##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549
 FORM 20-F (Mark One)o
    
    Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act
of 1934ORþ
    
    Annual report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004 OR o
    
    Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from ___________________ to___________________ Commission file number 0-30530 KABUSHIKI KAISHA CRAYFISH  CRAYFISH CO., LTD.  JAPAN
    
    HIKARI CENTER BLDG., 5TH FLOOR 16-15,
MINAMI IKEBUKURO 1-CHOME
TOSHIMA-KU, TOKYO 171-0022 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 RegisteredNONE
    
    NONE
 Securities registered or to be registered pursuant to Section 12(g) of the Act: (1) COMMON STOCK (SHARES)*
(2) AMERICAN DEPOSITARY SHARES (ADSs), EACH OF WHICH REPRESENTS
1/500TH 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 September 30, 2004, 10,268 shares of common stock were outstanding, comprised of 9,884
Shares and 192,000 ADSs (equivalent to 384 shares).** Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 þ      *

NOT FOR TRADING, BUT ONLY IN CONNECTION WITH THE REGISTRATION OF THE ADSs.**

AS OF NOVEMBER 21, 2000, THE ADS RATIO WAS CHANGED FROM 5,000 ADSs REPRESENTING ONE SHARE OF
COMMON STOCK TO 500 ADSs REPRESENTING ONE SHARE OF COMMON STOCK.




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TABLE OF CONTENTS
Forward-looking Statements PAGEPART IItem 1
    
    Identity of Directors, Senior Management and Advisers
    
    3Item 2
    
    Offer Statistics and Expected Timetable
    
    3Item 3
    
    Key Information
    
    3Item 4
    
    Information on the Company
    
    14Item 5
    
    Operating and Financial Review and Prospects
    
    23Item 6
    
    Directors, Senior Management and Employees
    
    35Item 7
    
    Major Shareholders and Related Party Transactions
    
    39Item 8
    
    Financial Information
    
    41Item 9
    
    The Offer and Listing
    
    42Item 10
    
    Additional Information
    
    43Item 11
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    54Item 12
    
    Description of Securities Other than Equity Securities
    
    54PART IIItem 13
    
    Defaults, Dividend Arrearages and Delinquencies
    
    54Item 14
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    54Item 15
    
    Controls and Procedures
    
    54Item 16
    
    [Reserved]
    
    55Item 16A
    
    Audit Committee Financial Expert
    
    55Item 16B
    
    Code of Ethics
    
    55Item 16C
    
    Principal Accountant Fees and Services
    
    55Item 16D
    
    Exemptions from the Listing Standards for Audit Committee
    
    56Item 16E
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    56PART IIIItem 17
    
    Financial Statements
    
    56Item 18
    
    Financial Statements
    
    56Item 19
    
    Exhibits
    
    57EX-1.1 Articles of Incorporation of the Registrant, as amended (English Translation)EX-12.1 Certification by the CEO, President and Representative Director pursuant to Section 302EX-12.2 Certification by the Principal Officer of Administration Department pursuant to Section 302EX-13.1 Certification by the CEO, President and Representative Director pursuant to Section 906EX-13.2 Certification by the Principal Officer of Administration Department pursuant to Section 906
  Forward-looking Statements This
annual report contains forward-looking statements based upon our current expectations,
assumptions, estimates and projections about our business and industry in light of the information
currently available to us. To the extent that statements in this
annual report on Form 20-F do not
relate strictly to historical or current facts, they may constitute
forward-looking statements.
These statements discuss future expectations, identify strategies, discuss market trends, contain
projections of results of operations or of our financial condition,
or state other forward-looking
information. Our actual actions or results may differ materially from those discussed in any
forward-looking statement as a result of known and unknown risks, uncertainties and other factors. Important risks and factors that could cause our actual results to differ materially from our
expectations are generally discussed in Item 3.D and include, without limitation:  

that our revenues will continue to decline if we do not retainer customers, and

that we may be unable to develop an effective marketing channel to increase sales. We
undertake no obligation to publicly update any forward-looking statement after the date of
this annual report, but investors are advised to consult any further disclosures by us in our
subsequent filings pursuant to the Securities Exchange Act of 1934. 2




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS. Not applicable 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE. Not applicable 
 ITEM 3. KEY INFORMATION. A. SELECTED FINANCIAL DATA. The selected financial data below should be read together with our financial statements and
related notes beginning on page F-1 in response to Item 8 and Item 18 and the Operating and
Financial Review and Prospects included as Item 5. All amounts in this document are based on
accounting principles generally accepted in the United States of America or U.S. GAAP unless
otherwise noted. Historical results are not necessarily indicative of results to be expected for
any future period. U.S. GAAP FINANCIAL DATA The consolidated statements of operations data below for the fiscal years ended September 30,
2000, 2001, 2002, 2003 and 2004 and the consolidated balance sheet data as of September 30, 2000,
2001, 2002, 2003 and 2004 that are identified as being prepared in accordance with U.S. GAAP, are
derived from our audited consolidated financial statements prepared in accordance with U.S. GAAP.
The consolidated U.S. GAAP statements of operations data for the fiscal years ended September 30,
2002, 2003 and 2004 and the consolidated U.S. GAAP balance sheet data as of September 30, 2002,
2003 and 2004 were audited by BDO Sanyu & Co., independent registered public accountants.
Consolidated U.S. GAAP statements of operations data for the years ended September 30, 2002, 2003
and 2004 and consolidated balance sheet data as of September 30, 2003 and 2004 are included in our
consolidated financial statements and related notes beginning on page F-1. The results of operations for the year ended September 30, 2000 have been revised to
reclassify activities attributable to the discontinued segments to the line item (Loss) income
from operations of discontinued business segments in our statements of operations. Historically,
we had operated as three separate segments for management and financial reporting purposes. In
accordance with our Business Revival Plan announced in July 2001, we discontinued our Other
Hosting Services and Systems Development Services segments, leaving only our Deskwing Hosting
Services segment remaining. In addition, we terminated several on-going research and development
projects. As a result, we began reporting a single segment since the year ended September 30, 2001.
These reclassifications have no effect on previously reported results of operations and
shareholders equity. Since the fiscal year ended September 30, 2002, we have started to prepare
the segment of Advertising and Other. For the year ended September 30, 2003, the Company has
started to prepare Product sales (Commodity sales) segments. We have prepared the consolidated
financial statements to include the wholly owned subsidiary, Cyber Joy, Inc., which Crayfish
established in October 2003. We have accounted for our discontinued operations in accordance with the provisions of
Accounting Principles Board Opinion (APB) No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. Accordingly, the discontinued segments historical
results of operations together with losses attributable to the disposal of related assets and
settlement of related liabilities have been reflected as discontinued operations in the
consolidated statements of operations data for the years ended September 30, 2000, and 2001 below. 3




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CONSOLIDATED STATEMENTS OF OPERATIONS DATA (U.S. GAAP): Year ended September 30,2000(1)
    
    
    2001(2)
    
    
    2002
    
    
    2003(4)
    
    
    2004(4)
    
    
    2004(4)(in thousands of yen and U.S. dollars, except share and per share amounts)Revenue
    
    Yen
    6,728,865
    
    
    Yen
    5,311,814
    
    
    Yen
    2,945,360
    
    
    Yen
    1,771,918
    
    
    Yen
    3,304,725
    
    
    $
    29,989Cost of revenue (3)
    
    
    5,653,051
    
    
    
    3,391,888
    
    
    
    636,174
    
    
    
    649,620
    
    
    
    2,160,441
    
    
    
    19,605Gross profit
    
    
    1,075,814
    
    
    
    1,919,926
    
    
    
    2,309,186
    
    
    
    1,122,298
    
    
    
    1,144,284
    
    
    
    10,384Total operating expenses (3)
    
    
    2,079,134
    
    
    
    9,273,622
    
    
    
    978,184
    
    
    
    559,572
    
    
    
    641,754
    
    
    
    5,824(Loss) income from operations
    
    
    (1,003,320
    )
    
    
    (7,353,696
    )
    
    
    1,331,002
    
    
    
    562,726
    
    
    
    502,530
    
    
    
    4,560Other income (expenses), net
    
    
    7,665
    
    
    
    (1,047,112
    )
    
    
    10,542
    
    
    
    (789,274
    )
    
    
    (2,114
    )
    
    
    (19
    )(Loss) income from continuing
operations before income taxes
    
    
    (995,655
    )
    
    
    (8,400,808
    )
    
    
    1,341,544
    
    
    
    (226,548
    )
    
    
    500,416
    
    
    
    4,541Income taxesCurrent
    
    
    3,800
    
    
    
    3,800
    
    
    
    3,800
    
    
    
    1,210
    
    
    
    1,280
    
    
    
    12Deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,839
    )
    
    
    (888
    )(Loss) income from continuing operations
    
    
    (999,455
    )
    
    
    (8,404,608
    )
    
    
    1,337,744
    
    
    
    (227,758
    )
    
    
    596,975
    
    
    
    5,417Gain (loss) from operations of
discontinued business segments
    
    
    (542,129
    )
    
    
    (1,164,113
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    Yen
    (1,541,584
    )
    
    Yen
    (9,568,721
    )
    
    Yen
    1,337,744
    
    
    Yen
    (227,758
    )
    
    Yen
    596,975
    
    
    $
    5,417(Loss) earnings per sharePer common share basic:(Loss) income from continuing operations
    
    Yen
    (106,859.30
    )
    
    Yen
    (823,496.77
    )
    
    Yen
    130,460.70
    
    
    Yen
    (22,192.15
    )
    
    Yen
    58,139.37
    
    
    $
    527.58(Loss) income from operations of
discontinued business segments
    
    
    (57,963.11
    )
    
    
    (114,061.63
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    Yen
    (164,822.41
    )
    
    Yen
    (937,558.40
    )
    
    Yen
    130,460.70
    
    
    Yen
    (22,192.15
    )
    
    Yen
    58,139.37
    
    
    $
    527.58Per common share diluted:(Loss) income from continuing operations.
    
    Yen
    (106,859.30
    )
    
    Yen
    (823,496.77
    )
    
    Yen
    130,346.30
    
    
    Yen
    (22,192.15
    )
    
    Yen
    58,139.37
    
    
    $
    527.58(Loss) income from operations of
discontinued business segments
    
    
    (57,963.11
    )
    
    
    (114,061.63
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    Yen
    (164,822.41
    )
    
    Yen
    (937,558.40
    )
    
    Yen
    130,346.30
    
    
    Yen
    (22,192.15
    )
    
    Yen
    58,139.37
    
    
    $
    527.58Shares used in per share calculation  basic
    
    
    9,353
    
    
    
    10,206
    
    
    
    10,254
    
    
    
    10,263
    
    
    
    10,268
    
    
    
    10,268Diluted
    
    
    9,353
    
    
    
    10,206
    
    
    
    10,263
    
    
    
    10,263
    
    
    
    10,268
    
    
    
    10,268
   (1)
    
    Reclassifications have been made to conform to the presentation for the year ended
September 30, 2001. We have accounted for our discontinued operations in accordance with the
provisions of APB No. 30. Accordingly, the discontinued segments historical results of
operations together with losses attributable to the disposal of related assets and settlement
of related liabilities have been reflected as discontinued operations in our statements of
operations.(2)
    
    As a result of the elimination of the Other Hosting Services and Systems Development
Services segments for the year ended September 30, 2001, the presentation of statements of
operations data has changed from previous fiscal years. We have accounted for our discontinued
operations in accordance with the provisions of APB No. 30. Accordingly, the discontinued
segments historical results of operations together with losses attributable to the disposal
of related assets and settlement of related liabilities have been reflected as discontinued
operations in the statements of operations.(3)
    
    Service fees paid to Hikari Tsushin, Inc (Hikari Tsushin) previously accounted for under
operating expenses have been reclassified under cost of revenue for the years ended September
30, 1999, 2000 and 2001. 4




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##### Table of Contents



(4)
    
    The Company consolidates its subsidiary. CONSOLIDATED BALANCE SHEET DATA (U.S. GAAP): As of September 30,2000
    
    
    2001
    
    
    2002
    
    
    2003(1)(2)
    
    
    2004(2)
    
    
    2004(2)(in thousands of yen and U.S. dollars)Cash and cash equivalents
    
    Yen
    23,017,011
    
    
    Yen
    14,429,199
    
    
    Yen
    16,412,076
    
    
    Yen
    1,941,316
    
    
    Yen
    2,587,059
    
    
    $
    23,476Total assets
    
    
    27,673,791
    
    
    
    15,609,662
    
    
    
    16,914,902
    
    
    
    3,113,277
    
    
    
    3,320,896
    
    
    
    30,135Total shareholders equity
    
    
    25,027,240
    
    
    
    15,376,806
    
    
    
    16,716,800
    
    
    
    2,117,842
    
    
    
    2,714,817
    
    
    
    24,636
   (1)
    
    The shareholders, at an extraordinary shareholders meeting held on July 31, 2003,
approved a distribution of cash to the Companys shareholders in connection with reduction of
common stock and additional paid-in capital pursuant to the Japanese Commercial Code. In light
of factors including present conditions: the size of its business at present or anticipated
future, margin of safety and operational efficiency, the Company concluded that it had an
excessive amount of funds in comparison with the appropriate level for the size of its
business. The total cash distribution was Yen 14,375,200 thousand and the reduction of capital
was effective on September 9, 2003. Amount to be reduced in common stock and additional
paid-in capital was Yen 7,639,106 thousand and Yen 6,736,094 thousand, respectively.(2)
    
    The Company consolidates its subsidiary. JAPANESE GAAP FINANCIAL DATA The consolidated statements of operations data below for the fiscal years ended September 30,
2000, 2001, 2002, 2003 and 2004 and the consolidated balance sheet audited data as of September 30,
2000, 2001, 2002, 2003 and 2004 are derived from our condensed consolidated financial statements
prepared in accordance with Japanese GAAP. Our condensed consolidated financial statements prepared
in accordance with Japanese GAAP are not included in this annual report. We had a consolidated subsidiary, Intranets K.K., under Japan GAAP for the year ended
September 30, 2001. Based upon the resolution of shareholders meeting of Intranets K.K. held on
October 19, 2001, we sold all the interests of Intranets K.K. in which the transactions were
completed in March 2002. The disposed subsidiary has not been consolidated for purposes of the
Japanese GAAP Selected Operations Data and Selected Balance Sheet Data presented below. The
Company established Cyber Joy, Inc. (Cyber Joy) on October 1, 2003, and has consolidated Cyber
Joy since the beginning of the fiscal year ended September 30, 2004. Information presented in Japanese GAAP differs in important ways from U.S. GAAP. CONSOLIDATED SELECTED OPERATIONS DATA (Japan GAAP): Year ended September 30,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(1)
    
    
    2004(1)(in thousands of yen and U.S. dollars)Total revenue
    
    Yen
    6,822,669
    
    
    Yen
    5,416,939
    
    
    Yen
    2,939,808
    
    
    Yen
    1,768,165
    
    
    Yen
    3,304,593
    
    
    $
    29,987Total cost of revenue
    
    
    2,311,013
    
    
    
    2,842,794
    
    
    
    630,264
    
    
    
    649,620
    
    
    
    2,161,722
    
    
    
    19,616Gross profit
    
    
    4,511,656
    
    
    
    2,574,145
    
    
    
    2,309,544
    
    
    
    1,118,545
    
    
    
    1,142,871
    
    
    
    10,371Selling, general and
administrative expenses
    
    
    5,820,002
    
    
    
    4,751,197
    
    
    
    803,595
    
    
    
    507,307
    
    
    
    626,215
    
    
    
    5,683Operating profit (loss)
    
    
    (1,308,346
    )
    
    
    (2,177,052
    )
    
    
    1,505,949
    
    
    
    611,238
    
    
    
    516,656
    
    
    
    4,688Other income (expense), net
    
    
    (635,228
    )
    
    
    (127,470
    )
    
    
    (60,104
    )
    
    
    (16,460
    )
    
    
    (11,091
    )
    
    
    (101
    )Special income (loss), net
    
    
    (7,058
    )
    
    
    (7,499,090
    )
    
    
    (104,116
    )
    
    
    (825,682
    )
    
    
    (7,878
    )
    
    
    (71
    )Income (loss) before provision
for income taxes
    
    
    (1,950,632
    )
    
    
    (9,803,612
    )
    
    
    1,341,729
    
    
    
    (230,904
    )
    
    
    497,687
    
    
    
    4,516Provision for income taxes
    
    
    3,800
    
    
    
    4,171
    
    
    
    3,800
    
    
    
    1,210
    
    
    
    1,280
    
    
    
    11Minority interest in loss
    
    
    
    
    
    
    79,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income taxes  deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93,587
    )
    
    
    (849
    )Net income (loss)
    
    Yen
    (1,954,432
    )
    
    Yen
    (9,728,022
    )
    
    Yen
    1,337,929
    
    
    Yen
    (232,114
    )
    
    Yen
    589,994
    
    
    $
    (5,354
    )
 5




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##### Table of Contents



(1)
    
    The Company consolidates its subsidiary CONSOLIDATED SELECTED BALANCE SHEET DATA (Japan GAAP): As of September 30,2000
    
    
    2001
    
    
    2002
    
    
    2003(1)
    
    
    2004(2)
    
    
    2004(2)(in thousands of Yen and U.S. dollars)Cash and cash equivalents
    
    Yen
    22,764,731
    
    
    Yen
    14,485,802
    
    
    Yen
    16,412,076
    
    
    Yen
    1,931,315
    
    
    Yen
    2,587,059
    
    
    $
    23,476Total assets
    
    
    22,563,597
    
    
    
    15,820,206
    
    
    
    16,914,902
    
    
    
    3,129,038
    
    
    
    3,331,545
    
    
    
    30,232Total liabilities
    
    
    446,104
    
    
    
    271,629
    
    
    
    198,102
    
    
    
    991,436
    
    
    
    603,948
    
    
    
    5,480Total shareholders equity
    
    
    25,117,493
    
    
    
    15,402,657
    
    
    
    16,716,800
    
    
    
    2,137,602
    
    
    
    2,727,596
    
    
    
    24,751
   (1)
    
    The shareholders, at an extraordinary shareholders meeting held on July 31, 2003,
approved a distribution of cash to the Companys shareholders in connection with a reduction
of common stock and additional paid-in capital pursuant to the Japanese Commercial Code. In
light of factors then existing including the Companys financial condition, the size of its
business at that time and its anticipated future, margin of safety and operational efficiency,
the Company concluded that it had an excessive amount of funds in comparison with the
appropriate level for the size of its business. The total cash distribution was Yen14,375,200
thousand and the reduction of capital was effective on September 9, 2003. The amounts reduced
in common stock and additional paid-in capital were Yen7,495,640 thousand and Yen6,879,560
thousand, respectively.(2)
    
    The Company consolidates its subsidiary. EXCHANGE RATES Fluctuations in exchange rates between the yen and dollar and other currencies will affect the
dollar and other currency equivalents of the yen price of our shares and ADSs and the dollar amounts
received on conversion of any cash dividends. We have translated some yen amounts presented in this
annual report into dollars solely for your convenience. Unless
otherwise noted, the rate used for the translations was Yen110.20 to U.S.$1.00, which
was the noon buying rate announced by the Federal Reserve Bank of New York on September 30, 2004. The following table presents the noon buying rates for yen per $1.00 in New York City for cable
transfers in Yen as certified for customs purposes by the Federal Reserve Bank of New York for and as
of the end of each period indicated. These translations do not imply that the yen amounts actually
represent, or have been or could be converted into, equivalent amounts in dollars. YEAR ENDED/ENDING SEPTEMBER 30,
    
    HIGH
    
    
    

    LOW
    
    
    AVERAGE(1)
    
    
    PERIODEND2000
    
    
    Yen111.11
    
    
    
    Yen101.53
    
    
    
    Yen106.43
    
    
    
    Yen107.902001
    
    
    126.75
    
    
    
    107.30
    
    
    
    118.14
    
    
    
    119.232002
    
    
    134.77
    
    
    
    115.71
    
    
    
    125.52
    
    
    
    121.742003
    
    
    107.18
    
    
    
    121.42
    
    
    
    115.93
    
    
    
    111.432004
    
    
    114.30
    
    
    
    103.70
    
    
    
    108.93
    
    
    
    110.202005 (through March 31, 2005)CALENDAR YEAR 2004October
    
    
    111.34
    
    
    
    106.04
    
    
    
    108.78
    
    
    
    106.04November
    
    
    106.91
    
    
    
    102.58
    
    
    
    104.70
    
    
    
    103.04December
    
    
    105.59
    
    
    
    102.56
    
    
    
    103.81
    
    
    
    102.68CALENDAR YEAR 2005January
    
    
    104.93
    
    
    
    102.26
    
    
    
    103.34
    
    
    
    103.55February
    
    
    105.84
    
    
    
    103.70
    
    
    
    104.94
    
    
    
    104.25March
    
    
    107.49
    
    
    
    103.87
    
    
    
    105.25
    
    
    
    107.22
   (1)
    
    Fiscal year average is calculated from the average of the exchange rates on the last day
of each month during the period. 6




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The noon buying rate for Japanese Yen on April 7, 2005 was 108.44 Japanese Yen per US$1.00. B. CAPITALIZATION AND INDEBTEDNESS. Not applicable C. REASONS FOR THE OFFER AND USE OF PROCEEDS. Not applicable D. RISK FACTORS. You should be aware of the risks described below. Any of these risks could adversely affect
our business, financial condition or results of operations. As a result, the trading price of our
securities could decline, and investors may lose all or part of their investment. Other risks and
uncertainties not now known to us or that we think are immaterial may also impair our business. OUR REVENUE MAY DECLINE IF WE DO NOT RETAIN CUSTOMERS Our success depends on the retention of customers. The number of our DESKWING subscribers
declined from 8,209 as of September 30, 2003, to 6,457 as of September 30, 2004. Reasons for
customer losses include, among others, competition from competitors offering comparable services at
lower prices or offering services targeting our market, dissatisfaction with our customer or
technical support, frustration or the perceived difficulty of using our services or the internet in
general, and the inability to realize expected benefits from the use of our services or the
internet in general. WE OPERATE IN A VERY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY; INEFFECTIVE
COMPETITION MAY NEGATIVELY AFFECT OUR REVENUES The market for information technology businesses is very competitive not only in the world but
also in Japan. There are few substantial barriers to entry, and we expect to face additional
competition not only from existing competitors but also from new market entrants in the future. Our
current and potential competitors for server (hosting) business include: Japanese and international
telecommunications carriers and related internet service providers such as Nippon Telegraph and
Telephone Corporation group companies, KDDI Corporation, All In One Solution, Inc., Internet
Initiative Japan Inc., Global Media Online Inc. (GMO) and other companies. These competitors have
substantially greater financial, technical and marketing resources, larger customer bases, longer
operating histories, more cost efficient products, greater name recognition and more established
relationships in the information technology industry than us. Furthermore, some of our competitors
have offered services similar to or better than ours at lower prices than ours or with incentives
not matched by us. Moreover, recently, revenue of our server business has declined. If the revenue
of our server business continues to decline and does not meet our profit expectations, the
Companys profits and earnings will decline. IF WE ARE UNABLE TO DEVELOP AN EFFECTIVE MARKETING CHANNEL TO INCREASE SALES, OUR BUSINESS MAY
SUFFER. Until November 2000, we outsourced sales and marketing of our DESKWING service to Hikari
Tsushin. After the November 2000 termination of this agreement, we began to build our own sales and
marketing team, but concluded that the costs associated with customer acquisition would continue to
exceed revenues from new customers for our current service offerings under existing competitive
conditions. As a result, we reduced the size of our sales and marketing team and focused primarily
on customer retention. Currently, we have been attempting to reduce the number of customer
cancellations by offering new services promoted mostly through IE Group, Inc. (IE Group), an
affiliate of Hikari Tsushin, and on our website. If we are unable to develop costefficient
marketing channels to expand our customer base and sales, the size of our customer base will likely
continue to decline, we will not be able to increase revenues and our ability to achieve
profitability will be limited. RISKS THAT MAY HARM OUR COMMODITY SALES (HARDWARE AND SOFTWARE) BUSINESS ALSO INCLUDE COMPETITION,
PAYMENT COLLECTION AND DAMAGE TO REPUTATION 7




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Most IT companies have been experiencing lower earnings due to the prolonged slump in the
economy and consumer spending in Japan as well as the decline in IT goods and service prices
resulting from deflation and other factors. Our current commodity sales business is included in
sales of hardware and software since the beginning of the fiscal year ended September 30, 2004.
Our current commodity sales competitors include Japanese and international companies such as
DAIWABOU Information System Co., Ltd., SOFTBANK Corp. group companies, OTSUKA Corporation group
companies, OBIC Co., Ltd and other companies. These companies have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the hardware, software and information technology
industry than us. Some of our competitors may purchase products that are similar to ours at lower
prices from vendors, makers, wholesale or retail companies; they may offer products that are
similar to or better than ours at lower prices. It is possible that our competitors may make it
more difficult for us to acquire new customers or to retain existing customers. Additionally, there
is no assurance that clients will pay our hardware or/and software product fees pursuant to our
contract terms. Failure to pay these fees may negatively affect our earnings. Furthermore, while
our contracts limit our liability for defective products, delivering defective products to our
customers may adversely affect our commodity sales business by damaging relationships with clients
and our corporate image. On January 21 2005, we publicly announced that we will cease marketing
our hardware business during the fiscal year ending September 30, 2005. However, we plan to
continue to market our software business RISKS THAT MAY HARM OUR INTERNET ADVERTISING SPACE SALES BUSINESS ALSO INCLUDE COMPETITION, PAYMENT
COLLECTION, SECURITY VIOLATIONS, LAW VIOLATIONS AND COPYRIGHT INFRINGEMENT The Company and its wholly owned subsidiary, Cyber Joy, purchased 95% ownership of both Five
Any, Inc (Five Any) and First Charge, Inc (First Charge) on December 31, 2004 from Hikari
Tsushin in order to develop the Companys internet related business. The Company and these
consolidated companies are directly and indirectly involved in the internet advertising and media
market. Large Japanese internet and mobile internet advertising agencies, and media companies, such
as Cyber Agent, Ltd., Cyber Communications Inc., Digital Advertising Consortium Inc., SEPTENI Co.,
Ltd., OPT, Inc, GMO group companies, Yahoo Japan Corporation, Rakuten, Inc. and other companies
have exhaustive information on many types of customers and medias. These companies also have
substantially greater financial, technical and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established relationships in the advertising
information technology and media industry than us. Some of our competitors may also offer similar
or better advertising spaces than ours at lower prices. These companies create and manage similar
or better quality and a greater variety of media than we do. Competition from these and other
companies may limit our ability to acquire new customers or cause our existing customers to stop
using our services, and may therefore limit our profitability. Additionally there is no guarantee
that clients will pay the advertisement fees pursuant to our contract terms. Failure to pay these
fees may negatively affect our earnings. We have implemented a security system to attempt to
prevent unauthorized access, computer viruses and other similar problems. However our security
system may not be sufficient to protect our network from all forms of network attacks. A computer
virus or security breach could potentially damage relationships with our clients and damage our
internet advertising space business. The content of our clients advertisements may violate
Japanese laws or regulations, or may damage the relationships between Crayfish group companies and
media space companies such as television and radio broadcasters, and publishers of magazines and
newspapers. Additionally, if our clients internet advertising or our advertising or other medias
infringe on a copyright of a third party, we may be liable to such third party under Japanese or
International copyright laws, and our earnings or reputation may suffer as a result. IF WE MAY FAIL TO CARRY OUT OUR BUSINESS STRATEGY, OUR BUSINESS MAY SUFFER. If we fail to meet customer needs, develop effective market channels, or if Hikari Tsushins
affiliates stop selling our new or existing business products or services, our profitability will
be limited. We may also consider merging with or acquiring other companies, investing in other
companies, or purchasing part or all of a business from other companies. However, there is no
guarantee that we will succeed in implementing any new business strategies we adopt. We may incur
significant losses if we fail to implement our business strategy. OUR SALES AND REVENUES ARE SENSITIVE TO ECONOMIC TRENDS IN THE INTERNATIONAL OR JAPANESE MARKET,
WHICH MAY BE NEGATIVE. Purchases of our products and services are, to a very significant extent, discretionary.
Accordingly, weakening economic conditions may reduce consumption in any of our major markets which
would cause material declines in our sales and operating income. In addition, weakening economic
conditions may also affect collection of fees from our subscribers. If the international or 8




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Japanese economy declines, if international political and military instability depresses consumer
confidence, or if other negative economic trends continue or accelerate in any of our markets, our
profitability may be significantly adversely affected. WE HAVE A HISTORY OF LOSSES AND WE MAY INCUR LOSSES IN THE FUTURE. We earned net income of approximately Yen597 million for the fiscal year ended September 30,
2004. We incurred a net loss of approximately Yen228 million for the year ended September 30, 2003.
We earned a net income of Yen1,338 million in fiscal year 2002. We incurred net losses of Yen9,569
million for the year ended September 30, 2001 and Yen1,542 million for the year ended September 30,
2000. We may incur net losses at the end of the next fiscal year and perhaps thereafter. In
addition, especially server business revenue has decreased in the fiscal year 2004 due to a
reduction in the size of our DESKWING customer base. The number of our subscribers has declined
from 8,209 as of September 30, 2003 to 6,457 as of September 30, 2004 (Please see Item 5., A.
OPERATING RESULTS for more detailed information). Moreover we will consolidate both Five Any and
First Charge beginning in the fiscal year ending September 30, 2005, and the Companys revenue is
dependent on and strongly connected with these companies revenues. IF WE FAIL TO OFFER CUSTOMERS SERVICES WHICH MEET THEIR NEEDS IN A TIMELY AND EFFICIENT MANNER, OUR
BUSINESS MAY SUFFER. In order to succeed, we must accurately forecast, design and implement service enhancements
and new services that meet customer and market needs in a timely and efficient manner. The server
(hosting), commodity (product) sales, media (internet advertising space) and other businesses are
influenced by rapidly changing technology and customer or market needs, as well as by frequent new
product introductions and terminations. Enhancement of existing services or development of new ones
may require substantial time and expense and may not achieve sufficient market acceptance. The
expansion of customer and market needs is also related to the increasing purposes and expanding
uses of computers and servers. The introduction of new products may affect the sales of our current
services. Also, if we are unable to apply rapidly changing technology to meet evolving customer
and market needs or if there is the occurrence of any event of force majeure, we may not be
successful in increasing revenues and achieving profitability. WE COULD EXPERIENCE SYSTEM FAILURES, WHICH COULD AFFECT OUR ABILITY TO OFFER OUR SERVICES. To succeed, we must operate our network infrastructure on a 24-hour, 7-days-a-week basis
without interruption. Although we have attempted to ensure that redundancy is built into the
network and server facilities, these facilities are currently subject to various independent points
of failure. Our operations depend upon our ability to protect our network infrastructure, equipment
and customer data against damage from:  

human errors;

various natural disasters, such as earthquakes;

power loss or telecommunications failures; and

sabotage or other intentional acts of vandalism. However, even if we take precautions, the occurrence of a natural disaster or other
unanticipated problem at our data centers could result in interruptions in providing our services. We have experienced interruptions in service in the past. Any future interruptions could:  

require us to spend substantial amounts of money and time to replace existing equipment or
add redundant facilities;

damage our reputation for reliable service;

cause existing end users, resellers and referral partners to cancel their contracts;

cause end users to seek damages for losses incurred; or 9




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

make it more difficult for us to attract new end users, resellers and referral partners. Any of these occurrences could adversely affect our business. THE MARKET FOR OUR SERVICES MAY NOT GROW. Our success depends particularly on continued growth in the use of e-mail hosting and other
internet-related services, especially by small and medium-sized enterprises in Japan. It is
uncertain if this market will continue to grow. If this market does not continue to grow, our
business will be adversely affected. OUR BUSINESS MAY SUFFER IF WE LOSE THE SERVICES OF OUR EXECUTIVE OFFICERS. Our ability to achieve profitability also depends on the continued service of our current
executive officers. We rely on their experience in the operations of our business and on their
personal relationships with our shareholders and business partners. The loss of their services
could have a material adverse effect on our business. OUR BUSINESS MAY SUFFER IF WE CANNOT RECRUIT AND RETAIN QUALIFIED PERSONNEL. We have substantially reduced the number of our fulltime employees in the past and as a
result, we are increasingly dependent upon a small number of key employees to operate our business.
Recruitment and retention of employees will continue to be difficult due to growing qualified
employers among competitors, and because of increasingly competitive market conditions. Our
employment system encourages employees to meet with department managers to discuss job conditions.
It includes incentives, rewards employees based on their performance, and provides for quarterly
performance evaluations. We may not be able to retain or attract qualified personnel
notwithstanding our employment system, or due to other factors, and as a result, the quality of our
operations or our ability to develop new services may be adversely affected. WE ARE SUBJECT TO CONTROL BY HIKARI TSUSHIN. Hikari Tsushin currently directly and indirectly controls 81.9% of our issued shares as of
September 30, 2004. Please see Item 7. A. MAJOR SHAREHOLDERS for more detailed information. As a
result, Hikari Tsushin can exercise a controlling influence over important decisions affecting our
business and affairs. These decisions may involve significant corporate transactions such as the
sale of our company, changes in business strategy, corporate governance, corporate restructuring,
investment in other businesses or assets, or the terms of future financings. The interests of
Hikari Tsushin in these and other matters may differ from yours; these decisions may affect our
current and future profitability. In addition, if Hikari Tsushin, its affiliates or other major
shareholders were to sell their stockholdings in us, it could negatively impact our stock price. WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS. Our business may be adversely affected by claims that we or our customers are infringing the
proprietary rights of others. While we are not aware of any infringement by us of the proprietary
rights of third parties, we might face claims of infringement in the future. Any claim, whether
meritorious or not, could be time consuming, result in costly litigation, cause service delays or
require us to enter into royalty or licensing agreements. Any royalty or licensing agreements
required might not be available at all or on terms acceptable to us. THE PROTECTION OF OUR PROPRIETARY INFORMATION IS LIMITED. We have no patented technology. Our technology may be misappropriated, or a third party may
independently develop similar technologies. We outsource some of our programming development works
to a number of independent software developers, and in most of these cases, our agreements with
these software developers do not prohibit them from developing an application based on the
knowledge of the underlying operating software they acquire through providing their services to us.
We registered DESKWING as a service mark on July 5, 2002. We rely on a combination of copyright,
trademark, service mark, trade secret and other related laws and contractual restrictions to
establish and protect certain proprietary rights in our technology. The steps we have taken, or can
take, to protect our intellectual property may be insufficient to protect our assets. 10




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WE DEPEND UPON THIRD PARTIES AND HIKARI TSUSHIN AND ITS AFFILIATES TO MAINTAIN AND ENHANCE OUR
BUSINESSES. We have become increasingly reliant on the services of third parties such as GMO and CTW,
which provide a part of DESKWING services pursuant to outsourcing agreements as announced in our
press releases as of August 1, 2002. We receive marketing and sales support from Hikari Tsushin and
its affiliates for our server, commodity sales, media (internet advertising space) and other
businesses. Our business may be disrupted, and our reputation or profitability may be damaged if
such third parties fail to provide our and their services appropriately or by the misconduct of
third parties, Hikari Tsushin, or its affiliates, such as the misuse of confidential information
acquired during the course of performing their services. Working with third parties, Hikari Tsushin
or its affiliates may lengthen the time required to respond to subscribers inquiries, and
therefore negatively affect subscriptions. In the future, we may outsource business operations to
third parties, Hikari Tsushin or its affiliates. OUR SHARES AND ADSs ARE LIKELY TO BE TREATED AS STOCK OF A PASSIVE FOREIGN INVESTMENT COMPANY FOR
U.S. FEDERAL INCOME TAX PURPOSES. We believe that our shares and ADSs are likely to be treated as stock of a passive foreign
investment company for U.S. federal income tax purposes. U.S. persons who hold our shares or ADSs,
either directly or indirectly, may be subject to materially adverse U.S. federal income tax
consequences. Please see Item 10.E Taxation  United States Taxation  PFIC Rules for more
detailed information. However, we have delisted from the Nasdaq National Market and terminated the
ADR program. WE MAY HAVE TO CONSTRAIN OUR BUSINESS ACTIVITIES TO AVOID BEING DEEMED AN INVESTMENT COMPANY UNDER
THE U.S. INVESTMENT COMPANY ACT OF 1940. In general, a company may be deemed to be an investment company under the U.S. Investment
Company Act of 1940 if it owns investment securities with a value exceeding 40% of its total assets
exclusive of cash and U.S. treasury bonds. Because substantially all of our assets are bank
deposits and other liquid assets and we have few other assets, even a small additional allocation
of our assets into investment securities or appreciation of these securities could cause us to be
deemed an investment company for purposes of the Investment Company Act. If we were to become an
investment company, we would be prohibited from issuing our securities in the United States and may
have to terminate our U.S. listing or other sponsorship promoting a U.S. trading market for our
securities. In order to avoid these prohibitions, we may be forced to maintain our cash reserves in
ordinary bank accounts or U.S. Treasury bonds and forego opportunities to invest our cash reserves
in instruments which may offer a higher rate of return, potentially limiting our growth and our
profitability. DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES MAY ADVERSELY IMPACT
OUR BUSINESS. A
significant barrier to the growth of e-commerce and communications over the internet has
been the need for secure transmission of confidential information. Despite our design and
implementation of a variety of network security measures, unauthorized access, computer viruses,
accidental or intentional actions and other disruptions could occur. We experienced three instances
of unauthorized access to data of our customers in December 1999. We may incur significant costs to
protect against the threat of security breaches or to alleviate problems caused by such breaches.
If a third person were able to misappropriate our users personal or proprietary information or
credit card information, we could be subject to claims, litigation or other potential liabilities. WE COULD FACE LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK. It
is possible that claims could be made against e-mail and other Web-related hosting service
providers in connection with the nature or content of the materials disseminated through their
networks. Several private lawsuits are pending in the United States which seek to impose liability
upon service providers as a result of the nature or content of materials disseminated over the
internet. It is possible that there may be similar lawsuits in Japan in the future. If any of these
actions succeed, we might be required to respond by investing substantial resources or
discontinuing some of our services. In addition, the governments of Japan, the United States and
other jurisdictions could enact laws and regulations related to content distributed over the
internet that are more strict than those currently in place. The increased attention focused upon
liability as a result of these lawsuits and legislative proposals could impact the growth of
internet use. 11




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WE MAY BE DELISTED FROM THE MOTHERS MARKET OF THE TOKYO STOCK EXCHANGE OR FORCED TO TAKE COSTLY
MEASURES TO PREVENT BEING DELISTED FROM THE TOKYO STOCK EXCHANGE Between September 30, 2003 and September 30, 2004, the number of our shareholders decreased
from 389 shareholders to 316 shareholders. The number of our shareholders may fall below the
minimum listing requirements of the Mothers market of the Tokyo Stock Exchange. Under current
requirements, if the number of our shareholders falls below 150, we will have one year within which
to return to a minimum of 150 shareholders in order to retain our listing. We may be required to
take costly measures to avoid being delisted. If these measures are not successful, we may be
delisted from the Mothers market of the Tokyo Stock Exchange. FAILURE TO COMPLY WITH NEW U.S. LAWS AND REGULATIONS AFFECTING CERTAIN COMPANIES WHICH ARE PUBLICLY
TRADED IN THE U.S. MAY HARM OUR BUSINESS The
Sarbanes-Oxley Act of 2002 imposes several new requirements on certain companies whose
securities are registered under certain U.S. federal securities laws, including Crayfish. We are a
SEC-registered non-U.S. company. The application and interpretation of some of the Acts provisions
are uncertain at this time and some of the provisions are only effective after SEC rulemaking.
However, we may be required to take costly steps to comply with the
Sarbanes-Oxley Act. Failure to
take these steps may subject us to costly penalties which may harm our business, profitability and
financial condition, and might affect the liquidity and price of our shares. WE MAY BE UNABLE TO TERMINATE OUR REGISTRATION UNDER U.S. SECURITIES LAWS AND WE MAY CONTINUE TO
INCUR COSTS TO COMPLY WITH U.S. SECURITIES LAWS. Recent changes in U.S. laws and regulations may require changes in corporate governance that
are different from the way Japanese companies traditionally operate. Compliance with new U.S. laws
and regulations also may cause us to incur additional expenses in order to comply with such laws
and regulations. These costs may harm our business and affect the liquidity and price of our
securities. For these and other reasons, management decided to delist its ADSs from Nasdaq and
terminate the registration of our ADSs under Section 12(g), 12(h) and 15(d) of the Securities and
Exchange Act of 1934. While we delisted our ADSs from Nasdaq effective November 24, 2003, U.S. laws
and regulations will not allow us to terminate our registration under Section 12(g), 12(h) and
15(d) of the Securities and Exchange Act of 1934 until the total number of our shareholders,
including ADS holders, falls to under 300. If we are unable to terminate our registration, we will
continue to incur expenses in connection with our reporting obligations as a SEC-registered
company. These costs may harm our business and affect the liquidity and price of our securities. WE MIGHT BE LIABLE FOR DAMAGES IF THERE ARE DEFECTS IN ASSETS WE HAVE SOLD. We sold a significant portion of certain servers and other technical equipment used to operate
our DESKWING service to Diamond Lease Company Ltd. (Diamond Lease) in fiscal year 2003. We may be
liable to Diamond Lease for damages caused by any material defects in the equipment. JAPANESE LAWS AND REGULATIONS WHICH IMPACT OUR INDUSTRY COULD HARM OUR BUSINESS. We are not currently subject to direct regulation by any governmental agency, or laws or
regulations, other than the Telecommunications Business Law of Japan, the Law concerning Limitation
on Liability of Specified Telecommunication Service Providers and Disclosure of Information on
Senders of Telecommunication of Japan, regulation related to advertisements and regulations
applicable to businesses in general including, but not limited to, the Japanese Civil Code. Our
service users or we may be held responsible for information, which is posted, on the internet. Such
claims may include, but not be limited to, claims involving defamation. We may also be responsible
for products or services we sold such as server, commodity (software and hardware) and internet
advertising space, or media we arranged to post. Our business could suffer if we fail to comply
with the aforementioned regulations or any new laws or regulations that may be adopted in the
future. IF OUR CONFIDENTIAL INFORMATION WERE LEAKED OUTSIDE OF THE COMPANY. OUR RELATIONSHIPS WITH
CUSTOMERS AND SUPPLIERS, AND OUR FINANCIAL PERFORMANCE AND STOCK PRICE COULD BE NEGATIVELY
AFFECTED. 12




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We keep and manage confidential information received from our customers and suppliers. We
carefully protect the confidentiality of such information and take steps to ensure the security of
our network. However, our network, like all information technology systems, is vulnerable to
external attack from computer viruses, hackers or other such sources. In addition, despite internal
controls, misconduct by an employee could result in the improper use or disclosure of confidential
information. If any significant leak of such information were to occur, we could be subject to
lawsuit for damages from our customers that could adversely impact our business operations,
financial condition and stock price. The realization of these or similar risks may have a material
adverse effect on our business, financial condition and results of operations. WHEN CUSTOMERS OR SUPPLIERS BECOME BANKRUPT, WE MUST FIND NEW CUSTOMERS OR SUPPLIERS QUICKLY OR OUR
BUSINESS MAY BE HARMED. Our major clients include Hikari Tsushin, its affiliates, other wholesale companies, ad
agencies, small and mid size enterprises, and individual people. Some of our main suppliers are
identified in contracts between Crayfish and the suppliers filed as exhibits to this report. If any
of these companies become bankrupt, we will need to find new clients and suppliers soon. If we fail
to find new clients and suppliers soon, our business operations profitability, financial condition
and relations to other companies could be affected negatively. IF OUR SUBSIDIARIES, CYBER JOY, FIVE ANY AND FIRST CHARGE DO NOT ACHIEVE ANTICIPATED RESULTS, WE
MAY DECIDE TO CEASE BUSINESS OPERATIONS OF THESE COMPANIES. Cyber Joy, Five Any and First Charge sell internet advertising space to small and mid size
enterprises or ad agencies in Japan. The internet advertising and media industry is very
competitive. There are many competitors. If the business operations of these companies do not
achieve the results Crayfish expects, we may decide to terminate their businesses. This may
negatively affect our business performance, operations or future profitability. WHEN WE FILE FORM 15 WITH THE SECURITIES AND EXCHANGE COMMISSION, THE COMPANY MAY NO LONGER
DISCLOSE ANY INFORMATION IN ENGLISH. The Company delisted from the Nasdaq National Market System and terminated our ADR program on
November 24, 2004. Crayfish intends to file a Form 15 with the Securities and Exchange Commission
to terminate its reporting requirements in the U.S. and reduce its expenses when the number of
shareholders in the U.S. is less than 300. When the Company files the Form 15 with the SEC, the
Company may stop publishing any news releases in English with the SEC and on our homepage.
Moreover, the Company may suddenly stop publishing news releases in English without any advance
notice. Persons desiring information concerning Crayfish who do not speak the Japanese language
may need to have the information translated to their language at their own expense. IF OUR CUSTOMERS ARE DISSATISFIED WITH OUR GOODS AND SERVICES, OUR BUSINESS MAY SUFFER. We strive to take good care of our customers. However, if our customers are dissatisfied with
using our goods or services, or our aftercare customer support system, they may stop using our
goods and services. Moreover if our goods and services do not meet our customers expectations,
they may stop using our goods and services. This could also damage our reputation. In the worst
case, the Company could face lawsuits from dissatisfied customers. This could harm our business. 13




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ITEM 4. INFORMATION ON THE COMPANY. A. HISTORY AND DEVELOPMENT OF THE COMPANY. We were incorporated on October 16, 1995 in Japan as a joint stock corporation under the name
Crayfish Co., Ltd. Our head office is located at Hikari Center Bldg. 5th Floor, 16-15, Minami
Ikebukuro 1-chome Toshima-ku, Tokyo 171-0022, Japan. Our telephone number is 81-3-5951-7192. Our
World Wide Web address is www.Crayfish.Co.Jp. Information contained in our Web site does
not constitute part of this annual report on Form 20-F. Our agent for service of process in the
United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. Our business grew from our origins in internet-based hosting services. These services involved
the provision of server space and support operations for internet-related applications for
customers. In October 1995, we began operating domestic Web-hosting services for internet service
providers. We have since entirely phased out these services. We began to offer our Hitmail e-mail
hosting services to small and medium-sized enterprises in Japan in May 1998. As of February 1,
2001, we renamed Hitmail as DESKWING. Hikari Tsushin, Inc (Hikari Tsushin) became our exclusive sales agent for Hitmail in May
1998, providing us with marketing and sales support. Hikari Tsushin acquired a majority of our
shares in March 1999. In December 2000, we terminated our sales agreement with Hikari Tsushin and
began to market our services alone. In March 2000, we became a public company following the listing
of our shares on both the Nasdaq National Market in the United States and the Mothers market of the
Tokyo Stock Exchange in Japan. As a result of the public offering, Hikari Tsushins direct and
indirect ownership of Crayfish was reduced to 46.29% at that time. Following the resignation of our board of statutory auditors and independent accountants, and
the imposition of a temporary trading halt in our ADSs on the Nasdaq National Market in April 2001,
Hikari Tsushin issued a written demand to management, as permitted by the Japanese Commercial Code,
to elect new management and hold an extraordinary shareholders meeting. At an extraordinary shareholders general meeting on June 20, 2001, new directors and corporate
auditors proposed by Hikari Tsushin were elected. New management appointed at the shareholders meeting held in June 2001 refocused our targets
and reorganized our cost structures. In July 2001, we announced our Business Revival Plan. As part of our July 2001 Business Revival Plan, we eliminated the following services in July
and August 2001:  

Crayf!sh 2000, a system similar to DESKWING we began to market in December 2000 and
launched on an OEM basis in November 2000;

Crayf!sh 4000, a middle scale hosting service for small and medium-sized enterprises
launched in May 2000;

M27, a personal groupware service launched in April 2001; and

System Development Services, design of Web sites and development of related system applications
for large corporate customers. Nasdaq released our ADSs from the temporary trading halt on July 26, 2001. As a result of a public tender offer in Japan for our shares by Hikari Tsushin during the
period from September 5 to 25, 2001, Hikari Tsushins direct and indirect shareholdings increased
from 4,761 shares, or 46.7% of our outstanding shares, to 7,469 shares, representing 72.9% of our
outstanding shares as of September 30, 2001. Hikari Tsushin purchased 2,750 shares in the offering
at a per share price of Yen900,000 on September 26, 2001. On August 22, 2003, Hikari Tsushin
acquired 1,500 of our shares at a price of Yen285,000 per share. Hikari Tsushin directly and
indirectly owned 8,411 shares representing 81.9% of our shares as of September 30, 2004. 14




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We began several new businesses in fiscal year 2003 including commodity (software and
hardware) sales and media (sales of internet advertising space). Hikari Tsushins affiliates
provide to us sales and marketing support in connection with these new businesses. Revenue from
these businesses during fiscal year 2003 and thereafter were primarily generated from our sales to
affiliates of Hikari Tsushin. The hardware business will be discontinued during the fiscal year
ending September 30, 2005. In October 2003, the Company established a wholly owned subsidiary, Cyber Joy, Inc. (Cyber
Joy). Cyber Joys head office is located at the same place as Crayfishs head office. Cyber Joy
does not own a World Wide Web site. Cyber Joy sells internet advertising space to small and medium
sized enterprises in Japan. The purpose of establishing Cyber Joy was to implement its internet
advertising business, and potentially increase our earnings. Cyber Joys shares are owned by
Crayfish and are not listed on any market. In December 2004, the Company purchased 95% of the issued and outstanding shares of both Five
Any, Inc. (Five Any) and First Charge, Inc. (First Charge) from Hikari Tsushin. Five Any is
engaged in the media business and rep business. Five Anys media business is mainly operating and
managing media sites on a mobile, and its rep business is mainly selling internet advertising space
to ad agencies. First Charge is engaged in marketing internet advertising space; it is selling
internet advertising space to advertisers or small and medium sized enterprises in Japan. These two
companies head offices are located at Hikari Center Bldg. 2nd Floor, 16-15, Minami Ikebukuro
1-chome Toshima-ku, Tokyo 171-0022, Japan. The Company will consolidate Five Any and First Charge during the fiscal year ending September
30, 2005. The financial results of these two companies will not affect the consolidated financial
statements of the Company for the fiscal year ended September 30, 2004. On July 31, 2003, our shareholders approved a significant reduction in capital and paid-in
capital based on our belief that we will not require significant future capital investments or
expenditures related to the class action lawsuit which has been settled. Subsequently, we filed
with the Tokyo Legal Affairs Bureau, and distributed cash to our security holders in accordance
with the Japanese Commercial Code in the amount of Yen14,375,200,000, or Yen1,400,000 per common
share or Yen2,800 per American Depositary Receipt (ADR). The cash was distributed on October 10,
2003 to ADR holders of record as of August 15, 2003. We have terminated our ADR program and delisted our ADRs from Nasdaq. As announced in our
press release on August 22, 2003, our Board of Directors decided to delist our ADRs from Nasdaq
effective on November 24, 2003 and to terminate our ADR program on the same date after considering
various factors as described in the release. Information concerning our principal capital expenditures during the last three years has been
included under Item 4.D. Property, Plant and Equipment. Information concerning divestitures made
by us during the last three years has been included under Item 4.C. Organizational Structure and
in Item 4.D. Property, Plant and Equipment. B. BUSINESS OVERVIEW. We provide server (hosting) services, and sell commodities (software and hardware) and media
(internet advertising space), to small and medium-sized enterprises in Japan. We seek to alleviate
the intimidation that small and medium-sized enterprises may feel about the cost, time or
technology involved in establishing and maintaining an internet presence and purchasing
business-friendly hardware and software. Our customers enjoy the benefits of internet
communications, productivity and e-commerce hardware and software solutions which cannot be
achieved on their own without building and maintaining a costly information-technology
infrastructure. OUR SERVICES 1. CORE SERVICE  DESKWING Hitmail, a server business targeting small and medium-sized enterprises and the predecessor of
our core service, DESKWING, was introduced in May 1998. Our original DESKWING service provided to
customers a domain name of their own choosing with up to 50 e-mail addresses and 100 megabytes of
server capacity, and an average daily transfer volume up to 800 megabytes. On November 1, 2002 we
began to offer a new enhanced DESKWING service (sometimes referred to herein as New DESKWING)
that provides several pricing and service options under two service plans, Type-1 and Type-2.
Type-1 provides customers with a domain name of their own choosing, up to 600 e-mail addresses, 600
megabytes of server capacity (including internet access) and 15




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an unlimited average daily transfer volume. Original DESKWING subscribers are automatically
upgraded to Type-1. Type-2 provides customers with a domain name of their own choosing, up to 600
e-mail addresses, 1,500 megabytes of server capacity (including internet access) and an unlimited
average daily transfer volume. Both Type-1 and Type-2 include additional features such as SSL
encryption, and free mailing lists. Type-2 provides a larger range of functions including PHP and
MySQL at no charge. The initial fee of Yen30,000 for former DESKWING subscribers has been generally
waived for marketing purposes in the past. The original initial fee for Type-1 is Yen10,000 and
Type-2 has no initial fee. Monthly fees for both Type-1 and Type-2 are Yen10,000 and Yen20,000,
respectively. On December 1, 2002, we offered a new discount campaign that waived the initial
payment of Yen10,000 for Type-1 DESKWING service. We ended this discount campaign on September 30,
2003 and began a new discount plan which waived the initial payment of Yen10,000 for Type-1
DESKWING service and the initial payment for any Virus Check plan when customers applied for Type-1
DESKWING service and any Virus Check plan at the same time. (Virus Check is further described below
under Additional Services Related to DESKWING.) We then began a discount plan on September 30,
2003 wherein the initial payment of Yen10,000 for Type-1 DESKWING service was waived when customers
applied for Type-1 DESKWING and Nikkei Telecom 21 services at the same time. (Nikkei Telecom 21 is
further described below under Additional Services Related to DESKWING.) Both discount plans were
terminated on February 29, 2004. During fiscal year 2004, we offered several new DESKWING discount plans and campaigns. From
October 1, 2003 to December 31, 2003, we offered a new discount campaign that waived three months
of the Asymmetric Digital Subscriber Line (ADSL) service monthly fees (monthly fee is JPY2,200)
when DESKWING users first applied for the service during the discount campaign term. From October
8, 2003 to December 31, 2003, we offered a discount campaign that waived the initial payment
(JPY1,000) for using the electronic bulletin board, and the monthly fee (JPY800) until March 2004
of using the board. From December 1, 2003 to February 29, 2004, we offered a discount campaign that
waived the first three months of the Type-2 DESKWING service fees when a Type-1 DESKWING user
upgraded to Type-2, and we also gave a Hypertext Preprocessor (PHP) guidebook (JPY3,600). From
March 1, 2004 to May 31, 2004, we offered a competitive upgrade discount campaign that waived the
Type 1 initial fee and two months of its monthly fee when another companys server users made the
transition to DESKWING service. And also when another companys server user changed the server
service to DESKWING Type 2 service, two months of the monthly fees were waived. From March 1, 2004
to May 31, 2004, we offered a discount campaign that waived initial payment of Type-1 DESKWING
service for new users. From April 15, 2004 to May 31, 2004, we offered a gift campaign that when
DESKWING users introduced a person to the Company who decided to use DESKWING service, introducers
were given a JPY10,000 JCB coupon. From June 24, 2004 to August 31, 2004, we offered a discount
campaign that waived initial payment of Type-1 fees and two months of the related monthly fee for
new users.  New enhanced DESKWING has the following basic features:

Service and Support  We designed DESKWING to serve users with different experience
levels. We provide free telephone and e-mail technical support for DESKWING as well as advice
regarding how to choose a personal computer and internet service provider, from 9:00 a.m. to
6:00 p.m. Tokyo time, 5 days a week. We do not provide in-person client support. On August 1,
2002 we began to outsource our customer support services to CalltoWeb, Inc. (CTW), an
affiliate of Hikari Tsushin.

Client-Site Controllability  Each DESKWING subscriber receives a log-in ID and password
for access to its control panel. The control panel allows the subscriber to change, add and
delete e-mail addresses under its domain name.

Customers Own Domain Name  We register domain names in the customers own name, such as
www.smallbusiness.com, rather than derivative or lower-level domain names provided by
internet service providers, such as www.isp.com/smallbusiness. This allows our customers to
maintain online name recognition on the internet.

Home Page Service  We began to offer our Web-page hosting service in May 1998. As of
September 30, 2004, approximately 10% of our DESKWING customers subscribed to our Web
service. Web allows customers to publish a corporate Web page under their own domain name. A
customer who subscribes to DESKWING and Web is able to use a portion of the 600 megabytes of
server data capacity for the Type-1 plan or a portion of the 1.5GB of server capacity for the
Type-2 plan. A Web subscription gives customers access to our easy-to-use Web-page design
application. Using this application, accessible through the customer control panel, the
customer may put words into Web pages based on ready-made templates. For customers desiring
more sophisticated Web-designs, we offer references to independent Web-page design service
providers. Moreover, this service contains a free security system for individual information.
This service contains some paid service, which is described below under i) Additional
Services Related to DESKWING 16




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

Enhanceability  For additional charges, we provide a range of optional services (as
described below) such as Virus Check (internet security), ADSL and ISDN (internet
connection), and Nikkei Telecom 21 (business news and information database). i) Additional Services Related to DESKWING Subscribers to New DESKWING may use the following free and fee-based additional services.
Revenues from these additional services accounted for approximately 10% of our average monthly
revenue per customer for both fiscal years ended September 30, 2003 and September 30, 2004,
respectively. Web. Basic Web page creation is generally provided at no charge. The Company can host
Web-page designs that customers create with their own Microsoft FrontPage 2000 software with small
charges. While we have previously charged Yen1,200 per month for the standard Web service with
using FrontPage 2000 software, after introduction of the new DESKWING plan on November 1, 2002
DESKWING now includes the standard Web service free of charge. Virus Check. In January 2002, based on requests that we had received from customers from our
in-house call center, we began to offer a virus check service on a trial basis through a
partnership with Network Associates Co., Ltd. The virus check detects and exterminates computer
viruses at the server site. The 300 available trial subscriptions to the service quickly sold out
and in March 2002, we formally began to offer subscriptions to the service under two plans,
Virus-Check One, priced at a monthly fee of Yen350 per account, with an initial fee of Yen5,000,
and Virus-Check 50, priced at a monthly fee of Yen11,000 per 50 accounts, with an initial fee of
Yen10,000. On July 22, 2003, we introduced a new virus check service, Virus-Check 10, priced at a
monthly fee of Yen3,000 per 10 accounts, with an initial fee of Yen5,000. We began a discount
campaign for Virus Check on July 18, 2003 that waived the initial fee for Virus-Check 50,
Virus-Check 10, and Virus-Check One, and discounted the monthly fee for Virus-Check 10 to Yen2,500
per 10 accounts, applicable until December 31, 2003. This discount campaign ended October 31,
2003. Other additional fee-based services we currently offer are: Nikkei Telecom 21, a news and
corporate information database; domain name acquisition and forwarding; bulletin board; automated
Web-site access log analysis; Kantanne!jp, a real estate web site creation application; ADSL,
Integrated Services Digital Network (ISDN), dial up and global internet access. As part of our July 2001 Business Revival Plan, in August 2001 we discontinued the following
services: Shop, our business-to-consumer e-commerce enabling service introduced in January 2000;
Office, a personal information management service and information sharing service introduced in
April 2000; and Unified Messaging, a combination of fax, voice and e-mail service. To access our services, customers need computer equipment and access to the internet provided
by a third party internet service provider through a conventional telephone line, a leased line, a
digital subscriber line (DSL), or cable (CATV), etc. Until November 2000, Hikari Tsushin, as
our former sales agent, assisted customers with acquiring these connection services. Since the
termination of our contract with Hikari Tsushin, our own sales and marketing team has assisted
customers with acquiring these products. We may also introduce a third party internet service
provider to customers. ii) Subscriptions In accordance with our outsourcing agreement with Global Media Online Inc. (GMO) which
began on September 1, 2002, when a customer subscribes to our services, GMO processes subscriber
applications, collects any applicable initial and monthly fees, and then configures the DESKWING
server to allocate disk space for the subscribers data. Ordinarily, customers are able to begin
using our services one to two weeks following the time of subscription. Acquisition of Domain Names. We acquire domain names for our customers. Approximately
one-half of our customers request Japanese domain names, which end with the extension .jp. For
these names, we apply to Japan Registry Service Co., Ltd. (JPRS), of which we are a member of
administrating specification-operating companies. Some of our customers request domain names which
end with extensions such as .com, .org or .net. for which there are several registrars in
the United States. 17




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Our Contracts with Customers. We enter into a standard contract with each customer that
subscribes to our services. Our standard DESKWING contract defines the content and scope of our
services, among other terms. Our standard DESKWING contract also contains the following key terms:  

Minimum Subscription Period  The minimum subscription period is currently twelve
months. If the subscriber terminates the contract before the end of the minimum subscription
period, the contract requires the customer to pay the balance of the fees for that period.

Right to Terminate Subscription  Subject to the minimum subscription period, the
subscriber can terminate our services after two months written notice.

Limitation of Our Liability  If we fail to provide the services we promised, the
contract limits our liability to the subscriber. If a failure continues for more than 12
hours after we have learned of it, the subscriber can demand a refund. The amount of refund
the customer can demand is roughly proportional to the monthly fee, based on the duration of
the failure beginning 12 hours after we learned of it. The contract further limits our
liability if the failure is caused by the telephone company connecting the subscriber to our
data center. 2. Commodity sales (Product sales). Beginning in fiscal year 2004 the Companys software business and hardware business are
included in commodity sales (product sales) business. In fiscal year 2004, revenues from
commodity sales accounted for approximately 50.2% of total revenues in Japan. We have included an
overview of software and hardware businesses below. i) Software We began to design and market software in February 2002 following test marketing to identify
software products that are marketable to small and medium-sized enterprises. We purchase software
from third party software companies such as MAGREX Co., Ltd. and then sell this software to Hikari
Tsushin affiliates such as IE Group, Inc. (IE Group) and CTW. Hikari Tsushin affiliates in turn
sell this software to small and medium-sized Japanese enterprises. In October 2003, we began to
develop software using an in-house software development team.  Examples of software we sell include the following:

Enterprises Resource Planning (ERP) Software. ERP manages sales, purchase, accounting,
salary, and customer data. ERP includes business card management software that allows
customers to build a business card database by scanning a business card with an ultra-small
scanner.

PC-FAX Software. PC-FAX software allows users to fax documents directly from a computer.

Anti-Virus Software. Anti-Virus Software protects users computers from viruses and
unauthorized entry and uses a heuristic method that allows users to see the difference
between infected and non-infected computer files.

Homepage Manager. Homepage Manager software supports customers homepage management, but
it does not create a Homepage. For example, when a customer wants to register a search site,
such as Yahoo or Google, the software creates a special registered application form to
easily register those sites. However the software users need to be connected to the internet
when they use this software.

OSAMA FAX. OSAMA FAX is hardware. However our software department is engaged to manage
and maintain this product. The function of OSAMA FAX is the same as PC-FAX software. A
users PC connects OSAMA FAX to the users network system (the number of maximum connections
from PCs to OSAMA FAX is 999 PCs), and then the users PC may work the fax system, as well.
The function of OSAMA FAX includes sending and receiving faxes into a PC by any type of
file, such as a word file, excel file, PDF file and so on. It may keep sent and received
faxes in the OSAMA FAX as a file. 18




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ii) Hardware As part of our goal to market a wide array of information technology (IT) products and
services to small and medium sized enterprises, in September 2003 we began to market PC and
computer peripherals hardware to Japanese small and medium sized enterprises. We will discontinue
this business effective during fiscal year ending September 30, 2005. Crayfish mainly purchased
hardware from IDK Inc. and other hardware makers and wholesalers, and mainly sold this hardware to
Hikari Tsushin affiliates such as IE Group and CTW who in turn sold the hardware to small and
medium sized companies in Japan. 3. Media (Internet Advertising). In line with our aim to increase earnings by stabilizing our DESKWING operations, in April
2003 Crayfish began to purchase internet advertising space and to market this space to internet
sites together with affiliates of Hikari Tsushin. We also created a regional information portal
site on the internet. We sell banner advertisement spaces on that site. In October 2003, we
established a wholly owned subsidiary, Cyber Joy, to market internet advertising space as its
business. Cyber Joy mainly sells internet advertising spaces to small and medium sized companies in
Japan. Revenues from sales of internet advertising accounted for approximately 14.6% of total
revenues in fiscal year 2004. Internet advertising and media include the following types of
advertisements and media:  

Banner Advertisements. Banner advertisements are posted on highly trafficked Web sites and
hyperlink users to the web site in the banner advertisement when users click the banner. Banners
may contain pictures and animation and allow advertisers to measure the effectiveness of the
banner by tracking the number of clicks on the banner.

E-mail Advertisements. E-mail advertisements are attached to Mail Magazines, informational
magazines that are periodically sent to users via e-mail. E-mail advertisements resemble
advertisements in paper magazines and newspapers and are generally more effective and less costly
than banner advertisements.

A regional information site [e-Machi TOWN]. The site mainly contains regional prefecture
information in Japan. The site contains banner-advertising spaces, which we sell in Japan through
Five Any and First Charge. In December 2004, the Company purchased 95% of the issued and outstanding shares of both Five
Any and First Charge from Hikari Tsushin. Five Any is engaged in the media business and rep
business. Five Anys media business is mainly operating and managing media sites on a mobile, and
its rep business is mainly selling internet advertising spaces to ad agencies. First Charge is
engaged in marketing internet advertising space; it is selling internet advertising space to
advertisers or small and medium sized enterprises in Japan. The Company will consolidate Five Any and First Charge during the fiscal year ending September
30, 2005. The financial results of these two companies will not affect the consolidated financial
statements of the Company for the fiscal year ended September 30, 2004. These two companies are
mainly engaged to sell banner advertisements and mail advertisements. SALES AND MARKETING Most of our customers are small and medium-sized Japanese enterprises, particularly businesses
with no more than 20 employees. We believe that while many of these companies lack experience with
internet technology, they are willing to adopt new products and services. As of September 30, 2004, a staff of 1 (12 as of September 30, 2003) was responsible for
general operation of DESKWING, including product and service development. Our sales and marketing
efforts focus on retaining existing customers. After terminating our marketing agreement with
Hikari Tsushin in November 2000, we began to build a direct sales and marketing force for DESKWING.
However, following our July 2001 management change, we concluded that both direct marketing and
outsourcing were not cost-effective under current competitive conditions. Currently, we have tried
to minimize DESKWING subscriber cancellations, and as a result, the monthly subscription
cancellation rate has decreased during fiscal year 2004. Therefore we may focus on keeping a low
cancellation rate. 19




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Until termination of our marketing agreement with Hikari Tsushin, we worked closely with
Hikari Tsushin to market our services. Hikari Tsushin conducted direct-marketing activities
directly and through sales agents. A department within Hikari Tsushin promoted sales of our
services and monitored and supervised these agents activities. We paid Hikari Tsushin a sales
commission for each subscription Hikari Tsushin or its sales agents had obtained. Hikari Tsushins
sales agents also processed applications for our services and collected fees on our behalf. The
sales commission consisted of the following two components:      All or whatever portion we collected of the Yen30,000 start-up fee paid by the subscriber. We
generally waived this fee for marketing purposes in the past.    We also paid Hikari Tsushin a portion of the monthly fee paid by subscribers for our services.
For subscriptions to the standard service, we paid Hikari Tsushin 50% of the monthly fee. For our
additional services, we typically paid 50% of revenues net of the fees we paid to ITOCHU
Technology, Inc. for the use of its servers prior to our July 2000 termination of this
arrangement. As of September 30, 2004, a staff of 10 was responsible for marketing commodities, which
included the software business staff and the hardware business staff. We began selling software in
February 2003. Our commodity marketing staff has focused on marketing through Hikari Tsushins
affiliates, through which most of our software and hardware has been sold. We have also worked with
vendors to develop new software to fit clients tastes, or in certain cases, we have developed this
software in-house. In September 2003, we began to market hardware to small and medium sized
enterprises in Japan. The software marketing staffs also marketed hardware in fiscal years 2003 and
2004. Our commodity marketing staff sells most of the hardware to Hikari Tsushins affiliates who
in turn sell this hardware to small and medium sized Japanese enterprises. We will discontinue our
hardware sales business during the fiscal year ending September 30, 2005. We began to market internet advertising (media) in March 2003. As of September 30, 2003 a
staff of 10 was responsible for marketing internet advertising space. As of September 30, 2004, no
staff members were assigned to the media (market internet advertising space). The Company will
consolidate Five Any and First Charge beginning with the fiscal year ending September 2005.
Therefore these two companies staffs will join into the business from the companies. We assist
enterprises that wish to advertise on the internet to sell their advertisements to internet sites
through our wholly owned subsidiary Cyber Joy and through other Hikari Tsushins affiliates.
Moreover the Company also creates web pages on the internet. TECHNOLOGY We have outsourced to GMO the administration and maintenance of servers supporting DESKWING
and related operations since September 1, 2002. As discussed below in Item 4.D. Property, Plant
and Equipment, we sold to GMO and Diamond Lease Company Ltd. (Diamond Lease) certain servers and
other technical equipment used to operate our DESKWING service. Diamond Lease leases all of the
equipment it acquired from Crayfish to GMO. The facilities that house the DESKWING servers have redundant systems for power, fire
protection, seismic reinforcement and 24-hour 7-days-a-week security surveillance by system
administrators. As of December 2004, Daikanyama data center, which is a part of KDDI CORPORATION,
owns the facility in Tokyo that houses all DESKWING servers. Our security efforts focus on preventing unauthorized access to our customers e-mail and
other database, on protecting our hardware and software from being tampered with by intruders, and
on preventing service failure or slowdown caused by such intruders. Currently GMO is solely
responsible for maintaining DESKWING security in accordance with the outsourcing to GMO of DESKWING
administration and maintenance. GOVERNMENT REGULATION We are not currently subject to direct regulation by any governmental agency, or laws or
regulations, other than the Telecommunications Business Law of Japan, the Law concerning Limitation
on Liability of Specified Telecommunication Service Providers and Disclosure of Information on
Senders of Telecommunication of Japan, regulation related to advertisements and regulations
applicable to businesses in general including, but not limited to, the Japanese Civil Code. The Telecommunications Business law of Japan regulates two types of telecommunications
companies: Type I Carriers and Type II Carriers. In connection with our Access service, as an
internet-access provider, we fall under the category of General Type 20




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II carriers. We formally notified the Ministry of Public Management, Home Affairs, Posts and
Telecommunications before commencing General Type II business and specified the categories of
service to be provided. If matters written in the notification change, General Type II Carriers
must give a notification of the change to the Ministry of Public Management, Home Affairs, Posts
and Telecommunications. On May 27, 2002, the Law concerning Limitation on Liability of Specified Telecommunication
Service Providers and Disclosure of Information on Senders of Telecommunication of Japan became
effective. We are classified as a Telecommunication Service Provider under this law. Under this
law, claims of infringement by third parties against telecommunications service providers must meet
certain conditions in order to find telecommunication service providers liable. This law also
provides that the telecommunications service providers may have to disclose certain information
concerning the sender of the telecommunication to a third party alleging infringement. Other than the laws and regulations mentioned above, certain laws and regulations applicable
to advertisements generally and general Japanese business laws and regulations including, but not
limited to, the Japanese Civil Code currently apply to e-mail hosting, Web page hosting, internet
access, marketing software, hardware and internet advertising space and other our business
activities in Japan. Due to the increasing popularity and use of the internet and other information
technology products and services, it is possible that laws and regulations with respect to internet
and other business activities of ours may be adopted in Japan or other jurisdictions. Governmental
agencies in Japan and elsewhere are currently adopting or considering the adoption of such laws and
regulations. These laws and regulations could cover issues such as user privacy, freedom of
expression, pricing, characteristics and quality of products and services, taxation, libel,
advertising, obscenity, intellectual property rights, information security and the convergence of
traditional telecommunications services with internet communications. We cannot determine at this
time the nature of future possible legislation and regulation and the manner and impact of their
interpretation or enforcement. C. ORGANIZATIONAL STRUCTURE. As of September 30, 2004, Hikari Tsushin directly and indirectly owned or controlled 81.9% of
our outstanding shares of common stock. As of January 31, 2005 twenty-five employees were seconded
to work for us while they were still employed by Hikari Tsushin. We are considered a part of the
Hikari Tsushin corporate group and accounted for as a consolidated subsidiary in its financial
statements. In December 2000, we acquired 47.1% of the outstanding shares of Intranets K.K., a provider of
free groupware functions including web-based scheduling, for a total amount of Yen600 million.
However, after review of our overall strategy as outlined in our Business Revival Plan of July
2001, we determined that the investment had not produced the positive synergistic value originally
expected. As a result of the completion in March 2002 of a share buyback and subsequent retirement
of shares repurchased by Intranets K.K. in connection with a capital reduction of Intranets K.K.,
we currently own 1,333 shares of preferred stock of Intranets K.K. In January 2001, we purchased 3,875 ordinary shares of MCC Holdings, Ltd. (MCC Holdings), a
developer of mobile communications technology and content for mobile communication services, for a
total amount of Yen194 million. After the transaction, we held 60.0% of the 6,458 outstanding
ordinary shares of MCC Holdings. In September 2001, we sold all of our shares in MCC Holdings to a
representative director of MCC Holdings for a total amount of Yen7.75 million. Accordingly, MCC
Holdings is not included as a consolidated subsidiary in our consolidated financial results. In October 2003, we established Cyber Joy to improve our marketing of internet advertising
space and to increase our revenues. Cyber Joy was established as a wholly owned subsidiary, by
investing Yen10 million to acquire 100% of Cyber Joys capital stock from Cyber Joy. In December 2004, we purchased 95% of the shares of both Five Any and First Charge from Hikari
Tsushin to increase our operating base in the internet business. The Company will consolidate these
companies beginning with fiscal year 2005. The purchase prices of the shares of Five Any and First
Charge from Hikari Tsushin were Yen544 million and Yen166 million, respectively. 21




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D. PROPERTY, PLANT AND EQUIPMENT. The table below shows our capital expenditures, including a portion of payments under
capitalized leases for the last three years. FOR THE YEAR ENDEDSEPTEMBER 30,2002
    
    
    2003
    
    
    2004(millions of yen)Capital expenditures,
including a portion of
payments under
capitalized leases
    
    Yen
    37
    
    
    Yen
    5
    
    
    Yen
    32
 Our capital expenditures are difficult to plan given the rapid changes and
uncertainties in the IT market including e-mail hosting and related services. Most of our past
capital expenditures had been related to the expansion and improvement of our hosting
infrastructure, and the installation of servers necessary to offer hosting and e-mail services.
Although our capital expenditures plans may change as new business opportunities arise, we expect
future capital expenditures for the year ending September 30, 2005 to be lower than those for the
year ended September 30, 2004 as we currently do not anticipate expanding our existing hosting
infrastructure. We have primarily paid for capital expenditures with our cash. A wide ranging review of our operations and cost structure undertaken by our new management
revealed that most of our servers were operating at a very low capacity. At the same time, we were
paying high fixed charges under our July 12, 2000 server leasing contract with IBJ Leasing Co.,
Ltd. for this underutilized server capacity. As a result, we terminated the leasing contract on
July 24, 2001 and bought back all leased servers for a cost of Yen2,410 million. This amount
represented the remaining three years of payments outstanding under the leasing contract. The
servers had been assessed and valued at Yen80 million. As a result of the transaction, we incurred
a one-time charge of Yen2,110 million during our fiscal year ended September 30, 2001. On October 31, 2002, we sold certain servers and other technical equipment used to operate our
DESKWING service to GMO and to Diamond Lease. Diamond Lease is leasing all of the equipment it
acquired from Crayfish to GMO. The asset sale was reflected in our first quarter financial
statements for the year ended September 30, 2003. A book value of Yen 68 million in property and
equipment was sold for Yen 80 million in cash. During fiscal year ended September 30, 2004, we made
capital expenditures on leasehold improvements JPY1 million, office equipment JPY3.7 million, and
purchased software JPY27.2 million. This totaled approximately JPY32 million. 22




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS. You should read the following discussion of our financial condition and results of operations
together with our financial statements and the accompanying notes to those financial statements
beginning on page F-1 in response to Item 8 and Item 18. This discussion is based on U.S. GAAP
financial information except as noted otherwise. This section contains forward-looking statements,
and you should read the discussion relating to forward-looking statements appearing at the
beginning of this annual report on Form 20-F. A. OPERATING RESULTS. OVERVIEW. We provide server services and other information technology products to small and medium-sized
enterprises in Japan. We began our business with the launch of DESKWING in May 1998 and have since
focused on expanding our information technology products and services, including server services
(our core server services business is DESKWING), and sales of hardware and software commodities
and internet advertising space (Media). In the year ended September 30, 2004, revenue was comprised
of revenues from each of these businesses and our wholly owned subsidiary, Cyber Joy. Previously, we also derived revenues from our prior server system SSOS (from licensing and
operating our server-hosting platform technology to internet service providers) and system
development (Web-site design and consulting). We had been phasing these services out in recent
years and, following the implementation of our Business Revival Plan in July 2001, we discontinued
our Other Server Services and Systems Development Services segments. In the year ended
September 30, 2001, our revenues were derived primarily from DESKWING services, and we received no
revenues from SSOS and only nominal revenues from system development services. As a result, reclassifications had been made to the statements of operations data for the year
ended September 30, 2000 to conform to the presentation for the year ended September 30, 2001. We
had accounted for our discontinued operations in accordance with the provisions of Accounting
Principles Board Opinion (APB) No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. Accordingly, the discontinued segments historical results of
operations together with losses attributable to the disposal of related assets and settlement of
related liabilities have been reflected as discontinued operations in the statements of operations. In addition, service fees, comprising primarily fees paid to Hikari Tsushin, Inc. for its
services as sales agent prior to the November 2000 termination of our agreement with Hikari
Tsushin, have been included in cost of revenues. In previous years, service fees were included
under operating expenses. We have reclassified these costs for each of the fiscal years ended
September 30, 2000 and 2001 to cost of revenues. Following outsourcing to Global Media Online Inc. (GMO) of the administration and
maintenance of servers supporting DESKWING and related operations in September 1, 2002, costs for
maintenance and other serviceshave been included in cost of revenues. Following the outsourcing of
our call center services to CalltoWeb, Inc. (CTW) in August 1, 2002, costs for call center
services have been included in cost of revenues since August 1, 2002. We began our commodities and internet advertising space (Media) sales businesses during fiscal
year 2003. Total revenue in fiscal year 2003 includes revenue from each of these businesses, and
the cost of goods sold also includes the cost of goods sold from each of these businesses. During
fiscal year 2003, a group affiliated company acted as a sales agent to sell internet advertising
space (Media), and the commission paid to this sales agent for its services was included in
selling, general and administrative expenses. We established Cyber Joy, a wholly owned subsidiary in October 2003. The financial results of
Cyber Joy are included in the media business segment in the consolidated financial statements for
the fiscal year 2004. In addition, internal transactions between the Company and Cyber Joy are
eliminated under the Japan GAAP base. 23




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##### Table of Contents



REVENUE The major components of revenue during fiscal year 2004 include revenues from our server
business (approximately 33.5%), commodity sales (approximately 50.2%), media and others
(collectively approximately 16.3%). Revenues from these businesses were primarily generated from
sales to affiliates of Hikari Tsushin or other customers. Server Business (Hosting) Revenue from our server business consists primarily of fixed monthly fees paid by our DESKWING
customers. Prior to November 1, 2002, the contract for basic DESKWING service required an initial
payment of Yen30,000 and a monthly fee of Yen10,000. On November 1, 2002, a New DESKWING plan was
introduced. This plan provides several pricing and service alternatives under two service plans,
Type-1 and Type-2. The contract for Type-1 provides for an initial payment of Yen10,000 and a
monthly fee of Yen10,000. The contract for Type-2 provides for a monthly fee of Yen20,000 and no
initial fee. The service alternatives are described in Item 4
under the caption CORE SERVICE  DESKWING. We started a new discount plan which began on November 1, 2002 under which subscriber to
either Type-1 or Type-2 DESKWING service plans may be eligible to receive a discount on the
following years subscription fees, based on the term of their subscription. For example, users may
be eligible to receive a 5% discount on the second years subscription fees after one year of
subscribing, a 10% discount on the third years subscription fees after two years of subscribing,
and a maximum discount of 25% after five years. The new discount campaigns and plans during fiscal
year 2004 are described in Item 4 under the caption 1. CORE SERVICE  DESKWING. Fees for other
related services vary. Fees for additional related services comprised approximately 10% of our
total DESKWING related revenues for the years ended September 30, 2003 and September 30, 2004.
Revenues are recognized on a monthly basis over the contract period, beginning when the
subscription fee for the first month is collected. We receive initial contract fees related to the
DESKWING server services from first-time customers, which are deferred as received and recognized
over an estimated service term of 17 months. As of September 30, 2003 and 2004, initial contract
fees of Yen251 thousand and Yen120 thousand, respectively, were deferred. The following table shows, for each of the quarters indicated, the number of newly subscribed
DESKWING service customers, the number of customers that terminated our services and the
quarter-end number of current customers. Our contract with each customer includes a restriction
that the customer cannot terminate the contract during the first year and must provide two-months
prior notice to terminate. YEAR ENDED SEPTEMBER 30,2002
    
    
    2003
    
    
    20041Q
    
    
    2Q
    
    
    3Q
    
    
    4Q
    
    
    1Q
    
    
    2Q
    
    
    3Q
    
    
    4Q
    
    
    1Q
    
    
    2Q
    
    
    3Q
    
    
    4QNewly Subscribed
    
    
    235
    
    
    
    196
    
    
    
    160
    
    
    
    90
    
    
    
    54
    
    
    
    59
    
    
    
    83
    
    
    
    70
    
    
    
    70
    
    
    
    57
    
    
    
    49
    
    
    
    43Cancelled
    
    
    7,759
    
    
    
    4,908
    
    
    
    3,408
    
    
    
    2,999
    
    
    
    2,202
    
    
    
    1,230
    
    
    
    844
    
    
    
    645
    
    
    
    545
    
    
    
    501
    
    
    
    536
    
    
    
    389Quarter-end Balance
    
    
    23,733
    
    
    
    19,021
    
    
    
    15,773
    
    
    
    12,864
    
    
    
    10,716
    
    
    
    9,545
    
    
    
    8,784
    
    
    
    8,209
    
    
    
    7,734
    
    
    
    7,290
    
    
    
    6,803
    
    
    
    6,457
 Commodity (Product) Sales Revenue from commodity (product) sales is produced mainly from our software sales and our
hardware sales. Crayfish provides primarily five types of software for our software business: Enterprise
Resource Planning (ERP), Virus Checker, PC-FAX software, Homepage Manager software and OSAMA FAX.
Sales of ERP commenced in October 2002. The price of ERP is Yen750,000, and it is sold through our
sales agent. Revenue from Virus Checker is earned from monthly fees for maintenance and renewal. Virus
Checker is virus check software, and sold with either one or three licenses. The package that
includes three licenses requires an initial payment of Yen200,000 and a monthly fee of Yen2,000.
Crayfish began to sell Virus Checker packaged with one license in August 2003. Virus Checker with
one license requires an initial payment of Yen80,000 and a monthly fee of Yen1,000. 24




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##### Table of Contents



Sales of PC-FAX software began in February 2003. The price of PC-FAX is Yen550,000 and it is
sold through our sales agents. Sales of Homepage Manager software began in December 2003. The price of Homepage Manager is
Yen1,200,000 and it is sold through our sales agents. Sales of OSAMA FAX began in January 2004 and it is sold through our sales agents. Revenue from
OSAMA FAX is earned from monthly fees for maintenance. The price of OSAMA FAX is Yen1,680,000, and
a monthly fee of Yen6,000. We sell the above types of commodities to small and medium enterprises through Hikari
Tsushins affiliates such as IE Group, Inc., (IE Group) and CTW. Our agreements with IE Group and
CTW are attached to our Annual Report on Form 20-F for our fiscal year ended September 30, 2003 as
Exhibit 4.12 and Exhibit 4.22, respectively. We also provide hardware to small and medium sized Japanese enterprises, mainly through Hikari
Tsushins affiliates, and to individuals. However, we will terminate our sales of hardware during
the fiscal year ending September 30, 2005. Payments by businesses for these products are received
at the end of the month following the month in which the product is sold. Payments by individuals
for these products are received prior to shipping the product. Media Business (Internet Advertising Space) and Others Revenue from our media and other businesses are mainly generated from sales of internet
advertising space. Other revenues include revenues from test marketing, web page design and
management. During fiscal years 2003 and 2004, Crayfish mainly sold internet advertising space
through First Charge, an affiliate of Hikari Tsushin. However, in the years ended September 30,
2003 and 2004, we sold internet advertising space directly to small and medium sized enterprises or
Cyber Joy. Cyber Joys main business is to sell internet advertising space to small and medium
sized enterprises and advertisers. Revenues for the year ended September 30, 2003 came mainly from
First Charge. Payments from First Charge are more fully described in the agreement with First
Charge attached to our Annual Report on Form 20-F for the year ended September 30, 2003 as Exhibit
4.24. In addition, revenues for the year ended September 30, 2004 included revenue generated by
Cyber Joy. COST OF REVENUE Cost of revenue includes costs incurred from our hosting (server) business, product
(commodity) sales, internet advertising (Media) and others. The total cost of revenue consisted of
approximately 66.6% from e-mail hosting services (server business), 20.0% from product sales
(commodity sales), and 13.4% from internet adverting (media) and others during the fiscal year
ended September 30, 2003. In addition, the total cost of revenue during the fiscal year ended
September 30, 2004 consisted of approximately 15.5% from our server business, 67.4% from commodity
sales, 17.1% from media and other businesses. Server (Hosting) business We include expenses related to DESKWING and its related services either as a part of cost of
revenue or as a part of operating expenses. The principal expense items related to DESKWING and its
related services which are accounted for as cost of revenue, as they are incurred, are as follows:      Initial and Ongoing Fees for Acquisition and Maintenance of a Domain Name. These fees are
payable to the relevant administrator of  Prior to the introduction of our new DESKWING plan in November 2002, we had paid initial
domain name registration costs for our new customers. Initial domain name registration costs were
fees paid to register new domain names. We recouped these costs over a period of time from our
monthly DESKWING service subscription fees. Since introducing the new DESKWING plan, initial domain
name registration fees are charged to and paid by new DESKWING customers instead of by us. Until March 31, 2001, we paid to Japan Network Information Center (JPNIC) Yen5,000 per name
for the first year of registration of Japanese attribute domain names, used primarily for Japanese
corporations and organizations, represented as co.jp and or.jp, respectively. In April 2001,
this initial fee was reduced to Yen4,762, with annual registration fees of Yen3,500 thereafter. On
December 1, 2002, we discontinued our use of JPNIC and began to register Japanese attribute domain
names with 25




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##### Table of Contents



Japan Registry Service Co., Ltd (JPRS). We pay to JPRS an initial Japanese attribute domain name
registration fee of Yen3,500 and an annual renewal fee of Yen3,500 thereafter. We pay Yen3,500 to JPRS for the registration of a Japanese domain name (.jp), used primarily
for Japanese domain names. We also pay an annual fee of Yen3,500 for each registered domain name we
have obtained after the first year from the registration. For U.S. domain names, we pay to Verisign $14.50 per top level domain name annually. From
November 2001 through October 2003, we paid $70 per name for the first two years, and $35 per name
for each year thereafter. On November 1, 2003, we changed the
U.S. domain name provider to Discount  Domain.com, which is provided by GMO.      Service fees. Prior to November 2000, a service fee was payable to Hikari Tsushin for its
services as our sales agent. This service fee was equal to 50% of monthly fees and 10% of fees from
additional services.      Administrative Expenses for Application Processing. These expenses included expenses we incurred
in inputting the subscribers information in our database, processing and mailing documents to the
subscriber and preparing a users manual. Since September 2002, in connection with the outsourcing
agreement with GMO, these expenses were included in cost of revenue.      Outsourcing Fees. On September 1, 2002 we outsourced to GMO the administration and maintenance of servers
supporting DESKWING and related operations, and, as a result, we pay outsourcing fees to GMO which
have been included in cost of revenue since September 1, 2002. Beginning August 1, 2002, we outsourced to CTW our customer support services for DESKWING and,
as a result, fees for customer support services have been included in cost of revenue since August
1, 2002. From September 1, 2001 to July 31, 2002, we provided in-house customer support services,
and expenses related to such services were included in selling, general and administrative
expenses. Effective August 1, 2001, we terminated the contract with Telemarketing Japan, which
previously provided our customer support services. The fees for these outsourced services were
included in cost of revenue. Commodity Sales (Product Sales) Cost of revenue in commodity or product sales is mainly associated with purchasing software or
related licenses, and purchasing hardware. In the fiscal years ended September 30, 2003 and 2004,
Crayfish purchased software mainly from MAGREX Co., Ltd. (referred to as Magrex or MAGREX) for
our software business. The payment method to Magrex is described in Master Agreement for OEM [C
master First] which is attached as Exhibit 4.11 to our Annual Report on Form 20-F for the fiscal
year ended September 30, 2003. During fiscal years 2003 and 2004, most of our hardware products were purchased from IDK Inc.
and other vendors for our hardware business. The payment method to IDK Inc. is described in the
Commodity Exchange Agreement, which is attached as Exhibit 4.25 to our Annual Report on Form 20-F
for the fiscal year ended September 30, 2003. Media (Internet Advertising) Business Cost of revenue in our media business mainly comes from purchases of internet advertising
space from enterprises that own internet advertising space. Crayfish then sells this advertising
space to advertisers mostly through Hikari Tsushins affiliates and Cyber Joy. Cost of revenue
accrues after our sales agent contracts with a customer to purchase internet advertising space. 26




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OPERATING EXPENSES Our operating expenses include the following:  

Selling, General and Administrative Expenses. Our selling, general and administrative
expenses include personnel expenses associated with our management, sales and administrative
functions, office rent for our headquarters, advertising expenses, depreciation and
amortization expenses and expenses incurred in connection with in-house customer support.

Research and Development Expenses. In order to enhance the functionality of our services
and develop new services, research and development expenses are normally incurred. In the
past, significant research and development costs we incurred related to development of new
server services. Since July 2001, we substantially scaled down our research and development
plans. Research and development expenses will increase when we identify appropriate research
and development opportunities to grow our business.

Loss on Impairment of Equipment. In the year ended September 30, 2001, a Yen2,111 million
loss on impairment of equipment was incurred in connection with the termination of the Lease
Contract with IBJ Leasing Co., Ltd. in July 2001.

Loss on Impairment of Purchased Intangible Servicing Asset. A Yen3,500 million loss on
impairment of purchased intangible servicing asset was recognized in the fiscal year ended
September 30, 2001 in connection with the termination in November 2000 of our marketing
agreement with Hikari Tsushin. Upon termination we paid Hikari Tsushin Yen3,500 million based
on an independent valuation of the fair value of the expected future net revenues to be
received by Hikari Tsushin under the agreement. The expected future revenues were based on
pricing terms then in effect with customers and on estimated future cancellation rates.
Subsequent to termination of the agreement, actual cancellation rates increased significantly
from those projected and we implemented a 50% reduction in the monthly fee charged for our
DESKWING server business. RESULTS OF OPERATIONS As an aid to understanding our historical consolidated operating results, the following table
shows items from our consolidated statements of operations for each of the three years ended
September 30, 2002, 2003, and 2004 indicated in yen amounts and as percentages of total revenues.
Our historical consolidated operating results are not necessarily indicative of future performance. Year ended September 30,2002
    
    
    
    
    
    
    2003(2)
    
    
    
    
    
    
    2004(2)(in thousands, except percentages)CONSOLIDATED STATEMENTS OF OPERATIONS DATA:Revenue(1)
    
    Yen
    2,945,360
    
    
    
    100.0
    %
    
    Yen
    1,771,918
    
    
    
    100.0
    %
    
    Yen
    3,304,725
    
    
    
    100.0
    %Cost of revenue(1)
    
    
    636,174
    
    
    
    21.6
    %
    
    
    649,620
    
    
    
    36.7
    %
    
    
    2,160,441
    
    
    
    65.4
    %Gross profit
    
    
    2,309,186
    
    
    
    78.4
    %
    
    
    1,122,298
    
    
    
    63.3
    %
    
    
    1,144,284
    
    
    
    34.6
    %Total operating expenses
    
    
    978,184
    
    
    
    33.2
    %
    
    
    559,572
    
    
    
    31.6
    %
    
    
    641,754
    
    
    
    19.4
    %Income from operations
    
    
    1,331,002
    
    
    
    45.2
    %
    
    
    562,726
    
    
    
    31.8
    %
    
    
    502,530
    
    
    
    15.2
    %Other income (expenses), net
    
    
    10,542
    
    
    
    0.4
    %
    
    
    (789,274
    )
    
    
    (44.5
    )%
    
    
    (2,114
    )
    
    
    Income (loss) from continuing operations
before income taxes
    
    
    1,341,544
    
    
    
    45.5
    %
    
    
    (226,548
    )
    
    
    (12.8
    )%
    
    
    500,416
    
    
    
    15.1
    %Income taxesCurrent
    
    
    3,800
    
    
    
    
    
    
    
    1,210
    
    
    
    
    
    
    
    1,280
    
    
    
    Deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,839
    )
    
    
    Net income (loss)
    
    Yen
    1,337,744
    
    
    
    45.4
    %
    
    Yen
    (227,758
    )
    
    
    (12.9
    )%
    
    Yen
    596,975
    
    
    
    18.1
    %
   (1)
    
    Revenue and Cost of revenue in Fiscal Year 2003 described above is total revenue and total
cost of revenue of Hosting services (Server business), Product sales (Commodity sales) and
Advertising (Media) and others. Revenue from Hosting services (Server business), Product sales
(Commodity sales) and Advertising (Media) and others are Yen1,440 million, Yen199 million and
Yen132 million, respectively. Cost of revenue for Hosting service, Product sales and
Advertising (Media) and others are Yen433 million, Yen130 million and Yen87 million,
respectively. Revenue and Cost of revenue in Fiscal Year 2004 described above is total revenue and
total cost of revenue of Server (Hosting), Commodity (Product) sales and Media (Advertising)
and others. Revenue from Server, Commodity (Product) sales and Media (Advertising) and
others are Yen1,107 million, Yen1,659 million and Yen539 million, respectively. Cost of revenue for Server,
Commodity (Product) sales and Media (Advertising) and others are Yen335 million, Yen1,457
million and Yen370 million, respectively. 27




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(2)
    
    The Company consolidates its subsidiary. Internal transactions between the Company and its
subsidiary are eliminated under the Japan GAAP base. YEAR ENDED SEPTEMBER 30, 2004 COMPARED TO YEAR ENDED SEPTEMBER 30, 2003 REVENUE. Revenue increased 86.5% to Yen3,305 million in the year ended September 30, 2004
from Yen1,772 million in the year ended September 30, 2003. The number of DESKWING subscribers
declined from 8,209 as of September 30, 2003, to 6,457 as of September 30, 2004. However this
increase was mainly attributable to an increase in net commodity sales business and media and other
business revenues. Revenue from our commodity sales business, and media business and others in the
year ended September 30, 2003 were Yen199 million and 132 million, and in the year ended September
30, 2004 these were Yen1,659 million and Yen538 million, respectively. In the year ended September
30, 2004, total revenue consisted of 33.5% from server business, 50.2% from commodity sales
business, and 16.3% from media and other business. COST OF REVENUE. Cost of revenue increased 232.6% to Yen2,160 million in the year ended
September 30, 2004 from Yen650 million in the year ended September 30, 2003. The increase in cost
of revenue is mainly attributable to the increase in cost of revenue for buying PCs and peripheral
equipment in our commodity business. Cost of revenue for Server, Commodity (Product) sales and
Media (Advertising) and others are Yen335 million, Yen1,457 million and Yen370 million,
respectively. GROSS PROFIT. Crayfish recorded gross profit increased 2.0% from Yen1,122 million in the year
ended September 30, 2003 to Yen1,144 million in the year ended September 30, 2004. The increase in
gross profit is mainly attributable to our commodity sales and media businesses. TOTAL OPERATING EXPENSES. Operating expenses for the year ended September 30, 2004 increased
14.7% from Yen560 million in the year ended September 30, 2003 to Yen642 million in the year ended
September 30, 2004. This increase in operating expenses is mainly attributable to an increase in
the number of employees in our commodity sales and media businesses from fiscal year ended
September 30, 2003. Selling, general and administrative expenses increased to Yen624 million in the year ended
September 30, 2004, up 21.9% from Yen512 million in the year ended September 30, 2003. The increase
in selling, general and administrative expenses is mainly due to an increase in the number of our
employees in our commodity sales and media businesses, and increased employment cost of Cyber Joy,
which was established in October 2003 and wholly owned by the Company. As a result, selling,
general and administrative expenses increased. INCOME FROM OPERATIONS. As a result of factors mentioned above, Crayfish recorded income from
operations of Yen503 million in the year ended September 30, 2004 which is a 10.7% decrease
compared to income from operations of Yen563 million in the year ended September 30, 2003. The
decrease in income from operations is primarily attributable to an increase in operating expenses
from our commodity sales and media businesses. OTHER INCOME (EXPENSES), NET. Other expense, net, for the year ended September 30, 2004 was
Yen2 million compared with other expense, net of Yen789 million for the year ended September 30,
2003. This substantial change resulted primarily from an expense for litigation settlement of
Yen782 million in the year ended September 30, 2003 described below under LITIGATION, and also
from a decrease in interest income. INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Income from continuing
operations before income taxes was Yen500 million for the year ended September 30, 2004 compared
with a loss from continuing operations before income taxes of Yen227 million for the year ended
September 30, 2003. INCOME TAXES (DEFERRED). Income taxes deferred for the year ended September 30, 2004 was
approximately Yen97 million. The aggregate statutory income tax rate used for calculation of
deferred income tax assets and liabilities was 42.05% for the years ended September 30, 2003 and
2004. Effective for years commencing on October 1, 2004 or later, according to the revised
Japanese tax law, income tax rates for enterprise taxes were reduced depending on the size of
business. NET INCOME (LOSS). As a result of the factors described above, net income was Yen597 million
in the year ended September 30, 2004 compared to a net loss of Yen228 million in the year ended
September 30, 2003. 28




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##### Table of Contents



YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO YEAR ENDED SEPTEMBER 30, 2002 REVENUE. Revenue decreased 39.8% from Yen2,945 million in the year ended September 30, 2002 to
Yen1,772 million in the year ended September 30, 2003. This decrease was mainly attributable to a
decrease in net DESKWING revenues as a result of a decrease in the number of DESKWING subscribers.
There were 8,209 DESKWING subscribers as of September 30, 2003, a 36.2% decrease from 12,864
DESKWING subscribers as of September 30, 2002. In the year ended September 30, 2003, total revenue
consisted of 81.3% from hosting services, 11.2% from product sales, and 7.5% from internet
advertisement business and others. COST OF REVENUE. Cost of revenue increased 2.2% to Yen650 million in the year ended September
30, 2003 from Yen636 million in the year ended September 30, 2002. The increase in cost of revenue
is mainly attributable to the increase in cost of revenue for new businesses. The cost of revenue
for new businesses is described above. GROSS PROFIT. Crayfish recorded gross profit of Yen1,122 million in the year ended September
30, 2003, a 51.4% decrease from the gross profit of Yen2,309 million recorded in the year ended
September 30, 2002. The decline in gross profit largely reflects the decrease in revenue from our
DESKWING hosting services. Gross profit margin decreased from 78.4% in the year ended September 30,
2002 to 63.3% in the year ended September 30, 2003. Gross profit margins decreased due to the
introduction of new businesses, which have lower profit margins than DESKWING. TOTAL OPERATING EXPENSES. Operating expenses for the year ended September 30, 2003 decreased
by 42.7% from Yen978 million in the year ended September 30, 2002 to Yen560 million. This decrease
in operating expenses was due primarily to a decrease in selling, general and administrative
expenses, research and development expenses, and loss on disposal of property and equipment in
connection with the sale of fixed assets to GMO. Selling, general and administrative expenses decreased to Yen512 million in the year ended
September 30, 2003, down 36.5% from Yen806 million in the year ended September 30, 2002. The
decrease in selling, general and administrative expenses is mainly due to a decrease in salaries as
a result of outsourcing call-center operations to CTW and a decrease in depreciation in connection
with the sale of fixed assets, as announced on November 13, 2002. INCOME FROM OPERATIONS. As a result of factors mentioned above, Crayfish recorded income from
operations of Yen563 million in the year ended September 30, 2003 compared to income from
operations of Yen1,331 million in the year ended September 30, 2002. A 57.7% decrease in income
from operations from the year ended September 30, 2002 to the year ended September 30, 2003 is
primarily attributable to a decrease in revenue from our DESKWING hosting services business. OTHER INCOME (EXPENSES), NET. Other expense, net, for the year ended September 30, 2003 was
Yen789 million compared with other income, net of Yen11 million for the year ended September 30,
2002. This substantial change resulted primarily from expense for litigation settlement of Yen782
million in the year ended September 30, 2003 described below under LITIGATION, and also from a
decrease in interest income. The decrease in interest income was due to lower interest rates. INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. Loss from continuing operations
before income taxes was Yen227 million for the year ended September 30, 2003 compared with income
from continuing operations before income taxes of Yen1,342 million for the year ended September 30,
2002. NET INCOME (LOSS). As a result of the factors described above, net loss was Yen228 million in
the year ended September 30, 2003 compared to net income of Yen1,338 million in the year ended
September 30, 2002. B. LIQUIDITY AND CAPITAL RESOURCES. Our principal capital and liquidity needs have typically been for working capital relating to
our DESKWING business, and, in the past, for research and development activities. We have met these
needs primarily from cash generated from sales of our shares. We expect that our future principal capital and liquidity needs will be for working capital
for marketing our services and for any expansion of our services. We incurred Yen24 million in
legal costs during the year ended September 30, 2002 as a result of the class action litigation
filed against us in the United States in September 2000. However, we reached an agreement for
settlement in this litigation on June 7, 2003. As a result the defendants agreed to pay U.S.
$9,000,000 in the settlement of the litigation, of which 29




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##### Table of Contents



we paid U.S.$6,625,000 into an escrow
account in July 2003 for expected future payment. Other amounts were paid by other defendants,
Hikari Tsushin and Isao Matsushima (Crayfishs CEO at that time). We also distributed Yen14,375
million of cash to our shareholders in connection with a capital reduction on September 9, 2003. A
summary of our consolidated cash flows is as follows: Year ended September 30,2002
    
    
    2003(1)(2)
    
    
    2004(2)
    
    
    2004(2)(in thousands)Net cash provided by (used in) operating activities
    
    Yen
    1,777,463
    
    
    Yen
    (217,465
    )
    
    Yen
    702,072
    
    
    $
    6,370Net cash provided by (used in) investing activities
    
    
    203,303
    
    
    
    118,055
    
    
    
    (56,276
    )
    
    
    (511
    )Net cash provided by (used in) financing activities
    
    
    2,111
    
    
    
    (14,371,350
    )
    
    
    (53
    )
    
    
    (1
    )Net increase (decrease) in cash equivalents
    
    
    1,982,877
    
    
    
    (14,480,760
    )
    
    
    645,743
    
    
    
    5,860
   (1)
    
    The shareholders, at an extraordinary shareholders meeting held on July 31, 2003,
approved a distribution of cash to the Companys shareholders in connection with reduction of
common stock and additional paid-in capital pursuant to the Japanese Commercial Code. In light
of factors then existing including the Companys financial condition: the size of its then
present or anticipated future business, and margin of safety and operational efficiency, the
Company concluded that it had an excessive amount of funds in comparison with the appropriate
level for the size of its business. The total cash distribution was Yen14,375,200 thousand and
the reduction of capital was effective on September 9, 2003. Amounts to be reduced in common
stock and additional paid-in capital were Yen7,639,106 thousand and Yen6,736,094 thousand,
respectively.(2)
    
    The Company consolidates its subsidiary. Internal transactions between the Company and its
subsidiary are eliminated under the Japan GAAP base. CASH FLOWS FOR YEAR ENDED SEPTEMBER 30, 2004 COMPARED TO YEAR ENDED SEPTEMBER 30, 2003 We incurred a net loss of Yen228 million for the year ended September 30, 2003, and earned net
income of Yen597 million for the year ended September 30, 2004. Net cash used in operating activities was Yen217 million for the year ended September 30,
2003, and net cash provided by operating activities was Yen702 million for the year ended September
30, 2004. Net cash provided by operating activities during the fiscal year ended September 30, 2004
was mainly associated with our commodity sales and media businesses, which began during the fiscal
year ended September 30, 2003. Net cash provided by investing activities was Yen118 million for the year ended September 30,
2003, and net cash used in investing activities was Yen56 million for the year ended September 30,
2004. Net cash used in operating activities during the fiscal year ended September 30, 2004 was
mainly associated with purchase of property and equipment of Yen32 million. Net cash used in financing activities was Yen14,371 million in the year ended September 30,
2003 and net cash used in financing activities was Yen53 thousand in the year ended September 30,
2004. We currently do not have outstanding short-term or long-term borrowings with banks or other
financial institutions. We currently do not have any plans to seek additional debt or equity
financing. We do not have in place any bank lines of credit or other pre-arranged sources of
liquidity. We believe that our current cash levels will be adequate to meet all of our anticipated
obligations and capital expenditure requirements through the year ending September 30, 2005. Our total capital lease obligations as of September 30, 2003 were Yen53 thousand, all of which
paid out during fiscal year ended September 30, 2004. We had rent expense under operating leases of Yen17 million for the year ended September 30,
2003 and Yen10 million for the year ended September 30, 2004. 30




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CASH FLOWS FOR YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO YEAR ENDED SEPTEMBER 30, 2002 We earned net income of Yen1,338 million for the year ended September 30, 2002, and incurred
net loss of Yen228 million for the year ended September 30, 2003. Net cash provided by operating activities was Yen1,777 million for the year ended September
30, 2002, and net cash used in operating activities was Yen217 million for the year ended September
30, 2003. Net cash used in operating activities during the fiscal year ended September 30, 2003 was
mainly associated with the litigation settlement of Yen782 million paid in the U.S. class action
litigation and a Yen228 million net loss related to this settlement. Net cash provided by investing activities was Yen203 million for the year ended September 30,
2002, and net cash provided by investing activities was Yen118 million for the year ended September
30, 2003. Decrease in net cash provided by investing activities in the year ended September 30,
2003, was partially due to used deposits of Yen27,092 thousand and proceeds from sales of property
and equipment of Yen95,585 thousand. Net cash provided by financing activities was Yen2 million for the year ended September 30,
2002 and net cash used in financing activities was Yen14,371 million in the year ended September
30, 2003. Net cash used in financing activities for the year ended September 30, 2003 consisted
primarily of payment of the cash distribution to shareholders with a capital reduction of Yen14,375
million. We currently do not have outstanding short-term or long-term borrowings with banks or other
financial institutions. We currently do not have any plans to seek additional debt or equity
financing. We do not have in place any bank lines of credit or other pre-arranged sources of
liquidity. We believe that our current cash levels will be adequate to meet all of our anticipated
obligations and capital expenditure requirements through the year ending September 30, 2004. Our total capital lease obligations were Yen203 thousand as of September 30, 2002, and Yen53
thousand as of September 30, 2003. We had rent expense under operating leases of Yen17 million for the year ended September 30,
2002 and Yen17 million for the year ended September 30, 2003. C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. RESEARCH AND DEVELOPMENT In order to enhance our services and develop new businesses, research and development expenses
are normally incurred. In the past, significant research and development costs incurred related to
research and development of new hosting services, which was discontinued in July 2001.
Subsequently, we substantially scaled down our research and development plans, and research and
development costs for the recent fiscal years are as follows: Yen51 million, Yen0.5 million and
Yen0 in the years ended September 30, 2002, 2003 and 2004, respectively. During the year ended
September 30, 2003, we started to offer new services and products for small and medium-sized
enterprises including sales of enterprise resource planning software and internet advertisement
placement services. However, we ceased marketing some of these services to focus on research and
development of new software during the year ended September 30, 2004. We may have research and development costs in the fiscal year ending September 30, 2005 that
would consist of software or media business development expenses and marketing research expenses in
connection with development of new businesses. We expect expenditures on research and development
activities to increase in the future, mainly the result of increases in research and development in
software, media or future new businesses. PROPRIETARY RIGHTS We rely on a combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect proprietary rights to our services and products.
We have no patented technology that would preclude or inhibit competitors from entering our
markets. The steps we have taken to protect our intellectual property may not prove sufficient to
prevent misappropriation of our technology or to deter independent third-party development of
similar technologies. To the extent 31




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that our businesses may in the future extend to regions outside Japan, the laws applicable in such
regions may not protect our services or intellectual property rights to the same extent as do the
laws of Japan. To the extent that we rely on technologies we license from third parties, such
licenses may not be available to us at all or on commercially reasonable terms in the future. To
date, we have received no notice that our services or products infringe on the proprietary rights
of third parties, but third parties could claim that our current or future services or products
infringe on their rights. We expect that participants in our markets will be increasingly subject
to infringement claims as the number of services, products and competitors in our markets grows. We
may involuntarily become involved in such actions. Any of these claims, whether meritorious or not,
could be time-consuming, result in costly litigation, cause service installation delays or require
us to enter into royalty or licensing agreements. Royalty or licensing agreements might not be
available on terms acceptable to us or at all. As a result, any of these claims could have an
adverse effect on our business. D. TREND INFORMATION. Among the factors that influence the future profitability of our operations, we believe that
the following are significant and subject to substantial uncertainties: THE SIZE OF OUR DESKWING SERVICE CUSTOMER BASE. The size of our DESKWING service customer base
fundamentally determines a large portion of our revenues. The size of our DESKWING service customer
base is affected by our ability to attract new customers and retain existing ones as well as by
changes in the size of the market for e-mail hosting (server business) and related services for
small and medium-sized enterprises. We had 8,209 DESKWING subscribers as of September 30, 2003, and
6,457 subscribers as of September 30, 2004. We expect the number of subscribers to continue
declining at least through the year ending September 30, 2005 and potentially beyond. We currently
focus primarily upon customer retention, rather than obtaining new customers. We believe continued
losses of customers result from, among other factors, competition from competitors offering
comparable services targeting our market at lower prices, dissatisfaction with our customer
support, frustration or the perceived difficulty of using our services or the internet in general,
and the inability to realize expected benefits from the use of our services or the internet in
general. CUSTOMER ACQUISITION COSTS. Currently, we are focusing on customer retention, and overall
customer acquisition costs are not increasing. Customer acquisition costs may affect revenue growth
unless we can control these costs or successfully implement other businesses. We are exploring
other possibilities for customer acquisition such as the use of sales agents and franchising, which
would allow us to benefit from increases in the number of customers without bearing all costs of
customer acquisition. In order to do so, we may consider the possibility of entering into
arrangements with Hikari Tsushin and companies affiliated with it. OUTSOURCING PART OF DESKWING OPERATION TO GLOBAL MEDIA ONLINE INC. AND CALLTOWEB, INC. We
outsourced to GMO the administration and maintenance of servers supporting DESKWING and related
operations on September 1, 2002, and outsourced to CTW, a subsidiary of Hikari Tsushin, the
in-house call center services on August 1, 2002. As a result, we have been paying outsourcing fees
to GMO and CTW for these operations. These outsourcing agreements may help to contain costs even if
the number of DESKWING subscribers were to continue to decline at present rates. COMMODITY SALES (PRODUCT SALES). While we purchase our software from Magrex and other vendors,
there is no guarantee that these vendors will be able to supply the software that is in demand.
Similarly, IDK supplies most of the hardware that we sell and may not always be able to supply
hardware that is in demand. The failure by Magrex, IDK or other vendors to supply software or
hardware to meet customer needs may negatively affect the earnings of the hardware and software
sales business. We sell software and hardware through Hikari Tsushins affiliate. These companies may not be
always able to market software and hardware that we have acquired. While Hikari Tsushin advises us
regarding the types of software and hardware that are required by the market, Hikari Tsushin and
its affiliates may not always have correct information regarding market requirements. Our earnings from software and hardware sales are dependent upon the price at which we acquire
the software and hardware, and on the price at which we are able to sell the software and hardware
to Hikari Tsushins affiliates. These prices may fluctuate and affect the earnings of this
business. 32




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MEDIA (Internet Advertising Space). The effectiveness of this business depends upon the
availability and price of advertising space on highly trafficked internet sites. Internet
advertisers are usually desirous of advertising on sites that are highly trafficked. Internet
advertising space on sites other than these is not as highly demanded, and therefore more difficult
to sell. The more highly trafficked sites such as Lycos and Yahoo have a limited availability of
internet advertising space. The success of this business may be affected by Cyber Joys
relationships with highly trafficked sites and the ability to procure such advertising space at
reasonable prices. In addition, during the fiscal year ending September 30, 2005, the Company
purchased 95% of the outstanding shares of both Five Any and First Charge. The success of this
business may be affected by the relationships among Five Any, First Charge, Cyber Joy, Crayfish and
their customers. STARTING NEW BUSINESSES. We are considering the possibility of providing a wide variety of
products and services for small and medium-sized enterprises in Japan in an attempt to increase our
profitability and to stabilize our operations. We have been carrying out test marketing for new
services and products, some of which are not related to DESKWING. For instance, we began sales of
software to small and medium-sized enterprises in February 2003, sales of internet advertising
space (Media) in April 2003 and sales of hardware in September 2003. We also established a wholly
owned subsidiary, Cyber Joy, in October 2004, and purchased 95% of the outstanding shares of both
Five Any and First Charge in December 2004. We propose to increase our participation in this market
by identifying the needs of small and medium-sized enterprises, and then attempting to meet those
needs. THE LEVELS OF FEES WE CHARGE FOR OUR DESKWING AND RELATED SERVICES. Competition in the e-mail
hosting (Server) market has created pressure to reduce pricing on our DESKWING service. In an
attempt to reduce potential cancellations of long-term DESKWING subscriptions, we introduced 50%
discounts in April 2001 for customers who continued to subscribe to DESKWING for a period of 13
months or longer. However, in October 2001, we discontinued the campaign because the discounted
price was below cost and did not stem the decline in DESKWING subscription cancellations. We
introduced two new DESKWING service plans on November 1, 2002 that allow subscribers to pay either:
(i) Yen10,000 as an initial introduction fee and Yen10,000 as a monthly fee, or (ii) to pay
Yen20,000 as a monthly fee with no introductory fee. Our new discount plan provides a discount,
ranging from 5% to 25%, to subscribers who subscribe to our services for over one year. On December
1, 2002, we offered a new discount campaign which waived the initial payment of Yen10,000 of Type-1
DESKWING service. We ended this discount campaign on September 30, 2003. We began a new discount
plan at that time, which waived the initial payment of Yen10,000 for Type-1 DESKWING service and
the initial payment for any Virus Check plan when customers apply for Type-1 DESKWING service and
any Virus Check plan at the same time. Virus Check is further described in Additional Service. We
also began another discount plan on September 30, 2003 wherein the initial payment of Yen10,000 for
Type-1 DESKWING service is waived when customers apply for Type-1 DESKWING and Nikkei Telecom 21
services at the same time. Nikkei Telecom 21 is further described in Additional Service. Both
discount plans were terminated on December 31, 2003. Monthly fees for both Type-1 and Type-2 are
Yen10,000 and Yen20,000, respectively. During fiscal year 2004, we offered several new DESKWING discount plans and campaigns. From
October 1, 2003 to December 31, 2003, we offered a new discount campaign that waived three months
of the Asymmetric Digital Subscriber Line (ADSL) service monthly fees (monthly fee is JPY2,200)
when DESKWING users first applied for the service during the discount campaign term. From October
8, 2003 to December 31, 2003, we offered a discount campaign that waived the initial payment
(JPY1,000) for using the electronic bulletin board, and the monthly fee (JPY800) until March 2004
of using the board. From December 1, 2003 to February 29, 2004, we offered a discount campaign that
waived the first three months of the Type-2 DESKWING service fees when a Type-1 DESKWING user
upgraded to Type-2, and we also gave a Hypertext Preprocessor (PHP) guidebook (JPY3,600). From
March 1, 2004 to May 31, 2004, we offered a competitive upgrade discount campaign that waived the
Type 1 initial fee and two months of its monthly fee when another companys server users made the
transition to DESKWING service. And also when another companys server user changed the server
service to DESKWING Type 2 service, two months of the monthly fees were waived. From March 1, 2004
to May 31, 2004, we offered a discount campaign that waived initial payment of Type-1 DESKWING
service for new users. From April 15, 2004 to May 31, 2004, we offered a gift campaign that when
DESKWING users introduced a person to the Company who decided to use DESKWING service, introducers
were given a JPY10,000 JCB coupon. From June 24, 2004 to August 31, 2004, we offered a discount
campaign that waived initial payment of Type-1 fees and two months of the related monthly fee for
new users. 33




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LITIGATION On and after September 8, 2000, class actions were filed in the United States District Court
for the Southern District of New York against (i) Crayfish, (ii) its CEO at the time, (iii) its
underwriters Morgan Stanley Dean Witter, Nomura Securities International Inc. and Merrill Lynch &
Co. and (iv) Hikari Tsushin, Inc. The complaints included allegations that, during the course of
its March 8, 2000 public offering of American Depositary Shares, Crayfish violated U.S. securities
law by making inaccurate and misleading statements. The complaints included related allegations
against the other defendants based on U.S. securities law. Eleven class actions were initially
filed. On September 26, 2001, the court entered an order consolidating all eleven actions and
appointing lead plaintiff and lead counsel for the plaintiffs. On June 4, 2002, the court entered
an order appointing a new lead plaintiff and new lead counsel for the plaintiffs. A consolidated
amended class action complaint was served and filed on July 19, 2002. Crayfish negotiated with the plaintiffs, and the parties agreed to a settlement which was
approved by the court. Pursuant to the terms of the settlement, all pending class actions were
settled and dismissed. Crayfish paid US$9,000,000 in the settlement. Other amounts were paid by
other defendants Hikari Tsushin and Isao Matsushima (Crayfishs CEO at that time). Crayfish
entered into this settlement solely to avoid any further cost, burden or uncertainty from the class
actions, and Crayfish did not acknowledge the validity of any claims alleged by the plaintiffs. E. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources that are
material to investors. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATION We lease office space under operating lease agreements that are cancelable by us with six
months advance notice. We have paid Yen17,493 thousand and Yen9,709 thousand for the year ended
September 30, 2003 and 2004, respectively. In addition, we lease office equipment of which
remaining lease obligations at September 30, 2003 were Yen53 thousand, all of which paid out during
fiscal year ended September 30, 2004. We do not have any other lease obligations. G. SAFE HARBOR The safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange
Actapplies to forward-looking information provided pursuant to Items 5E and F above. 34




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. A. DIRECTORS AND SENIOR MANAGEMENT. The following table provides information about our directors, executive officers and statutory
auditors. MONTH IN WHICHNAME
    
    POSITION
    
    DATE OF BIRTH
    
    CURRENT TERM EXPIRESMasaaki Shimamura
    
    Representative Director,
President and Chief Executive
Officer
    
    January 5, 1969
    
    December 2005Takeshi Tamamura
    
    Chairman of Board of Directors
    
    July 16, 1970
    
    December 2005Tomoya Hirota
    
    Director
    
    April 26, 1979
    
    December 2005Koh Gidoh
    
    Director
    
    August 31, 1963
    
    December 2005Tatsuo Shigeta
    
    Statutory Auditor
    
    October 9, 1962
    
    December 2007Masataka Watanabe
    
    Statutory Auditor
    
    November 20, 1968
    
    December 2007Yuichiro Mori
    
    Statutory Auditor
    
    October 5, 1969
    
    December 2007Tatsumasa Komatsu
    
    Statutory Auditor
    
    July 22, 1964
    
    December 2007
 MASAAKI SHIMAMURA became the president and representative director of Crayfish Co., Ltd.
(Crayfish or the Company) in July 2004. He worked as a director of the Company from June 2002
to July 2004. He has served as a director of Business Partner K.K since June 2004, a director of
Best Partner K.K since May 2004 and a director of Cyber Joy, Inc. since February 2004. He worked
for CalltoWeb, Inc. (CTW, an affiliate of Hikari Tsushin,
Inc.) for two and one-half years and
became General Manager of CTWs Operations Planning Department in November 2000. He joined Hikari
Tsushin in 1999 and has worked in various capacities since then. TAKESHI TAMAMURA became the chairman of the board of directors of the Company in December
2004. He has served as representative director, president and chief operating officer of Hikari
Tsushin, Inc. (Hikari Tsushin) since July 2003. He joined Hikari Tsushin in April 1991, and he
has worked in various capacities at Hikari Tsushin since then. TOMOYA HIROTA became a director of the Company in December 2004. He has served as president
and representative director of Five Any, Inc. (Five Any) since April 2003 and as its President
since October 2003. He has served as a director of HTA, Inc. (HTA) since June 2004. He has served
as a director of Seek, Inc. (Seek) and First Charge, Inc. (First Charge) since June 2004. He
joined Hikari Tsushin in September 2001. KOH GIDOH became a director of the Company in December 2004. He has served as a director of
Hikari Tsushin since December 2001 and as the Chief Accounting Officer of Hikari Tsushin since July
2003. He has worked in various capacities at Hikari Tsushin and its affiliates since 1992. He has
served as a director of IE Group, Inc. since March 2004, a director of HT Solutions, Inc. since
October 2004 and Statutory Auditor of BP debt collection K.K since June 2004. 35




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TATSUO SHIGETA became a statutory auditor for the Company in December 2003. He has been
registered in Japan as an attorney since April 1988. His experience includes 9 years as Partner,
Tokyo Eiwa, Attorneys-At-Law and 3 years as General Counsel at Hikari Tsushin. He has served as the
Statutory Auditor of IE Group, Inc. since April 2003, Statutory Auditor of CTW since November 2001,
Statutory Auditor of Newton Financial Consulting, Inc. since April 2003, Statutory Auditor of Five
Any since November 2002, Statutory Auditor of First Charge since June 2003, Statutory Auditor of
Seek since June 2003, Statutory Auditor of HTA since October 2003, Statutory Auditor of OBM Co.,
Ltd. since April 2002, and a director of BP debt collection K.K since June 2004. He currently
operates his own law office. MASATAKA WATANABE became a statutory auditor for the Company in December 2003. He joined
Hikari Tsushin in October 1995. He has served as Statutory Auditor of IE Group, Inc. since June
2002, Statutory Auditor of CTW since August 2001, Statutory Auditor of Newton Financial Consulting,
Inc. since May 2002, Statutory Auditor of Five Any since November 2001, Statutory Auditor of GIAO
since June 2003, Statutory Auditor of Business Partner KK. since June 2002, Statutory Auditor of
Contact Center KK. since December 2003, Statutory Auditor of HT solutions since April 2004,
Statutory Auditor of Best Partner K.K since May 2004, Statutory Auditor of BP debt collection K.K
since June 2004 Statutory Auditor of HTC, Inc since June 2004, Statutory Auditor of OBM Co., Ltd.
since April 2002, Statutory Auditor of DTC K.K since August 2003, Statutory Auditor of Info Service
K.K since June 2004, Statutory Auditor of OBM Japan Co., Ltd. since June 2004, Statutory Auditor of
PT&C K.K since June 2003, Statutory Auditor of Handy Phone, Co., Ltd. since June 2004, Statutory
Auditor of DG Networks, Inc. since September 2004 and Statutory Auditor of J Communications, Inc.
since June 2004. YUICHIRO MORI became a statutory auditor for the Company in December 2003. He has worked with
Hikari Tsushin since April 1997, and currently he serves in Hikari Tsushins legal department. TATSUMASA KOMATSU became a statutory auditor for the Company in December 2003. He has served
as a director of Newton Financial Consulting, Inc. since June 2004. He has worked in various
capacities for Hikari Tsushin since October 1996, and currently serves as a head of the consumer
satisfaction department in Hikari Tsushin. B. COMPENSATION. For the year ended September 30, 2004, the aggregate compensation paid by the Company to all
our directors and statutory auditors was approximately Yen55 million. C. BOARD PRACTICES. DIRECTORS Directors are elected at a general meeting of shareholders, and the term of office of
directors under our articles of incorporation expires at the close of the ordinary general meeting
of shareholders first held near the end of the fiscal year, which shall be less than a year from
their assumption of office, although they may serve any number of consecutive terms. As is standard
practice in Japan, we do not have an audit or remuneration committee. We do not have any service
contracts with any of our directors providing for benefits upon termination of employment. We have
not established a retirement plan or corporate pension plan for our directors or employees. Mr. Takeshi Tamamura and Mr. Koh Gidoh devote only part-time efforts to Crayfish as directors. STATUTORY AUDITORS In accordance with the requirements of Japanese law and our articles of incorporation, we must
have at least three, but not more than six Statutory Auditors. Statutory Auditors, of whom at least
one must be from outside of the Company, are elected at a general meeting of shareholders. The
terms of office of Statutory Auditors shall expire at the conclusion of the Ordinary General
Meeting of Shareholders held with respect to the last closing of accounts within four years after
their assumption of office. The term of office for a Statutory Auditor who replaces an acting
Statutory Auditor in mid-term is equal to the term remaining in the acting Statutory Auditors
term. Statutory Auditors may serve any number of consecutive terms. Each Statutory Auditor has a
statutory duty to examine the financial statements and business reports to be submitted by the
Board of Directors at the General Meeting of Shareholders and also to supervise the Directors
administration of Company affairs. Statutory Auditors are required to attend meetings of the Board
of Directors but are not entitled to vote. Under the Law concerning special Measures to the
Commercial 36




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Code with respect to Audit, the Board of Statutory Auditors has a statutory duty to prepare and
submit its audit report to the Board of Directors each year. A Statutory Auditor may separately
note his or her opinion in the audit report if it is different from the opinion of the Board of
Statutory Auditors that is expressed in the audit report. The Board of Statutory Auditors is
empowered to establish audit principles, the method of examination by the Statutory Auditors of the
Companys affairs and financial position, and other matters concerning the performance of the
Statutory Auditors duties. D. EMPLOYEES. The
following table shows the number of our full-time, temporary and part-time employees: As of September 30,2002
    
    
    2003
    
    
    2004Full-time
    
    
    27
    
    
    
    30
    
    
    
    30Temporary or
Part-time
    
    
    16
    
    
    
    7
    
    
    
    17Total
    
    
    43
    
    
    
    37
    
    
    
    47
   Note:
    
    Figures for 2002, 2003 and 2004 include employees who had been assigned to work for us
but who were still employed (seconded) by Hikari Tsushin to the Company. In fiscal year 2002,
2003 and 2004, nearly 100% of employees are seconded from Hikari Tsushin. Number
of temporary or part-time employees is based on the average number of temporary or
part-time employees during each fiscal year. Of
the 30 full-time employees at September 30, 2004, 5 were in administrative positions and 25
were in operating positions. As of September 30, 2003, 7 employees were in administrative
positions, and 23 employees were in operating positions. At September 30, 2002, 8 were in
administrative positions, and 19 were in operating positions, including administrative, marketing
and product development positions. E. SHARE OWNERSHIP. None of our present directors, executive officers or statutory auditors beneficially owned any
shares of our common stock as of September 30, 2004. Mr. Shimamura acquired six shares of our
common stock after September 30, 2004. Under the provisions of the Commercial Code of Japan in effect, we amended our articles of
incorporation to allow us to adopt a warrant option plan. In addition, special resolutions of
shareholders at the shareholders meetings were adopted to grant warrant options. We issued options
to directors by issuing to financial institutions warrants with detachable subscription rights,
immediately repurchasing the subscription rights, and issuing these to directors as a part of their
remuneration. The revision of the Commercial Code of Japan in 2001 allows us to grant subscription rights
subject to the approval of the Board of Directors, without amending our articles, provided such
rights are not granted on conditions unfavorable to our shareholders. At September 30, 2004,
outstanding options or warrants to purchase a total of 1,632 shares were exercisable at a weighted
average exercise price per share of Yen1,033,520.30. The options or warrants outstanding and
exercisable by exercise price at September 30, 2004 were as follows (whole amount): 37




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Options/Warrants Outstanding
    
    
    Options/Warrants ExercisableWeighted Average Remaining
    
    
    
    
    
    
    
    
    
    
    WeightedExercise
    
    Number
    
    
    Contractual Life
    
    
    Weighted Average
    
    
    Number
    
    
    AveragePrice
    
    Outstanding
    
    
    (in year)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise PriceYen1,033,520.30
    
    
    1,632
    
    
    
    3
    
    
    Yen
    1,033,520.30
    
    
    
    1,632
    
    
    Yen
    1,033,520.30
 Of the options and warrants outstanding described above, all were held by Isao
Matsushima who formerly served as representative director of the Company. The number of options or
warrants and exercise prices were adjusted in fiscal year 2003 due to the requirements of the stock
option plan and the cash distribution made in connection with a capital reduction on September 9,
2003. Mr. Matsushima exercised a part of the outstanding options or warrants on November 17, 24,
2004 and January 26, 2005; he totally exercised all of the outstanding options or warrants to
purchase 1,632 shares of the Companys common stock. Therefore the options or warrants included in
the table above are no longer outstanding. For more detailed information, please see ITEM 7, A.
MAJOR SHAREHOLDERS. No options or warrants are held by persons who currently serve as directors,
executive officers or statutory auditors of the Company. 38




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. A. MAJOR SHAREHOLDERS. To our knowledge, the persons in the following table are the only owners or beneficial owners
or holders of 5% or more of our outstanding common stock as of September 30, 2004. We are not
required by Japanese law to disclose beneficial ownership of our common stock. As explained in Item
10.B any person who becomes, beneficially and solely or jointly, a holder of more than 5% of our
outstanding common stock must file a report with the relevant local finance bureau of the Ministry
of Finance. The information in this table is based upon our shareholders of record and reports
filed with the Financial Services Agency and the U.S. Securities and Exchange Commission. SEPTEMBER 30, 2004NAME OF BENEFICIAL OWNER
    
    NUMBER
    
    
    PERCENTAGEHikari Tsushin, Inc. (1)
    
    
    8,369
    
    
    
    81.51HTC Partners L.P. (2)
    
    
    600
    
    
    
    5.84Directors and executive officers as a group
    
    
    0
    
    
    
    0
   (1)
    
    If the shares held by HTC Partners, L.P., separately identified in this table, and shares
held by Hikari Tsushins affiliates such as CalltoWeb, Inc. (CTW) are included, Hikari
Tsushin directly or indirectly controlled 8,411 shares or 81.9% of our common stock as of
September 30, 2004. CTW owns 42 shares representing 0.41 percent.(2)
    
    HTC Partners, L.P. is a private equity fund established in the Cayman Islands. A
wholly-owned subsidiary of Hikari Tsushin is the general partner of the fund as well as an
investor in the fund Hikari Tsushin disclaims beneficial ownership of the Crayfish shares held
by HTC Partners L.P. Therefore we do not include HTCs shareholdings in Hikari Tsushins
shareholding numbers. During fiscal year 2003, Hikari Tsushin acquired 1,500 shares of Crayfishs common stock at a
price of Yen285,000 per share (closing price on August 21, 2003, Tokyo Stock Exchange Mothers
Market). Hikari Tsushin acquired Crayfishs common stock through Tokyo Stock Exchanges ToSTNET-. HTC Partners L.P. held 600 shares, representing 5.84% of our outstanding shares as of
September 30, 2004. Our ADSs were traded only on the Nasdaq National Market. Our common stock is listed on the
Mothers market of the Tokyo Stock Exchange. As of September 30, 2004, of the 10,268 shares of
common stock outstanding, 384 shares were held in the form of ADSs, which at the then applicable
conversion ratio was equal to 192,000 ADSs. As of November 21, 2000, the conversion ratio was
changed from 5,000 ADSs representing one share of common stock to 500 ADSs representing one share
of common stock and consequently the 9,225,000 outstanding ADSs were redenominated as 922,500 ADSs.
The 384 shares of common stock underlying the 192,000 ADSs outstanding as of September 30, 2004
were held by Hero & Company, a subsidiary of the depositary for our ADSs, for the account of the
ultimate beneficial owners of the ADSs. Crayfish has been delisted from Nasdaq since the end of
business day of November 24, 2003, and ADSs are no longer traded on the Nasdaq National Market. Our major shareholders have the same voting rights as other holders of our common stock.
Hikari Tsushin directly or indirectly controls 81.9% of our shares as of September 30, 2004, and we
are accordingly subject to control by Hikari Tsushin. We now know of no current arrangements the
operation of which may at a later time result in a change of control of us. Isao Matsushima exercised a part of the warrants on November 17, and November 24, 2004. On
January 26, 2005; he exercised all of the remaining outstanding options or warrants. By exercising
the options or warrants he purchased 1,632 shares, or 13.71% of the Companys common stock (For
more detailed warrant information, please see ITEM 6, E. SHARE OWNERSHIP). After he purchased our
shares, a report filed with the Ministry of Finance indicated that he owned less than 5% of
outstanding shares. As of January 28, 2005, the outstanding number of shares of the Companys
common stock was 11,900 shares. 39




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B. RELATED PARTY TRANSACTIONS. Since September 30, 2001, except as described below, there have been no material transactions
between us and our directors, officers, corporate auditors or their respective family members or
enterprises over which they can exert significant influence. TRANSACTIONS BETWEEN US AND OUR PRINCIPAL SHAREHOLDERS, SUBSIDIARIES AND AFFILIATES Following the fiscal year ended September 30, 2001, we have engaged in related party
transactions with four subsidiaries of Hikari Tsushin and with Hikari Tsushin. These related party
transactions include, but are not limited to, the sales of equipment to Hikari Tsushin, a deposit
paid to Hikari Tsushin and its affiliate in connection with the re-location of our office in
December 2001, rent expenses paid to Hikari Tsushin and its affiliate in connection with renting
the office owned by Hikari Tsushin and paid to its affiliate due to a
sub-lease, outsourcing fees
to CTW in connection with outsourcing call-center operations, and payment for seconded employees. During the fiscal year ended September 30, 2003, we started new businesses: commodity sales
business and internet advertisement business. In the commodity sales business, we purchase software
and PC hardware from third parties and sell these products primarily to IE Group, Inc. and CTW,
affiliates of Hikari Tsushin, who then sell these products to small and medium sized companies. The
Company will cease marketing the sale of hardware during the fiscal year ending September 30, 2005.
In the media (internet advertisement business), we purchase internet advertising space from
enterprises that own internet advertising space and sell the advertising space primarily to First
Charge, Inc., an affiliate of Hikari Tsushin (as of September 30, 2004), who then sells the
advertising space to small and medium sized enterprises. Moreover, we established a wholly owned
subsidiary, Cyber Joy, to market internet advertising space to small and medium sized enterprises
in Japan during the fiscal year ended September 30, 2004. Information concerning the amounts involved in the related party transactions described in the
two preceding paragraphs has been included in the following table below. In December 2004, the Company purchased 95% of the issued and outstanding shares of both Five
Any and First Charge for Yen544 million and Yen166 million, respectively. During November 2004 and January 2005, Mr. Isao Matsushima exercised a warrant to purchase
1,632 shares of the Companys common stock at an exercise price of Yen1,033,520.30 per share. The
warrant was granted to Mr. Matsushima on September 27, 1999, when he was the representative
director of the Company before Crayfishs securities became listed on the Nasadaq National Market
and the Tokyo Stock Exchange Mothers Market. 40




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Account balances and transactions with Hikari Tsushin and its affiliates as of September 30,
2002, 2003 and 2004 are as follows (in thousands): September 30,September 30,2002
    
    
    2003
    
    
    2004
    
    
    2004 (Note 1)Accounts balances at:Accounts receivable
   
   JPY
    21,436
     
   
    JPY
    90,453
    
   
    JPY
    313,739
    
   
    $
    2,847Deposits paid
    
    
    24,751
    
    
    
    1,789
    
    
    
    1,789
    
    
    
    16Accounts payable
    
    
    9,110
    
    
    
    25,237
    
    
    
    22,962
    
    
    
    208Other
    
    
    
    
    
    
    728
    
    
    
    4,201
    
    
    
    38Transactions for the year ended:Sale of property and equipment
    
    
    15,326
    
    
    
    5,566
    
    
    
    
    
    
    
    Purchase of property and equipment
    
    
    2,483
    
    
    
    2,133
    
    
    
    
    
    
    
    Consulting fees received
    
    
    
    
    
    
    12,924
    
    
    
    1,000
    
    
    
    9Sales
    
    
    9,069
    
    
    
    333,767
    
    
    
    2,070,646
    
    
    
    18,790Cost of sales
    
    
    
    
    
    
    52,933
    
    
    
    43,636
    
    
    
    396Compensation received
    
    
    4,872
    
    
    
    82,373
    
    
    
    157,564
    
    
    
    1,430Service fee payment
    
    
    14,689
    
    
    
    24,579
    
    
    
    106,169
    
    
    
    963Rent expense
    
    
    33,394
    
    
    
    17,635
    
    
    
    8,675
    
    
    
    79Other general and administrative
expense reimbursement
    
    
    21,581
    
    
    
    19,250
    
    
    
    55,324
    
    
    
    502Moving expenses
    
    
    7,094
    
    
    
    7,086
    
    
    
    
    
    
    
    Other
    
    
    4,460
    
    
    
    2,712
    
    
    
    1,936
    
    
    
    18
   Note 1: U.S. dollar amounts presented in the accompanying financial statements are included
solely for the convenience of the reader, using the spot rate of the Federal Reserve Bank in the
U.S. at September 30, 2004, which was JPY 110.20 to U.S.$1.00. The convenience translations should
not be construed as representations that the Japanese yen amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this or any other rate of exchange. C. INTEREST OF EXPERTS AND COUNSEL. Not applicable 
 ITEM 8. FINANCIAL INFORMATION The information required by this item has been provided beginning on page F-1. 41




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ITEM 9. THE OFFER AND LISTING. ADSs representing our common stock were first quoted on the Nasdaq National Market on March 8,
2000. Our common stock has been listed on the Mothers market of the Tokyo Stock Exchange since
March 10, 2000. Our ADSs were delisted from the Nasdaq National Market in November 2003. The price history of our common stock and ADSs is reflected in the table below: MOTHERS(YEN)
    
    
    NASDAQ($)(1)HIGH
    
    
    LOW
    
    
    HIGH
    
    
    LOWYEAR ENDED/ENDING SEPTEMBER 30,2000(2)
    
    
    32,800,000
    
    
    
    2,100,000
    
    
    
    166.00
    
    
    
    3.252001(3)
    
    
    1,420,000
    
    
    
    351,000
    
    
    
    13.55
    
    
    
    1.132002(4)
    
    
    850,000
    
    
    
    443,000
    
    
    
    11.49
    
    
    
    7.042003(5)
    
    
    1,550,000
    
    
    
    137,000
    
    
    
    30.50
    
    
    
    9.60Quarter ended December 31, 2002
    
    
    792,000
    
    
    
    630,000
    
    
    
    12.67
    
    
    
    10.00Quarter ended March 31, 2003
    
    
    710,000
    
    
    
    596,000
    
    
    
    12.00
    
    
    
    10.00Quarter ended June 30, 2003
    
    
    1,540,000
    
    
    
    670,000
    
    
    
    26.75
    
    
    
    9.60Quarter ended September 30, 2003
    
    
    1,550,000
    
    
    
    137,000
    
    
    
    30.50
    
    
    
    23.512004(6)
    
    
    1,960,000
    
    
    
    300,000
    
    
    
    32.74
    
    
    
    7.99Quarter ended December 31, 2003(7)
    
    
    839,000
    
    
    
    300,000
    
    
    
    32.74
    
    
    
    7.99Quarter ended March 31, 2004
    
    
    540,000
    
    
    
    400,000
    
    
    
    
    
    
    
    Quarter ended June 30, 2004
    
    
    1,000,000
    
    
    
    446,000
    
    
    
    
    
    
    
    Quarter ended September 30, 2004
    
    
    1,960,000
    
    
    
    770,000
    
    
    
    
    
    
    
    2005Quarter ended December 31, 2004
    
    
    3,580,000
    
    
    
    1,120,000
    
    
    
    
    
    
    
    Quarter ended March 31, 2005
    
    
    3,890,000
    
    
    
    2,370,000
    
    
    
    
    
    
    
    CALENDAR YEAR 2004October
    
    
    1,340,000
    
    
    
    1,120,000
    
    
    
    
    
    
    
    November
    
    
    3,580,000
    
    
    
    1,210,000
    
    
    
    
    
    
    
    December
    
    
    2,980,000
    
    
    
    1,760,000
    
    
    
    
    
    
    
    CALENDAR YEAR 2005January
    
    
    3,890,000
    
    
    
    2,370,000
    
    
    
    
    
    
    
    February
    
    
    3,170,000
    
    
    
    2,650,000
    
    
    
    
    
    
    
    March
    
    
    3,260,000
    
    
    
    2,570,000
    
    
    
    
    
    
    
    
   (1)
    
    Nasdaq Share price information has been retroactively adjusted to reflect the November 21,
2000 change in the ADS ratio to common stock from 5,000 ADSs representing one share of common
stock to 500 ADSs representing one share of common stock.(2)
    
    From our initial public offering in March 2000 through September 30, 2000.(3)
    
    Fiscal year 2001 is the period from October 1, 2000 through September 30, 2001.(4)
    
    Fiscal year 2002 is the period from October 1, 2001 through September 30, 2002.(5)
    
    Fiscal year 2003 is the period from October 1, 2002 through September 30, 2003.(6)
    
    Fiscal year 2004 is the period from October 1, 2003 through September 30, 2004.(7)
    
    Our ADSs were delisted from NASDAQ in November 2003. We have no present plans to relist our
ADSs on NASDAQ or to list our ADSs on any other exchange in the United States. 42




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ITEM 10. ADDITIONAL INFORMATION.  A.

SHARE CAPITAL.Not applicableB.

MEMORANDUM AND ARTICLES OF ASSOCIATION. CORPORATE OBJECTS AND PURPOSES IN OUR ARTICLES OF INCORPORATION Article 2 of our articles of incorporation states our corporate objectives and purposes, which
include:     Data gathering, analyzing, processing and providing by use of computer telecommunications
networks and the internet;   Research and development related to data processing, and development, production, sale and
technical guidance of and consulting service for software and hardware;   Development, planning, maintenance, manufacture, sale and technical guidance of and consulting
service for computers and peripheral equipment and related software;   Analyzing, designing, planning, development, sales and maintenance of computer systems;   Training for computer operating staff;   Advertising agency, advertising related business, and planning for and operation of
promotional gatherings and events;   Planning for and production of commercial and industrial designs;   Photographing;   Publishing, production, sales, planning and creating of books and electronic publishing;   Mail order sales;   Provision of goods information on consignment from mail order dealers, acceptance of orders
and delivery of goods;   Electric and telecommunications works;   Contracting for maintenance for electric and telecommunications facilities;   Manufacture of, maintenance for, purchase, sale, rental, lease, import, export, converting,
working, and consulting of systems and software for electric and telecommunications equipment and
telecommunications;   Planning, development, maintenance, consulting, education for and sale of
telecommunications network systems;   Contracting for surveys and researches of telecommunications, computers and the internet;   Agency, mediation service, consulting service concerning subscription for telecommunication
service, broadcasting service and telecommunication business;   Planning and designing for data communications systems, and introduction of and guidance for
operational management thereof and agent business therefore;   Sale, lease, installation and maintenance of office automation equipment, annexed equipment,
annexed material, office equipment and office-use products; 43




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   Market research and marketing research services;   Consulting service concerning general management;   Information processing business and communications service;   Sales and support of hardware and software for multimedia;   Collecting and conducting information by using information systems;   Publishing business;   Obtaining, administrating and managing copyright, related rights, design right, trademark
rights and industrial rights;   Administrating, licensing, sell and transfer, mediating and substitute for character goods,
which contains distinct name and figure;   Financial business;   Nonlife insurance agent business;   Planning, researching and developing for information recorded magnetic card system;   Issuing and sales of magnetic cards, which system contains cash before delivery, such as
telephone card;   Mediation and surety of money lending, handling service for credit cards, and sales of
information recorded magnetic cards and gift coupons;   Buying, selling, and leasing used things;   Agency for setting vending machines;   Sales of clothing, foods, home appliances, pets, cars, houses and furniture; and   Research, planning, investigation, development, education and training for each of the
preceding items. 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 an interested director is required to refrain from voting on
these matters at board of directors meetings. The Commercial Code of Japan as well as our articles of incorporation provide that the
compensation for directors is to be determined at a general meeting of shareholders of a company.
Within the 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 resolution, leave such
decision to the presidents discretion. The Commercial Code of Japan provides that a significant loan from a third party to 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. 44




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RIGHTS OF HOLDERS OF ADSS. 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.333-11448), declared
effective on March 3, 2000, as amended, or the copy thereof attached hereto as Exhibit 10.1,
incorporated herein by reference. Pursuant to a Notice of Termination given by The Bank of New York effective on the close of
business November 24, 2003, the ADS program for Crayfish was terminated. All remaining deposited
underlying shares have been sold. To claim the sale proceeds (less any expenses), current holders
of Crayfish ADSs are required to surrender their certificate(s) to The Bank of New York for
cancellation. Effective on the opening of business of January 14, 2005, upon presentation of
Crayfish ADSs for cancellation, holders are entitled to receive $37.4111 per ADS. RIGHTS OF SHAREHOLDERS OF OUR COMMON STOCK. Our common stock is the only class of shares we have issued. Rights of shareholders of our
common stock 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 shareholders 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: (1) the transfer of all
or a material part of the business, (2) an amendment of our articles of incorporation to establish
a restriction on share transfer, (3) exchange of stock for stock in a company in existence or to
be newly incorporated, (4) corporate separation, or (5) a merger or consolidation. The Commercial Code of Japan provides additional specific rights for shareholders owning a
substantial number of shares. Shareholders holding 10% or more of the outstanding shares with voting rights 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 outstanding shares with voting rights 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 outstanding shares with voting rights have the right
to:     examine our accounting books and documents and make copies of them, 45




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   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 outstanding shares with voting rights 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 general meeting of shareholders. Shareholders who have held 300 voting rights for six months or more have the right to demand
that certain matters be made agenda items at a general meeting of shareholders. Shareholders who have held any number of shares for six months or more have the right to
demand:     us to institute an action to enforce the liability of one of our directors or statutory
auditors,   us to institute an action to recover from a recipient the benefit of a proprietary nature given
in relation to exercising the right of a shareholder, and   a director on our behalf for the cessation of an illegal or ultra vires action. There is no provision under the Commercial Code of Japan or our articles with regards to any
sinking fund. There is no provision under the Commercial Code of Japan or our articles which requires
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. Such an amendment must be approved by two thirds or more of the votes represented by
the shares present at a meeting of shareholders at which a quorum of shareholders having a majority
of outstanding shares with voting rights are present. 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.
Shareholders having held 3% or more of the outstanding shares with voting rights for six months or
more are 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
September 30 of each year or other dates as decided by the board of directors from time to time,
have the right to attend the annual general meeting of our shareholders. In order to determine the
shareholders entitled to attend annual general meetings and extraordinary general meetings of
shareholders, we are required to make public notice of the 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. RESTRICTIONS ON HOLDERS OF OUR COMMON STOCK. There
is no restriction on non-resident or foreign shareholders to hold our shares or exercise
voting rights. However, pursuant to a provision of our regulations with regard to our shares of
common stock, 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. 46




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There is no provision in our articles of incorporation or other subordinated rules regarding
the ownership threshold above which shareholder ownership must be disclosed. A shareholder holding
more than 5% of the shares of a public company in Japan is required to disclose the shareholder
ownership pursuant to the Securities Exchange Law of Japan. There is no provision in our articles of incorporation governing changes in capital more
stringent than required by law. C. MATERIAL CONTRACTS. The following information is intended only to summarize material contracts, other than those
entered into in the ordinary course of our business. Under the Memorandum on Microsoft Hosting Deployment Program, dated September 17, 1999,
between Microsoft Co., Ltd. and us, we are allowed, as one of four Premier Hosting Partners in
Japan, to advertise our e-mail, Web-page hosting, and our future
services through CD-ROMs and
pamphlets included in Microsofts Office Internet Package 2000 bundles distributed in Japan and
through banner announcements on Microsoft Networks Japanese-language Website. In return for this
advertising, we provide commercial hosting services to the public for which we are required to
purchase software and systems provided by Microsoft. Under the Agreement on Delegation of Intermediary Business relating to Application for the
Registration of Organizational type and Geographical type JP Domain Names, dated April 1, 2001
between JPNIC and us, which restates and amends the Agreement on Delegation of Intermediary
Business relating to Application for the Registration of Domain Names, dated March 8, 1999, JPNIC
delegates to us the intermediary business with respect to the application for the registration of
organizational type and geographical type JP domain names and other related matters. The agreement
was renewed in April 2002 for one year and shall also be renewed for one year in April 2003 as
neither party gave a notice of termination by December 31, 2002. Under the Software License Contract dated March 4, 2002 between Network Associates Co., Ltd.
and us, we license computer software and products with virus alert function which were designed,
developed and sold by Network Associates Inc., a Delaware corporation. We pay a monthly fee to
Network Associates depending on service usage. On March 31, 2001, we entered into an agreement with Japan Network Information Center pursuant
to which we manage an IP address that JPNIC has assigned to us. The agreement requires us to pay
fees for end users assigned IP addresses, an annual domain maintenance fee, and not to disclose
end users confidential information. On June 1, 2002 we entered into a software supply agreement with CalltoWeb, Inc. (CTW an
affiliate of Hikari Tsushin, Inc.) pursuant to which CTW purchases from Crayfish computer software
and then sells the software to its customers. The agreement permits Crayfish to use the name of and
display OSAMA DESK services, including: (1) server hosting services; (2) ASP services; (3) leasing
and selling PC applications; and (4) additional services related to the above points. On June 3, 2002, we entered into an agreement with MAGREX Co., Ltd. (Magrex) pursuant to the
OEM deal of C Master First (Magrexs Software), which is created by Magrex. The agreement
requires Magrex to sell the software, which the Company outsourced Magrex to develop and produce.
The purpose of the contract is for Magrex to continually sell the product to Crayfish according to
the terms of the agreement, and for Crayfish to buy the product and resell the product in the
Territory. The agreement between Crayfish and MAGREX includes terms covering the sales price,
ordering the product, delivery of the product, quality guarantee of product and so on. On August 1, 2002, we entered into an agreement with CalltoWeb, Inc. (CTW) pursuant to which
we outsourced call center operations for DESKWING to CTW. The contract requires us to pay
outsourcing fees to CTW and obligates CTW to protect end users confidential information. The term
of the agreement is five years. On September 30, 2002, we entered into a basic outsourcing agreement with Global Media Online
Inc. (GMO) pursuant to which we outsourced research and development, maintenance and
administration, consumer support and management described in the agreement. The agreement requires
us to pay outsourcing fees to GMO based on the number of DESKWING subscribers and obligates GMO to
protect end users confidential information. The term of the agreement is three years. 47




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On September 30, 2002, we entered into a leasing agreement with GMO in connection
with the basic outsourcing agreement as described above, pursuant to which we leased certain
equipment, including equipment leased free of charge. The agreement requires GMO to use the leased
assets to carry out the aforementioned outsourced DESKWING operations. On October 31, 2002, we entered into a sales agreement with Diamond Lease Company Ltd
(Diamond Lease), pursuant to which we sold assets in connection with DESKWING operations to
Diamond Lease. Diamond Lease then leased these assets to GMO. We received Yen83.8 million (included
Yen3.9 million as taxes) from Diamond Lease from the asset sale. On March 1, 2003 we entered into a software supply agreement with IE Group, Inc. (IE an
affiliate of Hikari Tsushin, Inc.) pursuant to which IE purchases from Crayfish computer software
and then sells the software to its customers. The purpose of the contract is to provide that
Crayfish shall continuously sell the product to IE in accordance with the terms of the agreement,
and IE shall purchase the product from Crayfish and resell it to customers. The agreement between
Crayfish and IE covers such terms as sales price, ordering the product, delivery of the product and
so on. On March 12, 2003 we entered into an agreement with First Charge, Inc. (First Charge), an
affiliate of Hikari Tsushin, Inc. wherein First Charge introduces to Crayfishs customers who wish
to advertise on the internet. The purpose of the contract is for First Charge to cooperate with
Crayfish to obtain the original manuscript of the advertisement. The agreement covers such terms as
advertisement and commission fees, the application of advertisements, exemptions and so on. The
agreement requires First Charge to ensure that the content of the advertisement is acceptable to
Crayfish. On September 1, 2003 we entered into a Commodity Exchange Agreement with IDK, Inc. (IDK)
wherein IDK sells to Crayfish computer hardware and other products. Under the terms of the
agreement, IDK shall continuously sell to Crayfish telecommunication hardware, office automation
hardware, working materials, services related to these materials, and other products which seller
handles. This agreement covers such terms as conditions of payment, transfer of ownership rights,
expiration dates and so on. D. EXCHANGE CONTROLS. JAPANESE FOREIGN EXCHANGE REGULATIONS The Foreign Exchange and Foreign Trade Law of Japan, frequently referred to as the Foreign
Exchange Law, and related cabinet orders and ministerial ordinances govern the issuance of shares
by companies and the acquisition and holding of shares by exchange non-residents and foreign
investors under the Foreign Exchange Law. Exchange non-residents are:    individuals who do not reside in Japan; and    corporations whose principal offices are not in Japan. Generally, branches and other offices located within Japan of non-resident corporations are
regarded as exchange residents of Japan and branches and other offices of Japanese corporations
located outside Japan are regarded as exchange non-residents of Japan. Foreign investors are:  (1)
individuals who are exchange non-residents;(2)
corporations which are organized under the laws of foreign countries or whose principal
offices are located outside Japan;(3)
corporations in which 50% or more of the shares are directly or indirectly held by persons
described in (1) and/or (2), above; and(4)
corporations in which a majority of whose directors or a majority of whose officers having
the power of representation are described in (1) above. 48




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Under the Foreign Exchange Law, with minor exceptions, all aspects of foreign exchange and
foreign trade transactions by exchange non-residents and foreign investors require post-transaction
reporting. The Minister of Finance of Japan also has the power to impose licensing requirements for
transactions in limited circumstances. POTENTIAL CONSEQUENCES RESULTING FROM AN ACQUISITION OF LISTED SHARES If a foreign investor acquires our shares and if the foreign investors direct and indirect
total holdings are 10% or more of our issued shares after the acquisition, the foreign investor
must file a report of the acquisition with the Minister of Finance and any other competent Minister
within 15 days from and including the date of such acquisition. However, in certain limited
circumstances, a prior notification of such acquisition must be filed with the Minister of Finance
and any other competent Minister, who may then modify or prohibit the proposed acquisition. The
acquisition of shares by exchange non-residents as a result of stock splits is not subject to any
of the foregoing requirements. POTENTIAL CONSEQUENCES RESULTING FROM THE SALE OF SECURITIES TO EXCHANGE NON-RESIDENT A Japanese resident is required to file a report with the Minister of Finance concerning the
transfer of securities for value exceeding Yen100 million to an exchange non-resident within 20
days of the date of the transfer. POTENTIAL CONSEQUENCES RESULTING FROM DIVIDENDS AND PROCEEDS OF SALES Under the current Foreign Exchange Law, dividends paid on, and the proceeds of sales in Japan
of shares held by exchange non-residents generally may be converted into any foreign currency and
repatriated abroad. In general, there is no restriction imposed with regard to the import or export of capital,
including the availability of cash and cash equivalents for our use. E. TAXATION. JAPANESE TAXATION The following is a summary of the principal 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
below are based on the laws in force and as interpreted by the Japanese taxation authorities as of
the date of this annual report on Form 20-F. 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.
Investors should satisfy themselves by consulting their own tax advisers as to the overall tax
consequences of the ownership and disposition of shares or ADSs, including specifically the tax
consequences under Japanese law, the laws of the jurisdiction of which they are resident, and any
tax treaty between Japan and their country of residence. 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 are not subject to
Japanese income tax, provided however, that a transfer of retained earnings or legal reserve (but,
generally, not additional paid-in capital) to stated capital (whether made in connection with a
stock split or otherwise) is treated as a dividend payment to shareholders for Japanese tax
purposes and is, generally, subject to Japanese income tax. The Convention Between the United States of America and Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the Treaty)
establishes the maximum rate of Japanese withholding tax which may be imposed on dividends paid to
a United States resident or corporation not having a permanent establishment in Japan. A
permanent establishment in Japan is generally a fixed place of business for industrial or
commercial activity in Japan. Under this treaty, the maximum withholding rate for most U.S.
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 49




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
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 purpose of the treaty and Japanese tax law, U.S. holders of American Depository Receipts
will be treated as the owners of the shares underlying the ADSs evidenced by the American
Depository Receipts. Without an applicable tax treaty, convention or agreement to the rate of Japanese withholding
tax applicable to dividends paid by Japanese corporations to a non-resident or non-Japanese
corporation, the maximum rate of withholding tax is 20%. Except for any individual shareholder who
holds 5% or more of the total outstanding shares, the aforementioned 20% withholding tax rate is
reduced pursuant to the Special Taxation Measures Law of Japan to (i) 10% for dividends due and
payable on or after April 1, 2003, but on or before December 31, 2003, (ii) 7% for dividends due
and payable on or after January 1, 2004, but on or before March 31, 2008, and (iii) 15% for
dividends due and payable on or after April 1, 2008. Japan has entered into income tax treaties,
conventions or agreements with a number of countries, reducing the above-mentioned withholding tax
rate generally to 15% for investors. 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. 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 with The Bank of New York, as depositary. 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
a non-Japanese corporation not having a permanent establishment in Japan are in general not subject
to Japanese income or corporation taxes. However, if a Japanese company repurchases its shares or
ADSs and distributes assets in connection with the repurchase, under certain circumstances, the
selling shareholders are deemed to have received a dividend in an amount equal to the selling price
less the aggregate of the stated capital and the additional paid-in capital attributable to the
shares for Japanese tax purposes. An individual who has acquired shares or ADSs as a distributee,
legatee or donee may have to pay Japanese inheritance and gift taxes at progressive rates. We have paid or will pay any stamp, registration or similar tax imposed by Japan in connection
with the issue of our shares, except that we will not pay any tax payable in connection with the
transfer or sale of the shares by a holder of the shares. UNITED STATES TAXATION The following discusses the material United States federal income tax consequences of the
ownership of shares or ADSs. It applies to you only if you are a U.S. holder, as defined below, and
you hold your shares or ADSs as capital assets. It does not address the tax treatment to special
classes of holders, some of whom may be subject to other rules including:  
tax-exempt entities, 50




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
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 our voting stock,
investors that hold shares or 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 corporation organized under the laws of the United States or any political subdivision
thereof,
an estate whose income is subject to United States federal income tax regardless of its
source, or
a trust if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all substantial
decisions of the trust. This discussion addresses only United States federal income taxation. You should consult your
own tax advisor regarding the United States federal, state and local and other tax consequences of
owning and disposing of shares and ADSs in your particular circumstances. In general, and taking into account the earlier assumptions, for United States federal income
tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares
represented by those ADSs. Exchanges of shares for ADSs, and ADSs for shares, generally will not be
subject to United States federal income tax. WE BELIEVE THAT THE SHARES OR ADSs ARE LIKELY TO BE TREATED AS STOCK OF A PASSIVE FOREIGN
INVESTMENT COMPANY (A PFIC) FOR UNITED STATES FEDERAL INCOME TAX PURPOSES AND THIS DISCUSSION SO
ASSUMES. AS A RESULT, U.S. HOLDERS MAY BE SUBJECT TO ADVERSE TAX CONSEQUENCES, AS DESCRIBED BELOW.
U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THEIR TAX CONSEQUENCES OF OWNING
SHARES IN A PFIC. PFIC RULES In general, we will be a PFIC with respect to you if for any of our taxable years in which you
held our ADSs or shares:  
at least 75% of our gross income for the taxable year is passive income; or
at least 50% of the value, determined on the basis of a quarterly average, of our assets is
attributable to assets that produce or are held for the production of passive income. 51




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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 you do 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,
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. Amounts subject to these rules will not be eligible for the dividends-received deduction
generally allowed to U.S. corporations in respect of dividends received from other U.S.
corporations. If the shares or ADSs are regularly traded on Nasdaq they will be treated as marketable
stock and 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 make this election after
the first year of your holding period in the shares or ADSs, any distributions or dispositions of
such shares or ADSs in the year for which such election is made will be subject to the PFIC rules
described above and all mark-to-market gain with respect to such taxable year will be treated as
gain from the disposition of such shares or ADSs that is subject to the PFIC rules. If you own shares or ADSs during any year that we are a PFIC you must file Internal Revenue
Service Form 8621. TAXATION OF DIVIDENDS If you receive distributions that are not subject to the PFIC rules described above, you must
include in your gross income the gross amount of any dividend paid by us out of our 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 52




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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. Such 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 and will be subject to the PFIC
rules described above. Subject to general limitations that apply to the creditability of foreign taxes, 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. See Japanese
Taxation, above, for the procedures for obtaining a reduced withholding rate under a treaty or a
tax refund. Special rules apply for calculating the amount of the foreign tax credit with respect to
excess distributions subject to the PFIC rules described above. For example, if you do not make a
mark-to-market election, the section 904 tax credit limitations would be applied separately with
respect to the amount of excess distribution allocable to each such taxable year and carryovers, if
any, are not allowed. Dividends from us will constitute income from sources outside the United States, but generally
will be passive income or, if received by certain 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 of our shareholders generally will not be subject to United
States federal income tax. In 2003, the U.S. Congress enacted the Jobs and Growth Tax Relief Reconciliation Act of 2003
(the Act). Under the Act, certain qualified dividends received from foreign corporations are
taxed at the same rates which apply to net capital gains. Dividends from a PFIC do not qualify for
treatment as qualified dividends. F. DIVIDENDS AND PAYING AGENTS. Not
applicable. G. STATEMENT BY EXPERTS. Not
applicable. H. DOCUMENTS ON DISPLAY. Our annual reports on Form 20-F, periodic reports on Form 6-K, Registration Statement on Form
F-6 relating to our ADSs 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. 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. Our annual reports on Form 20-F for the fiscal year ended September 30, 2001 and subsequent
years and our periodic reports on Form 6-K from November 8, 2002 may be reviewed on the SECs EDGAR
database at www.sec.gov. In addition, documents referred to in this 20-F filing may be inspected at our Tokyo
headquarters, located at Hikari Center Building, 5th Floor, 16-15, Minami Ikebukuro 1-chome
Toshima-ku, Tokyo 171-0022, Japan. I. SUBSIDIARY INFORMATION. Not applicable. 53




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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our primary market risk exposure is to foreign exchange rate fluctuations. Our periodic payment obligations for U.S. domain name registrations 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. From time to time, we have entered into foreign
currency forward contracts to hedge against the risk of foreign exchange rate fluctuation. At
September 30, 2004, we had no foreign currency contracts outstanding. We do not believe that our
periodic payment obligations for U.S. domain name registrations subject us to any material foreign
currency exchange risks. We are equity financed and do not have debt that could subject us to significant interest rate
exchange risks. We maintain our cash balances at financial institutions. We invest excess cash in
accordance with an investment policy which authorizes the investment of excess cash in money market
funds and time deposits. We have not entered into any derivative contracts since August 2000, and
at September 30, 2001, 2002, 2003 and 2004, we had no outstanding derivative contracts. Our cash
equivalents are highly liquid investments with original maturities of three months or less. Certain
of our cash equivalents are subject to interest rate risk. Due to the short duration and
conservative nature of these investments, we do not believe that we have a material exposure to
interest rate risk. 
 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 Since our March 2000 initial public offering we have not materially modified the instruments
defining the rights of holders of any class of registered securities, except that on November 21,
2000 a change was made in the ADS ratio to common stock from 5,000 ADSs representing one share of
common stock to 500 ADSs representing one share of common stock. We delisted our ADSs from NASDAQ
effective November 24, 2003. Pursuant to a Notice of Termination given by The Bank of New York
effective on the close of business November 24, 2003, the ADS program for Crayfish was terminated.
All remaining deposited underlying shares have been sold. To claim the sale proceeds (less any
expenses), current holders of Crayfish ADSs are required to surrender their certificate(s) to The
Bank of New York for cancellation. Effective on the opening of business of January 14, 2005, upon
presentation of Crayfish ADSs for cancellation, holders are entitled to receive $37,4111 per ADS. We received approximately Yen10.7 billion in net proceeds from the sale of ADSs in our March
2000 initial public offering. For the year ended September 30, 2000, we used approximately Yen796
million of the net proceeds for payment for capitalized server and related equipment leases to IBJ
Leasing Co., Ltd., Yen209 million on capital expenditures, Yen311 million on research and
development and Yen135 million as general working capital. For the year ended September 30, 2001,
we used an additional Yen2.4 billion of the proceeds to pay a fee in connection with the
termination of the lease contract with IBJ Leasing Co., Ltd., Yen3.5 billion to pay a fee in
connection with the termination of the marketing contract with Hikari Tsushin, and an additional
Yen130 million as general working capital. For the year ended September 30, 2002, we did not use
any of the remaining net proceeds. For the year ended September 30, 2003, we used approximately
Yen2,257 million for cash distribution to the shareholders. For the year ended September 30, 2004,
we did not use any significant amount of the remaining net proceeds. 
 ITEM 15. CONTROLS AND PROCEDURES A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. 54




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Our chief executive officer and the principal officer of our administration department have
evaluated the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual
report on Form 20-F. Based on that evaluation, the chief executive officer and the principal
officer of our administration department have concluded that as of September 30, 2004 our
disclosure controls and procedures were effective to ensure that information required to be
disclosed by Crayfish in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms. B. CHANGES IN INTERNAL CONTROLS. There has been no change in our internal control over financial reporting that occurred during
our fiscal year ended September 30, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. There have not been any
significant changes in our internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. 
 ITEM 16. [RESERVED] 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Crayfish is a foreign private issuer established and existing as a corporation under the
Commercial Code of Japan and has one or more statutory auditors as provided under such code.
Messrs. Tatsuo Shigeta, Masataka Watanabe, Yuichiro Mori and Tatsumasa Komatsu currently serve as
registrants statutory auditors, each having been elected to his position by Crayfishs
shareholders at the shareholders annual meeting held on December 19, 2003. Crayfishs board of
directors has determined that Mr. Masataka Watanabe is an audit committee financial expert.
However, because of Mr. Watanabes relationship with Hikari Tsushin and its affiliated companies,
he is not independent. 
 ITEM 16B CODE OF ETHICS Crayfish has not adopted a code of ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing
similar functions. Crayfish has not determined at this time that a code of ethics is appropriate to
adopt taking into account various factors including that (i) the duties and responsibilities of
Crayfishs senior financial officers is subject to separate and independent review by the board of
directors and the statutory auditors, (ii) the directors and statutory auditors are appointed by a
vote of Crayfishs shareholders, and (iii) the creation of a code of ethics would divert Crayfishs
resources from its principal business activities. 
 ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The aggregate fees billed for fiscal 2004 and 2003 for professional services
rendered by the principal accountant for the audit of the Companys annual financial statements or
services that are normally provided by the accountant in connection with statutory and regulatory
filings or engagements for those years were Yen26 million and Yen34 million, respectively. Audit-Related Fees The Company did not pay any additional audit related fees for fiscal 2004 or
2003 to the principal accountant. Tax Fees The Company did not pay any fees for fiscal 2004 or 2003 to the principal
accountant for tax compliance, tax advice, or tax planning. All Other Fees 55




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The Company did not pay any fees for fiscal 2004 or 2003 for other professional
services to the principal accountant (other than those reported above). Pre-approval Policies The Company has adopted a pre-approval policy. Pursuant to the policy, the
Audit Committee pre-approved audit, audit-related and tax services for the twelve months ending
September 30, 2004. The pre-approved services included services associated with documents filed
with the SEC and quarterly reports, financial statement audits of federal, state, provincial,
international and local tax returns. Services not pre-approved or services resulting in fees
beyond those approved require specific pre-approval by the Companys audit committee (or one of its
members to whom pre-approval authority has been delegated by the audit committee prior to
commencement of the service). The policy also contains a list of prohibited non-audit services
consistent with Rule 2-01(c)(4) of Regulation S-X. Requests for specific approval of additional
services must be submitted by both the independent auditor and the Chief Executive Officer, or
principal officer of administration department, and must include a statement from the auditor as to
whether, in the auditors view the request is consistent with SEC rules on auditor independence. None of the services described under the captions Audit-Related Fees, Tax
Fees or All Other Fees were approved by the Audit Committee pursuant to the waiver of
pre-approval procedures described in Rule 2-01(c)(7)(i)(C) of Regulation S-X. 
 ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable 
 ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable 
 PART III 
 ITEM 17. FINANCIAL STATEMENTS. Not applicable 
 ITEM 18. FINANCIAL STATEMENTS. See
our financial statements attached hereto beginning on page F-1. 56




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ITEM 19. EXHIBITS EXHIBIT INDEX EXHIBIT
    
    DESCRIPTION
    
    PAGE1.1
    
    
    Articles of Incorporation of the Registrant, as amended (English translation)
    
    1.2
    
    
    Share Handling Regulations of the Registrant, as amended (with English translation)*1.3
    
    
    Regulations of the Board of Directors of the Registrant, as amended (English
translation) *****1.4
    
    
    Regulations of the Board of Corporate Auditors of the Registrant, as amended
(English translation) *****2.1
    
    
    Specimen Common Stock certificates of the Registrant*2.2
    
    
    Form of Deposit Agreement among the Registrant, The Bank of New York as depositary
and all owners and holders from time to time of American Depositary Receipts,
including the form of American Depositary Receipt.*4.1
    
    
    Memorandum on Microsoft Hosting Deployment Program dated September 17, 1999 between
Microsoft Co., Ltd and the Registrant (with English translation)*4.2
    
    
    Agreement on Delegation of Intermediary Business relating to Application for the
Registration of the Organizational Type/Geographical Type JP Domain Name dated
April 1, 2001 between Shadan Hojin Japan Network Information Center and the
Registrant (with English translation)*4.3
    
    
    Amended and Restated Agreement on Delegation of Business dated February 1, 2000
between the Registrant and Hikari Tsushin, Inc (with English translation)*4.4
    
    
    Agreement on Agreed Termination and Transfer of Business dated November 1, 2000
between the Registrant and Hikari Tsushin, Inc (with English translation)**4.5
    
    
    Order Sheet and Receipt of Order dated July 12, 2000 between the Registrant and IBJ
Leasing, Co., Ltd. (with English translation)**4.6
    
    
    Lease Contract dated July 12, 2000 between the Registrant and IBJ Leasing, Co.,
Ltd. (with English translation)**4.7
    
    
    Agreement on Agreed Termination of Lease Contract dated July 24, 2001 between the
Registrant and IBJ Leasing Co., Ltd. (English translation)***4.8
    
    
    Sales Contract dated July 24, 2001 between the Registrant and IBJ Leasing Co., Ltd.
(English translation)***4.9
    
    
    Software License Agreement dated March 4, 2002 between the Registrant and Network
Associates Co., Ltd. (English translation)***4.10
    
    
    Agreement on Delegation of Business relating to the specified Administration
Company of IP address dated March 31, 2001 between Shadan Hojin Japan Network
Information Center and the Registrant (English translation)***4.11
    
    
    C master First OEM Master Agreement dated June 3, 2002 between the Registrant and
Magrex Co., Ltd. (English Translation) *****4.12
    
    
    Software Supply Agreement dated July 1, 2002 between the Registrant and CalltoWeb,
Inc. (English translation) *****4.13
    
    
    OUSAMA-DESK outsourcing master agreement dated July 1, 2002 between the
 57




---



##### Table of Contents



EXHIBIT
    
    DESCRIPTION
    
    PAGERegistrant and CalltoWeb, Inc. (English translation)*****4.14
    
    
    Outsourcing Agreement dated August 1, 2002 between the
Registrant and CalltoWeb, Inc. (English translation)****4.15
    
    
    Outsourcing Fee Agreement dated August 1, 2002 between
the Registrant and CalltoWeb, Inc. (English
translation)****4.16
    
    
    Amendment to Outsourcing Fee Agreement dated August 1,
2002 between the Registrant and CalltoWeb, Inc. (English
translation)****4.17
    
    
    Basic Outsourcing Agreement dated September 30, 2002
between the Registrant and Global Media Online Inc.
(English translation)****4.18
    
    
    Outsourcing Fee Agreement dated September 30, 2002
between the Registrant and Global Media Online Inc.
(English translation)****4.19
    
    
    Outsourcing and Fee Agreement Amendment dated November
1, 2002 between the Registrant and Global Media Online
Inc. (English translation)****4.20
    
    
    Sales Agreement dated October 31, 2002 between the
Registrant and Diamond Lease Company Ltd. (English
translation)****4.21
    
    
    Lease Agreement dated September 30, 2002 between the
Registrant and Global Media Online Inc. (English
translation)****4.22
    
    
    Software Supply Agreement dated March 1, 2003 between
the Registrant and IE Group, Inc. (English translation)
*****4.23
    
    
    Amendment of Basic Outsourcing Agreement dated March 7,
2003 between the Registrant and Global Media Online Inc.
(English translation)****4.24
    
    
    Agreement on Advertisement Treatment dated March 12,
2003 between the Registrant and First Charge, Inc.
(English translation) *****4.25
    
    
    Commodity Exchange Agreement dated September 1, 2003
between the Registrant and IDK Inc. (English
translation) *****10.1
    
    
    Description of American Depositary Receipts****12.1
    
    
    Certification by the Chief Executive Officer, President
and Representative Director pursuant to SEC Rule
13a-14(a) / 15d-14(a), as adopted pursuant to section
302 of the Sarbanes-Oxley Act of 2002
    
    12.2
    
    
    Certification by the Principal Officer of Administration
Department pursuant to SEC Rule 13a-14(a) / 15d-14(a),
as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
    
    13.1
    
    
    Certification by Chief Executive Officer, President and
Representative Director pursuant to U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
    
    13.2
    
    
    Certification by Principal Officer of Administration
Department Pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
    
    
 58




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##### Table of Contents



*
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Registration Statement on Form F-1
(File No. 333-11448) declared effective on March 3, 2000.**
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Registration Statement on Form 20-F
(File No. 0-30530) filed on March 30, 2001.***
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Annual Report on Form 20-F
(File No. 0-30530) filed on April 12, 2002.****
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Annual Report on Form 20-F
(File No. 0-30530) filed on March 27, 2003*****
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Annual Report on Form 20-F
(File No. 0-30530) filed on March 10, 2004 59




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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 and
that it has duly caused and authorized the undersigned to sign this annual report on its behalf. Crayfish Co., Ltd.Date April 12, 2005
    By
    /s/  Masaaki ShimamuraName:
    Masaaki ShimamuraTitle:
    President, Chief Executive Officer andRepresentative Director




---



##### Table of Contents



CRAYFISH CO., LTD. AND SUBSIDIARY INDEX TO FINANCIAL STATEMENTS Page in Form 20-FReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of September 30, 2003 and 2004
    
    
    F-3Consolidated Statements of Operations for the years ended September 30, 2002, 2003 and 2004
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended September 30, 2002, 2003
and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended September 30, 2002, 2003 and 2004
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of
Crayfish Co., Ltd. We have audited the accompanying consolidated balance sheets of Crayfish Co., Ltd. (a Japanese
corporation) and its subsidiary as of September 30, 2003 and 2004 and the related consolidated
statements of operations, shareholders equity and cash flows for each of the three years in the
period ended September 30, 2004. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 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 consolidated financial position of Crayfish Co., Ltd. and its consolidated
subsidiary as of September 30, 2003 and 2004, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended September 30, 2004, in conformity
with accounting principles generally accepted in the United States of America. Also, in our opinion, the U.S. dollar amounts presented in the accompanying consolidated
financial statements as of and for the year ended September 30, 2004 have been translated from
Japanese yen on the basis set forth in Note 3 to the consolidated financial statements.  BDO Sanyu & Co.
Tokyo, Japan December 22, 2004 except for
Note 13, as to which the date is
December 27, 2004 F-2




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##### Table of Contents



CRAYFISH CO., LTD. AND SUBSIDIARY 
 CONSOLIDATED BALANCE
SHEETS
(in thousands, except share amounts) September 30,
    
    
    September 30,2003
    
    
    2004
    
    
    2004 (Note 3)ASSETSCurrent assets:Cash and cash equivalents
    
    ¥
    1,941,316
    
    
    ¥
    2,587,059
    
    
    $
    23,476Time deposits in bank
    
    
    200,000
    
    
    
    200,000
    
    
    
    1,815Accounts receivable, net of allowance for doubtful
accounts of ¥9,067 and ¥5,402 ($49) in 2003 and 2004,
respectively
    
    
    25,674
    
    
    
    18,534
    
    
    
    168Accounts receivable due from related parties
    
    
    90,453
    
    
    
    313,739
    
    
    
    2,847Inventories
    
    
    2,365
    
    
    
    36,190
    
    
    
    328Deposits paid for litigation settlement
    
    
    782,081
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    97,839
    
    
    
    888Prepaid expenses and other current assets
    
    
    49,343
    
    
    
    9,446
    
    
    
    86Total current assets
    
    
    3,081,232
    
    
    
    3,262,807
    
    
    
    29,608Property and equipment, net
    
    
    19,529
    
    
    
    31,126
    
    
    
    282Loan receivable, net
    
    
    
    
    
    
    24,672
    
    
    
    224Deposits paid to related parties
    
    
    1,789
    
    
    
    1,789
    
    
    
    16Other assets
    
    
    727
    
    
    
    502
    
    
    
    5Total assets
    
    ¥
    3,113,277
    
    
    ¥
    3,320,896
    
    
    $
    30,135LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    155,287
    
    
    
    556,786
    
    
    
    5,052Accounts payable due to related parties
    
    
    25,237
    
    
    
    22,962
    
    
    
    208Accrued income taxes
    
    
    
    
    
    
    1,276
    
    
    
    12Consumption tax payable
    
    
    
    
    
    
    3,446
    
    
    
    31Accrual for litigation settlement
    
    
    782,081
    
    
    
    
    
    
    
    Deferred initial contract fees
    
    
    251
    
    
    
    120
    
    
    
    1Accrued liabilities and other current liabilities
    
    
    32,579
    
    
    
    21,489
    
    
    
    195Total current liabilities
    
    
    995,435
    
    
    
    606,079
    
    
    
    5,499Commitments and contingencies (Note 6)Common stockPer value: Designated valueAuthorized shares: 40,996 in 2003 and 2004Outstanding shares: 10,268 in 2003 and 2004
    
    
    423,219
    
    
    
    423,219
    
    
    
    3,841Retained earnings, since October 1, 2001
    
    
    1,694,623
    
    
    
    2,291,598
    
    
    
    20,795Total shareholders equity
    
    
    2,117,842
    
    
    
    2,714,817
    
    
    
    24,636Total liabilities and shareholders equity
    
    ¥
    3,113,277
    
    
    ¥
    3,320,896
    
    
    $
    30,135
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



CRAYFISH CO., LTD. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts) September 30,
    
    
    September 30,2002
    
    
    2003
    
    
    2004
    
    
    2004 (Note 3)RevenuesThird party
    
    ¥
    2,936,291
    
    
    ¥
    1,438,151
    
    
    ¥
    1,220,679
    
    
    $
    11,078Related party
    
    
    9,069
    
    
    
    333,767
    
    
    
    2,084,046
    
    
    
    18,911Total Revenues
    
    
    2,945,360
    
    
    
    1,771,918
    
    
    
    3,304,725
    
    
    
    29,989Cost of revenues
    
    
    636,174
    
    
    
    649,620
    
    
    
    2,160,441
    
    
    
    19,605Gross profit
    
    
    2,309,186
    
    
    
    1,122,298
    
    
    
    1,144,284
    
    
    
    10,384Operating expenses:Selling, general and administrative
    
    
    806,258
    
    
    
    511,581
    
    
    
    623,853
    
    
    
    5,661Research and development
    
    
    51,031
    
    
    
    500
    
    
    
    
    
    
    
    Loss on impairment and disposal of property and
equipment, and other
    
    
    97,050
    
    
    
    23,583
    
    
    
    8,910
    
    
    
    81Expenses related to litigation
    
    
    23,845
    
    
    
    23,908
    
    
    
    8,991
    
    
    
    82Total operating expenses
    
    
    978,184
    
    
    
    559,572
    
    
    
    641,754
    
    
    
    5,824Income from operations
    
    
    1,331,002
    
    
    
    562,726
    
    
    
    502,530
    
    
    
    4,560Other income (expenses):Interest income
    
    
    2,688
    
    
    
    350
    
    
    
    69
    
    
    
    1Interest expense
    
    
    (21
    )
    
    
    (10
    )
    
    
    (14
    )
    
    
    Expenses for litigation settlement
    
    
    
    
    
    
    (782,081
    )
    
    
    
    
    
    
    Foreign exchange (loss) gain, net
    
    
    (3,357
    )
    
    
    235
    
    
    
    267
    
    
    
    2Gain on sale and write-off of
Investments
    
    
    9,975
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of investment in an affiliate, net
    
    
    32,646
    
    
    
    
    
    
    
    
    
    
    
    Other, net
    
    
    (31,389
    )
    
    
    (7,768
    )
    
    
    (2,436
    )
    
    
    (22
    )Other income (expenses), net
    
    
    10,542
    
    
    
    (789,274
    )
    
    
    (2,114
    )
    
    
    (19
    )Income (expenses) before income taxes
    
    
    1,341,544
    
    
    
    (226,548
    )
    
    
    500,416
    
    
    
    4,541Income
taxes
Current
    
    
    3,800
    
    
    
    1,210
    
    
    
    1,280
    
    
    
    12Deferred
    
    
    
    
    
    
    
    
    
    
    (97,839
    )
    
    
    (888
    )Net income (loss)
    
    ¥
    1,337,744
    
    
    ¥
    (227,758
    )
    
    ¥
    596,975
    
    
    $
    5,417Earnings (loss) per shareBasic
    
    ¥
    130,460.70
    
    
    ¥
    (22,192.15
    )
    
    ¥
    58,139.37
    
    
    $
    527.58Diluted
    
    
    130,346.30
    
    
    
    (22,192.15
    )
    
    
    58,139.37
    
    
    
    527.58Shares used in per share calculationBasic
    
    
    10,254
    
    
    
    10,263
    
    
    
    10,268
    
    
    
    10,268Diluted
    
    
    10,263
    
    
    
    10,263
    
    
    
    10,268
    
    
    
    10,268
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



CRAYFISH CO., LTD. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share data) (AccumulatedDeficit)
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Additional
    
    
    Retained
    
    
    Legal
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Reserve
    
    
    EquityBalances, September
30, 2001
    
    
    10,249
    
    
    ¥
    8,058,075
    
    
    ¥
    18,805,670
    
    
    ¥
    (11,487,119
    )
    
    ¥
    180
    
    
    ¥
    15,376,806Transfer to accumulated
deficit (Note 1)
    
    
    
    
    
    
    
    
    
    
    (12,071,576
    )
    
    
    12,071,756
    
    
    
    (180
    )
    
    
    Adjusted balances,
October 1, 2001
    
    
    10,249
    
    
    
    8,058,075
    
    
    
    6,734,094
    
    
    
    584,637
    
    
    
    
    
    
    
    15,376,806Stock options exercised
    
    
    9
    
    
    
    2,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,250Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,337,744
    
    
    
    
    
    
    
    1,337,744Balances, September
30, 2002
    
    
    10,258
    
    
    
    8,060,325
    
    
    
    6,734,094
    
    
    
    1,922,381
    
    
    
    
    
    
    
    16,716,800Cash distribution to
shareholders as capital
reduction
    
    
    
    
    
    
    (7,639,106
    )
    
    
    (6,736,094
    )
    
    
    
    
    
    
    
    
    
    
    (14,375,200
    )Stock options exercised
    
    
    10
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227,758
    )
    
    
    
    
    
    
    (227,758
    )Balances, September
30, 2003
    
    
    10,268
    
    
    
    423,219
    
    
    
    
    
    
    
    1,694,623
    
    
    
    
    
    
    
    2,117,842Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    596,975
    
    
    
    
    
    
    
    596,975Balances, September
30, 2004
    
    
    10,268
    
    
    ¥
    423,219
    
    
    ¥
    
    
    
    ¥
    2,291,598
    
    
    ¥
    
    
    
    ¥
    2,714,817Balances,
September 30,
2003 (Note 3)
    
    
    10,268
    
    
    $
    3,841
    
    
    $
    
    
    
    $
    15,378
    
    
    $
    
    
    
    $
    19,219Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,417
    
    
    
    
    
    
    
    5,417Balances, September
30, 2004
    
    
    10,268
    
    
    $
    3,841
    
    
    $
    
    
    
    $
    20,795
    
    
    $
    
    
    
    $
    24,636
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



CRAYFISH CO., LTD. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) September 30,
    
    
    September 30,2002
    
    
    2003
    
    
    2004
    
    
    2004 (Note 3)Cash flows from operating activities:Net income (loss)
    
    ¥
    1,337,744
    
    
    ¥
    (227,758
    )
    
    ¥
    596,975
    
    
    $
    5,417Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    136,932
    
    
    
    41,940
    
    
    
    11,322
    
    
    
    102Allowance for doubtful accounts
    
    
    1,287
    
    
    
    920
    
    
    
    (3,665
    )
    
    
    (33
    )Loss on impairment and disposal of property and
equipment, and other
    
    
    97,050
    
    
    
    23,583
    
    
    
    8,910
    
    
    
    81Gain on sale of long-term investments
    
    
    (9,975
    )
    
    
    
    
    
    
    
    
    
    
    Gain on sale of investment in an affiliate, net
    
    
    (32,646
    )
    
    
    
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,759
    )
    
    
    (80,860
    )
    
    
    (212,481
    )
    
    
    (1,928
    )Inventories
    
    
    
    
    
    
    (2,365
    )
    
    
    (33,825
    )
    
    
    (307
    )Deferred income tax assets
    
    
    
    
    
    
    
    
    
    
    (97,839
    )
    
    
    (887
    )Prepaid expenses and other current assets
    
    
    322,318
    
    
    
    11,674
    
    
    
    39,897
    
    
    
    362Accounts payable
    
    
    (98,063
    )
    
    
    97,404
    
    
    
    399,224
    
    
    
    3,622Accrued income taxes
    
    
    
    
    
    
    
    
    
    
    1,276
    
    
    
    11Consumption tax payable
    
    
    88,819
    
    
    
    (88,819
    )
    
    
    3,446
    
    
    
    31Accrued liabilities and other current liabilities
    
    
    (58,293
    )
    
    
    10,570
    
    
    
    (11,037
    )
    
    
    (100
    )Deferred initial contract fees
    
    
    (5,552
    )
    
    
    (3,753
    )
    
    
    (131
    )
    
    
    (1
    )Other assets
    
    
    4,601
    
    
    
    (1
    )
    
    
    
    
    
    
    Net cash provided by (used in) operating
activities
    
    
    1,777,463
    
    
    
    (217,465
    )
    
    
    702,072
    
    
    
    6,370Cash flows from investing activities:Proceeds from sale of property and equipment
    
    
    10,484
    
    
    
    95,585
    
    
    
    303
    
    
    
    3Purchase of property and equipment
    
    
    (36,681
    )
    
    
    (4,622
    )
    
    
    (31,907
    )
    
    
    (290
    )Proceeds from sale of investment in an affiliate
    
    
    160,020
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of investment in equity securities
    
    
    43,225
    
    
    
    
    
    
    
    
    
    
    
    Loan receivable, net
    
    
    
    
    
    
    
    
    
    
    (24,672
    )
    
    
    (224
    )Deposits
    
    
    26,255
    
    
    
    27,092
    
    
    
    
    
    
    
    Net cash provided by (used in) investing
activities
    
    
    203,303
    
    
    
    118,055
    
    
    
    (56,276
    )
    
    
    (511
    )Cash flows from financing activities:Principal payments on capital leases
    
    
    (139
    )
    
    
    (150
    )
    
    
    (53
    )
    
    
    1Proceeds from exercise of stock options
    
    
    2,250
    
    
    
    4,000
    
    
    
    
    
    
    
    Cash distribution to shareholders as capital reduction
    
    
    
    
    
    
    (14,375,200
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    2,111
    
    
    
    (14,371,350
    )
    
    
    (53
    )
    
    
    1Net increase (decrease) in cash equivalents
    
    
    1,982,877
    
    
    
    (14,470,760
    )
    
    
    645,743
    
    
    
    5,860Cash and cash equivalents at beginning of period
    
    
    14,429,199
    
    
    
    16,412,076
    
    
    
    1,941,316
    
    
    
    17,616Cash and cash equivalents at end of period
    
    ¥
    16,412,076
    
    
    ¥
    1,941,316
    
    
    ¥
    2,587,059
    
    
    $
    23,476
 September 30,
    
    
    September 30,2002
    
    
    2003
    
    
    2004
    
    
    2004 (Note 3)Supplemental cash flows information:Cash paid for income taxes
    
    ¥
    531
    
    
    ¥
    3,653
    
    
    ¥
    1,152
    
    
    $
    10Cash paid for interest
    
    
    21
    
    
    
    10
    
    
    
    14
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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CRAYFISH CO., LTD. AND SUBSIDIARY 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Business Organization and Restructuring Nature of operations Crayfish Co., Ltd. (the Company or Crayfish) was incorporated in Japan on October 16, 1995.
Since its inception, the Company has provided e-mail hosting services (Deskwing) to small and
medium-sized businesses in Japan. The Deskwing hosting service provides customers with e-mail
addresses with their own domain extensions. At the June 20, 2001 special shareholders meeting, shareholders approved the election of new
management of the Company. This management performed a strategic review of business operations,
and on July 25, 2001, announced a Business Revival Plan (the Plan) to restructure the Company.
According to the Plan, the Company started internet advertising space business during the fiscal
year of 2001 and product sales business during the fiscal year of 2003. In October 2003, the Company established a wholly owned subsidiary, Cyber Joy, Inc. (the
Subsidiary) to market internet advertising space. The Subsidiarys head office is located at the
same place as Crayfishs head office. The Subsidiary mainly sells internet advertising space to
small and medium sized companies in Japan. In internet advertising services, the Subsidiary
purchases and resells banner advertisements and e-mail advertisements. The banner advertisements
are posted on highly trafficked Web sites which hyperlink users to the advertisers web site when
users click the banner. E-mail advertisements are attached to Mail Magazines, informational
magazines that are periodically sent to users via E-mail. E-mail advertisements resemble
advertisements in paper magazines and newspapers. Product sales business consists of computer software sales and hardware sales. In the
computer software sales business, the Company markets software products to small and medium sized
enterprises through mainly its affiliated companies. The Company purchases the software from
outside software-development companies and customizes the software to the needs of its targeted
customers. The Company does not pay for the development of the software to its venders. In
hardware sales business, the Company purchases hardware including computer servers, personal
computers, network instruments and printers from manufacturers and resells them to third parties
and its affiliated companies. The Board of Directors of the Company, at the meeting held on August 22, 2003, resolved to
delist from NASDAQ and terminate its American Depository Shares (ADR) programs effective on
November 24, 2003. U.S. laws and regulations will not allow the Company to terminate the
registration under 12(g), 12(h) and 15(d) of the Securities and Exchange Act of 1934 until the
total number of ADS holders falls to under 300. When the holders falls to under 300, the Company
will file the Form 15 with the Securities and Exchange Commission to null the registration of the
Securities and Exchange Act of 1934. Elimination of accumulated deficit as of September 30, 2001 in accordance with the Commercial Code
of Japan approved by shareholders All restructuring activities under the Plan were completed and all liabilities and costs incurred
under the Plan were settled by September 30, 2001 and, accordingly, shareholders at the regular
shareholders meeting held on December 20, 2001 approved, pursuant to the Commercial Code of Japan
(the Code), elimination of the accumulated deficit of ¥12,071,756 thousand as of September 30,
2001, as recorded in the statutory book of accounts, transferring ¥12,071,576 thousand of
additional paid-in capital (APIC) and ¥180 thousand of legal reserve. As a result, the entire
accumulated deficit as of October 1, 2001 recorded in the statutory book kept under accounting
principles generally accepted (GAAP) in Japan (Japan GAAP) was eliminated. As a result of
differences between U.S. GAAP and Japan GAAP, the accumulated deficit under U.S. GAAP as of
September 30, 2001 was ¥584,637 thousand less than that based on Japan GAAP, mainly due to the
accounting for stock issuance costs. Stock issuance costs are deducted from APIC under U.S. GAAP
whereas they are expensed as incurred under Japan GAAP. Therefore, the transfer of APIC and legal
reserve to the accumulated deficit account resulted in retained earnings of ¥584,637 thousand which
will be carried forward under U. S. GAAP. F-7




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2. Summary of Significant Accounting Policies Basis of consolidated financial statements presentation
The Company and its subsidiary (Collectively the Companies) maintain their records and prepare
their financial statements in accordance with Japan GAAP. Certain adjustments and
reclassifications, including those relating to stock compensation expenses, accounting for leases
and accrual of certain expenses and impairment of long-lived assets, have been incorporated in the
accompanying financial statements to conform with U.S. GAAP. These adjustments were not recorded
in the statutory accounts. Accounts denominated in foreign currencies have been re-measured into Japanese yen, the
Companies functional currency. Foreign currency gains and losses from re-measurement, which have
been insignificant to date, are included in the consolidated statements of income. Financial instruments
Cash equivalents are highly liquid investments with original maturities of three months or less as
of the date of purchase. Investments, which consist of time deposits in bank, and money management funds invested in
bonds, are recorded at cost, which approximates market value. The amounts reported for cash equivalents, receivables and other financial instruments are
considered to approximate fair values based upon comparable market information available at the
respective balance sheet dates and their short-term nature. Financial instruments that potentially subject the Companies to concentrations of credit risk
comprise principally of cash, investments and accounts receivable. The Companies maintain their
cash balances at financial institutions and have not experienced any material losses relating to
such instruments. The Companies invest their excess cash in accordance with an investment policy
which authorizes the investment of excess cash in money market funds and time deposits.
Concentration of credit risk with respect to accounts receivable is limited due to the large number
of customers comprising the Companies customer base. Fair value of financial instruments
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosure about Fair Value of
Financial Instruments requires disclosures of the fair value of financial instruments, including
both assets and liabilities recognized and not recognized in the Companies balance sheet. The
estimated fair value amounts of financial instruments have been determined by the Companies using
available market information and appropriate valuation methodologies. The use of different market
assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts. Considerable judgments is required in estimating fair values and the estimates presented
are not necessarily indicative of the amounts the Companies could realize in a current market
exchange. Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization for property and equipment is provided using the straight-line method
over the estimated useful lives of the respective assets, which are generally three years for
office equipment, leasehold improvements and purchased software. Depreciation for capitalized
leases is provided using the straight-line method over the shorter of the estimated useful lives of
the respective assets or the remaining lease term. Maintenance and repairs are charged to expense
as incurred. Major repairs and improvements, which extend the lives of the related assets, are
capitalized and depreciated at applicable straight-line rates. Long-lived assets
Whenever circumstances indicate, the Companies assess the recoverability of long-lived assets by
determining whether the amortization of the asset balance over its remaining life can be recovered
through undiscounted future operating cash flows of the long-lived assets. The amount of
impairment, if any, is measured based on projected discounted future operating cash flow and is
recognized as a write-down of the asset to a net realizable value. Cash concentration F-8




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At September 30, 2004, the Companies maintain ¥2,787 million ($25,291 thousand) in banks, including
a ¥200 million ($1,815 thousand) time deposits with a maturity of greater than three months, which
represented 83.9% of total assets of the Companies. The Deposit Insurance Corporation of Japan, a
government agent, guarantees up to ¥10 million and its related unpaid interest per depositor, for
time deposits starting from April 1, 2002 and for savings and checking accounts starting from April
1, 2005. Amounts in excess of the ¥10 million are not insured or guaranteed. Revenue recognition
The Company derives revenue through three sources described in the Nature of Operations above. The Deskwing hosting service is provided based on one-year contractual rates per customer
domain name for the first-time customer. At the end of the first year, the contract is
automatically extended, but can be cancelled by the customers anytime with a two-month advance
notice. The first month subscription fee is collected together with the second month fee at the
beginning of the second month and, thereafter, the monthly fee is collected at the beginning of
each month. Revenues are recognized on a monthly basis over the contract period for each customer
domain name covered by a valid contract, beginning when the initial subscription fee is collected.
Cancellation fees are recognized when received, provided all obligations under the contract have
been fulfilled. The Company receives initial contract fees related to the Deskwing hosting
services from its first-time customers, which are deferred as received and recognized over an
estimated service term of 17 months. Sales of computer software and hardware are recognized when
products are physically delivered to customers. Revenue from internet advertising services is recognized at the end of the contract period.
For the service contract of which the contract period is more than one month, revenue is recognized
the straight-line method through the contract period. Revenue from product sales is recognized when the Company delivers products to costumers. Allowance for doubtful accounts
The Companies perform on-going credit evaluations of its customers creditworthiness and does not
require collateral. The Companies maintain allowances for potential credit losses and such losses
have been within managements expectations. The allowance for doubtful accounts is reported as an amount determined by adding the
individually estimated uncollectable amounts to a general reserve calculated by applying a rate
based on past collection experience. Stock-based compensation
As permitted by SFAS No. 123, Accounting for Stock-based Compensation, the Company has elected to
account for its stock-based compensation arrangements in accordance with APB No. 25, Accounting
for Stock Issued to Employees. Under this method, the excess, if any, of the quoted market price
of the stock at the grant date of the award or other measurement date over the stated exercise
price of the award is recognized as deferred stock-based compensation cost which is amortized over
the vesting period of the award. Since October 1, 2001 the Company granted no stock options or
warrants to employees or consultants. Income taxes
The Company accounts for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and tax basis of the underlying assets and
liabilities as well as operating loss and tax credit carry-forwards. A valuation allowance is
recognized if it is anticipated that some or all of a deferred tax asset may not be realized. Advertising and promotional costs
The Company expenses advertising and promotional costs as they are incurred. Advertising expenses
for the years of 2002, 2003 and 2004 were ¥3,220 thousand, ¥3,810 thousand and ¥22,496 thousand
($204 thousand), respectively. F-9




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Computation of earnings per share
The Company calculates earnings per share in accordance with SFAS No.128, Earnings Per Share.
Basic earnings per share is calculated by dividing net earnings available to common shares by
average common shares outstanding. Diluted earnings per share is calculated similarly, except that
it includes the dilutive effect of the assumed exercise of securities, including the effect of the
shares issuable under the Companys incentive plans (see Note 10). Since the Company has incurred losses for the fiscal year 2003 presented in the statements of
income, options and warrants were not included in the computation of diluted earnings per share, as
such options and warrants were antidilutive. The effect of the assumed exercise of options and
warrants that would have potentially diluted basic loss per share at September 30, 2003 was 2
shares. Comprehensive income
The Companies account for comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 established standards for the reporting and presentation of
comprehensive income and its components (other comprehensive income) in the financial statements.
The Company had no amounts categorized as other comprehensive income in any of years of 2002, 2003
or 2004. Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Reclassifications
In connection with separate presentation of inventories of ¥36,190 thousand ($328 thousand) in the
balance sheet due to growth of product sales in the fiscal 2004, the prior years inventories of
¥2,362 thousand, which was included in other current assets, also is separately presented. This
reclassification has no effects on previously reported net loss or income and shareholders equity. 3. U.S. Dollar Amounts U.S. dollar amounts presented in the accompanying financial statements are included solely for the
convenience of the reader, using the spot rate of the Federal Reserve Bank in the U.S. at September
30, 2004, which was ¥110.20 to U.S.$1.00. The convenience translations should not be construed as
representations that the Japanese yen amounts have been, could have been, or could in the future
be, converted into U.S. dollars at this or any other rate of exchange. 4. Recently Issued Accounting Pronouncements In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments which provides new guidance for assessing impairment
losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure
requirements for investments that are deemed to be temporarily impaired. The adoption of EITF No.
03-1 did not have a material effect on the Companys financial position, results of operations, or
cash flows for the year ended December 31, 2004. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123, Share-Based Payment (SFAS 123R) which will become effective for
periods beginning after June 15, 2005. SFAS 123R will result in the recognition of substantial
compensation expense relating to our employee stock options and employee stock purchase plans. The
Company currently uses the intrinsic value method to measure compensation expense for stock-based
awards to its employees. Under this standard, the Company generally does not recognize any
compensation related to stock option grants the Company issues under its stock option plans or
related to the discounts the Company provides under its employee stock purchase plans. Under the
new rules however, the Company is required to adopt a fair-value-based method for measuring the F-10




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##### Table of Contents



compensation expense related to employee stock awards and therefore this will lead to substantial
additional compensation expense that will be included in the Companys reported results of
operations. The footnote section above entitled Stock Based Compensation provides the pro forma net
income (loss) and earnings (losses) per share as if the Company had used a fair-value-based method
similar to the methods required under SFAS 123R to measure the compensation expense for employee
stock awards during 2004, 2003 and 2002. At its November 2003 meeting, the Emerging Issues Task Force (EITF) reached a consensus on
disclosure guidance previously discussed under EITF 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The consensus provided for certain
disclosure requirements that were effective for fiscal years ending after December 15, 2003. The
Company adopted the disclosure requirements during the fiscal year ended March 31, 2004. At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance
previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary
impairment and its application to investments classified as either available-for-sale or
held-to-maturity under FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and investments accounted for under the cost method or the equity method. The
recognition and measurement guidance for which the consensus was reached in the March 2004 meeting
is to be applied to other-than-temporary impairment evaluations in reporting periods beginning
after June 15, 2004. The adoption of EITF 03-01 did not have any impact on the Companys
consolidated financial statements. 5. Balance Sheet Detail Property and equipment, net (in thousands): September 30,
    
    
    September 30,2003
    
    
    2004
    
    
    2004 (Note 3)Office equipment
    
    ¥
    92,981
    
    
    ¥
    70,440
    
    
    $
    639Leasehold improvements
    
    
    3,062
    
    
    
    4,062
    
    
    
    37Purchased software
    
    
    17,946
    
    
    
    45,144
    
    
    
    410113,989
    
    
    
    119,646
    
    
    
    1,086Less: Accumulated
depreciation and
amortization
    
    
    (94,460
    )
    
    
    (88,520
    )
    
    
    (804
    )Property and equipment, net
    
    ¥
    19,529
    
    
    ¥
    31,126
    
    
    $
    282
 Depreciation and amortization expense for the years of 2002, 2003 and 2004 was ¥136,932
thousand, ¥ 41,940 thousand and ¥11,322 thousand ($102 thousand), respectively. Included in
depreciation and amortization expense is depreciation expense relating to assets subject to capital
leases of ¥74 thousand for the year of 2002 and none for the years of 2003 and 2004. Accrued liabilities and other current liabilities (in thousands): September 30,
    
    
    September 30,2003
    
    
    2004
    
    
    2004 (Note 3)Compensated absences
    
    ¥
    12,132
    
    
    ¥
    10,448
    
    
    $
    95Bonuses
    
    
    9,199
    
    
    
    7,113
    
    
    
    64Other
    
    
    8,864
    
    
    
    767
    
    
    
    7Total accrued liabilities
    
    
    30,195
    
    
    
    18,328
    
    
    
    166Other current liabilities
    
    
    2,384
    
    
    
    3,161
    
    
    
    29Accrued liabilities and other current liabilities
    
    ¥
    32,579
    
    
    ¥
    21,489
    
    
    $
    195
 6. Commitments and Contingencies Operating leases F-11




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The Company entered into four new two-year operating lease contracts for office facilities during
the fiscal year ended September 30, 2002. These agreements were all cancelable by the Company with
six months advance notice. During the year of 2003, the Company cancelled three lease contracts
and entered to a one-year office lease contract with annual renewals at the option of the company .
The Company uses newly leased office space as its headquarters, and intends to renew the contract
annually. Total rent under operating lease agreements for the years of 2002, 2003 and 2004 were ¥17,488
thousand, ¥17,493 thousand and ¥9,709 thousand ($88 thousand), respectively. The minimum rent for the year ending September 30, 2005 assuming no cancellation on operating
lease contracts that have initial lease terms are ¥9,000 thousand ($82 thousand). Legal proceedings
On and after September 8, 2000, class actions were filed in the United States District Court for
the Southern District of New York against (i) the Company, (ii) its CEO at the time, (iii) its
underwriters Morgan Stanley Dean Witter, Nomura Securities International Inc. and Merrill Lynch &
Co. and (iv) Hikari Tsushin, Inc. The complaints included allegations that, during the course of
its March 8, 2000 public offering of American Depositary Shares, the Company violated U.S.
securities law by making inaccurate and misleading statements. The Company and other defendants negotiated with the plaintiffs and all parties have entered
into a memorandum of understanding regarding the settlement of the class actions, subject to the
execution of a final settlement agreement and approval by the Court in June, 2003. Pursuant to the
memorandum of understanding, US$ 6,625 thousand, a portion allocated to the Company, has been paid
by the Company into an escrow account for expected future payment, which was expensed for the year
ended September 30, 2003. On July 29, 2004 , the Company received a copy of the signed Order and Final Judgment ending
this action. No more expenses related to the litigation are incurred. Indemnifications
In the ordinary course of business, the Company enters into contractual arrangements under which
the Company may agree to indemnify the third party to such arrangement from any losses incurred
relating to the services they perform on behalf of the Company or for losses arising from certain
events as defined within the particular contract, which may include, for example, litigation or
claims relating to patent infringement. Such indemnification obligations may not be subject to
maximum loss clauses. To date, the Company has not made any payments related to these
indemnifications. 7. Investments in an affiliate On December 22, 2000, the Company acquired a 47.1% ownership interest in Intranets K.K. (IKK), a
privately held internet based application service provider, for ¥600,000 thousand. This investment
was accounted for using the equity method. At the time of the acquisition, the net book value of
IKK was ¥471,763 thousand and unrecorded goodwill was ¥377,800 thousand, which was being amortized
over five years based on its estimated economic life. During 2001, new management decided to sell
the Companys interest in IKK. In connection with this decision, the Company obtained a third
party valuation of the investment, and based on the valuation, wrote down the investment to
¥128,000 thousand. As a result, the Company recognized a devaluation loss of ¥399,377 thousand in
addition to an equity loss from IKK of ¥73,249 thousand in the year of 2001. At September 30,
2001, the remaining book value of the Companys investment was ¥127,374 thousand. In March 2002, the Company sold all of its interest in IKK for ¥160,020 thousand and realized
a gain on sale of ¥32,646 thousand. 8. Transactions with Hikari Tsushin (HT), Inc and its Related Parties The Company has related party transactions with HT, the Companys principal shareholders directly
and indirectly owing a 67.0% at September 30, 2002 and a 81.9% at September 30, 2003 and 2004, and
its related parties. Account balances and transactions with them at and for the years ended
September 30, F-12




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##### Table of Contents



2002, 2003 and 2004 were as follows: In thousandsSeptember 30,
    
    
    September 30,2002
    
    
    2003
    
    
    2004
    
    
    2004 (Note 3)Accounts receivable
    
    ¥
    21,436
    
    
    ¥
    90,453
    
    
    ¥
    313,739
    
    
    $
    2,847Deposits paid
    
    
    24,751
    
    
    
    1,789
    
    
    
    1,789
    
    
    
    16Accounts payable
    
    
    9,110
    
    
    
    25,237
    
    
    
    22,962
    
    
    
    208Other
    
    
    
    
    
    
    728
    
    
    
    4,201
    
    
    
    38Transactions for the year ended:Sale of property and equipment
    
    
    15,326
    
    
    
    5,566
    
    
    
    
    
    
    
    Purchase of property and
Equipment
    
    
    2,483
    
    
    
    2,133
    
    
    
    
    
    
    
    Consulting fees reimbursed
    
    
    
    
    
    
    12,924
    
    
    
    1,000
    
    
    
    9Sales
    
    
    9,069
    
    
    
    333,767
    
    
    
    2,084,046
    
    
    
    18,911Cost of sales
    
    
    
    
    
    
    52,933
    
    
    
    53,789
    
    
    
    488Compensation reimbursed
    
    
    4,872
    
    
    
    82,373
    
    
    
    157,564
    
    
    
    1,430Service fee payment
    
    
    14,689
    
    
    
    24,579
    
    
    
    106,169
    
    
    
    963Rent expense
    
    
    33,394
    
    
    
    17,635
    
    
    
    8,675
    
    
    
    79Other general and
administrative expense
reimbursed
    
    
    21,581
    
    
    
    19,250
    
    
    
    55,324
    
    
    
    502Moving expenses
    
    
    7,094
    
    
    
    7,086
    
    
    
    
    
    
    
    Other
    
    
    4,460
    
    
    
    2,712
    
    
    
    1,936
    
    
    
    18
 9. Shareholders Equity Under the Code, the entire amounts of the issue price of shares is required to be accounted for as
capital, although a company may, by resolution of its Board of Directors, account not exceeding one
half of the issue price of the new shares as additional paid-in capital, which is included in
capital surplus. Effective October 1, 2001, the Code provides that an amount equal to at least 10% of cash
dividends and other cash appropriations shall be appropriated and set aside as a legal earnings
reserve until the total amount of legal earnings reserve and additional paid-in capital equals 25%
of common stock. The total amount of legal earnings reserve and additional paid-in capital has
been reached 25% of common stock, and therefore the Company is not required to provide legal
earnings reserve any more. The legal earnings reserve and additional paid-in capital may be used
to eliminate or reduce a deficit by resolution of the shareholders meeting or may be capitalized
by resolution or the Board of Directors. On condition that the total amount of legal earnings
reserve and additional paid-in capital remains being equal to or exceeding 25% of common stock,
they are available for distribution by the resolution of shareholders meeting. As discussed in more detail in Note 1, at the regular shareholders meeting held on December
20, 2001, shareholders approved, pursuant to the Code, elimination of the Japan GAAP accumulated
deficit of ¥12,071,756 thousand as of September 30, 2001 as recorded in the statutory book of
accounts, transferring ¥12,071,576 thousand of APIC and ¥180 thousand of legal earnings reserve. The shareholders, at an extraordinary shareholders meeting held on July 31, 2003, approved a
cash distribution to the Company shareholders in connection with a reduction of common stock and
additional paid-in capital pursuant to the Code. In light of factors including present
conditions: the size of the Companys business at present or anticipated future periods, margin of
safety and operational efficiency, the Company has concluded that it has excessive amount of funds
in comparison with the appropriate level for the size of its business. The total cash distribution
was ¥14,375,200 thousand and the reduction of capital was effective on September 9, 2003. Amounts
reduced in common stock and additional paid-in capital were ¥7,495,640 thousand and ¥6,879,560
thousand, respectively, based on Japan GAAP. As discussed in Note 1, APIC under Japan GAAP is
different from that under U.S. GAAP. Based on U.S. GAAP, amount to be reduced in common stock and
additional paid-in capital were ¥7,639,106 thousand and ¥6,736,094 thousand, respectively. F-13




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The Maximum amount that the Company can distribute as dividends is calculated based on the
financial statements of the Company in accordance with the Code. 10. Stock-Based Compensation The Company issues stock options to its employees and directors at the discretion of the Board of
Directors, but subject to the provisions of the articles of incorporation and shareholders
approval. At the shareholders meetings, the shareholders approve the amount of stock options
granted to each employee and director, the exercise price of each grant, the vesting period and the
life of each option. Options typically vest after two years and have a five-year life. In August
1999, the Company issued options to employees and directors with exercise prices below the fair
market value of the Companys common stock and recorded a deferred stock compensation charge of
approximately ¥329,000 thousand to be amortized over the vesting period of the options of two
years. In the year of 2001, the Company recognized ¥125,599 thousand of compensation expense from
amortization of deferred stock compensation. In the year of 2001, the Company reversed ¥220,500
thousand of compensation expense relating to the forfeiture of unvested options including ¥94,901
thousand in compensation expense recognized in previous years. No unamortized stock compensation
expense remained at the end of the year of 2001. On September 30, 1998, the Company issued bonds of ¥1,762,500 to financial institutions with
detachable warrants to purchase 705 shares of common stock. The Company repurchased all warrants
immediately after issuance of the bonds in order to grant to its former directors of the Company as
a part of remuneration. As the Code had restricted an amount of stock options that a company could
only issue up to 10% of outstanding shares of a companys common stock until April 1, 2002,
warrants were used to address restrictions in the Code limiting the amount of stock options that
can be granted. Warrants to purchase 675 shares of common stock with exercise price of ¥2, 500,000
per share remained outstanding at September 30, 2002, none of which were exercised during fiscal
2003 and 2004. As a result of the reduction of capital effective on September 9, 2003, the
exercise price per share was reduced to ¥1,033,520 per share. As a result, the number of shares
available for the warrants increased to 1,632 shares, all of which were outstanding at September
30, 2003 and 2004. The following is a summary of option/warrant activity (whole amounts): WeightedAverageNumber of
    
    
    Exercise Price
    
    
    Options/WarrantsShares
    
    
    Per Share
    
    
    Price Range Per ShareOutstanding at September 30, 2001
    
    
    749
    
    
    ¥
    2,473,645
    
    
    ¥
    250,000
    
    
    ¥
    3,776,250Options/warrants granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options/warrants exercised
    
    
    (9
    )
    
    
    250,000
    
    
    
    400,000
    
    
    
    400,000Options/warrants canceled
    
    
    (45
    )
    
    
    1,672,139
    
    
    
    250,000
    
    
    
    3,776,250Outstanding at September 30, 2002
    
    
    695
    
    
    
    2,493,005
    
    
    
    400,000
    
    
    
    3,776,250Options/warrants granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options/warrants exercised
    
    
    (10
    )
    
    
    400,000
    
    
    
    400,000
    
    
    
    400,000Options/warrants canceled
    
    
    (10
    )
    
    
    3,776,250
    
    
    
    400,000
    
    
    
    3,776,250Warrants adjustment in restructuring
    
    
    957
    
    
    
    1,033,520
    
    
    
    1,033,520
    
    
    
    1,033,520Outstanding at September 30, 2003
    
    
    1,632
    
    
    
    1,033,520
    
    
    
    1,033,520
    
    
    
    1,033,520Outstanding at September 30, 2004
    
    
    1,632
    
    
    ¥
    1,033,520
    
    
    ¥
    1,033,520
    
    
    ¥
    1,033,520
 At September 30, 2002, 684 option /warrants were exercisable at weighted average exercise
prices per share of ¥2.5 million. At September 30, 2003, all stock options the Company had granted
were cancelled or exercised and no more stock options outstanding existed. At September 30, 2003
and 2004, 1,632 warrants were exercisable at exercise prices per share of ¥1,034 thousand ($9.4
thousand). 11. Income Taxes F-14




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##### Table of Contents



The provision for income taxes consisted of the following components (in thousands): September 30,
    
    
    September 30,2002
    
    
    2003
    
    
    2004
    
    
    2004 (Note 3)CurrentFederal
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    
    
    
    $
    Local
    
    
    3,800
    
    
    
    1,210
    
    
    
    1,280
    
    
    
    12Deferred
    
    
    
    
    
    
    
    
    
    
    (97,839
    )
    
    
    (888
    )Provision (benefit) for income taxes
    
    ¥
    3,800
    
    
    ¥
    1,210
    
    
    ¥
    (96,559
    )
    
    $
    (876
    )
 The aggregate statutory income tax rate used for calculation of deferred income tax assets and
liabilities was 42.05% for the years ended September 30, 2002, 2003 and 2004. Effective for years
commencing on October 1, 2004 or later, according to the revised Japanese tax law, income tax rates
for enterprise taxes was reduced depending on the size of business. Based on the change of income
tax rates, for calculation of deferred income tax assets and liabilities, the Company used the
aggregate statutory income tax rate of 40.69% for non-current portion of deferred tax assets and
liabilities at September 30, 2003. As a result of this change, deferred tax assets at September
30, 2003 decreased by ¥137,596 thousand compared with what would have been recorded under the
provisions of local tax law. Provision for deferred income taxes was not affected in the fiscal
year 2003 by this change. Reconciliation of the differences between the amount of reported income taxes and the amount of
income taxes computed using the normal statutory tax rate for the years of 2002, 2003 and 2004 is
as follows (in thousands): September 30,
    
    
    September 30,2002
    
    
    2003
    
    
    2004
    
    
    2004 (Note 3)Amount computed by
using normal
Japanese statutory
tax rate
    
    ¥
    564,119
    
    
    ¥
    (95,263
    )
    
    ¥
    210,175
    
    
    $
    1,907Increase (decrease)
in taxes resulting
from:Expenses not
deductible for
tax purposes
    
    
    1,603
    
    
    
    1,028
    
    
    
    1,990
    
    
    
    18Decrease in
deferred tax
asset valuation
allowance
    
    
    (565,804
    )
    
    
    (41,142
    )
    
    
    (306,612
    )
    
    
    (2,782
    )Effect of tax
rate change
    
    
    
    
    
    
    137,596
    
    
    
    
    
    
    
    Per-capita levy
    
    
    3,800
    
    
    
    1,210
    
    
    
    1,280
    
    
    
    12Others-net
    
    
    82
    
    
    
    (2,219
    )
    
    
    (3,392
    )
    
    
    (31
    )Income taxes as
reported
    
    ¥
    3,800
    
    
    ¥
    1,210
    
    
    ¥
    (96,559
    )
    
    $
    (876
    )
 The significant components of deferred income tax assets and liabilities at September 30, 2003
and 2004
were as follows (in thousands): F-15




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##### Table of Contents



September 30,
    
    
    September 30,2003
    
    
    2004
    
    
    2004 (Note 3)Deferred tax assets:Operating loss carry-forwards
    
    ¥
    3,971,293
    
    
    ¥
    4,108,540
    
    
    $
    37,283Loss on impairment of equipment not deductible
for tax purposes
    
    
    
    
    
    
    488
    
    
    
    4Expense for litigation settlement not
deductible for tax purposes
    
    
    328,865
    
    
    
    
    
    
    
    Depreciation in excess of tax deductible amount
    
    
    39,352
    
    
    
    21,652
    
    
    
    196Write-off of accounts receivable in excess of
tax deductible amount
    
    
    106,128
    
    
    
    106,128
    
    
    
    963Allowance for doubtful accounts in excess of
tax deductible amount
    
    
    3,850
    
    
    
    
    
    
    
    Other expenses not deductible for tax purposes
    
    
    3,544
    
    
    
    7,451
    
    
    
    68Gross deferred tax assets
    
    
    4,453,032
    
    
    
    4,244,259
    
    
    
    38,514Less:Valuation allowance
    
    
    (4,453,032
    )
    
    
    (4,146,420
    )
    
    
    $(37,626)Net deferred tax assets
    
    ¥
    
    
    
    ¥
    97,839
    
    
    $
    888
 Operating loss carry-forwards for tax purposes at September 30, 2004 amounted to approximately
¥10,096 million ($91,615 thousand) which is available to offset future taxable income.
Approximately ¥1,469 million, ¥6,642 million, ¥1,649 million and ¥336 of operating loss
carry-forwards will expire in the periods ending September 30, 2005, 2006, 2007 and 2009,
respectively, unless utilized prior to that date. A full valuation allowance had been recorded due
to the uncertainty whether the deferred tax assets would be realized until the prior year. For the
fiscal year 2004, current portion of deferred tax assets is recognized based on the weight of
available evidence related to realization of deferred tax assets in the fiscal year 2005. The net changes in the valuation allowance for deferred tax assets during the fiscal years
2003 and 2004 was a decrease of ¥41,142 thousand and ¥306,612 thousand ($2,782 thousand),
respectively. 12. Segment Information When the Company was incorporated in 1995, the Company had three reportable segments: Deskwing,
other hosting service, and system development services, as determined by the Companys management.
All product segments used common assets and management did not review this information separately.
The Company changed its business strategy in accordance with the Plan, and as discussed in Note 1,
the Company started to engage in two new businesses: product sales and internet advertising. These
newly introduced businesses were not considered separate reportable segments since management did
not review discrete financial information for these businesses other than revenues and product
costs. On October 1, 2003, the Company established a wholly owned subsidiary, Cyber Joy, Inc., for
the purposes providing internet advertising space. Management has developed and now reviews
discrete financial information for these businesses. As a result, these businesses are now
considered separate segments. All of the Companys operations are conducted in Japan. Below is a
summary of information related to each of the separate business segments: For the year ended September 30, 2002
    Thousands of yenHosting
    
    
    Product
    
    
    Advertising
    
    
    Corporation
    
    
    Consolidatedservice
    
    
    sales
    
    
    and Other
    
    
    and eliminations
    
    
    RevenueRevenue
    
    ¥
    2,941,431
    
    
    ¥
    
    
    
    ¥
    3,929
    
    
    ¥
    
    
    
    ¥
    2,945,360Production cost
    
    
    632,293
    
    
    
    
    
    
    
    3,881
    
    
    
    
    
    
    
    636,174
 For
the year ended September 30, 2003
    Thousands of yenHosting
    
    
    Product
    
    
    Advertising
    
    
    Corporation
    
    
    Consolidatedservice
    
    
    sales
    
    
    and Other
    
    
    and eliminations
    
    
    RevenueRevenue
    
    ¥
    1,440,291
    
    
    ¥
    199,300
    
    
    ¥
    132,327
    
    
    ¥
    
    
    
    ¥
    1,771,918Production cost
    
    
    432,767
    
    
    
    130,144
    
    
    
    86,709
    
    
    
    
    
    
    
    649,620
 F-16




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##### Table of Contents



For the year ended September 30, 2004
    Thousands of yenHosting
    
    
    Product
    
    
    Advertising
    
    
    Corporation
    
    
    Consolidatedservice
    
    
    sales
    
    
    and other
    
    
    and eliminations
    
    
    RevenueRevenue
    
    ¥
    1,106,723
    
    
    ¥
    1,659,406
    
    
    ¥
    538,596
    
    
    ¥
    
    
    
    ¥
    3,304,725Operating expenses
    
    
    405,398
    
    
    
    1,589,146
    
    
    
    621,796
    
    
    
    185,855
    
    
    
    2,802,195Operating income
    
    ¥
    701,325
    
    
    ¥
    70,260
    
    
    ¥
    (83,200
    )
    
    ¥
    (185,855
    )
    
    ¥
    502,530Segment assets
    
    ¥
    34,217
    
    
    ¥
    392,080
    
    
    ¥
    19,350
    
    
    ¥
    2,875,249
    
    
    ¥
    3,320,896Depreciation and amortization
    
    ¥
    3,659
    
    
    ¥
    5,344
    
    
    ¥
    1,931
    
    
    ¥
    388
    
    
    ¥
    11,322Capital expenditures
    
    ¥
    752
    
    
    ¥
    24,927
    
    
    ¥
    2,227
    
    
    ¥
    4,001
    
    
    ¥
    31,907
 For the year ended September 30, 2004
    Thousands of U.S. Dollars(Note 3)Hosting
    
    
    Product
    
    
    Advertising
    
    
    Corporation
    
    
    Consolidatedservice
    
    
    sales
    
    
    and other
    
    
    and eliminations
    
    
    RevenueRevenue
    
    $
    10,043
    
    
    $
    15,059
    
    
    $
    4,887
    
    
    $
    
    
    
    $
    29,989Operating expenses
    
    
    3,679
    
    
    
    14,421
    
    
    
    5,642
    
    
    
    1,687
    
    
    
    25,429Operating income
    
    $
    6,364
    
    
    $
    638
    
    
    $
    (755
    )
    
    $
    (1,687
    )
    
    $
    4,560Segment assets
    
    $
    310
    
    
    $
    3,558
    
    
    $
    176
    
    
    $
    26,091
    
    
    $
    30,135Depreciation and amortization
    
    $
    33
    
    
    $
    48
    
    
    $
    18
    
    
    $
    3
    
    
    $
    102Capital expenditures
    
    $
    7
    
    
    $
    227
    
    
    $
    20
    
    
    $
    36
    
    
    $
    290
 Note: Revenues shown represent revenues from external customers. There are no transactions between
segments. 13. Subsequent Events The Board of Directors of the Company, at a meeting held on November 15, 2004, approved the
purchase of a 95% interest in both Five Any, Inc. and First Charge, Inc., which are wholly owned by
Hikari Tsusin, in order to develop the Companys internet related business. Five Any, Inc. is engaged mainly in mobile media business and First Charge, Inc. is engaged in
marketing internet advertising space. The acquisition date for both companies is December 31, 2004 and purchase price is ¥522
million ($4,737 thousand) for Five Any, Inc. and ¥166 million ($1,506 thousand).  After the balance sheet date, 23 stock purchase warrants were exercised. As a result, the shares
of common stock increased by 834 and the amount of capital and additional paid-in capital increased
by ¥430,978 thousand ($3,911 thousand), respectively. F-17




---



##### Table of Contents



EXHIBIT INDEX EXHIBIT
    
    DESCRIPTION
    
    PAGE1.1
    
    
    Articles of Incorporation of the Registrant, as amended (English translation)
    
    1.2
    
    
    Share Handling Regulations of the Registrant, as amended (with English translation)*1.3
    
    
    Regulations of the Board of Directors of the Registrant, as amended (English
translation) *****1.4
    
    
    Regulations of the Board of Corporate Auditors of the Registrant, as amended
(English translation) *****2.1
    
    
    Specimen Common Stock certificates of the Registrant*2.2
    
    
    Form of Deposit Agreement among the Registrant, The Bank of New York as depositary
and all owners and holders from time to time of American Depositary Receipts,
including the form of American Depositary Receipt.*4.1
    
    
    Memorandum on Microsoft Hosting Deployment Program dated September 17, 1999 between
Microsoft Co., Ltd and the Registrant (with English translation)*4.2
    
    
    Agreement on Delegation of Intermediary Business relating to Application for the
Registration of the Organizational Type/Geographical Type JP Domain Name dated
April 1, 2001 between Shadan Hojin Japan Network Information Center and the
Registrant (with English translation)*4.3
    
    
    Amended and Restated Agreement on Delegation of Business dated February 1, 2000
between the Registrant and Hikari Tsushin, Inc (with English translation)*4.4
    
    
    Agreement on Agreed Termination and Transfer of Business dated November 1, 2000
between the Registrant and Hikari Tsushin, Inc (with English translation)**4.5
    
    
    Order Sheet and Receipt of Order dated July 12, 2000 between the Registrant and IBJ
Leasing, Co., Ltd. (with English translation)**4.6
    
    
    Lease Contract dated July 12, 2000 between the Registrant and IBJ Leasing, Co.,
Ltd. (with English translation)**4.7
    
    
    Agreement on Agreed Termination of Lease Contract dated July 24, 2001 between the
Registrant and IBJ Leasing Co., Ltd. (English translation)***4.8
    
    
    Sales Contract dated July 24, 2001 between the Registrant and IBJ Leasing Co., Ltd.
(English translation)***4.9
    
    
    Software License Agreement dated March 4, 2002 between the Registrant and Network
Associates Co., Ltd. (English translation)***4.10
    
    
    Agreement on Delegation of Business relating to the specified Administration
Company of IP address dated March 31, 2001 between Shadan Hojin Japan Network
Information Center and the Registrant (English translation)***4.11
    
    
    C master First OEM Master Agreement dated June 3, 2002 between the Registrant and
Magrex Co., Ltd. (English Translation) *****4.12
    
    
    Software Supply Agreement dated July 1, 2002 between the Registrant and CalltoWeb,
Inc. (English translation) *****4.13
    
    
    OUSAMA-DESK outsourcing master agreement dated July 1, 2002 between the




---



##### Table of Contents



EXHIBIT
    
    DESCRIPTION
    
    PAGERegistrant and CalltoWeb, Inc. (English translation)*****4.14
    
    
    Outsourcing Agreement dated August 1, 2002 between the
Registrant and CalltoWeb, Inc. (English translation)****4.15
    
    
    Outsourcing Fee Agreement dated August 1, 2002 between
the Registrant and CalltoWeb, Inc. (English
translation)****4.16
    
    
    Amendment to Outsourcing Fee Agreement dated August 1,
2002 between the Registrant and CalltoWeb, Inc. (English
translation)****4.17
    
    
    Basic Outsourcing Agreement dated September 30, 2002
between the Registrant and Global Media Online Inc.
(English translation)****4.18
    
    
    Outsourcing Fee Agreement dated September 30, 2002
between the Registrant and Global Media Online Inc.
(English translation)****4.19
    
    
    Outsourcing and Fee Agreement Amendment dated November
1, 2002 between the Registrant and Global Media Online
Inc. (English translation)****4.20
    
    
    Sales Agreement dated October 31, 2002 between the
Registrant and Diamond Lease Company Ltd. (English
translation)****4.21
    
    
    Lease Agreement dated September 30, 2002 between the
Registrant and Global Media Online Inc. (English
translation)****4.22
    
    
    Software Supply Agreement dated March 1, 2003 between
the Registrant and IE Group, Inc. (English translation)
*****4.23
    
    
    Amendment of Basic Outsourcing Agreement dated March 7,
2003 between the Registrant and Global Media Online Inc.
(English translation)****4.24
    
    
    Agreement on Advertisement Treatment dated March 12,
2003 between the Registrant and First Charge, Inc.
(English translation) *****4.25
    
    
    Commodity Exchange Agreement dated September 1, 2003
between the Registrant and IDK Inc. (English
translation) *****10.1
    
    
    Description of American Depositary Receipts****12.1
    
    
    Certification by the Chief Executive Officer, President
and Representative Director pursuant to SEC Rule
13a-14(a) / 15d-14(a), as adopted pursuant to section
302 of the Sarbanes-Oxley Act of 2002
    
    12.2
    
    
    Certification by the Principal Officer of Administration
Department pursuant to SEC Rule 13a-14(a) / 15d-14(a),
as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
    
    13.1
    
    
    Certification by Chief Executive Officer, President and
Representative Director pursuant to U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
    
    13.2
    
    
    Certification by Principal Officer of Administration
Department Pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
    
    




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##### Table of Contents



*
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Registration Statement on Form F1
(File No. 33311448) declared effective on March 3, 2000.**
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Registration Statement on Form 20F
(File No. 030530) filed on March 30, 2001.***
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Annual Report on Form 20F
(File No. 030530) filed on April 12, 2002.****
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Annual Report on Form 20F
(File No. 030530) filed on March 27, 2003*****
    
    Previously filed and hereby incorporated by reference to the
corresponding exhibit to our Annual Report on Form 20F
(File No. 030530) filed on March 10, 2004