##### Table of Contents



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

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

OR

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|   
|   
|   
|   
|    |  | For the fiscal year ended March 31, 2001                                            

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number: 0-30868

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

|                                                |  |                                         
|----------------------------------------------- |  | ----------------------------------------
|                                                |  | Crest Yasuda Bldg                       
|                                                |  | 3-21, Kanda Nishiki-cho                 
|                                               
|                                               
|                                               
|                                               
|Japan                                           |  | Chiyoda-ku, Tokyo 101-0054 Japan        
|                                               
|                                               
|                                               
|                                               
|(Jurisdiction of incorporation or organization) |  | (Address of principal executive offices)

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

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

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


(1) Common Stock, par value ¥50,000 per share*
(2) American Depositary Shares (ADSs), each of which represents 1/200th of a share
(Title of Class)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.None
(Title of Class)

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

As of March 31, 2001, 501,960 shares of common stock were outstanding,
comprised of 415,000 shares and 17,392,000 ADSs (equivalent to 86,960 shares).

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

|        |  |    |  |      |  | 
|------- |  | -- |  | ---- |  | 
|Yes [X] |  | No |  | [  ] |  | 

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

|             |  |         |  |    
|------------ |  | ------- |  | ---
|Item 17 [  ] |  | Item 18 |  | [X]

___________

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



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TABLE OF CONTENTS



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



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TABLE OF CONTENTS

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| |      |  |  |        |  |         | Forward-Looking Statements                                                   |  |  | 3    | 
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| |      |  |  | PART I |  |         |                                                                              | 
| | Item |  |  | 1      |  |         | Identity of Directors, Senior Management and Advisors                        |  |  | 4    | 
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| | Item |  |  | 2      |  |         | Offer Statistics and Expected Timetable                                      |  |  | 4    | 
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| | Item |  |  | 3      |  |         | Key Information                                                              |  |  | 4    | 
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| | Item |  |  | 4      |  |         | Information on the Company                                                   |  |  | 16   | 
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| | Item |  |  | 5      |  |         | Operating and Financial Review and Prospects                                 |  |  | 35   | 
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| | Item |  |  | 6      |  |         | Directors, Senior Management and Employees                                   |  |  | 41   | 
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| | Item |  |  | 7      |  |         | Major Shareholders and Related Party Transactions                            |  |  | 45   | 
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| | Item |  |  | 8      |  |         | Financial Information                                                        |  |  | 47   | 
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| | Item |  |  | 9      |  |         | The Offer and Listing                                                        |  |  | 47   | 
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| | Item |  |  | 10     |  |         | Additional Information                                                       |  |  | 48   | 
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| | Item |  |  | 11     |  |         | Quantitative and Qualitative Disclosures about Market Risk                   |  |  | 58   | 
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| | Item |  |  | 12     |  |         | Description of Securities Other than Equity Securities                       |  |  | 59   | 
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| |      |  |  |        |  | PART II |                                                                              |  |  |     
|
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| | Item |  |  | 13     |  |         | Defaults, Dividend Arrearages and Delinquencies                              |  |  | 59   | 
|
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| | Item |  |  | 14     |  |         | Material
Modifications to the Rights of Security Holders and Use of Proceeds |  |  | 59   | 
|
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| | Item |  |  | 15     |  |         | [Reserved]                                                                   |  |  | 60   | 
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| | Item |  |  | 16     |  |         | [Reserved]                                                                   |  |  | 60   | 
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| |      |  |  |        |  | PART IV |                                                                              |  |  |     
|
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| | Item |  |  | 17     |  |         | Financial Statements                                                         |  |  | 60   | 
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| | Item |  |  | 18     |  |         | Financial Statements                                                         |  |  | 60   | 
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| | Item |  |  | 19     |  |         | Exhibits                                                                     |  |  | 60   | 

2



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##### Table of Contents






Forward-looking Statement

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

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



| |  |  | that we are making large investments in data communications
infrastructure, but if we are unable to attract a high
volume of data traffic we will not realize a return on our
investment,                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | that we incurred significant losses in our last fiscal year and expect to incur
substantially larger losses in the future,                                                                                                                            
|
| |  |  | that we will need additional capital to further develop our
network and if we are unable to obtain it we may not be
able to complete our network development plans as scheduled
or we may be forced to modify or abandon some or all of our
plans, and
|
| |  |  | that if we incur substantial additional debt to finance our
business, we may be restricted in various ways that would
limit our operations or growth.                                                                                                 

3



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##### Table of Contents






PART I




Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.




Item 2. Offer Statistics and Expected Timetable

Not applicable.




Item 3. Key Information

A. Selected Financial Data

The selected consolidated financial data set forth below should be read
in conjunction with our consolidated financial statements and the notes thereto
beginning on page F-1 in response to Item 8. and Item 18. and Operating and
Financial Review and Prospects included as Item 5. The statement of operations
data below for the period from October 28, 1998 (date of inception) through
March 31, 1999 and for the fiscal years ended March 31, 2000 and 2001 and the
consolidated balance sheet data as of March 31, 1999, 2000 and 2001 are derived
from our audited consolidated financial statements, which have been prepared in
accordance with U.S. GAAP and audited by Asahi & Co., a member firm of Andersen
Worldwide SC, independent public accountants. The historical results are not
necessarily indicative of results to be expected for any future period. See Item
5. Operating and Financial Review and Prospects.

4



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|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |         | 
|---------------------------------------------------- | ----------------------------------- | ---------------------------------- | --------- | --------------------------------------------- | ------ | ---------- | ---------- | --------- | --------- | --------- | ----------- | --------- | ---------- | - | ------- | ------ | ------- | 
|                                                     |                                     |                                    |           | October                                       |        |            |            |           |           | Year      |             | Year     
|                                                     |                                     |                                    |           | 28, 1998 to                                   |        | Year ended |            | ended     |           | ended    
|                                                     |                                     |                                    |           | March 31,                                     |        | March 31,  |            | March 31, |           | March 31,
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |          
|                                                     |                                     |                                    |           | 1999                                          |        | 2000       |            | 2001      |           | 2001     
|                                                     |                                     |                                    |           | (in thousands, except per share and ADS data)
|Consolidated Statements of
Operations Data:          |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|Revenues:                                            |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Data communication services         |                                    | ¥         |                                              |        |            | ¥          | 231,786   |           |           | ¥           | 2,628,655 |            |   | ¥       | 20,939 |        
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |        
|Operating costs and expenses:                        |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cost of data communication services |                                    |           |                                              |        |            |            | 6,098,725 |           |           |             | 9,513,127 |            |   |         | 75,778 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Depreciation and amortization       |                                    |           | 405                                           |        |            |            | 841,648   |           |           |             | 2,306,980 |            |   |         | 18,376 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Sales and marketing                 |                                    |           |                                              |        |            |            | 431,019   |           |           |             | 632,983   |            |   |         | 5,042  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | General and administrative          |                                    |           | 82,097                                        |        |            |            | 520,311   |           |           |             | 1,138,943 |            |   |         | 9,073  |        
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |        
|                                                     |                                     | Total operating costs and
expenses |           |                                               | 82,502 |            |            |           | 7,891,703 |           |             |           | 13,592,033 |   |         |        | 108,269 | 
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |        
|Operating loss                                       |                                     |                                    | (82,502   | )                                             |        |            | (7,659,917 | )         |           |           | (10,963,378 | )         |            |   | (87,330 | )     
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |        
|Other income (expenses):                             |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest expense, net               |                                    |           | (22                                           | )      |            |            | (195,852  | )         |           |             | (280,835  | )          |   |         | (2,237 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Foreign exchange gain               |                                    |           |                                              |        |            |            | 10,121    |           |           |             | 553,001   |            |   |         | 4,405  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other, net                          |                                    |           | (812                                          | )      |            |            | (3,646    | )         |           |             | (170,931  | )          |   |         | (1,361 | )      
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |        
|Loss before minority interests and
income taxes      |                                     |                                    | (83,336   | )                                             |        |            | (7,849,294 | )         |           |           | (10,862,143 | )         |            |   | (86,523 | )     
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |       
|Minority interests in consolidated
subsidiaries      |                                     |                                    |          |                                               |        |            |           |           |           |           | 15,302      |           |            |   | 122     |       
|                                                    
|                                                    
|                                                    
|                                                    
|Income taxes                                         |                                     |                                    |          |                                               |        |            |           |           |           |           |            |           |            |   |        |       
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |        
|Net loss                                             |                                     | ¥                                  | (83,336   | )                                             |        | ¥          | (7,849,294 | )         |           | ¥         | (10,846,841 | )         |            | ¥ | (86,401 | )     
|                                                     |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |        |        
|Per Share and ADS Data:                              |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss per share:                                  |                                     | ¥                                  | (8,569    | )                                             |        | ¥          | (46,643    | )         |           | ¥         | (23,308     | )         |            | ¥ | (186    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss per ADS:                                    |                                     |                                    | (43       | )                                             |        |            | (233       | )         |           |           | (117        | )         |            |   | (1      | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Weighted average number of common
shares outstanding |                                     |                                    | 9,725     |                                               |        |            | 168,285    |           |           |           | 465,366     |           |            |   | 465,366 |       
|                                                    
|                                                    
|                                                    
|                                                    
|Consolidated Balance Sheets Data:                    |                                     |                                    |           |                                               |        |            |            |           |           |           |             |           |            |   |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents                            |                                     | ¥                                  | 5,071,739 |                                               |        | ¥          | 12,239,362 |           |           | ¥         | 24,039,851  |           |            | ¥ | 191,492 |       
|                                                    
|                                                    
|                                                    
|                                                    
|Property and equipment, net                          |                                     |                                    | 1,526,578 |                                               |        |            | 15,005,373 |           |           |           | 31,368,009  |           |            |   | 249,864 |       
|                                                    
|                                                    
|                                                    
|                                                    
|Total assets                                         |                                     |                                    | 6,712,114 |                                               |        |            | 28,091,481 |           |           |           | 59,202,442  |           |            |   | 471,582 |       
|                                                    
|                                                    
|                                                    
|                                                    
|Capital lease obligations, including
current portion |                                     |                                    | 3,067     |                                               |        |            | 11,454,500 |           |           |           | 11,167,123  |           |            |   | 88,953  |       
|                                                    
|                                                    
|                                                    
|                                                    
|Total liabilities                                    |                                     |                                    | 441,516   |                                               |        |            | 16,169,315 |           |           |           | 29,084,420  |           |            |   | 231,675 |       
|                                                    
|                                                    
|                                                    
|                                                    
|Shareholders equity                                 |                                     |                                    | 6,270,598 |                                               |        |            | 11,922,166 |           |           |           | 30,033,482  |           |            |   | 239,234 |       

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|                                |                      |           |                                               |   |            |   |            |            |           |  |      |            |            |   |   |         |         |   |  |  | 
|------------------------------- | -------------------- | --------- | --------------------------------------------- | - | ---------- | - | ---------- | ---------- | --------- |  | ---- | ---------- | ---------- | - | - | ------- | ------- | - |  |  | 
|                                |                      |           | October                                       |   |            |   |            |            | Year      |  | Year |            |            |   |  
|                                |                      |           | 28, 1998 to                                   |   | Year ended |   | ended      |            | ended     |  |      |            |           
|                                |                      |           | March 31,                                     |   | March 31,  |   | March 31,  |            | March 31, |  |      |            |           
|                                |                      |           |                                               |   |            |   |            |            |           |  |      |            |           
|                                |                      |           | 1999                                          |   | 2000       |   | 2001       |            | 2001      |  |      |            |           
|                                |                      |           | (in thousands, except per share and ADS data) |   |            |   |           
|Other Data:                     |                      |           |                                               |   |            |   |            |            |           |  |      |            |            |   |   |         |        
|                               
|                               
|                               
|                               
|Adjusted EBITDA(1)              | ¥                    | (82,097   | )                                             |   |            | ¥ | (6,818,269 | )          |           |  | ¥    | (8,656,398 | )          |   | ¥ | (68,954 | )      
|                               
|                               
|                               
|                               
|Capital expenditures(2)         |                      | 1,191,014 |                                               |   |            |   | 13,413,510 |            |           |  |      | 16,159,932 |            |   |   | 128,723 |        
|                               
|                               
|                               
|                               
|Net cash provided by (used in): |                      |           |                                               |   |            |   |            |            |           |  |      |            |            |   |   |         |         |   |  | 
|                               
|                               
|                               
|                               
|Operating activities            |                      | (53,111   | )                                             |   |            |   | (3,983,211 | )          |           |  |      | (8,533,824 | )          |   |   | (67,977 | )      
|                               
|                               
|                               
|                               
|                                | Investing activities |           | (1,228,899                                    | ) |            |   |            | (1,722,269 | )         |  |      |            | (7,935,171 | ) |   |         | (63,208 | )
|                               
|                               
|                               
|                               
|                                | Financing activities |           | 6,353,749                                     |   |            |   |            | 12,873,103 |           |  |      |            | 27,322,902 |   |   |         | 217,643 |  



---

|(1) |  | Adjusted EBITDA represents operating income (loss) before depreciation
and amortization. Adjusted EBITDA is provided because it is a measure
commonly used by investors to analyze and compare companies on the basis
of operating performance. Adjusted EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be construed as a substitute for operating income, net income
or cash flows from operating activities for purposes of analyzing
Crosswavess operating performance, financial position and cash flows.
Adjusted EBITDA is not necessarily comparable with similarly titled
measures for other companies.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Capital expenditures include expenditures for property and equipment and
initial obligations under capital leases and installment loans adjusted
for sale and lease/installment back transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Exchange Rates

In parts of this annual report, we have translated Japanese yen amounts
into U.S. dollars for the convenience of investors. The rate we used for the
translations was ¥125.54 equal to ¥1.00, which was the noon buying rate
announced by the Federal Reserve Bank of New York on March 30, 2001. The
following table shows the noon buying rates for Japanese yen expressed in
Japanese yen per ¥1.00. The noon buying rate on September 18, 2001 was ¥1=
117.30. No representation is made that the Japanese yen or U.S. dollar amounts
referred to herein could have been or could be converted into U.S. dollars or
Japanese yen, as the case may be, at any particular rate or at all.

|                     |  |      |        |     |  |         |        |            |  |   |        |  |  |   |        | 
|-------------------- |  | ---- | ------ | --- |  | ------- | ------ | ---------- |  | - | ------ |  |  | - | ------ | 
|Year ended March 31, |  | High |        | Low |  | Average |        | Period-end
|                     |  |      |        |     |  |         |        |            | 
|1997                 |  | ¥    | 124.54 |     |  | ¥       | 104.49 |            |  | ¥ | 112.52 |  |  | ¥ | 123.72 | 
|                    
|                    
|                    
|                    
|1998                 |  |      | 133.99 |     |  |         | 111.42 |            |  |   | 122.78 |  |  |   | 133.29 | 
|                    
|                    
|                    
|                    
|1999                 |  |      | 147.14 |     |  |         | 108.83 |            |  |   | 128.19 |  |  |   | 118.43 | 
|                    
|                    
|                    
|                    
|2000                 |  |      | 124.45 |     |  |         | 101.53 |            |  |   | 111.35 |  |  |   | 102.73 | 
|                    
|                    
|                    
|                    
|2001                 |  |      | 125.54 |     |  |         | 104.19 |            |  |   | 110.60 |  |  |   | 125.54 | 

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

6



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|                   |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|------------------ |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|Calendar Year 2001
|March              |  | ¥ | 125.54 |  |  | ¥ | 117.33 |  |  | ¥ | 121.51 |  |  | ¥ | 125.54 | 
|                  
|                  
|                  
|                  
|April              |  |   | 126.75 |  |  |   | 121.68 |  |  |   | 123.77 |  |  |   | 123.57 | 
|                  
|                  
|                  
|                  
|May                |  |   | 123.67 |  |  |   | 118.88 |  |  |   | 121.77 |  |  |   | 118.88 | 
|                  
|                  
|                  
|                  
|June               |  |   | 124.73 |  |  |   | 119.13 |  |  |   | 121.35 |  |  |   | 124.73 | 
|                  
|                  
|                  
|                  
|July               |  |   | 125.85 |  |  |   | 122.85 |  |  |   | 124.50 |  |  |   | 125.00 | 
|                  
|                  
|                  
|                  
|August             |  |   | 124.87 |  |  |   | 118.75 |  |  |   | 121.37 |  |  |   | 118.75 | 

A.     Capitalization and Indebtedness

Not applicable.

B.     Reasons for the Offer and Use of Proceeds

Not applicable.

C.     Risk Factors

You should carefully consider the risks described below before making an
investment decision.

We are making large investments in data communications infrastructure, but if we
are unable to attract a high volume of data traffic we will not realize expected
returns on our investment

Our network is specifically designed for data communications such as
corporate computer networks and the use of the Internet. We must attract a
substantial volume of data traffic to our network in order to generate
sufficient revenues and to realize the anticipated cash flow, operating
efficiencies and cost benefits of our network development plan. If we are not
successful in attracting new large-volume customers, we will not be able to
generate sufficient traffic and revenue to justify our initial investments or to
support our continued network and data center buildout.

Potential obstacles to attracting our target customers include:



| |  |  | customers may be reluctant to use a new, less-established provider even if we
offer attractive services;                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the market for new services we introduce may not develop as soon as we
anticipate or at all;                                                                        
|
| |  |  | our services may fail to perform as expected;                                                                                                                       
|
| |  |  | delays in the installation and development of our network infrastructure could
hurt our ability to attract customers and/or prevent us from delivering our
services;
|
| |  |  | growth of overall demand for data transmission in Japan may slow down; and                                                                                          

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| |  |  | other competitive factors such as aggressive pricing by our competitors.
| | - |  | ------------------------------------------------------------------------

We incurred significant losses in our last fiscal year and expect to incur
substantially larger losses in the future

In starting up our business and in developing our nationwide fiber optic
network and data centers, we have incurred operating and net losses and working
capital deficits and we expect each of these to continue to grow in the next
several fiscal years. For the year ended March 31, 2001, we had revenues of
¥2,629 million, operating losses of ¥10,963 million and net losses of
¥10,847 million. Our accumulated deficit at March 31, 2001 was ¥18,779
million. Although we expect revenues to increase by more than three times in the
fiscal year ending March 31, 2002, we also expect to continue to record
substantial operating and net losses in the current fiscal year. There is no
assurance that we will be able to generate returns sufficient to reverse our
operating and net losses and clear our accumulated deficits on a timely basis or
at all. If our losses are larger than expected, we may not be able to fully
implement our business plan or to implement it on schedule. This could affect
our ability to offer the levels of services anticipated and to generate the
revenue we expect, which could, in turn, cause our ADS price to fall.

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

We believe that cash on hand and cash flow from service revenues will
be sufficient to satisfy our cash requirements into the first quarter of fiscal
2002, including cash required to execute our network buildout plan and to fund
negative cash flows from operations. We will need additional capital for further
development of our network, including our nationwide, metropolitan and local
access network buildouts, to add international capacity, to construct and
develop our data centers and to fund our operations. We will need at most approximately
an additional ¥30 billion through the year ending March 31, 2004. We expect to
obtain the additional funds that we need from bank borrowings or placements of
debt and equity securities. However, there can be no assurance that funding will
be available to us on a timely basis or at all, or on terms acceptable to us,
especially in light of the general tightening of the credit markets in Japan.
Any inability to raise funds may prevent us from implementing our plans or may
require us to modify or abandon some or all of our plans and may have an adverse
effect on our operations.

If we incur substantial additional debt to finance our business, we may be
restricted in various ways that would limit our operations or growth

Our need for additional funds may compel us to borrow. If we incur
substantial amounts of debt, our negative cash flows may restrict our ability to
service and repay the debt. Additionally, substantial indebtedness could:



| |  |  | increase our vulnerability to general adverse economic and industry conditions;                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | limit our ability to fund future capital expenditures, working capital and other
general corporate requirements; and

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| |  |  | limit our flexibility in planning for and adapting to changes in the industry in
which we operate.
| | - |  | --------------------------------------------------------------------------------------------------

We have a limited operating history and may not be able to successfully implement our business
plan

We have a limited operating history. We started our operations in May
1999 and there is limited information available to evaluate our performance.
Although our operations, including network construction, sales and customer
base, have expanded, our business is still in development. Accordingly, our
prospects and the merits of investing in our stock must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving, capital-intensive industries such as those related to data
communications infrastructure and services. If our business model proves to be
unsuccessful, the trading price of our ADSs could further decline.

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

The telecommunications industry in Japan, although not as well
developed or diverse as it is in the United States, is competitive and becoming
even more so. Even though the data communications market is a relatively new
market in Japan, many of our competitors have developed or are currently
developing extensive fiber optic networks and data communications services or
have announced plans for extensive infrastructure development and new service
offerings. Our competitors are primarily large telecommunications companies in
Japan such as NTT and its group companies, Japan Telecom, KDDI, PNJ
Communications (PNJ-C), and potentially major foreign telecommunications
companies. These competitors may have advantages, including:



| |  |  | substantially greater financial resources;                                                             
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | more extensive and well-developed marketing and sales networks;                                        
|
| |  |  | greater numbers of existing customers which may become customers of their
data communications services;
|
| |  |  | substantially greater personnel, marketing, service development and other
resources; and               
|
| |  |  | higher name and brand recognition.                                                                     

With these advantages our competitors may be better able to:



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

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

We may also be vulnerable to existing telecommunications companies
with significant amounts of fiber already installed such as NTT, KDDI and Japan
Telecom, and to new entrants whose cost of entry into the data communications
business, particularly the provision of data transmission capacity, may be
substantially lower than it was for us. We were the first telecommunications
company to own transmission lines nationwide in Japan by means of an IRU. An
IRU, or Indefeasible Right of Use, is a long-term right, usually granted by
contract, to use the transmission lines and facilities of another company or
entity. Recently, the price of acquisition of transmission facilities has
declined substantially and, as a result, competition has increased. As the
market for data communications develops and as the supply of fiber or other data
communications infrastructure continues to expand, it may be possible for
competitors to enter more cost-effectively into IRU contracts for the long-term
use of transmission facilities. If they are able to do so, we are more likely to
see the number of new entrants offering services at competitive prices increase.

In addition, competition could significantly increase as a result of:



| |  |  | increased consolidation and strategic alliances in the industry;
| | - |  | ----------------------------------------------------------------
|
| |  |  | increased competition from foreign carriers and others;         
|
| |  |  | further technological advances; and                             
|
| |  |  | further deregulation and other regulatory initiatives.          

We also expect to face significant competition in providing data
center services from a number of existing and new competitors such as NTT, KDDI
Japan Telecom, PNJ-C and their affiliated companies. Such competition could, for
example, make it difficult for us to attract enough customers to pay for the
investments we intend to make in data center infrastructure.

Our customers in connectivity service that are also our competitors may
terminate our services if they are able to do so without sacrificing quality

Currently, because of the high quality of our services and the large
capacity of our network, many of the major telecommunications carriers and their
affiliated network operators are our customers. They may terminate or reduce our
services when lower cost services of reasonably good quality are available from
other providers or to the extent they are able to increase their ability to use
their own networks.

We anticipate that prices for data transmission bandwidth and other services we
offer will continue to decline which may reduce our revenues or limit our
ability to grow our revenues

The prices we currently charge to our customers for transmission
capacity and other services are likely to decline for the following reasons:



| |  |  | future rate reductions for data communications services by our competitors;
| | - |  | ---------------------------------------------------------------------------

10



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| |  |  | continuing development by our competitors of cost-efficient fiber optic
networks;                                                                                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | installation by us and our competitors of additional fiber and related equipment
that provides substantially more transmission capacity than initially needed; and                                             
|
| |  |  | recent or future technological advances that enable
substantial increases in, or better usage of, the
transmission capacity of both new and existing fiber (and
other transmission medium such as copper wire).

If prices for data transmission and our other services decline, we
may experience a decline in revenues or in the rate of growth of our revenues
which would have a material adverse effect on our development plans and
operations. Additionally, we may be more vulnerable than our competitors to
slower revenue growth as a result of downward price pressure on services offered
because we may not be able to easily lower the cost of our two major IRU
agreements, in particular our IRU agreement with KDDI. That agreement contains
provisions that allow for renegotiation of the lease payment amounts in the
event that the amounts provided for become unreasonable based on changes in the
telecommunications industry, general price levels and socio-economic
circumstances, but there is no assurance that we would be able to negotiate any
reduction.

If the general market level of prices for fiber optic cable, by IRU
agreement or otherwise, is reduced more than anticipated or more rapidly than
anticipated, our services will become less competitive and we will not be able
to generate the revenues that we expect. This will also be true if last mile
pricing is significantly reduced after we have committed significant amounts of
capital to our local access infrastructure development in order to bypass NTT
and other local carriers in the last mile.

Our operating results are likely to fluctuate significantly and may differ from market expectations

Our annual and quarterly operating results may vary significantly in
the future due to a number of factors, many of which are beyond our control. As
a result, we believe that quarter-to- quarter comparisons of our operating
results may not be a good indication of our future performance. It is likely
that, in some future quarter, our operating results may be below the
expectations of public market analysts and investors.

Factors which may cause fluctuation include:



| |  |  | the timely completion of the various stages of our network buildout plan, or the
modification of this plan;                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timely implementation of planned services;                                                                                                         
|
| |  |  | the rate at which we are able to offer new services to remain competitive as the
market for data communications develops;                              
|
| |  |  | the timing of large purchases of equipment, the timing of payments or prepayments
of contracts for transmission lines and the timing of other expenses;

11



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| |  |  | the rate at which we are able to add new customers;             
| | - |  | ----------------------------------------------------------------
|
| |  |  | the addition or loss of major customers;                        
|
| |  |  | the rate at which customers increase the bandwidth they use; and
|
| |  |  | fluctuations in the yen/dollar exchange rate.                   

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

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

Our network uses a collection of communications equipment, software,
operating protocols and proprietary applications for the high-speed transmission
of large quantities of data among multiple locations. Given the structure of our
network and the nature of Ethernet or IP protocol, it may be possible that data
will be delayed, lost or distorted in the provision of services like Wide-area
Ethernet platform or dial-up port services, although we are not aware of any
significant delays to date. Delays in data delivery may cause significant
performance degradations in applications that customers are using. Our network
may also contain undetected design faults and software bugs that, despite our
testing, may be discovered only after the network has been installed and is in
use. The failure of any equipment or facility on the network could result in the
interruption of customer service until necessary repairs are made or replacement
equipment is installed. Although we have had a few temporary failures during the
construction and activation of our network, we have had no significant failures
resulting in any material adverse consequences. Any failures, faults or errors
could cause delays or service interruptions, expose us to customer liability or
require expensive modifications that could have a material adverse effect on our
business.

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

We expect that new equipment and technologies will emerge and that
existing equipment and technologies will further develop. New equipment and
technologies may reduce the prices for the types of services we offer or they
may be superior to, and render obsolete, these services and the equipment and
technologies we use. As a result, our most significant competitors in the future
may be new entrants to our markets which would not be burdened by an installed
base of older equipment. It may be very expensive for us to upgrade our
equipment and technology in order to continue to compete effectively. Our future
success depends, in part, on our ability to anticipate and adapt in a timely
manner to technological changes.

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With respect to our network, we have designed and completed the network
to operate using DWDM, or Dense Wavelength Division Multiplexing transmission
technology, and SONET, or Synchronous Optical Network technology. If a new
technology is developed that provides the ability to transmit larger amounts of
traffic more efficiently and cost-effectively on the same fiber optic cables, we
may be unable to convert to the new technology on a timely basis or at all and,
if we are able to convert, we may lose the benefits of significant amounts of
investments in equipment and technology related to DWDM and SONET.

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

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

We rely on IIJ for the development of our network and for the procurement of our
network equipment, without which we may not be able to maintain the quality of
our network

Our network was designed and installed jointly with engineers and other
personnel at IIJ. Mr. Asaba, our Chief Technology Officer and the Co-Chief
Technology Officer at IIJ, coordinated this network development. Some technical
personnel, including Mr. Asaba, divide their time between IIJ and us. IIJ pays
their salaries. We reimburse IIJ for a portion of the costs of these employees
based on how much of their time is devoted to us.

IIJs continued support in developing our network and services,
implementing our network development plan, and identifying, evaluating and
procuring equipment and new technologies for our network is important. We expect
that this support will continue to be available to us. Mr. Asaba and various
project managers at Crosswave and IIJ, coordinate the network and service
development and various other projects at Crosswave and IIJ on a case-by-case
basis to ensure that resources are assigned to projects as needed. In those
instances where IIJ employees are temporarily assigned to us, we reimburse IIJ
for the time of the IIJ employees at scheduled rates. The quality of our network
and services may be affected and our business may suffer to the extent this
continued support is unavailable on a timely basis or at all.

Our business and relationships with customers and major stockholders may suffer
if we lose the services of key directors and executive officers that split time
between IIJ and us

Mr. Koichi Suzuki, our President and Representative Director, and Mr. Toshiya Asaba, our
Chief Technology Officer, split their time between Crosswave and IIJ, where Mr. Suzuki serves as
President, Chief Executive Officer and Representative Director, and Mr. Asaba serves as Director
and Co-Chief Technology Officer. Mr. Suzuki currently spends approximately one-third of his time
working for us and Mr. Asaba currently spends approximately one-half of his time working for us.
We expect that their future allocations of time will be approximately the same. However, business
circumstances may result in one or both of these key persons spending more of his time with IIJ than
anticipated. In addition, Mr. Akio Onishi, our Chief Executive Officer, also serves as a director of
IIJ. To the extent any of these or other employees are not available to us at important times, our

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business may suffer. We also rely on their expertise in the operation of our businesses and on Mr.
Suzukis relationships with our three main shareholders. None of our directors, officers or key
employees, including Mr. Suzuki, Mr. Onishi and Mr. Asaba, is bound by an employment or
noncompetition agreement.

We depend on key personnel and our business may suffer if we cannot attract or retain qualified
personnel

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

IIJ is our main customer and our main sales agent and to the extent its business suffers, ours may
also

In the year ended March 31, 2001, services rendered to IIJ and its
affiliates accounted for approximately 64.4% of our revenues. Additionally,
another 10.6% of our revenues were attributable to Sony and Toyota and their
affiliates. Although we expect to significantly diversify our sources of revenue
in this and future fiscal years, IIJ will continue to be a significant customer.
To the extent IIJ does not continue to be successful in expanding its business
and increasing the number of its customers and the bandwidth its customers use,
our business will suffer accordingly.

Additionally, IIJ is one of our largest sales agents. As IIJ expands its
value-added and systems integration services, we expect our sales to increase.
To the extent IIJ is not successful in promoting our services, either
individually or as part of its systems integration services, our business will
not grow as rapidly as anticipated.

Conflicts of interest may arise between us and IIJ which could be resolved in a manner
unfavorable to us

Conflicts of interest could arise relating to the nature, quality and
pricing of services provided by us to IIJ or by IIJ to us, the allocation of
corporate opportunities and general issues relating to maintaining or increasing
our profitability. In addition, our President and Representative Director is
also the President, Chief Executive Officer and Representative Director at IIJ,
and many of our key management and technical personnel perform services for both
us and IIJ. There could be potential conflicts of interest when these directors
and officers are faced with decisions that could have different implications for
our company and IIJ. As a result, it is possible that these directors and
executive officers could place the interest of IIJ ahead of our interests when
the two are incompatible. We have not entered into any agreement with IIJ
regarding conflicts of interest.

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Our three main shareholders have the ability to control us and their interests
may conflict with your interests

As of the date of this annual report, IIJ, Sony and Toyota own 37.9%,
23.9% and 23.9% of our shares, respectively. These shareholders are actively
involved in and will continue to have the ability to control our affairs and
business. They have agreed that until August, 2003, IIJ will be able to nominate
two our board of director members and Sony and Toyota one each, and they will
vote their shares in favor of each others respective nominees. As noted above,
there is also a significant amount of management overlap and dependence on IIJ
personnel. It is possible that our main shareholders interests could conflict
with your interest.

We may not be able to continue using our transmission lines under our IRU
agreements or our data centers under leases if the grantor of one of our IRU
agreements or one of our landlords becomes insolvent

We obtained access to nationwide transmission lines in Japan through our
long-term IRU agreement with KDDI to lease dark fiber. We have also acquired
capacity between Japan and the United States by entering into an IRU agreement
with Global Crossing. Our rights under these IRU agreements can be asserted only
against the carriers granting the IRU. Therefore, we may not be able to continue
using the transmission lines under the IRU agreements if the carriers were to
become insolvent or bankrupt or if the transmission lines were to be foreclosed
on or disposed of. Additionally, we have pre-paid $25 million to Global Crossing
which we might not be able to recover in the event of an insolvency or
bankruptcy.

We have also leased space for the construction of our data centers from
certain landlords. If one or more of these landlords become insolvent or files
bankruptcy, and if, as a result, we are unable to continue operating our data
centers at one or more locations, our results may be adversely affected.

We may not be able to expand our network if there are delays in the construction of conduits for
our fiber or in the installation of the fiber

Our existing network backbone consists of four strands of nationwide
dark fiber that we lease under an IRU agreement. To date, we have installed
transmission equipment and have lit two strands of this fiber. Although this
will provide a substantial amount of transmission capacity and will support all
of the services we currently offer, we expect tremendous growth in data
transmission. To prepare for future demand, our backbone network development
plan calls for us to significantly expand our nationwide network by using
conduits currently being installed by the Ministry of Land, Infrastructure and
Transport under national roadways throughout Japan. We have applied to install
cables with multiple strands of fiber in these conduits. Delays by the Ministry
of Land, Infrastructure and Transport in completing these conduits or issuing
final approval of our applications or delays by us or our contractors in the
installation of the fiber could prevent us from completing expansion of our
backbone network on a timely basis or at all.

A failure to obtain or maintain appropriate rights-of-way could delay the
completion of our network and increase its cost

We cannot assure you that we will be successful in obtaining additional rights-of-way and

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other permits required to install and use fiber underground or in other conduits
or to use electricity and telephone pole space and other rights-of-way. We must
obtain these rights-of-way from parties such as railroads, operators of subways,
utilities, highway authorities, local governments and commercial landlords. We
must also obtain approvals for construction from local authorities in most of
these cases. The process of obtaining these permits, rights and approvals is
usually time- consuming and burdensome. If we are unable, on acceptable terms
and on a timely basis, to obtain and maintain the permits, rights and approvals
needed to implement our business plan, the buildout of our network could be
prevented or delayed or could be more costly than anticipated and our business,
financial condition and results of operations could be materially and adversely
affected.

Regulatory matters 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 Posts and Telecommunications (MPHPT). We operate pursuant to licenses and
approvals that have been granted by the MPHPT. Our licenses are issued under the
Telecommunications Business Law to provide telecommunications services through
our network which makes us a Type I Carrier. We were the first Type 1 Carrier to
receive a license to provide services through a network the rights of which were
obtained pursuant to a long-term lease. Previously Type I Carriers were required
to own their networks. Any decisions or changes by the MPHPT in the areas of the
grant, amendment or renewal of licenses based on the leasing of facilities could
require us to substantially change our business model.

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

Existing and future governmental regulation may substantially affect the
way in which we conduct business. These regulations may increase the cost of
doing business or may restrict the way in which we offer products and services.
We cannot predict the future regulatory framework of our business. Any changes
in laws, regulations or MPHPT policy affecting our business activities and those
of our competitors could adversely affect our financial condition or results of
operations. These regulations are summarized in more detail in the section
entitled Regulation of the Telecommunications Industry in Japan in Item 4.




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
Crosswave Communications Inc. We were formed in October 28, 1998 as a joint
venture of Internet Initiative Japan Inc., Sony Corporation and Toyota Motor
Corporation and operate under the laws of Japan. We began operations in May
1999, making us one of the first high-speed telecommunications facilities and
networks in Japan specifically designed for data communications. We became a
public

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company in August 2000 with our initial public offering on the Nasdaq National
Market.

Our head office is located at Crest Yasuda Bldg., 3-21, Kanda
Nishiki-cho, Chiyoda-ku, Tokyo 101-0054, Japan, and our telephone number at that
location is 81-3-5205-4500. Our agent in the United States is Crosswave
Communications America, Inc., 1999 South Bascom Avenue, Suite 705, Campbell,
California 95008 and our telephone number at that location is 408-879-6238. We
have a Web site that you may access at http://www.cwc.co.jp/en/. Information
contained on our Web site does not constitute part of this annual report filed
on Form 20-F.

For a discussion of capital expenditures for the past three years see
Capital expenditures at the end of Item 4.B. For a discussion of current
capital expenditures and divestitures see Item 5.B  Liquidity and Capital
Resources.

B.    Business Overview

We are a pioneer in the introduction of broadband data communications
infrastructure and services to businesses and telecommunications carriers in
Japan. We offer two main types of services, Network services and Data Center
services. Network services include our High-speed backbone service, Wide-area
Ethernet platform service, Dial-up port service and other services. We operate
the first nationwide fiber optic network specifically designed for the
high-speed transmission of data. Our network uses advanced optical technologies
that allow us to deliver high-capacity, cost- effective and highly reliable data
communication services, eliminating the burden of multiple layers of equipment
employed in traditional telephony systems. Our extensive network is also
flexible and scalable in that it can be easily expanded and/or upgraded to
increase capacity, support new services and incorporate new transmission
technologies as the market demands.

Our goal is to become the leading provider of advanced, end-to-end data
communications services in Japan. As the first nationwide network in Japan
specifically designed only for data communications, we are not burdened by
legacy infrastructure such as voice telephony switching equipment. We are
therefore free from the restructuring costs associated with dismantling or
replacing voice-oriented legacy equipment as we install our own network
equipment.

In order to establish a backbone network quickly and begin offering our
services, we leased 3,689 route miles of dark fiber nationwide pursuant to an
IRU agreement with KDDI that currently extends through April 2009. We
constructed our network by installing the equipment necessary to enable data
transmission over the leased fiber. In May 2000, this network became fully
operational nationwide.

We are now expanding our network by:



| |  |  | installing our own fiber along national roadways to increase capacity, geographical
coverage and network redundancy;                                                                                                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | installing or leasing fiber to form a metropolitan backbone network in high-density
urban areas; and                                                                                                                                                                                      
|
| |  |  | installing or leasing fiber and other local access
infrastructure in some urban areas where we see a significant
demand for data traffic so as to provide direct access to the
buildings of target customers, enabling them to access our
network without the use of third-party carriers.

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We plan to extend our network to encompass a total of approximately
8,000 route miles of fiber in Japan by 2005. We have also secured backbone
capacity to the United States. We are seeking opportunities to further expand
our international network to the United States and other parts of Asia. In
addition to expanding network capacity, we are establishing data center
facilities which will complement our transmission network by acting as data
traffic hubs and access gateways to our network.

Our Services

Our ultimate goal is to provide advanced, end-to-end data communications
services over high- capacity, seamless, nationwide networks to our customers. We
do this by offering a variety of data communications services to our customers.
Our individual services serve as building blocks that we use to tailor data
communications solutions that meet the individual needs of our customers.
Customers can use our services individually or in combination with other
services.

We offer two main types of services, Network services and Data Center
services. Network services include our High-speed backbone service, Wide-area
Ethernet platform service, Dial-up port service and other services. We also
provide various custom solutions utilizing these services which we develop to
meet specific needs of our customers.

High-speed Backbone Service

We offer high-speed backbone services targeted at telecommunications
carriers, value-added network operators such as ISPs, and companies with large
data transmission requirements such as cable television broadcasters and media
organizations. We offer speeds of up to 600 Mbps using DWDM and SONET
transmission technologies.

We anticipate future upgrades of our network to support Gigabit Ethernet
or other high-speed transmission technologies as these technologies become
available, which will enable us to offer even higher transmission rates to our
customers than we currently can provide.

Pricing for our high-speed backbone service.We believe that our prices
for leased lines are competitive with leased lines offered by our competitor
carriers. Our monthly charges for our high- speed backbone service, excluding
charges for local access lines, are as follows:

|          |  |                    |        |             |  |       |        |  |  |           |        | 
|--------- |  | ------------------ | ------ | ----------- |  | ----- | ------ |  |  | --------- | ------ | 
|          |  |                    |        |             |  |       |        |  |  | More Than
|Bandwidth |  | Up to 200km        |        | Up to 600km |  | 600km
|          |  |                    |        |             |  |      
|          |  | (thousands of yen)
|1.5 Mbps  |  | ¥                  | 200    |             |  | ¥     | 300    |  |  | ¥         | 400    | 
|         
|         
|         
|         
|45 Mbps   |  |                    | 1,600  |             |  |       | 2,400  |  |  |           | 3,200  | 
|         
|         
|         
|         
|150 Mbps  |  |                    | 3,600  |             |  |       | 5,400  |  |  |           | 7,200  | 
|         
|         
|         
|         
|600 Mbps  |  |                    | 10,000 |             |  |       | 15,000 |  |  |           | 20,000 | 

We have also recently begun to combine our monthly charges with the
local access charges of a number of our local access carriers so that a growing
number of our customers can receive end to end service directly through us.

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International backbone service.We received permission in April 2000
from the Ministry of Public Management, Home Affairs, Posts and
Telecommunications to conduct international telecommunications services for data
transmission and leased circuits. We began to offer services in September 2000.
Pricing for our international backbone service is based on bandwidth and
destination. See Our Network  International Network Buildout Plan for more
information on our international network buildout plan.

Wide-area Ethernet Platform Service

We offer Wide-area Ethernet platform service targeted to corporations,
particularly those with multiple offices, buildings, factories, laboratories or
shops and value-added network operators. Wide-area Ethernet platform service
provides customers with a seamless LAN environment over a large geographic area.
This releases the customers network from the concept of distance found in
networks using geographically segregated LANs connected through a traditional
wide area network, or WAN. Traditional WAN services only provide point-to-point
connections with an interface incompatible with the LAN interface. With this
type of WAN service, a customer who wants to build a multi-location network must
maintain a matrix of traffic flow volumes between each location being connected
and design a topology for the network. The customer must then order various
point- to-point services with appropriate bandwidth according to the desired
topology. Also, the customer has to purchase and maintain all of the additional
equipment necessary for translating LAN protocol to WAN protocol and for
transmitting and switching data over those WAN services. This imposes additional
equipment and operating costs on the customer.

Our Wide-area Ethernet platform service moves from this point-to-point
model to a multi- point-to-multi-point architecture in which LAN networks
connect to each other seamlessly through our high-speed network. This
architecture, incorporating multi-point-to-multi-point Ethernet switching,
allows a customers headquarters and branch offices, which may be separated by
long distances, to communicate with each other as if they were part of the same
LAN without the need for any additional equipment, thereby realizing a seamless
LAN environment over a wide area with higher reliability at lower costs. We
provide either a 10 base-T or a 100 base-T (Fast Ethernet) interface depending
on a customers access speed and preference.

Pricing for our Wide-area Ethernet platform service.Our Wide-area
Ethernet platform service offers customers a distance-free, flat-rate tariff
system. Three main factors determine the monthly fee charged to customers:



| |  |  | Number of ports.Customers connect their local access lines
into our backbone network through ports at our access points.
One line connects to each port and we charge a fee for each
port used by a customer.                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Speed of service.Currently, we provide this service at 128
Kbps, 512 Kbps, 1.5 Mbps, 3 Mbps, 6 Mbps, 12 Mbps, 25 Mbps and
45 Mbps. Customers are able to choose the speed they desire
over our network, and we charge them a fee based on this
choice.
|
| |  |  | Type of local access lines.Customers access our network
through local access lines connecting their physical LAN
locations to ports at our network access points.                                                                                     

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| |  |  | Customers may use our local access infrastructure, such as
direct fiber, FWA or other direct access methods as they
become available, or they may choose to use third-party access
lines provided by NTT or other local carriers. We bill
customers based upon the access method they choose. We pass
through costs of third-party access lines to our customers
without any mark-up.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, there are installation, monthly Ethernet terminal use and
local access fees.

Dial-up Port Service

We offer dial-up port services targeted at value-added network
operators, such as ISPs, and corporations. Our dial-up port services allow our
customers to offer nationwide dial-up access to their own networks via our
infrastructure. We offer more than 80 access points nationwide.

Permitted users who want to access a network supported by our dial-up
port service call the telephone number of the closest access point using a
telephone or ISDN line. The call is then transmitted over our infrastructure to
the designated entrance location of the customers network.

Pricing for our dial-up port service is based on the number of ports
each customer subscribes for with the rates per port decreasing for multiple
ports per customer.

Data Center Services

We have six data centers in major metropolitan areas in Japan-Tokyo,
Osaka, Nagoya, Sapporo, Sendai, and Fukuoka-targeted at a wide variety of
customers, including large companies and value-added network service providers,
such as application and digital content service providers, and new entrants into
the Japanese telecommunications market that require high-speed access to
networks and resources, co-location and operational support for their systems.

Our personnel operate and manage each of our data centers, and we
outsource certain support and maintenance services to NetCare, an IIJ group
company, and other third-party providers. At our data centers, we provide
services that will, together with IIJs services, provide total network
solutions to end users. The basic services that we offer include:



| |  |  | Co-location services.Customers are able to lease rack space
for their computers, networking and other equipment. Our data
centers have a functional design that allows convenient
set-up, maintenance, adjustment and troubleshooting of lines
and other equipment. Our six data centers have approximately
9,100 total square meters of floor space. Our experienced
engineers and staff provide 24 hour-a-day, seven- day-a-week
support and maintenance of the facilities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Broadband network connectivity.Our data centers allow
customers direct access to our network. They serve as data
traffic hubs and gateways to our broadband network, allowing
customers high-capacity access to our network. We also provide
cross-connect services allowing customers to connect with each
other.                                                                                                                                                           

We receive recurring monthly fees for renting racks and floor space at our data centers and

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we receive fees for connectivity services that we provide from our data centers.
The fees we charge depend on factors such as geographic location, demand and
volume.

We have constructed our data centers for security. We employ various
measures to enhance the access security of our facilities, including
pre-authorization procedures and advanced identification systems.

Our data centers are housed in safe structures. We choose or design
buildings which meet new anti-earthquake guidelines issued by the Ministry of
Land, Infrastructure, and Transport. We have back-up generators with on-site
fuel tanks to assure continuous power supply. We also have an un-interruptible
power supply system to stabilize electric current levels that power customers
equipment and air-conditioning. We have advanced fire suppression systems that
use nonflammable gas that, unlike water, does not damage customer equipment.

As of March 31, 2001 most of our leased racks are leased to companies in
the IIJ group. IIJ subleases this rack space to its customers together with
IIJs other services. We also expect to sell these services to other systems
integrators, ISPs and other customers such as corporate customers of our
Wide-area Ethernet platform service and other services.

Our Markets

Our primary market, contributing over 95% of revenues, is Japan. The
telecommunications industry in Japan is the second largest in the world and is
among the most well developed and extensive in the world.

This market has historically been dominated by NTT. However, competition
continues to increase and intensify. As of March 1, 2001, there were 336 Type I
Carriers and 8,771 Type II Carriers. Type I Carriers are telecommunications
operators which provide telecommunications services by establishing their own
circuits and facilities (such as us, NTT East, NTT West and Japan Telecom), and
Type II Carriers are telecommunications carriers other than Type I Carriers
(such as IIJ).

Major trends evident in the telecommunications industry in Japan that
support our market opportunity include continuing deregulation and increasing
competition, technological advances, the rapid growth of the Internet in Japan
and the growing demand for data traffic and communications services.

Sales and Marketing

We are introducing services new to the Japanese market so our marketing
strategy focuses on educating potential customers about the benefits of our
services.

We use direct sales to target ISPs, carriers, broadcasting companies and
content providers, as these large enterprise customers are fewer in number but
can become very large customers generating significant revenues for us. We also
use sales agents, including large vendors and systems integrators, who work on a
commission basis, to expand our marketing reach. These sales agents allow us to
efficiently increase our corporate sales by providing us business opportunities
without our having to hire and manage a large sales staff directly.

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Many of IIJs customers are also, directly and indirectly, our
customers. IIJ is a total solutions provider for Internet services. IIJ
originally created us, in part, so that we could provide the high-speed backbone
it needed for the provision of its own services to customers. As the number of
IIJs customers grows, IIJs demand for our high-speed backbone and data center
facility services will also grow. Furthermore, because IIJ acts as our sales
agent for non-Internet services, direct demand for our services through IIJ will
grow as well. We are also actively educating other major systems integrators in
Japan as to the availability of our services as components of the network
solutions they design for end users.

We use a service-oriented sales strategy to secure customers. Our sales
teams feature specialized sales personnel with engineering backgrounds that we
call sales engineers. As of June 2001, we had 28 sales people in our sales and
marketing department, of which 12 are sales engineers. We anticipate that our
sales staff will grow to approximately 58 sales people, of which more than 22
will be sales engineers, by March 31, 2002. These sales engineers work together
with our network engineers to design and market services to our target
customers. We believe that the attention and expertise of our sales engineers
and other personnel throughout this development process give us an advantage in
gaining the trust of customers by making them feel comfortable that we can
provide them with the best solutions for their data transmission needs.

Our Relationship with the IIJ Group

IIJ is our largest and most important customer. We serve as the backbone
network provider for IIJ. IIJ is an ISP, so its business depends on having a
reliable, cost-effective, high-capacity backbone network for its Internet
services. As IIJs customer base for its basic Internet connectivity services
grows, this will create demand from IIJ for more capacity on our network. Many
of IIJs customers, especially individual and residential customers, seek
Internet connectivity over standard phone lines through modems. IIJ utilizes our
dial-up port service to provide dial-up Internet access to its customers. As the
numbers of IIJs dial-up access customers grows, so will the demand for our
dial-up port service.

IIJ and many of the IIJ group companies are also value-added network
service providers. They enhance basic networks by providing consulting services,
maintenance and care of networks, Internet Web page design, Web page hosting on
servers, firewall security, and many other services that leverage a network. Our
Wide-area Ethernet platform service and data center facilities integrate well
with these value-added services by providing the basic network infrastructure
and physical facilities needed by IIJ and IIJ group companies to develop and
offer these services.

IIJ acts as a sales agent for us, referring its customers to us for
non-Internet services under an annually renewable sales cooperation agreement
with IIJ. Under this agreement, we pay IIJ a sales commission of between 5% and
20% of the monthly basic line fee for our high-speed backbone services and
Wide-area Ethernet platform services that IIJ sells.

We have annually renewable agreements with IIJ to outsource back-office
and administrative services, assistance with network planning and service
development, public relations and advertisement, and similar services. Netcare,
an affiliate of IIJ, provides network monitoring and support services to us
under an agreement we have with them. We also have entered into arrangements
with IIJ for the secondment of employees to us as discussed in the section
entitled Employees in Item 6.

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We have entered into an agreement with IIJ to provide IIJ with leased
line between Japan and the U.S. beginning July 2000. We also have agreements
with IIJ to provide IIJ with use of our dial- up access port services for a fee
based on the number of ports used and to lease racks in our data centers at a
fixed amount per rack. We believe that the payment terms for these services are
set at fair market value based on market pricing.

Information on purchases of equipment from IIJ and its affiliates and
aggregate payments under the agreements discussed above is provided in the
section entitled Related Party Transactions in Item 7.

Proprietary Rights

We believe that our success is more dependent upon the quality of our
network and our technical, marketing and customer service expertise than our
proprietary rights. However, we rely on a combination of trademark and
contractual restrictions to establish and protect our intellectual property. We
license a large amount of computer software and some of our network equipment
under standard form licenses. However, we currently are not licensing any
material technology from third parties nor do we license any of our technology
to third parties out of the ordinary course of our business. We have applied for
trademark registrations of our corporate name Crosswave Communications Inc.
and certain other corporate and product names in Japan and the United States.
Currently, there are five applications pending, and seven have been completed.

Additionally, on behalf of Crosswave Facilities, we have also applied
for trademark registration of our subsidiary Crosswave Facilities Inc. and
currently three applications are pending.

Competition

The market for broadband data communication, although competitive, is
not as well developed in Japan as it is in the United States. We are also one of
the few carriers in Japan using DWDM and SONET technology.

Our major current competitor is NTT, including its affiliated companies,
which has advanced data transmission technology and a nationwide network of
optical fiber as well as substantially larger resources. Additionally, we expect
to compete with other existing telecommunications carriers, including Japan
Telecom, KDDI and PNJ-C, many of which have announced plans to increase their
data transmission capacities through next generation networks. Some of our
competitors have recently announced services similar to our Wide-area Ethernet
platform service to compete with our innovative service offerings.

We have competitive advantages in broadband data communication services
over legacy carriers such as NTT and foreign carriers newly entering the market.
Unlike incumbent carriers, we are not burdened by the depreciation of legacy
assets, such as voice transmission equipment, or the need to integrate such
systems into future network development plans. We are constructing a network
infrastructure that we believe is the most suitable for providing our
cost-efficient broadband data transmission services, without the need to worry
about integrating legacy systems.

KDDI is also a competitor as it also has a nationwide network of optical fiber that is not the

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subject of KDDIs contract with us. Some other carriers are also applying to the
Ministry of Land, Infrastructure, and Transport for use of the conduits being
installed along national roadways.

In our data center business, we expect competition from a variety of
sources including not only NTT, KDDI, JT, PNJ-C and their affiliated companies
but also real estate companies, power utility companies and others.

Regulation of the Telecommunications Industry in Japan

The Ministry of Public Management, Home Affairs, Posts and
Telecommunications (the MPHPT), (formerly the Ministry of Posts and
Telecommunications) regulates the Japanese telecommunications industry. Type I,
including us, and Type II Carriers are regulated by the MPHPT primarily under
the Telecommunications Business Law.

The Telecommunications Business Law

The Telecommunications Business Law, which became effective in 1985,
authorizes the MPHPT to regulate two types of telecommunications companies, Type
I Carriers and Type II Carriers. Type I Carriers include NTT Communications, NTT
East, NTT West, KDDI, Japan Telecom and other new common carriers, including us,
as well as cellular or other mobile operators. Type I Carriers provide
telecommunications services by establishing their own telecommunications circuit
facilities. Type II Carriers are telecommunications carriers other than Type I
Carriers. Type II Carriers may engage in the businesses of telecommunications
circuit resale and the provision of Internet services. Type II Carriers provide
telecommunications services to customers by using the telecommunications
facilities of Type I Carriers, typically NTT East and NTT West. Thus, Type II
Carriers can potentially be our customers.

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



| |  |  | the agreement may not be unilaterally terminable by the owner of the facilities;               
| | - |  | -----------------------------------------------------------------------------------------------
|
| |  |  | a reasonable use fee for the whole term of the agreement is determined;                        
|
| |  |  | the owner may not have granted any security interest in the facilities to any third-
party; and
|
| |  |  | the agreement is a long-term agreement (not less than ten years).                              

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

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impact of this amendment on Type I Carriers is not yet clear.

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

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

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



---

|*  |  | NTT East and NTT West are required to receive MPHPT approval for their
Interconnection charges.                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Prior notification is required under the Foreign Exchange and Foreign
Trade Law. This is not applicable to purchasers of ADRs. A 20% foreign
ownership restriction is applicable only to NTT (which shall be changed
to a 33.3% foreign ownership restriction after December 2001).

Regulation of Type I Carriers

The following regulations apply to us as a Type I Carrier.

Application for permission from the MPHPT.A Type I Carrier must obtain
permission from the MPHPT before commencing a Type I business by submitting an
application to the MPHPT. The application must set forth, among other things,
the categories of service, descriptions of the services, service areas and
telecommunications facilities. If any of the items included in the application
is to be changed, the Type I Carrier must obtain prior permission from the
MPHPT.

The categories of services that a Type I Carrier may engage in are as
follows:



| |  |  | Voice transmission  defined as telecommunications services
other than data transmission services using telecommunication
facilities that have switching and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | transmission functions principally for voice and other sounds.                                                                                                                                   
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Data transmission  defined as telecommunications services
solely for communications using telecommunication facilities
that have switching and transmission functions for data and
video images.
|
| |  |  | Leased circuits  defined as telecommunications services that
allow exclusive use of telecommunications facilities to a
specified person.                                                        

Our IRU agreement with KDDI is for data transmission services. The IRU
agreement states that we will not engage in voice transmission services using
circuit switching, and that we will first discuss with KDDI before engaging in
voice transmission services as defined in the Telecommunications Business Law
using its dark fiber. We have no intention to engage in voice transmission
services through circuit switching. We may, however, seek to engage in voice
services or the transmission of voice, such as voice over IP, in a manner
consistent with the provisions in the IRU agreement, if an opportunity that we
view as potentially profitable arises in the future.

Obligation to provide services.Type I Carriers must not, without due
reason, refuse to provide telecommunications services within their service
areas.

Terms and conditions for the provision of services.Type I Carriers must
establish standard terms and conditions for the provision of telecommunications
services that they offer. The terms and conditions, and any amendments to them,
are subject to MPHPT approval (after December 2001, they are subject to MPHPT
approval for local service dominant Type I Carriers and to prior notification to
the MPHPT for mobile service dominant Type I Carriers and other Type I
Carriers). Type I Carriers are prohibited from providing telecommunications
services other than pursuant to the terms and conditions approved by (or, after
December 2001, notified to) the MPHPT. Prior to formally establishing the terms
and conditions of services they offer, a Type I Carrier may offer trial services
but only to a limited number of subscribers and for a limited period of time.

Tariff regulation.Type I Carriers must establish tariffs for the
telecommunications services that they offer. Since November 1, 1998, tariffs may
be established and changed simply by prior notification to the MPHPT with no
approval necessary. Prior to November 1, 1998, tariffs had to be approved by the
MPHPT before they took effect. The MPHPT may still order a change to the tariffs
if it determines that the tariffs are unfair and unreasonable, are not
calculated according to a properly and clearly stipulated method or include any
provision that unfairly discriminates against any person.

Type I Carriers are prohibited from providing their telecommunications
services other than pursuant to the tariffs notified to the MPHPT, except for
the limited trial services discussed above. Thus, Type I Carriers are not able
to negotiate their tariffs with customers.

Interconnection regulation.The Telecommunications Business Law requires
that every Type I Carrier must agree to the request of other telecommunications
carriers to access its network through interconnection, subject to limited
exceptions. Interconnection tariffs, terms and conditions are subject to special
regulation by the MPHPT.

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NTT East and NTT West, which are designated by the MPHPT as dominant
Type I Carriers, must submit each interconnection tariff and conditions of
interconnection to the MPHPT for approval (after December 2001, the same
regulations shall apply to local service dominant Type I Carriers). The MPHPT
will issue approval only if it determines that such tariffs and terms are fair
and reasonable considering the appropriate allocation of income received and
costs incurred relating to interconnections under efficient management.
Additionally, the terms must not be disadvantageous as compared to the terms and
conditions that NTT East or NTT West would impose to connect its own
telecommunications facilities. Further, the tariffs and terms must not include
any provisions that unfairly discriminate against any telecommunications
carrier.

(After December 2001, mobile service dominant Type I Carriers must
submit prior notification to the MPHPT on interconnection tariffs, terms and
conditions. The MPHPT may order changes after MPHPTs examination of such
submitted terms and conditions based upon criteria similar to those of local
service dominant Type I Carrier.)

In the case of other Type I Carriers like us (i.e., those not designated
as a dominant Type I Carrier) who enter into interconnection agreements with
other Type I Carriers or special Type II Carriers, the interconnection tariffs,
terms and conditions may be set by negotiation and agreement. Such
interconnection rates and terms are subject to MPHPT approval which has set
forth the general criteria for approval. This criteria requires, primarily, that
the amount of the interconnection fee be fair and reasonable in consideration of
the costs, the conditions imposed on the interconnecting party not be unjust, an
the agreement not unfairly discriminate against the interconnecting party when
compared with other agreements entered into by the Type I Carrier. However, if a
Type I Carrier has established a set of standard terms and conditions of
interconnection which have been approved by the MPHPT, only prior notification
is required to enter into interconnection agreements. (After December 2001,
those carriers not designated as a local service dominant Type I Carrier or a
mobile service dominant Type I Carrier may enter into interconnection agreements
with prior notification to the MPHPT.)

Revocation of permit.A permit may be revoked by the MPHPT if a Type I
Carrier (1) has failed to commence its telecommunications business within the
time period designated by the MPHPT, (2) violates telecommunications laws and
regulations so as to impair the public interest, (3) if it or any director has
been sentenced to a fine or any more severe penalty under the telecommunications
laws within the past two years or (4) employs a director who has been sentenced
to a fine or more severe penalty or who has had a license revoked within the
past two years.

Withdrawal from Type I Carrier business.If a Type I Carrier intends to
abolish or dissolve its business, the Type I Carrier must obtain MPHPT Approval.
A business transfer of the going- concern or a merger of a Type I Carrier is
also subject to MPHPT prior approval.

Technical standards for Type I Carriers

After obtaining permission and prior to the commencement of its
telecommunications business, a Type I Carrier must obtain a confirmation from
the MPHPT that its telecommunications facilities conform to the technical
conditions referred to in the Telecommunications Business Law. In addition, Type
I Carriers must maintain their telecommunications facilities in conformity with
the technical standards provided in the applicable ordinances of the MPHPT. If
the MPHPT determines

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that the telecommunications facilities fail to meet the technical standards, the
MPHPT may order the Type I Carrier to improve, repair or limit the use of its
telecommunications facilities. The technical standards are specified to avoid
damage or failure of, or interference to, telecommunications facilities, to
maintain the quality of the telecommunications service, to maintain secrecy of
communications and to clarify the demarcation of responsibilities between the
telecommunications facilities of telecommunications carriers.

In addition, Type I Carriers must establish their own administrative
rules in accordance with MPHPT ordinances in order to secure the reliable and
stable provision of telecommunications services. These administrative rules must
regulate the operation and manipulation of telecommunications facilities and the
safeguarding, inspecting and testing regarding the construction, maintenance and
administration of telecommunications facilities, etc. Such administrative rules
must be submitted to the MPHPT prior to the commencement of operations, and
changes must be submitted to the MPHPT after they are implemented without delay.

Universal Service Fund

Any telecommunications carrier which is designated by the MPHPT as a
Fundamental Telecommunications Service Carrier will be entitled to receive a
subsidy as a Qualified Telecommunications Carrier. The subsidy will be taken
from other carriers who entered into interconnection agreements with the
Qualified Carrier.

The Universal Service Fund was provided for in the June 2001 amendment
to the Telecommunications Business Law. It will take effect one year after the
effective date of such the amendment.

Capital expenditures

The table below represents our capital expenditures, including
expenditures for property and equipment and initial obligations under capital
leases and installment loans, adjusted for sale and lease/installment back
transactions, for the last three years.

|                     |  |                              |       |      |  |      |        |  |  |   |        | 
|-------------------- |  | ---------------------------- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                     |  | For the year ended March 31,
|                     |  |                             
|                     |  | 1999                         |       | 2000 |  | 2001
|                     |  |                              |       |      |  |     
|                     |  | (millions of yen)           
|Capital expenditures |  | ¥                            | 1,191 |      |  | ¥    | 13,414 |  |  | ¥ | 16,160 | 

Our capital expenditures continue to relate primarily to our network
buildout, including necessary equipment and consists of property, plant and
equipment and capital leases.

In the year ended in March 2000, capital expenditures amounted to
¥13,414 million mainly comprised of capital lease payments for the
international backbone lines and equipment relating to our nationwide network.
The capital expenditures for the international backbone lines we acquired on an
IRU basis amounted to ¥2,610 million.

In the year ended in March 2001, capital expenditures amounted to
¥16,160 million, mainly comprised of ¥4,083 million for the nationwide
network buildout, ¥8,000 million for land we

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purchased for a future data center in Yokohama and ¥2,165 million for data
center equipment and various other capital expenditures.

We have not made any material divestitures in the past three fiscal
years nor are any currently in progress.

For a discussion of current capital expenditures, see Item 5. B -
Liquidity and Capital Resources.

C.   Organizational Structure

We offer our services directly and together with our subsidiaries. Our
subsidiaries work closely together in providing data communications services to
our customers. We collaborate on the development of various services and
products and we market our services and products together. However, our
subsidiaries specialize in different aspects of our services. Our customers
main point of contact is Crosswave itself. We then draw upon the resources and
specialization to offer data communications services.

Our group companies are all majority-owned subsidiaries. Therefore, we
consolidate all of the group companies and exercise significant influence over
several of them. All of our group companies are incorporated in Japan except for
Crosswave Communications America, which is incorporated in California.

Crosswave Facilities Inc.

Crosswave Facilities Inc. was formed in September 2000 by Crosswave,
which owns 60%, and Furukawa Electric, Sumitomo Electric, Nippon Comsys
Corporation, Todentsu, and Sanwa Elec, each of which owns 8%.

As of March 31, 2001, Crosswave Facilities had 21 full-time employees,
one of whom was seconded from Crosswave.

Crosswave Facilities sub-contracts line maintenance and management for
the fiber optic networks built by Type I telecommunications carriers and CATV
operators, and undertakes network construction work, providing infrastructure
comprehensive network support to meet rapidly growing data communications
demand.

For the year ended March 31, 2001, it had revenues of ¥91 million and
a net loss of ¥19 million.

Crosswave Services Inc.

Crosswave Services was established in September 2000 and is registered
as a Type II telecommunications carrier, and supplies the comprehensive
communications services tailored to customers needs by handling the re-sale of
telecommunications services from Type I carriers including Crosswave as well as
from Type II carriers like ISPs.

As of March 31, 2001, we owned 100.0% of Crosswave Services.

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Crosswave Services had sales of approximately ¥33 million for the year
ended March 31, 2001. As of March 31, 2001, Crosswave Services had three
employees, all of whom were seconded from Crosswave, and only one of which is a
full-time employee.

Crosswave Communications America Inc.

Crosswave Communications America was formed October 2, 2000 and manages
business related to maintenance of Crosswaves Japan-U.S. transmission lines.

As of March 31, 2001, we owned 100.0% of Crosswave Communications
America.

Crosswave Communications America had sales of approximately ¥4 million
for the year ended March 31, 2001. As of March 31, 2001, Crosswave
Communications America had one employee who was seconded from Crosswave.

D.   Property, Plants and Equipment

Data Centers

Our data centers in Tokyo, Nagoya, Osaka, Sendai, Sapporo and Fukuoka
are connected through our fiber optic network. These data centers serve as data
traffic hubs and gateways where customers can directly access our advanced
network services. We constructed these data centers in buildings leased under
two-year or five-year renewable leases.

Because of high demand for data centers in Tokyo and Osaka, we plan to
build new data centers in these metropolitan areas and new areas as demand
warrants. Currently, we have announced a new data center in Kyoto that we expect
will begin operating in October 2001. We also plan to construct two large-scale
data centers in the suburbs of Tokyo. One will be in Kawaguchi SKIP City in
Saitama Prefecture and the other in Yokohama. The Kawaguchi data center will
have approximately 14,000 square meters of floor space, and we expect it to be
operational in 2003. SKIP City is an administrative project of Saitama
Prefecture for the purpose of attracting high-tech ventures and the content and
film industries to the prefecture. One of Japans greatest video and films
archive facilities, NHK Archives, will be set up in the city along with
Crosswaves data center facility. The Yokohama data center will be one of the
largest scale in Japan, with approximately 40,000 square meters of floor space
and we expect it to be operational in 2002.

Our data centers are specifically designed for network equipment
housing, co-location services, high capacity access to our network and other
network services. At these data centers, we offer quality co-location, operation
and maintenance services that allow us to provide equipment management solutions
to our customers. Crosswaves largest shareholder, IIJ, offers Internet
connectivity, firewall security, managed hosting services, and other value-added
services in Crosswaves data centers. Crosswave, IIJ and IIJ group companies
have a complementary relationship specializing in their respective businesses.

These data centers have 24-hour-a-day, seven-day-a-week operations and
security and are equipped with uninterruptible power supplies and backup
generators, seismic damage precautions, fire suppression equipment and other
features to optimize our ability to offer high-quality services. Customers lease
rack space for their own equipment.

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Our Network

Our primary asset is our network. As of May 2000, we have made
operational the 3,689 route miles of backbone fiber in our network that are
leased from KDDI providing a nationwide backbone reaching into every prefecture
in Japan except Okinawa and Shimane.

Our network consists of three main levels of infrastructure which
together will form our single nationwide end-to-end network. First, we have our
nationwide backbone network infrastructure. This consists of our high-speed
optical fiber backbone and transmission equipment. Second, we will develop our
metropolitan network infrastructure. This will expand our backbone network in
Japans most important commercial centers. Third, we will develop our local
access infrastructure by leasing or constructing our own lines or by using those
of NTT, other carriers or other infrastructure providers. This will consist of a
variety of last mile network connectivity solutions that give our customers
direct high-speed access to our network.

Nationwide Backbone Network Buildout

We have divided the development of our nationwide backbone network into
two phases. The first phase was the rapid development of our initial backbone
network of dark fiber which we leased on an IRU basis from KDDI. Our phase one
network was completed in May 2000 and is operational along national highways
throughout Japan.

The current phase centers on developing our national roadway network,
which layers onto our existing network infrastructure, using our own cable laid
in conduits constructed by the Ministry of Land, Infrastructure, and Transport
along national roadways. The construction of the conduits by the Ministry of
Land, Infrastructure, and Transport will be done over the next four years ending
in 2005. We will begin laying our fiber in the different segments as they are
completed by the Ministry of Land, Infrastructure, and Transport.

Phase One  Our Initial Backbone Network

We obtained our initial backbone capacity by entering into a long-term
IRU contract for the lease of dark fiber with KDDI. The leased dark fiber is
laid along major highways that run throughout Japan. The contract with KDDI runs
through April 2009, but provides for renewal for additional three year terms
unless KDDI or we give three months prior written notice of termination. The
significant financial terms of this contract are set forth in Notes 2 and 6 of
the Notes to the Financial Statements included herein.

We began operating our initial backbone network using these leased lines
in April 1999 and currently operate our initial backbone network nationwide,
except Okinawa and Shimane, with over 80 access points. Our initial backbone
network includes the following primary segments:

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|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  |                    |                     |  | 
|------------------------------- | --------- | ----- | ----- | ----- | ----- | ---- | --------- | ----------------- | ---------------- | ------------ |  | ------------------ |  | ------------------ | ------------------- |  | 
|                                |           |       | Route |       | Fiber |      | Operation |                   | Major population
|Segment                         |           | Miles |       | Miles |       | date |           | centers connected
|                                |           |       |       |       |       |      |           |                  
|Tokyo-Nagoya-Osaka              |           |       | 454   |       |       |      | 1,302     |                   |                  | April 1999   |  | Tokyo, Yokohama,  
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Shizuoka, Toyota, 
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Nagoya, Osaka     
|                               
|                               
|                               
|                               
|Tokyo-Niigata-Kanazawa-Osaka    |           |       | 531   |       |       |      | 2,122     |                   |                  | April 1999   |  | Tokyo, Niigata,   
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Kanazawa, Kyoto,  
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Osaka             
|                               
|                               
|                               
|                               
|Tokyo-Sendai-Aomori-Sapporo     |           |       | 733   |       |       |      | 3,269     |                   |                  | October 1999 |  | Tokyo, Sendai,    
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Sapporo           
|                               
|                               
|                               
|                               
|Tokyo-Fuchu-Suwa-Nagoya         |           |       | 298   |       |       |      | 1,144     |                   |                  | October 1999 |  | Tokyo, Nagano,    
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Nagoya            
|                               
|                               
|                               
|                               
|Osaka-Kobe-Tokushima-Hiroshima- |           |       | 578   |       |       |      | 2,430     |                   |                  | October 1999 |  | Osaka, Kobe,      
|                               
|                               
|                               
|                               
|                                | Fukuoka   |       |       |       |       |      |           |                   |                  |              |  |                    |  |                    | Tokushima, Okayama,
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Hiroshima, Fukuoka
|                               
|                               
|                               
|                               
|Osaka-Okayama-Yamaguchi         |           |       | 283   |       |       |      | 1,181     |                   |                  | October 1999 |  | Osaka, Himeji,    
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Okayama, Yamaguchi
|                               
|                               
|                               
|                               
|Fukuoka-Kumamoto-Miyazaki-      |           |       | 373   |       |       |      | 1,569     |                   |                  | May 2000     |  | Fukuoka, Nagasaki,
|                               
|                               
|                               
|                               
|                                | Kagoshima |       |       |       |       |      |           |                   |                  |              |  |                    |  |                    | Miyazaki, Kagoshima
|                               
|                               
|                               
|                               
|Other                           |           |       | 438   |       |       |      | 1,778     |                   |                  | May 2000     |  | Gifu, Yonago,     
|                               
|                               
|                               
|                               
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  | Wakayama          
|                                |           |       |       |       |       |      |           |                   |                  |              |  |                    |  |                    |                     | 
|Total                           |           |       | 3,689 |       |       |      | 14,795    |                   |                  |              |  |                    |  |                    |                     | 

Phase Two  Our National Roadway Network

Our continuing backbone network buildout focuses on the development and
enhancement of our national roadway network. We are participating in the
Ministry of Land, Infrastructure, and Transports Information Box project, which
includes, among other things, a development and installation plan for conduits
through which fiber optic cable can be installed. In order to participate in
this project, applications must be made directly to the local offices of the
Ministry of Land, Infrastructure, and Transport on a region-by-region basis. We
have made substantially all of our preliminary applications for inclusion in
this project nationwide.

Participation in this project is not based on the timing of the
applications but is rather based on a balancing of considerations. If the number
of applicants for any segment of conduit exceeds the available capacity,
coordination meetings are held in which voluntary accommodations are sought from
the parties, such as sharing of conduit space or dividing fibers within a cable.
We expect to be included in every segment of the development, as the Ministry of
Land, Infrastructure, and Transport generally permits all Type I Carriers and
cable television operators to participate in this project, subject to
confirmation of usage plans and other minimal requirements. Once rights to these
conduits are obtained, the rights usually continue for five years. We believe
these rights will generally be renewable as a routine matter.

The national roadways have significant advantages over the highways
where our initial backbone network is laid. The primary advantages of the
national road system are its nationwide

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coverage and its proximity to city centers, as the national roadways frequently
run directly through the most important business districts throughout Japan.
This will bring our backbone network much closer to our customers. The
redundancy of having multiple backbone lines and a variety of routes between
major access points will also reduce risks of local network failures by allowing
us to effectively reroute traffic in the event of a local line break or similar
problems.

The government has determined the amount it will charge for the use of
the conduits in this project. We will be required to pay a fee of ¥4 to ¥10
per meter of conduit per year. We will also be responsible for the installation
of the cables containing our fiber, which essentially involves the threading of
the cable through the conduits being installed by the Ministry of Land,
Infrastructure, and Transport.

We expect to share installation costs for portions of the fiber cables
that we lay in the Ministry of Land, Infrastructure, and Transports conduits
with other carriers. In return, we will share rights in those cables with these
other carriers by dividing the fibers in these cables between us. We expect to
install fiber cable with 150 to 200 strands in most conduit segments but we will
adjust the size of the cable based on expected demand for a particular area.

We expect that the Ministry of Land, Infrastructure, and Transport will
complete the construction of the conduits in 2005. We will begin laying our
fiber in the various segments as construction is completed by the Ministry of
Land, Infrastructure, and Transport. Although the following table summarizes our
current plans for completing our national roadway network, the segments,
estimated route miles and scheduled completion dates listed below may change due
to market, regulatory and other circumstances, some of which are beyond our
control.

|                                                     |  |                 |     |                            |  |                         |  | 
|---------------------------------------------------- |  | --------------- | --- | -------------------------- |  | ----------------------- |  | 
|                                                     |  |                 |     |                            |  | Completion or scheduled
|                                                     |  | Estimated route |     | completion of threading of
|Route/Segment                                        |  | miles           |     | cable                     
|                                                     |  |                 |     |                           
|Tohoku A (Aomori  Yamagata)                         |  |                 | 260 |                            |  |                        
|                                                    
|                                                    
|                                                    
|                                                    
|Tokaido (Tokyo  Nagoya)                             |  |                 | 230 |                            |  | In FY 2001             
|                                                    
|                                                    
|                                                    
|                                                    
|Kyushu A (Kitakyushu  Fukuoka  Kagoshima)          |  |                 | 320 |                            |  |                         |  | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Meihan A (Nagoya  Mie  Osaka)                      |  |                 | 110 |                            |  | In FY 2002             
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Joban (Yamagata Tendoo  Tokyo)                      |  |                 | 290 |                            |  |                        
|                                                    
|                                                    
|                                                    
|                                                    
|Route 16 (Tokyo Machida  Chiba Kashiwa)             |  |                 | 70  |                            |  | In FY 2003             
|                                                    
|                                                    
|                                                    
|                                                    
|Hokuriku (Nagaoka  Shiga)                           |  |                 | 260 |                            |  |                         |  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Sanyoo (Osaka  Hiroshima  Kitakyushu)              |  |                 | 380 |                            |  |                         |  | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Joetsu (Tokyo  Niigata  Yamagata)                  |  |                 | 320 |                            |  |                        
|                                                    
|                                                    
|                                                    
|                                                    
|Meihan B (Shiga  Nagoya, Mie Seki  Osaka))         |  |                 | 120 |                            |  |                        
|                                                    
|                                                    
|                                                    
|                                                    
|Hokkaido (Aomori  Sapporo- Asahikawa)               |  |                 | 400 |                            |  |                         |  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Tohoku B (Aomori  Saitama Kitakatsushikagun)        |  |                 | 460 |                            |  |                         |  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Chuodo (Tokyo  Shiojiri  Nagoya, Shiojiri- Joetsu) |  |                 | 390 |                            |  |                         |  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Sanin (Kyoto  Shimane  Yamaguchi)                  |  |                 | 410 |                            |  | In FY 2004             
|                                                    
|                                                    
|                                                    
|                                                    
|Shikoku (Kobe  Tokushima  Matsuyama)               |  |                 | 250 |                            |  | and thereafter         
|                                                    
|                                                    
|                                                    
|                                                    
|Kyushu B (Kitakyushu  Kagoshima)                    |  |                 | 240 |                            |  |                         |  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Kyushu C (Saga  Nagasaki)                           |  |                 | 90  |                            |  |                         |  | 

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|              |  |                 |       |                            |  |                         |  | 
|------------- |  | --------------- | ----- | -------------------------- |  | ----------------------- |  | 
|              |  |                 |       |                            |  | Completion or scheduled
|              |  | Estimated route |       | completion of threading of
|Route/Segment |  | miles           |       | cable                     
|              |  |                 |       |                           
|Total         |  |                 | 4,600 |                           
|              |  |                 |       |                           

In the fiscal year ended March 2001, we commenced construction work on
three routes; the Tokaido route, the Tohoku A route, and the Kyushu A route. The
Tokaido route has already been completed and the Tohoku A and Kyushu A routes
are expected to be completed in Autumn 2001. The completion schedule for these
segments has been affected by the conduit construction schedule handled by the
Ministry of Land, Infrastructure, and Transport but those scheduled changes will
not significantly impact the execution of our business plan.

Metropolitan Network Infrastructure Buildout Plan

We plan on expanding our metropolitan network infrastructure in urban
areas in order to position ourselves to provide end-to-end network connectivity
to a greater number of customers in large metropolitan areas. We may expand our
metropolitan network infrastructure in other cities as well, but we currently
have no definitive plans to do so.

In the Tokyo, Osaka and Nagoya metropolitan areas, we are negotiating
and contracting to lease dark fiber that is currently being installed by
telecommunications carriers as well as by municipal governments, private
railroad companies and public utility organizations in subway systems, along
railroads, in electricity conduits and in sewers as well as telecommunications
carriers. We will build some lines ourselves. This will allow us to increase our
number of access points significantly in these municipalities and to develop
more effectively our local access infrastructure, which will connect into our
backbones network or metropolitan infrastructure at these access points.

Local Access Infrastructure Buildout Plan

We are expanding our local access infrastructure in order to help
customers connect directly to our network. We are using a variety of means to
expand local access including the laying of fiber in select areas and the use of
existing infrastructure such as NTT and other carriers existing fiber,
broadband cable and DSL. With the unbundling of NTTs local access lines and the
increasing availability of broadband cable and DSL access, it has become easier
and cheaper to overcome the last-mile access problems that we previously faced.

International Network Buildout Plan

In addition to our optical fiber network in Japan, we have acquired
capacity between Japan and the United States. In March 2000, we entered into an
IRU contract with Global Crossing giving us the rights to the equivalent of ten
STM-1s between Japan and the United States.We can lease up to five STM-1s to any
customer after September 30, 2001. In September 2000, we launched our Japan-US
fiber optic cable operation and immediately started leasing international
capacity at 150 Mbps. As of June 2001, we are providing 600 Mbps service.

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Item 5. Operating and Financial Review and Prospects

A.     Operating Results

You should read the following discussion of the financial condition and
results of operations of Crosswave together with the consolidated financial
statements and the notes to those financial statements. The discussion in this
section contains forward-looking statements and you should read the risk factors
relating to forward-looking statements appearing at the beginning of this
document.

Overview

We are a provider of broadband data communications infrastructure and
services in Japan. We operate a nationwide fiber optic network which we are
continually expanding. We were founded on October 28, 1998 as a joint venture
among IIJ, Sony and Toyota. For our first six months, we were primarily
developing our business plan, raising capital to implement the plan, designing
and developing our network, and securing the necessary equipment to improve our
network and offer services. Beginning in May 1999, we started offering our
high-speed backbone service in the Tokyo- Nagoya-Osaka corridor. In December
1999, we launched Wide-area Ethernet Platform Services. In March 2000, we opened
our first data center in Tokyo and we started data center operations in Osaka,
Nagoya, Sapporo, Sendai, and Fukuoka during fiscal 2000. On August 4, 2000, we
completed our initial public offering on the Nasdaq National Market.

Result of Operations

As an aid to understanding our operating results, the following table
sets forth items from our statement of operations for the periods indicated in
yen amounts.

|                             |                                     |   |         |        |   |      |            |                    |   |   |             |           |   | 
|---------------------------- | ----------------------------------- | - | ------- | ------ | - | ---- | ---------- | ------------------ | - | - | ----------- | --------- | - | 
|                             |                                     |   |         |        |   |      |            | March 31,          |   |   |             |          
|                             |                                     |   |         |        |   |      |            |                   
|                             |                                     |   |         | 1999   |   | 2000 |            | 2001              
|                             |                                     |   |         |        |   |      |            |                   
|                             |                                     |   |         |        |   |      |            | (thousands of yen) |   |   |             |          
|Revenue                      |                                     | ¥ |        |        |   | ¥    | 231,786    |                    |   | ¥ | 2,628,655   |          
|                            
|                            
|                            
|                            
|Operating Costs and Expenses |                                     |   |         |        |   |      |            |                    |   |   |             |          
|                            
|                            
|                            
|                            
|                             |                                     |   |         |        |   |      |            |                    |   |   |             |          
|                            
|                            
|                            
|                            
|                             | Cost of data communication services |   |         |       |   |      |            | 6,098,725          |   |   |             | 9,513,127 |  
|                            
|                            
|                            
|                            
|                             | Depreciation and amortization       |   |         | 405    |   |      |            | 841,648            |   |   |             | 2,306,980 |  
|                            
|                            
|                            
|                            
|                             | Sales and marketing                 |   |         |       |   |      |            | 431,019            |   |   |             | 632,983   |  
|                            
|                            
|                            
|                            
|                             | General
and administrative          |   |         | 82,097 |   |      |            | 520,311            |   |   |             | 1,138,943 |  
|                             |                                     |   |         |        |   |      |            |                    |   |   |             |          
|                             |                                     |   | 82,502  |        |   |      | 7,891,703  |                    |   |   | 13,592,033  |          
|                             |                                     |   |         |        |   |      |            |                    |   |   |             |          
|                             |                                     |   |         |        |   |      |            |                    |   |   |             |          
|                            
|                            
|                            
|                            
|Operating loss               |                                     |   | (82,502 | )      |   |      | (7,659,917 | )                  |   |   | (10,963,378 | )        
|                            
|                            
|                            
|                            
|Other Income (Expense):      |                                     |   |         |        |   |      |            |                    |   |   |             |          
|                            
|                            
|                            
|                            
|                             | Interest expense, net               |   |         | (22    | ) |      |            | (195,852           | ) |   |             | (280,835  | )
|                            
|                            
|                            
|                            
|                             | Foreign exchange gain               |   |         |       |   |      |            | 10,121             |   |   |             | 553,001   |  

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|                                                |            |                                                 |      |      |         |      |          |           |            |   |         |          |             |  
|----------------------------------------------- | ---------- | ----------------------------------------------- | ---- | ---- | ------- | ---- | -------- | --------- | ---------- | - | ------- | -------- | ----------- | -
|                                                |            |                                                 |      |      |         |      |          | March 31, |            |   |         |         
|                                                |            |                                                 |      |      |         |      |          |          
|                                                |            |                                                 |      | 1999 |         | 2000 |          | 2001     
|                                                |            |                                                 |      |      |         |      |          |          
|                                                | Other, net |                                                 |      | (812 | )       |      |          | (3,646    | )          |   |         | (170,931 | )          
|                                                |            |                                                 |      |      |         |      |          |           |            |   |         |         
|                                                |            |                                                 | (834 | )    |         |      | (189,377 | )         |            |   | 101,235 |         
|                                                |            |                                                 |      |      |         |      |          |           |            |   |         |         
|                                                |            | Loss before minority interests and
income taxes |      |      | (83,336 | )    |          |           | (7,849,294 | ) |         |          | (10,862,143 | )
|                                               
|                                               
|                                               
|                                               
|Minority Interests in Consolidated
Subsidiaries |            |                                                 |     |      |         |      |         |           |            |   | 15,302  |         
|                                               
|                                               
|                                               
|                                               
|Income Taxes                                    |            |                                                 |     |      |         |      |         |           |            |   |        |         
|                                                |            |                                                 |      |      |         |      |          |           |            |   |         |         
|                                                |            | Net Loss                                        |      | ¥    | (83,336 | )    |          | ¥         | (7,849,294 | ) |         | ¥        | (10,846,841 | )
|                                                |            |                                                 |      |      |         |      |          |           |            |   |         |         

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

Revenues.

Total revenues for the year ended March 31, 2001 increased more than 10
times to ¥2,628.7 million from ¥231.8 million the prior year. This was
primarily due to customer growth and to the fact that we only began offering our
services in May 1999. We had strong revenue growth in the year ended March 31,
2001 in our Wide-area Ethernet platform services. For the year ended March 31,
2001, revenues from Wide-area Ethernet platform services totaled ¥444.2
million compared to only ¥5.7 million in the prior year which only recorded
revenues for this service for four months as these services commenced in
December 1999. The growth in Wide-area Ethernet was driven by increases in the
number of customers and increases in the number of ports and total capacity for
existing customers. We also experienced strong revenue growth in other network
services which increased more than eight times compared to the prior year to
¥1,806.2 million and data center services revenues which increased to ¥378.3
million from only ¥9.9 million in the prior year. With respect to revenues
from related parties, 75.0% of total revenues was from related parties in the
year ended March 31, 2001, compared to 92.4% in the prior year. IIJ accounted
for approximately 64.4% of total revenues in the year ended March 31, 2001,
compared to 86.2% in the prior year.

Cost of Data Communication Services.

Our cost of data communications services include payments relating to
our IRU agreement with KDDI, leasing fees for local access lines, and
outsourcing fees related to maintaining and monitoring our network and data
centers. In the year ended March 31, 2001, our cost of data communications
services increased by 56.0% to ¥9,513.1 million primarily due to increases in
data center operating costs from our rapid data center buildout and increases in
maintenance costs of our network. For the year ended March 31, 2001, ¥5,614.7
million, or 59.0 %, of our cost of data communication services related to our
KDDI IRU agreement compared to ¥5,075.1 million, or 83.2% in the prior year.

Depreciation and Amortization.

Our depreciation and
amortization expenses increased by 174.1% to ¥2,307.0 million in the

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year ended March 31, 2001, from ¥841.6 million in the prior year due primarily
to recording a full year worth of depreciation and amortization relating to
equipment used for our Phase I network plus increases in depreciation and
amortization as a result of our rapid data center growth and the increase of
equipment used therein.

Sales and Marketing.

Sales and marketing expenses increased by 46.9% to ¥633.0 million in
the year ended March 31, 2001, from ¥431.0 million in the prior fiscal year
primarily because of an increase in sales personnel expenses as we strengthened
of our sales force.

General and Administrative.

General and administrative expenses increased by 118.9% to ¥1,138.9
million in the year ended March 31, 2001, from ¥520.3 million in the prior
fiscal year primarily due to increases in employee headcount and in recruiting
expenses.

Operating Loss.

As a result of the above, our operating loss increased by 43.1% to
¥10,963.4 million in the year ended March 31, 2001, from ¥7,659.9 million in
the prior fiscal year.

Other Income (Expense).

We had other income of ¥101.2 million in the year ended March 31,
2001, compared to other expense of ¥189.4 million in the prior fiscal year. Our
interest expense, net increased to ¥280.8 million primarily due to increased
use of capital lease financing for the acquisition of network equipment such as
DWDM and SONET for the Phase I network. Additionally, we had an increased
expense in other, net which reflected expected losses accrued as a result of a
bankruptcy filing by a third party to which we had made a contract prepayment
for a certain capacity contract we terminated.

These other expenses, however, were more than offset by a foreign
currency gain of ¥553.0 million relating to the U.S. dollar proceeds from our
initial public offering during the fiscal year ended in March 31, 2001.

Income Taxes.

We incurred and paid no income tax. Also, we recognized no tax benefit
of net operating loss carry forwards due to uncertainty as to the realization of
such benefit.

As a result of the above, in the year ended March 31, 2001, we had a
net loss for the year of ¥10,846.8 million compared to
¥7,849.3 million in the prior
fiscal year.

Year ended March 31, 2000 as compared to the period from October 28, 1998 to
March 31, 1999

A comparison of results of operations between the year ended March 31,
2000 and the period from October 28, 1998 to March 31, 1999 is not meaningful.
Although we were founded in October 1998, we were only in the development stage
and did not begin offering services until May

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1999. As a result, we had no revenue for the period from October 28, 1998 to
March 31, 1999, and our operating expenses of only ¥82.5 million were limited
to general and administrative expenses related to compensation for employees and
other expenses such as the leasing of office space.

Results of operations for the year ended March 31, 2000

Data communication services revenues.We began offering services and
generating revenue in May 1999. Total revenues generated for the year ended
March 31, 2000 were ¥231.8 million. The largest component was revenues from
our high-speed backbone service which accounted for ¥193.3 million, or 83.4%
of our total revenues. We also had revenues of ¥22.9 million from our dial-up
port service, ¥5.7 million from our Wide-area Ethernet platform service and
¥9.9 million from our data center services.

Cost of data communication services.The cost of data communication
services for the year ended March 31, 2000 was ¥6,098.7 million. Of this
amount, ¥5,075.1 million, or 83.2% was related to the KDDI IRU agreement.
Approximately ¥153.2 million, or 2.5%, was related to rental fees paid to
telecommunications carriers for rack space to house our equipment and ¥124.4
million, or 2.0%, was related to lease payments to local landlords and others
for our access points and offices.

Depreciation and amortization.Our depreciation and amortization
expenses for the year were ¥841.6 million relating primarily to the
depreciation and amortization of the DWDM and SONET equipment used to light our
optical fiber and prepare our access points as we expanded our network
operations from primarily in the Tokyo-Nagoya-Osaka corridor in May 1999 to
nationwide service in March 2000.

Sales and marketing.Our sales and marketing expenses for the year were
¥431.0 million. Of this amount, ¥215.8 million, or 50.0%, related to
television and other advertising conducted in the first three months of the year
when we were launching our services.

General and administrative.General and administrative expenses for the
year were ¥520.3 million and were primarily related to personnel, recruiting
and professional fees for membership of certain employees in various
professional associations.

Other income (expense).Our other income (expense), were expenses of
¥189.4 million. Our primary other expense was interest expense of ¥195.8
million relating to the financing of our equipment purchases.

Income taxes.We incurred and paid no income tax. Also, we recognized
no tax benefit of net operating loss carry forwards due to uncertainty as to the
realization of such benefit.

As a result of the above, we had a net loss for the year of ¥7,849.3
million.

B.     Liquidity and Capital Resources

Our principal capital and liquidity needs have historically been
related to the development and expansion of our network infrastructure, sales
and marketing activities and general working capital needs. We have met these
capital needs primarily by cash flow from service revenues,

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issuance of our common shares and capital lease arrangements.

Net cash used in operating activities was ¥8,533.8 million for the
year ended March 31, 2001 compared to ¥3,983.2 million for the year ended
March 31, 2000. The primary adjustments to the net loss of ¥10,846.8 million
to determine net cash used in operating activities included depreciation and
amortization of ¥2,307.0 million and increases in accrued expenses and other
current liabilities of ¥2,624.1 million offset by cash used of ¥823.2
million as a result of increases in refundable consumption tax and other current
assets, decreases in accounts payable of ¥569.6 million increases in accounts
receivable of ¥583.7 million and unrealized foreign currency exchange gain of
¥641.1 million.

Net cash used in investing activities was ¥7,935.2 million for the
year ended March 31, 2001 compared to ¥1,722.3 million for the year ended
March 31, 2000. The net cash used in investing activities was primarily for
purchases of property and equipment of ¥11,328.1 million, although we had
¥4,155.2 million of cash provided by proceeds from the sale and lease back of
equipment.

Net cash provided by financing activities was ¥27,322.9 million for
the year ended March 31, 2001 compared to ¥12,873.1 million for the year ended
March 31, 2000. We had ¥29,368.9 million of proceeds from our initial public
offering.

We have an extensive network buildout plan that consists of



| |  |  | significantly increasing the coverage and redundancy of our nationwide network,                               
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | building out metropolitan network infrastructures in Tokyo, Osaka and Nagoya,                                 
|
| |  |  | developing local access infrastructure to position ourselves to connect customers
directly to our network, and
|
| |  |  | building data centers in major cities in Japan.                                                               

Please see the description of our network buildout plan contained in
Item 4.D, Property, Plants and Equipment.

Building out our network in this manner will require a significant
amount of capital. We estimate that the total cash required to develop our
network as set forth in our network development plan and to operate the
infrastructure for the three fiscal years ending March 31, 2004 will be up to
approximately ¥60 billion, which is a downward revision of approximately ¥40
billion from previous estimates we made in August 2000 due to favorable changes
in the local access business environment, which has provided us with more
options for our local access network buildout plan. Our current estimate for the
three fiscal years ending March 31, 2004, includes the following:



| |  |  | We estimate that cash required for our nationwide backbone
network buildout will be approximately ¥20 billion.                                                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We estimate that cash required for our local access
infrastructure buildout will be approximately ¥10 billion,
although it is difficult to accurately estimate the costs that
will be incurred developing our local access infrastructure
buildout, mainly

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| |   |  | because the local access infrastructure will be driven
primarily by the needs and locations of our future customers.           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We estimate that cash required to develop our data centers and
other infrastructure and facilities will be at most ¥30 billion.

As of March 31, 2001, we had approximately ¥24 billion of cash and
cash equivalents, which consisted primarily of proceeds from our initial public
offering. Even considering the capital required to execute our network buildout
plan and to fund negative cash flows from operations for the rest of this fiscal
year, we believe that cash on hand and cash flow from service revenues will be
sufficient to satisfy our cash requirements into the first quarter of fiscal
2002.

We do not believe that we will generate positive cash flow until at
least the year ending March 31, 2006. Therefore, we will need to raise
additional capital to complete our current network buildout plans through the
year ending March 31, 2006. We intend to raise these funds primarily from
offerings or strategic placements of debt and equity securities and bank
borrowings, and we have retained a financial advisor to assist us. However, at
this time, we have no concrete plans as to the timing or manner of any offering
or borrowing.

We may also explore opportunities to leverage our network capacity, or
to sell or lease portions of our future network infrastructure, with third
parties, depending on the development of the data communications market and the
regulatory environment. These types of transactions could help us to raise, or
reduce our need for, additional capital. We will continue to monitor our needs
for cash and market conditions for opportunities to raise funds. However, there
can be no assurance that we will be able to raise funds on a timely basis or at
all or on terms that are acceptable to us. If we are unable to do so, it will
delay the completion of our current network buildout plans.

As of March 31, 2001, we had capital lease obligations of ¥11,167.1
million (of which the current portion was ¥1,935.2 million) and long-term
debt, primarily related to property we purchased for a Yokohama data center, of
¥7,884.2 million (of which the current portion was ¥236.0 million). Please
see Notes 6 and 7 to our Consolidated financial statements for additional
details on our capital lease obligations and long-term debt.

C.     Research and development

Most of our research and development efforts are focused on evaluating
equipment that will be used on our network. Our engineers work directly with
vendors to design, evaluate and alter, as necessary, equipment for use on our
network.

Costs related to research and development are borne by us, though we do
not incur significant research and development expenses for these activities.
Essentially, our only expenses are salary expenses for research and development
personnel. We do not expect these activities to produce material intellectual
property rights but would expect to allocate any rights on a case-by- case basis
in proportion to the relative contributions of each party.

D.     Trend information

We believe the following factors are
the most significant factors (in addition to those

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discussed above in B. Liquidity and Capital Resources and elsewhere) likely to
affect the financial results of Crosswave and its consolidated subsidiaries.

We expect that the telecom sector will continue to experience
significant end-user demand in most markets. Providing cost effective and highly
reliable data communication services continues to be the key to attracting
customers, and our ability to provide flexible and scalable services remains a
competitive advantage in approaching our target customers. Growth will be
driven, however, by the continuing acceptance of our high-end services and
continuing expenditures by Japanese companies on information technology (IT) and
IT infrastructure. To the extent that the economic situation in Japan continues
to deteriorate, our growth may be slower than we anticipate.

The discussion above includes forward-looking statements based on
managements assumptions and beliefs as to the factors set forth above, as to
market and industry conditions and as to our performance under those conditions
and are subject to the qualifications set forth in Forward- looking
Statements. Our actual results could vary significantly from these projections
and could be influenced by a number of factors including changes in the market
and industry conditions, competition and other factors and risks as discussed in
Risk Factors in Item 3.D. Additionally, unanticipated events and circumstances
may affect our actual financial and operating results. As a result, no
representation can be or is made with respect to the accuracy of the foregoing
projections and you should be aware that the actual results achieved may vary,
potentially materially, from these projections.




Item 6. Directors, Senior Management and Employees

A.     Directors and Senior Management

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

|                     |  |     |    |          |  |                                                                              
|-------------------- |  | --- | -- | -------- |  | -----------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Koichi Suzuki        |  |     | 54 |          |  | President and Representative Director                                        
|                    
|                    
|                    
|                    
|Akio Onishi          |  |     | 42 |          |  | Chief Executive Officer and Representative
Director                          
|                    
|                    
|                    
|                    
|Yasuharu Fushimi     |  |     | 50 |          |  | Chief Financial Officer, Chief Accounting
Officer and Representative Director
|                    
|                    
|                    
|                    
|Takehisa Hayashi     |  |     | 57 |          |  | Chief Marketing Officer and Director                                         
|                    
|                    
|                    
|                    
|Senji Yamamoto       |  |     | 55 |          |  | Director                                                                     
|                    
|                    
|                    
|                    
|Masamitsu Tao        |  |     | 53 |          |  | Director                                                                     
|                    
|                    
|                    
|                    
|Toshiya Asaba        |  |     | 39 |          |  | Chief Technology Officer                                                     
|                    
|                    
|                    
|                    
|Kanetake Imai        |  |     | 56 |          |  | Executive Officer                                                            
|                    
|                    
|                    
|                    
|Nobutaka Hirabayashi |  |     | 41 |          |  | Executive Officer                                                            
|                    
|                    
|                    
|                    
|Hisao Inaba          |  |     | 49 |          |  | Executive Officer                                                            
|                    
|                    
|                    
|                    
|Hiromichi Koike      |  |     | 58 |          |  | Standing Statutory Auditor                                                   
|                    
|                    
|                    
|                    
|Masako Tanaka        |  |     | 43 |          |  | Statutory Auditor                                                            
|                    
|                    
|                    
|                    
|Takami Nagasaka      |  |     | 45 |          |  | Statutory Auditor                                                            
|                    
|                    
|                    
|                    
|Hideki Matsushita    |  |     | 58 |          |  | Statutory Auditor                                                            

We have designated a President, Chief Executive Officer, Chief Financial and Chief

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Accounting Officer, Chief Marketing Officer, Chief Technology Officer and
Executive Officers. Under the Regulations of the Board of Directors, the Chief
Executive Officer, the Chief Financial and Chief Accounting Officer, the Chief
Marketing Officer, the Chief Technology Officer and the Executive Officers are
charged with the responsibilities of our day to day operations.

Koichi Suzukihas been the President and Representative Director of
Crosswave since October 1998. He also has been the President, Chief Executive
Officer and Representative Director of IIJ since April 1994 and has over 20
years of experience in the computer and communication industry. In addition, Mr.
Suzuki is the Representative Director of Crosswave Facilities, Crosswave
Service, IIJ America, IIJ Media Communications, IIJ Technology, Internet
Multifeed, NetCare, Asia Internet Holding. He also serves as a Director of
Crosswave Communications America, atom, Lycos Japan, Monex, Net Chart Japan,
AyalaPort Makati and i-Heart. From December 1992 to April 1994, Mr. Suzuki was a
Director of IIJ. Prior to joining IIJ, Mr. Suzuki was employed at Japan
Management Association where he served as general manager.

Akio
Onishi has been the Chief Executive Officer and Representative
Director of Crosswave since May 2000. Prior to that, Mr. Onishi had been a
Director of Crosswave since June 1999. Mr. Onishi is also a Director of IIJ,
Internet Multifeed, NetCare and DLJdirect SFG Securities Inc., Skip City,
AyalaPort Makati and i-Heart. He was the Chief Strategic Officer of IIJ from May
1999 until June 2000 and has been a Director of IIJ since June 1998. Mr. Onishi
joined IIJ in April 1997. Prior to joining IIJ, Mr. Onishi worked at the
Organization for Economic Cooperation and Development from February 1995 to
April 1997, at McKinsey & Company Inc. Japan as a consultant from October 1989
to February 1995, and at the Ministry of International Trade and Industry of
Japan from April 1982 to August 1989.

Yasuharu Fushimihas been the Chief Financial Officer, Chief Accounting
Officer and Representative Director of Crosswave since May 2000. He has also
been the President of IIJ America since November 1999 and the President and
Director of Crosswave Communications America since October 2000. Prior to May
2000, Mr. Fushimi had served as an advisor to Crosswave since July 1999. He was
with the Ministry of Finance from April 1974 until 1999 where he was the
director of the Ministry of Finance Taxation Division from June 1995.

Takehisa Hayashihas served as Chief Marketing Officer and Director of
Crosswave since May 2000. He has also been a Director of Crosswave
Communications America since October 2000. Prior to May 2000, Mr. Hayashi had
served as an Executive Director of Crosswave since August 1999. Prior to joining
Crosswave, Mr. Hayashi served in numerous managerial positions with
International Digital Communications, which he joined in June 1990, and was most
recently the Executive Director for the Sales Department of International
Digital Communications. Mr. Hayashi worked at Nippon Steel from April 1967 to
June 1990.

Senji Yamamotohas been a Director of Crosswave since October 1998. From November
1995 to December 1997, Mr. Yamamoto was the Director of Sony Communication Network where
he has been the President and Representative Director since January 1998. Mr. Yamamoto has been
with Sony since April 1970.

Masamitsu Taohas served as a Director of Crosswave since June 2000. He
has been General Manger of the Information Business Planning Department of
Toyota since January 2000.

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He has been with Toyota since April 1972.

Toshiya Asabahas been the Chief Technology Officer of Crosswave since
May 2000. Prior to that, Mr. Asaba had served as a Director of Crosswave since
June 1999. He has also served as a Director and Co-chief Technology Officer of
IIJ since May 1999. Mr. Asaba is also a Director of Crosswave Communications
America, Asia Internet Holding, Asia Internet Holding Taiwan, IIJ America and
Internet Multifeed. From 1995 to June 1999, Mr. Asaba was General Manager,
Network Engineering Division. Mr. Asaba joined IIJ in 1992. He has eleven years
of experience on Internet technology, through three years of Internet-related
research and eight years of Internet backbone engineering, including network
design, routing and traffic management.

Kanetake Imaihas served as an Executive Officer of Crosswave since
June 2001. Prior to that, Mr. Imai had served as a Director of Toyota Media
Station Incorporated since June 1999. Mr. Imai has been with Toyota since April
1968.

Nobutaka Hirabayashihas served as an Executive Officer of Crosswave since May 2000.
Mr. Hirabayashi has been a General Manager of Corporate Planning Division since May 2000. Prior
to that, he had been a Deputy General Manager of Corporate Planning Division since February 1999.
He had been serving as a Manager of Sony Communication Network from May 1996. Mr.
Hirabayashi has been with Sony since April 1983.

Hisao Inabahas served as an Executive Officer of Crosswave since June 2000. Mr. Inaba
has been a General Manager of our Network Operating Division since January 2000, and also serves
as a General Manager of Network Planning Division and Customer Service Division. He has also
been the Director of Crosswave Services. Mr. Inaba joined IIJ in October 1999. Prior to that, he
worked at KDDI, the former KDD.

Hiromichi Koikehas served as a Standing Statutory Auditor of Crosswave
since June 1999. He became the President of Kansai Digital Phone in June 1998 to
where he was transferred from Toyota in January 1997. From April 1966 to
December 1994, he had been with Toyota.

Masako Tanakahas served as a Statutory Auditor of Crosswave since
October 1998. She has been with IIJ since December 1992. She also worked for
Itochu and Japan Applied Research prior to joining IIJ.

Takami Nagasakahas served as a Statutory Auditor of Crosswave
since June 2001. He has been working for Sony since August 1981 and is also a
General Manager of Connection Managing in its Accounting Department.

Hideki Matsushitahas served as a Statutory Auditor of Crosswave
since June 2001. He has also been a Standing Statutory Auditor of IIJ since June
1998.

B.     Compensation

For the year ended March 31, 2001, the aggregate compensation paid by
Crosswave to all of its executive officers and directors was approximately ¥70
million. We do not provide pension, retirement or similar benefits for our
officers and directors.

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C.     Board Practices

Our Articles of Incorporation and Regulations of the Board of
Directors provide that the following matters shall be approved by the
affirmative vote of two-thirds of Directors present at the meeting of the Board
of Directors at which a majority of all Directors are present:



| |  |  | Approvals and amendments of the business plan, including the basic
policy of the management, budget, investment plan, contents of
actual business, commencement of new business areas and
application or withdrawal of important licenses;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Approvals and amendments of the business plan and the budget of each fiscal year;                                                                                                                                                         
|
| |  |  | Issuance of new shares, convertible bonds and warrant bonds; and                                                                                                                                                                          
|
| |  |  | Amendments of the Regulations of the Board of Directors.                                                                                                                                                                                  

D.     Employees

As of May 2001, we had 168 employees plus our six directors and three
statutory auditors, for a total of 177.

It is common in Japan for start-up companies to use employees seconded
from affiliates. We believe we have benefitted during our initial period of
operations from the availability of employees seconded from our three
shareholders and other Japanese institutions with which we have relationships.
Seconded employees are transferred to work full-time for us on an indefinite
basis and we reimburse the seconding company based on scheduled rates agreed
with the seconding company. Our management does not distinguish between these
seconded employees and direct employees at the operational level. As of May
2001, approximately 12.5% of our employees were seconded, including 11 from IIJ,
three from Sony and three from Toyota. It is possible that some of these
employees will become our direct employees in the future, as has happened with
15 of our seconded employees as of March 31, 2001, but there is no fixed
schedule for such action. We expect the percentage of seconded employees in our
work force to drop quickly as substantially all new hires are direct employees.

Additionally, approximately 19 IIJ employees spend some portion of
their time working for us. IIJ pays these employees. We reimburse IIJ for the
time these employees spend working for us based on scheduled rates agreed to
with IIJ.

Our employees are not unionized. We consider our level of remuneration,
non-wage benefits, working conditions and other allowances to be generally
competitive with those offered in Japan by telecommunications companies. In
connection with this initial public offering, we will establish a stock option
plan which we believe will help us attract and retain key employees.

E.     Share Ownership

Stock Option Plans

In August 2000, we implemented a stock option plan for our directors and employees under

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which options to acquire a total of 3,800 shares or 760,000 ADS equivalents, or
approximately 1.2% of the total outstanding shares were granted to our employees
and nine of our directors. In June 2001 we granted an additional 2,225 shares or
445,000 ADS equivalents, or approximately 0.4% of the total outstanding shares
to our employees and 36 of our directors. The option exercise price for the
shares was set at 5% above the 30-day average of the closing market price
beginning 45 days prior to the grant. The options will be exercisable at various
times from two years to ten years from the date of grant.




Item 7. Major Shareholders and Related Party Transactions

A.     Major Shareholders

The following table sets forth information known to us with respect to
the beneficial ownership of our common stock as of June 30, 2001 by each
shareholder known by us to own beneficially more than 5% of our common stock and
all directors and executive officers as a group.

|                               |  |                    |         |            |  |  |      |    
|------------------------------ |  | ------------------ | ------- | ---------- |  |  | ---- | ---
|                               |  | Shares of         
|                               |  | Common Stock      
|                               |  | Beneficially Owned
|                               |  |                   
|Name of Beneficial Owner       |  | Number             |         | Percentage
|                               |  |                    |         |           
|Internet Initiative Japan Inc. |  |                    | 190,000 |            |  |  | 37.9 | (*)
|                              
|                              
|                              
|                              
|Sony Corporation               |  |                    | 120,000 |            |  |  | 23.9 |    
|                              
|                              
|                              
|                              
|Toyota Motor Corporation       |  |                    | 120,000 |            |  |  | 23.9 |    



---

| |  | (*) 190,000 shares held by Internet Initiative Japan Inc. comprised of 175,000 shares of common
stock and 3,000,000 ADSs (equivalent to 15,000 shares of common stock).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our ADSs are traded only on the Nasdaq National Market. Our common
stock is not otherwise registered for trading on any exchange. Of the 501,960
shares of common stock outstanding as of March 31, 2001, 86,960 shares were held
in the form of ADSs, which is equal to 17,392,000 ADSs.

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

B.     Related Party Transactions

Transactions Between Us and our Directors, Officers, Statutory Auditors or Companies With
Whom They Have a Relationship

Since our incorporation, there have been no transactions between us and
any of our directors, officers, statutory auditors or with any companies with
which any of the above have a relationship, except for transactions with our
principal shareholders as discussed immediately below.

Transactions Between Us and Our Principal Shareholders

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In total, the amount of our revenues from IIJ, its subsidiaries and
affiliates since our inception through March 31, 2001, is approximately
¥1,893.6 million.

In fiscal year 1998, we paid ¥1,080.1 million to IIJ for network
equipment. Additionally, we paid IIJ ¥2.2 million for rental space and an
additional ¥1.9 million to Asia Internet Holding, an affiliate of IIJ. We also
paid an outsource fee of ¥0.94 million to atom, an affiliate of IIJ.
Additionally, the company paid ¥0.29 million to IIJ and ¥0.24 million to IIJ
Media Communications, an IIJ subsidiary, for other services rendered.

In fiscal year 1998, we paid Intervision Inc., a subsidiary of Sony, a
total of ¥17.5 million, of which ¥6.5 million was for promotion and
advertising. ¥10.1 million was an outsourcing fee, and ¥0.84 million was for
other services.

In fiscal year 1999, we have received approximately ¥193.2 million in
revenues from services that we offer to IIJ and ¥6.7 million in revenues for
services that we offer to IIJ Technology. We have paid approximately ¥1,373.6
million to IIJ for network equipment that we have purchased from IIJ, and paid
to IIJ Technology ¥5.1 million for software that we have purchased. We have
also paid IIJ approximately ¥13.4 million in rental fees for the use of office
space from IIJ, ¥13.3 million for various access services provided to us by
IIJ and a subsidiary of IIJ, NetCare, and an additional ¥16.8 million for
various other services provided to us by IIJ and IIJ group company members. We
believe that all services provided to and paid for by IIJ and IIJ Technology,
all purchases of equipment from IIJ and all payments for services and office
space from IIJ and IIJ group companies by us have been done at fair value based
on market pricing.

In fiscal year 1999, we have received approximately ¥12.6 million in
revenues for services provided to Sonet, a subsidiary of Sony. We have paid
approximately ¥317.9 million for advertising and promotion to Intervision, a
subsidiary of Sony, and an additional ¥1.3 million for other services from
Intervision. We believe that these transactions have been done at fair value
based on market pricing.

In fiscal year 1999, we have received approximately ¥1.7 million of
revenues from Toyota for services that we provide Toyota and paid to them ¥0.2
million for space in which we locate some of our FWA equipment. We believe that
these transactions have been done at fair value based on market pricing.

In fiscal 1999 we had a number of employees that were assigned or
seconded to us from our major shareholders. For these employees we paid
approximately ¥172.5 million to IIJ, ¥27.7 million to Sony and ¥30.3
million to Toyota and an affiliate of Toyota. We also paid to IIJ and its
subsidiary, NetCare, approximately ¥128.8 million for services we outsourced
to them and we paid ¥10.5 million to a subsidiary of Sony for services
outsourced to it.

In fiscal year 2000, we have received approximately ¥1,693.7 million
in revenues for services to IIJ and its subsidiaries IIJ Technology and NetCare.
We have paid approximately ¥579.5 million to IIJ, of which ¥335.2 million
was for network equipment, and paid ¥202.1 million to IIJ Technology and
NetCare relating to network construction. We have also paid IIJ approximately
¥9.2 million as sales commissions, and ¥34.3 million for various access
services provided to us by IIJ and NetCare. We believe that all these
transactions have been conducted at fair value based on market pricing.

46



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In fiscal year 2000, we have received approximately ¥273.4 million in
revenues for services provided to Sony and its subsidiaries including Sonet. We
have paid approximately ¥5.7 million for advertising and promotion to
Intervision, a subsidiary of Sony. We believe that these transactions have been
conduct at fair value based on market pricing.

In fiscal year 2000, we have received approximately ¥4.9 million of
revenues from Toyota for services that we provided to Toyota. We have also paid
¥14.0 million for software we purchased from a subsidiary of Toyota. We
believe that these transactions have been conducted at fair value based on
market pricing.

In fiscal 2000 we had a number of employees that were assigned or
seconded to us from our major shareholders. For these employees we paid
approximately ¥124.8 million to IIJ, ¥43.2 million to Sony and ¥52.1
million to Toyota and an affiliate of Toyota. We also paid IIJ and IIJ group
companies approximately ¥353.5 million for services we outsourced to them.

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

C.     Interests of Experts and Counsel

Not applicable.




Item 8. Financial Information

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

Legal Proceedings

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




Item 9. The Offer and Listing

American Depositary Shares representing our common stock have been
quoted on the Nasdaq National Market since August 4, 2000.

47



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

|                                  |  |            |         |     |  |  |         | 
|--------------------------------- |  | ---------- | ------- | --- |  |  | ------- | 
|                                  |  | NASDAQ ($)
|                                  |  |           
|                                  |  | High       |         | Low
|                                  |  |            |         |    
|August 2000                       |  |            | 14.0000 |     |  |  | 12.9375 | 
|                                 
|                                 
|                                 
|                                 
|September 2000                    |  |            | 12.1875 |     |  |  | 8.3750  | 
|                                 
|                                 
|                                 
|                                 
|Quarter ended September 30, 2000* |  |            | 14.0000 |     |  |  | 8.3750  | 
|                                 
|                                 
|                                 
|                                 
|October 2000                      |  |            | 10.7500 |     |  |  | 9.1250  | 
|                                 
|                                 
|                                 
|                                 
|November 2000                     |  |            | 10.0000 |     |  |  | 8.1250  | 
|                                 
|                                 
|                                 
|                                 
|December 2000                     |  |            | 8.4375  |     |  |  | 8.0625  | 
|                                 
|                                 
|                                 
|                                 
|Quarter ended December 31, 2000   |  |            | 10.7500 |     |  |  | 8.0625  | 
|                                 
|                                 
|                                 
|                                 
|January 2001                      |  |            | 8.2500  |     |  |  | 7.1250  | 
|                                 
|                                 
|                                 
|                                 
|February 2001                     |  |            | 7.2500  |     |  |  | 5.4531  | 
|                                 
|                                 
|                                 
|                                 
|March 2001                        |  |            | 5.7344  |     |  |  | 2.6250  | 
|                                 
|                                 
|                                 
|                                 
|Quarter ended March 31, 2001      |  |            | 8.2500  |     |  |  | 2.6250  | 
|                                 
|                                 
|                                 
|                                 
|April 2001                        |  |            | 2.6250  |     |  |  | 2.0000  | 
|                                 
|                                 
|                                 
|                                 
|May 2001                          |  |            | 3.03    |     |  |  | 2.06    | 
|                                 
|                                 
|                                 
|                                 
|June 2001                         |  |            | 3.00    |     |  |  | 2.05    | 
|                                 
|                                 
|                                 
|                                 
|Quarter ended June 30, 2001       |  |            | 3.03    |     |  |  | 2.00    | 



---

|* |  | Since the Companys initial public offering in August, 2000.
|- |  | ------------------------------------------------------------




Item 10. Additional Information

A.     Share Capital

Not applicable.

B.     Memorandum and Articles of Association

Objects and Purposes in Our Articles of Incorporation

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



| |  |  | The telecommunications business as set forth in the Telecommunications Business Law;
and
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | Any and all businesses related or incidental to the foregoing.                          

48



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Provisions Regarding Directors

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

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

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

There is no mandatory retirement age for Directors under the Commercial
Code of Japan or our Articles of Incorporation.

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

Rights of Shareholders of Our Common Stock

We have issued only one class of shares, our common stock. Rights of
holders of shares of our common stock have under the Commercial Code of Japan
and our Articles of Incorporation include:



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

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| |  |  | at a shareholders meeting at which shareholders having a majority of the voting rights
are in attendance.
| |  |  | ----------------------------------------------------------------------------------------------------------

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

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



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

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



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

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



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

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



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

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

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



| |  |  | us to institute an action to enforce the liability of one of our directors or statutory
auditors,                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | us to institute an action to recover from a recipient the benefit
of a proprietary nature given in relation to exercising the right
of a shareholder, and

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| |  |  |  | a director on our behalf for the cessation of an illegal or ultra vires action.
| |  | - |  | -------------------------------------------------------------------------------

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

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

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

Rights of Holders of Fractional Shares of Our Common Stock

Under the Commercial Code of Japan, holders of fractional shares
representing 1/100 of a share or integral multiples of 1/100 of a share have the
following limited rights:



| |  |  | to request a company to issue certificates for the fractional
shares unless the companys articles of incorporation provide that
the company does not issue such certificates;                   
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to inspect and copy the register of fractional shares;                                                                                                                                           
|
| |  |  | to receive additional shares, money and residual properties in the
event of cancellation, consolidation or split of shares, stock
transfer, exchange of shares, split of a company or merger; and
|
| |  |  | dividend, interim dividend or preemptive rights if so provided in their articles of
incorporation, as is provided in ours;                                                                       

Holders of fractional shares may sell their fractional shares by
delivery of certificates of fractional shares unless the companys articles of
incorporation provide that the company does not issue such certificates, in
which case the holders may request the company to purchase their fractional
shares. Our Articles of Incorporation do not contain a provision against the
issuance of such certificates.

Holders of fractional shares recorded in the register of fractional shares or holding
certificates of fractional shares may exercise their rights. Holders of fractional shares holding
certificates shall deposit the certificates with us in order to exercise their rights. Our Articles of

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Incorporation provide that we may fix a record date to determine the holders of
fractional shares who can exercise their rights.

Restrictions on Holders of Our Common Stock

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

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

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

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

For a description of rights of holders of ADSs, please see the
Description of American Depositary Receipts section in our F-1 Registration
Statement (File No. 333-12264), declared effective on August 2, 2000, as
amended, hereby incorporated by reference.

C.     Material Contracts

We have entered into the following material contracts:

On November 30, 1998, we entered into a contract with KDDI, the former
KDD, to purchase an IRU in units of capacity of a nationwide network of dark
fiber in Japan for 10 years, from May 1999 through April 2009. Under this
contract, we are obliged to make lease payments of variable and fixed portions
and pay maintenance fees to KDDI for the use of dark fiber. The amount of the
fixed portion is ¥2 billion per year through March 31, 2002 and ¥4 billion
per year until the end of the lease term in April 2009, totaling ¥34 billion
for the life of the IRU agreement.

The variable portion of the lease payment is set at 5% of total sales
during a fiscal year based on sales projections available at the time of the
contract, subject to prospective adjustments by agreement of the parties in the
percentage in case of future deviations of 10% or more from the projected amount
of the variable portion on a cumulative basis from the following business year
after such deviation. The contract is being accounted for as an operating lease
based on the criteria set forth in SFAS No. 13, Accounting for Leases. The
fixed portion of lease expense and maintenance expense is recognized on a
straight-line basis over the term of the contract and the differences between
such expenses and actual cash payments that fluctuate over the lease term are
recorded as accrued expenses in the accompanying consolidated balance sheets.
Lease expense under this

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operating lease, including variable and fixed portions, amounted to ¥3,137,787
thousand for the year ended March 31, 2000, and ¥ 3,501,215 thousand (US¥
27,889 thousand) for the year ended March 31, 2001.

On March 28, 2000, we entered into a contract with Global Crossing to
purchase an IRU in units of dedicated capacity of an international data traffic
connection on optic fiber lines between Japan and the United States for the
period commencing from March 2000 through December 2023, for a total contract
price of US¥25 million. We paid the initial contract fee of ¥6,250 thousand (25%
of the total contract price) upon signing the contract in March 2000 and the
remaining contract fee of ¥18,750 thousand in March 2001 in accordance with the
payment schedule set forth in the contract. The contract is being accounted for
as a capital lease based on the criteria set forth in SFAS No. 13. Under this
contract, we are also obligated to pay an annual maintenance fee of US¥150,000
per minimum capacity unit for the five units, totaling US¥750,000.

D.     Exchange Controls

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

E.     Taxation

Japanese Taxation

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



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

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

The Convention Between the United States of America and Japan for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Treaty),
establishes the maximum rate of Japanese withholding tax which may be imposed on dividends paid
to an United States resident or corporation not having a permanent establishment in Japan. A

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permanent establishment in Japan is generally a fixed place of business for
industrial or commercial activity in Japan. Under the Treaty, the maximum
withholding rate for most shareholders is limited to 15% of the gross amount
actually distributed. However, the maximum rate is 10% of the gross amount
actually distributed, if the recipient is a corporation and



| |  |  | during the part of the paying corporations taxable year which
precedes the date of payment of the dividend and during the whole
of its prior taxable year, if any, at least 10% of the voting
shares of the paying corporation were owned by the recipient
corporation, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | not more than 25% of the gross income of the paying corporation
for such prior taxable year, if any, consists of interest or
dividends as defined in the Treaty.                                                                                                            

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

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

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

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

Gains derived from the sale outside Japan of the shares or ADSs by a
non-resident of Japan or a non-Japanese corporation are in general not subject
to Japanese income or corporation taxes. In addition, gains derived from the
sale of shares or ADSs within Japan by a non-resident of Japan or non-Japanese
corporation not having a permanent establishment in Japan are in general not
subject to Japanese income or corporation taxes. An individual who has acquired
shares or ADSs

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as a distributee, legatee or donee may have to pay Japanese inheritance and gift
taxes at progressive rates.

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

United States Taxation

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



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

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

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



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

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

In general, and taking into account the earlier assumptions, for United States federal income

55



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

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

Taxation of Dividends

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

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

The amount of the dividend distribution that you must include in your
income as a U.S. holder will be the U.S. dollar value of the Japanese yen
payments made, determined at the spot Japanese yen/U.S. dollar rate on the date
the dividend distribution is includible in your income, regardless of whether
the payment is in fact converted into U.S. dollars. Generally, any gain or loss
resulting from currency exchange fluctuations during the period from the date
you include the dividend payment in income to the date you convert the payment
into U.S. dollars will be treated as ordinary income or loss. The gain or loss
generally will be from sources within the United States for foreign tax credit
limitation purposes.

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

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

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

Distributions of additional shares to you with respect to shares or
ADSs that are made as part of a pro rata distribution to all shareholders of
Crosswave generally will not be subject to United

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States federal income tax.

Taxation of Capital Gains

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

PFIC Rules

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

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



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

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

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



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

Under these rules:



| |  |  | the gain or excess distribution will be allocated ratably over your holding period for the
shares or ADSs,                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the amount allocated to the taxable year in which you realized the
gain or excess distribution will be taxed as ordinary income,

57



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##### Table of Contents





| |  |  | the amount allocated to each prior year, with certain exceptions,
will be taxed at the highest tax rate in effect for that year, and  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the interest charge generally applicable to underpayments of tax
will be imposed in respect of the tax attributable to each such
year.

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

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

If you own shares or ADSs during any year that Crosswave is a PFIC you
must file Internal Revenue Service Form 8821.

F.     Dividends and Paying Agents

Not applicable.

G.     Statement by Experts

Not applicable.

H.     Documents on Display

Our 20-F, 6-K reports and other filings with the SEC can be inspected
and copied without charge at the SECs public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SECs regional office located at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also get
copies by calling the SEC at 1-800-SEC-0330 or by writing the SEC upon payment
of a prescribed fee.

In addition, documents referred to in this 20-F filing may be inspected
at Crosswave Communications Tokyo headquarters, located at Crest Yasuda Bldg.,
3-21, Kanda Nishiki-cho, Chiyoda-ku, Tokyo 101-0054, Japan.

I.     Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures about Market Risk




58



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##### Table of Contents



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

As a result of our initial public offering in August 2000, we hold a
significant amount of dollar-denominated assets, primarily demand and short-term
time deposits.

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

Our exposure to fluctuations in interest rates relates primarily to
short-term and long-term borrowings and lease obligations related to capitalized
equipment. As of March 31, 2001, these borrowings and obligations were payable
at a fixed interest rate.

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

We do not hold any marketable common stock investments nor any
derivative financial instruments as of March 31, 2001.




Item 12. Description of Securities Other than Equity Securities

Not applicable.




PART II




Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.




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

Use of Proceeds

On August 10, 2000, we completed an initial public offering of ADSs representing our
shares. The offering was lead managed by Goldman Sachs & Co., J.P. Morgan & Co. and Robertson
Stephens. The ADSs are quoted on the Nasdaq National Market. Registration Statement (No.333-
12264) for the offering was declared effective August 4, 2000.

|                              |  |                     |        |                     |  |                    |             | 
|----------------------------- |  | ------------------- | ------ | ------------------- |  | ------------------ | ----------- | 
|                              |  |                     |        |                     |  | Aggregate Offering
|                              |  | Amount of Shares    |        | price of Shares    
|                              |  | Registered and Sold |        | Registered-and-Sold
|                              |  |                     |        |                    
|Crosswave Communications Inc. |  |                     | 86,960 |                     |  | $                  | 243,488,000 | 

59



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##### Table of Contents





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

In connection with the issuance and distribution of ADSs, we incurred
approximately $19,089 in expenses. Of these expenses, $15,305 was for
underwriting discounts and commissions, approximately $625 was to reimburse the
underwriters for certain of their expenses, and approximately $3,160 was for
other expenses related to the registration and offering of the ADSs. No finders
fees were paid.

We received approximately ¥29.0 billion in net proceeds from the sale
of ADSs in the initial public offering. Of the net proceeds, we have used
approximately ¥3.2 billion for our investment in our nationwide network,
¥2.2 for IRU and maintenance payments to KDDI, ¥2.3 billion for investment
in our Japan-US cable, ¥1.6 billion for land purchases and ¥1.2 billion for
lease of equipment.




Item 15. [Reserved]




Item 16. [Reserved]




PART IV




Item 17. Financial Statements

Not applicable.




Item 18. Financial Statements

See Consolidated financial statements for Crosswave Communications Inc. and Subsidiaries
attached hereto beginning on page F-1.




Item 19. Exhibits

|    |  |                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1 |  | Articles of Incorporation, as amended (with English translation)                                                                                                                                            
|   
|   
|   
|   
|1.2 |  | Share Handling Regulations (with English translation)*                                                                                                                                                      
|   
|   
|   
|   
|1.3 |  | Regulations of the Board of Directors (with English translation)*                                                                                                                                           
|   
|   
|   
|   
|1.4 |  | Regulations of the Board of Statutory Auditors (with English translation)*                                                                                                                                  
|   
|   
|   
|   
|2.1 |  | Specimen Common Stock Certificate*                                                                                                                                                                          
|   
|   
|   
|   
|4.1 |  | Joint Venture Agreement, dated January 26, 1999, among Internet Initiative Japan Inc.,
Toyota Motor Corporation and Sony Corporation and an amendment thereto dated May 10,
1999 (with English translation)*
|   
|   
|   
|   
|4.2 |  | Right of Use Agreement for Transmission Network Facilities, dated November 30, 1998,                                                                                                                        

60



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##### Table of Contents



|     |  |                                                                                                                                                                                                                                                                                                                                       
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|     |  | between Crosswave Communications Inc. and Teleway Corporation (presently, KDDI
Corporation) (with English translation)**                                                                                                                                                                                                              
|    
|    
|    
|    
|4.3  |  | Memorandum on Amendments to the Original Agreement, dated November 30, 1998,
between Crosswave Communications Inc. and Teleway Corporation (presently, KDDI
Corporation) (with English translation)**                                                                                                                                 
|    
|    
|    
|    
|4.4  |  | Confirmation of IRU Fees, dated November 30, 1998, between Crosswave Communications
Inc. and Teleway Corporation (presently, KDDI Corporation) (with English translation)**                                                                                                                                                           
|    
|    
|    
|    
|4.5  |  | Memorandum on Business Cooperation, dated November 30, 1998, between Crosswave
Communications Inc. and Teleway Corporation (presently, KDDI Corporation) (with
English translation)*                                                                                                                                                  
|    
|    
|    
|    
|4.12 |  | Purchase and Sales Agreement, dated January 8, 1999, between Crosswave Communications
Inc. and Internet Initiative Japan Inc. (with English translation)*                                                                                                                                                                             
|    
|    
|    
|    
|4.14 |  | Enforcement Rules with regard to the Payment of Fee for Right of Use of Transmission
Network Facilities, dated September 30, 1999, between Crosswave Communications Inc.
and KDDI Corporation establishes rules with regard to the payment of a fee by Crosswave
Communications Inc. to KDDI Corporation (with English translation)***
|    
|    
|    
|    
|4.15 |  | Sales Cooperation Agreement, dated August 20, 1999, between Crosswave Communications
Inc. and Internet Initiative Japan Inc. (with English translation)***                                                                                                                                                                            
|    
|    
|    
|    
|4.16 |  | Business Entrustment Agreement, dated April 1, 1999 between Crosswave Communications
Inc. and Internet Initiative Japan Inc. (with English translation)***                                                                                                                                                                            
|    
|    
|    
|    
|4.17 |  | Letter of Confirmation, dated November 16, 1999 between Crosswave Communications Inc.
and Internet Initiative Japan Inc. (with English translation)***                                                                                                                                                                                
|    
|    
|    
|    
|4.18 |  | Agreement On Trial Service Of the International Dedicated Line dated June 1, 2000
between Crosswave Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                              
|    
|    
|    
|    
|4.19 |  | Data Center Service Agency Agreement dated March 1, 2000 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English translation)***                                                                                                                                                                       
|    
|    
|    
|    
|4.20 |  | Land Transfer Agreement, dated September 29, 2000, between Crosswave Communications
Inc. and Urban Development Corporation (with English Translation)                                                                                                                                                                                 
|    
|    
|    
|    
|4.21 |  | Lease Agreement, dated March 30, 2001, between Crosswave Communications Inc. and
Kyoto Research Park Kabushiki Kaisha (with English Translation)                                                                                                                                                                                      
|    
|    
|    
|    
|8.1  |  | List of Subsidiaries (see Organizational Structure in
Item 4.C. of this Form 20-F/A)                                                                                                                                                                                                                                                



---

|* |  | Incorporated by reference to the corresponding exhibit to our Form F-1 Registration
|- |  | -----------------------------------------------------------------------------------

61



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##### Table of Contents



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

62



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##### Table of Contents



SIGNATURES

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

|                       |  |                               |  |        |  |                                      
|---------------------- |  | ----------------------------- |  | ------ |  | -------------------------------------
|                       |  | Crosswave Communications Inc. |  |        |  |                                      
|                      
|                       |  |                               |  | By     |  | (-s- Koichi Suzuki)                  
|                      
|                      
|                      
|                      
|                       |  |                               |  | Name:  |  | Koichi Suzuki                        
|                      
|                      
|                      
|                      
|                       |  |                               |  | Title: |  | President
and Representative Director
|                      
|                      
|                      
|                      
|Date: October 24, 2001 |  |                               |  |        |  |                                      

63



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

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

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

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

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

(-s- Asahi & Co.)

Asahi & Co

Tokyo, Japan

May 31, 2001

F-2



---



##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2000 and 2001

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

F-3



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS  (Continued)

March 31, 2000 and 2001

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

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

F-4



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

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

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

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

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

F-5



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

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

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

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

F-6



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

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

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

F-7



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)

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

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

F-8



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 1999, 2000 and 2001

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

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

F-9



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

F-10



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

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

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

F-11



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

F-12



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

2.      IRU Contracts With Carriers

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

F-13



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

3.      Investment in Joint Venture

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

F-14



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

4.      Related
Party Transactions

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

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

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

F-15



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

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

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

F-16



---



##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

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

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

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

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

F-17



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

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

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

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

F-18



---



##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

7.     Long-term
Debt

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

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

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

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

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

F-19



---



##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

8.     Employee Retirement and Pension Plans

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

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

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

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

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

F-20



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

| |  | 
| |  | 

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

9.     Income Taxes

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

F-21



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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

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

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

F-22



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

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

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

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

F-23



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

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

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

F-24



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##### Table of Contents



CROSSWAVE COMMUNICATIONS INC. AND SUBSIDIARIES

FINANCIAL STATEMENTS SCHEDULE

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

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

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

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

F-25



---



##### Table of Contents



INDEX OF EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                       
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                       
|Number  |  | Description                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                       
|1.1     |  | Articles of Incorporation, as amended (with English translation)                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|1.2     |  | Share Handling Regulations (with English translation)*                                                                                                                                                                                                                                                                                
|       
|       
|       
|       
|1.3     |  | Regulations of the Board of Directors (with English translation)*                                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|1.4     |  | Regulations of the Board of Statutory Auditors (with English translation)*                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|2.1     |  | Specimen Common Stock Certificate*                                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|4.1     |  | Joint Venture Agreement, dated January 26, 1999, among Internet Initiative Japan
Inc., Toyota Motor Corporation and Sony Corporation and amendment thereto
dated May 10, 1999 (with Englishtranslation)*                                                                                                                              
|       
|       
|       
|       
|4.2     |  | Right of Use Agreement for Transmission Network Facilities, dated November
30, 1998, between Crosswave Communications Inc. and Teleway Corporation
(presently, KDDI Corporation) (with English translation)**                                                                                                                         
|       
|       
|       
|       
|4.3     |  | Memorandum on Amendments to the Original Agreement, dated November 30,
1998, between Crosswave Communications Inc. and Teleway Corporation
(presently, KDDI Corporation) (with Englishtranslation)**                                                                                                                                  
|       
|       
|       
|       
|4.4     |  | Memorandum IRU Fees, dated November 30, 1998, between Crosswave
Communications Inc. and Teleway Corporation (presently, KDDI Corporation)
(with English translation)**                                                                                                                                                                
|       
|       
|       
|       
|4.5     |  | Memorandum on Business Coorperation, dated November 30, 1998, between
Crosswave Communications Inc. and Teleway Corporation (presently, KDDI
Corporation) (with English translation)*                                                                                                                                                 
|       
|       
|       
|       
|4.12    |  | Purchase and Sales Agreement, dated January 8, 1999, between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English translation)*                                                                                                                                                                             
|       
|       
|       
|       
|4.14    |  | Enforcement Rules with regard to the Payment of Fee for Right of Use of
Transmission Network Facilities, dated September 30, 1999, between Crosswave
Communications Inc. and KDDI Corporation establishes rules with regard to the
payment of a fee by Crosswave Communications Inc. to KDDI Corporation (with
English translation)***
|       
|       
|       
|       
|4.15    |  | Sales Cooperation Agreement, dated August 20, 1999, between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                                                                                                                                                                            





---



##### Table of Contents



|     |  |                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.16 |  | Business Entrustment Agreement, dated April 1, 1999 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                         
|    
|    
|    
|    
|4.17 |  | Letter of Confirmation, dated November 16, 1999 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                             
|    
|    
|    
|    
|4.18 |  | Agreement On Trial Service Of the Internet Dedicated Line dated June 1, 2000
between Crosswave Communications Inc. and Internet Initiative Japan Inc. (with
English translation)***
|    
|    
|    
|    
|4.19 |  | Data Center Service Agency Agreement dated March 1, 2000 between Crosswave
Communications Inc. and Internet Initiative Japan Inc. (with English
translation)***                    
|    
|    
|    
|    
|4.20 |  | Land Transfer Agreement, dated September 29, 2000, between Crosswave
Communications Inc. and Urban Development Corporation (with English
translation)                              
|    
|    
|    
|    
|4.21 |  | Lease Agreement, dated March 30, 2001, between Crosswave Communications
Inc. and Kyoto Research Park Kabushiki Kaisha (with English translation)                                   
|    
|    
|    
|    
|8.1  |  | List of Subsidiaries (see Organizational Structure in
Item 4.C. of this Form 20F/A)                                                                                              



---

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