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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

FORM 20-F

(Mark One)

[  ]      Registration statement pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934

OR

[X]     Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003

OR

[  ]      Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from            to

Commission file number 0-30530

KABUSHIKI KAISHA CRAYFISH
(Exact Name of Registrant as Specified in Its Charter)

CRAYFISH CO., LTD.
(Translation of Registrants Name into English)

HIKARI CENTER BLDG., 5TH FLOOR 16-15,MINAMI IKEBUKURO 1-CHOMEJAPAN
    
    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, 2003, 10,268 shares of common stock were outstanding,
comprised of 9,864 Shares and 202,000 ADSs (equivalent to 404 shares).**

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

Yes [X]  No [   ]

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

Item 17 [   ]  Item 18 [X]



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|* |  | 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



|                                                 |                                                                                       |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.                       
|                                                 | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.                                     
|                                                 | ITEM 3. KEY INFORMATION.                                                             
|                                                 | ITEM 4. INFORMATION ON THE COMPANY.                                                  
|                                                 | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.                                
|                                                 | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.                                  
|                                                 | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.                           
|                                                 | ITEM 8. FINANCIAL INFORMATION                                                        
|                                                 | ITEM 9. THE OFFER AND LISTING.                                                       
|                                                 | ITEM 10. ADDITIONAL INFORMATION.                                                     
|                                                 | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                 
|                                                 | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.                     
|PART II                                         
|                                                 | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.                            
|                                                 | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|                                                 | ITEM 15. CONTROLS AND PROCEDURES                                                     
|                                                 | ITEM 16. [RESERVED]                                                                  
|                                                 | ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                           
|                                                 | ITEM 16B CODE OF ETHICS                                                              
|                                                 | ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      
|                                                 | ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  
|                                                 | ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      
|PART III                                        
|                                                 | ITEM 17. FINANCIAL STATEMENTS.                                                       
|                                                 | ITEM 18. FINANCIAL STATEMENTS.                                                       
|                                                 | ITEM 19. EXHIBITS                                                                    
|EX-1.1 ARTICLES OF INCORPORATION                
|EX-1.3 REGULATIONS OF THE BOARD OF DIRECTORS    
|EX-1.4 REGULATIONS - BOARD OF CORPORATE AUDITORS
|EX-4.11 FIRST OEM MASTER AGREEMENT              
|EX-4.12 SOFTWARE SUPPLY AGREEMENT               
|EX-4.13 OUSAMA-DESK OUTSOURCING MASTER AGMT     
|EX-4.22 SOFTWARE SUPPLY AGREEMENT               
|EX-4.24 AGREEMENT ON ADVERTISEMENT TREATMENT    
|EX-4.25 COMMODITY EXCHANGE AGREEMENT            
|EX-12.1 CERTIFICATION OF THE PRESIDENT          
|EX-12.2 CERTIFICATION OF THE CFO                
|EX-13 CERTIFICATION OF THE PRESIDENT AND CFO    



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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
    
    16Item 5
    
    Operating and Financial Review and Prospects
    
    27Item 6
    
    Directors, Senior Management and Employees
    
    44Item 7
    
    Major Shareholders and Related Party Transactions
    
    48Item 8
    
    Financial Information
    
    51Item 9
    
    The Offer and Listing
    
    51Item 10
    
    Additional Information
    
    52Item 11
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    68Item 12
    
    Description of Securities Other than Equity Securities
    
    68PART II
    
    68Item 13
    
    Defaults, Dividend Arrearages and Delinquencies
    
    68Item 14
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    68Item 15
    
    Controls and Procedures
    
    69Item 16
    
    [Reserved]
    
    70Item 16A
    
    Audit Committee Financial Expert
    
    70Item 16B
    
    Code of Ethics
    
    70Item 16C
    
    Principal Accountant Fees and Services
    
    70Item 16D
    
    Exemptions from the Listing Standards for Audit Committee
    
    70Item 16E
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    70PART III
    
    70Item 17
    
    Financial Statements
    
    70Item 18
    
    Financial Statements
    
    70Item 19
    
    Exhibits
    
    71


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,
|- |  | ---------------------------------------------------------------------------



| |  | that we may be unable to develop an effective marketing channel to increase sales, and
|- |  | --------------------------------------------------------------------------------------



| |  | the outcome of securities class action litigation against us.
|- |  | -------------------------------------------------------------

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 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 statements of operations data below for the fiscal years ended
September 30, 1999, 2000, 2001, 2002 and 2003 and the balance sheet data as of
September 30, 1999, 2000, 2001, 2002 and 2003 that are identified as being
prepared in accordance with accounting principles generally accepted in the
United States, or U.S. GAAP, are derived from our audited financial statements
prepared in accordance with U.S. GAAP. The U.S. GAAP statements of operations
data for the fiscal years ended September 30, 2001, 2002 and 2003 and the U.S.
GAAP balance sheet data as of September 30, 2001, 2002 and 2003 were audited by
BDO Sanyu & Co., independent accountants. U.S. GAAP statements of operations
data for the years ended September 30, 2001, 2002 and 2003 and balance sheet
data as of September 30, 2002 and 2003 are included in our financial statements
and related notes beginning on page F-1.

The results of operations for the years of 1999 and 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.

3



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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 statements of operations data for the years ended September
30, 1999, 2000, and 2001 below.

STATEMENTS OF OPERATIONS DATA (U.S. GAAP):

Year ended September 30,1999(1)
    
    2000(1)
    
    2001(2)
    
    2002
    
    2003
    
    2003(in thousands of yen and U.S. dollars, except share and per share amounts)Revenue
    
    ¥
    811,687
    
    
    ¥
    6,728,865
    
    
    ¥
    5,311,814
    
    
    ¥
    2,945,360
    
    
    ¥
    1,771,918
    
    
    $
    15,901Cost of revenue (3)
    
    
    796,212
    
    
    
    5,653,051
    
    
    
    3,391,888
    
    
    
    636,174
    
    
    
    649,620
    
    
    
    5,829Gross profit
    
    
    15,475
    
    
    
    1,075,814
    
    
    
    1,919,926
    
    
    
    2,309,186
    
    
    
    1,122,298
    
    
    
    10,072Operating expenses (3)
    
    
    448,929
    
    
    
    2,079,134
    
    
    
    9,273,622
    
    
    
    978,184
    
    
    
    559,572
    
    
    
    5,022(Loss) income from operations
    
    
    (433,454
    )
    
    
    (1,003,320
    )
    
    
    (7,353,696
    )
    
    
    1,331,002
    
    
    
    562,726
    
    
    
    5,050Other (expense) income, net
    
    
    (19,090
    )
    
    
    7,665
    
    
    
    (1,047,112
    )
    
    
    10,542
    
    
    
    (789,274
    )
    
    
    (7,083
    )(Loss) income from continuing
operations before provision for income
taxes
    
    
    (452,544
    )
    
    
    (995,655
    )
    
    
    (8,400,808
    )
    
    
    1,341,544
    
    
    
    (226,548
    )
    
    
    (2,033
    )Provision for income taxes
    
    
    2,981
    
    
    
    3,800
    
    
    
    3,800
    
    
    
    3,800
    
    
    
    1,210
    
    
    
    11(Loss) income from continuing operations
    
    
    (455,525
    )
    
    
    (999,455
    )
    
    
    (8,404,608
    )
    
    
    1,337,744
    
    
    
    (227,758
    )
    
    
    (2,044
    )Gain (loss) from operations of
discontinued business segments
    
    
    99,786
    
    
    
    (542,129
    )
    
    
    (1,164,113
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    ¥
    (355,739
    )
    
    ¥
    (1,541,584
    )
    
    ¥
    (9,568,721
    )
    
    ¥
    1,337,744
    
    
    ¥
    (227,758
    )
    
    $
    (2,044
    )(Loss) earnings per sharePer common share basic:(Loss) income from continuing
operation
    
    ¥
    (100,958.55
    )
    
    ¥
    (106,859.30
    )
    
    ¥
    (823,496.77
    )
    
    ¥
    130,460.70
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )(Loss) income from operations of
discontinued business segments
    
    
    22,115.69
    
    
    
    (57,963.11
    )
    
    
    (114,061.63
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    ¥
    (78,842.86
    )
    
    ¥
    (164,822.41
    )
    
    ¥
    (937,558.40
    )
    
    ¥
    130,460.70
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Per common share diluted:(Loss) income from continuing operation
    
    ¥
    (100,958.55
    )
    
    ¥
    (106,859.30
    )
    
    ¥
    (823,496.77
    )
    
    ¥
    130,346.30
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )(Loss) income from operations of
discontinued business segments
    
    22,115.69
    
    
    
    (57,963.11
    )
    
    
    (114,061.63
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    ¥
    (78,842.86
    )
    
    ¥
    (164,822.41
    )
    
    ¥
    (937,558.40
    )
    
    ¥
    130,346.30
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Shares used in per share calculation basic
    
    
    4,512
    
    
    
    9,353
    
    
    
    10,206
    
    
    
    10,254
    
    
    
    10,263
    
    
    
    10,263diluted
    
    
    4,512
    
    
    
    9,353
    
    
    
    10,206
    
    
    
    10,263
    
    
    
    10,263
    
    
    
    10,263




---

|(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.

4



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##### Table of Contents



|(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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA (U.S. GAAP):

As of September 30,1999
    
    2000
    
    2001
    
    2002
    
    2003(1)
    
    2003(1)(in thousands of yen and U.S. dollars)Cash and cash equivalents
    
    Yen
    4,179,770
    
    
    Yen
    23,017,011
    
    
    Yen
    14,429,199
    
    
    Yen
    16,412,076
    
    
    Yen
    1,931,316
    
    
    $
    17,332Total assets
    
    
    6,282,423
    
    
    
    27,673,791
    
    
    
    15,609,662
    
    
    
    16,914,902
    
    
    
    3,113,277
    
    
    
    27,939Total shareholders equity
    
    
    4,142,249
    
    
    
    25,027,240
    
    
    
    15,376,806
    
    
    
    16,716,800
    
    
    
    2,117,842
    
    
    
    19,006




---

|(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 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 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 were Yen 7,639,106 thousand and Yen 6,736,094
thousand, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

JAPANESE GAAP FINANCIAL DATA

The statements of operations data below for the fiscal years ended
September 30, 1999, 2000, 2001, 2002 and 2003 and the balance sheet audited
data as of September 30, 1999, 2000, 2001, 2002 and 2003 are derived from our
condensed financial statements prepared in accordance with Japanese GAAP. Our
condensed 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.

Information presented in Japanese GAAP differs in important ways from U.S.
GAAP.

5



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##### Table of Contents



SELECTED OPERATIONS DATA (Japan GAAP):

Year ended September 30,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(in thousands of yen and U.S. dollars)Total revenue
    
    Yen
    1,137,942
    
    
    Yen
    6,822,669
    
    
    Yen
    5,416,939
    
    
    Yen
    2,939,808
    
    
    Yen
    1,768,165
    
    
    $
    15,868Total cost of revenue
    
    
    645,177
    
    
    
    2,311,013
    
    
    
    2,842,794
    
    
    
    630,264
    
    
    
    649,620
    
    
    
    5,830Gross profit
    
    
    492,765
    
    
    
    4,511,656
    
    
    
    2,574,145
    
    
    
    2,309,544
    
    
    
    1,118,545
    
    
    
    10,038Selling, general and
administrative expenses
    
    
    839,567
    
    
    
    5,820,002
    
    
    
    4,751,197
    
    
    
    803,595
    
    
    
    507,307
    
    
    
    4,553Operating profit (loss)
    
    
    (346,802
    )
    
    
    (1,308,346
    )
    
    
    (2,177,052
    )
    
    
    1,505,949
    
    
    
    611,238
    
    
    
    5,485Other income (expense), net
    
    
    (40,236
    )
    
    
    (635,228
    )
    
    
    (127,470
    )
    
    
    (60,104
    )
    
    
    (16,460
    )
    
    
    (147
    )Special income (loss), net
    
    
    (988
    )
    
    
    (7,058
    )
    
    
    (7,499,090
    )
    
    
    (104,116
    )
    
    
    (825,682
    )
    
    
    (7,410
    )Income (loss) before provision
for income taxes
    
    
    (388,026
    )
    
    
    (1,950,632
    )
    
    
    (9,803,612
    )
    
    
    1,341,729
    
    
    
    (230,904
    )
    
    
    (2,072
    )Provision for income taxes
    
    
    2,981
    
    
    
    3,800
    
    
    
    4,171
    
    
    
    3,800
    
    
    
    1,210
    
    
    
    11Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    79,761
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    Yen
    (391,007)
    
    
    Yen
    (1,954,432)
    
    
    Yen
    (9,728,022)
    
    
    Yen
    1,337,929
    
    
    Yen
    (232,114)
    
    
    $
    (2,083
    )


SELECTED BALANCE SHEET DATA (Japan GAAP):

As of September 30,1999
    
    2000
    
    2001
    
    2002
    
    2003(1)
    
    2003(1)(in thousands of Yen and U.S. dollars)Cash and cash equivalents
    
    Yen
    5,724,131
    
    
    Yen
    22,764,731
    
    
    Yen
    14,485,802
    
    
    Yen
    16,412,076
    
    
    Yen
    1,931,315
    
    
    $
    17,332Total assets
    
    
    6,243,078
    
    
    
    22,563,597
    
    
    
    15,820,206
    
    
    
    16,914,902
    
    
    
    3,129,038
    
    
    
    28,081Total liabilities
    
    
    2,110,282
    
    
    
    446,104
    
    
    
    271,629
    
    
    
    198,102
    
    
    
    991,436
    
    
    
    8,897Total shareholders equity
    
    
    4,132,796
    
    
    
    25,117,493
    
    
    
    15,402,657
    
    
    
    16,716,800
    
    
    
    2,137,602
    
    
    
    19,183




---

|(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 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 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 were Yen 7,495,640 thousand and Yen 6,879,560
thousand, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 Yen 111.43
to U.S.$1.00, which was the noon buying rate announced by the Federal Reserve
Bank of New York on September 30, 2003.

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.

6



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YEAR ENDED/ENDING SEPTEMBER 30,
    
    HIGH
    
    LOW
    
    AVERAGE(1)
    
    PERIODEND1999
    
    Yen
    135.75
    
    
    Yen
    103.78
    
    
    Yen
    117.49
    
    
    Yen
    106.822000
    
    
    111.11
    
    
    
    101.53
    
    
    
    106.43
    
    
    
    107.902001
    
    
    126.75
    
    
    
    107.30
    
    
    
    118.14
    
    
    
    119.232002
    
    
    134.77
    
    
    
    115.71
    
    
    
    125.52
    
    
    
    121.742003
    
    
    107.18
    
    
    
    121.42
    
    
    
    115.93
    
    
    
    111.432004 (through January 31, 2004)CALENDAR YEAR 2003August
    
    
    120.47
    
    
    
    116.71
    
    
    
    118.66
    
    
    
    116.71September
    
    
    117.41
    
    
    
    111.07
    
    
    
    114.80
    
    
    
    111.43October
    
    
    110.90
    
    
    
    108.18
    
    
    
    109.50
    
    
    
    110.10November
    
    
    111.20
    
    
    
    107.98
    
    
    
    109.18
    
    
    
    109.53December
    
    
    109.61
    
    
    
    107.18
    
    
    
    107.85
    
    
    
    107.18CALENDAR YEAR 2004January
    
    
    107.17
    
    
    
    106.06
    
    
    
    106.41
    
    
    
    106.21




---

|(1) |  | Fiscal year average is calculated from the average of the exchange rates
on the last day of each month during the period.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

The noon
buying rate for Japanese Yen on February 27, 2004 was 109.26 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 shares or ADSs 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 CONTINUE TO DECLINE IF WE DO NOT RETAIN CUSTOMERS

Our success depends on the retention of customers. The number of our
subscribers declined from 12,864 as of September 30, 2002, to 8,209 as of
September 30, 2003. 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
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.

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WE OPERATE IN A VERY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY; INEFFECTIVE COMPETITION MAY NEGATIVELY AFFECT OUR REVENUES

According to the Economic Planning Agency in 1999, the growing information
technology market was approximately Yen12.83 billion, and it was estimated
that the market will grow 2% to 4% per year. The market for information
technology businesses is very competitive 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 hosting business include:
Japanese and international telecommunications carriers and related internet
service providers such as Nippon Telegraph and Telephone Corporation, KDDI
Corporation, Hewlett-Packard Development Corporation, L.P., Internet Initiative
Japan Inc. and Global Media Online Inc. These competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the information technology industry than us. Furthermore, some
of our competitors have offered services similar to ours at lower prices than
ours or with incentives not matched by us.

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
hosting service to Hikari Tsushin, Inc. 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 CalltoWeb, an affiliate of Hikari Tsushin.
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 HARDWARE BUSINESS ALSO INCLUDE COMPETITION, PAYMENT
COLLECTION AND DAMAGE TO REPUTATION

Our current hardware competitors include Japanese and international
companies such as DAIWABOU Information System Co., Ltd., SOFTBANK Corp., OTSUKA
Corporation 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 industry than us. Some of our competitors may
offer products that are similar to 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 product fees

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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 hardware business by damaging relationships with clients
and our corporate image.

RISKS THAT MAY HARM OUR SOFTWARE BUSINESS ALSO INCLUDE COMPETITION, PAYMENT
COLLECTION AND DAMAGE TO REPUTATION

Current and potential competitors to our Enterprise Resource Planning
(ERP) and other software business include Enterprise Resource Planning (ERP)
companies, companies connected with providing ERP packages, and providers of
other business software such as OBIC Co., Ltd., OTSUKA Corporation and other
companies. These competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the software
industry than us. Some of our competitors may offer products that are similar
to 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 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 software business by damaging relationships with clients
and our corporate image.

RISKS THAT MAY HARM OUR INTERNET ADVERTISING SPACE SALES BUSINESS ALSO INCLUDE
COMPETITION, PAYMENT COLLECTION, SECURITY VIOLATIONS, LAW VIOLATIONS AND
COPYRIGHT INFRINGEMENT

Our advertising space business is directly and indirectly involved in the
internet market. Large Japanese advertising agencies, such as Dentsu Inc.,
Hakuhodo Inc. and Recruit carry exhaustive information on many types of
customers. 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
industry than us. Some of our competitors may also offer similar products to
ours at lower prices. 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 business.
The content of our clients advertisements may violate Japanese laws or
regulations, or may damage the relationships between Crayfish and media space
companies such as television and radio broadcasters, and publishers of
magazines and newspapers. Additionally, if our clients internet advertising
infringes 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.

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IF WE MAY FAIL TO CARRY OUT OUR NEW 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 business products, 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 new business strategy.

WE ARE PARTY TO SECURITIES CLASS ACTION LITIGATION WHICH MAY BE COSTLY TO
DEFEND, THE OUTCOME OF WHICH IS UNCERTAIN AND WHICH MAY HARM OUR BUSINESS.

We are party to securities class action litigation which may be costly to
defend and the outcome of which is uncertain and may harm our business. On and
after September 8, 2000, class action lawsuits were filed in the United States
District Court for the Southern District of New York against (i) the Company,
(ii) our CEO at the time, (iii) the 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 our American Depositary Shares, Crayfish
violated U.S. securities laws by making inaccurate and misleading statements.
The complaints included related allegations against the other defendants based
on U.S. securities laws. Eleven lawsuits 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. After negotiations, the parties have entered into
a memorandum of understanding regarding the settlement of the class action
litigation, subject to the execution of a final settlement agreement and
approval by the court.

Pursuant to the memorandum of understanding, defendants Crayfish, Hikari
Tsushin, Inc., and Isao Matsushima, Crayfishs CEO at the time of our public
offering, reached a settlement with the plaintiffs to settle and dismiss all
pending class action litigation for US$9,000,000. Crayfish entered into this
settlement solely to avoid any further cost, burden or uncertainty from the
litigation, and has not acknowledged and will not acknowledge the validity of
any claims alleged by the plaintiffs. Out of the US$9,000,000 required to be
paid under the memorandum of understanding, US$6,625,000 has already been
deposited by Crayfish into an escrow account pending court approval of the
settlement. Crayfish recorded this amount as an expense in its third fiscal
quarter ended June 30, 2003.

This settlement will not become final until approved by the court. Court
approval of the settlement depends on several factors which may be beyond
Crayfishs control. The court may or may not approve the settlement. Failure to
settle the litigation may result in costly defense costs to us, and the outcome
of the litigation is uncertain, and could have a material adverse effect on our
business and financial condition.

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OUR SALES AND REVENUES ARE SENSITIVE TO ECONOMIC TRENDS IN THE 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 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 incurred a net loss of approximately Yen228 million for the year ended
September 30, 2003. We earned 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, Yen1,542 million for the year ended September 30, 2000 and Yen356
million for the year ended September 30, 1999. We may incur net losses at the
end of the current fiscal year and perhaps thereafter. In addition, revenues
have decreased in the fiscal year 2003 due to a reduction in the size of our
DESKWING customer base. The number of our subscribers has declined from 12,864
as of September 30, 2002 to 8,209 as of September 30, 2003. We believe that
under the present economic conditions in Japan, the size of our e-mail hosting
service customer base will continue to decrease.

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 needs in a timely and
efficient manner. The e-mail hosting business, software business, hardware, and
advertising space business are influenced by rapidly changing technology and
customer 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 needs is also related to the increasing
purposes and expanding uses of computers and servers. However, the
introduction of new products may affect the sales of our current services, such
that the introduction of small server hardware may reduce the customer base of
our rental server business. Also, if we are unable to apply rapidly changing
technology to meet evolving customer 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.

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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 hosting 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
| | - |  | -------------------------------------------------------



| |  |  | 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.

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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 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 more 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 87.76% of our
issued shares. See Item 7. A. MAJOR SHAREHOLDERS. 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, 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. In addition, if Hikari Tsushin were to sell its 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,

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##### Table of Contents



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.

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 Global Media Online Inc. and CalltoWeb, which provide DESKWING services
pursuant to outsourcing agreements as announced in our press releases as of
August 1, 2002. We receive marketing support from Hikari Tsushin and its
affiliates for our software sales, hardware sales and internet advertising
space business. Our business may be disrupted and our reputation may be
damaged if such third parties fail to provide 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. See Item
10.E Taxation  United States Taxation  PFIC Rules.

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.

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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.

WE MAY BE DELISTED FROM THE TOKYO
STOCK EXCHANGE OR FORCED TO TAKE COSTLY
MEASURES TO PREVENT BEING DELISTED FROM THE TOKYO STOCK EXCHANGE

Between September 30, 2002 and September 30, 2003, the number of our
shareholders increased from 211 shareholders to 389 shareholders. However, 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 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

15



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only effective after SEC rulemaking. However, we may be required to
perform U.S. GAAP audits of our 6K filings and take other 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 and 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 has decided
to delist its ADSs from Nasdaq and terminate the registration of our ADSs under
Section 12(g) 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 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 ourselves 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
product we sold such as software, hardware and advertising space, or
advertisement 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.




ITEM 4. INFORMATION ON THE COMPANY.

A. HISTORY AND DEVELOPMENT OF THE COMPANY.

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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 service to small and medium-sized enterprises in Japan in May
1998. As of February 1, 2001, we renamed Hitmail as DESKWING.

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
| | - |  | -------------------------------------------------------------

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| |  |  | 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 our shares at a price of Yen285,000 per
share. Hikari Tsushin directly and indirectly owned 9,011 shares representing
87.76% of our shares as of September 30, 2003.

We began
several new businesses in fiscal year 2003 including sales of software, hardware and internet advertising. Hikari Tsushins
affiliates provide to us sales and marketing support in connection with these
new businesses. Revenue from these new businesses during fiscal year
2003 was
primarily generated from our sales to affiliates of Hikari Tsushin.

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. Subsequently, we filed to Tokyo Legal Affairs Bureau, and
distributed cash 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 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 e-mail hosting services, and market software, internet
advertising and hardware, 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

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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 hosting service 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 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 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 December 31, 2003.



| | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2002 and September 30, 2003, respectively.

Web. We began to offer our Web-page hosting service in May 1998. As of
September 30, 2003, more than 90% of our customers for DESKWING 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 design Web pages based on ready-made templates. For
customers desiring more sophisticated Web-designs, we offer references to
independent Web-page design service providers. For an additional charge, we
can host Web-page designs that customers create with their own Microsoft
FrontPage 2000 software. While we have previously charged Yen1,000 per month
for the standard Web service, after introduction of the new DESKWING plan on
November 1, 2002 DESKWING 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
side. 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 Yen350 per account, with an
initial fee of Yen5,000, and Virus-Check 50, priced at Yen11,000 per 50
accounts, with an additional fee of Yen10,000. On July 22, 2003, we
introduced a new virus check service, Virus-Check 10, priced at Yen3,000 per
10 accounts, with an initial fee of Yen5,000. We began a discount

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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; home page construction; automated
Web-site access log analysis; Kantanne!jp, a real estate web site creation
application; ADSL 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.
Following the termination of our contract with Hikari Tsushin, our own sales
and marketing team 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. 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.

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:

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| |  |  | 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. 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. and CalltoWeb, Inc. 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. In fiscal year 2003, revenues from software sales accounted for approximately
9.4% of total revenues.

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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. Internet Advertising.

In line with our
aim to increase earnings by stabilizing our DESKWING operations and beginning
new businesses, in April 2003 Crayfish began to purchase internet advertising
space

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and to market this space to internet
sites together with affiliates of Hikari Tsushin. In October 2003, we
established a wholly owned subsidiary, Cyber Joy, Inc. to market
internet advertising space. Revenues from sales of internet advertising accounted for
6.9% of total revenues in Fiscal Year 2003. Internet advertising includes the
following types of advertisements:



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4. 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 hardware to Japanese small and medium
sized enterprises. Crayfish buys hardware from IDK Inc. and other hardware
manufacturers, and sells this hardware to Hikari Tsushin affiliates such as IE
Group, Inc. and CalltoWeb, Inc. who in turn sell the hardware to small and
medium sized companies in Japan. We can sell over one hundred thousand types of
hardware, including servers, PCs, network instruments and printers.

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.

September 30, 2003, a staff of 12 (11 as of September 30,
2002) were
responsible for sales promotion of DESKWING, including product and
service development.
Our sales and marketing team focuses 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 focus on marketing, developing new products and
services, and working with our parent company and its affiliates as part of our
overall customer acquisition strategy.

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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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We began
selling software in February 2003 and 11 staff were responsible for marketing
software as of September 30, 2003. Our software marketing staff
has focused on marketing through Hikari Tsushins affiliates,
through which most of our software has been sold. We have also worked
with vendors to develop new software to fit clients tastes, or
in certain case, develop this software in-house.

We began
to market internet advertising in March 2003 and 10 staff were
responsible for marketing internet advertising space as of
September 30, 2003. We enable 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 affiliates.

In September 2003, we began to market hardware to small and medium sized
enterprises in Japan. Software marketing staff also market hardware.
Our hardware marketing staff researches market requirements and sells
most of hardware to its affiliates who in turn sell this hardware to small and medium sized Japanese
enterprises.

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.

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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 2003, 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 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

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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, 2003, Hikari Tsushin directly and indirectly
controlled 87.76% of our outstanding
shares of common stock. As of January 31, 2004
thirty-eight 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.,
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, Inc. to improve our
marketing of internet advertising space. 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.

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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 30,2001
    
    2002
    
    2003(millions of yen)Capital expenditures, including a portion of
payments under capitalized leases
    
    Yen
    542
    
    
    Yen
    37
    
    
    Yen
    5


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, 2004 to be lower
than those for the year ended September 30, 2003 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.




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-

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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 e-mail hosting 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 e-mail hosting services
(our core e-mail hosting service is DESKWING), and sales of hardware,
software and internet advertising space. In the year ended September 30, 2003,
revenue was comprised of revenues from each of these businesses.

Previously, we also derived revenues from our prior hosting 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 Hosting 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 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.

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We began our software, hardware and internet advertising space sales
businesses in February, March and September 2003, respectively. 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, and the commission paid to this
sales agent for its services was included in selling, general and
administrative expenses.

REVENUE

The major components of revenue during fiscal year 2003 include revenues
from e-mail hosting services (approximately 81.3%), and revenues from new
businesses: product sales, internet advertising space sales and others (collectively approximately 18.7%). Revenues from these new
businesses were primarily generated from sales to affiliates of Hikari Tsushin.

Hosting Service

Revenue from our hosting 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. From December 1, 2002, we offered a new
discount campaign, which waived the initial payment of Yen10,000 for 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 Item 4
under the caption Additional
Service Related to DESKWING. 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. Both discount plans were terminated on December 31, 2003. Fees for other
related services vary. Fees for additional related services comprised
approximately 10% of our total DESKWING related revenues for the year ended
September 30, 2003. 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 hosting
services from first-time customers, which are deferred as received and
recognized over an estimated service term of 17 months. As of September 30,
2002 and 2003, initial contract fees of Yen4,004 thousand and Yen251 thousand,
respectively, were deferred.

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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 30,2001
    
    2002
    
    20031Q
    
    2Q
    
    3Q
    
    4Q
    
    1Q
    
    2Q
    
    3Q
    
    4Q
    
    1Q
    
    2Q
    
    3Q
    
    4QNewly Subscribed
    
    
    2,010
    
    
    
    321
    
    
    
    923
    
    
    
    597
    
    
    
    235
    
    
    
    196
    
    
    
    160
    
    
    
    90
    
    
    
    54
    
    
    
    59
    
    
    
    83
    
    
    
    70Cancelled
    
    
    10,919
    
    
    
    9,691
    
    
    
    6,648
    
    
    
    4,651
    
    
    
    7,759
    
    
    
    4,908
    
    
    
    3,408
    
    
    
    2,999
    
    
    
    2,202
    
    
    
    1,230
    
    
    
    844
    
    
    
    645Quarterend Balance
    
    
    50,463
    
    
    
    41,093
    
    
    
    35,310
    
    
    
    31,257
    
    
    
    23,733
    
    
    
    19,021
    
    
    
    15,773
    
    
    
    12,864
    
    
    
    10,716
    
    
    
    9,545
    
    
    
    8,784
    
    
    
    8,209


Product Sales

Revenue from product sales is produced mainly from our software sales
business and our hardware sales business.

Crayfish provides three types of software for our software business:
Enterprise Resource Planning (ERP), Virus Checker and PC-FAX software. 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 Check with one
license requires an initial payment of Yen80,000 and a monthly fee of Yen1,000.

Sales of PC-FAX began in February 2003. The price of PC-FAX is Yen550,000
and it is sold through our sales agents.

We sell the above three types of
software to small and medium enterprises
through Hikari Tsushins affiliates such as IE Group, Inc., and
CalltoWeb, Inc. Our agreements with IE Group, Inc., and CalltoWeb, Inc., are attached hereto as
Exhibit 4.12 and Exhibit 4.22.

We also
provide hardware to small and medium sized Japanese enterprises, mainly through
Hikari Tsushins affiliates, and to
individuals. 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.

Internet Advertising Business and Others

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Revenue from our internet advertising
and other businesses are mainly
generated from sales of internet advertising space. Other revenues include
revenues from test marketing and web page design. In the year ended September
30, 2003, Crayfish mainly sold internet advertising space through First Charge,
Inc., an affiliate of Hikari Tsushin, Inc. However, in the year ended September
30, 2003, we sold internet advertising space directly to small and medium sized
enterprises. In October 2003, Crayfish established Cyber Joy, Inc., a wholly
owned subsidiary, whose main business is to sell internet advertising space.
While Crayfish expects revenues from internet advertising space sales to come
mainly from Cyber Joy, Inc. for the year ended September 30, 2004, revenues for
the year ended September 30, 2003 came mainly from First Charge Inc. Payments
from First Charge, Inc. are more fully described in the agreement with First
Charge, Inc. attached hereto as Exhibit 4.24.

COST OF REVENUE

Cost of revenue includes costs incurred from hosting services, product
sales, internet advertising and others. The total cost of revenue consisted of
approximately 66.6% from e-mail hosting services, 20.0% from product
sales, and 13.4% from internet adverting and others during the fiscal year
ended September 30, 2003.

Hosting Services

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 the domain name
registries.

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 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.

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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.

Product Sales

Cost of revenue in product sales
is mainly associated with purchasing
software or its licenses, and purchasing hardware. In the year ended September
30, 2003, 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.

During fiscal year 2003, 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.

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Internet Advertising Business

Cost of revenue in our internet advertising space 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. Cost of revenue accrues after our sales agent contracts with a customer to
purchase internet advertising space.

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
hosting 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 of
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 hosting
service.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS

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As an aid to understanding our historical operating results, the following
table shows items from our statements of operations for each of the three years
ended September 30, 2001, 2002, and 2003 indicated in yen amounts and as
percentages of total revenues. Our historical operating results are not
necessarily indicative of future performance.

Year ended September 30,2001(1)
    
    
    
    
    
    2002
    
    
    
    
    
    2003(in thousands, except percentages)STATEMENTS OF OPERATIONS DATA:Revenue(2)
    
    Yen
    5,311,814
    
    
    
    100.0
    %
    
    Yen
    2,945,360
    
    
    
    100.0
    %
    
    Yen
    1,771,918
    
    
    
    100.0
    %Cost of revenue(2)
    
    
    3,391,888
    
    
    
    63.9
    %
    
    
    636,174
    
    
    
    21.6
    %
    
    
    649,620
    
    
    
    36.7
    %Gross profit
    
    
    1,919,926
    
    
    
    36.1
    %
    
    
    2,309,186
    
    
    
    78.4
    %
    
    
    1,122,298
    
    
    
    63.3
    %Operating expenses
    
    
    9,273,622
    
    
    
    174.6
    %
    
    
    978,184
    
    
    
    33.2
    %
    
    
    559,572
    
    
    
    31.6
    %(Loss) income from operations
    
    
    (7,353,696
    )
    
    
    (138.4
    )%
    
    
    1,331,002
    
    
    
    45.2
    %
    
    
    562,726
    
    
    
    31.8
    %Other income (expense), net
    
    
    (1,047,112
    )
    
    
    (19.7
    )%
    
    
    10,542
    
    
    
    0.4
    %
    
    
    (789,274
    )
    
    
    (44.5
    )%(Loss) income from continuing operations
before provision for income taxes
    
    
    (8,400,808
    )
    
    
    (158.2
    )%
    
    
    1,341,544
    
    
    
    45.5
    %
    
    
    (226,548
    )
    
    
    (12.8
    )%Provision for income taxes
    
    
    3,800
    
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    1,210
    
    
    
    (Loss) income from continuing operations
    
    
    (8,404,608
    )
    
    
    (158.2
    )%
    
    
    1,337,744
    
    
    
    45.5
    %
    
    
    (227,758
    )
    
    
    (12.9
    )%Loss from operations of discontinued
business segments
    
    
    (1,164,113
    )
    
    
    (21.9
    )%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    Yen
    (9,568,721)
    
    
    
    (180.1
    )%
    
    Yen
    1,337,744
    
    
    
    45.4
    %
    
    Yen
    (227,758)
    
    
    
    (12.9
    )%




---

|(1) |  | 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 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Revenue and Cost of revenue in Fiscal Year 2003 described above is total
revenue and total cost of revenue of Hosting services, Product sales and
Advertising and others. Revenue from Hosting services, Product
sales and Advertising and others are Yen 1,440 million, Yen 199 million
and Yen132 million, respectively. Cost of revenue for Hosting service,
Product sales and Advertising and others are Yen433 million, Yen130
million and Yen87 million, respectively.                                                                                                                                                                                                                                                                                                                                                

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.

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COST OF REVENUE. Cost of revenue increased 2.2% to Yen650 million in the
year ended September 30, 2003 from Yen 636 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
margin than DESKWING.

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.

(LOSS) 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.

(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME
TAXES. Loss from continuing operations before provision for income taxes was
Yen227 million for the year ended September 30, 2003 compared with income from
continuing operations before provision for income taxes of Yen1,342 million for
the year ended September 30, 2002.

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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.

YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO YEAR ENDED SEPTEMBER 30, 2001

REVENUE. Revenue decreased 44.6% from Yen5,312 million in the year ended
September 30, 2001 to Yen2,945 million in the year ended September 30, 2002,
mainly attributable to a decrease in the number of DESKWING subscribers.
Average revenue per subscriber for the three month periods ended June 2001,
September 2001 and December 2001 was as follows: Yen8,782 (April to June),
Yen7,643 (July to September) and Yen12,488 (October to December). The
three-month average revenue per subscriber represents three-months revenue
from DESKWING and its related services divided by the three months cumulative
subscribers. Three-months cumulative subscribers is determined by: (i)
subtracting the number of customer cancellations from the number of cumulative
subscribers as of the previous month-end, and adding to the result the number
of new subscriptions in the current month; and (ii) combining the result for
each month in the three month period. The increase in average revenue per
subscriber for three months ended December 2001 was primarily attributed to our
termination in October 2001 of the DESKWING discount campaign, as announced on
February 4, 2002. The DESKWING discount program provided discounts to certain
customers who had subscribed to DESKWING for 13 months or longer. In the year
ended September 30, 2002, all revenue was generated by DESKWING and its related
services. There were 12,864 subscribers as of September 30, 2002, a 58.8%
decrease from 31,257 subscribers as of September 30, 2001.

COST OF REVENUE. Cost of revenue decreased 81.2% to Yen636 million in the
year ended September 30, 2002 from Yen3,392 million in the year ended September
30, 2001. This substantial decline was due to factors including a decrease in
depreciation expenses of capitalized leased servers resulting from the
termination of lease contracts, which was announced by Crayfish on July 24,
2001, a decline in subscribers, a reduction in full-time personnel and a
reduction in the costs of certain operations that had been outsourced including
the elimination of Hikari Tsushins service fee. In August 2002, we outsourced
to CTW our in-house call center for DESKWING, and in September 2002, we
outsourced to GMO the administration and maintenance of servers supporting
DESKWING and related operations. Outsourcing fees incurred as a result of these
measures were included in cost of revenue for the fourth quarter of the fiscal
year ended September 30, 2002.

GROSS PROFIT. Gross profit increased 20.3% from Yen1,920 million in the
year ended September 30, 2001 to Yen2,309 million in the year ended September
30, 2002, reflecting a decrease in cost of revenue. Gross profit margin
increased from 36.1% in the year ended September 30, 2001 to 78.4% in the year
ended September 30, 2002. Gross profit and gross profit margin both increased
due to a substantial decline in cost of revenue.

OPERATING EXPENSES. Operating expenses for the year ended September 30,
2002 decreased by 89.5% from Yen9,274 million in the year ended September 30,
2001 to Yen978 million. This decrease in operating expenses was due primarily
to a reduction in research and development, selling, general and administrative
expenses, the recognition of loss on impairment of purchased intangible
servicing asset in connection with the termination in November 2000 of our
marketing

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agreement with Hikari Tsushin, and the recognition of loss on impairment
of equipment in connection with the termination of the Lease Contract with IBJ
Leasing Co., Ltd. in July 2001.

Selling, general and administrative expenses decreased by 53.0% to Yen806
million in the year ended September 30, 2002 from Yen1,714 million in the year
ended September 30, 2001. The decrease was mainly due to a reduction in the
costs of certain operations that had been outsourced and a reduction in
full-time personnel. The decrease was less than it would otherwise have been
due to the expenses incurred in defending the lawsuit described below under
LITIGATION.

As a result of increases in cancellations by subscribers, in the year
ended September 30, 2001 we recognized a loss on impairment of purchased
intangible service assets of Yen3,500 million in connection with the
termination in November 2000 of our marketing agreement with Hikari Tsushin. We
also recognized a loss on impairment of equipment of Yen2,111 million in
connection with the termination of the Lease Contract with IBJ Leasing Co.,
Ltd. in July 2001.

INCOME (LOSS) FROM OPERATIONS. As a result of factors mentioned above, we
had operating income of Yen1,331 million for the year ended September 30, 2002
compared to an operating loss of Yen7,354 million for the year ended September
30, 2001.

OTHER INCOME (EXPENSES), NET. Other income, net for the year ended
September 30, 2002 was Yen11 million, compared with other expenses, net of
Yen1,047 million for the year ended September 30, 2001. This large change
resulted from loss on devaluation of investment in an affiliate and loss on
sale and write-off of investments realized in the year 2001 and interest
expense incurred in the year 2001 related to the substantial capital lease
obligation, which terminated in July 2001. The substantial decrease in interest
income in the year ended September 30, 2002 from the year ended September 30,
2001 was mainly due to lower interest rates and substantially decreased
interest income from loans.

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME
TAXES. Income from continuing operations before provision for income taxes rose
to Yen1,342 million for the year ended September 30, 2002 compared with a loss
from continuing operations before provision for income taxes of Yen8,401
million for the year ended September 30, 2001.

PROVISIONS FOR INCOME TAXES. Since the inception of our company, we
incurred net losses for both financial accounting reporting and Japanese tax
purposes until the year of 2001 and have not recognized any tax provision
except Yen3.8 million of per-capita tax for each year. For the year ended
September 30, 2002, even though we earned net income of Yen1,342 million for
financial accounting purposes, we incurred net loss of Yen1,649 million for
Japanese tax purposes and, therefore, Yen3.8 million of per-capita tax was
provided for income tax for the year of 2002. We believe that it is more likely
than not that the deferred tax assets will not be realized so we have recorded
a full valuation allowance for these deferred tax assets.

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LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS SEGMENTS. Loss recorded from
operations of discontinued business segments was Yen1,164 million for the year
ended September 30, 2001. There was no similar reportable item for the year
ended September 30, 2002.

NET INCOME (LOSS). As a result of the above factors, net income increased
to Yen1,338 million in the year ended September 30, 2002 from a net loss of
Yen9,569 million in the year ended September 30, 2001.

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 Yen150 million in legal costs through September 30, 2001
and an additional 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 the agreement for
settlement in this litigation on June 7, 2003 (Japan Time). As a result the
defendants agreed to pay U.S. $9,000,000 in the settlement of the litigation,
of which we paid U.S.$6,625,000 into an escrow account in July 2003 for
expected future payment. 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 cash flows is as follows:

Year ended September 30,2001
    
    2002
    
    2003(1)
    
    2003(1)(in thousands)Net cash provided by (used in) operating activities
    
    Yen
    (5,506,783
    )
    
    Yen
    1,777,463
    
    
    Yen
    (217,465)
    
    
    $
    (1,952
    )Net cash provided by (used in) investing activities
    
    
    (1,592,709
    )
    
    
    203,303
    
    
    
    108,055
    
    
    
    970Net cash provided by (used in) financing activities
    
    
    (1,488,320
    )
    
    
    2,111
    
    
    
    (14,371,350
    )
    
    
    (128,972
    )Net increase (decrease) in cash equivalents
    
    
    (8,587,812
    )
    
    
    1,982,877
    
    
    
    (14,480,760
    )
    
    
    (129,954
    )




---

|(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 the light of factors
including present conditions: the size of its business at present or
anticipated future, 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 Yen14,375,200 thousand and the reduction of capital was
effective on September 9, 2003. Amount to be reduced in common stock and
additional paid-in capital were Yen7,639,106 thousand and Yen6,736,094
thousand, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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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 Yen 782 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
Yen108 million for the year ended September 30, 2003. Decrease in net cash
provided by investing activities in the year ended September 30, 2003, is
partially due to used deposits of Yen 27,092 thousand and proceeds from sales
of proper and equipment of Yen 95,585 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.

CASH FLOWS FOR YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO YEAR ENDED SEPTEMBER
30, 2001

We incurred net losses of Yen9,569 million for the year ended September
30, 2001, and earned net income of Yen1,338 million for the year ended
September 30, 2002.

Net cash used in operating activities was Yen5,507 million for the year
ended September 30, 2001, and net cash provided by operating activities was
Yen1,777 million for the year ended September 30, 2002. A large increase in net
cash provided by operating activities during the current fiscal year was the
result of having net income of Yen1,338 million in 2002 compared to a net loss
of Yen9,569 million in 2001.

Net cash used in investing activities was Yen1,593 million for the year
ended September 30, 2001, and net cash provided by investing activities was
Yen203 million for the year ended September 30, 2002. Cash provided by
investing activities in

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the year ended September 30, 2002, consisted primarily of the proceeds
from sale of investment in an affiliate (IKK) and the proceeds from sale of
investment in equity securities of Commerce Center Inc.

Net cash used in financing activities was Yen1,488 million for the year
ended September 30, 2001 and net cash provided by financing activities was Yen2
million in the year ended September 30, 2002. Cash used in financing activities
for the year ended September 30, 2001 consisted primarily of payments on
capital leases of Yen2,414 million, while cash provided from financing
activities for the year ended September 30, 2002 consisted primarily of the
exercise of stock options.

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,
2003.

Our total capital lease obligations were Yen342,000 as of September 30,
2001, and Yen203,000 as of September 30, 2002.

We had rent expense under operating leases of Yen17.5 million for the year
ended September 30, 2002 and are committed to Yen14.6 million and Yen2.1
million in the fiscal years ended September 30, 2003 and 2004, respectively.

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: Yen1,015 million,
Yen51 million and Yen0.5 million in the years ended September 30, 2001, 2002
and 2003, 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. We
expect that research and development costs in the fiscal year ending September
30, 2004 will mainly consist of software 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.

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

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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 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 the majority 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 and related services for small and
medium-sized enterprises. We had 12,864 DESKWING subscribers as of September
30, 2002, and 8,209 subscribers as of September 30, 2003. We expect the number
of subscribers to continue declining at least through the year ending September
30, 2004 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 of 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

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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.

SOFTWARE AND HARDWARE 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.

INTERNET ADVERTISING SALES.
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.

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 in April 2003, and sales of hardware in September
2003. 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 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:

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(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.

LITIGATION

We are party to securities class action litigation which may be costly to
defend and the outcome of which is uncertain and may harm our business.

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 appointed 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 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. The executed memorandum of understanding was received by Crayfish from
its litigation counsel on the morning of June 7, 2003 (Japan Time).

Pursuant to the memorandum of understanding, defendants in the class
actions, Crayfish, Hikari Tsushin, Inc., and Isao Matsushima, Crayfishs CEO at
the time of our public offering, have reached a settlement with the plaintiffs
to settle and dismiss all pending class actions for US$9,000,000. Crayfish has
entered into this settlement solely to avoid any further cost, burden or
uncertainty from the class actions, and has not acknowledged and will not
acknowledge the validity of any claims alleged by the plaintiffs. Out of
US$9,000,000, required to be paid under the memorandum of understanding,
US$6,625,000 has been paid by Crayfish and has been deposited into an escrow
account pending court approval of the settlement. Crayfish

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recorded this amount as an expense in the third quarter ended June 30,
2003. This settlement will not become final until approved by the court after
notice and hearing by the Court.

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 its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATION

We lease office space under operating lease agreement that are cancelable
by us with six months advance notice. We have paid Yen 17,493 thousand for
the year ended September 30, 2003. In addition, we lease one office equipment
of which remaining leas obligations at September 30, 2003 were Yen 53 thousand.

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.




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 EXPIRESKazuhiko Muraki
    
    Representative Director, President
and Chief Executive Officer
    
    January 15, 1977
    
    December 2004Kazuhiro Tamura
    
    Director and Chief Financial Officer
    
    July 31, 1968
    
    December 2004Masaaki Shimamura
    
    Director
    
    January 5, 1969
    
    December 2004Tatsuo Shigeta
    
    Statutory Auditor
    
    October 9, 1962
    
    December 2007Masataka Watanabe
    
    Statutory Auditor
    
    January 20, 1968
    
    December 2007Yuichiro Mori
    
    Statutory Auditor
    
    October 5, 1969
    
    December 2007Tatsumasa Komatsu
    
    Statutory Auditor
    
    July 22, 1964
    
    December 2007


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KAZUHIKO MURAKI became the president and representative director of the
Company in June 2002. He has served as non-exclusive director of Hikari
Tsushin, Inc. and director of Five Any, Inc. since June 2003. He has served as
director of Cyber Joy, Inc., HTA, Inc., and Seek, Inc. since October 2003. HTA,
Inc., Seek, Inc., Five Any, Inc. and First Charge, Inc. are affiliates of
Hikari Tsushin, Inc. He has served as the president and representative director
of GIAO Co., Ltd. since 2002. He worked three years at Hikari Tsushin, Inc. and
became General Manager of Hikari Tsushins Mobile Business Headquarters in
2000.

KAZUHIRO TAMURA became a director and Chief Financial Officer of the
Company in December 2003. He joined Crayfish Co., Ltd (Crayfish). in
November 2003 as vice president of the Administration Department. His past
work experiences include two years at Hikari Tsushin, Inc.

MASAAKI SHIMAMURA became a director of the Company in June 2002. He has
served as director of Business Partner KK (an affiliate of Hikari Tsushin,
Inc.) since June 2003. 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.

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, Inc. He has served as the
Statutory Auditor of IE Group, Inc. since April 2003, Statutory Auditor of
CalltoWeb, Inc. since November 2003, Statutory Auditor of Newton Financial
Consulting, Inc. since April 2003, Statutory Auditor of Five Any, Inc. since
November 2003, Statutory Auditor of First Charge, Inc. since June 2003,
Statutory Auditor of Seek, Inc. since October 2003, Statutory Auditor of HTA,
Inc. since October 2003, Statutory Auditor of OBM Co., Ltd. since April 2003,
and Statutory Auditor of Jay Communications, Inc. since December 2001. He
currently operates his own law office.

MASATAKA WATANABE became a statutory auditor for the Company in December
2003. He joined Hikari Tsushin, Inc. in October 1995. He has served as
Statutory Auditor of IE Group, Inc. since June 2002, Statutory Auditor of
CalltoWeb, Inc. since August 2001, Statutory Auditor of Hello Communications,
Inc. since August 2003, Statutory Auditor of Newton Financial Consulting, Inc.
since May 2002, Statutory Auditor of Five Any, Inc. since November 2001,
Statutory Auditor of GIAO Co., Ltd. since June 2003, Statutory Auditor of
Business Partner KK. since June 2002 and Statutory Auditor of Contact Center
KK. since December 2003.

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YUICHIRO MORI became a statutory auditor for the Company in December 2003.
He worked with Hikari Tsushin, Inc. since April 1997, and currently he serves
as Hikaris legal department.

TATSUMASA KOMATSU became a statutory auditor for the Company in December
2003. He served Hikari Tsushin, Inc. since October 1996, and currently serves
as general manager of the consumer satisfaction department in Hikari Tsushin,
Inc.

B. COMPENSATION.

For the year ended September 30, 2003, the aggregate compensation paid by
the Company to all our directors and statutory auditors was approximately Yen61
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 in end of 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.

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
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

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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 30,2001
    
    2002
    
    2003Fulltime
    
    
    74
    
    
    
    27
    
    
    
    30Temporary or Parttime
    
    
    34
    
    
    
    16
    
    
    
    7Total
    
    
    108
    
    
    
    43
    
    
    
    37


Note: Figures for 2002 and 2003 include employees who had been assigned to work for us
but who were still employed (seconded) by Hikari Tsushin to the Company.

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, 2003, 7 were in
administrative position, and 23 were in operating position. At September 30,
2002, 8 were in administrative positions, and 19 were in operating positions,
including administrative, marketing and product development positions. As of
September 30, 2002, of the 19 employees in operating positions, 14 had been
seconded to GMO, 5 had been seconded to CTW and 2 had been seconded to Hikari
Tsushin and its affiliate. Of the 74 fulltime employees at September 30, 2001,
12 were in administrative positions, 9 were in business development positions,
and 53 were in hosting service support positions, consisting primarily of
support positions, customer contract positions, product and planning
development positions, and customer billing 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, 2003.

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 the such rights are not granted on conditions
unfavorable to

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our shareholders. At September 30, 2002, outstanding options or warrants to
purchase a total of 684 shares were exercisable at weighted average exercise
prices per share of Yen2.5 million. The options or warrants outstanding and
currently exercisable by exercise price at September 30, 2003 were as follows
(whole amount):

Options/Warrants Outstanding
    
    Options/Warrants ExercisableWeighted Average Remaining
    
    
    
    
    
    
    
    
    
    WeightedExercise
    
    Number
    
    Contractual Life
    
    Weighted Average
    
    Number
    
    AveragePrices
    
    Outstanding
    
    (in year)
    
    Exercise Price
    
    Exercisable
    
    Exercise PriceYen 1,033,520.30
    
    
    1,632
    
    
    
    3
    
    
    Yen1,033,520.30
    
    
    1,632
    
    
    Yen1,033,520.30


Of the options and warrants outstanding described above, 1,632 options or
warrants are held by Isao Matsushima who formerly served as representative
director of the Company. The number of options or warrants and prices of this
option were adjusted in fiscal year 2003 due to issuance of stock option plan
in January 12, 2001, and cash distribution in connection with capital reduction
in September 9, 2003. No options or warrants are held by persons who currently
serve as directors, executive officers or statutory auditors of the Company.




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, 2003. 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, 2003NAME OF BENEFICIAL OWNER
    
    NUMBER
    
    PERCENTAGEHikari Tsushin, Inc. (1)
    
    
    8,369
    
    
    
    81.51Hikari Tsushin Partners L.P. (2)
    
    
    600
    
    
    
    5.84Directors and executive officers as a group
    
    
    0
    
    
    
    0




---

|(1) |  | If the shares held by Hikari Tsushin Partners, L.P., separately
identified in this table, and shares held by CalltoWeb, Inc., a wholly
owned subsidiary of Hikari Tsushin are included, Hikari Tsushin directly
or indirectly controlled 9,011 shares or 87.76% of our common stock as of
September 30, 2003. CalltoWeb owns 42 shares representing 0.41 percent.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Hikari Tsushin Partners, L.P. is a private equity fund established in the
Cayman Islands. A whollyowned subsidiary of Hikari Tsushin, Inc. is the
general partner of the fund as well as an investor in the fund.                                                                                                                                               

48



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Before a public tender offer of Hikari Tsushin was made to purchase our
shares, Hikari Tsushin owned 40.8% of our outstanding shares. As a result of a
public tender offer in Japan for our shares by Hikari Tsushin from September 5
to 25, 2001, Hikari Tsushins shareholdings increased to 6,869 shares,
representing 67.02% of our outstanding shares as of September 30, 2001. During
fiscal year 2003, Hikari Tsushin acquired 1,500 shares of Crayfishs common
stock at acquiring price of 285,000 yen per share (or closing price on August
21, 2003, Tokyo Stock Exchange Mothers). Hikari Tsushin acquired Crayfishs
common stock through Tokyo Stock Exchanges ToSTNET-.

Hikari Tsushin Partners L.P. held 600 shares, representing 5.84% of our
outstanding shares as of September 30, 2003.

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,
2003, of the 10,268 shares of common stock outstanding, 404 shares were held in
the form of ADSs, which at the then applicable conversion ratio was equal to
202,000 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 404 shares of common stock underlying the
202,000 ADSs outstanding as of September 30, 2003 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 87.76% of our
shares 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.

B. RELATED PARTY TRANSACTIONS.

Since September 30, 1999, 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

We entered into a marketing agreement with Hikari Tsushin in February,
2000, a related party owning a 67.0%, 67.0% and 81.5% interest in us as of
September 30, 2001, 2002 and 2003 respectively. Pursuant to the marketing
agreement, Hikari Tsushin marketed DESKWING and related services, processed
applications for service subscriptions, collected fees on behalf of us and
provided certain DESKWING customer support services. In exchange for providing
these services, Hikari Tsushin was entitled to a monthly commission based on
fifty percent of the DESKWING monthly subscription fee. At the end of the
month, Hikari Tsushin remitted fees collected on behalf of us net of
commissions earned. These services fees have been reflected as a component of
cost of revenue in the statements of operations.

49



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##### Table of Contents



We cancelled the foregoing agreement with Hikari Tsushin under a
termination agreement on November 1, 2000 and we paid Yen3.5 billion to Hikari
Tsushin in connection with the termination of the marketing agreement on
November 6, 2000. The amount of the payment to Hikari Tsushin was determined by
us in consultation with independent professionals who assessed the value to us
of the termination agreement and the transfer of Hikari Tsushins interest in
the DESKWING subscriber base. Under the termination agreement:



| |  |  | We received sole rights to the revenue stream from DESKWING
subscribers and are no longer required to make payments to Hikari
Tsushin in connection with those subscribers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hikari Tsushin transferred to us all rights and information relating
to the DESKWING subscriber base;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | We became able to begin providing services directly to DESKWING
subscribers and collecting subscription fees directly from subscribers;
and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We retained the right to use the Hitmail service mark, though we have
since rebranded the Hitmail Service as DESKWING.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

Also, to promote Hikari Tsushins marketing of our services, we paid
Hikari Tsushin the entire amount of the incentive discount that we received
from ITOCHU Technology, Inc. for each new customer in excess of a stated
minimum number that subscribed to our services. This arrangement was terminated
as of June 2000.

During the fiscal years ended September 30, 2000 and 2001, we had related
party transactions only with Hikari Tsushin as described above. 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 2003, we have started new businesses: product sales
business and internet advertisement business. In the product sales business,
we purchased software and PC hardware from third parties and sold these
products primarily to IE Group, Inc. and CalltoWeb, Inc. affiliates of Hikari
Tsushin, who then sold these products to small and medium sized companies. In
the internet advertisement business, we purchased internet advertising space
from enterprises that own internet advertising space and sold the advertising
space primarily to First Charge, Inc., an affiliate of Hikari Tsushin, who then
sold the advertising space to small and medium sized enterprises.

50



---



##### Table of Contents



Account balances and transactions with Hikari Tsushin and its affiliate as
of September 30, 2001, 2002 and 2003 are as follows (in thousands):

September 30,September 30,2001
    
    2002
    
    2003
    
    2003 (Note 1)Accounts balances at:Accounts receivable
    
    JPY
    
    
    
    JPY
    21,436
    
    
    JPY
    90,453
    
    
    $
    812Deposits paid
    
    
    
    
    
    
    24,751
    
    
    
    1,789
    
    
    
    16Accounts payable
    
    
    6,964
    
    
    
    9,110
    
    
    
    31,821
    
    
    
    285Other
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    7Transactions for the year ended:Sale of property and equipment
    
    
    
    
    
    
    15,326
    
    
    
    5,566
    
    
    
    50Purchase of property and
equipment
    
    
    
    
    
    
    2,483
    
    
    
    2,133
    
    
    
    19Consulting fees received
    
    
    
    
    
    
    
    
    
    
    12,924
    
    
    
    116Sales
    
    
    
    
    
    
    9,069
    
    
    
    333,767
    
    
    
    2,995Cost of sales
    
    
    
    
    
    
    
    
    
    
    52,933
    
    
    
    475Compensation received
    
    
    
    
    
    
    4,872
    
    
    
    82,373
    
    
    
    739Service fee payment
    
    
    656,949
    
    
    
    14,689
    
    
    
    24,579
    
    
    
    221Rent expense
    
    
    
    
    
    
    33,394
    
    
    
    17,635
    
    
    
    158Other general and
administrative expense
reimbursement
    
    
    10,607
    
    
    
    21,581
    
    
    
    19,250
    
    
    
    173Termination fee payment
    
    
    3,500,000
    
    
    
    
    
    
    
    
    
    
    
    Moving expenses
    
    
    
    
    
    
    7,094
    
    
    
    7,086
    
    
    
    64Other
    
    
    
    
    
    
    4,460
    
    
    
    2,712
    
    
    
    24




---

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, 2003, which was JPY
111.43 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.




ITEM 9. THE OFFER AND LISTING.

51



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ADS representing our common stock have been quoted on the Nasdaq National
Market since March 8, 2000 and our common stock has been listed on the Mothers
market of the Tokyo Stock Exchange since March 10, 2000.

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
    
    
    850,000
    
    
    
    443,000
    
    
    
    11.49
    
    
    
    7.04Quarter ended December 31, 2001
    
    
    710,000
    
    
    
    471,000
    
    
    
    11.49
    
    
    
    7.45Quarter ended March 31, 2002
    
    
    650,000
    
    
    
    530,000
    
    
    
    9.36
    
    
    
    7.04Quarter ended June 30, 2002
    
    
    600,000
    
    
    
    443,000
    
    
    
    9.32
    
    
    
    7.35Quarter ended September 30, 2002
    
    
    850,000
    
    
    
    500,000
    
    
    
    13.96
    
    
    
    7.902003
    
    
    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
    
    
    
    23.512004Quarter ended December 31, 2003 (4)
    
    
    839,000
    
    
    
    300,000
    
    
    
    32.74
    
    
    
    7.99Quarter ended March 31, 2004
(through January 31, 2003)
    
    
    540,000
    
    
    
    415,000
    
    
    
    
    
    
    
    CALENDAR YEAR 2003August
    
    
    1,550,000
    
    
    
    137,000
    
    
    
    28.26
    
    
    
    23.51September
    
    
    422,000
    
    
    
    241,000
    
    
    
    30.50
    
    
    
    24.50October
    
    
    839,000
    
    
    
    319,000
    
    
    
    32.74
    
    
    
    7.99November
    
    
    690,000
    
    
    
    430,000
    
    
    
    13.00
    
    
    
    8.20December (4)
    
    
    500,000
    
    
    
    300,000
    
    
    
    
    
    
    
    CALENDAR YEAR 2004January
    
    
    540,000
    
    
    
    415,000
    
    
    
    
    
    
    
    




---



|(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) |  | Since our initial public offering in March 2000.                                                                                                                                                                                                  
|   
|(3) |  | Fiscal year 2001 is the period between October 1, 2000 and September 30,
2001.                                                                                                                                                                    
|   
|(4) |  | The companys ADSs were delisted from NASDAQ in November 2003.                                                                                                                                                                                   




ITEM 10. ADDITIONAL INFORMATION.

A. SHARE CAPITAL.

Not applicable

B. MEMORANDUM AND ARTICLES OF ASSOCIATION.

52



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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, manufacture, sale and technical guidance of and
consulting service for computers and peripheral equipment;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Analyzing and designing computer systems;
| | - |  | -----------------------------------------



| |  |  | Training computer operating staff;
| | - |  | ----------------------------------



| |  |  | 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 and sale of books and magazines;
| | - |  | -------------------------------------------------------



| |  |  | 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 and export of systems and software for electric and
telecommunications equipment and telecommunications;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Planning, development, maintenance, consulting, education for and sale of telecommunications network systems;
| | - |  | -------------------------------------------------------------------------------------------------------------

53



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##### Table of Contents





| |  |  | Contracting for surveys and researches of telecommunications, computers and the internet;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Agency and mediation service concerning subscription for telecommunication service and broadcasting service;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Planning and designing for data communications systems, and
introduction of and guidance for operational management thereof and
agent business therefor;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sale, lease, installation and maintenance of office automation
equipment, annexed equipment, annexed material, office equipment and
officeuse products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market research and marketing research services;
| | - |  | ------------------------------------------------



| |  |  | Consulting service concerning general management; and
| | - |  | -----------------------------------------------------



| |  |  | Any and all businesses incidental to 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.

RIGHTS OF HOLDERS OF ADSS.

54



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##### Table of Contents



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.

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,
| | - |  | ----------------------------------------------------------

55



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##### Table of Contents





| |  |  | 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,
| | - |  | -------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------

56



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##### Table of Contents



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.

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.

57



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##### Table of Contents



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 Lease Contract, dated July 12, 2000, between IBJ Leasing Co.,
Ltd. (IBJ Leasing) and us, IBJ Leasing purchased from us newly purchased
equipment as well as equipment and software licenses. In turn, we rented this
equipment and licenses from IBJ Leasing. The Lease Contract was terminated
pursuant to a Lease Termination Agreement, dated July 24, 2001.

On July 24, 2001, we entered into a Lease Termination Agreement and a
Sales Agreement with IBJ Leasing Co., Ltd. pursuant to which we would terminate
the July 12, 2000 Lease Contract, return server equipment and software licenses
leased under the Lease Contract to IBJ Leasing and repurchase from IBJ Leasing
these server equipment and software licenses for Yen2,410 million (excluding
sales tax). The repurchase price of Yen2,410 million (excluding sales tax) was
paid to IBJ Leasing in lieu of paying to IBJ Leasing a lease termination
penalty of Yen2,410 million (excluding sales tax) pursuant to the Lease
Termination Agreement.

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.

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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.

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.

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.

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.

On March 12, 2003 we entered into an agreement with First Charge, Inc.
(First, and affiliate of Hikari Tsushin, Inc.) wherein First introduces to
Crayfishs customers who wish to advertise on the internet. The agreement
requires First 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.

D. EXCHANGE CONTROLS.

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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.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

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

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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.

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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



| |  |  | 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

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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,
| | - |  | --------------------



| |  |  | 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,
| | - |  | ------------------------------------------------------------------------------

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| |  |  | 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:

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| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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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 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

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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, 2002 and subsequent years and our periodic reports on
Form 6K from November 13, 2003 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.

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I. SUBSIDIARY INFORMATION.

Not applicable.




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, 2003, 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 and 2003, 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

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common stock from 5,000 ADSs representing one share of common stock to 500
ADSs representing one share of common stock.

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.




ITEM 15. CONTROLS AND PROCEDURES

A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Our chief executive officer and chief financial officer 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 chief financial officer have concluded that as
of September 30, 2003 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.

There has been no change in our internal control over financial reporting
that occurred during our fiscal year ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

B. CHANGES IN INTERNAL CONTROLS.

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.

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ITEM 16. [RESERVED]




ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Registrant is a foreign private issue 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 registrants
shareholders at the shareholders annual meeting held on December 19, 2003.
Registrants board of directors has determined that Mr. Masataka Watanabe is an
audit committee financial expert.




ITEM 16B CODE OF ETHICS

Registrant 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. Registrant 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 registrant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 registrants
shareholders, and (iii) the creation of a code of ethics would divert
registrants resources from its principal business activities.




ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES

Not applicable




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.

70



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##### Table of Contents






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
    
    


71



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##### 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 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 Chief Financial Officer pursuant to SEC Rule 13a-14(a) /
15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
    
    13
    
    Certification by President and Representative Director pursuant and Chief Financial
Officer pursuant to U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
    
    




---

|*  |  | 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.             

72



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##### Table of Contents



|***  |  | 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 

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.By
    
    /s/ Kazuhiko MurakiName: Kazuhiko MurakiTitle: President, Chief Executive Officer andRepresentative Director


Date: March 10, 2004

73



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##### Table of Contents



CRAYFISH CO., LTD.
INDEX TO FINANCIAL STATEMENTS

Page in Form 20-FIndependent Auditors Report
    
    
    F-2Balance Sheets as of September 30, 2002 and 2003
    
    
    F-3Statements of Operations for the years ended September 30, 2001, 2002 and 2003
    
    
    F-4Statements of Shareholders Equity for the years ended September 30, 2001,
2002 and 2003
    
    
    F-6Statements of Cash Flows for the years ended September 30, 2001, 2002 and 2003
    
    
    F-7Notes to the Financial Statements
    
    
    F-9


All schedules are omitted because they are not applicable or the required
information is shown
in the financial statements or the notes thereto.

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Crayfish Co., Ltd.

We have audited the accompanying balance sheets of Crayfish Co., Ltd. (a
Japanese corporation) as of September 30, 2002 and 2003 and the related
statements of operations, shareholders equity and cash flows for each of the
three years in the period ended September 30, 2003. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Crayfish Co., Ltd. as of
September 30, 2002 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2003, 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 financial statements as of and for the year ended September 30,
2003 have been translated from Japanese yen on the basis set forth in Note 3 to
the financial statements.

BDO Sanyu & Co.
Tokyo, Japan

December 19, 2003

F-2



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##### Table of Contents



CRAYFISH CO., LTD.

BALANCE SHEETS
(in thousands, except share amounts)

September 30,September 30,2002
    
    2003
    
    2003(Note 3)ASSETSCurrent assets:Cash and cash equivalents
    
    ¥
    16,412,076
    
    
    ¥
    1,931,316
    
    
    $
    17,332Time deposit in bank
    
    
    200,000
    
    
    
    200,000
    
    
    
    1,795Accounts receivable due from related parties
    
    
    21,436
    
    
    
    90,453
    
    
    
    812Accounts receivable, net of allowance for doubtful
accounts of ¥8,147 and ¥9,067 ($81) in 2002 and
2003, respectively
    
    
    14,751
    
    
    
    25,674
    
    
    
    230Deposit paid for litigation settlement
    
    
    
    
    
    
    782,081
    
    
    
    7,019Prepaid expenses and other current assets
    
    
    61,017
    
    
    
    51,708
    
    
    
    464Total current assets
    
    
    16,709,280
    
    
    
    3,081,232
    
    
    
    27,652Property and equipment, net
    
    
    159,390
    
    
    
    19,529
    
    
    
    175Deposit for subscription of equity stock
    
    
    
    
    
    
    10,000
    
    
    
    90Deposits paid
    
    
    4,630
    
    
    
    500
    
    
    
    4Deposits paid to related parties
    
    
    24,751
    
    
    
    1,789
    
    
    
    16Other assets
    
    
    16,851
    
    
    
    227
    
    
    
    2Total assets
    
    ¥
    16,914,902
    
    
    ¥
    3,113,277
    
    
    $
    27,939LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    74,160
    
    
    
    155,287
    
    
    
    1,394Accounts payable due to related parties
    
    
    9,110
    
    
    
    25,237
    
    
    
    226Consumption tax payable
    
    
    88,819
    
    
    
    
    
    
    
    Accrual for litigation settlement
    
    
    
    
    
    
    782,081
    
    
    
    7,019Deferred initial contract fees
    
    
    4,004
    
    
    
    251
    
    
    
    2Accrued liabilities and other current liabilities
    
    
    22,009
    
    
    
    32,579
    
    
    
    292Total current liabilities
    
    
    198,102
    
    
    
    995,435
    
    
    
    8,933Commitments and contingencies (Note 6)Common stockPer value: Designated value
Authorized shares: 40,996 in 2002 and 2003
Outstanding shares: 10,258 in 2002 and 10,268 in 2003
    
    
    8,060,325
    
    
    
    423,219
    
    
    
    3,798Additional paid-in capital
    
    
    6,734,094
    
    
    
    
    
    
    
    Retained earnings, since October 1, 2001
    
    
    1,922,381
    
    
    
    1,694,623
    
    
    
    15,208Total shareholders equity
    
    
    16,716,800
    
    
    
    2,117,842
    
    
    
    19,006Total liabilities and shareholders equity
    
    ¥
    16,914,902
    
    
    ¥
    3,113,277
    
    
    $
    27,939


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

F-3



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##### Table of Contents



CRAYFISH CO., LTD.

STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

September 30,2001
    
    2002
    
    2003
    
    September 30, 2003(Note 3)Revenue:Hosting service
    
    ¥
    5,295,879
    
    
    ¥
    2,933,103
    
    
    ¥
    1,420,031
    
    
    $
    12,744Hosting service to related party
    
    
    
    
    
    
    8,328
    
    
    
    20,260
    
    
    
    182Product sales to related party
    
    
    
    
    
    
    
    
    
    
    199,300
    
    
    
    1,788Advertising and other
    
    
    15,935
    
    
    
    3,188
    
    
    
    18,120
    
    
    
    162Advertising and other to related party
    
    
    
    
    
    
    741
    
    
    
    114,207
    
    
    
    1,025Total
    
    
    5,311,814
    
    
    
    2,945,360
    
    
    
    1,771,918
    
    
    
    15,901Cost of revenue:Hosting service
    
    
    3,327,955
    
    
    
    632,293
    
    
    
    432,767
    
    
    
    3,883Products sale
    
    
    
    
    
    
    
    
    
    
    130,144
    
    
    
    1,168Adverting and other
    
    
    63,933
    
    
    
    3,881
    
    
    
    86,709
    
    
    
    778Total
    
    
    3,391,888
    
    
    
    636,174
    
    
    
    649,620
    
    
    
    5,829Gross profit
    
    
    1,919,926
    
    
    
    2,309,186
    
    
    
    1,122,298
    
    
    
    10,072Operating expenses:Selling, general and administrative
    
    
    1,713,717
    
    
    
    806,258
    
    
    
    511,581
    
    
    
    4,591Research and development
    
    
    1,014,774
    
    
    
    51,031
    
    
    
    500
    
    
    
    4Loss on disposal of property and equipment
    
    
    332,452
    
    
    
    97,050
    
    
    
    23,583
    
    
    
    212Loss on impairment of property and equipment
    
    
    2,110,529
    
    
    
    
    
    
    
    
    
    
    
    Loss on termination of lease contracts
    
    
    91,616
    
    
    
    
    
    
    
    
    
    
    
    Expenses related to litigation
    
    
    150,211
    
    
    
    23,845
    
    
    
    23,908
    
    
    
    215Expenses related to business restructuring
    
    
    360,323
    
    
    
    
    
    
    
    
    
    
    
    Loss on impairment of intangible servicing
asset purchased from a related party
    
    
    3,500,000
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    9,273,622
    
    
    
    978,184
    
    
    
    559,572
    
    
    
    5,022(Loss) income from operations
    
    
    (7,353,696
    )
    
    
    1,331,002
    
    
    
    562,726
    
    
    
    5,050Other income (expenses):Interest income
    
    
    32,240
    
    
    
    2,688
    
    
    
    350
    
    
    
    3Interest expense
    
    
    (161,930
    )
    
    
    (21
    )
    
    
    (10
    )
    
    
    Expenses for litigation settlement
    
    
    
    
    
    
    
    
    
    
    (782,081
    )
    
    
    (7,019
    )Foreign exchange gain (loss), net
    
    
    24,690
    
    
    
    (3,357
    )
    
    
    235
    
    
    
    2Loss on devaluation of investment in an affiliate
    
    
    (399,377
    )
    
    
    
    
    
    
    
    
    
    
    (Loss) gain on sale and write-off of investments
    
    
    (440,000
    )
    
    
    9,975
    
    
    
    
    
    
    
    Gain on sale of investment in an affiliate
    
    
    
    
    
    
    32,646
    
    
    
    
    
    
    
    Equity in loss of an affiliate
    
    
    (73,249
    )
    
    
    
    
    
    
    
    
    
    
    Other, net
    
    
    (29,486
    )
    
    
    (31,389
    )
    
    
    (7,768
    )
    
    
    (69
    )Other (expenses) income, net
    
    
    (1,047,112
    )
    
    
    10,542
    
    
    
    (789,274
    )
    
    
    (7,083
    )(Loss) income from continuing operations
before provision for income taxes
    
    
    (8,400,808
    )
    
    
    1,341,544
    
    
    
    (226,548
    )
    
    
    (2,033
    )Provision for income taxes
    
    
    3,800
    
    
    
    3,800
    
    
    
    1,210
    
    
    
    11(Loss) income from continuing operations
    
    
    (8,404,608
    )
    
    
    1,337,744
    
    
    
    (227,758
    )
    
    
    (2,044
    )Loss from operations of discontinued
business segments
    
    
    (1,164,113
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    ¥
    (9,568,721
    )
    
    ¥
    1,337,744
    
    
    ¥
    (227,758
    )
    
    $
    (2,044
    )


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

F-4



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##### Table of Contents



CRAYFISH CO., LTD.

STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Continued)

September 30,2001
    
    2002
    
    2003
    
    September 30, 2003(Note 3)(Loss) earnings per sharePer common share basic:(Loss) income from continuing operations
    
    ¥
    (823,496.77
    )
    
    ¥
    130,460.70
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Loss from operations of discontinued business segments
    
    
    (114,061.63
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    ¥
    (937,558.40
    )
    
    ¥
    130,460.70
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Per common share diluted:(Loss) income from continuing operations
    
    ¥
    (823,496.77
    )
    
    ¥
    130,346.30
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Loss from operations of discontinued business segments
    
    
    (114,061.63
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    ¥
    (937,558.40
    )
    
    ¥
    130,346.30
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Shares used in per share calculation  basic
    
    
    10,206
    
    
    
    10,254
    
    
    
    10,263
    
    
    
    10,263diluted
    
    
    10,206
    
    
    
    10,263
    
    
    
    10,263
    
    
    
    10,263


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

F-5



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##### Table of Contents



CRAYFISH CO., LTD.

STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share data)

(AccumulatedCommon Stock
    
    Additional
    
    Deficit)
    
    
    
    
    
    
    
    
    
    TotalPaid-in
    
    Retained
    
    Legal
    
    Deferred Stock
    
    Shareholders'Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Reserve
    
    Compensation
    
    EquityBalances, September
30, 2000
    
    
    10,186
    
    
    ¥
    8,044,887
    
    
    ¥
    19,026,170
    
    
    ¥
    (1,918,398
    )
    
    ¥
    180
    
    
    ¥
    (125,599
    )
    
    ¥
    25,027,240Stock options exercised
    
    
    63
    
    
    
    13,188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,188Stock options forfeited
    
    
    
    
    
    
    
    
    
    
    (220,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (220,500
    )Deferred stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,599
    
    
    
    125,599Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,568,721
    )
    
    
    
    
    
    
    
    
    
    
    (9,568,721
    )Balances, September
30, 2001
    
    
    10,249
    
    
    
    8,058,075
    
    
    
    18,805,670
    
    
    
    (11,487,119
    )
    
    
    180
    
    
    
    0
    
    
    
    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
    
    
    
    0
    
    
    
    0
    
    
    
    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
    
    
    
    0
    
    
    
    0
    
    
    
    16,716,800Stock options exercised
    
    
    10
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Cash distribution to
shareholders as capital
reduction
    
    
    
    
    
    
    (7,639,106
    )
    
    
    (6,736,094
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,375,200
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227,758
    )
    
    
    
    
    
    
    
    
    
    
    (227,758
    )Balances, September
30, 2003
    
    
    10,268
    
    
    ¥
    423,219
    
    
    ¥
    0
    
    
    ¥
    1,694,623
    
    
    ¥
    0
    
    
    ¥
    0
    
    
    ¥
    2,117,842Balances, September
30, 2002
(Note 3)
    
    
    10,258
    
    
    $
    72,336
    
    
    $
    60,433
    
    
    $
    17,252
    
    
    $
    0
    
    
    $
    0
    
    
    $
    150,021Stock options exercised
    
    
    10
    
    
    
    18
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Cash distribution to
shareholders as capital
reduction
    
    
    
    
    
    
    (68,556
    )
    
    
    (60,451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129,007
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,044
    )
    
    
    
    
    
    
    
    
    
    
    (2,044
    )Balances, September
30, 2003
    
    
    10,268
    
    
    $
    3,798
    
    
    $
    0
    
    
    $
    15,208
    
    
    $
    0
    
    
    $
    0
    
    
    $
    19,006


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

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##### Table of Contents



CRAYFISH CO., LTD.

STATEMENTS OF CASH FLOWS
(in thousands)

September 30,September 30,2001
    
    2002
    
    2003
    
    2003 (Note 3)Cash flows from operating activities:Net (loss) income
    
    ¥
    (9,568,721
    )
    
    ¥
    1,337,744
    
    
    ¥
    (227,758
    )
    
    $
    (2,044
    )Adjustments
to reconcile net (loss) income to net cash
     (used in) provided by operating activities:Reversal of deferred stock compensation
    
    
    (94,901
    )
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    789,421
    
    
    
    136,932
    
    
    
    41,940
    
    
    
    376Allowance for doubtful accounts
    
    
    6,820
    
    
    
    1,287
    
    
    
    920
    
    
    
    8Loss on impairment and disposal of property and equipment
    
    
    2,514,891
    
    
    
    97,050
    
    
    
    23,583
    
    
    
    212Loss on termination of lease contracts
    
    
    91,616
    
    
    
    
    
    
    
    
    
    
    
    Write-off of investment in debt instrument
    
    
    254,000
    
    
    
    
    
    
    
    
    
    
    
    Loss (gain) on sale of long-term investments
    
    
    186,000
    
    
    
    (9,975
    )
    
    
    
    
    
    
    Gain on sale of investment in an affiliate, net
    
    
    
    
    
    
    (32,646
    )
    
    
    
    
    
    
    Loss on devaluation on an investment in an affiliate
    
    
    399,377
    
    
    
    
    
    
    
    
    
    
    
    Equity in loss of an affiliate
    
    
    73,249
    
    
    
    
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (55,899
    )
    
    
    (6,759
    )
    
    
    (80,860
    )
    
    
    (726
    )Prepaid expenses and other current assets
    
    
    141,475
    
    
    
    322,318
    
    
    
    9,309
    
    
    
    84Accounts payable
    
    
    (116,197
    )
    
    
    (98,063
    )
    
    
    97,404
    
    
    
    874Consumption tax payable
    
    
    
    
    
    
    88,819
    
    
    
    (88,819
    )
    
    
    (797
    )Accrued liabilities and other current liabilities
    
    
    (139,532
    )
    
    
    (58,293
    )
    
    
    10,570
    
    
    
    95Deferred initial contract fees
    
    
    9,556
    
    
    
    (5,552
    )
    
    
    (3,753
    )
    
    
    (34
    )Other assets
    
    
    2,062
    
    
    
    4,601
    
    
    
    (1
    )
    
    
    Net cash (used in) provided by operating activities
    
    
    (5,506,783
    )
    
    
    1,777,463
    
    
    
    (217,465
    )
    
    
    (1,952
    )Cash flows from investing activities:Purchase of time deposit in bank
    
    
    (200,000
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of property and equipment
    
    
    13,822
    
    
    
    10,484
    
    
    
    95,585
    
    
    
    858Purchase of property and equipment
    
    
    (542,232
    )
    
    
    (36,681
    )
    
    
    (4,622
    )
    
    
    (41
    )Investment in debt instrument
    
    
    (254,000
    )
    
    
    
    
    
    
    
    
    
    
    Deposit for subscription of equity stock
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    (90
    )Proceeds from sale of investment in an affiliate
    
    
    
    
    
    
    160,020
    
    
    
    
    
    
    
    Investment in an affiliate
    
    
    (600,000
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of investment in equity securities
    
    
    9,650
    
    
    
    43,225
    
    
    
    
    
    
    
    Purchase of investments in equity securities
    
    
    (197,000
    )
    
    
    
    
    
    
    
    
    
    
    Deposits
    
    
    177,051
    
    
    
    26,255
    
    
    
    27,092
    
    
    
    243Net cash (used in) provided by investing activities
    
    
    (1,592,709
    )
    
    
    203,303
    
    
    
    108,055
    
    
    
    970Cash flows from financing activities:Change in restricted cash
    
    
    950,000
    
    
    
    
    
    
    
    
    
    
    
    Principal payments on capital leases
    
    
    (2,414,008
    )
    
    
    (139
    )
    
    
    (150
    )
    
    
    (1
    )Repayment of long-term debt
    
    
    (37,500
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    13,188
    
    
    
    2,250
    
    
    
    4,000
    
    
    
    36Cash distribution to shareholders as capital reduction
    
    
    
    
    
    
    
    
    
    
    (14,375,200
    )
    
    
    (129,007
    )Net cash (used in) provided by financing
activities
    
    
    (1,488,320
    )
    
    
    2,111
    
    
    
    (14,371,350
    )
    
    
    (128,972
    )Net (decrease) increase in cash equivalents
    
    
    (8,587,812
    )
    
    
    1,982,877
    
    
    
    (14,480,760
    )
    
    
    (129,954
    )Cash and cash equivalents at beginning of period
    
    
    23,017,011
    
    
    
    14,429,199
    
    
    
    16,412,076
    
    
    
    147,286Cash and cash equivalents at end of period
    
    ¥
    14,429,199
    
    
    ¥
    16,412,076
    
    
    ¥
    1,931,316
    
    
    $
    17,332


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

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##### Table of Contents



CRAYFISH CO., LTD.

STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)

September 30,September 30,2001
    
    2002
    
    2003
    
    2003 (Note 3)Supplemental cash flows information:Cash transactions:Cash paid for income taxes
    
    ¥
    4,037
    
    
    ¥
    531
    
    
    ¥
    3,653
    
    
    $
    33Cash paid for interest
    
    
    82,439
    
    
    
    21
    
    
    
    10
    
    
    
    


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

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##### Table of Contents



CRAYFISH CO., LTD
NOTES TO THE FINANCIAL STATEMENTS

1. Business Organization and Restructuring

Nature of Operations

Crayfish Co., Ltd. (the Company) 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. During the current fiscal year, the Company started selling
products and providing internet advertising services (see Risk of business
concentration in Note 2).

Product sales business consists of computer software sales and hardware
sales. In the computer software sales business, the Company sells software
products primarily to affiliated companies of Hikari Tsushin Inc. (HT), a
major shareholder of the Company, who then sells these software products to
small and medium sized enterprises. The Company purchases the software from
outside software-development companies, with a requirement of customizations
suitable for the needs of its targeting 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 affiliated companies of HT.

In internet advertising services, the Company purchases and resells banner
advertisements and e-mail advertisements to third parties and an affiliated
company of HT. 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.

Discontinued Operations and Business Restructuring

(1) Background

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. Historically,
the Company had operated as three separate segments for management and
financial reporting purposes. In accordance with the Plan, the Company
discontinued its Other Hosting Services and Systems Development Services
segments, leaving only its Deskwing Hosting Services segment. In addition,
the Company terminated several ongoing research and development projects.

The Company accounted for its 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. A summary of the components of discontinued
operations is as follows (in thousands):

September 30, 2001Loss from operations
    
    ¥
    (1,026,180
    )Loss on disposal of equipment
    
    
    (71,910
    )Loss on termination of contracts with third parties
    
    
    (61,848
    )Facility expenses
    
    
    (4,175
    )Loss from discontinued segments
    
    ¥
    (1,164,113
    )


(2) Termination of lease contracts and impairment of equipment

The Company terminated a majority of its capital lease contracts, most of which
were for computer servers and their related peripherals used for discontinued
services and projects of the Deskwing segment. Upon termination, the Company
paid ¥2,414,008 thousand to settle the remaining balance of the lease
obligations and early termination penalties, and recorded a loss on termination
of ¥91,616 thousand in fiscal 2001, which was attributable to the Deskwing
segment, and is reported in continuing operations.

Prior to termination of the leases, the net book value of property subject
to the cancelled leases was ¥2,191,425 thousand, ¥2,110,529 thousand of which
was for 68 servers. Due to low actual and forecast utilization of those
severs, and high maintenance fees, the Company decided to sell the servers. In
accordance with a third party evaluation, the Company wrote down the servers to

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their estimated net realizable value of ¥80,000 thousand. As a result of the
write-down, the Company recognized an impairment loss of ¥2,110,529 thousand in fiscal 2001. See Note 6 Capitalized leases for
more information. The Company also recognized ¥404,362 thousand of additional
loss in fiscal 2001 on disposal of other property and equipment including
leased equipment other than the 68 servers. ¥71,910 thousand of these losses
related to the discontinued businesses, and the remaining balance of ¥332,452
thousand was attributable to the Deskwing segment, and was reported in
continuing operations.

(3) Termination of contracts with third parties

The Company terminated certain third party service contracts relating to
cancelled projects. In order to terminate these contracts, the Company paid
¥370,346 thousand in fiscal 2001. ¥61,848 thousand of this expense related to
the discontinued business, and the remaining balance of ¥308,498 thousand was
attributable to the Deskwing segment, and is reported in continuing operations.

(4) Personnel expenses

The Company terminated 177 full-time employees through September 30, 2001, and
recorded ¥31,000 thousand in fiscal 2001 resulting from severance paid to those
employees, which was attributable to the Deskwing segment and recorded in
continuing operations.

(5) Facility expenses

The Company rented four floors in a building used for the Companys
headquarters under a cancelable operating lease contract. In September 2001,
the Company cancelled the lease of three floors in connection with relocation
of its headquarters on December 1, 2001 and recorded ¥25,000 thousand of
clean-up expense paid to the lessor as a restructuring expense in fiscal 2001.
¥4,175 thousand of this expense related to the discontinued businesses, and the
remaining balance of ¥20,825 thousand was attributable to the Deskwing segment,
and is reported in continuing operations.

(6) 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.

2. Summary of Significant Accounting Policies

Basis of presentation

The Company maintains its records and prepares its 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 Companys functional currency. Foreign currency gains and
losses from re-measurement, which have been insignificant to date, are included
in the statements of operations.

Financial instruments

Cash equivalents are highly liquid investments with original maturities of
three months or less as of the date of purchase.

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Investments, which consist of time deposits, 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 Company to
concentrations of credit risk comprise principally cash, investments and
accounts receivable. The Company maintains its cash balances at financial
institutions and has not experienced any material losses relating to such
instruments. The Company invests its 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 Companys customer base.

Fair value of financial instruments

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 Companys balance sheet.
The estimated fair value amounts of financial instruments have been determined
by the Company 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 Company 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 Company assesses 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.

Risks and uncertainties

(1) Business concentration

As mentioned in Nature of Operations in Note 1, the Companys current main
operation is to provide e-mail hosting services (Deskwing) to small and
medium-sized businesses. The Company previously had three main revenue
generating businesses: The Deskwing hosting service, Other hosting services,
and System development services:



| |  |  | The Deskwing hosting service provides customers with e-mail addresses with
their own domain extensions.
| |  |  | -------------------------------------------------------------------------------------------------------



| |  |  | Other hosting services were based on a proprietary software operating system,
which the Company had internally developed to run its e-mail hosting and
other Internet-related applications.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | System development services generated revenue by contracting directly with
customers for the creation of Internet Web pages.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------

As discussed in Note 1, the Company concluded the Plan in the fiscal year
ended September 30, 2001 to withdraw from Other hosting services and System
development services and concentrate its resources on Deskwing and its related
services. During the fiscal year ended September 30, 2003, the Company started
product sales business and internet advertising space business. Both
businesses are still in an early stage.

(2) Cash concentration

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At September 30, 2003, the Company maintains ¥2,131 million ($19,127 thousand)
in banks including a ¥200 million ($1,795 thousand) time deposit with a
maturity of greater than three months, which represented 68.5% of total assets
of the Company. The Deposit Insurance Corporation of Japan, a government
agent, guarantees up to ¥10 million and its related unpaid interest, for time
deposits starting from April 1, 2002 and for savings and checking accounts
starting from April 1, 2005, which was originally announced to be effective
April 1, 2003. Amounts in excess of this guaranteed amount 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. At September 30, 2002
and 2003, initial contract fees of ¥4,004 thousand and ¥251 thousand ($2
thousand), respectively, were deferred.

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
contract period. For the service contract of which the contract period is more
than one month, revenue is recognized equally through the contract period.

The Company performs on-going credit evaluations of its customers
creditworthiness and does not require collateral. The Company maintains
allowances for potential credit losses and such losses have been within
managements expectations.

Allowance for doubtful accounts

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.

The fair value of the Companys stock options/warrants was estimated using a
Black-Scholes option-pricing model. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options/warrants that
have no vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions
including the expected share price volatility. Since the Companys stock
options and warrants granted to employees and directors have characteristics
significantly different from those of traded options, and because changes in
the subjective assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a
reasonable single measure of the fair value of its stock options/warrants. The
fair value of each option/warrant granted is estimated on the date of grant
using a type of Black-Scholes option-pricing model with the following
assumptions used for grants:

September 30,2001
    
    2002
    
    2003Expected volatility
    
    
    138.6
    %
    
    
    N/A
    
    
    
    N/AWeighted-average risk-free
interest rate
    
    
    0.50
    %
    
    
    N/A
    
    
    
    N/AExpected life (in years)
    
    
    2.5
    
    
    
    N/A
    
    
    
    N/AExpected dividends
    
    
    
    %
    
    
    N/A
    
    
    
    N/A


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For pro forma purposes, had compensation cost for the plan been determined
based on the fair value at the grant date for awards in 2001, 2002 and 2003
consistent with the provisions of SFAS 123, the Companys net (loss) income
would have been (in thousands, except per share data):

September 30,2001
    
    2002
    
    2003
    
    September 30, 2003(Note 3)Net (loss) incomeAs reported
    
    ¥
    (9,568,721
    )
    
    ¥
    1,337,744
    
    
    ¥
    (227,758
    )
    
    $
    (2,044
    )Pro forma
    
    
    (9,584,751
    )
    
    
    1,337,744
    
    
    
    (227,758
    )
    
    
    (2,044
    )Basic net (loss) income
per common shareAs reported
    
    ¥
    (937,558.40
    )
    
    ¥
    130,460.70
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Pro forma
    
    
    (939,128.50
    )
    
    
    130,460.70
    
    
    
    (22,192.15
    )
    
    
    (199.16
    )Diluted net (loss) income
per common shareAs reported
    
    ¥
    (937,558.40
    )
    
    ¥
    130,346.30
    
    
    ¥
    (22,192.15
    )
    
    $
    (199.16
    )Pro forma
    
    
    (939,128.50
    )
    
    
    130,346.30
    
    
    
    (22,192.15
    )
    
    
    (199.16
    )


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 2001, 2002 and 2003 were ¥437,665
thousand, ¥3,220 thousand and ¥3,810 thousand ($34 thousand), respectively.

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 periods of the years
of 2001 and 2003 presented in the statements of operations, 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, 2001 and 2003 were 594 shares and 2 shares,
respectively.

Comprehensive income

The Company accounts 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 2001, 2002 or
2003.

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.

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Reclassifications

Certain reclassifications have been made to conform to the current fiscal year
presentation. These reclassifications have 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, 2003, which was ¥111.43 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 April 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. In particular, SFAS
No. 149 clarifies under what circumstances a contract within an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 is generally effective for contracts entered into
or modified after June 30, 2003. Implementation of this FASB did not to have a
material impact on the Companys financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how certain financial instruments with
characteristics of both liabilities and equity shall be classified and
measured. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. For certain financial instruments, the
classification and measurement provisions of SFAS No. 150 have been deferred
indefinitely. The adoption of SFAS No. 150 did not have a material impact on
the Companys financial statements.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities (FIN 46), which requires the
primary beneficiary of a variable interest entitys activities to consolidate
the variable interest entity. The primary beneficiary is the party that absorbs
a majority of the expected losses and/or receives a majority of the expected
residual returns of the variable interest entitys activities.

In December 2003, the FASB revised FIN 46, delaying the effective dates for
certain entities created before February 1, 2003, and making other amendments
to clarify application of the guidance. For potential variable interest
entities other than any Special Purpose Entities (SPEs), the revised FIN 46
(FIN 46R) is now required to be applied no later than the end of the first
fiscal year or interim reporting period ending after March 15, 2004. The
original guidance under FIN 46 is still applicable, however, for all SPEs
created prior to February 1, 2003 at the end of the first interim or annual
reporting period ending after December 15, 2003. FIN 46R may be applied
prospectively with a cumulative-effect adjustment as of the date it is first
applied, or by restating previously issued financial statements with a
cumulative-effect adjustment as of the beginning of the first year restated.
FIN 46R also requires certain disclosures of an entitys relationship with
variable interest entities. We do not expect the adoption in the period ended
March 31, 2004 to have a material impact to our financial statements.

5. Balance Sheet Detail

Property and equipment, net (in thousands):

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September 30,2002
    
    2003
    
    September 30, 2003(Note 3)Office equipment
    
    ¥
    382,438
    
    
    ¥
    92,981
    
    
    $
    834Leasehold improvements
    
    
    6,334
    
    
    
    3,062
    
    
    
    27Purchased software
    
    
    15,854
    
    
    
    17,946
    
    
    
    161404,626
    
    
    
    113,989
    
    
    
    1,022Less: Accumulated
depreciation and
amortization
    
    
    (245,236
    )
    
    
    (94,460
    )
    
    
    (847
    )Property and equipment, net
    
    ¥
    159,390
    
    
    ¥
    19,529
    
    
    $
    175


Property and equipment held for sale of ¥16,088 thousand at September 30, 2002,
was included in other assets on the balance sheets.

Depreciation and amortization expense for the years of 2001, 2002 and 2003
was ¥789,421 thousand, ¥136,932 thousand and ¥41,940 thousand ($376 thousand),
respectively. Included in depreciation and amortization expense is
depreciation expense relating to assets subject to capital leases of ¥550,470
thousand, ¥74 thousand and none for the years of 2001, 2002 and 2003,
respectively.

Accrued liabilities (in thousands):

September 30,2002
    
    2003
    
    September 30, 2003(Note 3)Compensated absences
    
    ¥
    8,872
    
    
    ¥
    12,132
    
    
    $
    109Bonuses
    
    
    7,014
    
    
    
    9,199
    
    
    
    82Other
    
    
    5,920
    
    
    
    8,864
    
    
    
    80Total accrued liabilities
    
    ¥
    21,806
    
    
    ¥
    30,195
    
    
    $
    271


6. Commitments and Contingencies

Capitalized leases

The Company had leased certain servers and office equipment under capital lease
agreements. In accordance with the Plan discussed in Note 1, in July 2001, the
Company terminated its lease contract with IBJ leasing Co., Ltd. for 68 severs
used for the Deskwing hosting services. In addition, principally all other
capital leases of office equipment were also terminated between July 2001 and
September 2001. Upon termination, the Company paid ¥2,414,008 thousand to
settle the remaining balance of the lease obligations of ¥2,322,393 thousand,
net of ¥517,452 thousand of prepaid lease payments, and early termination
penalties of ¥91,616 thousand. These amounts were recorded as a loss on
termination of lease contracts in the year 2001.

Leased assets consist of only office equipment with a carrying value of
¥74 thousand at September 30, 2001, which was fully depreciated as of September
30, 2002. The related remaining lease obligations at September 30, 2002 and
2003 were ¥203 thousand and ¥53 thousand ($0.5 thousand), respectively. This
obligation is repayable through January, 2004.

Operating leases

In connection with relocation of the Companys headquarters on December 1, 2001
discussed in Note 1, the Company canceled the former office leases and 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 current fiscal
year, the Company cancelled three lease contracts and entered to a one-year
office lease contract. 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 2001, 2002
and 2003 were ¥123,173 thousand, ¥17,488 thousand and ¥17,493 thousand, ($157
thousand), respectively.

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The minimum rental assuming no cancellation on operating lease payments
that have initial lease terms in excess on one year as of September 30, 2003
are as follows:

Year ending September 30 (in thousands):2004
    
    ¥
    11,534
    
    
    $
    1042005
    
    
    11,534
    
    
    
    104Total minimum future rentals
    
    ¥
    23,068
    
    
    $
    208


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 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
appointed 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.

The Company 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. The executed memorandum of understanding was received by the
Company from its litigation counsel on the morning of June 7, 2003 (Japan
Time).

Pursuant to the memorandum of understanding, defendants in the class
actions, Crayfish, Hikari Tsushin, Inc., and Isao Matsushima, the Companys CEO
at the time of the Companys public offering, have reached a settlement with
the plaintiffs to settle and discontinue all pending class actions for $9,000
thousand. Out of $9,000 thousand, $6,625 thousand, or ¥782,081 thousand has
been paid by the Company into an escrow account for expected future payment.
This settlement will not become final until approved by the Court after notice
and hearing by the Court.

As of September 30, 2003, the Company was not engaged in any guarantee
activities under FIN 45.

7. Investments

Investment in equity securities

The Company had invested ¥33,250 thousand in non-marketable equity securities,
all of which were sold in December 2001 for ¥43,225 thousand. The Company
recognized ¥9,975 thousand in gain on sale of the security, which is presented
as gain on sale and write-off of investment in the section of other income in
the statements of operations. As of September 30, 2002, the Company had no
investment in equity securities. At September 29, 2003, the Company deposited
¥10 million ($90 thousand) for an equity stock subscription of Cyber Joy Inc.,
a newly incorporated subsidiary at October 1, 2003, wholly owned by the
Company. Cyber Joy Inc. is the Companys sales agent for internet advertising
business.

Investment
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,

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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 Related Parties

Termination fee paid to Hikari Tsushin, Inc.

In February 2000, the Company entered into a marketing agreement with HT, the
Companys principal shareholder owing a 67.0%, 67.0% and 81.5% interest in the
Company as of September 30, 2001, 2002 and 2003, respectively. Pursuant to the
marketing agreement, HT marketed Deskwing and related services, and processed
applications for service subscriptions, collected fees on behalf of the Company
and provided certain Deskwing customer support services. In exchange for
providing these services, HT was entitled to a monthly commission based on
fifty percent of the Deskwing monthly subscription fee. At the end of each
month, HT remitted fees collected on behalf of the Company net of commissions
earned. These service fees have been reflected as a component of cost of
revenue in the statements of operations.

On November 1, 2000, the Company paid HT ¥3.5 billion to terminate the
foregoing agreement. The amount paid under the termination agreement was based
on an independent valuation of the fair value of the expected future net
revenues to be received by HT under the agreement. The expected future
revenues were based on terms then in effect with customers, and on estimated
projected cancellation rates. Subsequent to termination of the agreement,
actual cancellation rates increased significantly from those projected, and the
Company implemented a 50% reduction in the monthly fee charged for its Deskwing
hosting service. Accordingly, the ¥3.5 billion termination payment has been
reflected as operating expenses in fiscal 2001 in the statements of operations.

Transactions with HT and its subsidiaries

During the fiscal years ended September 30, 2001, the Company had related party
transactions with only HT. During the fiscal years ended September 30, 2002
and 2003, the Company had transactions with four and eight subsidiaries of HT
in addition to HT, respectively. Account balances and transactions with HT and
its subsidiaries are as follows (in thousands):

September 30,
    
    September 30,20032001
    
    2002
    
    2003
    
    (Note 3)Accounts receivable
    
    ¥
    
    
    
    ¥
    21,436
    
    
    ¥
    90,453
    
    
    $
    812Deposits paid
    
    
    
    
    
    
    24,751
    
    
    
    1,789
    
    
    
    16Accounts payable
    
    
    6,964
    
    
    
    9,110
    
    
    
    31,821
    
    
    
    285Other
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    7Transactions for the year ended:Sale of property and equipment
    
    
    
    
    
    
    15,326
    
    
    
    5,566
    
    
    
    50Purchase of property and
equipment
    
    
    
    
    
    
    2,483
    
    
    
    2,133
    
    
    
    19Consulting fees received
    
    
    
    
    
    
    
    
    
    
    12,924
    
    
    
    116Sales
    
    
    
    
    
    
    9,069
    
    
    
    333,767
    
    
    
    2,995Cost of sales
    
    
    
    
    
    
    
    
    
    
    52,933
    
    
    
    475Compensation received
    
    
    
    
    
    
    4,872
    
    
    
    82,373
    
    
    
    739Service fee payment
    
    
    656,949
    
    
    
    14,689
    
    
    
    24,579
    
    
    
    221Rent expense
    
    
    
    
    
    
    33,394
    
    
    
    17,635
    
    
    
    158Other general and
administrative expense
reimbursement
    
    
    10,607
    
    
    
    21,581
    
    
    
    19,250
    
    
    
    173Termination fee payment
    
    
    3,500,000
    
    
    
    
    
    
    
    
    
    
    
    Moving expenses
    
    
    
    
    
    
    7,094
    
    
    
    7,086
    
    
    
    64Other
    
    
    
    
    
    
    4,460
    
    
    
    2,712
    
    
    
    24


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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. Legal earnings reserve is included in
retained earnings in the accompanying consolidated financial statements. At
September 30, 2002 and 2003, the legal earnings reserve included in retained
earnings was none.

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
($129,007 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 ($67,268 thousand) and ¥6,879,560 thousand ($61,739
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 ($68,556 thousand) and ¥6,736,094 thousand ($60,451
thousand), respectively.

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. As a result of the reduction of capital effective on
September 9, 2003, the exercise price per share was reduced to ¥1,033,520

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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. The
following is a summary of option/warrant activity (whole amounts):

WeightedAverage
    
    Options/WarrantsNumber of
    
    Exercise PriceShares
    
    Per Share
    
    Price Range
    
    Per ShareOutstanding at September 30, 2000
    
    
    1,199
    
    
    ¥
    2,443,688
    
    
    ¥
    62,500
    
    
    ¥
    3,776,250Options/warrants granted
    
    
    333
    
    
    
    400,000
    
    
    
    400,000
    
    
    
    400,000Options/warrants exercised
    
    
    (63
    )
    
    
    209,325
    
    
    
    62,500
    
    
    
    250,000Options/warrants canceled
    
    
    (720
    )
    
    
    1,898,196
    
    
    
    250,000
    
    
    
    3,776,250Outstanding 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
    
    
    ¥
    1,033,520


At September 30, 2001 and 2002, 685 and 684 option/warrants were exercisable
at weighted average exercise prices per share of ¥2.5 million and ¥2.5 million,
respectively. At September 30, 2003, all stock options the Company had granted
were cancelled or exercised and no more stock options outstanding existed, and
1,632 warrants were exercisable at exercise prices per share of ¥1,034 thousand
($9.3 thousand).

11. Income Taxes

The provision for income taxes consisted of the following components (in
thousands):

September 30,September 30,2001
    
    2002
    
    2003
    
    2003 (Note 3)Current
    
    ¥
    3,800
    
    
    ¥
    3,800
    
    
    ¥
    1,210
    
    
    $
    11Deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision for income taxes
    
    ¥
    3,800
    
    
    ¥
    3,800
    
    
    ¥
    1,210
    
    
    $
    11


The aggregate statutory income tax rate used for calculation of deferred income
tax assets and liabilities was 42.05% for each of three years in the period
ended September 30, 2003. Effective for years commencing on October 1, 2004 or
later, according to the revised local tax law, income tax rates for enterprise
taxes was reduced as a result of introducing the assessment by estimation on
the basis of 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% at September 30, 2003.

As a result of this change, deferred tax assets decreased by ¥137,596
thousand ($1,235 thousand) compared with what would have been recorded under
the provisions of local tax law. Provision for deferred income taxes were not
affected by this change.

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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 2001, 2002 and 2003 is as follows (in thousands):

September 30,September 30,2001
    
    2002
    
    2003
    
    2003 (Note 3)Amount computed by using
normal Japanese statutory
tax rate
    
    ¥
    (4,022,049
    )
    
    ¥
    564,119
    
    
    ¥
    (95,263
    )
    
    $
    (855
    )Increase (decrease) in
taxes resulting from:Expenses not deductible
for tax purposes
    
    
    2,390
    
    
    
    1,603
    
    
    
    1,028
    
    
    
    9Increase (decrease) in
deferred tax asset
valuation allowance
    
    
    4,019,705
    
    
    
    (565,804
    )
    
    
    (41,142
    )
    
    
    (369
    )Effect of tax rate change
    
    
    
    
    
    
    
    
    
    
    137,596
    
    
    
    1,235Per-capita levy
    
    
    3,800
    
    
    
    3,800
    
    
    
    1,210
    
    
    
    11Others-net
    
    
    (46
    )
    
    
    82
    
    
    
    (2,219
    )
    
    
    (20
    )Income taxes as reported
    
    ¥
    3,800
    
    
    ¥
    3,800
    
    
    ¥
    1,210
    
    
    $
    11


The significant components of deferred income tax assets and liabilities at
September 30, 2001, 2002 and 2003 were as follows (in thousands):

September 30,September 30,2002
    
    2003
    
    2003 (Note 3)Deferred tax assets:Operating loss carry-forwards
    
    ¥
    4,433,360
    
    
    ¥
    3,971,293
    
    
    $
    35,639Loss on impairment of equipment not deductible
for tax purposes
    
    
    2,683
    
    
    
    
    
    
    
    Expense for litigation settlement not deductible for
tax purposes
    
    
    
    
    
    
    328,865
    
    
    
    2,951Depreciation in excess of tax deductible amount
    
    
    35,645
    
    
    
    39,352
    
    
    
    353Write-off of accounts receivable in excess of tax
deductible amount
    
    
    17,317
    
    
    
    106,128
    
    
    
    953Allowance for doubtful accounts in excess of tax
deductible amount
    
    
    4,147
    
    
    
    3,850
    
    
    
    35Other
    
    
    1,023
    
    
    
    3,544
    
    
    
    31Gross deferred tax assets
    
    
    4,494,174
    
    
    
    4,453,032
    
    
    
    39,962Less:Valuation allowance
    
    
    (4,494,174
    )
    
    
    (4,453,032
    )
    
    
    (39,962
    )Net deferred tax assets
    
    ¥
    
    
    
    ¥
    
    
    
    $
    


Operating loss carry-forwards for tax purposes at September 30, 2003 amounted
to approximately ¥9,760 million ($87,589 thousand) which is available to
offset future taxable income. Approximately ¥1,469 million, ¥6,642 million
and ¥1,649 million of operating loss carry-forwards will expire in the
periods ending September 30, 2005, 2006 and 2007, respectively, unless
utilized prior to that date. A full valuation allowance has been recorded
due to the uncertainty whether the deferred tax asset will be realized.

The net changes in the valuation allowance for deferred tax assets
during the years of 2002 and 2003 were decrease of ¥565,804

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thousand and
¥41,142 thousand ($369 thousand), respectively.

12. Segment Information

As mentioned in Risk of business concentration in the Note 2, the Company
had three reportable segments: Deskwing, Other Hosting service, and System
Development services, as reviewed by the Companys management. All product
segments used common assets and management did not review this information
separately. The Company has changed its business strategy in accordance with
the Plan, and as discussed in Note 1, the Company now engages in two new
businesses: product sales business and internet advertising space business,
besides Deskwing and its related services. These newly introduced businesses
are not considered separate reportable segments since management does not
review discrete financial information for these businesses other than
revenues and product costs. All of the Companys operations are conducted in
Japan.

13. Subsequent Event

Board
of Directors, at a meeting held on August 22, 2003, resolved to delist
from NASDAQ and terminate its American Depositary Shares (ADR) program
effective on November 24, 2003.

F-21



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##### 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)
    
    






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##### Table of Contents



EXHIBIT
    
    DESCRIPTION
    
    PAGE4.12
    
    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 Registrant
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 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 Chief Financial Officer pursuant to SEC Rule 13a-14(a) /
15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
    
    13
    
    Certification by President and Representative Director pursuant and Chief Financial
Officer pursuant to U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
    
    






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|*    |  | 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.