Crosswave Communications Inc. 17,392,000 American Depositary Shares Representing 86,960 Shares of Common Stock

        This is the initial public offering of Crosswave Communications Inc. This prospectus relates to an offering of 17,392,000 American Depositary Shares in the United States. Each ADS is equal to 1/200th of a share of common stock of Crosswave.

      Prior to this offering, there has been no public market for the shares or ADSs. The ADSs have been approved for quotation on the Nasdaq National Market under the symbol “CWCI”.

      Our three current shareholders are Internet Initiative Japan, Sony Corporation and Toyota Motor Corporation. Following this offering, IIJ will own 34.9% of Crosswave, Sony and Toyota will each own 23.9% and, pursuant to a shareholders agreement, together they will control us.

       See “Risk Factors” beginning on page 8 to read about material risks you should consider before buying the ADSs.

       Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

      To the extent that the underwriters sell more than 17,392,000 ADSs, the underwriters have the option to purchase up to an additional 2,608,000 ADSs from us at the initial public offering price less the underwriting discount.

      The underwriters expect to deliver the ADSs against payment in New York, New York on August 9, 2000.

Goldman, Sachs & Co.

Prospectus dated August 3, 2000.

PROSPECTUS SUMMARY

      You should read the following summary together with the more detailed information regarding our company and the ADSs being sold in the offering and our financial statements and notes to those statements appearing elsewhere in this prospectus.

Crosswave Communications Inc.

Our Business

      We are a pioneer in the introduction of broadband data communications infrastructure and services to businesses and telecommunications carriers in Japan, including the high-speed backbone, wide area Ethernet platform, data center and other value-added services described below. We operate the first nationwide fiber optic network in Japan specifically designed for the high-speed transmission of data. We currently lease fiber for our network and are also starting to lay additional fiber which we own. Our network uses advanced optical technologies that allow us to deliver high-capacity, cost-effective and highly reliable data communication services, eliminating the burden of multiple layers of equipment employed in traditional telephony systems. Our extensive network can be easily upgraded to increase capacity, support new services and incorporate new transmission technologies, as the market demands.

      We were formed in October 1998 by IIJ, Sony and Toyota and began offering services in May 1999. For the year ended March 31, 2000, we had revenues of ¥232 million and a net loss of ¥7,849 million. Our accumulated deficit at March 31, 2000 was ¥7,933 million.

      Our goal is to become the leading provider of advanced, end-to-end data communications services relying solely on our network, without the use of third-party carriers. Currently, customers typically lease lines from other carriers, primarily NTT, to access our network.

      Although the telecommunications market in Japan is highly competitive, we believe there are a limited number of providers in Japan offering advanced cost-effective services. Our services include:

	•	High-speed backbone service. We were the first provider in Japan to offer dedicated lines in bandwidths of up to 600 Mbps.
	•	Wide area Ethernet platform service. We were the first carrier in Japan to create a platform using Ethernet switches and equipment to link all components of our customers’ networks. Ethernet is one of the most widespread standards used for networking computers but has been limited primarily to use in local area networks. This wide area Ethernet platform provides seamless data communications among distant network components as if they were in the same local area.
	•	Dial-up port service. We enable our customers to offer access to their own networks via our infrastructure. We offer over 80 access points nationwide where we locate network equipment used to connect customers who dial in to the network.
	•	Data center services. We offer equipment housing and network connectivity at our facilities in various locations throughout Japan.

      Our target customers include:

	•	corporations and other large organizations;
	•	Internet service providers, or ISPs;
	•	domestic and foreign telecommunications carriers;
	•	cable television and broadcasting companies;
	•	large-scale data and digital content service providers, such as providers of games, videos and music; and
	•	businesses engaged in e-commerce.

3

IIJ and its affiliates accounted for 86.2% of our revenues in the year ended March 31, 2000, during which 7.6% of our revenues were from third-party customers. We have increased the number of third-party customers in the first part of the current fiscal year. These customers are primarily corporations using our wide area Ethernet platform services and telecommunications carriers and corporations using our high-speed backbone services.

      In order to establish a backbone network quickly and begin offering our services, we leased 3,689 route miles of dark fiber nationwide pursuant to an IRU, or Indefeasible Right of Use, agreement with KDD that currently extends through April 2009. Dark fiber is installed fiber optic cable that does not include the equipment necessary to transmit data through the fiber. We constructed our network by installing the equipment necessary to enable data transmission over the leased fiber. As of May 2000, this network is fully operational nationwide.

      We are now expanding our network by:

	•	installing our own fiber along national roadways to increase capacity, geographical coverage and network redundancy;
	•	installing or leasing fiber to form a metropolitan backbone network in high-density urban areas; and
	•	installing or leasing fiber and other local access infrastructure in these urban areas to provide direct access to the buildings of target customers, enabling them to access our network without the use of third-party carriers.

      We plan to extend our network to encompass a total of approximately 7,900 route miles of fiber in Japan by 2004. In addition, we have already secured backbone capacity to the United States. We are seeking opportunities to further expand our international network to the United States and other parts of Asia.

      In addition to expanding network capacity, we are establishing data center facilities which will complement our transmission network by acting as data traffic hubs and access gateways to our network. We will have six data centers totaling approximately 6,000 square meters operational in leased space by the end of this calendar year. We expect our approximately 14,000 square meter data center in Saitama prefecture near Tokyo, which we will build and own, to be operational in the beginning of 2003. We will also build additional data center facilities in Tokyo and Osaka next year.

      In developing and providing our services, we cooperate closely with IIJ, a leading ISP and value-added network service provider in Japan. IIJ is our largest customer and sales agent. IIJ extensively uses our network infrastructure and data center facilities for itself and to offer Internet connectivity and value-added services to its base of approximately 6,000 corporate customers. We expect sales to IIJ to increase as IIJ’s own business expands. IIJ is also our controlling shareholder and our president and chief technology officer split their time between Crosswave and IIJ. Our chief executive officer also serves as a director of IIJ.

Our Market Opportunity

      Japan is the second largest telecommunications market in the world with revenues of over ¥14.8 trillion for the year ending March 31, 1999, and capital investment of over ¥4.0 trillion during the same year.

      As in the United States, the level of data traffic transmitted over communications networks is rapidly increasing in Japan. Major factors contributing to the growth in data traffic are:

	•	increasing numbers of Internet users;
	•	growth in Internet retailing and business-to-business e-commerce;
	•	growing corporate data communications needs; and
	•	the widespread introduction of broadband local access.

4

      We believe these trends are most pronounced in the metropolitan areas of Tokyo, Osaka and Nagoya, which are Japan’s largest commercial centers. As the Japanese telecommunications market is further deregulated and new technologies are introduced, the number and variety of communications services providers are increasing. These providers share a common need for high-capacity and cost-effective data transmission infrastructures.

      Our network and the services we offer position us to capture this demand.

Our Strategy

      The key components of our strategy are:

	•	Rapidly Develop our Broadband Data Transmission Infrastructure. We are focusing on completing our network development plan to expand geographic coverage and redundancy, increase network density in key urban areas and to offer direct local access to our target customers.
	•	Continue to Lead the Market in Introducing New Data Communications Services. We plan to support Gigabit Ethernet and provide other high-capacity data transmission services for applications such as digital video transmission.
	•	Provide Tailor-Made Services to Our Target Customers. Our sales and marketing department includes sales engineers whose technical expertise is vital in identifying and addressing the needs of potential customers and configuring an appropriate bundle of services.
	•	Capitalizing on Our Experienced Management Team and High Quality Employees. We have assembled a management team with extensive experience in the telecommunications industry. We believe the quality, experience and teamwork of our management and employees will be critical factors in the execution of our growth strategy.
	•	Offer Innovative, Distance-Free Pricing Structures. We will continue to introduce novel pricing structures based on levels of service instead of pure distance-based pricing.

Principal Executive Offices

      Our principal executive offices are located at Crest Yasuda Bldg., 3-21, Kanda Nishiki-cho, Chiyoda-ku, Tokyo 101-0054, Japan. Our main phone number is 81-3-5205-4500 and our fax number is 81-3-5205-4501. Our world wide web home page is located at http://www.cwc.co.jp/. The information on our website is not incorporated by reference into this prospectus.

5

The Offering

      The following information assumes that the underwriters do not exercise the option granted by Crosswave to purchase additional ADSs in the offering. The following information also includes information relating to the purchase by IIJ in a concurrent private placement of 15,000 shares of common stock at a price per share equivalent to the initial public offering price per ADS, adjusted for the ADS/share ratio.

6

Summary Financial and Other Data

7

RISK FACTORS

      You should carefully consider the risks described below before making an investment decision. If any of the risks described below actually occurs, our business, financial condition or results of operations could be adversely affected. The trading price of our ADSs could decline, and you may lose all or part of your investment.

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

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

      Potential obstacles to attracting our target customers include:

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

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

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

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

      The telecommunications industry in Japan, although not as well developed or diverse as it is in the United States, is competitive and becoming even more so. Even though the data communications market is a relatively new market in Japan and there are not many companies with extensive fiber optic networks or data communications infrastructure or services, many of our competitors have begun to develop extensive fiber optic networks and data communication services or have announced plans for extensive infrastructure development and new service offerings. Our competitors are primarily large telecommunications companies in Japan such as NTT and its group companies, Japan Telecom, KDD, DDI, TTNet and Osaka Media Port and their

8

	•	substantially greater financial resources which may enable them to better withstand losses in developing their networks;
	•	more extensive and well-developed networks which provide them with easier access to rights-of-way, conduits and customers;
	•	greater numbers of existing customers which may become customers of their data communications services;
	•	substantially greater personnel, marketing, service development and other resources; and
	•	higher name and brand recognition.

      We may also be vulnerable to new entrants whose cost of entry may be substantially lower than ours if the price of acquisition of transmission facilities declines. We were the first telecommunications company to own transmission lines nationwide in Japan by means of an IRU. An IRU, or “Indefeasible Right of Use”, is a long-term right, usually granted by contract, to use the transmission lines and facilities of another company or entity. As the market for data communications develops and as the supply of fiber or other data communications infrastructure grows, it may be possible for competitors to enter more cost-effectively into IRU contracts for the long-term use of transmission facilities. If they are able to, we are more likely to see the number of new entrants offering services at competitive prices increase.

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

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

      We also expect to face significant competition in providing data center services from a number of existing and new competitors such as NTT, Exodus Communications, Above Net and Global Crossing and their affiliated companies.

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

      In starting up our business and in developing our nationwide fiber optic network, we have incurred operating and net losses and working capital deficits and we expect each of these to continue to grow in the next several fiscal years. For the year ended March 31, 2000, we had revenues of ¥232 million, operating losses of ¥7,660 million and net losses of ¥7,849 million. Our accumulated deficit at March 31, 2000 was ¥7,933 million. We do not expect to record net income for the next several years. There is no assurance that we will be able to generate returns sufficient to reverse our operating and net losses and clear our accumulated deficits on a timely basis or at all. If our losses are larger than expected, we may not be able to fully implement our business plan or to implement it as soon as planned. This could affect our ability to offer the levels of services anticipated and generate the revenue we expect, which could, in turn, cause our ADS price to fall.

9

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

      We currently expect that we will need substantial additional capital for further development of our network, including our nationwide, metropolitan and local access network buildouts, adding international capacity, and the construction and development of our data centers, including approximately ¥21 billion for the year ending March 31, 2001 and ¥35 billion for the year ending March 31, 2002. We believe that we will have sufficient funds upon completion of the offering to meet our anticipated needs for working capital and capital expenditures for the next 15-18 months in connection with the plans that we have formulated as described in “Use of Proceeds”. We expect to obtain any additional funds that we need from public offerings or strategic placements of debt and equity securities and bank borrowings. However, there can be no assurance that funding will be available to us on a timely basis or at all, or on terms acceptable to us. Any inability to raise funds may prevent us from implementing our plans or may require us to modify or abandon some or all of our plans and may have an adverse effect on our operations.

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

      If we do incur substantial amounts of debt, our negative cash flows may restrict our ability to service and repay the debt. Additionally, substantial indebtedness could:

	•	increase our vulnerability to general adverse economic and industry conditions;
	•	limit our ability to fund future capital expenditures, working capital and other general corporate requirements; and
	•	limit our flexibility in planning for and adapting to changes in the industry in which we operate.

NTT and other incumbent local carriers’ control of the last mile may prevent us from reaching customers in the manner most beneficial to us

      To fully realize the value of our network, we need to be able to deliver our services directly to our customers. NTT and other local carriers control the last segment, referred to as the last mile, of the connections between end users and our backbone network. We could lower our prices and better attract customers to our services if we could gain direct access to them. We could also provide customers with better services and develop more advanced services for these customers if we did not have to go through the existing infrastructure of NTT and other local carriers.

      Additionally, this last mile connection to our network is one of the largest cost components of our services for the customer, representing generally between 50% to 60% of the total cost to a customer, depending on the customer’s circumstances. NTT’s and other local carriers’ prices vary depending on distance and bandwidth. NTT and the other local carriers control the pricing of this last mile. We are anticipating a significant reduction of rates from NTT and other local carriers which would make our services more attractive, but this reduction may not occur.

      We are working on different options to bypass these carriers in providing services directly to our customers. However, we are currently largely dependent on NTT and other local carriers for last mile connections. To the extent we are unable to bypass NTT and the other local carriers or otherwise improve upon the current situation, it may prevent us from attracting customers or providing them services as efficiently or cost-effectively as we would otherwise be able to do.

10

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

      We cannot assure you that we will be successful in obtaining additional rights-of-way and other permits required to install and use fiber underground or in other conduits or use electricity and telephone pole space and other rights-of-way. We must obtain these rights-of-way from parties such as railroads, operators of subways, utilities, highway authorities, local governments and commercial landlords. We must also obtain approvals for construction from local authorities in most of these cases. The process of obtaining these permits, rights and approvals is usually time-consuming and burdensome. If we are unable, on acceptable terms and on a timely basis, to obtain and maintain the permits, rights and approvals needed to implement our business plan, the buildout of our network could be prevented or delayed or could be more costly than anticipated and our business, financial condition and results of operations could be materially and adversely affected.

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

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

If we are unable to enter into agreements for the leasing and installation of fiber in metropolitan areas it would limit our ability to complete our network as planned and deliver our services

      Our network development plan also calls for significant leasing and installation of fiber in metropolitan areas to allow us to deliver services directly to our customers. Completion of this network development will depend on our ability to negotiate agreements with third parties such as railway operators, utilities, large building owners and local governments. There is no assurance that we will be able to conclude these agreements on commercially reasonable terms or at all. Failure to do so would limit our ability to complete our network as planned and deliver services directly to our customers.

We may not be able to sustain our growth if we are unable to hire a sufficient number of new employees

      As a relatively new company, we have limited operational and administrative resources and they could be inadequate to sustain the growth we want to achieve. In addition to the demands of starting up our company, we are in an industry that evolves rapidly, which requires us to devote significant personnel and time preparing for and adjusting to changes in the industry.

      We anticipate having to hire approximately 65 to 75 new employees in the current fiscal year to be able to adequately staff our operations. If we are unable to find the necessary personnel to devote to our growth and expansion, the rate of our growth could slow, the quality of our services could deteriorate and our business may suffer. Our employee turnover was less than 10% in our first full year of operations. However, there can be no assurance that we will be able to maintain this low rate.

11

Because of the advanced nature of our network, services and technology, our business may suffer if we cannot attract or retain qualified engineers and other technical personnel

      If we fail to attract or retain the qualified personnel we need, our business may be adversely affected. Because our network, services, products and technologies are advanced, we depend on the continued service of our existing engineers and other personnel and we will need to hire additional engineers as our business expands, including approximately 30-35 new engineers during this fiscal year. Competition for qualified engineers and other employees in the data transmission services industry in Japan is intense and there are a limited number of persons with the necessary knowledge and experience.

If we are unable to develop our business support systems it will be difficult to manage new customer growth

      Our strategy calls for the expansion of the number of services we offer, and we will need to develop business support systems on a schedule sufficient to meet our growth plans. Business support systems are needed for:

	•	implementing customer orders for services;
	•	providing, installing and delivering these services; and
	•	monthly billing for these services.

      The failure to develop effective business support systems could have a material adverse effect on our ability to implement our business plan.

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

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

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

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

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

12

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

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

      Factors which may cause fluctuation include:

	•	the timely completion of the various stages of our network buildout plan, or the modification of this plan;
	•	the timely implementation of planned services, such as completing the construction of our data centers and bringing them on-line as soon as planned;
	•	the rate at which we are able to offer new services to remain competitive as the market for data communications develops;
	•	the timing of large purchases of equipment, the timing of payments or prepayments of contracts for transmission lines and the timing of other expenses;
	•	the rate at which we are able to add new customers;
	•	the addition or loss of major customers;
	•	the rate at which customers, including IIJ, increase the bandwidth they use; and
	•	fluctuations in the yen/dollar exchange rate.

Network failures or delays or errors in transmissions could expose us to potential liability

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

Our business may be adversely affected if the physical integrity of our network is breached

      The reliability of our network could be affected by events or actions outside the network that may physically damage our fiber optic cable, our equipment or our access points and other locations in which we store equipment. We could suffer damage from fires, earthquakes, volcanoes and other natural disasters, power loss, telecommunications failures and similar events. In particular, most areas of Japan are subject to the risk of earthquakes. Accordingly, our

13

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

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

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

We are dependent on third parties, including suppliers, and the loss of key sources of supply could adversely affect us

      We are dependent upon third-party suppliers, including Ciena, Nortel, Cisco and NEC for a number of components and parts used in our network. Currently, all of our DWDM equipment and technology is procured from only one source, Ciena. Additionally, all of our equipment and technology related to SONET is acquired from Nortel. We believe that there are alternative suppliers or alternative components for all the components and transmission equipment contained in the network or required to offer bandwidth services. However, any delay or extended interruption in the supply of any of the key components, changes in the pricing arrangements with our suppliers and manufacturers or delay in transitioning a replacement supplier’s product into the network could disrupt our operations. If the disruption continues for an extended period of time, it could have a material adverse effect on our business, financial condition and results of operations.

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

      Our network was designed and installed jointly with engineers and other personnel at IIJ. Mr. Asaba, our Chief Technology Officer and the Co-Chief Technology Officer at IIJ, coordinated this network development. IIJ is our largest customer and our network was designed to meet the current and expected needs of IIJ and its own customers in addition to our other target customers. To the extent IIJ personnel cooperate with us to ensure that our network and services meet their needs, IIJ bears those costs. Some technical personnel, including Mr. Asaba, divide their time between IIJ and us. IIJ pays their salaries. We reimburse IIJ for a portion of the costs of these employees based on how much of their time is devoted to us.

14

      We also rely on IIJ for its technical and engineering expertise in identifying and evaluating the necessary equipment for our network and for the relationships with and access to the key vendors and suppliers from which we obtain our equipment. We generally purchase our equipment through IIJ or from parties introduced to us by IIJ. In the year ended March 31, 2000, we made equipment purchases of ¥1,373.6 million through IIJ.

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

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

      Mr. Koichi Suzuki, our President and Representative Director, and Mr. Toshiya Asaba, our Chief Technology Officer, split their time between Crosswave and IIJ, where Mr. Suzuki serves as President, Chief Executive Officer and Representative Director, and Mr. Asaba serves as Director and Co-Chief Technology Officer. Mr. Suzuki currently spends approximately one-third of his time for us and Mr. Asaba currently spends approximately one-half of his time for us. We expect that their future allocations of time will be approximately the same. However, business circumstances may result in one or both of these key persons spending more of his time with IIJ than anticipated. In addition, Mr. Akio Onishi, our Chief Executive Officer, also serves as a director of IIJ. To the extent any of these or other employees are not available to us at important times, our business may suffer. We also rely on their expertise in the operation of our businesses and on Mr. Suzuki’s relationships with our three main shareholders. None of our directors, officers or key employees, including Mr. Suzuki and Mr. Onishi, is bound by an employment or noncompetition agreement.

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

      In the year ended March 31, 2000, services rendered to IIJ and its affiliates accounted for approximately 86.2% of our revenues. Additionally, another 6.1% of our revenues were attributable to Sony and Toyota and their affiliates. Although, we expect to significantly diversify our sources of revenue in this and future fiscal years, IIJ will continue to be a significant customer. To the extent IIJ does not continue to be successful in expanding its business and increasing the number of its customers and the bandwidth its customers use, our business will suffer accordingly.

      Additionally, IIJ is our main sales agent. In the last fiscal year, we paid IIJ ¥2.2 million in sales commissions. As IIJ expands its value-added and systems integration services, we expect our sales to increase. To the extent IIJ is not successful in promoting our services, either individually or as part of its systems integration services, our business will not grow as rapidly as anticipated. We are also, however, diversifying our sales channels. To the extent we are unable to do so, we will continue to be largely dependent on IIJ to attract new customers to our services.

15

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

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

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

      As of the date of this prospectus, IIJ, Sony and Toyota own 40%, 30% and 30% of our shares, respectively, and, after the completion of the offering and the concurrent private placement to IIJ, will own 34.9%, 23.9% and 23.9%, respectively, assuming no exercise of the over-allotment option. These shareholders are actively involved in and will continue to have the ability to control our affairs and business. They have agreed that, during the three-year period after this offering, IIJ will be able to nominate two of our board of director members and Sony and Toyota one each, and that they will vote their shares in favor of each others’ respective nominees. As noted above, there is also a significant amount of management overlap and dependence on IIJ personnel. This will continue to be the case following the closing of the offering. It is possible that our main shareholders’ interests could conflict with your interest.

Regulatory matters could impact our ability to conduct our business

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

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

      Existing and future governmental regulation may substantially affect the way in which we conduct business. These regulations may increase the cost of doing business or may restrict the way in which we offer products and services. We cannot predict the future regulatory framework of our business. Any changes in laws, regulations or MPT policy affecting our business activities and those of our competitors could adversely affect our financial condition or results of

16

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

      We obtained access to nationwide transmission lines in Japan through our long-term IRU agreement with KDD to lease dark fiber. We have also acquired capacity between Japan and the United States by entering into an IRU agreement with Global Crossing. Our rights under these IRU agreements can be asserted only against the carriers granting the IRU. Therefore, we may not be able to continue using the transmission lines under the IRU agreements if the carriers were to become insolvent or bankrupt or if the transmission lines were to be foreclosed on or disposed of. Additionally, we have pre-paid $6.3 million to Global Crossing which we might not be able to recover in the event of an insolvency or bankruptcy.

This prospectus contains forward-looking statements which are inherently uncertain

      This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan” or other similar words. These statements discuss future expectations, identify strategies, contain projections of results of operations or of our financial condition, or state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause the actual results to differ materially from those contained in any forward-looking statement.

      We cannot promise that our expectations expressed in these forward-looking statements will turn out to be correct. Our actual results could be materially different from and worse than our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in this “Risk Factors” section.

There has been no prior market for our shares or the ADSs and a liquid trading market may not develop

      There is and will be no public market for our shares in Japan. Our ADSs have been approved for quotation on the Nasdaq National Market. However, being quoted on the Nasdaq National Market does not guarantee that a liquid trading market will develop. If no liquid trading market develops, you may have difficulty reselling your ADSs.

The price of our ADSs may be volatile and investors may not be able to resell their ADSs at or above the initial public offering price

      The market price of our ADSs is likely to fluctuate after the offering. In addition, the securities markets have experienced significant price and volume fluctuations and the market prices of the securities of Internet-related and telecommunications-related companies have been especially volatile. Investors may be unable to resell their ADSs at or above the initial public offering price.

You will incur immediate and substantial dilution

      The initial public offering price of our ADSs being offered in the offering is substantially higher than the book value per ADS equivalent of our outstanding shares. At the initial public offering price of ¥1,517 per ADS, the yen equivalent of the initial public offering price on the cover page of this prospectus, and after giving effect to the sale of the ADSs offered and after deducting underwriting discounts and commissions and other estimated expenses of the offering, but without taking into account any other changes in tangible book value after March 31, 2000, our net tangible book value per ADS would immediately increase by ¥258 per ADS equivalent to

17

As a holder of ADSs, you will have fewer rights than a shareholder has and you will have to act through the depositary to exercise those rights

      The rights of shareholders under Japanese law to take actions, including voting their shares, bringing derivative actions, examining our accounting books and records and exercising appraisal rights, are available only to holders of record on our register of shareholders. Because the depositary, through its custodian agent, is the registered holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. If we ask the depositary to obtain your voting instructions, the depositary will make efforts to vote the shares underlying your ADSs as instructed by you. However, in your capacity as an ADS holder, you will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights.

18

USE OF PROCEEDS

      We estimate we will receive aggregate net proceeds from the sale of the ADSs offered by us and the private placement of shares to IIJ of approximately ¥28.9 billion, or ¥32.9 billion if the underwriters’ over-allotment option is exercised in full, after deducting the estimated underwriting discount and offering expenses payable by us. These estimates are based on the initial public offering price of ¥1,517 per ADS, the yen equivalent of the initial public offering price set forth on the cover page of this prospectus.

      We intend to use the net proceeds as follows:

	•	approximately ¥14 billion for the further development of our national network, including the installation of our network backbone along national roadways, and the installation or leasing of fiber to form a metropolitan backbone network;
	•	approximately ¥2 billion for the installation or leasing of fiber and other local access infrastructure;
	•	approximately ¥3 billion for the expansion of our data center facilities;
	•	approximately ¥2 billion for payments relating to leasing of our international capacity; and
	•	approximately ¥7.9 billion for other expenditures, including payments related to the KDD IRU agreement, and general corporate purposes.

      Notwithstanding our current intentions, management will retain a significant amount of discretion over the application of the net proceeds of the offering and the private placement. Because of the number and variability of factors that determine our use of the net proceeds, our actual application of the net proceeds could vary substantially from our current intentions. The precise allocation of funds among these uses will depend on future commercial, technological, regulatory and other developments which may affect our business, the competitive climate in which we operate and the emergence of future opportunities.

      Pending the uses outlined above, we intend to invest the net proceeds in short-term, investment grade instruments, certificates of deposit or direct or guaranteed government obligations.

DIVIDEND POLICY

      We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, to finance our business and to fund growth and, therefore, do not expect to pay any cash dividends for the foreseeable future.

19

EXCHANGE RATES

      In certain parts of this prospectus, we have translated Japanese yen amounts into U.S. dollars for the convenience of investors. The rate we used for the translations was ¥102.73 equal to $1.00, which was the noon buying rate in New York City for cable transfers payable in Japanese yen on March 31, 2000 as certified for customs purposes by the Federal Reserve Bank of New York. The following table sets forth, for each period presented, the noon buying rates in New York City for cable transfers payable in Japanese yen, expressed in Japanese yen per $1.00, as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate on August 3, 2000 was ¥108.36 equal to $1.00. We do not guarantee that the Japanese yen or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Japanese yen at any particular rate or at all.

20

CAPITALIZATION

      The following table sets forth our capitalization as of March 31, 2000 on an actual basis and on an as adjusted basis to give effect to:

	•	a decrease of the authorized shares to 600,000 at the shareholders meeting on May 11, 2000;
	•	the receipt of the estimated net proceeds we will receive from the sale of 17,392,000 ADSs offered by us at the initial public offering price of ¥1,517 per ADS, after deduction of the underwriting discounts and estimated expenses payable by us in the offering; and
	•	the receipt of the estimated net proceeds we will receive from the sale of 15,000 shares (equivalent to 3,000,000 ADSs) in a private placement to IIJ at the price that is the equivalent of the price of the number of ADSs that constitute a share, after deduction of estimated expenses payable by us in the placement.

21

DILUTION

      As of March 31, 2000, our net tangible book value was approximately ¥11.9 billion, or approximately ¥149 per ADS. Net tangible book value per ADS represents the amount of our total tangible assets minus total liabilities divided by the number of ADS equivalents outstanding. Tangible assets are defined as our assets, excluding intangible assets such as goodwill. Dilution in the net tangible book value per ADS represents the difference between the amount per ADS paid by purchasers of ADSs in the offering and the net tangible book value per ADS immediately after the completion of the offering. After giving effect to both:

	•	the sale by us of 17,392,000 ADSs offered hereby at the initial public offering price of ¥1,517 per ADS, the yen equivalent of the initial public offering price set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and expenses payable by us in the offering; and
	•	the sale by us of 15,000 shares (equivalent to 3,000,000 ADSs) in a private placement to IIJ at the price that is the equivalent of the price of the number of ADSs that constitute a share, and after deducting the estimated expenses payable by us in the placement,

the net tangible book value at March 31, 2000 would have been approximately ¥40.9 billion, or approximately ¥407 per ADS. This represents an immediate increase in net tangible book value of ¥258 per ADS equivalent to existing shareholders and an immediate dilution in net tangible book value of ¥1,110 per ADS to new investors purchasing ADSs at the initial public offering price.

      The following table illustrates this dilution on a per ADS basis:

      The following table sets forth, as of March 31, 2000, the differences between the number and percentage of ADSs or ADS equivalents purchased from us, the amount and percentage of total consideration paid for the ADSs or ADS equivalents and the average price per ADS or ADS equivalent for our existing shareholders and for the new investors, including IIJ, before deducting the estimated underwriting discounts and offering expenses payable by us, at the initial public offering price of ¥1,517 per ADS, excluding any ADSs issued in connection with the underwriters’ over-allotment option.

22

SELECTED FINANCIAL DATA AND OTHER DATA

      The selected financial data set forth below should be read in conjunction with our financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The statement of operations data set forth below for the fiscal periods ended March 31, 1999 and 2000 and the balance sheet data at March 31, 1999 and 2000 are derived from the audited financial statements of Crosswave included elsewhere in this prospectus, which have been prepared in accordance with U.S. GAAP and audited by Asahi & Co., a member firm of Andersen Worldwide SC, independent public accountants. The historical results are not necessarily indicative of results to be expected for any future period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

23

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

      You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the notes to such statements included elsewhere in this prospectus. The discussion in this section contains forward-looking statements and you should read the risk factors relating to forward-looking statements in the section titled “Risk Factors” in this prospectus.

Overview

      We are a provider of broadband data communications infrastructure and services in Japan. We operate a nationwide fiber optic network which we are continually expanding. We were founded on October 28, 1998 as a joint venture between IIJ, Sony and Toyota. For our first six months, we were primarily developing our business plan, raising capital to implement the plan, designing and developing our network, and securing the necessary equipment to improve our network and offer services. Beginning in May 1999, we started offering our high-speed backbone service in the Tokyo-Nagoya-Osaka corridor. We began to offer other services in the second half of the fiscal year.

Revenues

      Our revenues are generated primarily from our services as follows:

	•	We receive recurring monthly fees from customers of our high-speed backbone service that lease our lines as dedicated lines. These fees are based primarily on the bandwidth subscribed for, but a portion of the fee is also based on the distance required for the point-to-point connection (up to 200 kms; 200 to 600 kms; over 600 kms). We also receive a small monthly recurring fee for equipment that we lease to customers in connection with this service and a non-recurring set-up fee when we initially begin providing services. For the year ended March 31, 2000, 83.4% of our total revenues were from this service, 87.0% of which was from IIJ and its affiliate and 0.9% of which was from Toyota. We expect that this service will continue to be the primary source of our revenues in the current fiscal year although we anticipate that a significant amount of our future revenues will be derived from our additional services.
	•	We receive recurring monthly fees from our wide area Ethernet platform service, which allow customers to lease entire dedicated networks from us to use as their own network infrastructure. The revenues we receive or the prices we charge for this service depend on a number of factors, including the bandwidth of service the customer needs, the number, length and speed of the direct local access line connections required and the number of ports. We also receive small monthly recurring fees for the terminal equipment used to connect to each port, a non-recurring fee when customers alter the port configuration, and an initial set-up fee when we begin providing services. For the year ended March  31, 2000, 2.5% of our total revenues were from this service, none of which was from IIJ.
	•	We receive recurring monthly fees from our dial-up port service, which allow customers to use our dial-up ports as access points for their own networking purposes. These fees are based on the number of ports each customer subscribes for, with the rates per port decreasing for multiple ports per subscriber or customer. We also receive small monthly recurring fees for the terminal equipment used to connect to each port, a non-recurring fee when customers alter the port configuration, and an initial set-up fee when we begin providing services. For the year ended March 31, 2000, 9.9% of our total revenues were from this service, 44.8% of which was from IIJ and its affiliate and 54.8% of which was from a subsidiary of Sony.

25

	•	We receive recurring monthly fees for renting racks and floor space at our data centers and we receive fees for connectivity services that we provide from our data centers. For the year ended March  31, 2000, 4.3% of our revenues were from this service, substantially all of which was from IIJ and its affiliates.

Other than the distance-based component to our high-speed backbone services, the rates that we charge for our services are not based on distance or time charges. We have been among the pioneers in distance-free, time-free pricing for data communications services and expect this to be an important marketing advantage that will allow us to attract subscribers to our services.

      Our revenue growth will primarily be driven by the number of customers that we are able to attract to our services and the level of service which they subscribe for. Our revenues from these services will also be affected by the prevailing market prices. To the extent we encounter increased competition either in the number of competitors or in terms of pricing, our revenues may be affected. We were the first or among the first to offer the types of services that we offer. We believe this will provide us a distinct advantage in attracting customers. However, it will also require us to more actively market and describe our services to potential customers who may otherwise be unaware of the service or the value and benefits to be gained by our services. We are currently developing our marketing department and strategies. To the extent that we are not successful in these marketing efforts and/ or to the extent that a market for the types of services we offer does not develop, we will not generate the revenues we expect. We do not expect our revenues or income to be affected by inflation.

Expenses

      Our primary expenses are related to our network, including the fees that we pay to KDD for our leased fiber-optic lines and for the maintenance of the lines under the IRU agreement. Other significant expense items include depreciation and amortization, sales and marketing expenses, and general and administrative expenses.

  Cost of data communication services

      Cost of data communication services consists primarily of costs related to our network such as the costs of leasing and maintaining our networks, particularly the IRU agreement portion of the network. The primary factors that will affect our data communications services expenses will be the size of our network and the rate of growth in our revenues.

      With respect to expenses related to our network, currently expenses related to the IRU agreement for dark fiber are the largest component. For the year ended March 31, 2000, 83.2% of our expenses were related to the lease and maintenance fees attributable to the IRU agreement with KDD. Under this IRU agreement, the lease payments consist of fixed and variable portions. The amount of the fixed portion is ¥2 billion per year through March 31, 2002 and ¥4 billion per year until the end of the lease term in April 2009, totalling ¥34 billion for the life of the IRU agreement. The variable portions of the payments are set at 5% of total sales based on sales projections that we estimated at the time of the contract. For the years ending March 31, 2000 and 2001, this percentage is fixed. However, thereafter, the percentage of total sales required to be paid is subject to prospective adjustment by agreement of the parties if the cumulative amounts of payments previously made deviated 10% or more from the projected payments established at the time of the contract. The projected payment in the year ending March 31, 2000 was ¥400 million; actual payment was ¥10.3 million. The projected payment in the agreement for the year ending March 31, 2001 is ¥800 million, but we expect our payment for this year to be substantially less than this amount. As the actual variable payments that were and will be made for the years ending March 31, 2000 and 2001 will be substantially less than the projected amounts in the contract, this may result in adjustment, subject to negotiations with KDD, to the percentage of total sales to be paid in later years according to the adjustment

26

      Additional cost of data communication services will consist of local access costs, maintenance costs, rental fees for the conduits from the Ministry of Construction and the costs associated with any additional operating leases that we enter into to implement our network buildout plan.

  Depreciation and amortization

      Our depreciation and amortization expenses are directly related to the amount of assets that we place in service. During the year ended March 31, 2000, most of the depreciation and amortization expenses were related to the DWDM and SONET equipment that we installed on our network to prepare it for the various services that we offer. In the future, depreciation and amortization will continue to be affected primarily by the rate of buildout of our network. As we construct our nationwide, metropolitan and local infrastructure networks, we will incur significant construction costs and buy and deploy large amounts of equipment to prepare and improve the dark fiber in our network to be used for our various network services. As we do, our depreciation and amortization expenses will increase.

      We have also entered into a long-term IRU contract for significant amounts of dedicated capacity between Japan and the United States with Global Crossing. We treat this contract as a capital lease, and payments related to the contract will be included in depreciation and amortization expenses and spread over the life of the lease. The contract has a total contract price of $25 million of which we paid 25% in March 2000 and will pay the remaining 75% in or before March 2001. This contract is for 23 years.

  Sales and marketing

      Our sales and marketing expenses consist primarily of costs related to marketing and general advertising, sales and marketing personnel expenses and commissions paid to IIJ and other third-party sales agents. Our sales and marketing expenses will increase significantly as we expand our operations and as we increase our sales and marketing activities. These increases will include increases in sales personnel expenses and in expenses payable to sales agents, primarily in the form of commissions. With respect to commissions, the commissions that we pay to IIJ and other third-party sales agents are generally between 5% and 20% depending on the services sold.

  General and administrative

      Our general and administrative expenses primarily include expenses associated with our management, accounting, finance and administrative functions, including personnel expenses. We believe that these expenses will increase as we grow our business and as we add additional staff as a result of becoming a public company. As of March 31, 2000, we had 58 employees. We

27

Results of Operations

      As an aid to understanding our operating results, the following table sets forth certain items from our statement of operations for the period from October 28, 1998 (date of incorporation) to March 31, 1999 and for the year ended March 31, 2000.

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

      A comparison of results of operations between the year ended March 31, 2000 and the period from October 28, 1998 to March 31, 1999 is not meaningful. Although we were founded in October 1998, we were only in the development stage and did not begin offering services until May 1999. As a result, we had no revenue for the period from October 28, 1998 to March 31, 1999, and our operating expenses of only ¥82.5 million were limited to general and administrative expenses related to compensation for employees and other expenses such as the leasing of office space.

  Results of operations for the year ended March 31, 2000

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

28

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

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

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

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

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

      Income taxes. We incurred and paid no income tax.

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

29

Quarterly Results of Operations

      The following table sets forth selected unaudited quarterly financial data for each of the four quarters in the year ended March 31, 2000. This unaudited information has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly this information. The operating results presented for any quarter are not necessarily indicative of results for any future period.

Financial Condition

      Our working capital increased substantially during the year primarily as a result of proceeds from the issuance of additional shares to IIJ, Sony and Toyota. Our operations used approximately ¥4.0 billion of cash during the year due to net losses of ¥7.8 billion. This was offset in part by an increase in accrued expenses and other liabilities of ¥2.8 billion, depreciation and amortization of ¥0.8 billion and an increase in accounts payable of ¥0.6 billion.

      We used ¥1.7 billion in investing activities which consisted primarily capital expenditures for purchases of property and equipment of ¥1.3 billion.

      Net cash provided by financing activities was ¥12.9 billion. As noted above, financing sources consisted primarily of proceeds of ¥13.5 billion from share issuances to IIJ, Sony and Toyota.

Liquidity and Capital Resources

      We have an extensive network buildout plan that consists of

	•	significantly increasing the coverage and redundancy of our nationwide network,
	•	building out metropolitan network infrastructures in Tokyo, Osaka and Nagoya,

30

	•	developing an extensive local access infrastructure to position ourselves to connect customers directly to our network by bringing our network lines to them, and
	•	building data centers in major cities in Japan.

Please see the description of our network buildout plan contained in the “Business — Network — Network Development Plan” of this prospectus for specific details.

      Building out our network in this manner will require a significant amount of capital. We estimate that the total cost to develop our network as set forth in our network development plan through March 31, 2004 will be approximately ¥122 billion, which will include approximately ¥21 billion for the current fiscal year and ¥35 billion for the next fiscal year. Our current estimates for the next two fiscal years include the following:

	•	We estimate that the cost to complete our nationwide backbone network buildout will be approximately ¥14 billion for the year ending March 31, 2001 and ¥17 billion for the year ending March 31, 2002.
	•	We estimate that the cost to complete our metropolitan network infrastructure buildout will be approximately ¥1 billion for the year ending March 31, 2001 and ¥2 billion for the year ending March 31, 2002.
	•	With respect to our local access infrastructure buildout, it is substantially more difficult to estimate the costs that will be incurred to develop this part of our network, mainly because the local access infrastructure will be driven primarily by the needs and locations of our future customers. Nevertheless, we anticipate that during the year ending March 31, 2001 we will spend approximately ¥1 billion on local access infrastructure. For the year ending March 31, 2002, we anticipate that we will spend approximately ¥12 billion.
	•	We estimate that the cost to develop our data centers will be ¥2 billion for the year ending March 31, 2001, at which time we will have completed the development of our first six data centers.

      As of March 31, 2000, we had approximately ¥12.2 billion of cash and cash equivalents, which consists primarily of proceeds from a share issuance to our founding shareholders of ¥12 billion in February 2000. We estimate that, for the rest of this fiscal year, capital required to execute our network buildout plan and to fund negative cash flows from operations will be approximately ¥20 billion. We believe that cash on hand, together with the proceeds of this offering and of the private placement of shares to IIJ, will satisfy our cash requirements for approximately the next 15-18 months.

      We do not believe that we will generate positive cash flow until at least the year ending March 31, 2006. Therefore, we will need to raise additional capital to complete our current network buildout plans. We intend to raise these funds primarily from public offerings or strategic placements of debt and equity securities and bank borrowings. However, at this time, we have no concrete plans as to the timing or manner of any offering or borrowing. We may also explore opportunities to swap our network capacity, or to swap, sell or lease portions of our future network infrastructure, with third parties, depending on the development of the data communications market and the regulatory environment. These types of transactions could help us to raise, or reduce our need for, additional capital. We will continue to monitor our needs for cash and market conditions for opportunities to raise funds. However, there can be no assurance that we will be able to raise funds on a timely basis or at all or on terms that are acceptable to us. If we are unable to do so, it will delay the completion of our current network buildout plans.

      With respect to our cash flow and our IRU agreement with KDD, the US GAAP treatment of the IRU arrangements is as an operating lease. As noted above, the lease payment consists of variable and fixed portions. The amount of the variable portions will increase as the level of our sales increases. The fixed portions will be flat, except for the increase in April 2003. Accordingly,

31

      We do not expect to generate net income or positive cash flow prior to the year ended March 31, 2006. We expect positive adjusted EBITDA for the year ending March 31, 2004. As we have no operating history, as the business environment surrounding us is uncertain and as the manner in which we conduct our business may change significantly depending upon a number of considerations (e.g., networking equipment can be provided by lease or purchase), we cannot be certain that our total annual expenses will not be larger than we anticipate, that our revenues will not be smaller than we anticipate or that we will become profitable as early as we anticipate.

Market Risks

      Our contract for leased lines between the United States and Japan requires payments to be made in U.S. dollars. Our expected payments for the current fiscal year are approximately $19.5 million. We may also enter into new contracts requiring U.S. dollar payments. We presently do not utilize derivative or other financial instruments to hedge the risks associated with the movement in U.S. dollars. However, management continually monitors fluctuations in the U.S. dollar and the Japanese yen and will consider the use of derivative financial instruments or employment of other hedging methods if cash flows or investment returns so warrant.

32

BUSINESS

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

      Our goal is to become the leading provider of advanced, end-to-end data communications services in Japan relying solely on our network, without the use of third-party carriers.

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

      We are now expanding our network by:

	•	installing our own fiber along national roadways to increase capacity, geographical coverage and network redundancy;
	•	installing or leasing fiber to form a metropolitan backbone network in high-density urban areas; and
	•	installing or leasing fiber and other local access infrastructure in these urban areas to provide direct access to the buildings of target customers, enabling them to access our network without the use of third-party carriers.

      We plan to extend our network to encompass a total of approximately 7,900 route miles of fiber in Japan by 2004. We have also secured backbone capacity to the United States. We are seeking opportunities to further expand our international network to the United States and other parts of Asia. In addition to expanding network capacity, we are establishing data center facilities which will complement our transmission network by acting as data traffic hubs and access gateways to our network.

Our History

      We were formed in October 1998 by IIJ Sony and Toyota and began offering services in May 1999.

      IIJ was one of the first commercial Internet service providers in Japan. Its founders included engineers who were participants in the WIDE project in Japan, which was a pioneering project for the advancement of the Internet in Japan.

      IIJ offers both dial-up and dedicated access Internet services and other value-added services. At March 31, 2000, IIJ had approximately 6,000 corporate customers with Internet connection speeds up to 150 Mbps. To provide its Internet access services, IIJ has become one of the largest users of leased lines, in terms of capacity, within Japan and between Japan and the United States.

      From its own experience as a large user of leased data transmission capacity, IIJ and its engineers recognized the market opportunity for an efficient, high-capacity and cost-effective data communications infrastructure operator in Japan. Because Japanese regulation would require this type of telecommunications provider to hold a Type I Carrier license, which IIJ does

33

      In order to develop such a large-scale project, IIJ involved Sony and Toyota as venture partners. IIJ contributed 40% of our equity, and each of the other shareholders contributed 30%. To date, these three shareholders have made aggregate capital contributions to us of ¥20 billion.

The Telecommunications Industry in Japan

      The telecommunications industry in Japan is among the most well developed and extensive in the world with fixed-line penetration rates at 49.5 lines per 100 population and cellular penetration rates at 40.3 per 100 as at March 31, 2000. The telecommunications market in Japan is the second largest in the world with total revenues of over ¥15.5 trillion for the year ended March 31, 1999, and capital investment estimated to have reached ¥3.5 trillion during the same fiscal year.

      This market has historically been dominated by NTT. Prior to 1985, NTT’s predecessor public corporation had been the sole domestic telecommunications carrier in Japan. In 1985, there were significant changes in the legislative and regulatory framework for telecommunications in Japan including the incorporation of NTT and the passing of reform laws aimed at promoting fair and effective competition in the telecommunications services market.

      It was only beginning in 1987 that any competitors to NTT began offering domestic telephone services in Japan. Since that time, however, there has been a rapid expansion in the number of telecommunications carriers in Japan. As of March 1, 2000, there were 249 Type I Carriers and 7,651 Type II Carriers. Type I Carriers are telecommunications operators which provide telecommunications services by establishing their own circuits and facilities (such as us, NTT East, NTT West and Japan Telecom), and Type II Carriers are telecommunications carriers other than Type I Carriers (such as IIJ).

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

  Deregulation

      Since 1987, competition in the telecommunications industry has been stimulated by significant steps in deregulation, including the following:

	•	regulations restricting new entry into the market have been revised by allowing competition in the telecommunications industry;
	•	rules designed to prevent excess investment have been repealed;
	•	rules restricting operators to a particular area of service, such as local, long distance or international, have been abolished;
	•	rules restricting foreign investment in telecom operators have been abolished, except with respect to NTT;
	•	interconnection of leased-line networks and international leased lines with the public switched network has been liberalized; and
	•	the requirement for prior approval of tariffs has been abolished for most services provided by Type I Carriers, and replaced by a simple notification requirement.

34

      For a description of the regulatory environment of the telecommunications industry, please refer to “Regulation of the Telecommunications Industry in Japan” included elsewhere in this prospectus.

  Technological Advances

      Historically, NTT and other carriers in Japan have designed their telecommunications networks for the main purpose of the efficient transmission of voice traffic. As a result, they have based their networks on narrowband circuit switching suitable for voice communications. This type of circuit switching establishes and keeps open a dedicated path until a telephone call is terminated. However, this switching is poorly suited for data transmission, because it does not use transmission capacity efficiently — once a circuit is dedicated, it is unavailable to transmit any other information even if the users of the circuit are not speaking or otherwise transmitting information. Packet switching does not consume capacity in this inefficient manner. Packet switching, which is a technology used in networks designed specifically for data transmission, divides data into small packets which are then independently transmitted to their destination via a designated path. The packets are then reassembled upon arrival. IP is the most commonly used packet switching based networking technology, and it is currently able to operate at speeds of 2.4 Gbps or more.

      Circuit switching and other older transmission technologies use narrowband transmission circuits with bandwidths in multiples of 64kbps. 64kbps is commonly used in circuit switching networks for voice traffic. With the advent of digital data transmission, narrowband transmission bandwidths of multiples of 64kbps units led to constraints on the organization of data and the formats available for sending data. These constraints resulted in inefficient use of bandwidth or available capacity. Most PCs, workstations and servers currently use broadband transmission protocols like Ethernet for data transmission, with wide band transmission channels of 10 Mbps, 100 Mbps or more. This allows for efficient organization of data within the capacity and allows greater freedom in using a variety of application protocols. Broadband transmissions can also be easily scaled to accommodate increasing traffic flows, adding flexibility to broadband networks.

      NTT and other carriers transmit voice, data and video signals primarily over copper cables, coaxial cables, microwave and, increasingly, fiber optic cables. Fiber optic cables use light to transmit information in digital format through ultra-thin strands of glass. Compared to copper, fiber optic cables provide significantly greater capacity at lower cost with fewer errors and increased reliability.

      There have been significant recent advances in switching and electronic technology that have further increased the bandwidth, or transmission capacity, of telecommunications networks, particularly those using fiber. DWDM allows for multiple light signals through a single optical fiber strand. This process, called “multiplexing”, can currently increase the bandwidth of fiber optic cables by more than 100 times the bandwidth of fiber not using DWDM.

      These technological evolutions, from circuit switching to packet switching, from narrowband to broadband, from copper to fiber and from one to many light signals, have produced significant increases in network capacity and scalability of networks.

  The Internet in Japan

      The Internet has experienced rapid growth in Japan since commercial application of the Internet began in the early 1990s. Use of the Internet in Japan has lagged behind use in the United States, but is extensive and growing quickly. According to Access Media International, Japan is the second largest Internet market in the world, with an estimated 18.5 million users at year end 1999. The same source projected that the Internet population in Japan will grow to 23.0 million at year end 2000 and to 27.0 million at year end 2001.

35

      We believe that businesses in Japan are now beginning to use and rely on the Internet for wider purposes, including establishing corporate Internet sites as a means to expand customer reach and improve communications efficiency and creating intranets or virtual private networks. Japan’s Ministry of International Trade and Industry estimates that the size of business-to-consumer e-commerce in Japan will grow from ¥65 billion in 1998 to ¥3.16 trillion in 2003, as compared to projected growth from ¥2.25 trillion in 1998 to ¥21.3 trillion in 2003 (at an assumed exchange rate of $1 = ¥120) in the United States. The Ministry also estimates that the size of business-to-business e-commerce in Japan will grow from ¥8.62 trillion in 1998 to ¥68.4 trillion in 2003, as compared to projected growth from ¥19.5 trillion in 1998 to ¥165.3 trillion in 2003 in the United States. The rapid growth of the Internet stimulates demand for data traffic. As usage by businesses increases, we expect an increase in the demand for advanced, highly reliable, high-capacity connectivity services to meet their networking and other needs.

  Increasing Demand for Data Traffic and Communications Services

      As in the United States, the level of data traffic, including Internet, voice and video, is rapidly increasing in Japan. We believe that there will continue to be significant growth in demand for long distance data, Internet, voice and video services.

      According to a survey conducted by Nikkei Communications, 85% of the 1,087 corporations responding to the survey, each of which is either a public company or private company with over 2,000 employees, were using the Internet in their businesses as of June 1999. Over 50% of the companies said they would like to increase their connectivity bandwidth by two to five times by January 2001. The same source projected that companies operating LANs, or local area networks, would grow from 65% of the total to 80% of the total by 2005, with the general trend being a move from 10 BaseT networks, essentially a high-speed (10 million bits per second) Ethernet LAN, to 100 BaseT or faster networks.

      The increases in computing power, number of computers networked over the Internet and connection speeds of networked computers are driving tremendous increases in communications use for Internet and data services. Additionally, we believe video conferencing, digital television, cable services and other multimedia applications being developed will continue to increase demand for transmission capacity.

Our Market Opportunity

      We believe that the growth of data traffic in Japan has been held back by a number of factors, including the legacy networks and the narrowband circuit switching systems that were specifically designed for voice transmission, the lack of fiber and other high-speed infrastructure development, the fee and rate structures in Japan based on distance and time that discourage users from heavy usage of the Internet, and the last mile problem which prevents networks like ours from gaining broad, direct access to customers and increases costs of services to end users and to us.

      However, we believe that there is and will continue to be significant growth in demand for broad-bandwidth and high-quality data transmission services in Japan. As the Japanese market is deregulated and new technology is introduced, the number and variety of communications services providers is increasing. These providers share a common need for high-capacity, high-quality and cost-effective data transmission infrastructure. Voice traffic may also begin to be transmitted over data networks, creating additional demands for reliable, high-quality broadband

36

  Corporate computer networks

      We believe that the increasing data traffic needs of large corporations will be significant. The growth in corporate networks will increase demand for data transmission capacity from companies desiring dedicated high-capacity data transmission either point-to-point or over a wide area.

  Internet service providers

      As Internet usage grows, Internet service providers need to maintain sufficient transmission capacity to ensure reliable service.

  Telecommunications carriers

      Telecommunications carriers provide a market for our broadband services in a variety of ways. For example, foreign entrants have recently been entering into the Japanese telecommunications market. These companies do not have their own nationwide network and we will market our services to these companies. With over 51 million cellular subscribers and a 40.3% market penetration as of March 31, 2000, Japan is among the most advanced mobile telecommunications markets in the world. Japanese carriers have been leaders in introducing wireless data communication. As carriers introduce third generation mobile systems designed to allow high-speed data transmission, they will also need to obtain broad-bandwidth transmission capacity to support such services. For example, NTT DoCoMo’s next generation cellular system offering 384kbps mobile wireless data transmission capabilities is scheduled to launch in May 2001.

  Broadcasting and Cable Television

      Due to technological changes, such as the change from analog to digital broadcasting and increasing interactivity in programming, the broadcasting industry is expected to change its infrastructure to make extensive use of data communications infrastructure. Digital TV broadcasting by satellite is expected to expand significantly with the launch of a new digital broadcasting service in Japan this year, and terrestrial digital TV broadcasting will start in several years. Such a shift may significantly change the broadcasting industry by facilitating changes in programming content, production processes and end user terminal hardware. As news or entertainment content will be processed in digital format, we believe that broadcasters will require more and more reliable and cost-effective data transmission infrastructure, interconnecting studios, production facilities and broadcasting centers. Moreover, programming content is becoming more and more interactive. The advent of digital broadcasting will encourage the replacement of current television terminals with those equipped with interactive capability through the Internet, phone lines or cable. Already some broadcasting media or programs are employing the Internet for interactive media.

      The shift to interactivity is also occurring in the cable TV industry. The Internet has been increasingly provided through cable TV infrastructure. The MPT reported that Internet users over cable in Japan increased from approximately 32,000 in March 1999 to approximately 154,000 in December 1999. Such trends are stimulating content providers to develop larger content, including video or music, for transmission over high-speed networks. We believe CATV operators will need to connect to each other through high-capacity networks to share such content and programs or to enhance their connectivity to this content and will thus be requiring reliable high-speed data communications infrastructure. We foresee this trend to strengthen as digital broadcasting penetration increases. The potential for such interactive data flows is large and the need for handling large-volume data communications traffic may arise on a nationwide scale.

37

  Digital Contents Distribution

      Digital data content, including video games, video, music and other multi-media content, will increasingly be transmitted or disseminated over telecommunications or broadcasting infrastructure as a result of the development of the Internet and digital broadcasting. Some content providers are currently planning to distribute content to convenience stores or other designated sites equipped with broadband access infrastructure. The data size of such content will grow larger and will require high-quality uninterrupted transmission capabilities. These content providers will require reliable, cost-efficient, high-capacity data transmission infrastructure, including high-capacity national backbone network, broadband local access infrastructure and data centers where data storage equipment and servers can be stored and directly connected to a high-speed network hub.

  E-Commerce Participants

      Japan’s high Internet penetration is now justifying business activity on the Internet aimed at both individuals and business users. At the same time, the increasing application of the Internet in business activity is also raising the demand for data transmission capability and increased quality of network connectivity. Internet retailers who rely on their websites as their main interface with consumers demand much higher capacity and reliability than non-commercial users. Likewise, major corporations who migrate sourcing and distribution functions to Internet based systems demand high-speed, reliable and secure systems. Cost-efficient high-speed networks and data centers will be key for such businesses.

Our Competitive Strengths

      We are pioneers in broadband data transmission in Japan with an extensive, flexible and scalable network specifically designed for cost-effective data communications. Our experienced management team, our organizational structure and our advanced technology and services position us to take advantage of the rapidly changing market for data transmission and to effectively execute our business plan.

  We Are Pioneers in Introducing Broadband Data Communication Services in Japan

	•	We were the first carrier in Japan to offer customers point-to-point data services of up to 600 Mbps;
	•	We were the first carrier in Japan to introduce and offer wide area Ethernet platform services; and
	•	We also introduced novel pricing structures, based on levels of service, in lieu of pure distance-based pricing common among voice carriers in Japan. Our Ethernet platform and dial-up port services use completely distance-free pricing.

      Our engineering expertise provides us with the capability and resources necessary to develop new network services, create new markets and generate additional demand for our network capacity.

  We Have an Extensive, Data-Dedicated Network

      Our network is our strongest asset.

      Nationwide coverage is already in place. By leasing our initial trunk lines through a dark fiber IRU agreement, we were able to establish in about 18 months a nationwide broadband network that extends to every prefecture in Japan except Okinawa and Shimane and has over 80 access points. By acquiring our initial nationwide network in this way, we saved significantly on construction costs and development time over competitors seeking to lay their own fiber.

38

      Specific design for cost-effective data communications. We use advanced optical technology to reduce the complexity and cost of our network while increasing the reliability of data transmission. As the first nationwide network in Japan specifically designed only for data communications, we are not burdened by legacy infrastructure such as voice telephony switching equipment. We are therefore free from the restructuring costs associated with dismantling or replacing voice-oriented legacy equipment as we install our own network equipment.

      Our network is flexible and scalable. We use technology compatible with a variety of network transmission technologies and protocols so that our infrastructure can easily accommodate various types of data traffic. For example, our network is well suited to transport IP-oriented data communications, positioning us to take advantage of the worldwide demand for IP networks and increasing Internet and intranet use. Our network currently has ample capacity and will easily support additional capacity for Gigabit class network usage. We believe our network design will enable us to take advantage of future innovations and developments and new technology to upgrade our network and offer new services more quickly than legacy carriers may be able to do.

  We Have an Experienced Management Team

      We have assembled a management team that we believe is well suited to lead the development of the data communications market in Japan. Our senior personnel have proven track records. Mr. Suzuki, our President, has over 20 years of experience in the telecommunications and computer industries. Mr. Onishi, our Chief Executive Officer, has over 5 years of experience in telecommunications and Internet-related industry and also has over 5 years of management consulting experience as a consultant at McKinsey & Company. Mr. Fushimi, our Chief Financial Officer and Chief Accounting Officer, has 25 years of experience at the Ministry of Finance of Japan in finance related matters. Mr. Hayashi, our Chief Marketing Officer, has over 10 years of experience in telecommunications including a number of managerial positions with International Digital Communications. Mr. Asaba, our Chief Technology Officer, has over 10 years of telecommunications and Internet-related experience, 7 of which are in Internet and telecommunications network backbone engineering, including network design, routing and traffic management. The directors nominated by Sony, Mr. Yamamoto, and Toyota, Mr. Tao, have over 9 years and 2 years of experience, respectively, in the telecommunications industry. In addition, Mr. Kamano, Mr. Hirabayashi and Mr. Inaba, our Executive Officers, have over 6 years, 7 years and 19 years of experience, respectively, in the telecommunications industry. Together, our 10 directors and executive officers have over 93 years of experience in the telecommunications industry. Many of our key personnel have been involved with the Internet in Japan since its inception. Others have significant experience in the telecommunications industry in Japan. Additionally, many of our key personnel have been involved in the development of IIJ and, therefore, have proven their ability to develop networks and services, to manage operations in competitive and rapidly growing markets and to execute business plans similar to ours.

  We Have a Light, Slim Organization and We Adapt Easily to Change

      Internet and data transmission technology and related markets change rapidly. Some existing carriers have been hampered by their existing, outdated technological and organizational infrastructure and are unable to adapt quickly to change, either technologically or organizationally. We are able to maintain a cost-effective corporate structure and implement decisions quickly, because our network infrastructure is efficient, flexible and scalable, and does not require a lot of personnel to operate. Also, we do not have the dated equipment and technology and associated upgrading costs of an incumbent carrier. Moreover, our target customers are large-volume corporate users, rather than individual users, and we are not burdened with unnecessary layers of management or excessive numbers of employees.

39

  We Benefit from Our Integral Relationship with the IIJ Group

      As a leading Internet access and network solution provider in Japan, IIJ helped create Crosswave because it understood the market opportunity for a new provider of broadband, high-quality data transmission infrastructure. We benefit from our integral relationship with IIJ and its affiliated companies. IIJ is our largest customer and sales agent. IIJ extensively uses our network infrastructure and data center facilities for itself and to offer Internet connectivity and value-added services to its base of approximately 6,000 corporate customers. We expect sales to IIJ to increase as IIJ’s own business expands. We cooperate with IIJ and the IIJ group companies in designing services, and IIJ provides engineering and design assistance to help with our own network development. When IIJ’s customers need non-Internet services, such as our wide area Ethernet platform service, IIJ also acts as our sales agent, thus expanding our own customer base.

Our Strategy

      We will take advantage of the market opportunities available to us by pursuing the following strategies:

  Rapidly Develop our Broadband Data Transmission Infrastructure

      We have in place an extensive, nationwide network that is dedicated exclusively to data. Our network is specifically designed to be cost-effective, flexible and scalable. Our network can be easily modified and upgraded to increase capacity and to support different services and transmission technologies.

      We are in the process of building out this network. The key ways we plan to upgrade our infrastructure are by:

      Expanding the geographic coverage and redundancy of our major trunk lines. We have applied to Japan’s Ministry of Construction for access to conduits along major national roadways in Japan in order to install over 4,000 route miles of fiber optic cable. We expect to have over half of the total fiber activated by March 2002. We have also agreed to lease significant capacity on an IRU basis between Japan and the United States.

      Increasing network density in key urban areas and offering direct local access to our target customers. We are extending metropolitan backbone networks out from our main trunk lines in the Tokyo, Osaka and Nagoya urban areas. We will primarily use dark fiber leased from local railroads, subways and utilities but also will install new fiber where it is necessary or more cost-effective. These metropolitan backbones will bring our network closer to large numbers of target customers. We plan to offer direct local access in these areas primarily by laying fiber directly to main office buildings but also will explore other methods of completing the last mile to the customer.

      Developing data center facilities nationwide. We plan to open data centers in six major cities this year, including data center facilities already open in Tokyo and Osaka, and to develop additional centers in the future. The data centers will offer direct connection to our network infrastructure and will complement our other services.

  Continue to Lead the Market in Introducing New Data Communications Services

      We aim to continue to lead the market in introducing new data communications services. For example, we plan to continue to increase the speed of the backbone services we offer to stay ahead of market demand. We plan to support Gigabit Ethernet and other high-quality, high-capacity network services to allow applications such as digital video transmission. We also plan to offer more integrated packages of services utilizing different components of our technological infrastructure, such as our managed SONET ring service, which offers full-service data

40

      We will focus our marketing efforts on targeting customers with broadband data communications requirements. We can identify and focus the efforts of our marketing team on a select pool of potential clients that include large corporations, ISPs, telecommunications carriers and other organizations. By concentrating on this group and on referrals made by IIJ and other sales agents, we can maximize the efficiency of our sales and marketing teams.

      Our sales engineers will provide tailor-made solutions. Many of our sales representatives are engineers. Also, many businesses in Japan are behind in developing network expertise compared to U.S. corporations. Especially for large corporate clients, the technical expertise of our sales engineers is vital in utilizing our basic infrastructure to configure a package of services that will meet their needs.

  Offer Innovative, Distance-Free Pricing Structures

      Our services are priced to give customers the opportunity to obtain high-quality advanced data communications at cost-effective rates. Our network has allowed us to introduce novel pricing structures based on levels of service instead of pure distance-based pricing. We believe this is a major shift away from the pricing practices of voice carriers in Japan and will redefine the data communications market. Our Ethernet platform and dial-up port services use completely distance-free pricing. The pricing structure of our high-speed backbone services is also simple with pricing levels significantly lower than those of comparable services from other carriers.

  Capitalize on Our Experienced Management Team and High Quality Employees

      We have assembled a management team with over 93 years of experience in the communications industry. We will capitalize on the relationships they have developed and their understanding of the industry, customer needs and available technologies to design, implement and offer new and innovative data communication services. We will also capitalize on our management’s ability to react quickly to changes and new opportunities in the market.

      We believe that we have developed an open, merit-based corporate culture that motivates employees to succeed in their work. Our goal is to attract and retain employees with the technical, engineering and other skills necessary for us to implement our business plans. As a young, rapidly growing company, we will need to hire additional personnel and believe we offer an exciting and challenging atmosphere. We are introducing stock options for key directors and employees.

Our Services

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

      We offer four main types of services, including our high-speed backbone service, wide area Ethernet platform service, dial-up port service and data center services. We also provide various

41

  High-speed Backbone Service

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

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

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

      To illustrate the lower pricing of our high-speed backbone service, the following table compares end-to-end monthly prices that Crosswave, KDD, NTT Communications and Japan Telecom charged for their leased lines between Tokyo and Osaka (approximately 400 kilometers) for the respective bandwidths indicated as of June 2000.

     International backbone service. We may seek to exploit opportunities to expand our high-speed backbone services internationally if there is sufficient demand from our customers. We received permission in April 2000 from the MPT to conduct international telecommunications services for data transmission and leased circuits. We expect to offer services beginning in July 2000 and currently expect IIJ to be a substantial customer. We currently expect pricing for our international backbone service to be based on volume and destination. See “Our Network — International Network Buildout Plan” for more information on our international network buildout plan.

42

  Wide Area Ethernet Platform Service

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

      Our Ethernet platform service moves from this “point-to-point” and incompatible model to a “point-to-multi-point” and compatible architecture in which LAN networks connect to each other seamlessly through our high-speed network. This architecture, incorporating point-to-multi-point Ethernet switching, allows a customer’s headquarters and branch offices, which may be separated by long distances, to communicate with each other as if they were a part of the same LAN without the need for any additional equipment, thereby realizing a seamless LAN environment over a wide area with higher reliability at lower costs. We provide either a 10 base-T or a 100 base-T (Fast Ethernet) interface depending on a customer’s access speed and preference.

      The following graphic illustrates our wide area Ethernet platform service and its advantages when compared to standard point-to-point services.

43

      Pricing for our wide area Ethernet platform service. Our wide area Ethernet platform service offers customers a distance-free, flat-rate tariff system. Three main factors determine the monthly fee charged to customers: the number of ports, speed and type of local access lines selected by the customer.

	•	Ports. Customers connect their local access lines into our backbone network through ports at our access points. One line connects to each port and we charge a fee for each port used by a customer.
	•	Speed. Currently, we provide this service at 1.5 Mbps, 3 Mbps, 6  Mbps, 12 Mbps, 25 Mbps and 45 Mbps. Customers are able to choose the speed they desire over our network, and we charge them a fee based on this choice.
	•	Local access lines. Customers access our network through local access lines connecting their physical LAN locations to ports at our network access points. Customers may use our local access infrastructure, such as direct fiber, FWA or other direct access methods as they become available, or they may choose to use third-party access lines provided by NTT or other local carriers. We bill customers based upon the access method they choose. We pass through costs of third-party access lines to our customers without any mark-up.

		The monthly per port price at which we currently offer our wide area Ethernet platform service are as follows:

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

44

  Dial-up Port Service

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

      Users who want to access a customer’s network can call the telephone number of the closest access point using a telephone or ISDN line. The call will then be transmitted over our infrastructure to the designated entrance location of the customer’s network. Depending on the customer’s choice of equipment or technologies at the entrance location, the customer can provide its users with a variety of services, such as dial-up IP or IP telephony.

      We currently offer this service as a trial service but have submitted an application for approval of its terms and conditions to the MPT. We do not anticipate having any problems obtaining the MPT’s approval. The pricing for this service will be based on the number of ports each customer subscribes for with the rates per port decreasing for multiple ports per customer.

  Data Center Services

      We plan to offer data centers in major metropolitan areas targeted at a wide range of customers, including large companies that demand a variety of network services and resources, value-added network service providers such as application and digital content service providers, and new entrants into the Japanese telecommunications market that require quick access to networks.

      Our personnel operate and manage each of our data centers, and we outsource some support and maintenance services to NetCare, an IIJ group company, and other third-party

45

	•	Quality Housing. Our data centers have a functional design that allows convenient set-up, maintenance, adjustment and troubleshooting of lines and other equipment. We expect that our initial six data centers will have a total of approximately 6,000 total square meters of floor space. Customers will be able to lease rack space for their computers, networking and other equipment. Our experienced engineers and staff will provide 24 hour-a-day, seven-day-a-week support and maintenance of the facilities.
	•	Network Connectivity. Our data centers will allow customers direct access to our network. They will serve as data traffic hubs and gateways to our broadband network, allowing customers high- capacity access to our network. We will also provide cross-connect services allowing customers to connect with each other.

      We receive recurring monthly fees for renting racks and floor space at our data centers and we receive fees for connectivity services that we provide from our data centers. We expect the fees we charge will depend on factors such as geographic location, demand and volume.

      We have constructed our data centers for security. We employ various measures to enhance the access security of our facilities, including pre-authorization procedures and advanced identification systems. We have remote cameras to record entrants to the data centers. Our racks have secure key locks which cannot be opened without the presence of our staff.

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

      As at March 31, 2000, most of our leased racks are leased to IIJ. IIJ subleases this rack space to its customers together with IIJ’s other services. We also expect to sell these services to other systems integrators, ISPs, and other customers such as corporate customers of our wide area Ethernet platform and other services.

  Other Network Services and Opportunities

      In conjunction with our four primary services, we are planning to introduce network services that help us diversify our service menu and capitalize on our network. We are developing the services described below in response to the needs of individuals or small groups of customers, and therefore we do not initially anticipate a high demand for these particular services. They exemplify the solutions we provide our customers, and we can design and implement other solutions tailored to our customers’ own data transmission needs.

	•	Lit fiber segment lease service. We are planning to offer customers a dedicated wavelength with 2.4 Gbps of capacity. Customers can access this fiber segment at any one of our access points by attaching their own transport or switching equipment directly at our access point or by using a custom solution provided by us. By accessing the 2.4 Gbps segment at different access points throughout our network, customers can create their own point-to-point platform in a ring topology based upon their traffic needs.
	•	Managed SONET multiple ring service. We are planning to offer a fully-managed 2.4 Gbps SONET ring service for customers who wish to implement for their network a high-speed SONET ring network, but who lack the expertise to do so themselves. We will provide customers with ready-to-use SONET equipment which we will operate and

46

		maintain for them. This service can be customized to meet the specific traffic and service needs of a customer.

      We may also explore opportunities to swap our network capacity, or to swap, sell or lease portions of our future network infrastructure, with third parties, depending on the development of the data communication market and the regulatory environment. Our flexibility in this regard may help us to generate revenue additional to that from our primary sources.

Our Network

      Our primary asset is our network. As of May 2000, we have made operational the 3,689 route miles of backbone fiber in our network that are leased from KDD providing a nationwide backbone reaching into every prefecture in Japan except Okinawa and Shimane. Through this network, we are able to offer data transmission services to customers at speeds of up to 600 Mbps. Based on current technology, we will be able to increase this speed to gigabit levels in order to meet growing traffic requirements.

      Our network consists of three main levels of infrastructure which together will form our single nationwide end-to-end network. First, we have our nationwide backbone network infrastructure. This consists of our high-speed optical fiber backbone and transmission equipment. Second, we will develop our metropolitan network infrastructure. This will expand our backbone network in Japan’s most important commercial centers, Tokyo, Osaka and Nagoya. Third, we will develop our local access infrastructure. This will consist of a variety of last mile network connectivity solutions that give our customers direct high-speed access to our network. All three of these levels of our network infrastructure are described in detail in the three sections immediately following. Parts of our network infrastructure, particularly the metropolitan and local access infrastructure, are in the process of construction.

      The table below summarizes the current and planned cumulative route miles and fiber miles of our network.

      Although the above table represents our current plans, we may have to expand our network, particularly the metropolitan network and local access infrastructures, more rapidly if customer demand increases faster than anticipated.

  Nationwide backbone network buildout

      The development of our nationwide backbone network divides into two distinct phases. The first phase was the rapid development of our initial backbone network of IRU dark fiber. The current phase centers on developing our national roadway network, which layers onto our existing network infrastructure, using our own cable laid in conduits constructed by the Ministry of Construction along national roadways.

      The following diagram represents our proposed nationwide backbone network. The initial backbone network portion was completed as of May 2000. The national roadway network will be developed over the next five years as detailed further below. The data centers will be completed this fiscal year.

47

  Phase One — Our Initial Backbone Network

      We obtained our initial backbone capacity by entering into a long-term IRU contract for the lease of dark fiber with KDD. The leased dark fiber is laid along major highways that run throughout Japan. The contract with KDD runs through April 2009, but provides for renewal for additional three year terms unless KDD or we give three months prior written notice of termination. Terms of this contract are set forth under the caption “Expenses — Cost of data communication services” under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

      We began operating our initial backbone network using these leased lines in April 1999 with 20 access points in the Tokyo-Nagoya-Osaka-Hokuriku ring. In October, we expanded our initial backbone network to 53 access points and extended it to most major cities in Japan. As of the end of May 2000, we had expanded our initial backbone network to operate nationwide, except Okinawa and Shimane, with over 80 access points. Our initial backbone network includes the following primary segments:

48

  Phase Two — Our National Roadway Network

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

      Participation in this project is not based on the timing of the applications but is rather based on a balancing of considerations. If the number of applicants for any segment of conduit exceeds the available capacity, coordination meetings are held in which voluntary accommodations are sought from the parties, such as sharing of conduit space or dividing fibers within a cable. We expect to be included in every segment of the development, as the Ministry of Construction generally permits all Type I Carriers and cable television operators to participate in this project, subject to confirmation of usage plans and other minimal requirements. Once rights to these conduits are obtained, the rights usually continue for 5 years. We believe these rights will generally be renewable as a routine matter.

      We expect to install 150 to 200 strands of fiber in most segments of conduit, as compared to the four nationwide strands of dark fiber we obtained in our initial backbone network. If we secure the rights to conduits on a nationwide basis, we would be able to increase our fiber miles of backbone cable from our current 14,795 fiber miles to approximately 800,000 fiber miles.

      Approximately 60% of the conduits for which we have preliminarily applied have been completed by the Ministry of Construction. Approximately 82% of the conduits in which we expect to begin installation of our fiber cables in fiscal 2000 have been completed. The national roadways have significant advantages over the highways where our initial backbone network is laid. The primary advantages of the national road system are its nationwide coverage and its proximity to city centers, as the national roadways frequently run directly through the most important business districts throughout Japan. This will bring our backbone network much closer to our customers. The redundancy of having multiple backbone lines and a variety of routes between major access points will also reduce risks of local network failures by allowing us to effectively reroute traffic in the event of a local line break or similar problems.

49

      The government has determined the amount it will charge for the use of the conduits in this project. We will be required to pay a fee of ¥4 to ¥10 per meter of conduit per year. Therefore, once we have completed our national roadway network, we expect that our maximum payout per year for these conduits will be less than ¥65 million. We will also be responsible for the installation of the cables containing our fiber, which essentially involves the threading of the cable through the conduits being installed by the Ministry of Construction.

      We expect to share installation costs for portions of the fiber cables that we lay in the Ministry of Construction’s conduits with other carriers. In return, we will share rights in those cables with these other carriers by dividing the fibers in these cables between us. We will be able to reduce our total installation costs in this manner.

      We expect to complete the development of our currently planned national roadway network in fiscal 2004. Although the following table summarizes our current plans for completing our national roadway network, the segments, estimated route miles and scheduled completion dates listed below may change due to market, regulatory and other circumstances, some of which are beyond our control. The miles of conduit constructed and percentage of construction completed columns are based on information available from the Ministry of Construction, but official figures are not published.

  Metropolitan Network Infrastructure Buildout Plan

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

      In the Tokyo, Osaka and Nagoya metropolitan areas, we are negotiating and contracting to lease dark fiber that is currently being installed by municipal governments, private railroad

50

      We have secured rights of way in the Tokyo area necessary to complete our metropolitan buildout plan for fiscal year 2000. We have not yet secured other rights of way or construction permits necessary to complete our metropolitan buildout plan, and there is no guarantee that we will be able to do so on favorable terms or at all.

      The following table sets forth our current development plans in terms of estimated route and fiber miles for the Tokyo, Osaka and Nagoya areas. The metropolitan areas and estimated route and fiber miles listed below may change due to market, regulatory and other circumstances, some of which may be beyond our control.

Cumulative metropolitan network infrastructure buildout plan