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With a clean bill of health from a federal committee overseeing foreign investment in national security industries, the proposed $5.5 billion purchase of Web host Verio by a division of Japan's NTT sits on President Clinton's desk awaiting his final approval.

That OK - which is expected before Aug. 29 and may come much sooner - may grease the skids for more foreign acquisitions of U.S. Internet companies, most notably the buyout of VoiceStream Wireless that was announced last month by Deutsche Telekom.

Like NTT Communications, in which the Japanese government currently holds a 53% investment stake (see story on page 34), the German government owns a majority share of DT. U.S. law prohibits the transfer of telecom licenses to any firm that is more than 25% owned by a foreign government, but that ban can be waived if the acquisition is deemed to be in the public interest.

After a 75-day review, the Committee on Foreign Investment in the United States, or CFIUS, gave a unanimous green light to the acquisition by NTT Communications, NTT's long-distance and Internet subsidiary.

"It's the first time the U.S. has had to concern itself with the involvement of another government in its Internet infrastructure," said analyst Brent Bracelin of Pacific Crest Securities. "Reviews like this have been done in the past... but this is the first instance in which the Internet industry has been given this top-level examination."

Foreign ownership of Verio raised concerns among law enforcement officials about their ability to execute court-authorized wiretaps on suspects who might use Verio for Internet access. The FBI reportedly was dismayed by the prospect that the Japanese parent company might have access to the technologies and the products of its electronic surveillance operations. The bureau requested provisions that would ensure that NTT Communications would remove itself from Verio's day-to-day operations.

NTT Communications officials reportedly balked at giving those assurances on the grounds that doing so might create the impression that Verio customers' data was less secure than that of other Web hosts.

But after extending the deadline for its $60 per share tender offer four times from the original June 30 closing, the company gave in during last-minute negotiations conducted days before CFIUS was due to present its recommendation to the president. By that time, fears that the deal would collapse had driven Verio's share price down to about $53.50.

Exact terms of the deal reached with the federal government have not been disclosed, but reports suggest NTT agreed to establish a separate Verio division - staffed only by U.S. citizens - to handle any requests by U.S. law-enforcement agencies for Internet wiretaps on the e-mail and instant message traffic.

U.S. officials also reportedly wanted assurances that Verio's Web servers and records would remain in the U.S. and be accessible by law enforcement officials.

NTT Communications said it would provide information about handling surveillance requests, including formal security procedures to protect classified information.

A three-member panel consisting of representatives from the Justice, State and Treasury departments will oversee the sale and enforcement of the agreed terms after the transaction is complete.

The FBI apparently saw the CFIUS review of Verio's sale as the most opportune moment to raise its fears about limitations foreign government ownership might place on its surveillance powers. "This was the time to speak up and gain the largest concessions from the parties to the deal," said James Lucier, vice president of research for Prudential Securities. "Once the deal is done, it's a lot harder to argue the terms."

But the concerns raised indicate, in part, the federal government's lack of understanding about the realities of the Internet world, Lucier said. "The concern that Verio might move its switches and data centers to the Far East makes no sense at all," he said.

As for the implications of approval of the NTT/Verio sale for future buyouts of U.S. telcos and Internet companies, the consensus is that these will be streamlined now that a procedure is in place.

"This shows that foreign acquisition of a U.S. telecommunications entity in the new economy will not be held up by a national security review," said Rudy Baca, an analyst with The Precursor Group.

That conclusion is open to question.

"The process has been slowed by federal agencies with competing agendas," Lucier said. "The process created a lot of unnecessary anxiety about the deal's outcome."