Connectivity Service, IIJ FiberAccess/F, IIJ T1 Standard, IIJ DSL/F, IIJ ISDN/F and IIJ Economy. The total bandwidth allocated to our dedicated access services has increased approximately 191% to 80.1 Gbps as of March 31, 2004, up from 42.0 Gbps a year earlier.

     IP Service. Our IP Service is a full-scale, high-speed access service that connects a customer’s network to our network and the Internet. This is the core service we offer. As of March 31, 2004, we had 738 customers for our IP Service compared to 663 for our IP Service as of March 31, 2003. The customer chooses the level of service it needs based upon its bandwidth requirements. As of March 31, 2004, we offered service at speeds from 64 kbps to 1.2 Gbps.

     Our IP Service revenues, including revenues of IIJ Data Center Connectivity Service, represented 25.6% of our total revenues for the fiscal year ended March 31, 2004 and 23.4% for the fiscal year ended March 31, 2003. We believe that as businesses continue to develop Internet capabilities, this service will continue to be the foundation of our total network solutions offerings.

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     Subscribers pay a monthly fee for the leased local access line from the customer’s location to one of our POPs. The amount of this fee varies depending on the carrier used and the distance between the customer’s site and our POPs. As the bandwidth that customers subscribe increases, customers use ATM (Asynchronous Transfer Mode) or Ethernet local access line, that supports over 2 Mbps bandwidth. We collect this fee from the customer and pay this amount to the carrier.

     Although fees are charged on a monthly basis, the minimum contract length is one year. For contracts of at least three years, a 10% per month discount is given. Of our IP Service contracts as of the end of March 2004, 3.6% were for at least three years.

     We also offer various IPv6-capable Internet-access services, namely IPv6 Tunnel, IPv6 Native and IPv6/IPv4 Dual Stack Services. In addition to corporate users, IPv6 Tunnel Service has been available to individual users. IPv6 is the next generation Internet Protocol, which allows IPv6 technology to overcome the problems, such as limited IP address availability, of IPv4, the protocol generally used. IPv6 Tunnel Service is a service to enable customers to use IPv6 technology via IPv4 access network, by encapsulating IPv6 data with IPv4 data. IPv6 Native and IPv6/IPv4 Services are services to provide IPv6 environment to customers without encapsulating it with IPv4 data. IPv6 technology enables customers to hook-up a vast range of electronic appliances and equipment, including cellular phones, AV equipment, car navigation devices and home electronics. We are the first commercial ISP in Japan to offer IPv6 service and our management believes that we will reap “first-mover” benefits from our initiative. In an effort to promote the dissemination and use of IPv6, we are not currently charging service fees for IPv6 Tunnel Service.

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

     We guarantee the performance of the following elements under our Service Level Agreements:

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

     Subscribers to our IP Service receive technical support 24 hours a day and seven days a week.

     IIJ Data Center Connectivity Service. We also provide connectivity services with respect to our data centers. Our data center connectivity services are an important part of being able to provide high-quality, high-speed, seamless service to our customers. Our connectivity services are asymmetric, meaning that transmission speeds in both directions are not the same — with the downstream transmission being faster to accommodate greater amounts of information being accessed from the Internet versus being sent to the Internet. The fee structure depends on the transmission capacity required for upstream and downstream transmissions. For downstream transmissions, we offer either 10BASE-T connectivity (10 Mbps) and 100BASE-T Connectivity (100 Mbps). For upstream transmissions, we offer bandwidths from 1 Mbps to 4 Mbps for 10BASE-T connectivity contracts, and 6 Mbps to 48 Mbps for 100BASE-T Connectivity. As of March 31, 2004, we had 196 customers for IIJ Data Center Connectivity Service. In addition to the above, we offer IPv6-capable data center services, which offer the same services using IPv6. As of March 31, 2004, we had 196 Internet data center connectivity contracts, compared with 156 as of March 31, 2003. Total

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contracted bandwidth for Internet data center connectivity service was 15.6 Gbps as of March 31, 2004, up from 9.9 Gbps as of March 31, 2003.

     IIJ FiberAccess/F Service. IIJ Fiber Access/F services is a dedicated Internet-access service that uses “BFLET’S” fiber optic access lines provided by regional NTT companies allowing service at 10 Mbps or 100 Mbps on a best-efforts basis. We began offering this service in August 2001. The service is available in four variations (Business, Basic, Family and Mansion), optimizing each customer’s needs in speed and connection interface. Customers also can choose the number of allocated IP addresses from: 1, 4, 8, 16, 32, 64 and 128. We support this service by providing guarantees of latency rates under Service Level Agreements. As of March 31, 2004, we had 6,292 customers for IIJ FiberAccess/F Service, IIJ T1 Standard, IIJ DSL/F Service, IIJ ISDN/F services and IIJ Economy.

     IIJ T1 Standard. Our IIJ T1 Standard is a connectivity service at 1.5 Mbps that we introduced in October 1999. It is a packaged dedicated line service limited to static routing and allocations of 8 or 16 IP addresses. Last mile access must be through NTT’s Digital Access 1500 or similar services from other carriers.

     IIJ DSL/F Service. IIJ DSL/F Service provides dedicated line Internet connectivity via ADSL with speeds up to 40 Mbps. We began offering this service in May 2001. IIJ DSL/F Service is primarily targeted at small- and medium-sized offices and home offices that have access to ADSL lines provided by regional NTT companies under the name of “FLET’S ADSL”. We support this service by providing guarantees of the maximum average latency between designated POPs under service agreements.

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

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

Our Dial-up Access Services

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

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

     We have expanded access to our network through roaming agreements that are an important part of our dial-up access services. We offer global Internet roaming service in 152 countries with approximately 36,000

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access numbers as of June 30, 2004. Additionally, in the United States and Canada through IIJ America, we have roaming access through a toll-free number for areas where we don’t already have local POPs through roaming agreements or otherwise. We have also expanded our provision of Content Delivery Network Platform, (“IIJ CDN Platform”) on an OEM basis to major broadband service providers, such as Excite Japan.

Our Value-Added Services

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

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

     Our value-added services include:

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Our Internet Data Center Services

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

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

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

Our Systems Integration Services

     We offer systems integration services tailored to our customers’ requirements, which include consulting/project planning, systems design, construction of network systems and systems and operations outsourcing. Our systems integration services mainly focus on Internet business systems and Intranet and Extranet corporate information systems. We have built a strong record in various business fields, including the representative below:

     Examples of systems integration services are:

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

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

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

     In the operation phase, by utilizing data center facilities directly linked to our network, we provide a range of outsourcing services, which take maximum advantage of the Internet system, network operation and management know-how of the IIJ Group companies. Rather than simply looking after the customer’s content, we take care of the customer’s entire computing environment and provide round-the-clock operation and

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management services, as well as custom-designed monitoring systems. These outsourcing services enable customers to free themselves from the burden of operating the network systems, which demands professional operation and maintenance to ensure prompt and flexible responses to unexpected system problems.

     We also provide our customers with basic, easy-order systems integration services, which we refer to as IBPS, a service to provide network resources such as network equipment, data storage systems, network monitoring and systems operation management for monthly rental on demand that allows our customers to launch their internal network system in the securely and cost effectively.

Our Equipment Sales

     In addition to the Internet-access and value-added services and systems integration, we sell our originally developed network equipment, SEIL/neu Series, to connect to the Internet and provide other features.

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

     We also sell third party equipment to meet the one stop needs of our customers.

Network

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

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

     The primary components of our network consist of:

Backbone

Leased lines

     Our network is anchored by our extensive Internet backbone in Japan and between Japan and the United States. As of June 30, 2004, we had a total capacity of 4.8 Gbps between Japan and the United States and 600 Mbps between Japan and China. We use our expertise in developing and operating our network to organize and connect these leased lines to form a backbone that has substantial transmission capacity.

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     We lease high-capacity, high-speed digital transmission lines in Japan from various carriers. The table below shows our international backbone capacity and cost. Average total capacity is calculated by averaging the international capacity at the end of each month.

International Backbone Capacity and Cost

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

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

     In Asia, we have established a backbone connection through the A-Bone, the Internet backbone network covering the Asia-Pacific region. The A-Bone is operated by Asia Internet Holding, of which we own 26.7%. Asia Internet Holding commissioned us to design and build the A-Bone, and we currently manage it.

Network upgrades

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

Network equipment

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

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POPs

     Points of Presence, or POPs, are the main points at which our customers connect to our backbone. We provide Internet-access from our POPs to commercial and residential customers through leased lines and dial-up connections over local exchange facilities. As of June 30, 2004, we had 27 primary POPs which allow for dedicated access and include the main Internet backbone routers that form our network. As of the same date, we also had 18 POPs for dial-up access. The number of POPs for dial-up access include one POP that can be accessed from anywhere in Japan with the minimum local telephone charge. We have introduced this POP in March 2004 to increase customer’s ease of usage of our Internet connectivity services.

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

Internet Data Centers

     We operate at eleven Internet data centers nationwide in Tokyo, Osaka, Sapporo, Sendai, Kawaguchi, Yokohama, Nagoya, Kyoto, Fukuoka and second data centers in Tokyo and in Yokohama which we use to offer our value-added data center services. These data centers are specifically designed for application hosting, co-location services and high capacity access to our networks. All of these data centers are leased from NTT Communications and CRC Solutions Corp.

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

     In addition, we have invested in data center development outside Japan. We have entered into the “i-Heart” joint venture with Samsung Corp., which operates in Korea with a total investment by us of ¥89 million in May 2000.

Network operations center and technical and customer support

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

Our Group Companies

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

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     The table below sets out our group companies, including our subsidiaries and principal equity method investees and our ownership of each of them as of June 30, 2004:

IIJ Technology Inc.

     IIJ Technology Inc. is an important element in our providing total Internet solutions to our customers. IIJ Technology Inc. is incorporated under the laws of Japan. IIJ Technology provides comprehensive network systems integration and consulting services, focusing on design, operation, and consulting for corporate networks (LANs, enterprise networks, Intranets) and their security systems. IIJ Technology assists customers in creating private IP networks, such as Intranets or virtual private networks, that securely isolate internal network traffic from public Internet traffic and provide each site on the private IP network access to other sites as well as to the Internet. IIJ Technology can integrate an organization’s multiple sites in different locations in Japan.

     On April 27, 2004, IIJ Technology completed a private placement of 10,000 shares of common stock to us and other shareholders for an approximate aggregate amount of ¥1,000 million. We accepted ¥850 million of the total amount. On June 30, 2004, 430 shares of 8,500 shares that we accepted were transferred to an employee stock holding association of IIJ Technology. As a result of those transactions, our shareholding in IIJ Technology became 67.9%.

     IIJ Technology had sales of approximately ¥12,964 million for the fiscal year ended March 31, 2004. As of March 31, 2004, IIJ Technology had 163 full-time employees, and 28 were seconded from us.

IIJ Media Communications Inc.

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

     IIJ Media Communications also provides total support for customers’ content and systems, particularly those customers who engage in e-commerce related activities. IIJ Media Communications provides consultation, planning, configuration (including selection of hardware and choices of applications), content production and ongoing support for its customers. Other basic media services offered by IIJ Media Communications include information management services related to the Internet. IIJ Media Communications also offers servers to manage mailing lists and provide simultaneous distribution services.

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     As of June 30, 2004, we own 60.1% of IIJ Media Communications.

     IIJ Media Communications had sales of approximately ¥843 million for the fiscal year ended March 31, 2004. As of March 31, 2004, IIJ Media Communications had 33 full-time employees, 33 of whom were seconded from us.

Net Care, Inc.

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

     As of June 30, 2004, we own 52.5% of Net Care.

     Net Care had sales of approximately ¥2,066 million for the fiscal year ended March 31, 2004. As of March 31, 2004, Net Care had 224 employees, and 12 were seconded from us.

IIJ America Inc.

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

     As of June 30, 2004, we own 91.3% of IIJ America and IIJ Technology own 8.7%.

     IIJ America had revenues of $10,399 thousand for the fiscal year ended December 31, 2003. As of March 31, 2004, IIJ America had 13 employees, 5 of whom were seconded from us.

Asia Internet Holding Co., Ltd.

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

     Currently, the A-Bone ties into networks in Japan and several regions including China, Hong Kong and South Korea. Asia Internet Holding has network operations centers in each of these countries. The A-Bone also connects to the United States through our network. The primary customers of Asia Internet Holding are telecom carriers and ISPs throughout Asia including Japan.

     As of June 30, 2004, we own 26.7% of Asia Internet Holding. We operate and manage the A-Bone pursuant to an agreement with Asia Internet Holding. The amount of payment from Asia Internet Holding to IIJ for the operation and management is ¥6 million per month, with the renewed agreement dated July 1, 2004.

     Asia Internet Holding had sales of approximately ¥1,354 million for the fiscal year ended March 31, 2004. As of March 31, 2004, Asia Internet Holding had 13 employees, 2 of whom were seconded from us and three of whom worked part time.

Internet Multifeed Co.

     Internet Multifeed Co. provides the location and facilities for directly connecting high-speed Internet backbones with content servers to make distribution on the Internet more efficient. Internet Multifeed is incorporated under the laws of Japan. We developed their technology jointly with NTT Group. Internet

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Multifeed launched new IX (Internet eXchange — where major ISPs exchange network traffic) services named JPNAP in Tokyo in May 2001 and expanded the service to Osaka in December 2001.

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

     As of June 30, 2004, we own 26% of Internet Multifeed and IIJ Technology and IIJ Media Communications each own 2%. Internet Multifeed had sales of approximately ¥1,746 million for the fiscal year ended March 31, 2004. As of March 2004, Internet Multifeed had 19 full-time employees, and four employees were seconded from us.

atom Co., Ltd.

     atom Co., Ltd., which is incorporated under the laws of Japan, is primarily a web page design company that aims to define new forms of design work using digital technology in all network-based aspects of design from content production to graphic design.

     As of June 30, 2004, we own 40% of atom, which had sales of approximately ¥672 million for the fiscal year ended March 31, 2004. As of March 31, 2004, atom had 61 employees, one of whom was seconded from us.

Capital Expenditures

     The table below shows our capital expenditures, which we define as amounts paid for purchases of property and equipment plus acquisition of assets by entering into capital leases, for the last three years.

     Our future capital expenditures are difficult to predict given the rapid changes and uncertainties in our business. Most of our capital expenditures relate to the expansion and improvement of our existing network, including the leasing of lines that form our network backbone and the installation of the routers and servers necessary to offer services on our network. Our current plans call for us to make capital expenditures, including acquisition of assets by entering into capital leases, of approximately ¥3.0 to ¥5.0 billion in each of the next few years to increase the access to our networks to maintain the current network quality. In addition, we will continue to add equipment to our network as we expand the capacity of our network.

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

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Seasonality

     See Item 5.D., “Trend Information — Factors Affecting Our Future Financial Results — Systems integration revenues including related equipment sales revenues — Seasonality.”

Sales and Marketing

     Our sales headquarters are in Tokyo. We also have branches in Osaka, Nagoya, Sapporo, Sendai, Toyota, Toyama, Hiroshima, Fukuoka and Okinawa in order to cover the major metropolitan areas in which the majority of large Japanese companies operate. As of March 31, 2004, we had approximately 210 people working in sales and marketing.

     We organize our sales personnel into seven distinct, separate divisions: five Sales Divisions, New Business Development Division and Marketing Division.

     Sales Divisions consists the five following Divisions:

     Our New Business Development Division focuses on new business development or partnerships with other service providers. Our Marketing Division has two sections: Strategic Sales and Promotion & Research. Strategic Sales is responsible for the planning and management on the sales figures, processes and other information. Promotion & Research promotes marketing communications through advertisement activities as well as organizes conferences and seminars given for targeted customers in order to enhance awareness of our total network solutions.

Customers

     We have approximately 6,000 business and other institutional customers and approximately 696,000 individual subscribers, which includes individuals through OEM services, as of March 31, 2004. Our main customers continue to be major corporations including ISPs. We were awarded the “best service provider” title in a major annual survey conducted by Nikkei Communications, a leading telecom industry trade magazine, for two consecutive years of 2001 and 2002 (The survey was not conducted in 2003). According to the survey in 2002, which included responses from 856 Japanese companies, we were ranked number one in qualifying categories of broadband services, dedicated access services and dial-up access services.

Research and Development

     We have always focused on advancing the use of networking technologies, including the Internet in Japan. Many of our engineers regularly participate in industry organizations and government-sponsored research projects such as researching new Internet protocol standards, namely Internet Protocol Version 6 (IPv6). These engineers have continued to develop innovative services, applications and products, many of which have set the standard for the Internet industry in Japan. In addition to our efforts to develop innovative

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services, we have engaged in the research and development of new basic technology by establishing IIJ Research Laboratory since 1998.

     Our research and development expenses averaged less than 1.0% of total revenues for the past two consecutive years. For the fiscal years ended March 31, 2004, 2003 and 2002, our research and development expenses were ¥358 million, ¥414 million and ¥319 million, respectively, most of which was personnel expense. The level of research and development expenditures is low in relation to our total costs primarily because we do not engage in extensive research and development of new technologies and products that require large investments. Rather, as noted above and as set forth in more detail below, we are intensively engaged in daily research and development activities. We focus on monitoring the developments in the industry and in developing new and innovative services and applications by using and modifying existing technologies and products.

     As of March 31, 2004, we had approximately 54 people working in our research and development organization, including the staff in IIJ Research Laboratory, all of whom also have additional responsibilities in the Business Development Department and the Development Department. Our research and development staff works very closely with our sales and marketing personnel and technical engineers to ensure that our research and development efforts are closely aligned with the demands of our customers.

Research and Development Organization

     We have organized our research and development staff to promptly and effectively address the rapidly changing technological environment in the Internet. Research and development on practical applications of new and developing technologies is the responsibility of the IIJ Research Laboratory, the Development Department and the Product Development Division in Business Development Department.

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

     Development Department. As of March 31, 2004, the Development Department comprised the following divisions:

     Product Development Division. The Product Development Division designs network-related products, such as network monitoring devices and routers.

     In April 2004, we reorganized the Development Department and the Business Development Department into the Technology Department, aiming to establish a more efficient service development structure.

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Research and Development Strategy

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

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

Proprietary Rights

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

Licenses

     We have acquired a license from Check Point Software Technologies that allows us to provide managed firewall services for high-end users using Check Point’s Firewall-1 and Provider-1 products. Since June 1999, we are also a licensee under an agreement with WatchGuard Technologies, Inc. for the right to use WatchGuard’s managed firewall service products that provide the ability to manage, update and configure firewalls remotely. We have acquired a license from Trend Micro Incorporated that will allow us to add the option of virus scanning to our e-mail hosting and e-mail services. We are also a licensee under an agreement with RSA Security Inc. that enables us to provide advanced secure remote access service to our customers. Additionally, we are a licensee under an agreement with NRI Secure Technologies, Ltd. which enables us to provide service to investigate and identify any security problems in our customers’ networks.

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Trademarks

     We have applied for trademark registrations of our corporate name, “Internet Initiative Japan Inc.” and certain other corporate and product names in Japan, the United States and certain European countries. As of June 30, 2004, there were no applications pending and 28 which have been granted.

Legal Proceedings

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

     In December 2001, a class action complaint alleging violations of the federal securities laws was filed against us in the United States District Court for the Southern District of New York, naming as defendants IIJ; Koichi Suzuki, our President, Chief Executive Officer and Representative Director; Yasuhiro Nishi, our former Director, Chief Financial Officer and Chief Accounting Officer; and the Goldman Sachs Group Inc. and Morgan Stanley Dean Witter, Inc., both of which served as underwriters of our initial public offering. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998, and all such actions have been included in a single coordinated proceeding in the Southern District of New York. An amended complaint was filed on April 24, 2002. The amended complaint alleges, among other things, that the underwriters of our initial public offering (i) entered into certain alleged compensation arrangements with the underwriters’ clients, such as undisclosed commissions or tie-in agreements to purchase stock in the after-market, and (ii) engaged in manipulative practices to artificially inflate the price of our stock in the after-market subsequent to the initial public offering. The IIJ defendants are named in the amended complaint pursuant to Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, on the basis of an alleged failure to disclose the underwriters’ alleged misconduct. The complaint seeks unspecified damages. On July 15, 2002, we joined in an ‘omnibus’ motion to dismiss the amended complaint filed by the issuers and individuals named in the various coordinated cases. In June 2003, we approved a settlement with the plaintiffs in this matter. In June 2004, we along with the plaintiffs, the insurers, and virtually all of the other solvent issuer companies in the coordinate cases, executed an agreement of settlement, which has been submitted to the United States District Court for the Southern District of New York for preliminary approval. The settlement releases us and the individual defendants for liability for the conduct alleged in the action. Under the settlement, we agreed to assign away, not assert, or release certain potential claims we may have against our underwriters. As to financial impact on us, the settlement provides that the class members will be guaranteed $1 billion dollars in recoveries by the insurers of the issuers. In addition to IIJ’s portion of the proposed settlement, some of the continuing legal expenses incurred in connection with the partial settlement would be borne by our insurer based on the settlement agreement and an individual agreement between us and our insurer. Consequently, we believe that there will be no significant financial impact on us as a result of this matter.

Regulation of the Telecommunications Industry in Japan

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

The Telecommunications Business Law

     The Telecommunications Business Law was considerably amended in July 2003. The amendments to the Telecommunications Business Law, which came into force on April 1, 2004, include, among other things:

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     The Prior Telecommunications Business Law stipulated that the Carriers shall be classified as either Type I Carrier or Type II Carrier, and imposed regulations in accordance with such classification of Carriers. Prior Type I Carriers, such as NTT East, NTT West, provided telecommunications services by establishing their own telecommunications circuit facilities. Prior Type II Carriers, including us, engaged in the businesses of telecommunications circuit resale and the provision of Internet services by using the telecommunications facilities of Type I Carriers.

     However, from the viewpoint of encouraging telecommunications carriers to carry out diverse business, etc, the Telecommunications Business Law was amended so as to abolish the classification of Type I Carriers and Type II Carriers, and thereupon the rules pertaining to services (i.e., start-up, abolition, charges and tariffs, etc.) were deregulated in principle while establishing rules to protect the users, and the rules pertaining to infrastructure were reviewed as necessary while maintaining the basic framework stipulated under the prior Telecommunications Business Law. For example, (i)the approval system for business entries and withdrawals was replaced by a registration/notification system, (ii)regulations pertaining to service offerings, tariff setting and interconnection between carriers were liberalized, (iii)regulations to protect service users such as announcement of withdrawal, explanation of important matters on services and swift processing of complaints were introduced, and (iv)an authorization system allowing priority usage of public utilities conducive to facilitation of circuit facilities deployment was introduced.

     The following table summarizes changes by the amendment above in some of the major regulatory requirements applicable to telecommunications carriers:

(Before Amendment)

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(After Amendment)

     Before the amendments to the Telecommunications Business Law, we were classified as a Special Type II Carrier. After the amendments, we are deemed by the effect of Supplementary Provisions to the amended Telecommunications Business Law to have filed the notification to MPHPT under the amended Telecommunications Business Law. In practice, we filed an actual notification to MPHPT in April 2004 according to the request of MPHPT.

Regulations of telecommunications carriers

     The following regulations apply to telecommunications carriers defined in the Telecommunication Business Law.

     Start-up of Services

     Charges and Tariffs

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     Articles of Interconnection Agreements

     Telecommunications Facilities of Carriers.

     Order to Improve Business Activities

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     Right of Way Privilege for Authorized Carriers

     Merger, Business Transfer or Divestiture of Carriers

     Business Suspension, Abolition or Dissolution of Carriers

     Foreign Capital Participation

     The information required by this item is in “ — Our Group Companies” above.

     The information required by this item is in “ — Network”, “ — Backbone”, “ — POPs”, and “ — Internet Data Centers” above.

Item 5. Operating and Financial Review and Prospects.

     You should read the following discussion of our financial condition and results of operations together with Item 3.A. of this annual report on Form 20-F and our consolidated financial statements and the notes to those financial statements beginning on page F-1 of this annual report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors including but not limited to those in Item 3.D. of this annual report on Form 20-F.

Overview

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

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

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

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

     Revenues were ¥39.9 billion, ¥44.0 billion and ¥38.8 billion for the fiscal years ended March 31, 2002, 2003 and 2004, respectively. In recent years, revenues from connectivity and value-added services have been stable overall, but revenues can fluctuate significantly based on the results of the systems integration business and equipment sales. The decrease in revenues for the year ended March 31, 2004 as compared to the previous fiscal year largely reflects the decline in systems integration service and equipment sales revenues in the first half of the fiscal year ended March 2004, which were adversely affected by weak corporate investment in Japan and influence of Crosswave’s commencement of corporate reorganization proceedings in that period, though revenue has increased, especially in the systems integration business, in the second half of the fiscal year ended March 2004. Systems integration revenues are typically stronger in the second half of the fiscal year.

     Operating losses in the fiscal year ended March 2004 was ¥1.4 billion, an improvement from an operating loss of ¥1.7 billion in the fiscal year ended March 2003. As a result of the increase in revenue in the systems integration business and the decrease in total costs and expenses, operating income for the fiscal year ended March 31, 2002 was ¥54 million. Operating income has started to show signs of improvement in the second half of the fiscal year ended March 31, 2004. We had unaudited operating loss of ¥12.1 billion for the first quarter and ¥0.8 billion for the second quarter and unaudited operating income of ¥0.2 billion for the third quarter and ¥0.3 billion for the fourth quarter of the fiscal year ended March 31, 2004. Positive operating income in the third quarter and the fourth quarter were not sufficient to cover the first half of the fiscal year’s operating loss.

     Net loss in the fiscal year ended March 2004 was ¥105 million, a significant improvement from ¥16,477 million in the fiscal year ended March 2003, and ¥7.4 billion for the year ended March 31, 2002 when net loss was negatively impacted by losses associated with our investment in Crosswave. In addition to the improvement in operating income for the second half of the year ended March 31, 2004, the improvement reflected a special gain from the sale of an equity investment and income tax benefits associated with increased unrealized gains from certain available-for-sale securities.

     On June 26 and September 16, 2003, we completed private placements of a total of 15,880 shares of our common stock to investors in Japan for an aggregate amount of ¥13.3 billion for working capital and repayment of our outstanding 1.75% convertible notes due on March 31, 2005. As a result of these transactions, the total number of our issued shares of common stock increased to 38,360 and NTT Group

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shareholding increased to 31.6%. We plan to redeem or repurchase the remaining ¥11.1 billion of 1.75% convertible notes due on March 31, 2005 using our cash and cash equivalent as well as available-for-sale securities.

     In order to provide our customers with total network solutions, we provide our services directly or by working together with the subsidiaries and affiliates of the IIJ Group. We refer to our subsidiaries and certain affiliates as our group companies, and we have invested heavily in and exercise significant influence over these companies. We have consolidated four of our group companies — IIJ Technology, IIJ Media Communications, IIJ America and Net Care. We account for our non-consolidated group companies by the equity method.

     We accounted for Crosswave under the equity method for the fiscal years ended March 31, 2002 and 2003. As a result of Crosswave’s financial condition, we recognized an impairment loss for the full value of our investment in Crosswave at March 31, 2003. As a result of Crosswave’s commencement of corporate reorganization proceedings in August 2003, we wrote off ¥1.7 billion of outstanding loans extended to Crosswave and ¥0.4 billion of accounts receivable owed to us by Crosswave in the fiscal year ended March 31, 2004 and no longer account for Crosswave under the equity method. For the fiscal year ended March 31, 2003, we have written off our equity method investment as well as a ¥5.0 billion security deposit advanced to four Japanese commercial banks on behalf of Crosswave in connection with financing provided by these banks to Crosswave. In December 2003, Crosswave transferred its business operations to NTT Communications.

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

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     Results of Operations

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

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