TOKYO -- Internet Initiative Japan Inc. (Nasdaq:IIJIE) ("IIJ"), one of Japan's leading Internet access and comprehensive network solutions providers, today announced its financial results for the 2nd quarter of the fiscal year ending March 31, 2004 ("Fiscal Year 2003").

Revenues totaled JPY 9,185 million ($ 82.4 million), an increase of 10.1% from JPY 8,344 million in 1Q03, though a decrease of 13.1% compared to 2Q02. The increase from 1Q03 is mainly due to revenue increases from Systems Integration ("SI"), Data Center and other value-added services.

Operating loss was JPY 830 million ($ 7.4 million), a decrease from 1,206 million in 1Q03 and an increase from JPY 194 million in 2Q02. The loss includes accounts receivable write-offs of JPY 287 million that related to transactions with Crosswave Communications Inc. ("Crosswave"), a former equity method affiliate of IIJ. The improvement in operating loss from 1Q03 was mainly due to increased SI profitability and a reduction of domestic backbone costs.

Adjusted EBITDA(2)was JPY 126 million ($ 1.1 million), an increase from the JPY 243 million adjusted EBITDA loss in 1Q03, though a decrease from JPY 662 million in 2Q02.

On August 20, Crosswave filed a voluntary petition for the commencement of corporate reorganization proceedings in Japan. IIJ has written-off all of its investments in, deposits for, loans to and accounts receivable due from Crosswave regarding the above through the end of this quarter. As a result of Crosswave no longer being accounted for under the equity method, the net loss decreased from JPY 2,326 million in 2Q02 to JPY 278 million in 2Q03. IIJ will not have further equity loss from Crosswave, which in the past had a significant negative impact on IIJ's financial statements.

IIJ completed an approximately JPY 12 billion private placement to NTT Group, Itochu Corporation, Sumitomo Corporation and three other companies on September 17, 2003. With this capital injection, the financial impact due to Crosswave's reorganization proceedings has been offset. As a result, IIJ's shareholders' equity has become positive.

IIJ received notice from Nasdaq that IIJ's American Depositary Shares will continue to be listed on the Nasdaq National Market, subject to requirements that IIJ file its annual report on Form 20-F for the fiscal year ending March 31, 2004 with the U.S. Securities and Exchange Commission and Nasdaq on or before September 30, 2004, and the IIJ demonstrate compliance with all requirements for continued listing on the Nasdaq National Market throughout this period. The fifth character "E" will remain appended to IIJ's trading symbol pending confirmation that IIJ has evidenced full compliance with Nasdaq's filling requirement and all other requirements for continued listing on the Nasdaq Stock Market.

Outlook:
By improving gross-margins and expanding SI service revenues, IIJ expects to reach a break-even level of operating income in 3Q03 and to achieve positive operating income in 4Q03. In addition, IIJ expects an additional one-time increase in "other income" of approximately JPY 1.6 billion in 3Q03 from the sales of our shares of DLJdirectSFG Securities Inc. and approximately JPY 120 million by repurchasing and canceling a portion of IIJ's convertible notes that are due in 2005.

Financial Results and Business Outlook
"As Japan's economy is beginning to show indications that it is in a recovery phase, there seems to be an environment where Japanese corporate customers are considering investing in their networks," said Koichi Suzuki, President and CEO of IIJ. "With the rapid changes in corporate networks, as expansion of broadband and increasing complexity, Japanese corporate customers are focusing more on in-house networks including the gateway to Internet. For example, Japanese companies are starting to use the latest network technology to connect branch offices or other sites at higher speeds with lower cost, increasing security on Internet traffic and outsourcing the operations of network equipment and servers. We are currently changing our SI development and business to meet those demands rapidly. We call this "Network Integration". Our strategy in the coming quarters is to seek new source of revenue by cross-selling these new solutions to meet the requirements of our current connectivity customers".

Koichi Suzuki continued, "On September 17, we completed the private placement to third parties to improve our capital structure, and NTT Group became our largest shareholder holding 31.6%. While we will retain our operating independence even after the private placement, we are going to have a collaborative relationship with NTT in the technological development and sales partnership".

"In 2Q03, revenues recovered compared to 1Q03, mainly driven by sales of SI, Data Center Services and other value-added services", said Yasuhiro Nishi, CFO of IIJ. "We have succeeded in acquiring new customers for network integration services, and the revenue from these cases will be accounted for in 3Q03. By continuing to expand in the higher-margin SI area and cross-selling to customers as well as reducing costs, we will keep on track for a recovery in profitability and hopefully achieve positive operating income in the second half of the year".

Yasuhiro Nishi also stated, "As for Crosswave's commencement of reorganization proceedings, we have written off all investments in, deposits for, loans to and accounts receivable due from Crosswave regarding the above through this quarter. We believe that the private placement on September 17 will cover the financial impact of Crosswave's reorganization, and we will not have further equity losses from Crosswave, which in the past had a significant negative impact on IIJ's financial statements".

Internet Initiative Japan Inc. (IIJ)