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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON 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, 2002

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)



|                                                     |  |                                                                                                                           
|---------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------
|JAPAN(Jurisdiction of Incorporation or Organization) |  | HIKARI BLDG., 6TH FLOOR 16-13,
IKEBUKURO 2-CHOME
TOSHIMA-KU, TOKYO 171-0014 JAPAN
(Address of Principal Executive Offices)

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

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

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

(1) COMMON STOCK (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, 2002, 10,258 shares of common stock were outstanding,
comprised of 9,810 Shares and 224,000 ADSs (equivalent to 448 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]                                                                  
|PART III                                          
|                                                   | ITEM 17. FINANCIAL STATEMENTS                                                        
|                                                   | ITEM 18. FINANCIAL STATEMENTS                                                        
|                                                   | ITEM 19. EXHIBITS                                                                    
|EXHIBIT INDEX                                     
|SIGNATURES                                        
|Articles of Incorporation                         
|Regulations of the Board of Directors             
|Regulations of the Boards of Corporate Auditors   
|Outsourcing Agreement Dated August 1, 2002        
|Outsourcing Fee Agreement Dated August 1, 2002    
|Amendment to Outsourcing Agreements               
|Basic Outsourcing Agreement Dated Sep. 30, 2002   
|Outsourcing Fee Agreement dated September 30, 2002
|Outsourcing and Fee Agreement Amendment Nov30,2002
|Sales Agreement dated October 31, 2002            
|Lease Agreement dated September 30, 2002          
|Amendment of Basic Outsourcing Agreement          
|Description of American Depositary Receipts       



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TABLE OF CONTENTS

|                           |  |                                                                              |  |   
|-------------------------- |  | ---------------------------------------------------------------------------- |  | --
|Forward-looking Statements |  | PAGE                                                                        
|                           |  |                                                                             
|                           |  | PART I                                                                       |  |   
|Item 1.                    |  | Identity of Directors, Senior Management and Advisers                        |  | 3 
|Item 2.                    |  | Offer Statistics and Expected Timetable                                      |  | 3 
|Item 3.                    |  | Key Information                                                              |  | 3 
|Item 4.                    |  | Information on the Company                                                   |  | 16
|Item 5.                    |  | Operating and Financial Review and Prospects                                 |  | 24
|Item 6.                    |  | Directors, Senior Management and Employees                                   |  | 38
|Item 7.                    |  | Major Shareholders and Related Party Transactions                            |  | 42
|Item 8.                    |  | Financial Information                                                        |  | 46
|Item 9.                    |  | The Offer and Listing                                                        |  | 46
|Item 10.                   |  | Additional Information                                                       |  | 47
|Item 11.                   |  | Quantitative and Qualitative Disclosures About Market Risk                   |  | 62
|Item 12.                   |  | Description of Securities Other than Equity Securities                       |  | 63
|                           |  | PART II                                                                      |  |   
|Item 13.                   |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 63
|Item 14.                   |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 63
|Item 15.                   |  | Controls and Procedures                                                      |  | 63
|Item 16.                   |  | [Reserved]                                                                   |  | 64
|                           |  | PART III                                                                     |  |   
|Item 17.                   |  | Financial Statements                                                         |  | 64
|Item 18.                   |  | Financial Statements                                                         |  | 64
|Item 19.                   |  | Exhibits                                                                     |  | 64

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:

2



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| |  | 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.













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, 1998, 1999, 2000, 2001 and 2002 and the balance sheet data as of
September 30, 1998, 1999, 2000, 2001 and 2002 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, 2000, 2001 and 2002 and the U.S.
GAAP balance sheet data as of September 30, 2000, 2001 and 2002 were audited by
BDO Sanyu & Co., independent accountants. U.S. GAAP statements of operations
data for the years ended September 30, 2000, 2001 and 2002 and balance sheet
data as of September 30, 2001 and 2002 are included in

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our financial statements and related notes beginning on page F-1.

The results of operations for the years of 1998, 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.

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, 1998, 1999, 2000, and 2001 below.

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

|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |       |   |          |   | 
|-------------------------------------------------------------------------- | ------------------- | ----------------------- | --------------------------------------- | --------------------------------------------------------------- | - | -------------------------------------------------------------------------- | -------- | ------- | - | ----------- | ---------- | --------- | - | ----------- | ---------- | --------- | - | ----------- | ----------- | ------- | - | ---------- | ------ | ----- | - | -------- | - | 
|                                                                           |                     |                         |                                         |                                                                 |   | Year ended September 30,                                                  
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                           
|                                                                           |                     |                         |                                         |                                                                 |   | 1998(1)                                                                    |          | 1999(1) |   | 2000(1)     |            | 2001(2)   |   | 2002        |            | 2002     
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |          
|                                                                           |                     |                         |                                         |                                                                 |   | (in thousands of yen and U.S. dollars, except share and per share amounts)
|Revenue                                                                    |                     | ¥                       | 4,743                                   |                                                                 |   | ¥                                                                          | 811,687  |         |   | ¥           | 6,728,865  |           |   | ¥           | 5,311,814  |           |   | ¥           | 2,945,360   |         |   | $          | 24,194 |      
|                                                                           | Cost of revenue (3) |                         |                                         | 14,166                                                          |   |                                                                            |          | 796,212 |   |             |            | 5,653,051 |   |             |            | 3,391,888 |   |             |             | 636,174 |   |            |        | 5,226 |  
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|Gross profit                                                               |                     |                         | (9,423                                  | )                                                               |   |                                                                            | 15,475   |         |   |             | 1,075,814  |           |   |             | 1,919,926  |           |   |             | 2,309,186   |         |   |            | 18,968 |      
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|Operating expenses (3)                                                     |                     |                         | 1,610                                   |                                                                 |   |                                                                            | 448,929  |         |   |             | 2,079,134  |           |   |             | 9,273,622  |           |   |             | 978,184     |         |   |            | 8,035  |      
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|(Loss) income from operations                                              |                     |                         | (11,033                                 | )                                                               |   |                                                                            | (433,454 | )       |   |             | (1,003,320 | )         |   |             | (7,353,696 | )         |   |             | 1,331,002   |         |   |            | 10,933 |      
|Other income (expense), net                                                |                     |                         | 1,124                                   |                                                                 |   |                                                                            | (19,090  | )       |   |             | 7,665      |           |   |             | (1,047,112 | )         |   |             | 10,542      |         |   |            | 87     |      
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|(Loss) income from continuing operations
before provision for income taxes |                     |                         | (9,909                                  | )                                                               |   |                                                                            | (452,544 | )       |   |             | (995,655   | )         |   |             | (8,400,808 | )         |   |             | 1,341,544   |         |   |            | 11,020 |      
|Provision for income taxes                                                 |                     |                         | 1,009                                   |                                                                 |   |                                                                            | 2,981    |         |   |             | 3,800      |           |   |             | 3,800      |           |   |             | 3,800       |         |   |            | 31     |      
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|(Loss) income from continuing operations                                   |                     |                         | (10,918                                 | )                                                               |   |                                                                            | (455,525 | )       |   |             | (999,455   | )         |   |             | (8,404,608 | )         |   |             | 1,337,744   |         |   |            | 10,989 |      
|Gain (loss) from operations of
discontinued business segments              |                     |                         | 8,955                                   |                                                                 |   |                                                                            | 99,786   |         |   |             | (542,129   | )         |   |             | (1,164,113 | )         |   |             |            |         |   |            |       |      
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|Net (loss) income                                                          |                     | ¥                       | (19,873                                 | )                                                               |   | ¥                                                                          | (355,739 | )       |   | ¥           | (1,541,584 | )         |   | ¥           | (9,568,721 | )         |   | ¥           | 1,337,744   |         |   | $          | 10,989 |      
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|(Loss) earnings per share                                                  |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      
|                                                                           |                     | Per common share basic: |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |       |   |         
|                                                                           |                     |                         | (Loss) income from continuing
operation |                                                                 | ¥ | (8,523                                                                     | )        |         | ¥ | (100,958.55 | )          |           | ¥ | (106,859.30 | )          |           | ¥ | (823,496.77 | )           |         | ¥ | 130,460.70 |        |       | $ | 1,071.63 |  
|                                                                           |                     |                         |                                         | (Loss) income from operations of
discontinued business segments |   |                                                                            | (6,991   | )       |   |             | 22,115.69  |           |   |             | (57,963.11 | )         |   |             | (114,061.63 | )       |   |            |       |       |   |          |  | 
|                                                                           |                     |                         |                                         |                                                                 |   |                                                                            |          |         |   |             |            |           |   |             |            |           |   |             |             |         |   |            |        |      

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|                                       |                           |  |                                                                 |                   |   |                          |         |         |   |             |            |         |   |             |             |      |   |             |             |   |   |            |            |  |   |          |          | 
|-------------------------------------- | ------------------------- |  | --------------------------------------------------------------- | ----------------- | - | ------------------------ | ------- | ------- | - | ----------- | ---------- | ------- | - | ----------- | ----------- | ---- | - | ----------- | ----------- | - | - | ---------- | ---------- |  | - | -------- | -------- | 
|                                       |                           |  |                                                                 |                   |   | Year ended September 30,
|                                       |                           |  |                                                                 |                   |   |                         
|                                       |                           |  |                                                                 |                   |   | 1998(1)                  |         | 1999(1) |   | 2000(1)     |            | 2001(2) |   | 2002        |             | 2002
|                                       |                           |  |                                                                 |                   |   |                          |         |         |   |             |            |         |   |             |             |     
|                                       |                           |  | Net (loss) income                                               |                   | ¥ | (15,514                  | )       |         | ¥ | (78,842.86  | )          |         | ¥ | (164,822.41 | )           |      | ¥ | (937,558.40 | )           |   | ¥ | 130,460.70 |            |  | $ | 1,071.63 |         
|                                       |                           |  |                                                                 |                   |   |                          |         |         |   |             |            |         |   |             |             |      |   |             |             |   |   |            |            | 
|                                       | Per common share diluted: |  |                                                                 |                   |   |                          |         |         |   |             |            |         |   |             |             |      |   |             |             |   |   |            |            |  |  
|                                       |                           |  | (Loss) income from continuing
operation                         |                   | ¥ | (8,523                   | )       |         | ¥ | (100,958.55 | )          |         | ¥ | (106,859.30 | )           |      | ¥ | (823,496.77 | )           |   | ¥ | 130,346.30 |            |  | $ | 1,070.69 |         
|                                       |                           |  | (Loss) income from operations of
discontinued business segments |                   |   | (6,991                   | )       |         |   | 22,115.69   |            |         |   | (57,963.11  | )           |      |   | (114,061.63 | )           |   |   |           |            |  |   |         |         
|                                       |                           |  |                                                                 |                   |   |                          |         |         |   |             |            |         |   |             |             |      |   |             |             |   |   |            |            | 
|                                       |                           |  |                                                                 | Net (loss) income |   | ¥                        | (15,514 | )       |   | ¥           | (78,842.86 | )       |   | ¥           | (164,822.41 | )    |   | ¥           | (937,558.40 | ) |   | ¥          | 130,346.30 |  |   | $        | 1,070.69 | 
|Shares
used in per share calculation  |                           |  |                                                                 |                   |   |                          |         |         |   |             |            |         |   |             |             |      |   |             |             |   |   |            |            | 
|                                       |                           |  |                                                                 | basic             |   |                          | 1,281   |         |   |             | 4,512      |         |   |             | 9,353       |      |   |             | 10,206      |   |   |            | 10,254     |  |   |          | 10,254   | 
|                                       |                           |  |                                                                 | diluted           |   |                          | 1,281   |         |   |             | 4,512      |         |   |             | 9,353       |      |   |             | 10,206      |   |   |            | 10,263     |  |   |          | 10,263   | 



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|(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 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 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 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.
|   
|(3) |  | Service fees paid to 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,                   
|                           |  |                                       
|                           |  | 1998                                   |         | 1999 |  | 2000 |           | 2001 |  | 2002 |            | 2002
|                           |  |                                        |         |      |  |      |           |      |  |      |            |     
|                           |  | (in thousands of yen and U.S. dollars)
|Cash and cash equivalents  |  | Yen                                    | 111,702 |      |  | Yen  | 4,179,770 |      |  | Yen  | 23,017,011 |      |  | Yen | 14,429,199 |  |  | Yen | 16,412,076 |  |  | $ | 134,813    | 
|Total assets               |  |                                        |         |      |  |      | 232,073   |      |  |      |            |      |  |     | 6,282,423  |  |  |     |            |  |  |   | 27,673,791 |  |  |  |  |  |  |  | 15,609,662 |  |  |  |  |  |  |  | 16,914,902 |  |  |  | 138,943 | 
|Total shareholders equity |  |                                        |         |      |  |      | 74,401    |      |  |      |            |      |  |     | 4,142,249  |  |  |     |            |  |  |   | 25,027,240 |  |  |  |  |  |  |  | 15,376,806 |  |  |  |  |  |  |  | 16,716,800 |  |  |  | 137,316 | 

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JAPANESE GAAP FINANCIAL DATA

The statements of operations data below for the fiscal years ended
September 30, 1998, 1999, 2000, 2001 and 2002 and the balance sheet audited
data as of September 30, 1998, 1999, 2000, 2001 and 2002 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.

SELECTED OPERATIONS DATA (Japan GAAP):

|                                                |  |                                        |         |  |  |      |           |      |  |      |            |      |  |      |            |      |  |     |           |  |  |   |            |   |  |  |  |  |  |  |            |   |  |  |  |  |  |  |           |   |  |  |           |  
|----------------------------------------------- |  | -------------------------------------- | ------- |  |  | ---- | --------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- | ---- |  | --- | --------- |  |  | - | ---------- | - |  |  |  |  |  |  | ---------- | - |  |  |  |  |  |  | --------- | - |  |  | --------- | -
|                                                |  | Year ended September 30,              
|                                                |  |                                       
|                                                |  |                                        |         |  |  | 1998 |           | 1999 |  | 2000 |            | 2001 |  | 2002 |            | 2002
|                                                |  |                                        |         |  |  |      |           |      |  |      |            |      |  |      |            |     
|                                                |  | (in thousands of yen and U.S. dollars)
|Total revenue                                   |  | Yen                                    | 277,685 |  |  | Yen  | 1,137,942 |      |  | Yen  | 6,822,669  |      |  | Yen  | 5,416,939  |      |  | Yen | 2,939,808 |  |  | $ | 24,148.25  |  
|Total cost of revenue                           |  |                                        |         |  |  |      | 151,884   |      |  |      |            |      |  |      | 645,177    |      |  |     |           |  |  |   | 2,311,013  |   |  |  |  |  |  |  | 2,842,794  |   |  |  |  |  |  |  | 630,264   |   |  |  | 5,177.13  |  
|                                                |  |                                        |         |  |  |      |           |      |  |      |            |      |  |      |            |      |  |     |           |  |  |   |            |   |  |  |  |  |  |  |            |   |  |  |  |  |  |  |           |   |  |  |           |  
|Gross profit                                    |  |                                        |         |  |  |      | 125,801   |      |  |      |            |      |  |      | 492,765    |      |  |     |           |  |  |   | 4,511,656  |   |  |  |  |  |  |  | 2,574,145  |   |  |  |  |  |  |  | 2,309,544 |   |  |  | 18,971.12 |  
|Selling, general and
administrative expenses    |  |                                        |         |  |  |      | 125,208   |      |  |      |            |      |  |      | 839,567    |      |  |     |           |  |  |   | 5,820,002  |   |  |  |  |  |  |  | 4,751,197  |   |  |  |  |  |  |  | 803,595   |   |  |  | 6,600.91  |  
|                                                |  |                                        |         |  |  |      |           |      |  |      |            |      |  |      |            |      |  |     |           |  |  |   |            |   |  |  |  |  |  |  |            |   |  |  |  |  |  |  |           |   |  |  |           |  
|Operating profit (loss)                         |  |                                        |         |  |  |      | 593       |      |  |      |            |      |  |      | (346,802   | )    |  |     |           |  |  |   | (1,308,346 | ) |  |  |  |  |  |  | (2,177,052 | ) |  |  |  |  |  |  | 1,505,949 |   |  |  | 12,370.21 |  
|Other income (expense), net                     |  |                                        |         |  |  |      | 1,549     |      |  |      |            |      |  |      | (40,236    | )    |  |     |           |  |  |   | (635,228   | ) |  |  |  |  |  |  | (127,470   | ) |  |  |  |  |  |  | (60,104   | ) |  |  | (493.71   | )
|Special income (loss), net                      |  |                                        |         |  |  |      | (532      | )    |  |      |            |      |  |      | (988       | )    |  |     |           |  |  |   | (7,058     | ) |  |  |  |  |  |  | (7,499,090 | ) |  |  |  |  |  |  | (104,116  | ) |  |  | (855.23   | )
|                                                |  |                                        |         |  |  |      |           |      |  |      |            |      |  |      |            |      |  |     |           |  |  |   |            |   |  |  |  |  |  |  |            |   |  |  |  |  |  |  |           |   |  |  |           |  
|Income (loss) before
provision for income taxes |  |                                        |         |  |  |      | 1,610     |      |  |      |            |      |  |      | (388,026   | )    |  |     |           |  |  |   | (1,950,632 | ) |  |  |  |  |  |  | (9,803,612 | ) |  |  |  |  |  |  | 1,341,729 |   |  |  | 11,021.27 |  
|Provision for income taxes                      |  |                                        |         |  |  |      | 779       |      |  |      |            |      |  |      | 2,981      |      |  |     |           |  |  |   | 3,800      |   |  |  |  |  |  |  | 4,171      |   |  |  |  |  |  |  | 3,800     |   |  |  | 31.22     |  
|Minority interest in loss                       |  |                                        |         |  |  |      |          |      |  |      |            |      |  |      |           |      |  |     |           |  |  |   |           |   |  |  |  |  |  |  | 79,761     |   |  |  |  |  |  |  |          |   |  |  |          |  
|                                                |  |                                        |         |  |  |      |           |      |  |      |            |      |  |      |            |      |  |     |           |  |  |   |            |   |  |  |  |  |  |  |            |   |  |  |  |  |  |  |           |   |  |  |           |  
|Net income (loss)                               |  | Yen                                    | 831     |  |  | Yen  | (391,007  | )    |  | Yen  | (1,954,432 | )    |  | Yen  | (9,728,022 | )    |  | Yen | 1,337,929 |  |  | $ | 10,990.05  |  
|                                                |  |                                        |         |  |  |      |           |      |  |      |            |      |  |      |            |      |  |     |           |  |  |   |            |   |  |  |  |  |  |  |            |   |  |  |  |  |  |  |           |   |  |  |           |  

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SELECTED BALANCE SHEET DATA (Japan GAAP):

|                           |  |                                        |         |      |  |      |           |      |  |      |            |      |  |     |  |  |            |  |            |     |  |  |            |  |  |   |            |  |  |  |         | 
|-------------------------- |  | -------------------------------------- | ------- | ---- |  | ---- | --------- | ---- |  | ---- | ---------- | ---- |  | --- |  |  | ---------- |  | ---------- | --- |  |  | ---------- |  |  | - | ---------- |  |  |  | ------- | 
|                           |  | As of September 30,                   
|                           |  |                                       
|                           |  | 1998                                   |         | 1999 |  | 2000 |           | 2001 |  | 2002 |            | 2002
|                           |  |                                        |         |      |  |      |           |      |  |      |            |     
|                           |  | (in thousands of Yen and U.S. dollars)
|Cash and cash equivalents  |  | Yen                                    | 111,702 |      |  | Yen  | 5,724,131 |      |  | Yen  | 22,764,731 |      |  | Yen |  |  | 14,485,802 |  |            | Yen |  |  | 16,412,076 |  |  | $ | 134,813    | 
|Total assets               |  |                                        | 235,914 |      |  |      | 6,243,078 |      |  |      | 22,563,597 |      |  |     |  |  |            |  | 15,820,206 |     |  |  |            |  |  |   | 16,914,902 |  |  |  | 138,943 | 
|Total liabilities          |  |                                        | 142,107 |      |  |      | 2,110,282 |      |  |      | 446,104    |      |  |     |  |  |            |  | 271,629    |     |  |  |            |  |  |   | 198,102    |  |  |  | 1,627   | 
|Total shareholders equity |  |                                        | 93,807  |      |  |      | 4,132,796 |      |  |      | 25,117,493 |      |  |     |  |  |            |  | 15,402,657 |     |  |  |            |  |  |   | 16,716,800 |  |  |  | 137,316 | 

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 Yen121.74
to $1.00, which was the noon buying rate announced by the Federal Reserve Bank
of New York on September 30, 2002.

The following table presents the noon buying rates for yen per $1.00 in
New York City for cable transfers in yen as certified for customs purposes by
the Federal Reserve Bank of New York for and as of the end of each period
indicated. These translations do not imply that the yen amounts actually
represent, or have been or could be converted into, equivalent amounts in
dollars.

|                                 |  |      |        |     |  |            |        |            |  |     |        |  |  |     |        |  |  |  |        | 
|-------------------------------- |  | ---- | ------ | --- |  | ---------- | ------ | ---------- |  | --- | ------ |  |  | --- | ------ |  |  |  | ------ | 
|YEAR ENDED/ENDING SEPTEMBER 30,  |  | HIGH |        | LOW |  | AVERAGE(1) |        | PERIOD-END
|                                 |  |      |        |     |  |            |        |           
|1998                             |  | Yen  | 147.14 |     |  | Yen        | 119.87 |            |  | Yen | 130.26 |  |  | Yen | 136.59 | 
|1999                             |  |      |        |     |  |            | 135.75 |            |  |     | 103.78 |  |  |     | 117.49 |  |  |  | 106.82 | 
|2000                             |  |      |        |     |  |            | 111.11 |            |  |     | 101.53 |  |  |     | 106.43 |  |  |  | 107.90 | 
|2001                             |  |      |        |     |  |            | 126.75 |            |  |     | 107.30 |  |  |     | 118.14 |  |  |  | 119.23 | 
|2002                             |  |      |        |     |  |            | 134.77 |            |  |     | 115.71 |  |  |     | 125.52 |  |  |  | 121.74 | 
|2003 (through February 28, 2003) |  |      |        |     |  |            | 125.52 |            |  |     | 117.14 |  |  |     | 121.12 |  |  |  | 118.22 | 
|CALENDAR YEAR 2002               |  |      |        |     |  |            |        |            |  |     |        |  |  |     |        |  |  |  |        | 
|September                        |  |      |        |     |  |            | 123.93 |            |  |     | 117.12 |  |  |     | 121.08 |  |  |  | 121.74 | 
|October                          |  |      |        |     |  |            | 125.52 |            |  |     | 122.55 |  |  |     | 123.91 |  |  |  | 122.78 | 
|November                         |  |      |        |     |  |            | 122.92 |            |  |     | 119.57 |  |  |     | 121.61 |  |  |  | 122.72 | 
|December                         |  |      |        |     |  |            | 124.99 |            |  |     | 118.38 |  |  |     | 121.91 |  |  |  | 118.75 | 
|CALENDAR YEAR 2003               |  |      |        |     |  |            |        |            |  |     |        |  |  |     |        |  |  |  |        | 
|January                          |  |      |        |     |  |            | 120.18 |            |  |     | 117.80 |  |  |     | 118.81 |  |  |  | 119.96 | 
|February                         |  |      |        |     |  |            | 121.30 |            |  |     | 117.14 |  |  |     | 119.34 |  |  |  | 118.22 | 

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---

|    |  |                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------
|   
|(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 March 19, 2003 was Japanese Yen
120.13 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 REVENUES WILL CONTINUE TO DECLINE IF WE DO NOT RETAIN CUSTOMERS.

Our success depends on the retention of customers. The number of our
subscribers has declined from 31,257 as of September 30, 2001 to 12,864 as of
September 30, 2002 and to 10,716 as of December 31, 2002. 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.

IF WE ARE UNABLE TO DEVELOP AN EFFECTIVE MARKETING CHANNEL TO INCREASE SALES,
OUR BUSINESS WILL 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

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marketing team and focused
primarily on customer retention. Currently, we have been attempting to reduce
the number of cancellations by offering new services promoted mostly through
CalltoWeb, a subsidiary 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 and we will not be
able to increase revenues and our ability to achieve profitability will be
limited.

WE MAY FAIL TO CARRY OUT OUR NEW BUSINESS STRATEGY.

We have been carrying out test marketing for new business strategies aimed
at increasing profitability. We may enter into new businesses that are not
necessarily related to hosting. 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 in implementing any new business strategies.

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.

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 September 8, 2000, the first of eleven related lawsuits was filed
against us in the United States District Court for the Southern District of New
York. The lawsuits include allegations in our March 8, 2000 public offering of
American Depositary Shares, we failed to disclose material facts about the
decline in business of our principal shareholder and former business partner,
Hikari Tsushin.

The lawsuits make similar allegations against the underwriters for the
offering and certain of our former officers and directors and Hikari Tsushin.
As alleged purchasers of our shares during the offering, the plaintiffs seek to
recover damages of an unspecified amount on behalf of the alleged class of
persons who purchased our shares in, or traceable to, the offering. The
plaintiffs also seek to recover attorneys fees, accountant and expert witness
fees as well as other expenses incidental to the litigation. Certain plaintiffs
moved to be appointed as lead plaintiffs and to consolidate all eleven actions.

On September 26, 2001, the court entered an order consolidating all eleven
actions and appointed lead counsel for the
plaintiffs. Certain of the plaintiffs who sought the appointment of
different lead counsel moved for reconsideration of the

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courts decision and
for the appointment of a different lead counsel.

By order of the court dated June 4, 2002, the motion for reconsideration
was granted and the Cheng group were appointed as lead plaintiffs and the firm
of Shalov, Stone and Bonner and the firm of Milberg, Weiss, Hynes Bershad &
Lerach were appointed co-lead counsel in the action. On July 19, 2002,
plaintiffs served and filed a Consolidated Amended Class Action Complaint,
which contains allegations substantially similar to the original complaint and
also includes additional allegations. The additional allegations, in
substance, assert additional material omissions from the Prospectus to the
effect that at the time of the offering, Hikari Tsushin sales agents were
engaged in inappropriate sales and marketing activities and that such omissions
rendered false certain statements in the Prospectus. On October 4, 2002, we and
each of the other defendants, moved to dismiss the action for failure to state
a claim upon which relief can be granted under Rule 12(b)(6) of the Federal
Rules of Civil Procedure. The plaintiffs responded to the motion to dismiss on
November 15, 2002, and we filed a reply on December 9, 2002. It is not possible
to predict when a decision will be issued by the Court., but we do not expect a
decision for at least 90 days or longer.

Although we intend to vigorously defend against any actions that are
properly brought against us, conclusion of the litigation in a manner adverse
to us could have a material adverse effect on our business and financial
condition.

WE OPERATE IN A VERY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.

The market for e-mail hosting services in Japan is very competitive. 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 include: Japanese
and international telecommunications carriers and related internet service
providers such as NTT and KDDI; independent internet service providers and
other service companies such as Internet Initiative Japan and Global Media
Online; and large information technology service companies such as Fujitsu and
NEC. 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. Substantial price-reductions and enhanced service plans may not
be sufficient to retain and attract customers and may substantially undercut
our profitability. For example, we introduced 50% discounts for long-term
existing customers, but discontinued this discounting as it was not effective
in reducing the number of cancellations. Moreover, in November 2002, we began
to offer new DESKWING service and discount plans that enable subscribers to
receive discounts on subscription fees based on their subscription terms.
However, it is uncertain whether either plan will help us to retain existing
customers or to attract new customers.

WEAK ECONOMIC CONDITIONS IN JAPAN MAY DEPRESS OUR REVENUES AND REDUCE OUR
ABILITY TO COLLECT FEES FROM SUBSCRIBERS.

Japans economy has experienced a prolonged recession that began in the
early 1990s. Despite the implementation of

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fiscal recovery programs and other
measures taken by the Japanese government, the current economic climate in
Japan may not improve significantly and may worsen in the near future. If
economic conditions in Japan do not improve, our business could be adversely
affected. In particular, collection of fees from our subscribers may be delayed
or prevented due to factors such as the worsening condition of the Japanese
economy and the businesses of our customers.

WE HAVE A HISTORY OF LOSSES AND WE MAY INCUR LOSSES IN THE FUTURE.

We earned net income of Yen1,338 million in fiscal year 2002 primarily
through restructuring started in July 2001. However, fiscal year 2002 is our
only profitable year since we began offering our DESKWING e-mail hosting
service in May 1998. 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 past fiscal years due to a reduction
in the size of our customer base, and we believe that under present conditions
the size of our 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 WILL 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 and related businesses are
characterized by rapidly changing technology, industry standards 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.
If we are unable to apply rapidly changing technology to evolving customer
needs, we will not be successful in increasing revenues and achieving
profitability.

WE COULD EXPERIENCE SYSTEM FAILURES, WHICH COULD AFFECT OUR ABILITY TO OFFER
OUR SERVICES.

To succeed, we must operate our network infrastructure on a 24-hour,
7-days-a-week basis without interruption. Although we have attempted to ensure
that redundancy is built into the network and 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 

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| |  |  | 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.

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
includes incentives, rewarding employees

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based on their performance, and
provides 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 72.8% 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 work 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 in July 5,
2002. We rely on a combination of copyright, trademark, service mark, trade
secret and other related laws and contractual restrictions to establish and
protect certain proprietary rights in our technology. The steps we have taken,
or can take, to protect our intellectual property may be insufficient to
protect our assets.

WE DEPEND UPON THIRD PARTIES 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. 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, such as the misuse of
confidential information acquired during the course

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of performing their
services. Working with third parties 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, including
Hikari Tsushin and 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.

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.

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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 EXHANGE OR FORCED TO TAKE COSTLY
MEASURES TO PREVENT BEING DELISTED FROM THE TOKYO STOCK EXCHANGE

Between September 30, 2001 and September 30, 2002, the number of our
shareholders decreased from 308 shareholders to 211 shareholders. The number of
our shareholders may fall below the minimum listing requirements of the Mothers
market of the Tokyo Stock Exchange. Under current requirements, if the number
of our shareholders falls below 150, we will have one year within which to
return to a minimum of 150 shareholders in order to retain our listing. We may
be required to take costly measures to avoid being delisted. If these measures
are not successful, we may be delisted from the Tokyo Stock Exchange. Even if
the measures are successful, the price or marketability of our shares or ADSs
may be adversely affected.

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 many of the Acts provisions are uncertain at
this time and some of the provisions are only effective after SEC rulemaking.
However, we may be required to establish an audit committee, perform US GAAP
audits of our 6-K filings and 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 ARE EVALUATING WHETHER CONTINUED REGISTRATION UNDER U.S. SECURITIES LAWS IS
IN OUR BEST INTERESTS

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
causes 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 shares. We are evaluating the impact of the new laws on the way
that we do business, the
amount of additional expense we expect to incur to comply with the new
laws, risks associated with any inadvertent failure

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to fully comply, and
whether continued registration under U.S. securities laws is in our best
interests. No decision has been made whether Crayfish will pursue termination
of its registration under U.S. securities laws. If we decide to pursue
termination of our registration under U.S. securities laws, it may affect the
liquidity and price of our ADSs and shares.

WE MIGHT BE LIABLE FOR DAMAGES IF THERE ARE DEFECTS IN ASSETS WE HAVE SOLD.

We have sold a significant portion of certain servers and other technical
equipment used to operate our DESKWING service to Diamond Lease Company Ltd.
(Diamond Lease). We may be liable to Diamond Lease for damages caused by
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, and regulations applicable to businesses in
general. We may be held responsible for information which is posted on the
Internet by our service users or ourselves. Such claims may include, but not be
limited to, claims involving defamation. 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.
|-- |  | ---------------------------------------

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 Bldg. 6th Floor, 16-13, Ikebukuro 2-chome Toshima-ku, Tokyo 171-0014,
Japan. Our telephone number is 81-3-5957-0644. 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, 13th Floor, 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
agent agreement with Hikari Tsushin and began to market our services alone. In
March 2000, we became a public company

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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%.

Following the resignation of our board of statutory auditors and
independent accountants, and the imposition of a temporary trading halt in our
ADSs on the Nasdaq National Market in April 2001, Hikari Tsushin issued a
written demand to management, as permitted by the Japanese Commercial Code, to
elect new management and hold an extraordinary shareholders meeting.

At an extraordinary shareholders general meeting on June 20, 2001, new
directors and corporate auditors proposed by Hikari Tsushin were elected.

New management appointed at the shareholders meeting held in June 2001
refocused our targets and reorganized our cost structures. In July 2001, we
announced our Business Revival Plan.

As part of our July 2001 Business Revival Plan, we eliminated the
following services in July and August 2001:



| |      Crayf!sh 2000, a system similar to DESKWING we began to market in
December 2000 and launched on an OEM basis in November 2000;
| | ------------------------------------------------------------------------------------------------------------------------------------
|
| |      Crayf!sh 4000, a middle scale hosting service for small and
medium-sized enterprises launched in May 2000;                    
|
| |      M27, a personal groupware service launched in April 2001; and                                                                 
|
| |      System Development Services, design of Web sites and development
of related system applications for large corporate customers.

Nasdaq released our ADSs from the temporary trading halt on July 26, 2001.

As a result of a public tender offer in Japan for our shares by Hikari
Tsushin during the period from September 5 to 25, 2001, Hikari Tsushins direct
and indirect shareholdings increased from 4,761 shares, or 46.7% of our
outstanding shares, to 7,469 shares, representing 72.9% of our outstanding
shares as of September 30, 2001. Hikari Tsushin purchased 2,750 shares in the
offering at a per share price of Yen900,000.

Information concerning our principle 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.

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|B. |  | BUSINESS OVERVIEW.
|-- |  | ------------------

We offer e-mail hosting services as well as Web-page hosting and other
internet-related services 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. By subscribing to our services, our customers
enjoy the benefits of internet communications, productivity and e-commerce
solutions which cannot be achieved on their own without building and
maintaining a costly information-technology infrastructure.

OUR SERVICES

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, mailing lists for free and
Type-2 provides a larger range of functions, including PHP, mySQL, PostgreSQL
at no charge. The initial fee of Yen30,000 for former DESKWING was generally
waived for marketing purposes in the past. The initial fee for Type-1 is
Yen10,000 and Type-2 has no initial fee. On December 1, 2002, we offered a new
discount campaign which waived the initial payment of Yen10,000 of Type-1
DESKWING service. We plan to end this discount campaign on approximately March
21, 2003. Monthly fees for both Type-1 and Type-2 are Yen10,000 and Yen20,000,
respectively.



| | New enhanced DESKWING has the following basic features:
| | -------------------------------------------------------
|
| |                                                       
|
| |                                                       

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| |   |  | 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).                                                                              

ADDITIONAL SERVICES

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 the year
ended September 30, 2002.

Web. We began to offer our Web-page hosting service in May 1998. As of
September 30, 2002, 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 100 megabytes of capacity included in the DESKWING package
for Web-hosting, and is able to rent additional server space as needed. 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-page 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 Yen 1,000 per month for the
standard Web service, DESKWING now includes the standard Web service free of
charge.

Virus Check. In January 2002, based on requests that we had received from
customers from our in-house call center, we began to offer a virus check
service on a trial basis through a partnership with Network Associates, Co.,
Ltd. The virus check detects and exterminates computer viruses at the server
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, and Virus-Check 50,
priced at Yen11,000 per 50 accounts.

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.

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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 began to assist customers with acquiring these products and
services. Currently, as a part of the outsourcing agreement with CTW, CTW
assists customers acquiring these products. We may also introduce a third party
internet service provider to customers in return for a fee.

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 half 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 United
States 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:                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| | 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.                                                                                                                

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

SALES AND MARKETING

Almost all of our customers belong to our core market, small and
medium-sized enterprises in Japan, particularly businesses with no more than 20
employees. We believe that potential customers in this market segment have not
yet fully taken advantage of the internet. A staff of 11 as of September 30,
2002 (12 as of September 30, 2001) is responsible for sales promotion
activities, including developing products and services. Our sales and marketing
focus is currently on retention of existing customers rather than on
acquisition of new customers. After the November 2000 termination of our
contract with Hikari Tsushin, we began to build our direct sales and marketing
force. However, following our July 2001 management change, we concluded that
both direct marketing and outsourcing are not a cost-effective means of
customer acquisition under current competitive conditions. Currently, we focus
on marketing and developing new products and services, and working with our
parent company and its affiliates as part of our overall customer acquisition
strategy.

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 its sales agents,
including CTW, its subsidiary. A department within Hikari Tsushin promoted
sales of our services and monitored and supervised these agents activities.

Until the termination of our marketing agreement with Hikari Tsushin, 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.

Hikari Tsushin no longer services our sales and no longer assists with
processing customer applications and providing customer service.

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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 will
lease all of the equipment it acquired from Crayfish to GMO.

The facilities that house the DESKWING servers have redundant systems for
power, fire protection, seismic reinforcement and 24-hour 7-days-a-week
security surveillance by system administrators. As of December 2002, Cable &
Wireless IDC 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 databases, on protecting our hardware and software
from being tampered with by intruders, and on preventing service failure or
slowdown caused by such intruders. We perform security-related patches on our
operating system and other applications using tools such as security scanners.
We also collect information from a Japanese affiliate of CERT, a group of
computer internet security experts based at Carnegie-Mellon University in the
United States, and other available free resources in order to maintain our
security. Currently, our security is jointly maintained by us and by GMO in
connection with the DESKWING operations. However, GMO may be solely responsible
for maintaining our security in the future.

GOVERNMENT REGULATION

We are not currently directly subject to national or local government laws
or regulations in Japan or other jurisdictions, 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, and laws and regulations
that generally apply to Japanese businesses.

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

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concerning the sender of the
telecommunication to a third party alleging infringement.

Other than the laws and regulations mentioned above, only a small body of
laws and regulations currently apply specifically to e-mail hosting, Web-page
hosting, internet-access and other internet-related activities in Japan. Due to
the increasing popularity and use of the internet, however, it is possible that
laws and regulations with respect to the internet may be adopted in Japan or
other jurisdictions. Governmental agencies in Japan and elsewhere are currently
adopting or considering the adoption of such laws and regulations. These laws
and regulations could cover issues such as user privacy, freedom of expression,
pricing, characteristics and quality of products and services, taxation, libel,
advertising, obscenity, intellectual property rights, information security and
the convergence of traditional telecommunications services with internet
communications. We cannot determine at this time the nature of future possible
legislation and regulation and the manner and impact of their interpretation or
enforcement.



|C. ORGANIZATIONAL STRUCTURE.
|----------------------------

Hikari Tsushin directly and indirectly controls 72.8% of our outstanding
shares of common stock. As of January 31, 2002, seven employees were assigned
to work for us while they were still employed by Hikari Tsushin. In February
2002, these employees formally terminated their employment with Hikari Tsushin
and began their employment with us. Two of them served on our board of
directors. We are considered 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 22.8% of the
outstanding shares 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.



|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.

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|                                                                               |  |                     |  |        |  |       |  |  |  |  |  | 
|------------------------------------------------------------------------------ |  | ------------------- |  | ------ |  | ----- |  |  |  |  |  | 
|                                                                               |  | FOR THE YEARS ENDED
|                                                                               |  |                    
|                                                                               |  | SEPTEMBER 30,      
|                                                                               |  |                    
|                                                                               |  | 2000                |  | 2001   |  | 2002 
|                                                                               |  |                     |  |        |  |      
|                                                                               |  | (millions of yen)  
|Capital expenditures, including a portion of
payments under capitalized leases |  | Yen3,361            |  | Yen542 |  | Yen37

Our capital expenditures are difficult to plan given the rapid changes and
uncertainties in the information technologies (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, 2003 to be lower than those for the year ended September 30, 2002
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 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
will lease all of the equipment it acquired from Crayfish to GMO. The asset
sale will be reflected in our first quarter financial statements for the year
ending September 30, 2003 as a Yen68 million decrease in property and equipment
(Yen214 million as of June 30, 2002), and a corresponding Yen80 million
increase 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-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.
|-- |  | ------------------

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OVERVIEW.

We provide e-mail hosting services to small and medium-sized enterprises
in Japan. Starting with the launch of DESKWING in May 1998, we have focused on
DESKWING and related services. In the year ended September 30, 2002, all of our
revenues came from DESKWING and related services.

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, leaving only our DESKWING Hosting Services segment. Less than 1.4%
of our revenues for the year ended September 30, 2000 came from these
discontinued services. 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 have 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 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.

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 services
have been included in cost of revenues. Following the outsourcing of our call
center service to Calltoweb, Inc. (CTW) in August 1, 2002, costs for call
center services have been included in cost of revenues since August 1, 2002.

REVENUE

Revenue consists primarily of fixed monthly fees paid by our customers to
us. 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

25



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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 November 1, 2002.
Subscribers 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. Beginning
December 1, 2002, we offered a new discount campaign, which waived the initial
payment of Yen10,000 for Type-1 DESKWING service. We plan to end this discount
campaign at approximately March 21, 2003. Fees for other services vary. Fees
for additional services comprised approximately 10% of our revenues for the
year ended September 30, 2002. 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 18 months. As of September 30,
2001 and 2002, initial contract fees of Yen9,556 thousand and Yen4,004 thousand
($33 thousand), respectively, were deferred.

The following table shows, for each of the quarters indicated, the number
of newly subscribed DESKWING service customers, the number of customers that
terminated our services and the quarter-end number of current customers. Our
contract with each customer includes a restriction that the customer cannot
terminate the contract during the first year and must provide two-months prior
notice to terminate.

|                    |  |                          |        |      |  |      |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | -- |  | -- | ------ | -- |  | -- | ------ | -- |  | -- | ------ | -- |  | -- | ------ | -- |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                    |  | YEAR ENDED SEPTEMBER 30,
|                    |  |                         
|                    |  | 2000                     |        | 2001 |  | 2002
|                    |  |                          |        |      |  |     
|                    |  | 1Q                       |        | 2Q   |  | 3Q   |        | 4Q |  | 1Q |        | 2Q |  | 3Q |        | 4Q |  | 1Q |        | 2Q |  | 3Q |        | 4Q
|                    |  |                          |        |      |  |      |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |    |        |   
|Newly Subscribed    |  |                          | 18,024 |      |  |      | 28,055 |    |  |    | 15,784 |    |  |    | 6,480  |    |  |    | 2,010  |    |  |    | 321    |    |  |  | 923    |  |  |  | 597    |  |  |  | 235    |  |  |  | 196    |  |  |  | 160    |  |  |  | 90     | 
|Cancelled           |  |                          | 1,308  |      |  |      | 3,840  |    |  |    | 8,879  |    |  |    | 16,552 |    |  |    | 10,919 |    |  |    | 9,691  |    |  |  | 6,648  |  |  |  | 4,651  |  |  |  | 7,759  |  |  |  | 4,908  |  |  |  | 3,408  |  |  |  | 2,999  | 
|                    |  |                          |        |      |  |      |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|Quarter-end
Balance |  |                          | 38,324 |      |  |      | 62,539 |    |  |    | 69,444 |    |  |    | 59,372 |    |  |    | 50,463 |    |  |    | 41,093 |    |  |  | 35,310 |  |  |  | 31,257 |  |  |  | 23,733 |  |  |  | 19,021 |  |  |  | 15,773 |  |  |  | 12,864 | 
|                    |  |                          |        |      |  |      |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 

COST OF REVENUE

We include expenses related to DESKWING and its related services either as
part of cost of revenue or as 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 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.
|
| |  |  | 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. Prior to November 2001, we paid $70 per name for the first two
years, and $35 for each year thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  |     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.
Information on related party transactions is provided in Item 7.A.                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  |     Administrative Expenses for Application Processing. These expenses
included expenses we incured 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 are now included in cost of
revenue.
     .                                                                                                                                                                                                                                                                                                             
|
| |  |  |     Outsourcing Fees.
In 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 service
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,                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

27



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| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     Initial Promotional Fees. Prior to termination of our contract with
ITOCHU Technology, Inc. in July 2000, a $30 promotional fee was payable to
Hikari Tsushin for each new subscription.                                                                                                                                                                                               

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 incurred related to development of new
hosting services, which we discontinued in July 2001. Subsequently, 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, 2000, 2001, and 2002 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,          
|                                                                           |  |                                   
|                                                                           |  | 2000(1)                            |  |     |            |   |            | 2001(2) |       |    |       |    |  | 2002 |            |   |  | 
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  | 
|                                                                           |  | (in thousands, except percentages)
|STATEMENTS OF OPERATIONS DATA:                                             |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  
|Revenue                                                                    |  |                                    |  | Yen | 6,728,865  |   |            |         | 100.0 | %  |       |    |  | Yen  | 5,311,814  |   |  |  | 100.0      | %  |  |  |        | Yen | 2,945,360 |  |  |  | 100.0 | %
|Cost of revenue(3)                                                         |  |                                    |  |     |            |   | 5,653,051  |         |       |    | 84.0  | %  |  |      |            |   |  |  | 3,391,888  |    |  |  | 63.9   | %   |           |  |  |  |       |   | 636,174   |  |  |  | 21.6 | %
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  
|Gross profit                                                               |  |                                    |  |     |            |   | 1,075,814  |         |       |    | 16.0  | %  |  |      |            |   |  |  | 1,919,926  |    |  |  | 36.1   | %   |           |  |  |  |       |   | 2,309,186 |  |  |  | 78.4 | %
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  
|Operating expenses(3)                                                      |  |                                    |  |     |            |   | 2,079,134  |         |       |    | 30.9  | %  |  |      |            |   |  |  | 9,273,622  |    |  |  | 174.6  | %   |           |  |  |  |       |   | 978,184   |  |  |  | 33.2 | %
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  
|(Loss) income from operations                                              |  |                                    |  |     |            |   | (1,003,320 | )       |       |    | (14.9 | )% |  |      |            |   |  |  | (7,353,696 | )  |  |  | (138.4 | )%  |           |  |  |  |       |   | 1,331,002 |  |  |  | 45.2 | %
|Other income (expense), net                                                |  |                                    |  |     |            |   | 7,665      |         |       |    | .1    | %  |  |      |            |   |  |  | (1,047,112 | )  |  |  | (19.7  | )%  |           |  |  |  |       |   | 10,542    |  |  |  | 0.4  | %
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  
|(Loss) income from continuing
operations before provision for income
taxes |  |                                    |  |     |            |   | (995,655   | )       |       |    | (14.8 | )% |  |      |            |   |  |  | (8,400,808 | )  |  |  | (158.2 | )%  |           |  |  |  |       |   | 1,341,544 |  |  |  | 45.5 | %
|Provision for income taxes                                                 |  |                                    |  |     |            |   | 3,800      |         |       |    |      |    |  |      |            |   |  |  | 3,800      |    |  |  |       |     |           |  |  |  |       |   | 3,800     |  |  |  |     |  
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  
|(Loss) income from continuing operations                                   |  |                                    |  |     |            |   | (999,455   | )       |       |    | (14.9 | )% |  |      |            |   |  |  | (8,404,608 | )  |  |  | (158.2 | )%  |           |  |  |  |       |   | 1,337,744 |  |  |  | 45.5 | %
|Loss from operations of discontinued
business segments                     |  |                                    |  |     |            |   | (542,129   | )       |       |    | (8.1  | )% |  |      |            |   |  |  | (1,164,113 | )  |  |  | (21.9  | )%  |           |  |  |  |       |   |          |  |  |  |     |  
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  
|Net (loss) income                                                          |  |                                    |  | Yen | (1,541,584 | ) |            |         | (22.9 | )% |       |    |  | Yen  | (9,568,721 | ) |  |  | (180.1     | )% |  |  |        | Yen | 1,337,744 |  |  |  | 45.4  | %
|                                                                           |  |                                    |  |     |            |   |            |         |       |    |       |    |  |      |            |   |  |  |            |    |  |  |        |     |           |  |  |  |       |   |           |  |  |  |      |  



---

|(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 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 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 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

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|    |  | assets and settlement of
related liabilities have been reflected as discontinued operations in the
statements of operations.                                                                                                                                           
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | Service fees paid to Hikari Tsushin previously included under operating
expenses have been reclassified as part of cost of revenues to conform
with the 2001 presentation, and the amount reclassified was Yen3,291,737
thousand for the year ended September 30, 2000.

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 the Company 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 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

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##### Table of Contents



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 Yen 1,649 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.

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

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September 30, 2002 from a net loss of
Yen9,569 million in the year ended September 30, 2001.

YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO YEAR ENDED SEPTEMBER 30, 2000

REVENUES. Revenues decreased 21.1% from Yen6,729 million in year ended
September 30, 2000 to Yen5,312 million in the year ended September 30, 2001.
The decrease in revenues was mainly attributable to a decline in net DESKWING
revenues as a result of a decrease in the number of DESKWING subscribers. In
the year ended September 30, 2001, DESKWING revenue accounted for 99.7% of
total revenue. There were 31,257 subscribers as of September 30, 2001, a 47.4%
decrease from 59,372 subscribers as of September 30, 2000.

COST OF REVENUE. Cost of revenue decreased 40.0% from Yen5,653 million in
the year ended September 30, 2000 to Yen3,392 million in the year ended
September 30, 2001. Cost of revenue decreased as a result of the decrease in
costs due to the decrease in DESKWING subscribers and lower service fees paid
to Hikari Tsushin. Service fees paid to related parties decreased by 80.0% to
Yen657 million in the year ended September 30, 2001 from Yen3,292 million in
the year ended September 30, 2000 due to the termination of our contract with
Hikari Tsushin.

GROSS PROFIT. Gross profit increased 78.5% from Yen1,076 million in the
year ended September 30, 2000 to Yen1,920 million in the year ended September
30, 2001, reflecting a decrease in cost of revenue. Gross profit margin
increased from 16.0% in the year ended September 30, 2000 to 36.1% in the year
ended September 30, 2001.

OPERATING EXPENSES. Operating expenses for the year ended September 30,
2001 increased by 346.0% from Yen2,079 million in the year ended September 30,
2000, to Yen9,274 million. The increase reflected an increase in selling,
general and administrative expenses, as a result of increases in employment
costs and commission fees, as well as the recognition of impairment of servers
and other equipment and intangibles in connection with our ongoing
restructuring.

Selling, general and administrative expenses increased by 85.3% to
Yen1,714 million in the year ended September 30, 2001 from Yen925 million in
the year ended September 30, 2000.

As a result of increases in cancellations by subscribers, we recognized a
loss on impairment of purchased intangible service assets of Yen3,500 million
in connection with the termination of our marketing agreement with Hikari
Tsushin. We also recognized a loss on impairment of equipment of Yen2,111
million relating to the termination of our contract with IBJ Leasing Co., Ltd.
for leasing of servers and related equipment.

LOSS FROM OPERATIONS. Operating loss of Yen7,354 million in the year
ended September 30, 2001 increased from operating loss of Yen1,003 million for
the year ended September 30, 2000, primarily due to the recognition of an
impairment for intangible assets acquired from Hikari Tsushin in connection
with the termination of the marketing agreement and the impairment of
equipment.

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OTHER INCOME (EXPENSE), NET. Other income (expense), net in the year
ended September 30, 2001 decreased to Yen1,047 million in net expense from net
income of Yen8 million in the year ended September 30, 2000. This decrease was
primarily due to a loss on devaluation of investments in Intranet K.K., loss on
sale of MCC Holdings shares and interest expense incurred related to the
substantial capital lease obligation for servers terminated in July 2001.

LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES. Loss
from continuing operations before provision for income taxes increased to
Yen8,401 million for the year ended September 30, 2001 from Yen996 million for
the year ended September 30, 2000.

PROVISIONS FOR INCOME TAXES. Since the inception of our company, we have
incurred net losses for both financial accounting reporting and Japanese tax
purposes and, therefore, we have not provided any income tax except Yen3.8
million of per-capita tax for the years of 2000 and 2001. 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.

LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations
increased to Yen8,405 million for the year ended September 30, 2001 from Yen999
million for the year ended September 30, 2000.

GAIN (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESS SEGMENTS. Loss from
operations of discontinued business segments increased to Yen1,164 million for
the year ended September 30, 2001 from Yen542 million for the year ended
September 30, 2000.

NET LOSS. As a result of these factors, net loss increased to Yen9,569
million in the year ended September 30, 2001 from a net loss of Yen1,542
million in the year ended September 30, 2000.



|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 issuances 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 also expect that future capital and liquidity needs for defending
the class action litigation filed against us in the United States in September
2000 may increase. 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 this litigation, and we expect to continue to
incur legal costs relating to our defense of this litigation in the future. A
summary of our cash flows is as follows:

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|                                                    |  |                          |  |      |            |      |            |      |  |     |            |   |  |  |            |     |           |  |  |   |        |  |           |  |  |  |        | 
|--------------------------------------------------- |  | ------------------------ |  | ---- | ---------- | ---- | ---------- | ---- |  | --- | ---------- | - |  |  | ---------- | --- | --------- |  |  | - | ------ |  | --------- |  |  |  | ------ | 
|                                                    |  | Year ended September 30,
|                                                    |  |                         
|                                                    |  | 2000                     |  | 2001 |            | 2002 |            | 2002
|                                                    |  |                          |  |      |            |      |            |     
|                                                    |  | (in thousands)          
|Net cash provided by (used in) operating activities |  |                          |  | Yen  | (1,207,125 | )    |            |      |  | Yen | (5,506,783 | ) |  |  |            | Yen | 1,777,463 |  |  | $ | 14,601 | 
|Net cash provided by (used in) investing activities |  |                          |  |      |            |      | (566,543   | )    |  |     |            |   |  |  | (1,592,709 | )   |           |  |  |   |        |  | 203,303   |  |  |  | 1,670  | 
|Net cash provided by (used in) financing activities |  |                          |  |      |            |      | 20,610,909 |      |  |     |            |   |  |  | (1,488,320 | )   |           |  |  |   |        |  | 2,111     |  |  |  | 17     | 
|Net increase (decrease) in cash equivalents         |  |                          |  |      |            |      | 18,837,241 |      |  |     |            |   |  |  | (8,587,812 | )   |           |  |  |   |        |  | 1,982,877 |  |  |  | 16,288 | 

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 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 thousand as of September
30, 2001, and Yen203 thousand 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

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committed to Yen 14.6 million and Yen2.1
million in the fiscal years ended September 30, 2003 and 2004, respectively.

CASH FLOWS FOR YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO YEAR ENDED
SEPTEMBER 30, 2000

We incurred net losses of Yen1,542 million for the year ended September
30, 2000, and Yen9,569 million for the year ended September 30, 2001.

Net cash used in operating activities was Yen1,207 million for the year
ended September 30, 2000, and Yen5,507 million for the year ended September 30,
2001. A Yen513 million increase in depreciation and amortization had an
offsetting effect on the amount of net cash used in operating activities for
the year ended September 30, 2001.

Net cash used in investing activities was Yen567 million for the year
ended September 30, 2000 and Yen1,593 million for the year ended September 30,
2001. Cash used in investing activities for the year ended September 30, 2001
consisted primarily of a Yen600 million investment in Intranets K.K., Yen542
million payment for purchase of equipment, and a Yen254 million investment in a
debt instruments to IB Web, Inc. and MCC Holdings, Ltd.

Net cash provided by financing activities was Yen20,611 million for the
year ended September 30, 2000 and net cash used in financing activities was
Yen1,488 million in the year ended September 30, 2001. Cash provided by
financing activities for the year ended September 30, 2000 consisted primarily
of proceeds from issuances of common stock in our global offering in Japan and
the United States while cash used by financing activities for the year ended
September 30, 2001 consisted primarily of payments on capital leases of
Yen2,414 million.

Our total capital lease obligations were Yen2,130 million as of September
30, 2000, and Yen342 million as of September 30, 2001.



|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:
Yen945 million, Yen1,015 million and Yen51 million in the years ended September
30, 2000, 2001 and 2002, respectively. During the year ending September 30,
2003, we are proposing to offer a new service plan and several various support
services for small and medium-sized enterprises, such as enterprise resource
planning software and customized Web design software. We expect that research
and development costs in the year of 2003 will mainly consist of software
development expenses and marketing research expenses in connection with
development of new businesses. While we expect expenditures on

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research and
development activities to decrease in the immediate future, such expenditures
might increase in the future as new services develop or our business expands.

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. We have no patented technology that would preclude or
inhibit competitors from entering our market. 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 business 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 infringe on the proprietary rights of third parties,
but third parties could claim that our current or future services infringe on
their rights. We expect that participants in our markets will be increasingly
subject to infringement claims as the number of services 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 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
10,716 subscribers as of December 31, 2002. We expect the number of subscribers
to continue declining at least through the year ending September 30, 2003 and
potentially beyond. We are currently focusing 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 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. Furthermore, revenue per subscriber in October 2002 was 13,302, down
8.8 % from 12,130 in December 2002 due to the introduction of the new DESKWING
service plans and the new discount plan. Monthly revenue per subscriber
represents monthly revenue divided by cumulative subscribers at month-end.
Cumulative subscribers is determined by subtracting

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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 subscribers in the
current month.

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 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.

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, some of which are not related to DESKWING. For
instance, we began to introduce software for small and medium-sized enterprises in February 2003, and we will begin to purchase internet
advertising space and to market this space together with affiliates of Hikari Tsushin, Inc. in early April 2003. We propose to increase
our participation in this market by identifying the needs of small
and medium-sized enterprises which we might be able to meet.

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: (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 plan to end this discount campaign on approximately March 21,
2003.

LITIGATION

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

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and may harm our business.

On September 8, 2000, the first of eleven related lawsuits was filed
against us in the United States District Court for the Southern District of New
York. The lawsuits include allegations in our March 8, 2000 public offering of
American Depositary Shares, we failed to disclose material facts about the
decline in business of our principal shareholder and former business partner,
Hikari Tsushin.

The lawsuits make similar allegations against the underwriters for the
offering and certain of our former officers and directors and Hikari Tsushin.
As alleged purchasers of our shares during the offering, the plaintiffs seek to
recover damages of an unspecified amount on behalf of the alleged class of
persons who purchased our shares in, or traceable to, the offering. The
plaintiffs also seek to recover attorneys fees, accountant and expert witness
fees as well as other expenses incidental to the litigation. Certain plaintiffs
moved to be appointed as lead plaintiffs and to consolidate all eleven actions.

On September 26, 2001, the court entered an order consolidating all eleven
actions and appointed lead counsel for the plaintiffs. Certain of the
plaintiffs who sought the appointment of different lead counsel moved for
reconsideration of the courts decision and for the appointment of a different
lead counsel.

By order of the court dated June 4, 2002, the motion for reconsideration
was granted and the Cheng group were appointed as lead plaintiffs and the firm
of Shalov, Stone and Bonner and the firm of Milberg, Weiss, Hynes Bershad &
Lerach were appointed co-lead counsel in the action. On July 19, 2002,
plaintiffs served and filed a Consolidated Amended Class Action Complaint,
which contains allegations substantially similar to the original complaint and
also includes additional allegations. The additional allegations, in
substance, assert additional material omissions from the Prospectus to the
effect that at the time of the offering, Hikari Tsushin sales agents were
engaged in inappropriate sales and marketing activities and that such omissions
rendered false certain statements in the Prospectus. On October 4, 2002, we and
each of the other defendants, moved to dismiss the action for failure to state
a claim upon which relief can be granted under Rule 12(b)(6) of the Federal
Rules of Civil Procedure. The plaintiffs responded to the motion to dismiss on
November 15, 2002, and we filed a reply on December 9, 2002. It is not possible
to predict when a decision will be issued by the Court., but we do not expect a
decision for at least 90 days or longer.




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.

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|                  |  |                                       |  |                   |  |                     
|----------------- |  | ------------------------------------- |  | ----------------- |  | --------------------
|                  |  |                                       |  |                   |  | MONTH IN WHICH      
|NAME              |  | POSITION                              |  | DATE OF BIRTH     |  | CURRENT TERM EXPIRES
|                  |  |                                       |  |                   |  |                     
|Kazuhiko Muraki   |  | Representative Director,              |  | January 15, 1977  |  | June 2003           
|                  |  | President and Chief
Executive Officer |  |                   |  |                     
|                  |  |                                       |  |                   |  |                     
|Masaaki Shimamura |  | Director                              |  | January 5, 1969   |  | June 2003           
|                  |  |                                       |  |                   |  |                     
|Fumio Komatsubara |  | Director, and Chief
Financial Officer |  | June 19, 1966     |  | June 2003           
|                  |  |                                       |  |                   |  |                     
|Kazuhiko Yabe     |  | Statutory Auditor                     |  | May 27, 1963      |  | December 2003       
|                  |  |                                       |  |                   |  |                     
|Koichi Kawai      |  | Statutory Auditor                     |  | February 10, 1971 |  | December 2003       
|                  |  |                                       |  |                   |  |                     
|Junji Tsuge       |  | Statutory Auditor                     |  | December 4, 1975  |  | December 2003       
|                  |  |                                       |  |                   |  |                     
|Shunji Harane     |  | Statutory Auditor                     |  | December 28, 1966 |  | December 2003       

KAZUHIKO MURAKI became the president and representative director of the
Company in June 2002. He has served as executive vice president and director of
Five Any, Inc., and director of First Charge, Inc. since 2001. 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s Mobile Business Headquarters in 2000.

MASAAKI SHIMAMURA became a director of the Company in June 2002. He
worked for CalltoWeb, Inc. (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.

FUMIO KOMATSUBARA became our chief financial officer and a director in
June 2002. His past experience includes seven years at Daiwa Securities Co.,
Ltd. and two and one-half years at Hikari Tsushin, Inc.

KAZUHIKO YABE became a statutory auditor for the Company in June 2001. His
experience includes over two years at Aoyama Audit Corporation (currently
PricewaterhouseCoopers), seven years at Nihon Tetra Pak K.K., two years at
Konami Corporation, one and one-half years at Hikari Tsushin, Inc.

JUNJI TSUGE became a statutory auditor for the Company in June 2001. He
currently serves as statutory auditor of affiliates of Hikari Tsushin, Inc.,
including Fishing Vision Co. Ltd., Five Any, Inc., GIAO
Co., Ltd. and Best Partner KK. He also serves as director of affiliates of Hikari Tsushin, Inc.,
which are Business Partner K.K. and Direct Japan, Inc. and has been an employee of Hikari
Tsushin since April 1999.

SHUNJI HARANE became a statutory auditor for the Company in December 2001.
He has been a certified public accountant since 1996, having worked at Tohmatsu
& Co. for three and a one-half years and Nikko Securities Co., Ltd. for one
year. He currently operates his own private certified public accounting
office.

KOICHI KAWAI became a statutory auditor for the Company in July 2002. He
has been a registered Licensed Tax

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Accountant since 1999. He worked at Hikari
Tsushin for approximately one and one-half years, and he left Hikari Tsushin in
July 2001. He currently operates his own private tax accounting office.

As announced in our press release as of June 20, 2001, Messrs. Kazuhiko
Yabe and Junji Tsuge were nominated by Hikari Tsushin and approved at the
extraordinary meeting of shareholders on June 20, 2001.



|B. |  | COMPENSATION.
|-- |  | -------------

For the year ended September 30, 2002, the aggregate compensation paid by
the Company to all our directors and statutory auditors was approximately
Yen57.8 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 general meeting of shareholders first held five months 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 three years (in the case of Statutory Auditors elected at an Ordinary
General Meeting of Shareholders held with respect to the first closing of
accounts of the financial year ending on and after May 1, 2002, 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

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that is
expressed in the audit report. The Board of Statutory Auditors is empowered to
establish audit principles, the method of examination by the Statutory Auditors
of the Companys affairs and financial position, and other matters concerning
the performance of the Statutory Auditors duties.



|D. |  | EMPLOYEES.                                                                               
|-- |  | -----------------------------------------------------------------------------------------
|  
|   |  | The following table shows the number of our full-time, temporary and
part-time employees:

|                       |  |                     |     |      |  |      |     |  |  |  |    | 
|---------------------- |  | ------------------- | --- | ---- |  | ---- | --- |  |  |  | -- | 
|                       |  | As of September 30,
|                       |  |                    
|                       |  | 2000                |     | 2001 |  | 2002
|                       |  |                     |     |      |  |     
|Full-time              |  |                     | 117 |      |  |      | 74  |  |  |  | 27 | 
|Temporary or Part-time |  |                     | 50  |      |  |      | 34  |  |  |  | 16 | 
|                       |  |                     |     |      |  |      |     |  |  |  |    | 
|Total                  |  |                     | 167 |      |  |      | 108 |  |  |  | 43 | 
|                       |  |                     |     |      |  |      |     |  |  |  |    | 

Note: Figures for 2002 exclude 5 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 27 full-time employees 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. Of the 117 full-time employees at
September 30, 2000, 18 were in administrative positions, 10 were in sales and
marketing positions, 42 were in technical positions, 42 were in service
positions and 5 were in business development positions.



|E. |  | SHARE OWNERSHIP.
|-- |  | ----------------

None of our present directors, executive officers or statutory auditors
beneficially owned any shares of our common stock as of September 30, 2002.

Under the provisions of the Commercial Code of Japan then in effect, we
amended our articles of incorporation to

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allow us to adopt a warrant option
plan. In addition, special resolutions of shareholders at the shareholders
meetings were adopted to grant warrant options. The special resolution
authorized us to grant warrant options provided the details of such warrants
were recorded and made available for viewing by shareholders and creditors at
Company.

We also issued warrants to our past directors at a time when they served
as directors. This was accomplished by issuing bonds to financial institutions
with detachable warrants. The warrants were repurchased immediately after
issuance and then granted to certain persons who were then serving as our
directors as a part of their remuneration.

With the revision of the Commercial Code of Japan in 2001 we deleted the
amendment from our articles of incorporation which allowed us to adopt the
warrants or options described above. However, under the revised Commercial Code
of Japan, without amending the articles of incorporation, we may grant
subscription rights and warrants subject to the approval of the Board of
Directors. Such subscription rights and warrants may not be granted on
conditions unfavorable to 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, 2002 were as follows (whole amount):

|         |           |             |                              |                  |                              |                  |                            |             |  |                |           |           |  |  |     |     |          |  |           |           | 
|-------- | --------- | ----------- | ---------------------------- | ---------------- | ---------------------------- | ---------------- | -------------------------- | ----------- |  | -------------- | --------- | --------- |  |  | --- | --- | -------- |  | --------- | --------- | 
|         |           |             | Options/Warrants Outstanding |                  | Options/Warrants Exercisable
|         |           |             |                              |                  |                             
|         |           |             |                              |                  |                              |                  | Weighted Average Remaining |             |  |                |           |           |  |  |     |     | Weighted
|Exercise |           | Number      |                              | Contractual Life |                              | Weighted Average |                            | Number      |  | Average       
|Prices   |           | Outstanding |                              | (in year)        |                              | Exercise Price   |                            | Exercisable |  | Exercise Price
|         |           |             |                              |                  |                              |                  |                            |             |  |               
|Yen      | 400,000   |             |                              | 11               |                              |                  |                            | 5.2         |  |                | Yen       | 400,000   |  |  |     |    |          |  | Yen       |          | 
|         | 2,500,000 |             |                              | 675              |                              |                  |                            | 4.0         |  |                |           | 2,500,000 |  |  |     | 675 |          |  |           | 2,500,000 | 
|         | 3,776,250 |             |                              | 9                |                              |                  |                            | 4.7         |  |                |           | 3,776,250 |  |  |     | 9   |          |  |           | 3,776,250 | 
|         |           |             |                              |                  |                              |                  |                            |             |  |                |           |           |  |  |     |     |          |  |           |          
|         |           |             | 695                          |                  |                              |                  | 4.0                        |             |  |                | 2,483,290 |           |  |  | 684 |     |          |  | 2,516,793 |          

Of the options and warrants outstanding described above, 675 options or
warrants are held by Isao Matsushima who formerly served as representative
director of the Company. 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, 2002. We are not
required by Japanese law to disclose

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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, 2002
|                                            |  |                   
|NAME OF BENEFICIAL OWNER                    |  | NUMBER             |       | PERCENTAGE
|                                            |  |                    |       |           
|Hikari Tsushin Inc. (1)                     |  |                    | 6,869 |            |  |  | 66.96 | 
|MAC Japan Active Shareholder Fund L.P. (2)  |  |                    | 1,571 |            |  |  | 15.31 | 
|Hikari Tsushin Partners L.P. (3)            |  |                    | 600   |            |  |  | 5.85  | 
|Directors and executive officers as a group |  |                    | 0     |            |  |  | 0     | 



---



|(1) |  | If the shares held by Hikari Tsushin Partners, L.P. and separately
identified in this table are included, Hikari Tsushin directly or
indirectly controlled 7,469 shares or 72.81% of our common stock as of
September 30, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | MAC Japan Active Shareholder Fund L.P. is a private equity fund
established in the Cayman Islands. The fund is not related to Hikari
Tsushin, Inc. or us.                                                                      
|   
|(3) |  | 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.             

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 our fiscal year ended September 30, 2002, MAC Japan Active
Shareholder Fund L.P. increased shareholdings to 1,571 shares, representing
15.31% of our outstanding shares as of September 30, 2002. Prior to October 1,
2001, MAC Japan Active Shareholder Fund L.P. owned less than 5% of our
outstanding shares.

Hikari Tsushin Partners L.P. held 600 shares, representing 5.9% of our
outstanding shares as of September 30, 2002.

Our ADSs are 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, 2002, of the 10,258 shares of
common stock outstanding, 448 shares were

43



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held in the form of ADSs, which at
the then applicable conversion ratio was equal to 224,000 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 448 shares of common stock underlying the 224,000 ADSs outstanding as of
September 30, 2002 were held by Hero & Company, a subsidiary of the depositary
for our ADSs, for the account of the ultimate beneficial owners of the ADSs.

Our major shareholders have the same voting rights as other holders of our
common stock. Hikari Tsushin directly or indirectly controls 72.81% 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 40.4%, 67.0% and 66.96% interest in us as of
September 30, 2000, 2001 and 2002 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.

We cancelled the foregoing agreement with Hikari Tsushin under a
termination agreement in 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;                                                                      

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| |  |  | 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. Information concerning the amounts
involved in
these related party transactions has been included below.

Account balances and transactions with Hikari Tsushin and its subsidiaries
as of September 30, 2000, 2001 and 2002 are as follows (in thousands):

|                   |                          |  |      |           |               |  |               |           |      |  |   |        |  |  |   |     | 
|------------------ | ------------------------ |  | ---- | --------- | ------------- |  | ------------- | --------- | ---- |  | - | ------ |  |  | - | --- | 
|                   |                          |  |      |           |               |  | September 30, |           |      |  |   |        | 
|                   |                          |  |      |           | September 30,
|                   |                          |  | 2000 |           | 2001          |  | 2002          |           | 2002
|                   |                          |  |      |           |               |  |               |           |     
|Accounts balances: |                          |  |      |           |               |  |               |           |      |  |   |        |  |  |   |    
|                   | Accounts receivable      |  | ¥    | 14,016    |               |  | ¥             |          |      |  | ¥ | 21,436 |  |  | $ | 176 | 
|                   | Deposits
paid            |  |      |          |               |  |               |          |      |  |   | 24,751 |  |  |   | 203 | 
|                   | Accounts payable         |  |      | 30,366    |               |  |               | 6,964     |      |  |   | 9,110  |  |  |   | 75  | 
|Transactions       |                          |  |      |           |               |  |               |           |      |  |   |        |  |  |   |    
|                   | Service revenue          |  |      | 11,540    |               |  |               |          |      |  |   | 9,069  |  |  |   | 74  | 
|                   | Sale of equipment        |  |      |          |               |  |               |          |      |  |   | 15,326 |  |  |   | 126 | 
|                   | Compensation received    |  |      |          |               |  |               |          |      |  |   | 5,418  |  |  |   | 45  | 
|                   | Service fee payment      |  |      | 3,291,737 |               |  |               | 656,949   |      |  |   | 14,689 |  |  |   | 121 | 
|                   | Sales promotion expenses |  |      | 204,209   |               |  |               |          |      |  |   |       |  |  |   |    | 
|                   | Rent expense             |  |      |          |               |  |               |          |      |  |   | 33,394 |  |  |   | 274 | 
|                   | Purchase of equipment    |  |      | 4,300     |               |  |               |          |      |  |   | 2,483  |  |  |   | 20  | 
|                   | Termination fee payment  |  |      |          |               |  |               | 3,500,000 |      |  |   |       |  |  |   |    | 
|                   | Compensation expenses    |  |      |          |               |  |               | 10,607    |      |  |   | 27,722 |  |  |   | 278 | 
|                   | Utility
expenses         |  |      |          |               |  |               |          |      |  |   | 4,076  |  |  |   | 33  | 
|                   | Moving expenses          |  |      |          |               |  |               |          |      |  |   | 7,094  |  |  |   | 58  | 
|                   | Other expenses           |  |      | 1,067     |               |  |               |          |      |  |   | 4,460  |  |  |   | 36  | 

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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.

ADSs 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      |         | LOW
|                                        |                                                          |  |              |           |              |  |           |         |    
|YEAR ENDED/ENDING SEPTEMBER 30,
2000(2) |                                                          |  | 32,800,000   |           |              |  | 2,100,000 |         |     |  | 166.00 |       |  |  | 3.25 |      
|2001                                    |                                                          |  | 1,420,000    |           |              |  | 351,000   |         |     |  | 13.55  |       |  |  | 1.13 |      
|                                        | Quarter ended December 31, 2000                          |  |              | 1,420,000 |              |  |           | 351,000 |     |  |        | 13.50 |  |  |      | 1.13  | 
|                                        | Quarter ended March 31, 2001                             |  |              | 909,000   |              |  |           | 395,000 |     |  |        | 16.25 |  |  |      | 6.75  | 
|                                        | Quarter ended June 30, 2001                              |  |              | 890,000   |              |  |           | 466,000 |     |  |        | 11.39 |  |  |      | 5.31  | 
|                                        | Quarter ended September 30, 2001                         |  |              | 833,000   |              |  |           | 415,000 |     |  |        | 13.55 |  |  |      | 6.54  | 
|2002                                    |                                                          |  | 850,000      |           |              |  | 443,000   |         |     |  | 11.49  |       |  |  | 7.04 |      
|                                        | Quarter ended December 31, 2001                          |  |              | 710,000   |              |  |           | 471,000 |     |  |        | 11.49 |  |  |      | 7.45  | 
|                                        | Quarter ended March 31, 2002                             |  |              | 650,000   |              |  |           | 530,000 |     |  |        | 9.36  |  |  |      | 7.04  | 
|                                        | Quarter ended June 30, 2002                              |  |              | 600,000   |              |  |           | 443,000 |     |  |        | 9.32  |  |  |      | 7.35  | 
|                                        | Quarter ended September 30, 2002                         |  |              | 850,000   |              |  |           | 500,000 |     |  |        | 13.96 |  |  |      | 7.90  | 
|2003 (through February 28)              |                                                          |  |              |           |              |  |           |         |     |  |        |       |  |  |      |      
|                                        | Quarter ended December 31, 2002                          |  |              | 792,000   |              |  |           | 630,000 |     |  |        | 12.67 |  |  |      | 10.00 | 
|                                        | Quarter ended March 31, 2003 (through February 28,
2003) |  |              | 710,000   |              |  |           | 650,000 |     |  |        | 12.00 |  |  |      | 10.20 | 
|CALENDAR YEAR 2002                      |                                                          |  |              |           |              |  |           |         |     |  |        |       |  |  |      |      
|                                        | September                                                |  |              | 850,000   |              |  |           | 691,000 |     |  |        | 13.75 |  |  |      | 12.50 | 

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|                   |  |  |              |  |              |  |         |  |     |  |       |  |  |  |       |  | 
|------------------ |  |  | ------------ |  | ------------ |  | ------- |  | --- |  | ----- |  |  |  | ----- |  | 
|                   |  |  | MOTHERS(YEN) |  | NASDAQ($)(1)
|                   |  |  |              |  |             
|                   |  |  | HIGH         |  | LOW          |  | HIGH    |  | LOW
|                   |  |  |              |  |              |  |         |  |    
|October            |  |  | 792,000      |  |              |  | 700,000 |  |     |  | 12.67 |  |  |  | 10.20 | 
|November           |  |  | 720,000      |  |              |  | 680,000 |  |     |  | 11.00 |  |  |  | 10.01 | 
|December           |  |  | 700,000      |  |              |  | 630,000 |  |     |  | 10.98 |  |  |  | 10.00 | 
|CALENDAR YEAR 2003 |  |  |              |  |              |  |         |  |     |  |       |  |  |  |       | 
|January            |  |  | 701,000      |  |              |  | 650,000 |  |     |  | 11.80 |  |  |  | 10.20 | 
|February           |  |  | 710,000      |  |              |  | 700,000 |  |     |  | 12.00 |  |  |  | 10.55 | 



| | (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.                                                                                                                                                                                                  

For information concerning a temporary trading halt in our ADSs in 2001,
see Item 4.A. History and Development of the Company.




ITEM 10. ADDITIONAL INFORMATION.

A. SHARE CAPITAL.

Not applicable

B. MEMORANDUM AND ARTICLES OF ASSOCIATION.

CORPORATE OBJECTS AND PURPOSES IN OUR ARTICLES OF INCORPORATION

Article 2 of our articles of incorporation states our corporate objectives
and purposes, which include:



| |  |  | Data gathering, analyzing, processing and providing by use of
computer telecommunications networks and the internet;                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Research and development related to data processing, and
development, production, sale and technical guidance of and consulting
service for software and hardware;
|
| |  |  | Development, manufacture, sale and technical guidance of and
consulting service for computers and peripheral equipment;                                           

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| |  |  | 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;                                                                  
|
| |  |  | 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;                                                                                                                               

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| |  |  | 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.

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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | the right to receive interim dividends as provided for in our
articles of incorporation, with this right lapsing three full years
after the due date for payment according to a provision in our articles
of incorporation;                                                                                                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the right to vote at a shareholders meeting (cumulative voting is
not allowed under our articles of incorporation);                                                                                                                                                                                                                                                                 
|
| |  |  | the right to receive surplus in the event of liquidation; and                                                                                                                                                                                                                                                                                                                        
|
| |  |  | the right to require us to purchase shares when a shareholder
opposes: (1) the transfer of all or a material part of the business,
(2) an amendment of our articles of incorporation to establish a
restriction on share transfer, (3) exchange of stock for stock in a
company in existence or to be newly incorporated, (4) corporate
separation, or (5) a merger or consolidation.

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

Shareholders holding 10% or more of the outstanding shares with voting
rights have the right to apply to a court of competent jurisdiction, or
competent court for:



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

Shareholders who have held 3% or more of the outstanding shares with
voting rights for six months or more have the right to:



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

Shareholders holding 3% or more of the outstanding shares with voting
rights have the right to:

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| |  |  | 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.                                                                          

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.

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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.

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.

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Under the Master Agreement of Business Arrangements, in 1997, between
ITOCHU Technology, Inc. (ITI), and us, we licensed to ITI internet
server-related software for the internet server hosting business provided by
ITI. The agreement was terminated as of November 30, 2000.

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 Amended and Restated Agreement on Delegation of Business
originally dated May 1, 1998, as amended and restated on February 1, 2000
between Hikari Tsushin and us, we authorized Hikari Tsushin to serve as sales
agent for subscriptions of Hitmail hosting services for an initial commission
of Yen30,000 per subscriber and 50% of the monthly subscription fee payable to
us. The agreement was terminated by us effective October 31, 2000 in an
Agreement on Agreed Termination and Transfer of Business, which provided for us
to pay a fee of Yen3.5 billion to Hikari Tsushin and certain commissions for
each new application for subscriptions accepted by Hikari Tsushin in November
2000. We retained the right to use the service mark for Hitmail in connection
with Hitmail hosting services after the termination date.

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

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addresses, an annual domain
maintenance fee, and not to disclose end users confidential information.

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.

D. EXCHANGE CONTROLS.

JAPANESE FOREIGN EXCHANGE REGULATIONS

The Foreign Exchange and Foreign Trade Law of Japan, frequently referred
to as the Foreign Exchange Law, and related cabinet orders and ministerial
ordinances govern the issuance of shares by companies and the acquisition and
holding of shares by exchange non-residents and foreign investors under the
Foreign Exchange Law.

Exchange non-residents are:



| |  |  | individuals who do not reside in Japan; and           
| | - |  | ------------------------------------------------------
|
| |  |  | corporations whose principal offices are not in Japan.

Generally, branches and other offices located within Japan of non-resident
corporations are regarded as exchange residents of Japan and branches and other
offices of Japanese corporations located outside Japan are regarded as exchange
non-residents of Japan.

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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 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.

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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, subject to the following, are not subject to Japanese income tax.
For Japanese tax purposes, a transfer of retained earnings or legal reserve to
stated capital is not treated as a dividend payment to shareholders, unless a
distribution of assets is involved. This is true whether or not the transfer
is made in connection with a stock split or otherwise. In general, a transfer
of additional paid-in capital to stated capital is not treated as a dividend.

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.                                                                                                             

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

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

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

Gains derived from the sale outside Japan of the shares or ADSs by a
non-resident of Japan or a non-Japanese corporation are in general not subject
to Japanese income or corporation taxes. In addition, gains derived from the
sale of shares or ADSs within Japan by a non-resident of Japan or a
non-Japanese corporation not having a permanent establishment in Japan are in
general not subject to Japanese income or corporation taxes. However, if a
Japanese company repurchases its shares or ADSs and distributes assets in
connection with the repurchase, under certain circumstances, the selling
shareholders are deemed to have received a dividend in an amount equal to the
selling price less the aggregate of the stated capital and the additional
paid-in capital attributable to the shares for Japanese tax purposes. An
individual who has acquired shares or ADSs as a distributee, legatee or donee
may have to pay Japanese inheritance and gift taxes at progressive rates.

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

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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,                     
|
| |  |  | 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

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| |  |  | a trust if a United States court can exercise primary supervision
over the trusts administration and one or more United States persons
are authorized to control all substantial decisions of the trust.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

WE BELIEVE THAT THE SHARES OR ADSs ARE LIKELY TO BE TREATED AS STOCK OF A
PASSIVE FOREIGN INVESTMENT COMPANY (A PFIC) FOR UNITED STATES FEDERAL INCOME
TAX PURPOSES AND THIS DISCUSSION SO ASSUMES. AS A RESULT, U.S. HOLDERS MAY BE
SUBJECT TO ADVERSE TAX CONSEQUENCES, AS DESCRIBED BELOW. U.S. HOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THEIR TAX CONSEQUENCES OF OWNING SHARES
IN A PFIC.

PFIC RULES

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



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

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

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| |  |  | the three preceding taxable years
or, if shorter, your holding period for the shares or ADSs.
| |  |  | ---------------------------------------------------------------------------------------------



| | Under these rules:
| | ------------------
|
| |                  
|
| |                  
|
| |                  
|
| |                  

Amounts subject to these rules will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations in respect
of dividends received from other U.S. corporations.

If the shares or ADSs are regularly traded on NASDAQ they will be treated
as marketable stock and you may make a mark-to-market election. If you make
this election, you will not be subject to the PFIC rules described above.
Instead, in general, you will include as ordinary income each year the excess,
if any, of the fair market value of your shares or ADSs at the end of the
taxable year over your adjusted basis in your shares or ADSs, and you will
recognize the additional gain, if any, on sale or other disposition of your
shares or ADSs as ordinary income for that taxable year. You will also be
allowed to take an ordinary loss in respect of the excess, if any, of the
adjusted basis of your shares or ADSs over their fair market value at the end
of the taxable year or over their final sale or disposition prices, but only to
the extent of the net amount of previously included income as a result of the
mark-to-market election. Your basis in the shares or ADSs will be adjusted to
reflect any such income or loss amounts. If you make this election after the
first year of your holding period in the shares or ADSs, any distributions or
dispositions of such shares or ADSs in the year for which such election is made
will be subject to the PFIC rules described above and all mark-to-market gain
with respect to such taxable year will be treated as gain from the disposition
of such shares or ADSs that is subject to the PFIC rules.

If you own shares or ADSs during any year that we are a PFIC you must file
Internal Revenue Service Form 8621.

TAXATION OF DIVIDENDS

If you receive distributions that are not subject to the PFIC rules
described above, you must include in your gross income the gross amount of any
dividend paid by us out of our current or accumulated earnings and profits, as
determined
for United States federal income tax purposes. You must include any
Japanese tax withheld from the dividend payment in

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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 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.

F. DIVIDENDS AND PAYING AGENTS.

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Not applicable

G. STATEMENT BY EXPERTS.

Not applicable

H. DOCUMENTS ON DISPLAY.

Our annual reports on Form 20-F, periodic reports on Form 6-K,
Registration Statement on Form F-6 relating to our ADSs and other filings with
the SEC can be inspected and copied without charge at the SECs public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also
get copies by calling the SEC at 1-800-SEC-0330 or by writing the SEC upon
payment of a prescribed fee. Our annual reports on Form 20-F for the fiscal
year ended September 30, 2001 and subsequent years and our periodic reports on
Form 6-K from November 8, 2002 may be reviewed on the SECs EDGAR database at
www.sec.gov.

In addition, documents referred to in this 20-F filing may be inspected at
our Tokyo headquarters, located at Hikari., 6th Floor, 16-13, Ikebukuro 2-chome
Toshima-ku, Tokyo 171-0014, Japan.

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, 2002, 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 and 2002, 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

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equivalents are
subject to interest rate risk. Due to the short duration and conservative
nature of these investments, we do not believe that we have a material exposure
to interest rate risk.




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not applicable




PART II




ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

Not applicable




ITEM 14. MATERIAL MODIFICATIONS TO THE
RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Since our March 2000 initial public offering we have not materially
modified the instruments defining the rights of holders of any class of
registered securities, except that on November 21, 2000 a change was made in
the ADS ratio to common stock from 5,000 ADSs representing one share of common
stock to 500 ADSs representing one share of common stock.

We received approximately Yen10.7 billion in net proceeds from the sale of
ADSs in our March 2000 initial public offering. As of September 30, 2000, we
had 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. As of September 30,
2001, we had 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. As of September 30, 2002, we had not used any of the
remaining net proceeds.




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  14(c)) as of a date within 90
days of the filing date of this annual report. Based on that evaluation, the
chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures are effective to ensure
that material information relating to Crayfish

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is made to such officers by
others within Crayfish, particularly during the period this annual report was
prepared, in order to allow timely decisions regarding required disclosure.

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.




ITEM 16. [RESERVED]




PART III




ITEM 17. FINANCIAL STATEMENTS.

Not applicable




ITEM 18. FINANCIAL STATEMENTS.

See our financial statements attached hereto beginning on page F-1.




ITEM 19. EXHIBITS




EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                      |  |     
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|EXHIBIT |  | DESCRIPTION                                                                                                                                                                                                          |  | PAGE
|        |  |                                                                                                                                                                                                                      |  |     
|1.1     |  | 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)*                                                                |  |     

64



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                    |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|EXHIBIT |  | DESCRIPTION                                                                                                                                                                                                                                                                        |  | PAGE
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|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    |  | Outsourcing Agreement dated August 1, 2002 between the Registrant and CalltoWeb,
Inc. (English translation)                                                                                                                                                                        |  |    
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|4.12    |  | Outsourcing Fee Agreement dated August 1, 2002
between the Registrant and CalltoWeb, Inc. (English translation)****                                                                                                                                                                |  |    
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|4.13    |  | Amendment to Outsourcing Fee Agreement dated August 1, 2002
between the Registrant and CaltoWeb, Inc. (English translation)****                                                                                                                                                    |  |    
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|4.14    |  | Basic Outsourcing Agreement dated September 30, 2002 between the Registrant and
Global Media Online Inc. (English translation)                                                                                                                                                     |  |    
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|4.15    |  | Outsourcing Fee Agreement dated September 30, 2002 between the Registrant and
Global Media Online Inc. (English translation)****                                                                                                                                                   |  |    
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|4.16    |  | Outsourcing and Fee Agreement Amendment dated November 1, 2002 between the Registrant and
Global Media Online Inc. (English translation)****                                                                                                                                       |  |    
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|4.17    |  | Sales Agreement dated October 31, 2002 between the Registrant and Diamond Lease
Company Ltd. (English translation)****                                                                                                                                                             |  |    

65



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|        |  |                                                                                                                                        |  |     
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|EXHIBIT |  | DESCRIPTION                                                                                                                            |  | PAGE
|        |  |                                                                                                                                        |  |     
|4.18    |  | Lease Agreement dated September 30, 2002 between the Registrant and Global Media
Online Inc. (English translation)****                 |  |    
|        |  |                                                                                                                                        |  |     
|4.19    |  | Amendment of Basic Outsourcing Agreement dated March 7, 2003 between
the Registrant and Global Media Online Inc. (English translation) |  |    
|        |  |                                                                                                                                        |  |     
|10.1    |  | Description of American Depositary Receipts                                                                                            |  |    



---

|*    |  | 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.                                              
|    
|**** |  | This exhibit contains confidential material that has been omitted
pursuant to a Confidential Treatment Request. The omitted information has
been filed separately with the Securities and Exchange Commission.




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                
| |  |                   

Date: March 27, 2003





---



##### Table of Contents



CERTIFICATIONS

I, Kazuhiko Muraki, certify that:



|1. I have reviewed this annual report on Form 20-F of Crayfish Co., Ltd.;                                                                                                                                                                                                                                                  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                           
|2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
|                                                                                                                                                                                                                                                                                                                           
|3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;                   
|                                                                                                                                                                                                                                                                                                                           
|4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                  



| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

67



---



##### Table of Contents





|6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 27, 2003

/s/ Kazuhiko Muraki

---

68



---



##### Table of Contents



I, Fumio Komatsubara, certify that:



|1. I have reviewed this annual report on Form 20-F of Crayfish Co., Ltd.;                                                                                                                                                                                                                                                  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                           
|2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
|                                                                                                                                                                                                                                                                                                                           
|3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;                   
|                                                                                                                                                                                                                                                                                                                           
|4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                  



| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        



|6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



69



---



##### Table of Contents



date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 27, 2003



/s/ Fumio Komatsubara


Name: Fumio Komatsubara
Title: Chief Financial Officer




70



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##### Table of Contents



CRAYFISH CO., LTD.
INDEX TO FINANCIAL STATEMENTS

|                                                                                         |  |                   |     | 
|---------------------------------------------------------------------------------------- |  | ----------------- | --- | 
|                                                                                         |  | Page in Form 20-F
|                                                                                         |  |                  
|Report of Independent Certified Public Accountants                                       |  |                   | F-2 | 
|Balance Sheets as of September 30, 2001 and 2002                                         |  |                   | F-3 | 
|Statements of Operations for the years ended September 30, 2000, 2001 and 2002           |  |                   | F-4 | 
|Statements of Shareholders Equity for the years ended September 30, 2000, 2001 and 2002 |  |                   | F-6 | 
|Statements of Cash Flows for the years ended September 30, 2000, 2001 and 2002           |  |                   | F-7 | 
|Notes 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



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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, 2001 and 2002 and the related
statements of operations, shareholders equity and cash flows for each of the
three years in the period ended September 30, 2002. 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, 2001 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2002, in
conformity with accounting principles generally accepted in the United States
of America.

Also, in our opinion, the U.S. dollar amounts in the accompanying
financial statements have been translated from Japanese yen on the basis set
forth in Note 3 to the financial statements.

BDO Sanyu & Co.Tokyo, Japan

December 21, 2002

F-2



---



##### Table of Contents



CRAYFISH CO., LTD.

BALANCE SHEETS
(in thousands, except share and per share amounts)

|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |         |         |  |          | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ---------- | ---------- | ------------- |  |  | ------------- |  | --------- | ---------- | ---------- |  | ------ | ------- | ------- |  | -------- | 
|                                                     |                                                                                                                       |                                            |             |            |            | September 30, |  |  |              
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  | September 30,
|                                                     |                                                                                                                       |                                            |             |            |            | 2001          |  |  |               |  |           |            | 2002       |  |        | 2002   
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |         |         |  | (Note 3) | 
|ASSETS                                               |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|Current assets:                                      |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     | Cash and cash
equivalents                                                                                             |                                            | ¥           | 14,429,199 |            |               |  |  |               |  | ¥         | 16,412,076 |            |  | $      | 134,813 |        
|                                                     | Time deposit in bank                                                                                                  |                                            |             | 200,000    |            |               |  |  |               |  |           | 200,000    |            |  |        | 1,643   |        
|                                                     | Accounts receivable, net of allowance for
doubtful accounts of ¥6,860 and ¥8,147 ($67) in
2001 and 2002, respectively |                                            |             | 30,714     |            |               |  |  |               |  |           | 14,751     |            |  |        | 121     |        
|                                                     | Accounts receivable due from related
parties                                                                          |                                            |             |           |            |               |  |  |               |  |           | 21,436     |            |  |        | 176     |        
|                                                     | Consumption tax refund
receivable                                                                                     |                                            |             | 113,606    |            |               |  |  |               |  |           |           |            |  |        |        |        
|                                                     | Prepaid expenses and other current
assets                                                                             |                                            |             | 269,729    |            |               |  |  |               |  |           | 61,017     |            |  |        | 501     |        
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     |                                                                                                                       | Total current assets                       |             |            | 15,043,248 |               |  |  |               |  |           |            | 16,709,280 |  |        |         | 137,254 | 
|Property and equipment,
net                          |                                                                                                                       |                                            | 323,624     |            |            |               |  |  |               |  | 159,390   |            |            |  | 1,309  |        
|Investments in equity
securities                     |                                                                                                                       |                                            | 33,250      |            |            |               |  |  |               |  |          |            |            |  |       |        
|Investment in an
affiliate                           |                                                                                                                       |                                            | 127,374     |            |            |               |  |  |               |  |          |            |            |  |       |        
|Deposits paid                                        |                                                                                                                       |                                            | 55,636      |            |            |               |  |  |               |  | 4,630     |            |            |  | 38     |        
|Deposits paid to related
parties                     |                                                                                                                       |                                            |            |            |            |               |  |  |               |  | 24,751    |            |            |  | 203    |        
|Other assets                                         |                                                                                                                       |                                            | 26,530      |            |            |               |  |  |               |  | 16,851    |            |            |  | 139    |        
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     |                                                                                                                       | Total assets                               |             | ¥          | 15,609,662 |               |  |  |               |  |           | ¥          | 16,914,902 |  |        | $       | 138,943 | 
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|LIABILITIES AND SHAREHOLDERS
EQUITY                 |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|Current liabilities:                                 |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     | Accounts payable                                                                                                      |                                            |             | 174,369    |            |               |  |  |               |  |           | 74,160     |            |  |        | 609     |        
|                                                     | Accounts payable due to related
parties                                                                               |                                            |             | 6,964      |            |               |  |  |               |  |           | 9,110      |            |  |        | 75      |        
|                                                     | Consumption tax payable                                                                                               |                                            |             |           |            |               |  |  |               |  |           | 88,819     |            |  |        | 730     |        
|                                                     | Deferred initial contract
fees                                                                                        |                                            |             | 9,556      |            |               |  |  |               |  |           | 4,004      |            |  |        | 33      |        
|                                                     | Accrued liabilities and other current
liabilities                                                                     |                                            |             | 41,967     |            |               |  |  |               |  |           | 22,009     |            |  |        | 180     |        
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     |                                                                                                                       | Total current liabilities                  |             |            | 232,856    |               |  |  |               |  |           |            | 198,102    |  |        |         | 1,627   | 
|Commitments and contingencies (Note
6)               |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|Common stock                                         |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|Par value: ¥50,000 in 2001, designated
value in 2002 |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|Authorized shares: 40,700 in 2001, 40,996
in 2002    |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|Outstanding shares: 10,249 in 2001,
10,258 in 2002   |                                                                                                                       |                                            | 8,058,075   |            |            |               |  |  |               |  | 8,060,325 |            |            |  | 66,209 |        
|Additional paid-in
capital                           |                                                                                                                       |                                            | 18,805,670  |            |            |               |  |  |               |  | 6,734,094 |            |            |  | 55,316 |        
|Legal reserve                                        |                                                                                                                       |                                            | 180         |            |            |               |  |  |               |  |          |            |            |  |       |        
|Retained earnings, since October 1,
2001             |                                                                                                                       |                                            |            |            |            |               |  |  |               |  | 1,922,381 |            |            |  | 15,791 |        
|Accumulated deficit                                  |                                                                                                                       |                                            | (11,487,119 | )          |            |               |  |  |               |  |          |            |            |  |       |        
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     |                                                                                                                       | Total shareholders equity                 |             |            | 15,376,806 |               |  |  |               |  |           |            | 16,716,800 |  |        |         | 137,316 | 
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        
|                                                     |                                                                                                                       | Total liabilities and shareholders
equity |             | ¥          | 15,609,662 |               |  |  |               |  |           | ¥          | 16,914,902 |  |        | $       | 138,943 | 
|                                                     |                                                                                                                       |                                            |             |            |            |               |  |  |               |  |           |            |            |  |        |        

F-3



---



##### Table of Contents



CRAYFISH CO., LTD.

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

|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            |  |       |          |          | 
|-------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---------- | --------------------------------------- | ------- | ------------- | ----------- | ---- | --------- | - | ----------- | - |  | ---- | --------- | ------------------ | ------- | - | ---------- |  | ----- | -------- | -------- | 
|                                                                           |  |                                                                                 |            |                                         |         | September 30, |             |      |           |  
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |  
|                                                                           |  |                                                                                 |            |                                         |         | 2000          |             | 2001 |           |   |             |   |  | 2002 |           | September 30, 2002
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                   
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            |  |       | (Note 3)
|Revenue                                                                    |  | ¥                                                                               | 6,728,865  |                                         |         | ¥             | 5,311,814   |      |           |   |             |   |  | ¥    | 2,945,360 |                    |         | $ | 24,194     | 
|Cost of revenue                                                            |  |                                                                                 | 5,653,051  |                                         |         |               | 3,391,888   |      |           |   |             |   |  |      | 636,174   |                    |         |   | 5,226      | 
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|Gross profit                                                               |  |                                                                                 | 1,075,814  |                                         |         |               | 1,919,926   |      |           |   |             |   |  |      | 2,309,186 |                    |         |   | 18,968     | 
|Operating expenses:                                                        |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|                                                                           |  | Sales promotion expenses to a related
party                                     |            |                                         | 204,209 |               |             |      |          |   |             |   |  |      |           |                    |        |   |            |  |      |         
|                                                                           |  | Selling, general and
administrative                                             |            |                                         | 925,008 |               |             |      | 1,713,717 |   |             |   |  |      |           |                    | 806,258 |   |            |  | 6,392 |         
|                                                                           |  | Research and
development                                                        |            |                                         | 944,942 |               |             |      | 1,014,774 |   |             |   |  |      |           |                    | 51,031  |   |            |  | 419   |         
|                                                                           |  | Loss on disposal of property and
equipment                                      |            |                                         | 4,975   |               |             |      | 332,452   |   |             |   |  |      |           |                    | 97,050  |   |            |  | 481   |         
|                                                                           |  | Loss 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  |   |            |  | 196   |         
|                                                                           |  | Expenses related to business
restructuring                                      |            |                                         |        |               |             |      | 360,323   |   |             |   |  |      |           |                    |        |   |            |  | 547   |         
|                                                                           |  | Loss on impairment of intangible
servicing asset purchased from a related
party |            |                                         |        |               |             |      | 3,500,000 |   |             |   |  |      |           |                    |        |   |            |  |      |         
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|                                                                           |  |                                                                                 |            | Total operating expenses                |         |               | 2,079,134   |      |           |   | 9,273,622   |   |  |      |           |                    |         |   | 978,184    |  |       |          | 8,035    | 
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|(Loss) income from
operations                                              |  |                                                                                 | (1,003,320 | )                                       |         |               | (7,353,696  | )    |           |   |             |   |  |      | 1,331,002 |                    |         |   | 10,933     | 
|Other income
(expenses):                                                   |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|                                                                           |  | Interest income                                                                 |            |                                         | 20,866  |               |             |      | 32,240    |   |             |   |  |      |           |                    | 2,688   |   |            |  | 22    |         
|                                                                           |  | Interest expense                                                                |            |                                         | (40,636 | )             |             |      | (161,930  | ) |             |   |  |      |           |                    | (21     | ) |            |  |      |         
|                                                                           |  | Foreign exchange gain (loss),
net                                               |            |                                         | 12,351  |               |             |      | 24,690    |   |             |   |  |      |           |                    | (3,357  | ) |            |  | (27   | )       
|                                                                           |  | Loss on devaluation of
investment in an affiliate                               |            |                                         |        |               |             |      | (399,377  | ) |             |   |  |      |           |                    |        |   |            |  |      |         
|                                                                           |  | (Loss) gain on sale and write-off
of investments                                |            |                                         |        |               |             |      | (440,000  | ) |             |   |  |      |           |                    | 9,975   |   |            |  | 82    |         
|                                                                           |  | Gain on sale of investment in an
affiliate                                      |            |                                         |        |               |             |      |          |   |             |   |  |      |           |                    | 32,646  |   |            |  | 268   |         
|                                                                           |  | Equity in loss of an
affiliate                                                  |            |                                         |        |               |             |      | (73,249   | ) |             |   |  |      |           |                    |        |   |            |  |      |         
|                                                                           |  | Other, net                                                                      |            |                                         | 15,084  |               |             |      | (29,486   | ) |             |   |  |      |           |                    | (31,389 | ) |            |  | (258  | )       
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|                                                                           |  |                                                                                 |            | Other income (expenses), net            |         |               | 7,665       |      |           |   | (1,047,112  | ) |  |      |           |                    |         |   | 10,542     |  |       |          | 87       | 
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|(Loss) income from continuing operations
before provision for income
taxes |  |                                                                                 | (995,655   | )                                       |         |               | (8,400,808  | )    |           |   |             |   |  |      | 1,341,544 |                    |         |   | 11,020     | 
|Provision for income
taxes                                                 |  |                                                                                 | 3,800      |                                         |         |               | 3,800       |      |           |   |             |   |  |      | 3,800     |                    |         |   | 31         | 
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|(Loss) income from continuing
operations                                   |  |                                                                                 | (999,455   | )                                       |         |               | (8,404,608  | )    |           |   |             |   |  |      | 1,337,744 |                    |         |   | 10,989     | 
|Loss from operations of discontinued
business segments                     |  |                                                                                 | (542,129   | )                                       |         |               | (1,164,113  | )    |           |   |             |   |  |      |          |                    |         |   |           | 
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|Net (loss) income                                                          |  | ¥                                                                               | (1,541,584 | )                                       |         | ¥             | (9,568,721  | )    |           |   |             |   |  | ¥    | 1,337,744 |                    |         | $ | 10,989     | 
|                                                                           |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|(Loss) earnings Per
Share                                                  |  |                                                                                 |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            | 
|                                                                           |  | Per common share basic:                                                         |            |                                         |         |               |             |      |           |   |             |   |  |      |           |                    |         |   |            |  |       |         
|                                                                           |  |                                                                                 |            | (Loss) income from continuing
operation |         | ¥             | (106,859.30 | )    |           | ¥ | (823,496.77 | ) |  |      |           |                    |         | ¥ | 130,460.70 |  |       | $        | 1,071.63 | 

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, |             |        |   |            
|                                             |                           |                                                        |                                                        |   |               |             |        |   |            
|                                             |                           |                                                        |                                                        |   | 2000          |             | 2001   |   | 2002        |             | September 30, 2002
|                                             |                           |                                                        |                                                        |   |               |             |        |   |             |             |                   
|                                             |                           |                                                        |                                                        |   |               |             |        |   |             |             |                    |   |            |            |        |   | (Note 3)
|                                             |                           |                                                        | Loss from operations of discontinued
business segments |   |               | (57,963.11  | )      |   |             | (114,061.63 | )                  |   |            |           |        |   |          |         | 
|                                             |                           |                                                        |                                                        |   |               |             |        |   |             |             |                    |   |            |            |        |  
|                                             |                           |                                                        | Net (loss) income                                      |   | ¥             | (164,822.41 | )      |   | ¥           | (937,558.40 | )                  |   | ¥          | 130,460.70 |        |   | $        | 1,071.63 | 
|                                             |                           |                                                        |                                                        |   |               |             |        |   |             |             |                    |   |            |            |        |  
|                                             | Per common share
diluted: |                                                        |                                                        |   |               |             |        |   |             |             |                    |   |            |            |        |   |         
|                                             |                           | (Loss) income from continuing
operations               |                                                        | ¥ | (106,859.0)   |             |        | ¥ | (823,496.77 | )           |                    | ¥ | 130,346.30 |            |        | $ | 1,070.69 |         
|                                             |                           | Loss from operations of discontinued
business segments |                                                        |   | (57,963.11    | )           |        |   | (114,061.63 | )           |                    |   |           |            |        |   |         |         
|                                             |                           |                                                        |                                                        |   |               |             |        |   |             |             |                    |   |            |            |        |  
|                                             |                           | Net (loss) Income                                      |                                                        | ¥ | (164,822,41   | )           |        | ¥ | (937,558.40 | )           |                    | ¥ | 130,346.30 |            |        | $ | 1,070.69 |         
|                                             |                           |                                                        |                                                        |   |               |             |        |   |             |             |                    |   |            |            |        |  
|Shares used in per share calculation
- basic |                           |                                                        | 9,353                                                  |   |               |             | 10,206 |   |             |             | 10,254             |   |            |            | 10,254 |  
|                                             |                           |                                                        | diluted                                                |   |               | 9,353       |        |   |             | 10,206      |                    |   |            | 10,263     |        |   |          | 10,263   | 

F-5



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##### Table of Contents



CRAYFISH CO., LTD.

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

|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |   |            |   |  | 
|------------------------------------------------- |  |  | ------ | ------------ |  | ---------- | - | ------------ |  | -------- | ----------- | -------------- |  | ------------ | ------------- | -------- | ------ | --- | ----- | ---- | - | -------- | - | -------- | - | - | --------- | - | ---------- | - |  | 
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               | Retained |        |     |       |      |   |          |   |          |   |   |           |   |            |  
|                                                  |  |  |        | Common Stock |  | Additional |   | Earnings     |  |          |             |                |  |              |               |          |        |     | Total |     
|                                                  |  |  |        |              |  | Paid-in    |   | (Accumulated |  | Legal    |             | Deferred Stock |  |              | Shareholders |         
|                                                  |  |  |        | Shares       |  | Amount     |   | Capital      |  | Deficit) |             | Reserve        |  | Compensation |               |          | equity |    
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |    
|Balances, September 30,
1999                      |  |  | 8,305  |              |  |            | ¥ | 2,321,375    |  | ¥        | 2,510,515   |                |  | ¥            | (376,814)     |          | ¥      | 180 |       |      | ¥ | (313,007 | ) |          |   | ¥ | 4,142,249 |  
|Stock warrants
exercised                          |  |  | 11     |              |  |            |   | 1,312        |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |   | 1,312      |  
|Deferred stock
compensation                       |  |  |        |              |  |            |   |              |  |          | (50,750     | )              |  |              |               |          |        |     |       |      |   |          |   | 187,408  |   |   |           |   | 136,658    |  
|Issuance of stock, net
of ¥649,212 issuance
costs |  |  | 1,870  |              |  |            |   | 5,722,200    |  |          | 16,566,405  |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |   | 22,288,605 |  
|Net loss                                          |  |  |        |              |  |            |   |              |  |          |             |                |  |              | (1,541,584    | )        |        |     |       |      |   |          |   |          |   |   |           |   | (1,541,584 | )
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |  
|Balances, September 30,
2000                      |  |  | 10,186 |              |  |            |   | 8,044,887    |  |          | 19,026,170  |                |  |              | (1,918,398    | )        |        |     |       | 180  |   |          |   | (125,599 | ) |   |           |   | 25,027,240 |  
|Stock options exercised                           |  |  | 63     |              |  |            |   | 13,188       |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |   | 13,188     |  
|Stock options forfeited                           |  |  |        |              |  |            |   |              |  |          | (220,500    | )              |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |   | (220,500   | )
|Deferred stock
compensation                       |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   | 125,599  |   |   |           |   | 125,599    |  
|Net loss                                          |  |  |        |              |  |            |   |              |  |          |             |                |  |              | (9,568,721    | )        |        |     |       |      |   |          |   |          |   |   |           |   | (9,568,721 | )
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |  
|Balances, September 30,
2001                      |  |  | 10,249 |              |  |            |   | 8,058,075    |  |          | 18,805,670  |                |  |              | (11,487,119   | )        |        |     |       | 180  |   |          |   | 0        |   |   |           |   | 15,376,806 |  
|Transfer 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        |   |   |           |   | 15,376,806 |  
|Stock options exercised                           |  |  | 9      |              |  |            |   | 2,250        |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |   | 2,250      |  
|Net income                                        |  |  |        |              |  |            |   |              |  |          |             |                |  |              | 1,337,744     |          |        |     |       |      |   |          |   |          |   |   |           |   | 1,337,744  |  
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |  
|Balances, September 30,
2002                      |  |  | 10,258 |              |  |            | ¥ | 8,060,325    |  | ¥        | 6,734,094   |                |  | ¥            | 1,922,381     |          |        |     | ¥     | 0    |   |          | ¥ | 0        |   |   |           | ¥ | 16,716,800 |  
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |  
|Balances, September 30, 2001
(Note 3)             |  |  | 10,249 |              |  |            | $ | 66,191       |  | $        | 154,474     |                |  | $            | (94,358       | )        |        |     | $     | 2    |   |          | $ | 0        |   |   |           | $ | 126,309    |  
|Transfer to accumulated deficit (Note 1)          |  |  |        |              |  |            |   |              |  |          | (99,158     | )              |  |              | 99,160        |          |        |     |       | (2   | ) |          |   |          |   |   |           |   |            |  
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |  
|Adjusted balances, October 1,
2001                |  |  | 10,249 |              |  |            |   | 66,191       |  |          | 55,316      |                |  |              | 4,802         |          |        |     |       |      |   |          |   | 0        |   |   |           |   | 126,309    |  
|Stock options exercised                           |  |  | 9      |              |  |            |   | 18           |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |   | 18         |  
|Net income                                        |  |  |        |              |  |            |   |              |  |          |             |                |  |              | 10,989        |          |        |     |       |      |   |          |   |          |   |   |           |   | 10,989     |  
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |  
|Balances, September 30,
2002                      |  |  | 10,258 |              |  |            | $ | 66,209       |  | $        | 55,316      |                |  | $            | 15,791        |          |        |     | $     | 0    |   |          | $ | 0        |   |   |           | $ | 137,316    |  
|                                                  |  |  |        |              |  |            |   |              |  |          |             |                |  |              |               |          |        |     |       |      |   |          |   |          |   |   |           |  

F-6



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##### Table of Contents



CRAYFISH CO., LTD.

STATEMENTS OF CASH FLOWS(in thousands)

|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |           |        |       |   |        |  
|----------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------------------- | ----------------------------- | --------------------------------------------------- |  | - | ---------- | ---------- | ------- | ------------- | ---------- | ------------- |  | - | ---------- | ---------- | --------- | - | ---------- | - |  | ---- | ---------- | ------------- | ------- | - | --------- | ------ | ----- | - | ------ | -
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         | September 30, |            |               | 
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            | September 30,
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         | 2000          |            |               |  |   |            | 2001       |           |   |            |   |  | 2002 |            | 2002 (Note 3)
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |              
|Cash flows from operating
activities:                 |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |           |       
|                                                      | Net (loss) income                                      |                                                           |                               |                                                     |  |   | ¥          | (1,541,584 | )       |               |            |               |  |   | ¥          | (9,568,721 | )         |   |            |   |  |      | ¥          | 1,337,744     |         |   | $         | 10,989 |      
|                                                      | Adjustments to reconcile net
(loss) income to net cash |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |           |        |      
|                                                      |                                                        |                                                           | used in operating
activities: |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |           |        |       |   |       
|                                                      |                                                        | Amortization (reversal) of deferred
stock compensation    |                               |                                                     |  |   |            |            | 136,658 |               |            |               |  |   |            |            | (94,901   | ) |            |   |  |      |            |               |        |   |           |        |      |  
|                                                      |                                                        | Depreciation and
amortization                             |                               |                                                     |  |   |            |            | 276,723 |               |            |               |  |   |            |            | 789,421   |   |            |   |  |      |            |               | 136,932 |   |           |        | 1,125 |  
|                                                      |                                                        | Allowance for doubtful
accounts                           |                               |                                                     |  |   |            |            | (181    | )             |            |               |  |   |            |            | 6,820     |   |            |   |  |      |            |               | 1,287   |   |           |        | 11    |  
|                                                      |                                                        | Loss on impairment and disposal of
property and equipment |                               |                                                     |  |   |            |            | 6,842   |               |            |               |  |   |            |            | 2,514,891 |   |            |   |  |      |            |               | 97,050  |   |           |        | 481   |  
|                                                      |                                                        | Loss 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  | ) |           |        | (82   | )
|                                                      |                                                        | Gain on sale of investment in an
affiliate, net           |                               |                                                     |  |   |            |            |        |               |            |               |  |   |            |            |          |   |            |   |  |      |            |               | (32,646 | ) |           |        | (268  | )
|                                                      |                                                        | 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                                 |  |   |            |            |         |               | 17,356     |               |  |   |            |            |           |   | (55,899    | ) |  |      |            |               |         |   | (6,759    | )      |       |   | (56    | )
|                                                      |                                                        |                                                           |                               | Prepaid expenses and other current
assets           |  |   |            |            |         |               | (218,709   | )             |  |   |            |            |           |   | 141,475    |   |  |      |            |               |         |   | 322,318   |        |       |   | 2,648  |  
|                                                      |                                                        |                                                           |                               | Accounts payable                                    |  |   |            |            |         |               | 36,024     |               |  |   |            |            |           |   | (116,197   | ) |  |      |            |               |         |   | (98,063   | )      |       |   | (806   | )
|                                                      |                                                        |                                                           |                               | Interest payable                                    |  |   |            |            |         |               | 33,805     |               |  |   |            |            |           |   |           |   |  |      |            |               |         |   |          |        |       |   |       |  
|                                                      |                                                        |                                                           |                               | Consumption tax payable                             |  |   |            |            |         |               |           |               |  |   |            |            |           |   |           |   |  |      |            |               |         |   | 88,819    |        |       |   | 730    |  
|                                                      |                                                        |                                                           |                               | Accrued liabilities and other current
liabilities   |  |   |            |            |         |               | 47,021     |               |  |   |            |            |           |   | (139,532   | ) |  |      |            |               |         |   | (58,293   | )      |       |   | (163   | )
|                                                      |                                                        |                                                           |                               | Deferred initial contract fees                      |  |   |            |            |         |               |           |               |  |   |            |            |           |   | 9,556      |   |  |      |            |               |         |   | (5,552    | )      |       |   | (46    | )
|                                                      |                                                        |                                                           |                               | Other
assets                                        |  |   |            |            |         |               | (1,080     | )             |  |   |            |            |           |   | 2,062      |   |  |      |            |               |         |   | 4,601     |        |       |   | 38     |  
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          
|                                                      |                                                        |                                                           |                               | Net cash (used in) provided by operating
activities |  |   |            |            |         |               | (1,207,125 | )             |  |   |            |            |           |   | (5,506,783 | ) |  |      |            |               |         |   | 1,777,463 |        |       |   | 14,601 |  
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          
|Cash flows from investing
activities:                 |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |           |       
|Purchase of time deposit in
bank                      |                                                        |                                                           |                               |                                                     |  |   |           |            |         |               |            |               |  |   | (200,000   | )          |           |   |            |   |  |      |           |               |         |   |          |       
|Proceeds from sale of property and
equipment          |                                                        |                                                           |                               |                                                     |  |   | 2,885,500  |            |         |               |            |               |  |   | 13,822     |            |           |   |            |   |  |      | 10,484     |               |         |   | 86        |       
|Purchase of property and
equipment                    |                                                        |                                                           |                               |                                                     |  |   | (3,360,967 | )          |         |               |            |               |  |   | (542,232   | )          |           |   |            |   |  |      | (36,681    | )             |         |   | (301      | )     
|Investment in debt
instrument                         |                                                        |                                                           |                               |                                                     |  |   |           |            |         |               |            |               |  |   | (254,000   | )          |           |   |            |   |  |      |           |               |         |   |          |       
|Proceeds from sale of investment in an
affiliate      |                                                        |                                                           |                               |                                                     |  |   |           |            |         |               |            |               |  |   |           |            |           |   |            |   |  |      | 160,020    |               |         |   | 1,314     |       
|Investment in an
affiliate                            |                                                        |                                                           |                               |                                                     |  |   |           |            |         |               |            |               |  |   | (600,000   | )          |           |   |            |   |  |      |           |               |         |   |          |       
|Proceeds from sale of investment in
equity securities |                                                        |                                                           |                               |                                                     |  |   |           |            |         |               |            |               |  |   | 9,650      |            |           |   |            |   |  |      | 43,225     |               |         |   | 355       |       
|Purchase of investments in equity
securities          |                                                        |                                                           |                               |                                                     |  |   |           |            |         |               |            |               |  |   | (197,000   | )          |           |   |            |   |  |      |           |               |         |   |          |       
|Deposits                                              |                                                        |                                                           |                               |                                                     |  |   | (91,076    | )          |         |               |            |               |  |   | 177,051    |            |           |   |            |   |  |      | 26,255     |               |         |   | 216       |       
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          
|                                                      |                                                        |                                                           |                               | Net cash (used in) provided by investing
activities |  |   |            |            |         |               | (566,543   | )             |  |   |            |            |           |   | (1,592,709 | ) |  |      |            |               |         |   | 203,303   |        |       |   | 1,670  |  
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          
|Cash flows from financing
activities:                 |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |           |       
|Change in restricted
cash                             |                                                        |                                                           |                               |                                                     |  |   | 812,500    |            |         |               |            |               |  |   | 950,000    |            |           |   |            |   |  |      |           |               |         |   |          |       
|Principal payments on capital
leases                  |                                                        |                                                           |                               |                                                     |  |   | (799,301   | )          |         |               |            |               |  |   | (2,414,008 | )          |           |   |            |   |  |      | (139       | )             |         |   | (1        | )     
|Proceeds from issuance of long-term
debt              |                                                        |                                                           |                               |                                                     |  |   | 35,135     |            |         |               |            |               |  |   |           |            |           |   |            |   |  |      |           |               |         |   |          |       
|Repayment of long-term
debt                           |                                                        |                                                           |                               |                                                     |  |   | (1,727,342 | )          |         |               |            |               |  |   | (37,500    | )          |           |   |            |   |  |      |           |               |         |   |          |       
|Proceeds from exercise of stock
options               |                                                        |                                                           |                               |                                                     |  |   | 1,312      |            |         |               |            |               |  |   | 13,188     |            |           |   |            |   |  |      | 2,250      |               |         |   | 18        |       
|Proceeds from issuance of common
stock                |                                                        |                                                           |                               |                                                     |  |   | 22,288,605 |            |         |               |            |               |  |   |           |            |           |   |            |   |  |      |           |               |         |   |          |       
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          
|                                                      |                                                        |                                                           |                               | Net cash provided by (used in) financing
activities |  |   |            |            |         |               | 20,610,909 |               |  |   |            |            |           |   | (1,488,320 | ) |  |      |            |               |         |   | 2,111     |        |       |   | 17     |  
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          
|Net increase (decrease) in cash
equivalents           |                                                        |                                                           |                               |                                                     |  |   | 18,837,241 |            |         |               |            |               |  |   | (8,587,812 | )          |           |   |            |   |  |      | 1,982,877  |               |         |   | 16,288    |       
|Cash and cash equivalents at beginning of
period      |                                                        |                                                           |                               |                                                     |  |   | 4,179,770  |            |         |               |            |               |  |   | 23,017,011 |            |           |   |            |   |  |      | 14,429,199 |               |         |   | 118,525   |       
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          
|Cash and cash equivalents at end of
period            |                                                        |                                                           |                               |                                                     |  | ¥ | 23,017,011 |            |         |               |            |               |  | ¥ | 14,429,199 |            |           |   |            |   |  | ¥    | 16,412,076 |               |         | $ | 134,813   |       
|                                                      |                                                        |                                                           |                               |                                                     |  |   |            |            |         |               |            |               |  |   |            |            |           |   |            |   |  |      |            |               |         |   |          

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CRAYFISH CO., LTD.

STATEMENTS OF CASH FLOWS(in thousands)
(Continued)

|                                     |                        |                                        |  |  |  |  |  |               |           |  |               |  |  |      |  |   |        |  |      |  |               |  |   |     |  |  |   |   | 
|------------------------------------ | ---------------------- | -------------------------------------- |  |  |  |  |  | ------------- | --------- |  | ------------- |  |  | ---- |  | - | ------ |  | ---- |  | ------------- |  | - | --- |  |  | - | - | 
|                                     |                        |                                        |  |  |  |  |  | September 30, |           |  |              
|                                     |                        |                                        |  |  |  |  |  |               |           |  | September 30,
|                                     |                        |                                        |  |  |  |  |  | 2000          |           |  |               |  |  | 2001 |  |   |        |  | 2002 |  | 2002 (Note 3)
|                                     |                        |                                        |  |  |  |  |  |               |           |  |               |  |  |      |  |   |        |  |      |  |              
|Supplemental Cash Flows
Information: |                        |                                        |  |  |  |  |  |               |           |  |               |  |  |      |  |   |        |  |      |  |               |  |   |     |  |  |  
|                                     | Cash transactions:     |                                        |  |  |  |  |  |               |           |  |               |  |  |      |  |   |        |  |      |  |               |  |   |     |  |  |  
|                                     |                        | Cash paid for income taxes             |  |  |  |  |  | ¥             | 4,400     |  |               |  |  |      |  | ¥ | 4,037  |  |      |  |               |  | ¥ | 531 |  |  | $ | 4 | 
|                                     |                        | Cash paid for interest                 |  |  |  |  |  |               | 7,016     |  |               |  |  |      |  |   | 82,439 |  |      |  |               |  |   | 21  |  |  |   |  | 
|                                     | Non-cash transactions: |                                        |  |  |  |  |  |               |           |  |               |  |  |      |  |   |        |  |      |  |               |  |   |     |  |  |   |  
|                                     |                        | Capitalized lease obligations
incurred |  |  |  |  |  | ¥             | 2,887,188 |  |               |  |  |      |  | ¥ |       |  |      |  |               |  | ¥ |    |  |  | $ |  | 
|                                     |                        | Capitalized lease obligation
cancelled |  |  |  |  |  |               | 6,153     |  |               |  |  |      |  |   |       |  |      |  |               |  |   |    |  |  |   |  | 

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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. The Company provides 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 (see Risk of
business concentration in Note 2).

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,
|                                                    |              
|                                                    | 2000          |   |          |   |  | 2001
|                                                    |               |   |          |   |  |     
|Loss from operations                                |               | ¥ | (540,261 | ) |  |      |  |  |  | ¥ | (1,026,180 | )
|Loss on disposal of equipment                       |               |   | (1,868   | ) |  |      |  |  |  |   | (71,910    | )
|Loss on termination of contracts with third
parties |               |   |         |   |  |      |  |  |  |   | (61,848    | )
|Facility expenses                                   |               |   |         |   |  |      |  |  |  |   | (4,175     | )
|                                                    |               |   |          |   |  |      |  |  |  |   |           
|Loss from discontinued segments                     |               | ¥ | (542,129 | ) |  |      |  |  |  | ¥ | (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

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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 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 ($99,160
thousand) as of September 30, 2001, as recorded in the statutory book of
accounts, transferring ¥12,071,576 thousand ($99,158 thousand) of additional
paid-in capital (APIC) and ¥180 thousand ($2 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 ($4,802 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 ($4,802 thousand) which will be carried forward under U. S. GAAP.

2. Summary of Significant Accounting Policies

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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. 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.

Derivative Financial Instruments

Effective October 1, 2000, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133. In accordance with SFAS No 133,
derivative instruments are measured at their fair value on the balance sheet,
and changes in the value of derivative financial instruments are recognized in
current earnings or other comprehensive income depending on whether the
derivative is designated as part of a hedge transaction and, if it is, the type
of transaction. Derivative financial instruments are, when necessary, utilized
by the Company to manage risk exposure to movements in foreign exchange rates.
The Company does not hold derivative financial instruments for trading
purposes.

The Company has not entered into any derivative contracts since August 2000 and
at September 30, 2001 and 2002, the Company had no outstanding derivative
contracts.

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 judgment 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.

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Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization for property and equipment is
determined 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 determined 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

Risk of business concentration:

As mentioned in Nature of Operations in Note 1, the Companys current main
business 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 formed 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.

Revenues from the Deskwing hosting service comprised 98.6%, 99.7% and 100% of
total revenues in the fiscal year ended September 30, 2000, 2001 and 2002,
respectively. Gross profits from the Deskwing hosting service generated 99.3%,
102.5% and 100% of gross profit in the fiscal year ended September 30, 2000,
2001 and 2002, respectively.

Risk of cash concentration:

At September 30, 2002, the Company maintains ¥16,612 million ($136,456
thousand) in banks including a ¥200 million ($1,643 thousand) time deposit with
a maturity of greater than three months, which represented 98.2% of total
assets of the Company. The Deposit Insurance Corporation of

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Japan, a government agency, 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

As discussed in Note 1, the Company formed the Plan in the fiscal year ended
September 30, 2001 to withdraw from Other hosting services and System
development services. Accordingly, the Companys revenue consists of only
Deskwing hosting service during the year of 2002.

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
customer 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 18 months. As of September 30,
2001 and 2002, initial contract fees of ¥9,556 thousand and ¥4,004 thousand
($33 thousand), respectively, were deferred.

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.

Research and development costs

Research and development costs incurred related to internet-based services are
expensed as incurred.

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.

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.

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Advertising and promotional costs

The Company expenses advertising and promotional costs as they are incurred.
Advertising expense for the years of 2000, 2001 and 2002 were ¥62,311 thousand,
¥437,665 thousand and ¥3,220 thousand ($26 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 11).

Since the Company has incurred losses for consecutive periods of the years of
2000 and 2001 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, 2000 and 2001 were 45 shares and 594 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 2000, 2001 or
2002.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Reclassifications

Certain reclassifications have been made to conform to the current year
presentation. These reclassifications have no effects on previously reported
net loss 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, 2002, which was ¥121.74 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.

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4. Recently Issued Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets (SFAS 144). SFAS No. 144
establishes additional criteria as compared to existing generally accepted
accounting principles to determine when a long-lived asset is held for sale.
It also broadens the definition of discontinued operations, but does not
allow for the accrual of future operating losses, as was previously permitted.
The Company plans to adopt SFAS No. 144 in its fiscal year beginning on October
1, 2002, and does not expect that adoption will result in significant changes
to earnings or financial position of the Company.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 requires recording
costs associated with exit or disposal activities at their fair values when
a liability has been incurred. Under previous guidance, certain exit costs
were accrued upon managements commitment to an exit plan, which is
generally before an actual liability has been incurred. The requirements of
SFAS 146 are effective prospectively for exit or disposal activities
initiated after December 31, 2002; however, early application is encouraged.
Management does not expect the adoption of SFAS 146 to have a material
effect on the Companys financial position, results of operations, or cash
flows.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. Management is still evaluating the effects of FIN 45, but does not
expect that the adoption of FIN 45 will have a material effect on the
Companys financial position, results of operations, or cash flows.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure (SFAS 148). SFAS 148 amends SFAS 123 Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148
is effective for fiscal years beginning after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
Management does not expect the adoption of SFAS 148 to have a material
effect on the Companys financial position, results of operations, or cash
flows.

5. Balance Sheet Detail

Property and equipment, net (in thousands):

|                       |  |  |  |  |  |               |         |               |  |      |  |         |  |   |       | 
|---------------------- |  |  |  |  |  | ------------- | ------- | ------------- |  | ---- |  | ------- |  | - | ----- | 
|                       |  |  |  |  |  | September 30, |         |               | 
|                       |  |  |  |  |  |               |         | September 30,
|                       |  |  |  |  |  | 2001          |         | 2002          |  | 2002
|                       |  |  |  |  |  |               |         |               |  |     
|Office equipment       |  |  |  |  |  | ¥             | 390,533 |               |  | ¥    |  | 382,438 |  | $ | 3,141 | 
|Leasehold improvements |  |  |  |  |  |               | 52,818  |               |  |      |  | 6,334   |  |   | 52    | 

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|                                                |  |  |  |  |  |               |          |               |  |      |          |   |  |   |        |  
|----------------------------------------------- |  |  |  |  |  | ------------- | -------- | ------------- |  | ---- | -------- | - |  | - | ------ | -
|                                                |  |  |  |  |  | September 30, |          |               | 
|                                                |  |  |  |  |  |               |          | September 30,
|                                                |  |  |  |  |  | 2001          |          | 2002          |  | 2002
|                                                |  |  |  |  |  |               |          |               |  |     
|Purchased software                              |  |  |  |  |  |               | 25,482   |               |  |      | 15,854   |   |  |   | 130    |  
|                                                |  |  |  |  |  |               |          |               |  |      |          |   |  |   |        |  
|                                                |  |  |  |  |  |               | 468,833  |               |  |      | 404,626  |   |  |   | 3,323  |  
|Less: Accumulated
depreciation and amortization |  |  |  |  |  |               | (145,209 | )             |  |      | (245,236 | ) |  |   | (2,014 | )
|                                                |  |  |  |  |  |               |          |               |  |      |          |   |  |   |        |  
|Property and equipment, net                     |  |  |  |  |  | ¥             | 323,624  |               |  | ¥    | 159,390  |   |  | $ | 1,309  |  
|                                                |  |  |  |  |  |               |          |               |  |      |          |   |  |   |        |  

As discussed in Restructuring and impairment charges in Note 1, the decrease
of property and equipment in the year of 2001 was due to the write-down of
impaired equipment, and subsequent sale or transfer of this equipment to other
assets on the balance sheets. Property and equipment held for sale of ¥25,767
thousand and ¥16,088 thousand ($132 thousand) at September 30, 2001 and 2002,
respectively, are included in other assets on the balance sheets.

Depreciation and amortization expense for the years of 2000, 2001 and 2002 was
¥276,723 thousand, ¥789,421 thousand and ¥136,932 thousand ($1,125 thousand),
respectively. Included in depreciation and amortization expense is
depreciation expense relating to assets subject to capital leases of ¥184,739
thousand, ¥550,470 thousand and ¥74 thousand ($1 thousand) for the years of
2000, 2001 and 2002, respectively.

Accrued liabilities (in thousands):

|                          |  |  |  |  |  |               |        |               |  |      |        |  |  |   |     | 
|------------------------- |  |  |  |  |  | ------------- | ------ | ------------- |  | ---- | ------ |  |  | - | --- | 
|                          |  |  |  |  |  | September 30, |        |               | 
|                          |  |  |  |  |  |               |        | September 30,
|                          |  |  |  |  |  | 2001          |        | 2002          |  | 2002
|                          |  |  |  |  |  |               |        |               |  |     
|Compensated absences      |  |  |  |  |  | ¥             | 7,160  |               |  | ¥    | 8,872  |  |  | $ | 73  | 
|Bonuses                   |  |  |  |  |  |               | 19,804 |               |  |      | 7,014  |  |  |   | 57  | 
|Other                     |  |  |  |  |  |               | 14,319 |               |  |      | 5,920  |  |  |   | 48  | 
|                          |  |  |  |  |  |               |        |               |  |      |        |  |  |   |     | 
|Total Accrued liabilities |  |  |  |  |  | ¥             | 41,283 |               |  | ¥    | 21,806 |  |  | $ | 178 | 
|                          |  |  |  |  |  |               |        |               |  |      |        |  |  |   |     | 

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, 2001 and 2002
were ¥342 thousand and ¥203 thousand ($2 thousand), respectively, which are
presented as other current liabilities on the balance sheets. This obligation
is repayable through September 30, 2003.

Operating lease:

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 agreements for office facilities during
the fiscal year ended September 30, 2002. These

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agreements are all cancelable by the Company with six months advance notice.
Total rent under operating lease agreements for the years of 2000, 2001 and
2002 was ¥196,048 thousand, ¥123,173 thousand and ¥ 17,488 thousand ($ 144
thousand), respectively.
The minimum rental assuming no cancellation on operating lease payments that
have initial lease terms in excess of one year as of September 30, 2002 are as
follows:

|                             |  |  |              |        |              |  |   |     | 
|---------------------------- |  |  | ------------ | ------ | ------------ |  | - | --- | 
|                             |  |  | Thousands of |        | Thousands of
|                             |  |  | Yen          |        | U.S. Dollars
|                             |  |  |              |        |             
|Year ended September 30:     |  |  |              |        |              |  |   |     | 
|2003                         |  |  | ¥            | 14,642 |              |  | $ | 120 | 
|2004                         |  |  |              | 2,109  |              |  |   | 17  | 
|                             |  |  |              |        |              |  |   |    
|Total minimum future rentals |  |  | ¥            | 16,761 |              |  | $ | 137 | 
|                             |  |  |              |        |              |  |   |    

Legal Proceedings

The Company is a defendant in a securities class action litigation in
connection with its March 8, 2000 public offering (the Offering) of American
Depositary Shares (ADS). Five other defendants were also named in the
securities class action. The Company intends to vigorously defend against this
action. The Companys counsel in this matter has advised the Company that at
this time it is not able to offer an opinion as to whether the Company will
ultimately be found liable, or to estimate the amount of damages which may be
awarded if such liability is found. Legal costs related to this litigation
incurred in 2001 and 2002 were ¥150,211 thousand and ¥23,845 thousand ($196
thousand), respectively. A summary of the litigation has been included below.

On September 6, 2000, the first of eleven related lawsuits was filed against
the Company in the United States District Court for the Southern District of
New York. The lawsuits include allegations that in the Companys March 8, 2000
public Offering of American Depositary Shares, the Company failed to disclose
material facts about the decline in business of the Companys principal
shareholder and former business partner, Hikari Tsushin (HT).

The lawsuits make similar allegations against the underwriters for the offering
and certain of the Companys former officers and directors and HT. As alleged
purchasers of the Companys shares during the Offering, the plaintiffs seek to
recover damages of an unspecified amount on behalf of the alleged class of
persons who purchased the Companys shares in, or traceable to, the Offering.
The plaintiffs also seek to recover attorneys fees, accountant and expert
witness fees as well as other expenses incidental to the litigation. Certain
plaintiffs moved to be appointed as lead plaintiffs and to consolidate all
eleven actions.

On September 26, 2001, the court entered an order consolidating all eleven
actions and appointed lead counsel for the plaintiffs. Certain of the
plaintiffs who sought the appointment of different lead counsel moved for
reconsideration of the courts decision and for the appointment of a different
lead counsel.

By order of the court dated June 4, 2002, the motion for reconsideration was
granted and the Cheng group were appointed as lead plaintiffs and the firm of
Shalov, Stone and Bonner and the firm of Milberg, Weiss, Hynes Bershad & Lerach
were appointed co-lead counsel in the action. On July 19, 2002, plaintiffs
served and filed a Consolidated Amended Class Action Complaint, which contains
allegations substantially similar to the original complaint and also includes
additional allegations. The additional allegations, in substance, assert
additional material omissions from the Prospectus to the effect that at the
time of the Offering, HT sales agents were engaged in inappropriate sales and
marketing activities and that such omissions rendered false certain statements
in the Prospectus. On October 4, 2002, the Company and each of the other
defendants, moved to dismiss the action for failure to state a claim upon which
relief can be granted under Rule 12(b)(6) of the Federal Rules of

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Civil Procedure. The plaintiffs responded to the motion to dismiss on November
15, 2002, and the Company filed a reply on December 9, 2002. It is not possible
to predict when a decision will be issued by the Court, but the Company does
not expect a decision for at least 90 days or longer.

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 2002 for ¥43,225 thousand ($355 thousand).
The Company recognized ¥9,975 thousand ($82 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 statement of operations. As of September 30,
2002, the Company had no investment in equity securities.

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, 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 ($1,315 thousand) and realized a gain on sale of ¥32,646 thousand
($268 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 40.4%, 67.0% and 67.0% interest in the
Company as of September 30, 2000, 2001 and 2002, 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) income.

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 an operating expense in fiscal 2001 in the statements of
operations.

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Transactions with HT and its subsidiaries:

During the fiscal years ended September 30, 2000 and 2001, the Company had
related party transactions with only HT. During the fiscal year ended 2002,
the Company had transactions with four subsidiaries of HT in addition to HT.

Account balances and transactions with HT and its subsidiaries are as
follows (in thousands):

|                   |                          |  |               |           |               |  |   |           |  |  |      |  |      |  |   |        |  |  |   |     | 
|------------------ | ------------------------ |  | ------------- | --------- | ------------- |  | - | --------- |  |  | ---- |  | ---- |  | - | ------ |  |  | - | --- | 
|                   |                          |  |               |           |               |  |   |           |  |  |      |  |      |  |   |        |  | 
|                   |                          |  | September 30, |           |              
|                   |                          |  |               |           | September 30,
|                   |                          |  | 2000          |           | 2001          |  |   |           |  |  | 2002 |  | 2002
|                   |                          |  |               |           |               |  |   |           |  |  |      |  |     
|Accounts balances: |                          |  |               |           |               |  |   |           |  |  |      |  |      |  |   |        |  |  |   |    
|                   | Accounts receivable      |  | ¥             | 14,016    |               |  | ¥ |          |  |  |      |  |      |  | ¥ | 21,436 |  |  | $ | 176 | 
|                   | Deposits paid            |  |               |          |               |  |   |          |  |  |      |  |      |  |   | 24,751 |  |  |   | 203 | 
|                   | Accounts payable         |  |               | 30,366    |               |  |   | 6,964     |  |  |      |  |      |  |   | 9,110  |  |  |   | 75  | 
|Transactions       |                          |  |               |           |               |  |   |           |  |  |      |  |      |  |   |        |  |  |   |    
|                   | Service revenue          |  |               | 11,540    |               |  |   |          |  |  |      |  |      |  |   | 9,069  |  |  |   | 74  | 
|                   | Sale of equipment        |  |               |          |               |  |   |          |  |  |      |  |      |  |   | 15,326 |  |  |   | 126 | 
|                   | Compensation received    |  |               |          |               |  |   |          |  |  |      |  |      |  |   | 5,418  |  |  |   | 45  | 
|                   | Service fee payment      |  |               | 3,291,737 |               |  |   | 656,949   |  |  |      |  |      |  |   | 14,689 |  |  |   | 121 | 
|                   | Sales promotion expenses |  |               | 204,209   |               |  |   |          |  |  |      |  |      |  |   |       |  |  |   |    | 
|                   | Rent expense             |  |               |          |               |  |   |          |  |  |      |  |      |  |   | 33,394 |  |  |   | 274 | 
|                   | Purchase of equipment    |  |               | 4,300     |               |  |   |          |  |  |      |  |      |  |   | 2,483  |  |  |   | 20  | 
|                   | Termination fee payment  |  |               |          |               |  |   | 3,500,000 |  |  |      |  |      |  |   |       |  |  |   |    | 
|                   | Compensation expenses    |  |               |          |               |  |   | 10,607    |  |  |      |  |      |  |   | 27,722 |  |  |   | 278 | 
|                   | Utility expenses         |  |               |          |               |  |   |          |  |  |      |  |      |  |   | 4,076  |  |  |   | 33  | 
|                   | Moving expenses          |  |               |          |               |  |   |          |  |  |      |  |      |  |   | 7,094  |  |  |   | 58  | 
|                   | Other expenses           |  |               | 1,067     |               |  |   |          |  |  |      |  |      |  |   | 4,460  |  |  |   | 36  | 

9. Long-Term Debt

Long-term debt as of September 30, 2001 and 2002 consisted of the following (in
thousands):

|                                     |  |  |               |      |               |  |      |      |   |  |   |    |  
|------------------------------------ |  |  | ------------- | ---- | ------------- |  | ---- | ---- | - |  | - | -- | -
|                                     |  |  |               |      |               |  |      |      |   |  |   |    |  
|                                     |  |  | September 30, |      |              
|                                     |  |  |               |      | September 30,
|                                     |  |  | 2001          |      | 2002          |  | 2002
|                                     |  |  |               |      |               |  |     
|Capital lease obligations            |  |  | ¥             | 342  |               |  | ¥    | 203  |   |  | $ | 2  |  
|Less: Current portion                |  |  |               | (127 | )             |  |      | (203 | ) |  |   | (2 | )
|                                     |  |  |               |      |               |  |      |      |   |  |   |    |  
|Long-term debt, less current
portion |  |  | ¥             | 215  |               |  | ¥    |     |   |  | $ |   |  
|                                     |  |  |               |      |               |  |      |      |   |  |   |    |  

Capital lease obligations at September 30, 2001 and 2002 are included in other
current liabilities on the balance sheets.

10. Shareholders Equity

Effective October 1, 2001, to comply with a change in the Code, the Companys
common stock was changed from ¥50,000 par value to no par stock. The change
had no impact to common stock outstanding or additional paid-in capital.
However, under the Code, at least 50% of the issue price of new shares is
required to be designated as common stock, and proceeds in excess of the amount
designated as common stock are to be credited to APIC. The portion to be
designated as common stock is determined by resolution of the Board of
Directors in advance of the issue. APIC is not

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available for dividends but may be used to reduce a deficit or transferred to
common stock by resolution of the Board of Directors.

The amended Code also provides that an amount equal to at least 10% of certain
cash disbursements with respect to each fiscal year be appropriated to a legal
reserve until the sum of the legal reserve and APIC equals 25% of paid-in
capital. The legal reserve may be used to reduce a deficit or transferred to
stated capital through suitable shareholder and director action but is not
available for dividend payment.

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
($99,160 thousand) as of September 30, 2001 as recorded in the statutory book
of accounts, transferring ¥12,071,576 thousand ($99,158 thousand) of APIC and
¥180 thousand ($2 thousand) of legal reserve.

11. 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. On July 30, 2000, the Company issued stock options to employees at fair
market value. No compensation charge was recorded for these options. In the
years of 2000 and 2001, the Company recognized ¥187,408 thousand and ¥125,599
thousand, respectively, of compensation expense from amortization of deferred
stock compensation. In the year of 2000, the Company reversed ¥50,750 of
deferred compensation expense relating to the forfeiture of unvested options,
and 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 the warrants to former directors of the Company as a part of
their remuneration. As the Code had restricted the amount of stock options the
Company could grant (the Company issued up to 10% of outstanding shares of the
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 remained outstanding
at September 30, 2002.

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

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##### Table of Contents



|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          
|--------------------------------- |  |  | --------- | - | -------------- |  | ---------------- | --------- | --------- | - | ------- |  | - | ---------
|                                  |  |  |           |   |                |  | Weighted         |           |           |   |         |  |  
|                                  |  |  |           |   |                |  | Average          |           |           |   |         |  |  
|                                  |  |  | Number of |   | Exercise Price |  | Options/Warrants
|                                  |  |  | Shares    |   | Per Share      |  | Price Range      |           | Per Share
|                                  |  |  |           |   |                |  |                  |           |          
|Outstanding at September 30,
1999 |  |  | 999       |   |                |  | ¥                | 1,832,708 |           | ¥ | 62,500  |  | ¥ | 2,500,000
|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          
|Options/warrants granted          |  |  | 322       |   |                |  |                  | 3,776,250 |           |   |        |  |   | 3,776,250
|Options/warrants exercised        |  |  | (11       | ) |                |  |                  | 119,318   |           |   | 62,500  |  |   | 125,000  
|Options/warrants canceled         |  |  | (111      | ) |                |  |                  | 1,158,739 |           |   | 62,500  |  |   | 3,776,250
|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          
|Outstanding at September 30,
2000 |  |  | 1,199     |   |                |  |                  | 2,443,688 |           |   | 62,500  |  |   | 3,776,250
|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          
|Options/warrants granted          |  |  | 333       |   |                |  |                  | 400,000   |           |   | 400,000 |  |   | 400,000  
|Options/warrants exercised        |  |  | (63       | ) |                |  |                  | 209,325   |           |   | 62,500  |  |   | 250,000  
|Options/warrants canceled         |  |  | (720      | ) |                |  |                  | 1,898,196 |           |   | 250,000 |  |   | 3,776,250
|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          
|Outstanding at September 30,
2001 |  |  | 749       |   |                |  |                  | 2,473,645 |           |   | 250,000 |  |   | 3,776,250
|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          
|Options/warrants granted          |  |  |          |   |                |  |                  |          |           |   |        |  |   |         
|Options/warrants exercised        |  |  | (9        | ) |                |  |                  | 250,000   |           |   | 400,000 |  |   | 400,000  
|Options/warrants canceled         |  |  | (45       | ) |                |  |                  | 1,672,139 |           |   | 250,000 |  |   | 3,776,250
|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          
|Outstanding at September 30,
2002 |  |  | 695       |   |                |  | ¥                | 2,493,005 |           | ¥ | 400,000 |  | ¥ | 3,776,250
|                                  |  |  |           |   |                |  |                  |           |           |   |         |  |   |          

At September 30, 2000, 2001 and 2002, 877, 685 and 684 options/warrants were
exercisable at weighted average exercise prices per share of ¥2.7 million, ¥2.5
million and ¥2.5 million ($21 thousand), respectively.

The options/warrants outstanding and currently exercisable by exercise price at
September 30, 2002 were as follows (whole amounts):

|         |           |             |                              |                  |                              |                |                  |             |          |                |   |           |  |  |          |     |  |  |   |           | 
|-------- | --------- | ----------- | ---------------------------- | ---------------- | ---------------------------- | -------------- | ---------------- | ----------- | -------- | -------------- | - | --------- |  |  | -------- | --- |  |  | - | --------- | 
|         |           |             | Options/Warrants Outstanding |                  | Options/Warrants Exercisable
|         |           |             |                              |                  |                             
|         |           |             |                              |                  |                              |                | Weighted Average |             |          |                |   |           |  |  |          |     |  |  |  
|         |           |             |                              |                  |                              |                | Remaining        |             | Weighted |                |   |           |  |  | Weighted
|Exercise |           | Number      |                              | Contractual Life |                              | Average        |                  | Number      |          | Average       
|Prices   |           | Outstanding |                              | (in year)        |                              | Exercise Price |                  | Exercisable |          | Exercise Price
|         |           |             |                              |                  |                              |                |                  |             |          |               
|¥        | 400,000   |             |                              | 11               |                              |                |                  | 5.2         |          |                | ¥ | 400,000   |  |  |          |    |  |  | ¥ |          | 
|         | 2,500,000 |             |                              | 675              |                              |                |                  | 4.0         |          |                |   | 2,500,000 |  |  |          | 675 |  |  |   | 2,500,000 | 
|         | 3,776,250 |             |                              | 9                |                              |                |                  | 4.7         |          |                |   | 3,776,250 |  |  |          | 9   |  |  |   | 3,776,250 | 
|         |           |             |                              |                  |                              |                |                  |             |          |                |   |           |  |  |          |     |  |  |   |           | 
|         |           |             |                              | 695              |                              |                |                  | 4.0         |          |                |   | 2,483,290 |  |  |          | 684 |  |  |   | 2,516,793 | 
|         |           |             |                              |                  |                              |                |                  |             |          |                |   |           |  |  |          |     |  |  |   |           | 
|         |           |             |                              |                  |                              |                |                  |             |          |                |   |           |  |  |          |     |  |  |   |           | 

The Company has elected to continue to follow the provisions of APB 25 for
financial reporting purposes and has adopted the disclosure-only provisions of
SFAS No.123, Accounting for Stock-Based Compensation. 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:

F-21



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##### Table of Contents



|                           |               |  |                    |      |                    |  |                    |      |   |  |     |     | 
|-------------------------- | ------------- |  | ------------------ | ---- | ------------------ |  | ------------------ | ---- | - |  | --- | --- | 
|                           |               |  | September 30, 2000 |      | September 30, 2001 |  | September 30, 2002
|                           |               |  |                    |      |                    |  |                   
|Expected volatility        |               |  | 168.5              | %    |                    |  | 138.6              | %    |   |  | N/A |    
|Weighted-average risk-free |               |  |                    |      |                    |  |                    |      |   |  |     |    
|                           | interest rate |  |                    | 0.50 | %                  |  |                    | 0.50 | % |  |     | N/A | 
|Expected life (in years)   |               |  | 2.5                |      |                    |  | 2.5                |      |   |  | N/A |    
|Expected dividends         |               |  |                   | %    |                    |  |                   | %    |   |  | N/A |    

For pro forma purposes, had compensation cost for the plan been determined
based on the fair value at the grant date for awards in 2000, 2001 and 2002
consistent with the provisions of SFAS 123, the Companys net loss would have
been (in thousands, except per share data):

|                                           |  |             |  |               |             |               |  |      |             |      |  |   |            |  |  |   |          | 
|------------------------------------------ |  | ----------- |  | ------------- | ----------- | ------------- |  | ---- | ----------- | ---- |  | - | ---------- |  |  | - | -------- | 
|                                           |  |             |  | September 30, |             | September 30,
|                                           |  |             |  |               |             |              
|                                           |  |             |  | 2000          |             | 2001          |  | 2002 |             | 2002
|                                           |  |             |  |               |             |               |  |      |             |     
|Net (loss) income                          |  |             |  |               |             |               |  |      |             |      |  |   |            |  |  |  
|                                           |  | As reported |  | ¥             | (1,541,584  | )             |  | ¥    | (9,568,721  | )    |  | ¥ | 1,337,744  |  |  | $ | 10,989   | 
|                                           |  | Pro forma   |  |               | (1,781,610  | )             |  |      | (9,584,751  | )    |  |   | 1,337,744  |  |  |   | 10,989   | 
|Basic net (loss) income
per common share   |  |             |  |               |             |               |  |      |             |      |  |   |            |  |  |  
|                                           |  | As reported |  | ¥             | (164,822.41 | )             |  | ¥    | (937,558.40 | )    |  | ¥ | 130,460.70 |  |  | $ | 1,071.63 | 
|                                           |  | Pro forma   |  |               | (190,485.61 | )             |  |      | (939,128.50 | )    |  |   | 130,460.70 |  |  |   | 1,071.63 | 
|Diluted net (loss) income
per common share |  |             |  |               |             |               |  |      |             |      |  |   |            |  |  |  
|                                           |  | As reported |  | ¥             | (164,822.41 | )             |  | ¥    | (937,558.40 | )    |  | ¥ | 130,346.30 |  |  | $ | 1,070.69 | 
|                                           |  | Pro forma   |  |               | (190,485.61 | )             |  |      | (939,128.50 | )    |  |   | 130,346.30 |  |  |   | 1,070.69 | 

12. Income Taxes

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

|                           |  |               |       |               |  |      |       |      |  |   |       |  |  |   |    | 
|-------------------------- |  | ------------- | ----- | ------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | -- | 
|                           |  | September 30, |       |              
|                           |  |               |       | September 30,
|                           |  | 2000          |       | 2001          |  | 2002 |       | 2002
|                           |  |               |       |               |  |      |       |     
|Current                    |  | ¥             | 3,800 |               |  | ¥    | 3,800 |      |  | ¥ | 3,800 |  |  | $ | 31 | 
|Deferred                   |  |               |      |               |  |      |      |      |  |   |      |  |  |   |   | 
|                           |  |               |       |               |  |      |       |      |  |   |       |  |  |   |    | 
|Provision for income taxes |  | ¥             | 3,800 |               |  | ¥    | 3,800 |      |  | ¥ | 3,800 |  |  | $ | 31 | 
|                           |  |               |       |               |  |      |       |      |  |   |       |  |  |   |    | 

The Company is subject to a number of different income taxes that, in
aggregate, result in a statutory tax rate in Japan of approximately 42% for
fiscal 2000 and 2001 and 2002 .

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 2000, 2001 and 2002 is as follows (in thousands):

|                                                            |  |                                          |          |               |        |               |            |      |       |      |         |  |       |   |       |  |    | 
|----------------------------------------------------------- |  | ---------------------------------------- | -------- | ------------- | ------ | ------------- | ---------- | ---- | ----- | ---- | ------- |  | ----- | - | ----- |  | -- | 
|                                                            |  |                                          |          | September 30, |       
|                                                            |  |                                          |          |               |        | September 30,
|                                                            |  |                                          |          | 2000          |        | 2001          |            | 2002 |       | 2002
|                                                            |  |                                          |          |               |        |               |            |      |       |     
|Amount
computed by using normal Japanese statutory
tax rate |  | ¥                                        | (646,637 | )             |        | ¥             | (4,022,049 | )    |       | ¥    | 564,119 |  |       | $ | 4,634 | 
|Increase (decrease) in taxes
resulting from:                |  |                                          |          |               |        |               |            |      |       |      |         |  |       |   |       | 
|                                                            |  | Expenses not deductible for
tax purposes |          |               | 59,427 |               |            |      | 2,390 |      |         |  | 1,603 |   |       |  | 13 | 

F-22



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##### Table of Contents



|                         |                                                               |   |               |          |               |   |       |           |      |   |       |          |   |   |    |        |  
|------------------------ | ------------------------------------------------------------- | - | ------------- | -------- | ------------- | - | ----- | --------- | ---- | - | ----- | -------- | - | - | -- | ------ | -
|                         |                                                               |   | September 30, |          | September 30,
|                         |                                                               |   |               |          |              
|                         |                                                               |   | 2000          |          | 2001          |   | 2002  |           | 2002
|                         |                                                               |   |               |          |               |   |       |           |     
|                         | Tax deductible stock issuance expenses                        |   |               | (272,994 | )             |   |       |          |      |   |       |         |   |   |    |       |  
|                         | Increase (decrease) in deferred tax asset valuation allowance |   |               | 864,291  |               |   |       | 4,019,705 |      |   |       | (565,804 | ) |   |    | (4,648 | )
|                         | Per-capita levy                                               |   |               | 3,800    |               |   |       | 3,800     |      |   |       | 3,800    |   |   |    | 31     |  
|                         | Others-net                                                    |   |               | (4,087   | )             |   |       | (46       | )    |   |       | 82       |   |   |    | 1      |  
|                         |                                                               |   |               |          |               |   |       |           |      |   |       |          |   |   |    |        |  
|Income taxes as reported |                                                               | ¥ | 3,800         |          |               | ¥ | 3,800 |           |      | ¥ | 3,800 |          |   | $ | 31 |       
|                         |                                                               |   |               |          |               |   |       |           |      |   |       |          |   |   |    |        |  

The significant components of deferred income tax assets and liabilities at
September 30, 2000, 2001 and 2002 were as follows (in thousands):

|                        |                                                                     |                           |  |               |      |   |   |           |            |               |      |  |  |   |   |           |            |   |  |  |  |   |   |        |         |  
|----------------------- | ------------------------------------------------------------------- | ------------------------- |  | ------------- | ---- | - | - | --------- | ---------- | ------------- | ---- |  |  | - | - | --------- | ---------- | - |  |  |  | - | - | ------ | ------- | -
|                        |                                                                     |                           |  | September 30, |      |   |   |           |            | September 30,
|                        |                                                                     |                           |  |               |      |   |   |           |            |              
|                        |                                                                     |                           |  |               | 2001 |   |   |           |            |               | 2002 |  |  |   |   |           | 2002      
|                        |                                                                     |                           |  |               |      |   |   |           |            |               |      |  |  |   |   |          
|Deferred tax assets:    |                                                                     |                           |  |               |      |   |   |           |            |               |      |  |  |   |   |           |            |   |  |  |  |   |   |       
|                        | Operating loss carry-forwards                                       |                           |  |               |      |   | ¥ | 3,739,979 |            |               |      |  |  |   | ¥ | 4,433,360 |            |   |  |  |  |   | $ | 36,417 |        
|                        | Loss on impairment of equipment not deductible for tax purposes     |                           |  |               |      |   |   | 999,524   |            |               |      |  |  |   |   | 2,683     |            |   |  |  |  |   |   | 22     |        
|                        | Loss on impairment in an affiliate not deductible for tax purposes  |                           |  |               |      |   |   | 198,476   |            |               |      |  |  |   |   | 0         |            |   |  |  |  |   |   | 0      |        
|                        | Depreciation in excess of tax deductible amount                     |                           |  |               |      |   |   | 48,391    |            |               |      |  |  |   |   | 35,645    |            |   |  |  |  |   |   | 293    |        
|                        | Write-off of accounts receivable in excess of tax deductible amount |                           |  |               |      |   |   | 38,259    |            |               |      |  |  |   |   | 17,317    |            |   |  |  |  |   |   | 142    |        
|                        | Allowance for doubtful accounts in excess of tax deductible amount  |                           |  |               |      |   |   | 17,518    |            |               |      |  |  |   |   | 4,147     |            |   |  |  |  |   |   | 34     |        
|                        | Other                                                               |                           |  |               |      |   |   | 17,830    |            |               |      |  |  |   |   | 1,023     |            |   |  |  |  |   |   | 8      |        
|                        |                                                                     |                           |  |               |      |   |   |           |            |               |      |  |  |   |   |           |            |   |  |  |  |   |   |       
|                        |                                                                     | Gross deferred tax assets |  |               |      |   |   |           | 5,059,978  |               |      |  |  |   |   |           | 4,494,174  |   |  |  |  |   |   |        | 36,916  |  
|                        |                                                                     |                           |  |               |      |   |   |           |            |               |      |  |  |   |   |           |            |   |  |  |  |   |   |        |        
|                        |                                                                     | Less:                     |  |               |      |   |   |           |            |               |      |  |  |   |   |           |            |   |  |  |  |   |   |        |         |  
|                        |                                                                     | Valuation allowance       |  |               |      |   |   |           | (5,059,978 | )             |      |  |  |   |   |           | (4,494,174 | ) |  |  |  |   |   |        | (36,916 | )
|                        |                                                                     |                           |  |               |      |   |   |           |            |               |      |  |  |   |   |           |            |   |  |  |  |   |   |        |        
|Net deferred tax assets |                                                                     |                           |  |               |      | ¥ |  |           |            |               |      |  |  | ¥ |  |           |            |   |  |  |  | $ |  |       
|                        |                                                                     |                           |  |               |      |   |   |           |            |               |      |  |  |   |   |           |            |   |  |  |  |   |   |        |        

Operating loss carry-forwards for tax purposes at September 30, 2002 amounted
to approximately ¥10,543 million which is available to offset future taxable
income. Approximately ¥335 million, ¥1,917 million, ¥6,642 and ¥1,649 million
of operating loss carry-forwards will expire in the periods ending September
30, 2004, 2005, 2006 and 2007, respectively, unless utilized prior to that
date. The Company analyzes its deferred tax assets with regards to potential
realization. The Company has established a full valuation allowance on its
deferred tax assets based on managements determination that it is more likely
than not that the deferred tax asset will not be realized based upon the
uncertainty of their realization. The Company has considered estimated future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the amount of the valuation allowance.

The net changes in the valuation allowance for deferred tax assets during the
years of 2001 and 2002 were increase of ¥4,019,705 thousand and decrease of
¥565,804 thousand, respectively.

13. 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

F-23



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##### Table of Contents



review this information separately. The Company has changed its business
strategy and now offers Deskwing and its related services as only one business.
As discussed in Note 1, all of the Companys operations are conducted in
Japan.

F-24



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##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                    |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|EXHIBIT |  | DESCRIPTION                                                                                                                                                                                                                                                                        |  | PAGE
|        |  |                                                                                                                                                                                                                                                                                    |  |     
|1.1     |  | 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                                                                                                                                                                                                                      |  |     





---



##### Table of Contents



|        |  |                                                                                                                                                             |  |     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|EXHIBIT |  | DESCRIPTION                                                                                                                                                 |  | PAGE
|        |  |                                                                                                                                                             |  |     
|        |  |                                                                                                                                                             |  |     
|        |  | Administration Company of IP address dated March 31, 2001 between
Shadan Hojin Japan Network Information Center and the Registrant
(English translation)*** |  |     
|        |  |                                                                                                                                                             |  |     
|4.11    |  | Outsourcing Agreement dated August 1, 2002 between the Registrant and CalltoWeb,
Inc. (English translation)                                                 |  |    
|        |  |                                                                                                                                                             |  |     
|4.12    |  | Outsourcing Fee Agreement dated August 1, 2002 between the Registrant and
CalltoWeb, Inc. (English translation)****                                         |  |    
|        |  |                                                                                                                                                             |  |     
|4.13    |  | Amendment to Outsourcing Fee Agreement and Outsourcing Agreement dated August 1, 2002
between the Registrant and CalltoWeb, Inc. (English translation)****  |  |    
|        |  |                                                                                                                                                             |  |     
|4.14    |  | Basic Outsourcing Agreement dated September 30, 2002 between the Registrant
and Global Media Online, Inc. (English translation)                             |  |    
|        |  |                                                                                                                                                             |  |     
|4.15    |  | Outsourcing Fee Agreement dated September 30, 2002 between the Registrant and
Global Media Online Inc. (English translation)****                            |  |    
|        |  |                                                                                                                                                             |  |     
|4.16    |  | Outsourcing and Fee Agreement Amendment dated November 1, 2002 between the Registrant and Global
Media Online Inc. (English translation)****                |  |    
|        |  |                                                                                                                                                             |  |     
|4.17    |  | Sales Agreement dated October 31, 2002 between the Registrant and Diamond Lease
Company Ltd. (English translation)****                                      |  |    
|        |  |                                                                                                                                                             |  |     
|4.18    |  | Lease Agreement dated September 30, 2002 between the Registrant and Global Media
Online Inc. (English translation)****                                      |  |    
|        |  |                                                                                                                                                             |  |     
|4.19    |  | Amendment of Basic Outsourcing Agreement dated March 7, 2003 between the Registrant and Global Media
Online Inc. (English translation)                      |  |    
|        |  |                                                                                                                                                             |  |     
|10.1    |  | Description of American Depositary Receipts                                                                                                                 |  |    



---



|*    |  | 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.                                              
|    
|**** |  | This exhibit contains confidential material that has been omitted
pursuant to a Confidential Treatment Request. The omitted information has
been filed separately with the Securities and Exchange Commission.