EXODUS COMMUNICATIONS INC, S-1/A, 1998-03-10

EXODUS COMMUNICATIONS INC
S-1/A, 1998-03-10
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1998

REGISTRATION NO. 333-44469

---------------

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------

EXODUS COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 4813 77-0403076
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

---------------

2650 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(408) 346-2200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

---------------

K.B. CHANDRASEKHAR

CHIEF EXECUTIVE OFFICER
2650 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(408) 346-2200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

---------------

COPIES TO:

LAIRD H. SIMONS III, ESQ. LARRY W. SONSINI, ESQ.
FRED M. GREGURAS, ESQ. DAVID C. DRUMMOND, ESQ.
EILEEN DUFFY ROBINETT, ESQ. ROBERT D. SANCHEZ, ESQ.
ROBERT A. FREEDMAN, ESQ. WILSON SONSINI GOODRICH & ROSATI
JAY S. KOMAS, ESQ. PROFESSIONAL CORPORATION
FENWICK & WEST LLP 650 PAGE MILL ROAD
TWO PALO ALTO SQUARE PALO ALTO, CALIFORNIA 94304
PALO ALTO, CALIFORNIA 94306 (650) 493-9300
(650) 494-0600

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED MARCH 10, 1998

4,000,000 SHARES

EXODUS COMMUNICATIONS, INC.
COMMON STOCK
(PAR VALUE, $0.001 PER SHARE)
[LOGO OF EXODUS]

-----------

All of the 4,000,000 shares of Common Stock offered hereby are being sold by
Exodus Communications, Inc. Prior to the offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price will be between $9.00 and $11.00 per share. For
factors to be considered in determining the initial public offering price, see
"Underwriting".

SEE "RISK FACTORS" ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "EXDS" subject to official notice of issuance.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

-----------

<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT (2) COMPANY (3)
----------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................ $ $ $
Total (4)............................ $ $ $
</TABLE>
- -----

(1) In connection with the offering, the Underwriters have reserved up to
300,000 shares of Common Stock for sale at the initial public offering
price to directors, officers, employees and friends of the Company.
(2) The Company and certain of the Company's stockholders (the "Selling
Stockholders") have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before deducting estimated expenses of $1,400,000 payable by the Company.
(4) The Company and the Selling Stockholders have granted the Underwriters an
option for 30 days to purchase up to an additional 550,000 shares and
50,000 shares, respectively, at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. The
Company will not receive any proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders". If such
option is exercised in full, the total initial public offering price,
underwriting discount, proceeds to Company and proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting".

-----------

The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York on
or about , 1998, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO.
BT ALEX. BROWN
NATIONSBANC MONTGOMERY SECURITIES LLC

-----------

The date of this Prospectus is , 1998.
<PAGE>

[Description of inside front cover: In the background, representative customer
names appear. The following text is superimposed over the background of
customer names: "Exodus Communications, Inc. is a leading provider of Internet
system and network management solutions for enterprises with mission-critical
Internet operations. The Company's tailored solutions are designed to be
seamlessly integrated with existing systems architectures and enable customers
to outsource the monitoring, administration and optimatization of their
overall Internet operations." The Exodus logo appears at the bottom of the
page, above the following legend:

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH
THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ]
<PAGE>

[Description of gatefold: At the top appears the Exodus logo and "Internet
System and Network Management Solutions for Enterprises with Mission-Critical
Internet Operations" superimposed over "Exodus." Beneath that are the following
diagrams and textual explanations:
1. A rendering of the interior of an Internet Data Center, including
CyberRacks, CyberCabinets, Virtual Data Centers and CyberVaults and
related equipment and Company personnel. The following text appears
next to the picture:
"An Inside Look at an Exodus Internet Data Center"
"Internet Data Centers are designed for high-availability,
mission-critical operations."

"* 24x7 staffed Network Control Centers
* Multi-level physical site security
* Multiple physical fiber paths into each facility
* Raised-floor, HVAC computing environment
* Uninterruptible power supplies and back-up generators
* FM200 gas-based fire suppression systems"

2. A map of the United States which identifies (i) the Company's
Seattle, San Francisco, Los Angeles, New York and Washington metropolitan area
Internet Data Centers, (ii) the Company's DS-3 backbone ring, (iii) various
private and public peering interconnections and (iv) the public Internet
exchange points. In addition, a map of England is included to show the Company's
expected Internet Data Center to be located there, with a notation "coming in
1998." The maps are accompanied by a legend that identifies the symbols used for
Internet Data Centers, public Internet exchange points, private or public
peering with major carriers, the Exodus DS-3 SONET Ring and Exodus OC-3 ATM
links.

3. A diagram of how the various aspects of the Company's services fit
together, including:

a. Remote users, business users and home users (represented by
computers with captions) connecting to an Internet "cloud," with
the following captions:

"* Intelligent routing technologies direct user requests to
the closest Internet Data Center."
"* End users connect via their local ISPs."

b. Servers at a west coast and east coast Internet Data Center
connected to an Internet "cloud" through Internet exchange
points, with routers at the west coast and east coast Internet
Data Centers connected through the Company's backbone ring
across the United States. The following captions are associated
with this diagram:

"* Internet traffic flows are continuously monitored and
dynamically rerouted to optimize end-user response times."
"* The Company's policy of undersubscribing its network
capacity allows for customer spikes in demand."
"* Content is mirrored across multiple Internet Data Centers
via the Company's private fiber backbone, to maximize
application availability."

<PAGE>

c. Representations of computer screens, which contain a report
that can be generated through the Company's collaborative
management services. One screen is shown at a customer location.
The screens are connected to the Company's west coast and east
coast Internet Data Centers. The following caption is associated
with these depictions:

"* Collaborative management services enable customers and the
Company to manage customers' Internet operations jointly,
proactively and continuously."

d. Additional representations of computer screens containing
data available through the Company's collaborative management
and Internet technology services. The following captions are
associated with these representations.

"Internet system and network management -- Sophisticated
Internet system and network management solutions enable the
Company to identify and begin to resolve problems --
frequently before the customer is even aware that a problem
exists."
"Internet Technology Services -- Internet technology
services, which include security and content distribution,
integrate best of breed technologies with the Company's
expertise to provide customers with scalable, secure and
high performing Internet applications.]

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus, including the information under "Risk Factors."

Except where otherwise indicated, all information in this Prospectus (i)
reflects the conversion of all outstanding shares of redeemable convertible
preferred stock of the Company (the "Preferred Stock") into shares of Common
Stock upon the closing of this offering, (ii) assumes the Underwriters' over-
allotment option will not be exercised and (iii) reflects a one-for-three
reverse split of the Company's Common Stock and the Company's reincorporation
into Delaware, which occurred in February 1998, and associated changes in the
Company's charter documents. See "Description of Capital Stock" and
"Underwriting."

THE COMPANY

Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. The
Company's solutions include server hosting, Internet connectivity,
collaborative systems management and Internet technology services, which
together provide the high performance, scalability and expertise that
enterprises need to optimize their Internet operations. The Company delivers
its services from geographically distributed, state-of-the-art Internet Data
Centers that are connected through a redundant high performance dedicated
backbone ring. The Company's tailored solutions are designed to be seamlessly
integrated with existing enterprise systems architectures and enable customers
to outsource the monitoring, administration and optimization of their
equipment, applications and overall Internet operations. As of December 31,
1997, the Company had over 200 Internet Data Center customers and managed over
2,000 customer servers. The Company's customers range from pioneering Internet-
based businesses to Fortune 500 enterprises and include companies such as
Computer Associates International, Inc., GeoCities, Hewlett-Packard Company,
Hotmail Corporation, Inktomi Corporation, National Semiconductor Corporation,
PC World Communications, Inc., Software.net (a Cybersource company) and
USAToday Information Network.

Use of the Internet, including intranets and extranets, has grown rapidly in
recent years. As this use continues to grow, enterprises are increasing the
breadth and depth of their Internet product and service offerings. These
Internet operations are mission-critical for virtually all Internet-based
businesses and are becoming increasingly mission-critical for many mainstream
enterprises. In order to ensure the quality, reliability, availability and
redundancy of these mission-critical Internet operations, corporate IT
departments must make substantial investments in geographically distributed
state-of-the-art facilities and networks that are monitored and managed 24x7 by
experts in Internet technology, can be upgraded to reflect changing
technologies and can be scaled as the needs of enterprises evolve. However,
such a continuing significant investment of resources is often an inefficient
use of enterprises' overall resources. As a result, corporate IT departments
are increasingly seeking collaborative outsourcing arrangements that can
increase performance, provide continuous operation of their Internet solutions
and reduce Internet operating expenses. Exodus believes a significant
opportunity exists for a highly-focused company to provide a combination of
server hosting, Internet connectivity, collaborative systems management and
Internet technology services that will enable reliable, high performance of
enterprises' mission-critical Internet operations.

3
<PAGE>

Centers provide a secure platform for server hosting with uninterruptible power
supply and back-up generators, fire suppression, raised floors, HVAC, separate
cooling zones, seismically braced racks, 24x7 operations and high levels of
physical security. The Company's national backbone ring of multiple high-speed,
clear-channel DS-3 lines and private and public network peering
interconnections provide the foundation for the Company's high performance,
scalable Internet connectivity services. The Company's collaborative systems
management services, including performance monitoring and site management
reports, enable customers and the Company to manage customers' Internet
operations jointly, proactively and continuously. Finally, the Company's
Internet technology services, including security and content distribution,
integrate best-of-breed technologies of leading vendors with the Company's
expertise to provide customers with scalable, secure and high performing
Internet applications. The Company's portfolio of layered services optimizes
the development, deployment and proactive management of enterprises' mission-
critical Internet operations.

The Company began offering server hosting services in late 1995, opened its
first dedicated Internet Data Center in August 1996 and introduced its
collaborative systems management and Internet technology services in 1997. The
Company currently operates six Internet Data Centers, consisting of
approximately 110,000 gross square feet, located in five metropolitan areas:
Los Angeles, New York, San Francisco, Seattle and Washington, D.C. The Company
intends to expand domestically and internationally, including the expected
addition of an additional Internet Data Center in the San Francisco
metropolitan area and a new site in the London metropolitan area in the first
half of 1998.

The Company's objective is to become the leading provider of Internet system
and network management solutions for enterprises with mission-critical Internet
operations. The key elements of this strategy include (i) extending the
Company's market leadership, (ii) focusing on the development of new
collaborative systems management services, (iii) expanding domestically and
internationally by adding Internet Data Centers, (iv) leveraging the Company's
significant expertise to address new market opportunities such as e-commerce
and extranets and (v) establishing strategic relationships with leading
technology developers and distribution alliances with content developers,
system integrators, system vendors, consulting companies and ISPs.

The Company is the successor to a Maryland corporation that was formed in
August 1992 and reincorporated in California in May 1995. The Company
reincorporated in Delaware in February 1998. Unless the context otherwise
requires, the term "Company" or "Exodus" refers to Exodus Communications, Inc.
and its California and Maryland predecessors. The Company's principal executive
offices are located at 2650 San Tomas Expressway, Santa Clara, California
95051. The Company's telephone number is (408) 346-2200.

Exodus Communications, Exodus, CyberCabinet, CyberRack, HeadsUp Site Monitor,
Multipath Site, Multipath Net, SystemHealth Monitoring and Virtual Data Center
are trade names and trademarks of the Company. This Prospectus also includes
trade names and trademarks of other companies, including Unicenter(R) and
Unicenter(R) TNG(TM), which are trademarks of Computer Associates
International, Inc., and National Semiconductor(R), which is a trademark of
National Semiconductor Corporation.

4
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Company..... 4,000,000 shares
Common Stock to be outstanding after
this offering.......................... 17,439,624 shares(1)
Use of proceeds......................... For repayment of indebtedness and
working capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.. "EXDS"
</TABLE>

SUMMARY FINANCIAL INFORMATION

The following summary financial information should be read in conjunction
with the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The summary financial information for
each of the years in the three-year period ended December 31, 1997, and as of
December 31, 1997, is derived from financial statements of the Company that
have been audited by KPMG Peat Marwick LLP, independent auditors. Historical
results are not necessarily indicative of the results to be expected in the
future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................... $ 1,408 $ 3,130 $ 12,408
Operating loss.................................... (1,273) (4,094) (24,792)
Net loss.......................................... (1,311) (4,133) (25,298)
Cumulative dividends and accretion on redeemable
convertible preferred stock...................... -- -- (1,413)
Net loss attributable to common stockholders...... (1,311) (4,133) (26,711)
Basic and diluted net loss per share (2).......... (1.00) (2.16) (13.85)
Pro forma basic and diluted net loss per share
(2).............................................. (2.56)
Shares used in computing basic and diluted net
loss per share(2)................................ 1,315 1,914 1,928
Shares used in computing pro forma basic and
diluted net loss per share(2).................... 9,878
STATEMENT OF CASH FLOWS DATA:
Net cash used for operating activities............ $ (453) $(2,998) $(15,096)
Net cash used for investing activities............ (77) (3,617) (22,911)
Net cash provided by financing activities......... 692 10,167 44,562
OTHER DATA:
EBITDA (3)........................................ $(1,208) $(3,633) $(20,274)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------
ACTUAL PRO FORMA (4) AS ADJUSTED (5)
------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $10,270 $10,270 $43,070
Working capital (deficiency)........... (3,707) (3,707) 32,093
Total assets........................... 40,973 40,973 73,773
Debt and capital lease obligations,
less current portion.................. 15,135 15,135 15,135
Redeemable convertible preferred stock
and warrants.......................... 39,247 -- --
Total stockholders' (deficit) equity... (30,600) 8,647 44,447
</TABLE>
- --------

(1) Based on shares outstanding as of December 31, 1997. Does not include (i)
1,709,286 shares of Common Stock issuable upon the exercise of stock
options outstanding under the Company's stock option plans as of December
31, 1997 with a weighted average per share exercise price of $0.76 or
1,055,315 shares of Common Stock issuable upon the exercise of stock
options granted outside of the Company's stock option plans in January and
March 1998 with a weighted average per share exercise price of $10.42, (ii)
649,929 shares of Common Stock available for future grant as of December
31, 1997 under the Company's 1997 Equity Incentive Plan (the "1997 Plan")
and an additional 2,300,000 shares of Common Stock available for future
grant or issuance immediately after the offering under the Company's 1998
Equity Incentive Plan (the "1998 Plan"), 1998 Directors Stock Option Plan
(the "Directors Plan") and 1998 Employee Stock Purchase Plan (the "Purchase
Plan"), (iii) 950,163 shares of Common Stock issuable upon the exercise of
warrants outstanding as of December 31, 1997 with a weighted average per
share exercise price of $4.29 (of which warrants to purchase 615,454 shares
are expected to be exercised on or before the closing of the offering) or
6,667 shares of Common Stock issuable upon the exercise of a warrant
granted in January 1998 at a per share exercise price of $8.55, (iv) 39,181
shares issued by the Company in February 1998 at a per share purchase price
of $8.55 or (v) 50,000 shares of Common Stock issued by the Company in
March 1998 at a per share purchase price of $9.00. See "Capitalization,"
"Management--Director Compensation," "Management--Employee Benefit Plans,"
"Description of Capital Stock" and Notes 5 and 8 of Notes to Financial
Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data. The
pro forma data is unaudited.

(3) Represents earnings (loss) before net interest expense, income taxes,
depreciation, amortization (including amortization of deferred stock
compensation) and other noncash charges ("EBITDA"). Although EBITDA should
not be used as an alternative to operating loss or net cash provided by
(used for) operating activities, investing activities or financing
activities, each as measured under generally accepted accounting
principles, and, although EBITDA may not be comparable to other similarly
titled information from other companies, the Company's management believes
that EBITDA is an additional meaningful measure of performance and
liquidity.
(4) Pro forma to reflect the conversion of all outstanding shares of Preferred
Stock into shares of Common Stock upon the closing of this offering. This
data is unaudited.
(5) As adjusted to reflect the application of the net proceeds from the sale of
the 4,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share and after deducting the estimated
underwriting discount and offering expenses.

5
<PAGE>

RISK FACTORS

This offering involves a high degree of risk. In addition to the other
information set forth in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock of the Company. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed in this Prospectus. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES

While the Company began operations in 1992, it did not offer server hosting
services until 1995 and did not open its first dedicated Internet Data Center
until August 1996, at which time it refocused its business strategy on
providing Internet system and network management solutions for enterprises'
mission-critical Internet operations. As a result, the Company's business
model is still in an emerging state. Since it began to offer server hosting
services in 1995, the Company has experienced operating losses and negative
cash flows from operations in each quarterly and annual period. As of
December 31, 1997, the Company had an accumulated deficit of approximately
$30.6 million. The revenue and income potential of the Company's business and
market is unproven, and the Company's limited operating history makes an
evaluation of the Company and its prospects difficult. Currently, the Company
anticipates making significant investments in new Internet Data Centers and
product development and sales and marketing programs and personnel and
therefore believes that it will continue to experience net losses on a
quarterly and annual basis for the foreseeable future. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in the new and rapidly evolving market for Internet
system and network management solutions. To address these risks, among other
things, the Company must market its brand name effectively, provide scalable,
reliable and cost-effective services, continue to grow its infrastructure to
accommodate new Internet Data Centers and increased bandwidth use of its
network, expand its channels of distribution, retain and motivate qualified
personnel and continue to respond to competitive developments. Failure of the
Company's services to achieve market acceptance would have a material adverse
effect on the Company's business, results of operations and financial
condition. Although the Company has experienced significant growth in revenues
in recent periods, the Company does not believe that this growth rate
necessarily is indicative of future operating results, and there can be no
assurance that the Company will ever achieve profitability on a quarterly or
an annual basis or will sustain profitability if achieved. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS

The Company has experienced significant fluctuations in its results of
operations on a quarterly and an annual basis. The Company expects to continue
to experience significant fluctuations in its future quarterly and annual
results of operations due to a variety of factors, many of which are outside
the Company's control, including: demand for and market acceptance of the
Company's services and enhancements; introductions of services or enhancements
by the Company and its competitors; capacity utilization of its Internet Data
Centers; reliable continuity of service and network availability; the ability
to increase bandwidth as necessary; the timing of customer installations;
provisions for customer discounts and credits; the mix of services sold by the
Company; customer retention; the timing and success of marketing efforts and
service introductions by the Company; the timing and magnitude of capital
expenditures, including construction costs relating to the expansion of
operations; the timely expansion of existing Internet Data Centers and
completion of new Internet Data Centers;

6
<PAGE>

the introduction by third parties of new Internet and networking technologies;
increased competition in the Company's markets; changes in the pricing
policies of the Company and its competitors; fluctuations in bandwidth used by
customers; the retention of key personnel; economic conditions specific to the
Internet industry; and other general economic factors. In addition, a
relatively large portion of the Company's expenses are fixed in the short-
term, particularly with respect to telecommunications, depreciation, real
estate and interest expenses and personnel, and therefore the Company's
results of operations are particularly sensitive to fluctuations in revenues.
Also, if the Company's agreement with Computer Associates International, Inc.
("Computer Associates") were to terminate and the Company continued to require
Computer Associates' software, the license fees paid by the Company could
increase fixed costs significantly. Furthermore, if the Company were to become
unable to continue leveraging third party products in the Company's services
offerings, the Company's product development costs could increase
significantly. Although the Company has not encountered significant
difficulties in collecting upon accounts receivable in the past, many of the
Company's customers are in an emerging stage, and there can be no assurance
that the Company will be able to collect receivables on a timely basis. For
these and other reasons, in some future quarters, the Company's results of
operations may fall below the expectations of securities analysts or
investors, which could have a material adverse effect on the market price of
the Company's Common Stock. See "--Risks Associated with Planned Business
Expansion" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

RISKS ASSOCIATED WITH PLANNED BUSINESS EXPANSION

A key element of the Company's business strategy is the expansion of the
Company's network through the opening of additional Internet Data Centers in
geographically diverse locations. The Company opened five Internet Data
Centers during 1997 and currently has six sites located in five metropolitan
areas: San Francisco, New York, Los Angeles, Seattle and Washington, D.C. The
Company intends to expand domestically and internationally, including the
expected addition of an additional Internet Data Center in the San Francisco
metropolitan area and a new site in the London metropolitan area in the first
half of 1998. The Company's continued expansion and development of its network
will depend on, among other things, the Company's ability to assess markets,
identify Internet Data Center sites, install facilities and establish local
peering interconnections with ISPs, all in a timely manner, at reasonable
costs and on terms and conditions acceptable to the Company. The Company's
ability to manage this expansion effectively will require it to continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company's inability to establish
additional Internet Data Centers or manage effectively its expansion would
have a material adverse effect upon the Company's business, results of
operations and financial condition.

The establishment of each additional Internet Data Center will require the
Company to expend substantial resources for leases of real estate, significant
improvements of such facilities, purchase of equipment, implementation of
multiple telecommunications connections and hiring of network, administrative,
customer support and sales and marketing personnel. Capital expenditures,
including those for new Internet Data Centers, will be funded primarily
through existing and future equipment loans and lease lines. Moreover, the
Company expects to make significant investments in sales and marketing and the
development of new services as part of its expansion strategy. During the next
12 months, the Company expects to meet its working capital requirements,
including such requirements associated with the Company's planned expansion,
with existing cash and cash equivalents and short-term investments, the net
proceeds from this offering, cash from sales of services and proceeds from
existing and future working capital lines of credit and possibly other
borrowings. However, there can be no assurance that the Company will be
successful in generating sufficient cash from sales of services or in raising
capital in sufficient amounts on terms acceptable to it. The failure to
generate sufficient cash flows from sales of services or to raise sufficient
funds may require the Company to

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delay or abandon some or all of its development and expansion plans or
otherwise forego market opportunities and may make it difficult for the
Company to respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

The Company typically requires at least six months to select the appropriate
location for an Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure, and hire the
operations and sales personnel needed to conduct business at that site.
Expenditures related to an Internet Data Center commence well before the
Internet Data Center opens, and it takes an extended period to approach break-
even capacity utilization at each site. As a result, the Company expects that
individual Internet Data Centers will generally experience losses for in
excess of one year from the time they are opened. The Company experiences
further losses from sales personnel hired to test market the Company's
services in markets where there is no, and may never be an, Internet Data
Center. As a result, the Company expects to make investments in expanding the
Company's business rapidly into new geographic regions which, while
potentially increasing the Company's revenues in the long term, will lead to
significant losses for the foreseeable future. There can be no assurance that
the Company will be able to anticipate accurately the customer demand for such
additional Internet Data Centers or that the Company will be able to attract a
sufficient number of customers to such facilities. The Company's inability to
attract customers to new Internet Data Centers in a timely manner, or at all,
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

SUBSTANTIAL LEVERAGE AND DEBT SERVICE

The Company is, and after the offering will continue to be, substantially
leveraged. On December 31, 1997, the Company's total bank borrowings, debt and
capital lease obligations were approximately $23.1 million and its borrowing
availability under existing equipment loans and working capital lines of
credit was approximately $15.8 million, subject to the borrowing conditions
contained therein. The Company also expects to obtain additional equipment
loans and lease lines and working capital lines of credit, and possibly other
borrowings, during the next 12 months. The degree to which the Company is
leveraged could have important consequences to the Company's future
operations, including but not limited to: (i) increasing the Company's
vulnerability to general adverse economic and industry conditions; (ii)
limiting the Company's ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and other general
corporate requirements; (iii) requiring the dedication of a substantial
portion of the Company's cash flow from operations to the payment of principal
of, and interest on, its indebtedness, thereby reducing the availability of
such cash flow to fund working capital, capital expenditures or other general
corporate requirements; (iv) limiting the Company's flexibility in planning
for, or reacting to, changes in its business and the industry in which it
competes; and (v) placing the Company at a competitive disadvantage vis-a-vis
less leveraged or better capitalized competitors. Certain of the Company's
indebtedness is secured by the Company's assets. A default under such
indebtedness could result in the foreclosure on such collateral, which would
have a material adverse effect on the Company's business, results of
operations and financial condition.

The Company's ability to fund planned capital expenditures and service its
existing and future indebtedness will depend upon its future performance,
which, in turn, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. If the
Company is unable to generate sufficient cash flow from operations, or
additional equipment loans or equipment and working capital lines of credit,
in the future to service its debt, it may be required to sell assets, reduce
capital expenditures, refinance all or a portion of its existing indebtedness
or obtain other sources of financing. There can be no assurance that any such
refinancing would be available

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on commercially reasonable terms, or at all, or that any other financing could
be obtained, particularly in view of the Company's high level of indebtedness
and the fact that substantially all of the Company's assets have been pledged
to secure obligations under certain existing indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 3 and 6 of Notes to Financial Statements.

COMPETITION

The market served by the Company is highly competitive. There are few
substantial barriers to entry, and the Company expects that it will face
additional competition from existing competitors and new market entrants in
the future. The principal competitive factors in this market include Internet
system engineering expertise, customer service, network capability,
reliability, quality of service and scalability, broad geographic presence,
brand name, technical expertise and functionality, the variety of services
offered, the ability to maintain and expand distribution channels, customer
support, price, the timing of introductions of new services, network security,
financial resources and conformity with industry standards. There can be no
assurance that the Company will have the resources or expertise to compete
successfully in the future.

The Company's current and potential competitors in the market include: (i)
providers of server hosting services; (ii) national and regional Internet
service providers ("ISPs"); (iii) global, regional and local
telecommunications companies and Regional Bell Operating Companies ("RBOCs");
and (iv) large IT outsourcing firms. The Company's competitors may operate in
one or more of these areas and include companies such as certain subsidiaries
of GTE Corporation and WorldCom, Inc. ("WorldCom"), International Business
Machines Corporation ("IBM") and certain business units of GlobalCenter, Inc.
("GlobalCenter"), which recently announced its proposed acquisition by
Frontier Corporation.

Many of the Company's competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than the Company. As a result, certain of these competitors may be
able to develop and expand their network infrastructures and service offerings
more quickly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisition and other
opportunities more readily, devote greater resources to the marketing and sale
of their products and adopt more aggressive pricing policies than can the
Company. In addition, these competitors have entered and will likely continue
to enter into joint ventures or consortiums to provide additional services
competitive with those provided by the Company.

Certain of the Company's competitors may be able to provide customers with
additional benefits in connection with their Internet system and network
management solutions, including reduced communications costs, which could
reduce the overall costs of their services relative to the Company's. There
can be no assurance that the Company will be able to offset the effects of any
such price reductions. In addition, the Company believes that the businesses
in which the Company competes are likely to encounter consolidation in the
near future, which could result in increased price and other competition that
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Competition."

DEPENDENCE ON NEW MARKET; UNCERTAINTY OF ACCEPTANCE OF SERVICES

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<PAGE>

willingness of enterprises to outsource the system and network management of
their mission-critical Internet operations and the Company's ability to market
its services in a cost-effective manner to a sufficiently large number of
customers. There can be no assurance that the market for the Company's
services will develop, that the Company's services will be adopted or that
businesses, organizations or consumers will use the Internet for commerce and
communication. If this market fails to develop, or develops more slowly than
expected, or if the Company's services do not achieve market acceptance, the
Company's business, results of operations and financial condition would be
materially and adversely affected. In addition, in order to be successful in
this emerging market, the Company must be able to differentiate itself from
its competition through its service offerings, such as its recently introduced
collaborative systems management and Internet technology services. There can
be no assurance that the Company will be successful in differentiating itself
or achieving market acceptance of its services, or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services. If the Company incurs increased
costs or is unable, for technical or other reasons, to develop and introduce
new services or enhancements of existing services in a timely manner,
including certain collaborative systems management and Internet technology
services scheduled to be available in the first half of 1998, or if these or
other new products or services do not achieve market acceptance in a timely
manner or at all, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

RISK OF SYSTEM FAILURE

The Company's operations are dependent upon its ability to protect its
network infrastructure and customers' equipment against damage from human
error, fire, earthquakes, floods, power loss, telecommunications failures,
sabotage, intentional acts of vandalism and similar events. Despite
precautions taken by, and planned to be taken by the Company, the occurrence
of a natural disaster or other unanticipated problems at one or more of the
Company's Internet Data Centers could result in interruptions in the services
provided by the Company or significant damage to customer equipment. In
addition, failure of any of the Company's telecommunications providers, such
as WorldCom, to provide the data communications capacity required by the
Company, as a result of human error, a natural disaster or other operational
disruption, could result in interruptions in the Company's services. Any
damage to or failure of the systems of the Company or its service providers
could result in reductions in, or terminations of, services supplied to the
Company's customers, which could have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, the Company's reputation could be materially adversely affected.

The Company's customer contracts currently provide a limited service level
warranty related to the continuous availability of service on a 24 hours per
day, seven days per week ("24x7") basis, except for certain scheduled
maintenance periods. This warranty is generally limited to a credit consisting
of free service for a specified limited period of time for disruptions in
Internet transmission services. To date, only a limited number of customers
has utilized this warranty to receive credits for free service. Should the
Company incur significant obligations in connection with system downtime,
there can be no assurance that the Company's liability insurance would be
adequate to cover such expenses. The Company's customer contracts provide for
liability of the Company for personal injury or equipment damage in only
limited circumstances. Although these customer contracts typically provide for
no recovery with respect to incidental, punitive, indirect and consequential
damages resulting from damages to equipment or disruption of service, there
can be no assurance that, in the event of such damages, the Company would not
be found liable, and, in such event, that such damages would not exceed the
Company's liability insurance. See "Business--Customers" and "--Network
Design."

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UNPROVEN NETWORK SCALABILITY

The Company must continue to expand and adapt its network infrastructure as
the number of users and the amount of information they wish to transport
increase and to meet changing customer requirements. The expansion and
adaptation of the Company's telecommunications infrastructure will require
substantial financial, operational and management resources as the Company
negotiates telecommunications capacity with its existing and other network
infrastructure suppliers. If the Company is required to expand significantly
and rapidly its network due to increased usage, additional stress will be
placed upon the Company's network hardware and traffic management systems. Due
to the limited deployment of the Company's services to date, the ability of
the Company's network to connect and manage a substantially larger number of
customers at high transmission speeds is as yet unknown, and the Company faces
risks related to the network's ability to be scaled up to its expected
customer levels while maintaining superior performance. As customers' usage of
bandwidth increases, the Company will need to make additional investments in
its infrastructure to maintain adequate downstream data transmission speeds,
the availability of which may be limited or the cost of which may be
significant. There can be no assurance that additional network capacity will
be available from third-party suppliers as it is needed by the Company. As a
result, there can be no assurance that the Company's network will be able to
achieve or maintain a sufficiently high capacity of data transmission,
especially if the usage of the Company's customers increases. The Company's
failure to achieve or maintain high capacity data transmission could
significantly reduce consumer demand for its services and have a material
adverse effect on its business, results of operations and financial condition.
In addition, as the Company upgrades its telecommunications infrastructure to
increase bandwidth available to its customers, it is likely to encounter a
certain level of equipment or software incompatibility which may cause delays
in implementation. There can be no assurance that the Company will be able to
expand or adapt its telecommunications infrastructure to meet additional
demand or its customers' changing requirements, including its planned upgrade
to an OC-3c backbone within the first half of 1998, on a timely basis and at a
commercially reasonable cost, or at all. See "Business--Network Design."

DEPENDENCE UPON NETWORK INFRASTRUCTURE

The Company's success will depend upon the capacity, scalability,
reliability and security of its network infrastructure, including the capacity
leased from its telecommunications network suppliers. In particular, the
Company is dependent on WorldCom and certain other telecommunications
providers for its backbone capacity (including the Company's dedicated clear
channel network and transit access to ISPs) and is therefore dependent on such
companies to maintain the operational integrity of its backbone. In addition,
the Company relies on a number of public and private peering interconnections
to deliver its services. If the carriers that operate the Internet exchange
points ("IXPs") were to discontinue their support of the peering points and no
alternative providers were to emerge, or such alternative providers were to
increase the cost of utilizing the IXPs, the distribution of content through
the IXPs, including content distributed by the Company, would be significantly
constrained. Furthermore, as traffic through the IXPs increases, if
commensurate increases in bandwidth are not added, the Company's ability to
distribute content rapidly and reliably through these networks will be
adversely affected. Many of the operators of the private peering
interconnections are competitors of the Company. Currently, the Company does
not pay a fee for its public and private peering interconnections. The Company
and the operators of these public and private peering interconnections have
mutually agreed not to charge each other a fee for the exchange of traffic
between their respective networks, which is a standard industry practice. If
these organizations were to refuse to continue to peer directly with the
Company, the Company might be required to purchase transit access services
from these organizations in order to allow the Company's customers to reach
the customers of these organizations. In those cases where the Company
currently purchases transit access from other organizations, if these
organizations were to increase the pricing associated with their transit
access, the Company might be required to identify alternative methods through
which it can distribute

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<PAGE>

its customers' content. If the Company were unable to access on a cost-
effective basis alternative networks to distribute its customers' content or
pass through any additional costs of utilizing these networks to its
customers, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Business--Network
Design."

DEPENDENCE ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT

The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only
recently begun to develop, and the Company's success will depend in large part
on continued growth in the use of the Internet. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
access, quality of service and necessary increases in bandwidth availability,
remain unresolved and are likely to affect the development of the market for
the Company's services. The adoption of the Internet for information retrieval
and exchange, commerce and communications, particularly by those enterprises
that have historically relied upon alternative means of commerce and
communications, generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand and market acceptance
of the Internet are subject to a high level of uncertainty and are dependent
on a number of factors, including the growth in consumer access to and
acceptance of new interactive technologies, the development of technologies
that facilitate interactive communication between organizations and targeted
audiences and increases in user bandwidth. If the Internet as a commercial or
business medium fails to develop or develops more slowly than expected, the
Company's business, results of operations and financial condition could be
materially adversely affected. The recent growth in the use of the Internet
has caused frequent periods of performance degradation, requiring the upgrade
of routers and switches, telecommunications links and other components forming
the infrastructure of the Internet by ISPs and other organizations with links
to the Internet. Any perceived degradation in the performance of the Internet
as a whole could undermine the benefits of the Company's services. Potentially
increased performance provided by the services of the Company and others is
ultimately limited by and reliant upon the speed and reliability of the
networks operated by third parties. Consequently, the emergence and growth of
the market for the Company's services is dependent on improvements being made
to the entire Internet infrastructure to alleviate overloading and congestion.
See "Business--Network Design."

RAPID TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS

The Company's future success will depend, in part, on its ability to offer
services that incorporate leading technology, address the increasingly
sophisticated and varied needs of its current and prospective customers and
respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis. The market for the Company's
services is characterized by rapidly changing and unproven technology,
evolving industry standards, changes in customer needs, emerging competition
and frequent new service introductions. There can be no assurance that future
advances in technology will be beneficial to, or compatible with, the
Company's business or that the Company will be able to incorporate such
advances on a cost-effective and timely basis into its business. Moreover,
technological advances may have the effect of encouraging certain of the
Company's current or future customers to rely on in-house personnel and
equipment to furnish the services currently provided by the Company. In
addition, keeping pace with technological advances in the Company's industry
may require substantial expenditures and lead time. For instance, certain
networking hardware may not be immediately compatible with leading edge
telecommunications infrastructure services, such as WorldCom's OC-3c service,
which is not yet widely available and therefore may require the Company to
make significant investments to achieve compatibility.

The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products, services and architectures offered by various vendors.
Although the Company often works with various vendors in testing newly

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<PAGE>

developed products, there can be no assurance that such products will be
compatible with the Company's infrastructure or that such products will
adequately address changing customer needs. Although the Company currently
intends to support emerging standards, there can be no assurance that industry
standards will be established or, that if they become established, the Company
will be able to conform to these new standards in a timely fashion and
maintain a competitive position in the market. The failure of the Company to
conform to the prevailing standard, or the failure of a common standard to
emerge, could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, there can be no
assurance that products, services or technologies developed by others will not
render the Company's services uncompetitive or obsolete. See "Business--
Product Development."

SYSTEM SECURITY RISKS

A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Certain
of the Company's services rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
necessary to effect secure transmission of confidential information. Despite
the Company's design and implementation of a variety of network security
measures, there can be no assurance that unauthorized access, computer
viruses, accidental or intentional actions and other disruptions will not
occur. The Company's Internet Data Centers have in the past experienced and
may in the future experience delays or interruptions in service as a result of
the accidental or intentional actions of Internet users, current and former
employees or others. Furthermore, such inappropriate use of the network by
third parties could also potentially jeopardize the security of confidential
information, such as credit card and bank account numbers, stored in the
computer systems of the Company and its customers, which could result in
liability to the Company and the loss of existing customers or the deterrence
of potential customers. Although the Company intends to continue to implement
industry-standard security measures, such measures have been circumvented in
the past, and there can be no assurance that any such measures implemented by
the Company will not be circumvented in the future. The costs required to
eliminate computer viruses and alleviate other security problems could be
prohibitively expensive and the efforts to address such problems could result
in interruptions, delays or cessation of service to the Company's customers,
which could have a material adverse effect on the Company's business, results
of operations and financial condition. Concerns over the security of Internet
transactions and the privacy of users may also inhibit the growth of the
Internet, especially as a means of conducting commercial transactions. See
"Business--Network Design."

DEPENDENCE ON THIRD-PARTY SUPPLIERS

The Company is dependent on other companies to supply certain key components
of its telecommunications infrastructure and system and network management
solutions, including telecommunications services and networking equipment
that, in the quantities and quality demanded by the Company, are available
only from sole or limited sources. See "--Dependence Upon Network
Infrastructure." The routers, switches and modems used in the Company's
telecommunications infrastructure are currently supplied primarily by Cisco
Systems Inc. ("Cisco"). The Company purchases these components pursuant to
purchase orders placed from time to time, does not carry significant
inventories of these components and has no guaranteed supply arrangements with
these vendors. Any failure to obtain required products or services on a timely
basis and at an acceptable cost would have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, any failure of the Company's sole or limited source suppliers to
provide products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components used by the Company in its communications infrastructure could have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company expects to be dependent for a
time on third parties

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<PAGE>

to deliver its services from and manage the operations of its international
Internet Data Centers. See "--Risks Associated with International Operations"
and "Business--Network Design."

The Company has also licensed certain software from Computer Associates that
allows the Company to monitor its customers' Internet operations and assist in
resolving performance issues that arise from time to time. Under the agreement
with Computer Associates, if the Company desires to offer a service that has a
substantially similar functionality to that provided by Computer Associates'
Unicenter(R) TNG(TM) family of software, or its ARCserve or InocuLAN products
(the "CA Products"), the Company must generally utilize the CA Products, as
long as they meet the Company's requirements. In addition, the Company is a
beta test site for new versions of the CA Products and must, upon commercial
deployment, replace existing software with new CA Products if they are
substantially similar in functionality. During the term of the agreement, the
Company is obligated to pay Computer Associates a royalty equal to one percent
of the Company's gross revenues. Either party may terminate this agreement
upon 60 days' prior written notice with no penalties. Should Computer
Associates or the Company decide to terminate this agreement, the Company has
the right to continue licensing software from Computer Associates at a forty
percent discount from Computer Associates' prevailing standard prices for five
years and the Company will no longer be obligated to pay a royalty to Computer
Associates. See "Business--Relationship with Computer Associates."

MANAGEMENT OF GROWTH

The Company is currently experiencing a period of rapid growth with respect
to the building of its Internet Data Centers and expansion of its customer
base. In addition, from December 31, 1996 to December 31, 1997, the number of
Company employees increased from 55 to 220. This growth has placed, and if it
continues, will place, a significant strain on the Company's financial,
management, operational and other resources. In addition, the Company may be
required to manage multiple relationships with a growing number of third
parties as it seeks to complement its service offerings. There can be no
assurance that the Company's management, personnel, systems, procedures and
controls will be adequate to support the Company's existing and future
operations. The Company's ability to manage its growth effectively will
require it to continue to expand its operating and financial procedures and
controls, to replace or upgrade its operational, financial and management
information systems and to attract, train, motivate, manage and retain key
employees. The Company has recently hired many key employees and officers,
including its President, and as a result, the Company's entire management team
has worked together for only a brief time. The Company also has plans to hire
additional executive management personnel in the near future. If the Company's
executives are unable to manage growth effectively, the Company's business,
results of operations and financial condition could be materially adversely
affected. See "Management."

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

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Company and/or its customers to potential liability, which in turn could have
an adverse effect on the Company's business, results of operations and
financial condition. The adoption of any such laws or regulations might
decrease the growth of the Internet, which in turn could decrease the demand
for the services of the Company or increase the cost of doing business or in
some other manner have a material adverse effect on the Company's business,
results of operations or financial condition. In addition, applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the marketplace
which could reduce demand for the services of the Company or increase the cost
of doing business as a result of costs of litigation or increased service
delivery costs, or could in some other manner have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, as the Company's services are available over the Internet in
multiple states and foreign countries, and as the Company facilitates sales by
its customers to end users located in such states and foreign countries, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state or foreign country. The Company is
qualified to do business in only a limited number of states, and failure by
the Company to qualify as a foreign corporation in a jurisdiction where it is
required to do so could subject the Company to taxes and penalties for the
failure to qualify and could result in the inability of the Company to enforce
contracts in such jurisdictions. Any such new legislation or regulation, or
the application of laws or regulations from jurisdictions whose laws do not
currently apply to the Company's business, could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Government Regulation."

RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S NETWORK

The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both
United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of
the materials disseminated through their networks. Several private lawsuits
seeking to impose such liability upon online services companies and Internet
access providers are currently pending. In addition, legislation has been
proposed that imposes liability for or prohibits the transmission over the
Internet of certain types of information. The imposition upon the Company and
other Internet network providers of potential liability for information
carried on or disseminated through their systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources, or to discontinue certain service or
product offerings. The increased attention focused upon liability issues as a
result of these lawsuits and legislative proposals could impact the growth of
Internet use. While the Company carries professional liability insurance, it
may not be adequate to compensate or may not cover the Company in the event
the Company becomes liable for information carried on or disseminated through
its networks. Any costs not covered by insurance incurred as a result of such
liability or asserted liability could have a material adverse effect on the
Company's business, results of operations and financial condition. Certain
businesses, organizations and individuals have in the past sent unsolicited
commercial e-mails from servers hosted at the Company's facilities to massive
numbers of people, typically to advertise products or services. This practice,
known as "spamming," can lead to complaints against service providers that
enable such activities, particularly where recipients view the materials
received as offensive. In addition, certain ISPs and other online services
companies could deny network access to companies that allow undesired content
or spamming to be transmitted through their networks. The Company has in the
past received, and may in the future receive, letters from recipients of
information transmitted by the Company's customers objecting to such
transmission. Although the

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Company prohibits its customers by contract from spamming, there can be no
assurance that its customers will not engage in this practice, which could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Government Regulation."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

A component of the Company's long-term strategy is to expand into
international markets, and the Company currently plans to open an Internet
Data Center in the London metropolitan area in the first half of 1998. If
revenue generated by any current or future international Internet Data Center
is not adequate to offset the expense of establishing and maintaining any such
international operation, the Company's business, results of operations and
financial condition could be materially adversely affected. There can be no
assurance that the Company will be able to market, sell and deliver
successfully its services outside the United States. The Company generally
intends to outsource the initial operation of its international Internet Data
Centers. As a result, the Company will be dependent for a time on third
parties to deliver its services from and manage the operations of such
international Internet Data Centers. In addition to the uncertainty as to the
Company's ability to expand into international markets, there are certain
risks inherent in conducting business internationally, such as unexpected
changes in regulatory requirements, export restrictions, tariffs and other
trade barriers, challenges in staffing and managing foreign operations,
differing technology standards, employment laws and practices in foreign
countries, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates, imposition of
currency exchange controls, seasonal reductions in business activity and
potentially adverse tax consequences, any of which could adversely affect the
Company's international operations. Furthermore, certain foreign governments,
such as Germany, have enforced laws and regulations related to content
distributed over the Internet that are more strict than those currently in
place in the United States. There can be no assurance that one or more of
these factors will not have a material adverse effect on the Company's current
or future international operations and, consequently, on the Company's
business, results of operations and financial condition. In addition, there
can be no assurance that the Company will be able to obtain the necessary
telecommunications infrastructure in a cost-effective manner or compete
effectively in international markets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends in significant part upon the continued
services of its key technical, sales and senior management personnel,
including the Company's President, Chief Executive Officer and Chairman of the
Board of Directors, K.B. Chandrasekhar. Although certain of the Company's
executive officers participate in the Company's Executive Employment Policy,
none of the Company's officers is a party to an employment agreement with the
Company. Any officer or employee of the Company can terminate his or her
relationship with the Company at any time. The Company's future success will
also depend on its ability to attract, train, retain and motivate highly
qualified technical, marketing, sales and management personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract and retain key personnel. The loss of the services of
one or more of the Company's key employees or the Company's failure to attract
additional qualified personnel could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
does not carry key-man life insurance for any of its employees. See
"Business--Employees" and "Management."

RISKS ASSOCIATED WITH LEGAL PROCEEDINGS

On July 30, 1997, Michael Blackman ("Blackman"), a consultant to the Company
from October 1996 through January 1997, filed a complaint against the Company
in the Superior Court for the State

16
<PAGE>

of California in and for the County of Santa Clara alleging damages in an
unspecified amount suffered as a result of the Company's failure to grant
Blackman stock options for the Company's Common Stock as additional
compensation for consulting work he performed for the Company pursuant to an
alleged oral contract between Blackman and another consultant to the Company.
The Company believes that the suit is without merit and intends to contest the
suit vigorously. However, litigation is subject to inherent uncertainties,
and, therefore, there can be no assurance that this lawsuit will be resolved
in the Company's favor. See "Business--Legal Proceedings."

PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS

The Company relies on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect
certain proprietary rights in its products and services. The Company has no
patented technology that would preclude or inhibit competitors from entering
the Company's market. The Company has entered into confidentiality and
invention assignment agreements with its employees and contractors, and
nondisclosure agreements with its suppliers, distributors and appropriate
customers in order to limit access to and disclosure of its proprietary
information. There can be no assurance that these contractual arrangements or
the other steps taken by the Company to protect its intellectual property will
prove sufficient to prevent misappropriation of the Company's technology or to
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect the Company's products, services or
intellectual property rights to the same extent as do the laws of the United
States. The Company also relies on certain technologies that it licenses from
third parties, such as Computer Associates. See "--Dependence on Third-Party
Suppliers." There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially
reasonable terms. The loss of such technology could require the Company to
obtain substitute technology of lower quality or performance standards or at
greater cost, which could materially adversely affect the Company's business,
results of operations and financial condition.

To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. The Company expects that participants
in its markets will be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows.
Any such claim, whether meritorious or not, could be time- consuming, result
in costly litigation, cause product installation delays or require the Company
to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to the Company or at
all. As a result, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition. See
"Business--Intellectual Property Rights."

YEAR 2000 RISKS

The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000
date are a known risk. The Company has established procedures for evaluating
and managing the risks and costs associated with this problem and believes
that its computer systems are currently Year 2000 compliant. However, many of
the Company's customers maintain their Internet operations on UNIX-based
servers, which may be impacted by Year 2000 complications. The failure of the
Company's customers to ensure that their servers are Year 2000 compliant could
have a material adverse effect on the Company's customers, which in turn could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

17
<PAGE>

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the shares of Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in the Company's results of operations,
announcements of technological innovations or new Internet Data Centers, new
products or services introduced by the Company or its competitors, changes in
financial estimates by securities analysts, conditions and trends in the
Internet, general market conditions and other factors. Further, the stock
markets, and in particular the Nasdaq National Market, have experienced
extreme price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies and that often
have been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect price to earnings ratios substantially above
historical levels. There can be no assurance that these trading prices and
price to earnings ratios will be sustained. These broad market factors may
adversely affect the market price of the Company's Common Stock. These market
fluctuations, as well as general economic, political and market conditions
such as recessions, interest rates or international currency fluctuations, may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
companies. Such litigation, if instituted, could result in substantial costs
and a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, results of operations and
financial condition.

CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS

Upon completion of this offering, the Company's executive officers,
directors and existing greater than 5% stockholders (and their affiliates)
will, in the aggregate, own approximately 59.9% of the Company's outstanding
Common Stock (57.8% if the Underwriters' over-allotment option is exercised in
full). As a result, such persons, acting together, will have the ability to
control all matters submitted to stockholders of the Company for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) and to control
the management and affairs of the Company. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company, impede a merger, consolidation, takeover or other
business combination involving the Company or discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of the
Company, which in turn could have an adverse effect on the market price of the
Company's Common Stock. See "Management" and "Principal and Selling
Stockholders."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Company's Common Stock (including shares
issued upon the exercise of outstanding options and warrants) in the public
market after this offering could adversely affect the market price of the
Common Stock. Such sales also might make it more difficult for the Company to
sell equity or equity-related securities in the future at a time and price
that the Company deems appropriate. In addition to the 4,000,000 shares of
Common Stock offered hereby (assuming no exercise of the Underwriters' over-
allotment option), as of the date of this Prospectus, there will be 13,439,624
shares of Common Stock outstanding, all of which are restricted shares
("Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). As of such date, no Restricted Shares will be eligible for
sale in the public market. Following the expiration of 180-day lock-up
agreements with the representatives of the Underwriters, 12,086,491 Restricted
Shares will be available for sale in the public market and the remaining
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of applicable holding periods under Rule 144 under the Securities
Act. In addition, as of December 31, 1997, there were outstanding 1,709,286
options and 950,163 warrants to purchase Common Stock (of which warrants for
615,454 shares are expected to

18
<PAGE>

be exercised on or before the closing of this offering) and all of such
options and warrants will be subject to lock-up agreements. Goldman, Sachs &
Co. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to lock-up agreements. In addition, the
holders of 13,234,880 Restricted Shares and warrants to purchase 950,163
shares of Common Stock of the Company are entitled to certain rights with
respect to registration of such shares for sale in the public market. If such
holders sell in the public market, such sales could have a material adverse
effect on the market price of the Company's Common Stock.

Immediately after this offering, the Company intends to register
approximately 5,705,530 shares of Common Stock subject to outstanding options
and reserved for issuance under its stock option and purchase plans. See
"Shares Eligible for Future Sale."

BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $10.00 per
share, after deducting the estimated underwriting discount and offering
expenses, are estimated to be approximately $35.8 million. The primary
purposes of this offering are to obtain additional capital, repay certain
existing and expected indebtedness, create a public market for the Common
Stock and facilitate future access to public markets. The Company expects to
use the net proceeds primarily for working capital and other general corporate
purposes, including scheduled payments of principal and interest on
outstanding indebtedness. A portion of the net proceeds also may be used to
repay currently outstanding or future indebtedness, to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. Accordingly, the Company's management will retain
broad discretion as to the allocation of most of the proceeds of this
offering. The failure of management to apply such funds effectively could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds."

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW

Upon completion of this offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred Stock. The Company is also subject to certain provisions of Delaware
law which could have the effect of delaying, deterring or preventing a change
in control of the Company, including Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder unless certain
conditions are met. In addition, the Company's certificate of incorporation
and bylaws contain certain provisions that, together with the ownership
position of the Company's executive officers and directors and their
affiliates, could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management which could adversely
affect the market price of the Company's Common Stock. See "Description of
Capital Stock."

NO PRIOR MARKET FOR COMMON STOCK

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering

19
<PAGE>

or that investors will be able to sell the Common Stock should they desire to
do so. The initial public offering price will be determined by negotiations
between the Company and the representatives of the Underwriters and may bear
no relationship to the price at which the Common Stock will trade upon
completion of this offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Common Stock in this offering will suffer immediate and
substantial dilution of $7.45 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent that
outstanding options or warrants to purchase the Company's Common Stock are
exercised, there may be further dilution. See "Dilution."

20
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby are estimated to be $35.8 million at an assumed
initial public offering price of $10.00 per share and after deducting the
estimated underwriting discount and offering expenses ($40.9 million if the
over-allotment option is exercised in full). The primary purposes of this
offering are to obtain additional capital, repay certain existing and expected
indebtedness, create a public market for the Common Stock and facilitate
future access to public markets. Shortly after this offering, the Company
expects to begin to use approximately $5.0 million of the net proceeds to
repay existing ($3.0 million at December 31, 1997) and expected future
indebtedness under the Company's working capital line of credit agreement with
Silicon Valley Bank. Such indebtedness bears interest at the bank's prime rate
plus 1%, is collateralized by accounts receivable and matures in December
1998. In addition, beginning in January 1999, the Company expects to begin to
use a portion of the proceeds to repay aggregate indebtedness of $8.0 million
that it incurred in March 1998 pursuant to its working capital line of credit
agreement with Transamerica Business Credit Corporation and MMC/GATX
Partnership No. 1. This indebtedness bears interest at 12.95% and, if this
offering is completed, will mature in January 2000. The Company expects to use
the remaining net proceeds primarily for working capital and other general
corporate purposes to fund the Company's operations, including payment of
salaries and benefits for the Company's personnel, costs associated with the
operation of the Company's network, payments under leases and scheduled
monthly payments of principal and interest on outstanding and any future
indebtedness. See "Risk Factors--Broad Management Discretion in Allocation of
Proceeds." A portion of the proceeds also may be used to repay other
indebtedness, to acquire or invest in complementary businesses or products or
to obtain the right to use complementary technologies. See Note 3 of Notes to
Financial Statements. In the ordinary course of business, the Company
evaluates potential acquisitions of such businesses, products or technologies.
However, the Company has no present understandings, commitments or agreements
with respect to any acquisition of businesses, products or technologies.
Pending use of the net proceeds for the above purposes, the Company intends to
invest such funds in short-term, interest-bearing, investment-grade
securities. In addition to the use of the net proceeds from the offering, the
Company also expects during the next 12 months to meet its capital and working
capital requirements through existing cash and cash equivalents and short-term
investments, cash from sales of services and proceeds from existing and future
equipment loans and lease lines and working capital lines of credit and
possibly other borrowings. See "Risk Factors--Risks Associated with Planned
Business Expansion."

DIVIDEND POLICY

The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and does not anticipate paying any cash dividends for the
foreseeable future.

21
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect
the conversion of all outstanding shares of Preferred Stock into shares of
Common Stock upon the closing of this offering and (iii) the pro forma
capitalization as adjusted to reflect the receipt of the net proceeds from the
sale of the 4,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share and after deducting the
estimated underwriting discount and offering expenses.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank borrowings and current portion of debt and
capital lease obligations(1).................. $ 7,920 $ 7,920 $ 4,920
======== ======== ========
Debt and capital lease obligations, less
current portion(1)............................ $ 15,135 $ 15,135 $ 15,135
-------- -------- --------
Redeemable convertible preferred stock and
warrants, $0.001 par value: actual--74,960,124
shares authorized, 34,117,371 shares issued
and outstanding, aggregate liquidation
preference of $39,640,000; pro forma and as
adjusted--no shares authorized, issued or
outstanding................................... 39,247 -- --
-------- -------- --------
Stockholders' (deficit) equity(2):
Preferred stock, $0.001 par value: actual--no
shares authorized, issued or outstanding; pro
forma and as adjusted--5,000,000 shares
authorized, no shares issued or outstanding . -- -- --
Common stock, $0.001 par value: actual--
53,281,579 shares authorized, 2,067,253
shares issued and outstanding; pro forma--
50,000,000 shares authorized, 13,439,624
shares issued and outstanding; as adjusted--
50,000,000 shares authorized, 17,439,624
shares issued and outstanding................ 2 13 17
Additional paid-in capital.................... 2,508 41,744 77,540
Notes receivable from stockholders............ (140) (140) (140)
Deferred stock compensation................... (2,393) (2,393) (2,393)
Accumulated deficit........................... (30,577) (30,577) (30,577)
-------- -------- --------
Total stockholders' (deficit) equity.......... (30,600) 8,647 44,447
-------- -------- --------
Total capitalization......................... $ 23,782 $ 23,782 $ 59,582
======== ======== ========
</TABLE>
- --------
(1) See Notes 3, 6 and 8 of Notes to Financial Statements.

(2) Does not include (i) 1,709,286 shares of Common Stock issuable upon the
exercise of stock options outstanding under the Company's stock option
plans as of December 31, 1997 with a weighted average per share exercise
price of $0.76 or 1,055,315 shares of Common Stock issuable upon the
exercise of stock options granted outside of the Company's stock option
plans in January and March 1998 with a weighted average per share exercise
price of $10.42, (ii) 649,929 shares of Common Stock available for future
grant as of December 31, 1997 under the 1997 Plan, and an additional
2,300,000 shares of Common Stock available for future grant or issuance
immediately after the offering under the 1998 Plan, the Directors Plan and
the Purchase Plan, (iii) 950,163 shares of Common Stock issuable upon the
exercise of warrants outstanding as of December 31, 1997 with a weighted
average per share exercise price of $4.29 (of which warrants to purchase
615,454 shares are expected to be exercised on or before the closing of
the offering) or 6,667 shares of Common Stock issuable upon the exercise
of a warrant granted in January 1998 at a per share exercise price of
$8.55, (iv) 39,181 shares issued by the Company in February 1998 at a per
share purchase price of $8.55 or (v) 50,000 shares of Common Stock issued
by the Company in March 1998 at a per share purchase price of $9.00. See
"Management--Director Compensation," "Management--Employee Benefit Plans,"
"Description of Capital Stock" and Notes 5 and 8 of Notes to Financial
Statements.

22
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of December 31, 1997
was $8.6 million, or $0.64 per share of Common Stock, assuming the conversion
of all outstanding shares of Preferred Stock into shares of Common Stock. "Pro
forma net tangible book value per share" is determined by dividing the number
of outstanding shares of Common Stock into the net tangible book value of the
Company (total tangible assets less total liabilities). After giving effect to
the application of the estimated net proceeds from the sale by the Company of
the 4,000,000 shares of Common Stock offered hereby (based upon an assumed
initial public offering price of $10.00 per share and after deducting the
estimated underwriting discount and offering expenses), the pro forma net
tangible book value of the Company as of December 31, 1997 would have been
approximately $44.4 million, or $2.55 per share. This represents an immediate
increase in pro forma net tangible book value of $1.91 per share to existing
stockholders and an immediate dilution of $7.45 per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $10.00
Pro forma net tangible book value per share as of December 31,
1997............................................................. $0.64
Increase per share attributable to new investors(1)............... 1.91
-----
Pro forma net tangible book value per share after offering(1)..... 2.55
------
Dilution per share to new investors(1)............................ $ 7.45
======
</TABLE>
- -------
(1) Does not include options outstanding as of December 31, 1997 to purchase a
total of 1,709,286 shares of Common Stock with a weighted average per
share exercise price of $0.76 and warrants outstanding as of such date to
purchase a total of 950,163 shares of Common Stock at a weighted average
per share exercise price of $4.29. If these options and warrants were to
be exercised in full for cash, pro forma net tangible book value per share
after the offering would be $2.48, the increase per share attributable to
new investors would be $1.84, and the dilution per share to new investors
would be $7.52. See "Capitalization," "Management--Director Compensation,"
"Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 5 and 8 of Notes to Financial Statements.

The following table summarizes as of December 31, 1997, on the pro forma
basis described above, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing stockholders and by the investors purchasing shares
of Common Stock in this offering, based upon an assumed initial public
offering price of $10.00 per share (before deducting the estimated
underwriting discount and offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)....... 13,439,624 77.1% $37,992,000 48.7% $ 2.83
New investors(1)............... 4,000,000 22.9 40,000,000 51.3 10.00
---------- ----- ----------- -----
Total........................ 17,439,624 100.0% $77,992,000 100.0%
========== ===== =========== =====
</TABLE>
- -------
(1) If the Underwriters' over-allotment is exercised in full, the number of
shares held by existing stockholders will be reduced by 50,000 shares to
13,389,624, or 74.4% of the total shares of Common Stock to be outstanding
after this offering, and the number of shares held by new investors will
be increased to 4,600,000, or 25.6% of the total shares of Common Stock to
be outstanding after this offering.

23
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Company's Financial Statements and 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 for each of the
years in the three-year period ended December 31, 1997, and the balance sheet
data as of December 31, 1996 and 1997, are derived from financial statements
of the Company that have been audited by KPMG Peat Marwick LLP, independent
auditors, and are included elsewhere in this Prospectus. The balance sheet
data as of December 31, 1994 and 1995 are derived from financial statements of
the Company that have been audited by KPMG Peat Marwick LLP and that are not
included herein. The statement of operations data for the years ended December
31, 1993 and 1994 and the three months ended December 31, 1996 and March 31,
June 30, September 30 and December 31, 1997, and the balance sheet data as of
December 31, 1993, are derived from unaudited financial statements that are
not included herein. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future and results of interim periods are
not necessarily indicative of results for the entire year.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED
-------------------------- ------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1996 1997 1996 1997 1997 1997 1997
------- ------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Service revenues....... $ 1,068 $ 2,454 $ 11,588 $ 954 $ 1,551 $ 2,205 $ 3,260 $ 4,572
Equipment revenues..... 340 676 820 156 118 188 183 331
------- ------- -------- ------- ------- ------- ------- --------
Total revenues....... 1,408 3,130 12,408 1,110 1,669 2,393 3,443 4,903
------- ------- -------- ------- ------- ------- ------- --------
Cost and expenses:
Cost of service
revenues.............. 846 2,538 16,228 999 1,819 2,859 4,503 7,047
Cost of equipment
revenues.............. 282 452 640 107 80 140 141 279
Marketing and sales.... 1,056 2,734 12,702 1,244 1,630 2,746 3,291 5,035
General and
administrative........ 427 1,056 5,983 483 916 1,163 1,447 2,457
Product development.... 70 444 1,647 323 203 385 512 547
------- ------- -------- ------- ------- ------- ------- --------
Total cost and
expenses............ 2,681 7,224 37,200 3,156 4,648 7,293 9,894 15,365
------- ------- -------- ------- ------- ------- ------- --------
Operating loss....... (1,273) (4,094) (24,792) (2,046) (2,979) (4,900) (6,451) (10,462)
Net interest (income)
expense............... 38 39 506 (4) 56 81 105 264
------- ------- -------- ------- ------- ------- ------- --------
Net loss............. (1,311) (4,133) (25,298) (2,042) (3,035) (4,981) (6,556) (10,726)
Cumulative dividends
and accretion on
redeemable convertible
preferred stock....... -- -- (1,413) -- -- -- (823) (590)
------- ------- -------- ------- ------- ------- ------- --------
Net loss attributable
to common
stockholders.......... $(1,311) $(4,133) $(26,711) $(2,042) $(3,035) $(4,981) $(7,379) $(11,316)
======= ======= ======== ======= ======= ======= ======= ========
Basic and diluted net
loss per share(1)..... $ (1.00) $ (2.16) $ (13.85)
======= ======= ========
Pro forma basic and
diluted net loss per
share(1).............. $ (2.56)
========
Shares used in
computing basic and
diluted net loss per
share(1).............. 1,315 1,914 1,928
======= ======= ========
Shares used in
computing pro forma
basic and diluted net
loss per share(1)..... 9,878
========
STATEMENT OF CASH FLOWS
DATA:
Net cash used for
operating activities.. $ (453) $(2,998) $(15,096) $(1,487) $(1,554) $(3,519) $(4,147) $ (5,876)
Net cash used for
investing activities.. (77) (3,617) (22,911) (1,806) (2,802) (3,383) (8,841) (7,885)
Net cash provided by
financing activities.. 692 10,167 44,562 6,231 3,496 20,388 530 20,148
OTHER DATA:
EBITDA(2).............. $(1,208) $(3,633) $(20,274) $(1,817) $(2,629) $(4,288) $(5,566) $ (7,791)
</TABLE>

24
<PAGE>

- --------
(1 ) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The pro forma data is unaudited.

(2) Represents earnings (loss) before net interest expense, income taxes,
depreciation, amortization (including amortization of deferred stock
compensation) and other noncash charges ("EBITDA"). Although EBITDA should
not be used as an alternative to operating loss or net cash provided by
(used for) operating activities, investing activities or financing
activities, each as measured under generally accepted accounting
principles, and, although EBITDA may not be comparable to other similarly
titled information from other companies, the Company's management believes
that EBITDA is an additional meaningful measure of performance and
liquidity.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,(1)
---------------
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................................ $ 266 $ 977
Operating income.............................................. 19 143
Net income.................................................... 19 144
Basic and diluted net income per share........................ $ 0.02 $ 0.14
Shares used in computing basic and diluted net income per
share........................................................ 1,000 1,000
</TABLE>
- --------
(1) The Company is the successor to a Maryland Corporation that was formed in
August 1992 to provide computer consulting services. The Company began to
offer Internet connectivity services to enterprises in October 1994 and
server hosting services in late 1995. In August 1996, the Company opened
its first dedicated Internet Data Center and refocused its business
strategy on providing Internet system and network management solutions for
enterprises with mission-critical Internet operations.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995 1996 1997
---- ---- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2 $ 1 $ 163 $ 3,715 $10,270
Working capital (deficiency)............. (5) 93 (1,170) 1,892 (3,707)
Total assets............................. 32 320 840 8,289 40,973
Debt and capital lease obligations, less
current portion......................... -- -- 141 1,449 15,135
Redeemable convertible preferred stock... -- -- -- 9,609 39,247
Total stockholders' equity (deficit)..... 25 169 (1,140) (5,234) (30,600)
</TABLE>

25
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those set forth under "Risk
Factors."

OVERVIEW

The Company is the successor to a Maryland Corporation that was formed in
August 1992 to provide computer consulting services. The Company began to
offer Internet connectivity services to enterprises in October 1994 and server
hosting services in late 1995. In August 1996, the Company opened its first
dedicated Internet Data Center and refocused its business strategy on
providing Internet system and network management solutions for enterprises
with mission-critical Internet operations. Since refocusing its business
strategy, the Company has derived most of its revenues (and substantially all
of its growth in revenues) from customers for which it provides these
services. Each of the Company's Internet Data Center customers initially
purchases a subset of the Company's service offerings to address specific
departmental or enterprise Internet computing needs, and some of these
customers purchase additional services as the scale and complexity of their
Internet operations increase. The Company sells its services under contracts
that typically have terms of one year. Customers pay monthly fees for the
services utilized, as well as one-time fees for installation and for any
equipment that they choose to purchase from the Company.

The Company opened its first Internet Data Center in the San Francisco
metropolitan area in August 1996. Since that time, the Company has opened five
additional Internet Data Centers in the metropolitan areas of New York (March
1997), San Francisco (second site--August 1997), Seattle (September 1997), Los
Angeles (October 1997) and Washington, D.C. (December 1997). See "Business--
Facilities." These state-of-the-art facilities serve as a base for the array
of solutions offered by the Company, including server hosting, Internet
connectivity, collaborative systems management and Internet technology
services. The building of these Internet Data Centers has required the Company
to obtain substantial additional equity and debt financing. See "Risk
Factors--Substantial Leverage and Debt Service" and "--Liquidity and Capital
Resources" below.

The Company intends to expand domestically and internationally, including
the expected addition of an additional Internet Data Center in the San
Francisco metropolitan area and a new site in the London metropolitan area in
the first half of 1998. Prior to building an Internet Data Center in a new a
geographic region, the Company employs various means to evaluate the market
opportunity in a given location, including the use of focus groups and market
research on Internet usage statistics, the pre-selling of services into the
proposed market and analysis of specific financial criteria. The Company
typically requires at least six months to select the appropriate location for
an Internet Data Center, construct the necessary facilities, install equipment
and telecommunications infrastructure, and hire the operations and sales
personnel needed to conduct business at that site. Expenditures related to an
Internet Data Center commence well before the Internet Data Center opens, and
it takes an extended

26
<PAGE>

period to approach break-even capacity utilization at each site. As a result,
the Company expects that individual Internet Data Centers will generally
experience losses for in excess of one year from the time they are opened. The
Company experiences further losses from sales personnel hired to test market
the Company's services in markets where there is no, and may never be an,
Internet Data Center. As a result, the Company expects to make investments in
expanding the Company's business rapidly into new geographic regions which,
while potentially increasing the Company's revenues in the long term, will
lead to significant losses for the foreseeable future. The Company also
contemplates that such expansion will lead to substantial needs for further
financing. See "--Liquidity and Capital Resources" and "Risk Factors--Risks
Associated with Planned Business Expansion."

To address issues associated with network traffic spikes or line outages,
the Company has a policy of undersubscribing its network by provisioning
significant excess capacity. As a result, when the sustained utilized capacity
of a LAN, WAN or public or private peering link approaches 50%, the Company
begins to plan for the expansion of its available capacity. Thus, as the
number of, and usage of the network by, the Company's customers grows, this
policy will require the Company to incur increased network costs in order to
expand its network capacity. This policy may result in higher network costs
for the Company than for its competitors who do not maintain a similar policy.

Since the Company began to offer server hosting services in 1995, it has
experienced operating losses and negative cash flows from operations in each
quarterly and annual period. As of December 31, 1997, the Company had an
accumulated deficit of approximately $30.6 million. The revenue and income
potential of the Company's business and market is unproven, and the Company's
limited operating history makes an evaluation of the Company and its prospects
difficult. Currently, the Company anticipates making significant investments
in new Internet Data Centers and product development and sales and marketing
programs and personnel and therefore believes that it will continue to
experience net losses on a quarterly and annual basis for the foreseeable
future. The Company and its prospects must be considered in light of the
risks, expenses and difficulties encountered by companies in the new and
rapidly evolving market for Internet system and network management solutions.
To address these risks, among other things, the Company must market its brand
name effectively, provide scalable, reliable and cost-effective services,
continue to grow its infrastructure to accommodate new Internet Data Centers
and increased bandwidth use of its network, expand its channels of
distribution, retain and motivate qualified personnel and continue to respond
to competitive developments. Failure of the Company's services to achieve
market acceptance would have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will ever achieve profitability on a quarterly or
an annual basis or will sustain profitability if achieved. See "Risk Factors--
Limited Operating History; History of Losses."

27
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of operations
data as a percentage of total revenues for the three months ended December 31,
1996 and March 31, June 30, September 30 and December 31, 1997. This
information has been derived from the Company's unaudited financial
statements, which, in management's opinion, have been prepared on
substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial information for the quarters
presented. This information should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
operating results in any quarter are not necessarily indicative of the results
for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues....... 85.9% 92.9% 92.1% 94.7% 93.2%
Equipment revenues..... 14.1 7.1 7.9 5.3 6.8
------ ------ ------ ------ ------
Total revenues........ 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Cost and expenses:
Cost of service
revenues.............. 90.0 109.0 119.5 130.8 143.7
Cost of equipment
revenues.............. 9.6 4.8 5.8 4.1 5.7
Marketing and sales.... 112.1 97.7 114.8 95.6 102.7
General and
administrative........ 43.5 54.9 48.6 42.0 50.1
Product development.... 29.1 12.1 16.0 14.8 11.2
------ ------ ------ ------ ------
Total cost and
expenses............. 284.3 278.5 304.7 287.3 313.4
------ ------ ------ ------ ------
Operating loss........ (184.3) (178.5) (204.7) (187.3) (213.4)
Net interest (income)
expense................ (0.3) 3.4 3.4 3.1 5.4
------ ------ ------ ------ ------
Net loss.............. (184.0)% (181.9)% (208.1)% (190.4)% (218.8)%
====== ====== ====== ====== ======
</TABLE>

REVENUES

Service revenues consist of monthly fees for server hosting, Internet
connectivity, collaborative systems management and Internet technology
services and one-time fees for installation. Service revenues (other than
installation fees) are generally billed and recognized ratably over the term
of the contract, generally one year. Installation fees are typically
recognized at the time that installation occurs. Equipment revenues consist of
sales to customers of third-party equipment. Revenues from equipment sales are
recognized at the time the equipment is shipped to the customer or placed into
service at an Internet Data Center.

The Company's revenues increased sequentially each quarter from $1.1 million
to $1.7 million to $2.4 million to $3.4 million and to $4.9 million in the
quarters ended December 31, 1996 and March 31, June 30, September 30 and
December 31, 1997, respectively. The Company's service revenues also increased
sequentially each quarter from $954,000 to $1.6 million to $2.2 million to
$3.3 million and to $4.6 million in the quarters ended December 31, 1996 and
March 31, June 30, September 30 and December 31, 1997, respectively. This
growth in service revenues resulted primarily from increases in the number of
customers, increases in revenues per customer and the opening of new Internet
Data Centers. The Company's service revenues increased as a percentage of
total revenues in 1997 as the Company increased its average service revenues
per customer. The Company anticipates that service revenues as a percentage of
total revenues, although varying from quarter to quarter, will generally
continue to increase in 1998. The Company sells third-party equipment to its

28
<PAGE>

customers as an accommodation to facilitate their purchase of services; thus,
the Company's equipment revenues have varied from quarter to quarter depending
on particular customer needs. The Company's customers do not generally have a
right to return equipment purchased from the Company, although the Company may
elect from time to time to accept such a return.

COST OF REVENUES

The Company's cost of service revenues is comprised primarily of the
Company's costs for its nationwide backbone network and local telco loops,
salaries and benefits for the Company's customer service and operations
personnel (including its network engineers, backbone engineers, network
management and systems personnel and installers), and depreciation, rent,
repairs and utilities related to the Company's Internet Data Centers. Cost of
equipment revenues represents the cost to the Company of third-party equipment
sold to customers.

The Company's cost of service revenues increased sequentially each quarter
from $999,000 to $1.8 million to $2.9 million to $4.5 million and to $7.0
million in the quarters ended December 31, 1996 and March 31, June 30,
September 30 and December 31, 1997, respectively. Cost of service revenues as
a percentage of service revenues increased sequentially each quarter from 105%
to 117% to 130% to 138% and to 154% in the quarters ended December 31, 1996
and March 31, June 30, September 30 and December 31, 1997, respectively. These
increases in cost of service revenues in absolute dollars and as a percentage
of service revenues were primarily the result of opening additional Internet
Data Centers with the wages, depreciation and other costs associated
therewith, and of the increased costs for the Company's network. The Company
expects that its cost of service revenues as a percentage of service revenues
may remain above 100% through at least 1998. The cost of equipment revenues
varied from quarter to quarter, due primarily to fluctuations in equipment
revenues. Cost of equipment revenues as a percentage of equipment revenues
varied from 68% to 84% based on the particular mix of equipment purchased by
customers in a given quarter.

MARKETING AND SALES

The Company's marketing and sales expenses are comprised primarily of
salaries and benefits for the Company's marketing and sales personnel,
printing and advertising costs, consultants' fees and travel expenses.
Marketing and sales expenses have increased as a result of increased marketing
and sales personnel, increased advertising, increased marketing program
expenses and other marketing efforts. Marketing and sales expenses as a
percentage of total revenues fluctuated from quarter to quarter primarily due
to increases in headcount, the timing of sales compensation and the timing of
advertising and other promotional activities. The Company expects that
marketing and sales expenses will continue to increase in absolute dollars
during 1998 but will begin to decline as a percentage of total revenues as
recurring revenues from the existing customers, which tend to have lower
marketing and sales expenses associated with them, become a more significant
percentage of total revenues.

GENERAL AND ADMINISTRATIVE

The Company's general and administrative expenses are comprised primarily of
salaries and benefits for the Company's administrative and management
information systems personnel and fees paid for professional services and
recruiting. General and administrative expenses have increased primarily as a
result of additional personnel, recruiting fees and consulting costs. General
and administrative expenses as a percentage of total revenues increased during
the quarters ended March 31 and June 30, 1997 due to increased professional
services and recruiting fees and increased during the quarter ended December
31, 1997 primarily as a result of $656,000 of amortization of deferred
compensation expense and $278,000 of professional services and recruiting
fees. The Company expects that general and administrative expenses will
continue to increase in absolute dollars but will begin to decline as a
percentage of total revenues as existing overhead is spread over more
substantial operations.

29
<PAGE>

PRODUCT DEVELOPMENT

The Company's product development expenses are comprised primarily of
salaries and benefits for the Company's product development personnel and fees
paid to consultants, all of whom focus their efforts primarily on the
integration of best-of-breed products and services developed by leading
technology vendors with the Company's services. With the exception of the
quarter ended March 31, 1997, product development expenses have increased as a
result of continuing efforts to integrate and enhance best-of-breed third-
party technologies to support the Company's service offerings. The decline in
product development expenses in the quarter ended March 31, 1997 reflected a
temporary decline in the use of consultants for product development. Product
development expenses as a percentage of total revenues decreased during 1997
due to a high number of consultants used in product development during the
quarter ended December 31, 1996 and, with respect to the quarter ended
December 31, 1997, a transfer of personnel from product development activities
to backbone engineering activities that are charged to cost of service
revenues. The Company expects that product development expenses will continue
to increase in absolute dollars as the Company makes additional investments in
developing its collaborative systems management services but will decline as a
percentage of total revenues.

DEFERRED COMPENSATION EXPENSE

In the quarters ended September 30 and December 31, 1997, the Company
recorded aggregate deferred stock compensation of $3.5 million in connection
with the grant of certain stock options subsequent to March 1997, which amount
is generally being amortized over the 50 month vesting period of such options.
This amortization is being recorded in a manner consistent with Financial
Accounting Standards Board ("FASB") Interpretation No. 28. Of the total
deferred stock compensation, approximately $85,000 was amortized in the
quarter ended September 30, 1997 and approximately $1.0 million was amortized
in the quarter ended December 31, 1997. The Company expects amortization of
approximately $1.3 million during 1998, $700,000 during 1999, $300,000 during
2000 and $100,000 during 2001 related to these options. These amortization
amounts are allocated among the expense categories discussed above. See Note 5
of Notes to Financial Statements.

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

REVENUES

The Company's revenues increased 122% from $1.4 million in 1995 to $3.1
million in 1996 and increased an additional 296% to $12.4 million in 1997.
Service revenues increased 130% from $1.1 million in 1995 to $2.5 million in
1996. The growth in the Company's service revenues from 1995 to 1996 resulted
primarily from an increase in the number of customers to which the Company
provided Internet connectivity and to a lesser extent from an increase in
service revenues per Internet connectivity customer. Service revenues
increased 372% from $2.5 million in 1996 to $11.6 million in 1997. This growth
in service revenues was primarily the result of opening the Company's first
two Internet Data Centers in August 1996 and March 1997, increases in the
number of new customers, substantially all of which were Internet Data Center
customers, and increases in revenues per customer. The Company sells third-
party equipment to its customers as an accommodation to facilitate their
purchase of services. The Company's equipment revenues increased 99% from
$340,000 in 1995 to $676,000 in 1996 and increased an additional 21% to
$820,000 in 1997.

COST OF REVENUES

Cost of service revenues increased from $846,000 in 1995 to $2.5 million in
1996 and to $16.2 million in 1997. The Company's cost of service revenues as a
percentage of service revenues increased from 79% in 1995 to 103% in 1996 and
to 140% in 1997. The increases in cost of service revenues in absolute dollars
and as a percentage of service revenues were due to increased costs

30
<PAGE>

associated with the build-out and operation of the Company's increasing number
of Internet Data Centers, including increased costs for its network backbone
and local telco loops, salaries and benefits for its customer service and
operations personnel, depreciation and rent. Costs for the Company's network
backbone and local telco loops increased by approximately $834,000 from 1995
to 1996 and by approximately $3.8 million from 1996 to 1997. Salaries and
benefits for its customer service and operations personnel increased by
approximately $341,000 from 1995 to 1996 and by approximately $3.5 million
from 1996 to 1997. Depreciation increased by approximately $346,000 from 1995
to 1996 and by approximately $3.0 million from 1996 to 1997. Rent expense
increased by approximately $36,000 from 1995 to 1996 and by approximately
$945,000 from 1996 to 1997. Cost of equipment revenues increased from $282,000
in 1995 to $452,000 in 1996 and to $640,000 in 1997. Cost of equipment
revenues varies primarily as a result of equipment revenues and, to a lesser
extent, the mix of equipment purchased by customers.

MARKETING AND SALES

The Company's marketing and sales expenses increased from $1.1 million in
1995 to $2.7 million in 1996 and to $12.7 million in 1997. These increases
were primarily the result of hiring additional marketing and sales personnel
and expanding marketing programs in connection with the Company's expansion of
its operations, including the number and scope of its Internet system and
network management solutions. Salaries and benefits for its sales and
marketing personnel increased by approximately $649,000 from 1995 to 1996 and
by approximately $6.1 million from 1996 to 1997, and costs associated with
tradeshows and advertising increased by approximately $328,000 from 1995 to
1996 and by approximately $977,000 from 1996 to 1997.

GENERAL AND ADMINISTRATIVE

The Company's general and administrative expenses increased from $427,000 in
1995 to $1.1 million in 1996 and to $6.0 million in 1997. These increases were
primarily the result of increased hiring of general and administrative
personnel, costs for consultants and professional services providers, fees
paid for recruiting and amortization of deferred compensation. Salaries and
benefits for general and administrative personnel increased by approximately
$202,000 from 1995 to 1996 and by approximately $2.0 million from 1996 to
1997. Costs for consultants and professional services providers increased by
approximately $57,000 from 1995 to 1996 and by approximately $1.1 million from
1996 to 1997. Recruiting fees increased by approximately $193,000 from 1995 to
1996 and by approximately $968,000 from 1996 to 1997. These increased expenses
reflected the Company's need for additional general and administrative
personnel to handle the expansion of the Company's operations. The
amortization of deferred compensation included in general and administrative
expenses was $741,000 in 1997, and there was no such expense recorded in 1995
or 1996. See "--Deferred Compensation Expense" below.

PRODUCT DEVELOPMENT

The Company's product development expenses increased from $70,000 in 1995 to
$444,000 in 1996 and to $1.6 million in 1997. The Company's product
development expenses grew between the comparison periods primarily because of
the addition of product development personnel to support the Company's
expanded service offerings.

NET INTEREST EXPENSE

The Company's net interest expense increased from $38,000 in 1995 to $39,000
in 1996 and to $506,000 in 1997. The increases in net interest expense between
the comparison periods were primarily the result of substantially increased
borrowings as the Company entered into equipment loans and lease agreements to
finance the construction of its Internet Data Centers. The Company expects
that net interest expense will continue to grow as the Company enters into
additional equipment leases and loans and obtains additional borrowings for
working capital.

31
<PAGE>

DEFERRED COMPENSATION EXPENSE

During 1997, the Company recorded deferred stock compensation of
approximately $3.5 million in connection with the grant of certain stock
options subsequent to March 1997, which amount is generally being amortized
over the 50 month vesting period of such options. This amortization is being
recorded in a manner consistent with FASB Interpretation No. 28. Of the total
deferred stock compensation, approximately $1.1 million was amortized in 1997.
This amount is allocated among the expense categories discussed above. See
Note 5 of Notes to Financial Statements.

FACTORS AFFECTING RESULTS OF OPERATIONS

The Company expects to experience significant fluctuations in its future
quarterly and annual results of operations due to a variety of factors, many
of which are outside the Company's control including: demand for and market
acceptance of the Company's services and enhancements; introductions of
services or enhancements by the Company and its competitors; capacity
utilization of its Internet Data Centers; reliable continuity of service and
network availability; the ability to increase bandwidth as necessary; the
timing of customer installations; provisions for customer discounts and
credits; the mix of services sold by the Company; customer retention; the
timing and success of marketing efforts and service introductions by the
Company; the timing and magnitude of capital expenditures, including
construction costs relating to the expansion of operations; the timely
expansion of existing Internet Data Centers and completion of new Internet
Data Centers; the introduction by third parties of new Internet and networking
technologies; increased competition in the Company's markets; changes in the
pricing policies of the Company and its competitors; fluctuations in bandwidth
used by customers; the retention of key personnel; economic conditions
specific to the Internet industry; and other general economic factors. In
addition, a relatively large portion of the Company's expenses are fixed in
the short-term, particularly with respect to telecommunications, depreciation,
real estate and interest expenses and personnel, and therefore the Company's
results of operations are particularly sensitive to fluctuations in revenues.
Also, if the Company's agreement with Computer Associates were to terminate
and the Company continued to require Computer Associates' software, the
license fees paid by the Company could increase fixed costs significantly.
Furthermore, if the Company were to become unable to continue leveraging third
party products in the Company's services offerings, the Company's product
development costs could increase significantly. Although the Company has not
encountered significant difficulties in collecting upon accounts receivable in
the past, many of the Company's customers are in an emerging stage, and there
can be no assurance that the Company will be able to collect receivables on a
timely basis. For these and other reasons, in some future quarters, the
Company's results of operations may fall below the expectations of securities
analysts or investors, which could have a material adverse effect on the
market price of the Company's Common Stock.

The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and likely will be
characterized by an increasing number of market entrants. There is significant
uncertainty regarding whether this market ultimately will prove to be viable
or, if it becomes viable, that it will grow. In order to be successful in this
emerging market, the Company must be able to differentiate itself from its
competition through its service offerings, such as its recently introduced
collaborative systems management and Internet technology services. There can
be no assurance that the Company will be successful in differentiating itself
or achieving market acceptance of its services, or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services. If the Company incurs increased
costs or is unable, for technical or other reasons, to develop and introduce
new services or enhancements of existing services in a timely manner,
including certain collaborative systems management and Internet technology
services scheduled to be available in the first half of 1998, or if these or
other new products or services do not achieve market acceptance in a timely
manner or at all, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Risk Factors--
Dependence on New Market; Uncertainty of Acceptance of Services."

32
<PAGE>

A component of the Company's long-term strategy is to expand into
international markets, and the Company currently plans to open an Internet
Data Center in the London metropolitan area in the first half of 1998. There
can be no assurance that the Company will be able to market, sell and deliver
successfully its services outside the United States. The Company generally
intends to outsource the initial operation of its international Internet Data
Centers. As a result, the Company will be dependent for a time on third
parties to deliver its services from and manage the operations of such
international Internet Data Centers. In addition to the uncertainty as to the
Company's ability to expand into international markets, there are certain
risks inherent in conducting business internationally, such as unexpected
changes in regulatory requirements, export restrictions, tariffs and other
trade barriers, challenges in staffing and managing foreign operations,
differing technology standards, employment laws and practices in foreign
countries, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates, imposition of
currency exchange controls, seasonal reductions in business activity and
potentially adverse tax consequences, any of which could adversely affect the
Company's international operations. In addition, there can be no assurance
that the Company will be able to obtain the necessary telecommunications
infrastructure in a cost-effective manner or compete effectively in
international markets. See "Risk Factors--Risks Associated with International
Operations."

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
private sales of Preferred Stock and through various types of equipment loans
and lease lines and working capital lines of credit. At December 31, 1997, the
principal source of liquidity for the Company was $10.3 million of cash and
cash equivalents. As of that date, the Company also had $5.8 million in
equipment lines of credit and lease facilities available with interest rates
ranging from 14.5% to 16.4%, and working capital lines of credit with interest
rates ranging from 9.5% to 12.95% under which it could borrow up to an
additional aggregate of $10.0 million. Given the expected use of cash during
the first quarter of 1998, in March 1998, the Company drew down the $8.0
million available under its working capital line of credit agreement with
Transamerica Business Credit Corporation and MMC/GATX Partnership No. 1 in
order to continue to fund its operations. As of December 31, 1997, the
Company's total bank borrowings, debt and capital lease obligations were $23.8
million (including imputed interest), which require payments in 1998, 1999,
2000 and 2001 of $8.3 million, $6.0 million, $6.3 million and $3.2 million.
See Notes 3, 6 and 8 of Notes to Financial Statements.

Since the Company began to offer server hosting services in 1995, the
Company has had significant negative cash flows from operating activities. Net
cash used for operating activities in 1995, 1996 and 1997 was $453,000, $3.0
million and $15.1 million, respectively. Net cash used for operating
activities in each of these periods was primarily the result of net losses,
offset in part by increases in accounts payable, accrued expenses and
depreciation and amortization.

Net cash used for investing activities in 1995, 1996 and 1997 was $77,000,
$3.6 million and $22.9 million, respectively. Net cash used for investing
activities in these periods was almost entirely the result of capital
expenditures for the construction of Internet Data Centers, leasehold
improvements, furniture and fixtures, and computers and other equipment.

33
<PAGE>

Cash provided by financing activities in 1995, 1996 and 1997 was $692,000,
$10.2 million and $44.6 million, respectively. Of this cash, $9.4 million in
1996 and $23.3 million in 1997 resulted from the issuance of Preferred Stock,
net of issuance costs and related warrants, and $490,000, $719,000 and $17.0
million in 1995, 1996 and 1997 resulted from debt, bank borrowings and sale-
leaseback financings offset by payments thereon and required restricted
deposits.

The Company's capital expenditures for 1997 were approximately $25.2 million
and during 1998 are expected to be at least $17.8 million. Such expenditures
are primarily for property and equipment, in particular equipment needed for
existing and future Internet Data Centers, including the additional Internet
Data Center in the San Francisco metropolitan area and the new site in the
London metropolitan area scheduled to be opened in the first half of 1998, as
well as office equipment, computers and telephones. The Company expects to
finance such capital expenditures primarily through existing and future
equipment loans and lease lines. As discussed above, the Company currently has
available under existing equipment lines of credit and lease facilities an
aggregate of $5.8 million. Accordingly, the Company will need to obtain
additional financing during 1998 to fund the remaining $12.0 million of
expected capital expenditures for the year. As of December 31, 1997, the
Company also had commitments under capital leases and under noncancellable
operating leases of $4.4 million and $26.7 million, respectively, through
2007. See Note 6 of Notes to Financial Statements. The Company expects to meet
its working capital and capital expenditure requirements over the next 12
months, including such requirements associated with the Company's planned
expansion, with existing cash and cash equivalents and short-term investments,
the net proceeds from this offering, cash from sales of services and proceeds
from existing and future equipment loans and lease lines and working capital
lines of credit and possibly other borrowings. Currently, the Company is
negotiating to enter into additional credit facilities and believes it will
obtain such facilities on terms that are comparable to its existing
facilities. Thereafter, the Company may also need to raise additional funds
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that the Company will be successful in
generating sufficient cash flows from operations or in raising capital in
sufficient amounts on terms acceptable to it. The failure of the Company to
raise capital when needed could have a material adverse effect on the
Company's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of its then-current stockholders would be reduced.
Furthermore, such equity securities might have rights, preferences or
privileges senior to those of the Company's Common Stock. See "Risk Factors--
Risks Associated with Planned Business Expansion."

RECENT ACCOUNTING PRONOUNCEMENTS

The FASB recently issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in financial statements. It does not, however,
require a specific format, but requires the Company to display an amount
representing total comprehensive income for the period in its financial
statements. The Company is in the process of determining its preferred format.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.

The FASB also recently issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company has determined that it does not
have any separately reportable business segments.

34
<PAGE>

BUSINESS

THE COMPANY

Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. The
Company's solutions include server hosting, Internet connectivity,
collaborative systems management and Internet technology services, which
together provide the high performance, scalability and expertise that
enterprises need to optimize their Internet operations. The Company delivers
its services from geographically distributed, state-of-the-art Internet Data
Centers that are connected through a redundant high performance dedicated
backbone ring. The Company's tailored solutions are designed to be seamlessly
integrated with existing enterprise systems architectures and enable customers
to outsource the monitoring, administration and optimization of their
equipment, applications and overall Internet operations. As of December 31,
1997, the Company had over 200 Internet Data Center customers and managed over
2,000 customer servers. The Company's customers range from pioneering
Internet-based businesses to Fortune 500 enterprises and include companies
such as Computer Associates International, Inc., GeoCities, Hewlett-Packard
Company, Hotmail Corporation, Inktomi Corporation, National Semiconductor
Corporation, PC World Communications, Inc., Software.net (a Cybersource
company) and USAToday Information Network.

The Company's Internet system and network management solutions are based on
a core set of server hosting and Internet connectivity services, which are
enhanced by a growing number of collaborative systems management and Internet
technology services. The Company's server hosting and Internet connectivity
services, through its Internet Data Centers, national backbone ring of
multiple high speed clear channel DS-3 lines and public and private network
peering interconnections, provide the foundation for high performance,
availability, scalability and reliability of customers' Internet operations.
The Company's collaborative systems management services, including performance
monitoring and site management reports, enable customers and the Company to
manage customers' Internet operations jointly, proactively and continuously.
Finally, the Company's Internet technology services, which include security
and content distribution, integrate best-of-breed technologies of leading
vendors with the Company's expertise to provide customers with scalable,
secure and high performing Internet applications. The Company's portfolio of
layered services optimizes the development, deployment and proactive
management of enterprises' mission-critical Internet operations.

INDUSTRY BACKGROUND

Use of the Internet, including intranets and extranets, has grown rapidly in
recent years, driven by a number of factors, including the large and growing
installed base of advanced personal computers, improvements in network
architectures, increasing numbers of network-enabled applications, the
emergence of compelling content and commerce-enabling technologies and easier,
faster and cheaper access. International Data Corporation estimates that by
the end of 1997 the number of World Wide Web users worldwide would be
approximately 50 million and will continue to grow to approximately 129
million by the end of 2000. As a result of this growing use, the Internet has
become an important new global communications and commerce medium and
represents an enormous opportunity for

35
<PAGE>

enterprises to interact in new and different ways with a large number of
customers, employees, suppliers and partners.

Enterprises are responding to this opportunity by rapidly increasing their
investments in Internet sites and services. In the last several years, many
enterprises that focus solely on delivering services over the Internet have
emerged, and, more recently, mainstream businesses have begun to implement
Internet sites and commerce applications. This projected increase in
commercial Internet use should drive rapid growth in revenues from Internet
commerce which, according to International Data Corporation, are expected to
increase from approximately $10 billion in 1997 to approximately $120 billion
in 2000.

As use of the Internet grows, enterprises are increasing the breadth and
depth of their Internet product and service offerings. Pioneering Internet-
based businesses have developed Internet products and services in areas such
as finance, banking, entertainment, education and advertising. In addition,
mainstream businesses have begun to use the Internet for an expanding variety
of applications, ranging from corporate publicity and advertising, to sales,
distribution, customer service, employee training and communication with
business partners. These Internet operations are mission-critical for
virtually all Internet-based businesses and are becoming increasingly mission-
critical for many mainstream enterprises. Loss of the availability of mission-
critical Internet sites often results in losses in revenue and impairment of
customer goodwill. As a result, to ensure the reliability of their mission-
critical Internet operations, enterprises are requiring that these operations
have 24x7 performance, scalability and expert management.

The proliferation of Internet services offered and the growth in mission-
critical Internet applications are driving an increase in the complexity of
commercial Internet sites. In order to ensure the quality, reliability,
availability and redundancy of these Internet operations, corporate IT
departments must make substantial investments in developing Internet expertise
and infrastructure. They need geographically distributed state-of-the-art
facilities and networks that are monitored and managed 24x7 by experts in
Internet technology, can be upgraded to reflect changing technologies and can
be scaled as the needs of enterprises evolve. However, such a continuing
significant investment of resources is often an inefficient use of
enterprises' overall resources. As a result, corporate IT departments are
increasingly seeking collaborative outsourcing arrangements that can increase
performance, provide continuous operation of their Internet solutions and
reduce Internet operating expenses. Forrester Research, Inc. ("Forrester")
estimates that Internet hosting revenues will increase from approximately $200
million in 1997 to almost $8 billion by the year 2000. Furthermore, Forrester
estimates that the broader market for distributed infrastructure services,
which includes Internet hosting as well as wide area network ("WAN")
management, network design and end-user support will grow from approximately
$36 billion in 1997 to approximately $89 billion in 2000.

A variety of companies, such as regional ISPs, national ISPs and large IT
outsourcing firms, offer products and services that attempt to address
enterprises' Internet outsourcing needs. However, the solutions offered by
these companies fail to address certain elements required to ensure that
customers' mission-critical Internet operations are reliable, scalable and
high performing. For example, regional ISPs lack the geographically-
distributed data centers necessary to deliver content using replication or
caching technologies, which are becoming increasingly important as Internet
usage and bandwidth demands increase. National ISPs focus on providing
Internet access and generally have not developed sophisticated and reliable
server management capabilities. In addition, the Company believes that they
often oversubscribe their networks, resulting in poor performance and an
inability to handle effectively customers' sharp increases in bandwidth
demand. The Company believes that neither the regional nor the national ISPs
have developed the systems and application management, monitoring and customer
service capabilities required to support mission-critical Internet operations.
Finally, large IT outsourcing firms tend to focus on large enterprises that
want to outsource their entire IT infrastructure, not just their Internet
operations. These vendors often lack the network infrastructure

36
<PAGE>

and Internet expertise required to provide mission-critical Internet system
and network management services. As a result, Exodus believes a significant
opportunity exists for a highly-focused company to provide a combination of
server hosting, Internet connectivity, collaborative systems management and
Internet technology services that will enable reliable, high performance of
enterprises' mission-critical Internet operations.

THE EXODUS SOLUTION

Exodus is a leading provider of Internet system and network management
solutions for enterprises with mission-critical Internet operations. Its
server hosting, Internet connectivity, collaborative systems management and
Internet technology services are designed to provide enterprises with the high
performance, scalability and expertise necessary to optimize their Internet
operations. The Company's tailored solutions are designed to be seamlessly
integrated with existing enterprise systems architectures and enable customers
to outsource the monitoring, administration and optimization of their
equipment, applications and overall Internet operations. The Company believes
that its solutions enable customers to deploy and expand Internet operations
rapidly and cost-effectively, especially when compared to in-house solutions.
The Exodus solution provides the following key advantages to its customers:

HIGH PERFORMANCE. The Company supports enterprises' business objectives by
ensuring that their Internet sites perform effectively. The Company's
solutions provide the availability and reliability that customers need to be
able to depend on the Internet for mission-critical operations. The Company's
solutions are designed to maximize performance through features such as
geographically distributed Internet Data Centers, redundant and high speed
network design, content distribution technologies, security and 24x7
monitoring, diagnosis and problem resolution.

SCALABILITY. The Company's solutions are designed to be flexible and
scalable, ensuring customers a consistently high level of performance as their
Internet operations expand. The Company can quickly scale the amount of
hosting space, power, bandwidth or managed services that a customer receives,
all in a way transparent to the end-user. The Company believes that the
scalability of its solutions is a significant advantage over in-house
solutions.

INTERNET SYSTEM AND NETWORK MANAGEMENT EXPERTISE. By leveraging the
knowledge gained from supporting many leading-edge Internet operations, the
Company has developed a specialized Internet system and network management
expertise that is difficult for any single customer to replicate in-house.
Customers gain access to the Company's experience in network, system,
application and security management.

COLLABORATIVE AND PROACTIVE MANAGEMENT. The Company believes that
enterprises value Internet service relationships that are collaborative and
proactive. Therefore, the Company has developed a collaborative systems
management approach that provides customers with detailed monitoring,
reporting and management tools that can be accessed through the Internet to
control customers' Internet hardware, network, software and application
environments. This approach focuses on identifying and resolving potential
problems before they impact an Internet site's availability or performance.
Through the Company's system and network management framework, customers are
able to manage both mission-critical Internet operations housed at the
Company's Internet Data Centers and in-house IT applications. The Company
believes that this provides an important advantage to enterprises that seek to
outsource a portion of their Internet operations and to link the management of
the outsourced operations with in-house operations.

COST-EFFECTIVE SOLUTION. The Company's customers benefit from leveraging the
significant capital, operating and labor investments that the Company has made
to support distributed, mission-critical Internet operations. Most enterprises
today do not have the infrastructure that mission-critical

37
<PAGE>

Internet operations require, including data centers located adjacent to major
Internet connection points, 24x7 operations and specialized Internet
technology expertise. The Company believes that its solutions to optimize
enterprises' Internet operations are significantly more cost-effective than
most in-house solutions.

THE EXODUS STRATEGY

The Company's objective is to become the leading provider of Internet system
and network management solutions for enterprises with mission-critical
Internet operations. To achieve this objective, the Company's strategy
includes the following key elements:

EXTEND MARKET LEADERSHIP. The Company has played a leading role in creating
and defining the market for Internet system and network management solutions
and plans to establish itself as the brand name and leader in this market. The
Company believes that its highly-focused approach to serving this market
provides it with an advantage over competitors that also serve the entry-level
hosting market or the stand-alone Internet access market. The Company plans to
extend its leadership in the market for Internet system and network management
solutions both by aggressively continuing to expand its base of more than 180
Internet Data Center customers and by capitalizing on the growth of its
customers' needs for these solutions.

FOCUS ON COLLABORATIVE SYSTEMS MANAGEMENT AND INTERNET TECHNOLOGY
SERVICES. The Company believes that developing new services to manage
enterprises' mission-critical Internet operations jointly, proactively and
continuously will offer a compelling value proposition to its customers. The
Company has invested and is continuing to invest in services that will ensure
high availability and performance of customers' Internet-based applications,
including systems administration, disaster recovery, security and systems and
network management. As part of this strategy, the Company has developed and
intends to continue to develop relationships with providers of leading
Internet technologies in order to enhance its service offerings and meet its
customers' evolving needs.

CONTINUE DOMESTIC EXPANSION AND ESTABLISH GLOBAL PRESENCE. The Company is
continuing to build Internet Data Centers and expand direct sales coverage in
the United States and is also pursuing international opportunities. The
Company believes that having a number of widely distributed and networked
Internet Data Centers improves network performance and enhances overall site
redundancy. In addition, the Company's experience indicates that locating an
Internet Data Center within a geographic region can significantly enhance its
ability to attract new customers in that region. The Company intends to expand
domestically and internationally, including the expected addition of an
additional Internet Data Center in the San Francisco metropolitan area and a
new site in the London metropolitan area in the first half of 1998.

LEVERAGE EXPERTISE TO ADDRESS NEW MARKET OPPORTUNITIES. The Company intends
to leverage its significant achievements with pioneering Internet-based
businesses to address broader customer markets, such as e-commerce and
extranets. For example, mainstream corporations are increasingly establishing
extranets with suppliers and customers. However, many of these enterprises
lack the infrastructure and Internet expertise required to operate effectively
mission-critical Internet applications and are looking for collaborative
systems management assistance. The Company believes that its Internet system
and network management solutions can support the business needs of these
mainstream corporations by enabling them to deploy mission-critical extranet
operations successfully.

ESTABLISH STRATEGIC RELATIONSHIPS FOR TECHNOLOGY AND DISTRIBUTION. The
Company is establishing strategic relationships for technology and
distribution. The Company believes that establishing relationships with
technology developers enables it to leverage these enterprises' research and
development expertise cost-effectively. These relationships allow the Company
to gain

38
<PAGE>

more rapid access to new technologies and to provide value-added integrated
solutions for its customers. For example, the Company has worked closely with
Computer Associates to develop certain of the Company's collaborative systems
management services using Computer Associates' Unicenter(R) TNG(TM)
technology. The Company's product development personnel will continue to
develop vendor relationships and technology-based relationships, such as those
with Cisco, Raptor Systems, Inc., VeriFone, Inc. and CheckPoint Software
Technologies Limited, to enhance the Company's solutions. In addition, the
Company currently has distribution relationships with a number of companies
including Computer Associates, GE Capital Services, Poppe Tyson, Inc. and
SAVVIS Communications, Inc. and believes it can expand its customer base by
establishing additional distribution relationships with content developers,
system integrators, system vendors, consulting companies and ISPs.

SERVICES

The Company's services are designed to provide enterprises with the high
performance, scalability and expertise they need to optimize their mission-
critical Internet operations. The Company creates tailored solutions for its
customers based on their unique business and technical requirements, modifying
the services as customers' needs evolve. The services are delivered from
geographically distributed, state-of-the-art Internet Data Centers and include
server hosting, Internet connectivity, collaborative systems management and
Internet technology services. The server hosting and Internet connectivity
services provide the foundation for high performance, availability,
scalability and reliability of customers' Internet operations. The
collaborative systems management services enable customers and the Company to
manage customers' Internet operations jointly, proactively and continuously.
The Internet technology services integrate and enhance best-of-breed
technologies of leading vendors to support the Company's expertise to build
scalable, secure and high performing Internet applications. These services can
be layered to allow customers to outsource an increasing portion of the
management of their Internet operations. Customers pay monthly fees for the
services utilized, as well as one-time fees for installation and for any
equipment purchased from the Company.

SERVER HOSTING

The Company provides a broad range of server hosting services tailored to
meet the unique demands of sophisticated, multi-vendor mission-critical
Internet operations. The Company supports all leading Internet hardware and
software systems vendor platforms, including those from Compaq Computer
Corporation, Dell Computer Corporation, Hewlett-Packard Company, IBM,
Microsoft Corporation, Silicon Graphics, Inc., Sun Microsystems, Inc. and The
Santa Cruz Operation, Inc. This multi-vendor flexibility enables the customer
to retain complete control over the technical solution and enables its
Internet operations to be integrated into its existing IT technical
architecture. Because mission-critical Internet operations are typically very
dynamic and often require immediate hardware and software upgrades to maintain
targeted service levels, customers have unlimited 24x7 access to the Internet
Data Centers. Additional space and electrical power can be added as needed,
ensuring that the customer has access to additional server hosting services.

Customers can select from shared rack facilities, highly secure cabinets or
enclosed cage facilities based upon their business and technical requirements.
Most server hosting facilities include dedicated electrical power circuits to
ensure that each customer's electrical power requirements are met. Each
Internet Data Center is constructed based upon the requirements of high-
availability mission-critical computing with uninterruptible power supply and
back-up generators, fire suppression, raised floors, HVAC, separate cooling
zones, seismically braced racks, 24x7 operations and high levels of physical
security.

39
<PAGE>

The following chart summarizes the key features of the Company's current
server hosting services:

<TABLE>
<CAPTION>
SERVICE SIZE FEATURES
- -------------------------------------------------------------------------------
<S> <C> <C>
CyberRack 19" x 23" quarter, half or . Entry-level service providing
full rack economical solution for customers
that do not need dedicated
environments
. Secured environment that is shared
by multiple customers
- -------------------------------------------------------------------------------
CyberCabinet 19" x 23" full rack . Dedicated, locked cabinet
. Provides a single rack with the
security of a dedicated
environment
. Dedicated power circuits
- -------------------------------------------------------------------------------
Virtual Data 7' x 4' or 7' x 8' cage or . Dedicated, locked cage
Center customized to order . Provides flexibility in designing
and configuring Internet servers,
including space for multiple racks
and other customer computing
products
. Provides ventilation for heat
generating equipment
. Dedicated power circuits
- -------------------------------------------------------------------------------
ExodusVault 8' x 8' or 8' x 12' vault . Dedicated, enclosed security area
or customized to order . Provides additional security for
sensitive Internet transactions by
financial institutions and on-line
merchants
. Includes biometric identification
for entry and exit, motion and
temperature detectors, tiles
bolted to the floor, cameras, high
impact glass and secured data and
electrical lines
. Separate, dedicated power circuits
</TABLE>

INTERNET CONNECTIVITY

The Company's Internet connectivity services are designed to deliver the
scalability, high availability and performance required by high-volume,
mission-critical Internet operations. Since enterprises' mission-critical
Internet operations often experience network traffic spikes due to promotions
or events, the Company has a policy of undersubscribing its network by
provisioning significant excess capacity. In addition, customers can purchase
spare capacity and pay only for the bandwidth that is used.

To meet customers' requirements of near 100% availability, the Company's
network is designed to minimize the likelihood of any single point of failure.
Each Internet Data Center has multiple physical fiber paths into the
facility. The Company maintains multiple network links from multiple vendors
into each Internet connection point and regularly checks that its fiber
backbone is traversing physically-separated paths. Customers also enhance
their Internet site's availability by physically duplicating their site within
multiple Internet Data Centers and then synchronizing applications and content
via the Company's private fiber backbone network. This network architecture
optimizes the availability of a customer's site, even in the event of a link
failure.

40
<PAGE>

The Company's Internet connectivity services are also designed to
consistently deliver low-latency and peak network performance. The Company's
backbone engineering personnel continuously monitor traffic patterns and
congestion points throughout the Internet and dynamically reroute traffic
flows to optimize end-user response times. The Company also provides peak
network performance by maintaining what it believes is one of the largest
number of direct public and private network peering interconnections in the
industry. The Company's network includes private peering interconnections with
eight national ISPs and public peering interconnections with over 120 ISPs,
including many of the largest providers.

For customers seeking a direct communications link to the site of another
customer that is located at the same Internet Data Center, the Company offers
highly secure, fast and efficient cross-connections.

COLLABORATIVE SYSTEMS MANAGEMENT

The Company's collaborative systems management services support mission-
critical Internet operations by providing the customer with detailed
monitoring, reporting and management tools to control their hardware, network,
software and application environments. Through the Company's system and
network management framework, customers are able to manage both mission-
critical Internet operations housed at the Company's Internet Data Centers and
in-house IT applications. The Company believes that this provides an important
advantage to enterprises that seek to outsource a portion of their Internet
operations and to link the management of the outsourced operations with in-
house operations. The Company's proactive service methodology focuses on
identifying and resolving potential problems before they ever impact an
Internet site's availability or performance. The Company's sophisticated
Internet system and network management solutions enable the Company to
identify and to begin to resolve hardware, software, network and application
problems, frequently before the customer is even aware that a problem exists.
The Company offers the services summarized in the following chart:

<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
SystemHealth Basic . 24x7 proactive monitoring of . Maximizes availability of
Monitoring Service Internet server processes customers' mission-critical
. 24x7 rebooting of servers Internet operations by
. Monthly and daily reports proactively identifying
available via the Web potential problems
. Allows customers to leverage
Exodus' systems expertise
- ----------------------------------------------------------------------------------------
SystemHealth Pro . SystemHealth Basic Monitoring . Includes advantages of
Monitoring Service service plus an Exodus system SystemHealth Basic Monitoring
administrator leads problem Service plus offloads problem
resolution if problem arises resolution to Exodus
. Automated process restarts
- ----------------------------------------------------------------------------------------
DatabaseHealth . 24x7 proactive monitoring of . Maximizes availability of
Basic Monitoring SQL server processes customers' database resources
Service . Automated customer notification by proactively identifying
of database problems potential problems
. Monthly and daily reports
available via the Web
- ----------------------------------------------------------------------------------------
DatabaseHealth Pro . DatabaseHealth Basic Monitoring . Includes advantages of
Monitoring Service service plus an Exodus system DatabaseHealth Basic
administrator leads problem Monitoring Service plus
resolution if problem arises offloads problem resolution to
. Automated process restarts Exodus
. Problem resolution
</TABLE>
41
<PAGE>

<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Site Management . Bandwidth usage reports . Assists in capacity planning
Reports . Graphic and tabular statistics and management of network
. Information delivered to resources
customers via the Internet on
an hourly, daily and semi-
monthly basis
- ----------------------------------------------------------------------------------------
Internet Disaster . Tape management services to . Maximizes the availability of
Recovery restore sites after a system customers' applications
failure . Provides additional redundancy
. Distributed load balancing in the event of Website
services to seamlessly re-route failure
user traffic to an alternate
site in the event of a failure
- ----------------------------------------------------------------------------------------
Internet Systems . Assigned project manager . Assures a smooth transition to
Integration responsible for developing a an Exodus Internet Data Center
migration plan, managing the . Provides for ongoing support
site's installation and
providing ongoing account
support
. Company acts as value-added
reseller of Cisco products,
primarily routers, hubs and
switching equipment, in
connection with server hosting
services
</TABLE>

In addition, the following chart summarizes the key features of an
additional collaborative systems management service being developed by the
Company and expected to be available in the first half of 1998:

<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
HeadsUp Site . Will provide an integrated . Will allow customers to view
Monitor platform for delivering key the status of their entire
customer information Internet operations located at
. Will perform real-time Exodus through the Internet
monitoring of URLs, bandwidth, via a single integrated
server performance and Internet console
Data Center activities . Will proactively alert
customers with updates on any
internal or external network
event that might impact their
site
</TABLE>

42
<PAGE>

INTERNET TECHNOLOGY

The Company's Internet technology services are developed by integrating
best-of-breed technologies of leading vendors with its own Internet expertise.
Customers may select any or all of the Company's available Internet technology
services, depending on their needs. The following chart summarizes the key
features of the Internet technology services currently offered by the Company:

<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Exodus NetSecure . Full-range of perimeter . Enhances site security and
firewall security, encryption, integrity
automated intrusion monitoring,
site security auditing and
consulting services
. Potential intruders identified
and blocked from customer's
site
. Site's security probed and
tested 24x7 and audit reports
generated on potential security
risks
. Proactive agendas developed
before site integrity is
compromised
- ----------------------------------------------------------------------------------------
Exodus Multipath . Site requests intelligently . Increases availability and
Site balanced across multiple performance for multi-server
servers located within a single mission-critical Internet
Internet Data Center based on sites
server utilization,
availability and response times
- ----------------------------------------------------------------------------------------
Exodus Multipath . Intelligent routing services . Maximizes availability and
Net that geographically distribute performance for Internet sites
end-user requests located across multiple
. Traffic routed based upon Internet Data Centers
server performance and . Optimizes end-user response
availability, Internet traffic time
patterns and the geographic . Provides sophisticated
locations of the requesters Internet site redundancy
- ----------------------------------------------------------------------------------------
Exodus NetHost . Turnkey infrastructure services . Cost-effective solution for
for delivering high-performance one-time events such as
cybercast events software releases and concerts
. Includes high-bandwidth
connectivity, high performance
UNIX and NT servers and
specialized systems
administration and management
before and during the event
</TABLE>

The Company is developing certain additional Internet technology services in
the areas of e-commerce, collaborative computing, ad-servers and broadcasting
that it expects to be available in the first half of 1998.

43
<PAGE>

CUSTOMERS

The Company has established a diversified base of customers in a wide range
of industries, including finance, entertainment, high technology, education,
healthcare and publishing. As of December 31, 1997, the Company had over 200
Internet Data Center customers. The following is a representative list of the
Company's Internet Data Center customers, each of which are expected to
generate annualized revenues for the Company in excess of $34,000 based upon
the monthly recurring charges for such customers in January 1998. Based upon
such expected annualized revenues and assuming no addition of new customers,
the following customers would represent in the aggregate approximately 45% of
the Company's total expected annualized revenues, and none of such customers
individually would represent in excess of 10% of such total expected annualized
revenues.

<TABLE>

<S> <C> <C>
AdKnowledge GeoCities The Santa Cruz
(formerly FocaLink) GolfWeb, Inc. Operation, Inc.
Applied Materials, Inc. Hearst New Media Sierra On-Line, Inc.
Blizzard Entertainment Hewlett-Packard Company Software.net (a
BMG Entertainment Hotmail Corporation Cybersource company)
Computer Associates Inktomi Corporation Sony Online Ventures, Inc.
International, Inc. Internet Profiles Synopsys, Inc.
CondeNet Inc. Corporation ("I/Pro") Tripod, Inc.
DoubleClick Inc. Juno Online Services, L.P. United Media
DHL Airways, Inc. Mpath Interactive, Inc. USAToday
E-Loan National Semiconductor Visto Corporation
Eidos Interactive, Inc. Corporation (formerly RoamPage, Inc.)
Oracle Corporation Web Communications
PC World Communications, Inc. WhoWhere? Inc.
Poppe Tyson, Inc.

</TABLE>

The Company's contracts with its customers generally cover the provision of
services by the Company for a one year period and may contain, among other
things, certain service level warranties. Service agreements entered into with
customers prior to August 1997 typically included service level warranties
which provided that, if the Company failed to provide Internet Data Center
services to a customer for more than 24 consecutive hours, such customer's
account would be credited for the charges the customer paid for services it did
not receive during such period. Since August 1997, the Company's service
agreements have typically included service level warranties which provide that,
if the Company fails to provide Internet Data Center services to a customer for
more than two consecutive hours, such customer's account would be credited for
one day of service and, if for more than eight consecutive hours, one week of
service, with each customer limited to one credit per month. Certain customers
have received more favorable terms. To date, only a limited number of customers
has utilized this warranty to receive a credit for a period of free service.
See "Risk Factors--Risk of System Failure." As the Company did not open its
first dedicated Internet Data Center until August 1996, the Company has had
Internet Data Center customers for only a short period of time. Accordingly,
most of the Company's customers are within the first year of their service
contracts with the Company. The Company has had limited experience with
customers whose initial one year service contract terms have been completed and
whose contracts are therefore eligible for renewal. However, the Company
estimates that, of the Internet Data Center customers whose initial one year
service contracts have become eligible for renewal, substantially all have
elected to renew.

The following examples illustrate how the Company's customers use its server
hosting, Internet connectivity, collaborative systems management and Internet
technology services.

GEOCITIES

In 1997, GeoCities, a leading provider of free home pages on the Internet,
selected the Company to colocate its Internet servers and administer its
rapidly growing Internet computing requirements.

44
<PAGE>

GeoCities is one of the most frequently visited sites on the Internet
measuring over 100 million hits a day on a peak day, and GeoCities relied
heavily upon the Company's advanced professional services capabilities to plan
and manage the successful migration of the GeoCities site into Exodus'
Internet Data Center facilities. This migration posed unique challenges,
including minimizing downtime for GeoCities' more than one million
"homesteaders" (users), physically migrating more than 45 Internet servers and
shifting in real-time the network routing of more than 160 Mbps of sustained
Internet traffic. The Company currently provides GeoCities and its users
reliable connectivity, scalable bandwidth and 24x7 monitoring, systems
administration and disaster recovery services.

HOTMAIL CORPORATION

In 1996, Hotmail Corporation ("Hotmail"), a leading provider of globally-
accessible, free Web-based electronic mail, engaged the Company to host its
Internet servers to gain access to greater bandwidth to support Hotmail's
growing customer base. Hotmail's primary challenge was to find a company that
could support the significant growth that it was anticipating for its
services. Hotmail selected the Company, based upon the scalability and high
performance of the Company's Internet Data Center and network solutions, as
well as on the Company's reputation for high quality customer service. Within
a year of colocating its Internet site at the Company's Internet Data Center,
Hotmail's subscriber base has grown from 400,000 to over 10 million, the
number of servers required to operate its site has expanded from 16 to 200,
and Hotmail's sustained network traffic has grown from 10 Mbps to 140 Mbps.
The Company currently manages Hotmail's Web site daily and provides it with
the flexibility for expansion, additional technical support and bandwidth
capacity that can be increased to keep pace with Hotmail's growing subscriber
base.

NATIONAL SEMICONDUCTOR CORPORATION

In 1997, National Semiconductor Corporation ("National"), a global
semiconductor manufacturer, selected the Company for its application
management expertise. National depends on a Java-based e-commerce application
on its Internet site to sell components. This application reduces the time it
takes for customers to determine which components they need, and National
views it as a competitive advantage. Exodus provides the systems
administration, hardware maintenance and tape back-up necessary to manage this
application and to keep it available. National's Internet site serves a broad
array of additional functions, and use of it has grown significantly in the
last 18 months to a few hundred thousand hits per day.

HEARST NEW MEDIA & TECHNOLOGY

In 1997, Hearst New Media & Technology ("Hearst"), a unit of the Hearst
Corporation, decided to co-locate Internet hosting for its Web sites,
including "homearts.com," a leading site for women on the Web, to the
Company's Internet Data Center located in the New York metropolitan area.
Hearst chose the Company for its 24-hour per day monitoring services and its
array of systems management services. Hearst's objective was to improve
network performance, monitoring and systems management capabilities, allowing
the Hearst team to focus on further refinement and expansion of the site. The
Company now monitors Hearst's systems through its Unicenter(R) TNG(TM)-based
services and sends Hearst frequent Web-based reports that track the status of
over 40 domains.

SALES, DISTRIBUTION AND MARKETING

The Company's sales, distribution and marketing objective is to achieve
broad market penetration by targeting enterprises that depend upon the
Internet for mission-critical operations. As of December 31, 1997, the Company
had 86 employees engaged in sales, distribution and marketing.

The Company sells its services to enterprises directly through its sales
force and indirectly through its channel partners. The Company is actively
seeking to increase its sales and distribution capabilities

45
<PAGE>

and coverage in the United States and to expand internationally as new
Internet Data Centers are installed outside of the United States. Currently,
most of the Company's sales are derived through the efforts of its sales
force. The Company's sales force is organized into three separate groups,
consisting of field sales, strategic accounts and telesales, each of which is
further divided into four geographical regions within the United States. Sales
engineers and client integration engineers support the Company's sales force,
providing pre- and post-sales support to ensure that customer services are
implemented properly and efficiently.

The Company's sales force is also developing an indirect sales channel for
the Company's products by targeting content developers, system integrators,
system vendors, consulting companies and ISPs. The Company currently has
distribution relationships with a number of companies, including Computer
Associates, GE Capital Services Corporation, SAVVIS Communications, Inc. and
Poppe Tyson, Inc. and intends to expand its distribution relationships in the
future. The Company's channel partners typically receive referral fees for
bringing customers to the Company.

The Company's marketing organization is responsible for product management,
public relations and marketing communications. Product management includes
defining the product roadmap and bringing to market the portfolio of services
and programs that will enable the Company to meet its business objectives.
These activities include product strategy and definition, pricing, competitive
analysis, product launches, channel program management and product lifecycle
project management. The Company stimulates product demand through a broad
range of marketing communications and public relations activities. Primary
marketing communications vehicles include collateral, advertising, trade
shows, direct response programs, event sponsorship and management of the
Company's Web site. Public relations focuses on cultivating industry analyst
and media relationships with the goal of securing broad media coverage and
public recognition of the Company's leadership position in the market for
Internet system and network management solutions.

CUSTOMER SERVICE

The Company offers superior customer service by understanding the technical
requirements and business objectives of its customers and fulfilling their
needs proactively on an individual basis. By working closely with its
customers, the Company is able to optimize the performance of its customers'
Internet operations, avoid downtime, resolve quickly any problems that may
arise and make appropriate adjustments in services as customer needs change
over time. As the Company works with its customers over time, it solicits
their feedback to ensure that it is offering the appropriate types and quality
of service. The Company uses advanced software tools to aid in its customer
monitoring and service efforts. Many customer service employees have been
specifically trained and, as appropriate, certified by the vendors of the
Company's software tools, including Sun Microsystems, Inc., Microsoft
Corporation, Oracle Corporation and Computer Associates.

Customer service begins before a sale, when the Company provides technical
support for complex orders. During the installation phase, the Company assigns
a transition team and a project manager, who also retains responsibility for
the account after installation, to assist the new customer with the
installation process. In addition, the Company provides system integration
services between the customer's Web site and legacy systems. After
installation, the primary customer support area is each Internet Data Center's
Network Control Center, which is operated 24x7 by engineers who answer
customer calls, monitor site and network operations and activate teams to
solve problems that arise. To solve complex problems, the Company draws on the
collective expertise at all of its Internet Data Centers, creating a
nationwide engineering pool. The Company's customer service personnel are also
available to assist customers whose operations require specialized procedures.

46
<PAGE>

Finally, the Company employs network engineers who collaborate with a
customer to design and maintain the LAN environment within the Internet Data
Center and integrate the customer's home LAN and WAN with its Internet site.
The network engineers are trained on NT and Solaris and other UNIX platforms
as well as Cisco routers and switches, and they serve as the second level of
support for customer issues that cannot be resolved by the Network Control
Center. The Company also employs a group of backbone engineers who are
responsible for designing the network that connects the Company's Internet
Data Centers. This group constantly monitors the network design and
effectiveness to optimize performance for customers, rerouting and redesigning
traffic as conditions require.

As of December 31, 1997, the Company had 93 employees dedicated to customer
service and network and backbone engineering.

NETWORK DESIGN

The Company's high performance server network is designed to provide the
highest possible availability in order to enable its customers to achieve
reliable Internet operations. It is comprised of the Company's six Internet
Data Centers interconnected by a high-performance network backbone ring and
connected to the Internet through public peering interconnections and private
peering interconnections. Within each Internet Data Center, a virtual LAN
environment provides redundant, high-speed internal connectivity.

The Company's Internet Data Centers are located near most of the major
Internet exchange points ("IXPs") and are connected to their local IXPs by
multiple DS-3 or OC-3c links, provisioned by Teleport Communications Group
Inc., MFS Communications Company, Inc., Brooks Fiber Properties, Inc. and
Regional Bell Operating Companies. These links to the local exchange points,
combined with private exchanges with ISPs, connect the customers' traffic to
the Internet. In order to provide for high redundancy, performance and
capacity, and to perform real-time content replication or caching across its
Internet Data Centers, the Company has multiple clear channel DS-3 links
interconnecting the Internet Data Centers. The Company has engineered its
backbone with a geographically diverse fiber path to provide high
availability, even in the event of a link failure. The Company is planning to
upgrade to an OC-3c backbone in order to accommodate expected traffic growth.
For customers with servers located at multiple Internet Data Centers, the
Company is developing dynamic response time and load balancing technologies
for optimal routing.

Within each Internet Data Center, the Company deploys a virtual LAN
environment to increase reliability and performance and provides customers
with redundant connectivity to the Exodus backbone and the Internet. DS-3 and
OC-3c lines are strategically placed on different routers to avoid any single
points of failure. The Company uses a combination of public and private
peering interconnections to achieve fast and reliable delivery of content. It
has private peering interconnections with eight national ISPs, public peering
interconnections with over 120 ISPs, including many of the largest providers,
and a presence at each of the major U.S. IXPs. The Company will continue to
work with ISPs to establish direct private peering interconnections at each of
its Internet Data Centers to provide low latency content delivery. This broad
combination of private and public peering interconnections provides customers
with the reliability and redundancy that they need to ensure their content
reaches its intended destination. The Company has a general policy of keeping
significant unutilized network capacity for every LAN, WAN and public and
private peering link to allow for spikes in demand or line outages. As a
result, when the sustained utilized capacity of the link approaches 50%, the
Company begins to plan for the expansion of its available capacity.

If the carriers that operate the IXPs were to discontinue their support of
the peering points and no alternative providers emerged, or such alternative
providers increased the cost of utilizing the IXPs, the distribution of
content through the IXPs, including content distributed by the Company, would
be

47
<PAGE>

significantly constrained. Furthermore, as traffic through the IXPs increases,
if commensurate increases in bandwidth are not added, the Company's ability to
distribute content rapidly and reliably through these networks will be
adversely affected. Many of the operators of the private peering
interconnections are competitors of the Company. Currently, the Company does
not pay a fee for its public and private peering interconnections. If these
organizations were to refuse to continue to peer directly with the Company,
the Company might be required to purchase transit access services from these
organizations in order to allow the Company's customers to reach the customers
of these organizations. In those cases where the Company currently purchases
transit access from other organizations, if these organizations were to
increase the pricing associated with their transit access, the Company might
be required to identify alternative methods through which it can distribute
its customers' content. See "Risk Factors--Dependence Upon Network
Infrastructure."

The Company is dependent on other companies to supply certain key components
of its telecommunications infrastructure and system and network management
solutions, including telecommunications services and networking equipment
that, in the quantities and quality demanded by the Company, are available
only from sole or limited sources. In particular, the Company is dependent on
WorldCom and certain other telecommunications providers for its backbone
capacity and is therefore dependent on such companies to maintain the
operational integrity of its backbone. The routers, switches and modems used
in the Company's telecommunications infrastructure are currently supplied
primarily by Cisco. The Company purchases these components pursuant to
purchase orders placed from time to time, does not carry significant
inventories of these components and has no guaranteed supply arrangements with
these vendors. Any failure to obtain required products or services on a timely
basis and at an acceptable cost would have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, any failure of the Company's sole or limited source suppliers to
provide products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components used by the Company in its communications infrastructure could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Dependence Upon Network
Infrastructure" and "--Dependence on Third-Party Suppliers."

48
<PAGE>

PRODUCT DEVELOPMENT

The Company's product development group is primarily responsible for
evaluating and integrating best-of-breed technologies with the Company's
service offerings to support its customers' mission-critical Internet
operations. The Company believes that establishing relationships with
technology enterprises enables it to leverage these enterprises' research and
development expertise. These relationships allow the Company to gain quicker
access to new technologies and to provide value-added integrated solutions for
its customers. For example, the Company has worked very closely with Computer
Associates, including having dedicated Computer Associates engineers located
at the Company, to develop certain of the Company's collaborative systems
management services using Computer Associates' Unicenter(R) TNG(TM)
technology. See "--Relationship with Computer Associates." The Company's
product development personnel will continue to develop strategic
relationships, such as the one with Computer Associates, and vendor and
technology-based relationships, such as those it has with Raptor Systems,
Inc., VeriFone, Inc. and Checkpoint Software Technologies Limited, to enhance
the Company's services through the integration of leading technologies. To the
extent that the Company is unable to obtain the technology necessary to meet
its customers' needs from a third party, the Company may need to develop the
technology itself. As of December 31, 1997, the Company employed 10 persons in
product development.

49
<PAGE>

services currently provided by the Company. In addition, keeping pace with
technological advances in the Company's industry may require substantial
expenditures and lead time.

The Company incurred $70,000, $444,000 and $1.6 million in product
development expenses during the years ended December 31, 1995, 1996 and 1997,
respectively.

RELATIONSHIP WITH COMPUTER ASSOCIATES

The Company has a strategic relationship with Computer Associates
encompassing sales, marketing, operations and engineering. Under the terms of
the Company's agreement with Computer Associates, the Company is deploying the
Unicenter(R) TNG(TM) systems, network and application management software
products (including the Cheyenne ARCserve(R) product) to manage the Company's
customer service operations and to monitor its customers' Internet solutions.
The Unicenter technology is the Company's primary enterprise management tool
and is the technology on which many of the Company's value-added services are
and will be based. To facilitate the Company's deployment of Unicenter TNG,
Computer Associates has located dedicated software engineers at the Company.
By becoming one of the leading Unicenter TNG implementations, the Company has
also become a primary reference account for Computer Associates' extensive
sales force, which has also created opportunities for the Company to market
its services actively into large enterprises.

Under the agreement with Computer Associates, if the Company desires to
offer a service that has a substantially similar functionality to that
provided by Computer Associates' Unicenter(R) TNG(TM) family of software, or
its ARCserve or InocuLAN products (the "CA Products"), the Company must
generally utilize the CA Products as long as they meet the Company's
requirements. In addition, the Company is a beta test site for new versions of
the CA Products and must, upon commercial deployment, replace existing
software with new CA Products if they are substantially similar in
functionality. During the term of the agreement, the Company is obligated to
pay Computer Associates a royalty equal to one percent of the Company's gross
revenues. Either party may terminate this agreement upon 60 days' prior
written notice with no penalties. Should Computer Associates or the Company
decide to terminate this agreement, the Company has the right to continue
licensing software from Computer Associates at a forty percent discount from
Computer Associates' prevailing standard prices for five years and the Company
will no longer be obligated to pay a royalty to Computer Associates. In
connection with this agreement, the Company agreed to host Computer
Associates' hosting servers at prices below the Company's standard rates.

COMPETITION

The Company's current and potential competitors in the market include: (i)
providers of server hosting services; (ii) national and regional ISPs; (iii)
global, regional and local telecommunications companies and RBOCs; and (iv)
large IT outsourcing firms. The Company's competitors may operate in one or
more of these areas and include companies such as certain subsidiaries of GTE
Corporation and WorldCom, IBM and certain business units of GlobalCenter,
which recently announced its proposed acquisition by Frontier Corporation.

50
<PAGE>

Certain of the Company's competitors may be able to provide customers with
additional benefits in connection with the Internet system and network
management solutions, including reduced communications costs, which could
reduce the overall costs of their services relative to the Company's. There
can be no assurance that the Company will be able to offset the effects of any
such price reductions. In addition, the Company believes that the businesses
in which the Company competes are likely to encounter consolidation in the
near future, which could result in increased price and other competition that
could have a material adverse effect on the Company's business, results of
operations and financial condition.

INTELLECTUAL PROPERTY RIGHTS

The Company relies on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect
certain proprietary rights in its products and services. The Company has no
patented technology that would preclude or inhibit competitors from entering
the Company's market. The Company has entered into confidentiality and
invention assignment agreements with its employees, and nondisclosure
agreements with its suppliers, distributors and appropriate customers in order
to limit access to and disclosure of its proprietary information. There can be
no assurance that these contractual arrangements or the other steps taken by
the Company to protect its intellectual property will prove sufficient to
prevent misappropriation of the Company's technology or to deter independent
third-party development of similar technologies. The laws of certain foreign
countries may not protect the Company's products, services or intellectual
property rights to the same extent as do the laws of the United States. The
Company also relies on certain technologies that it licenses from third
parties, such as Computer Associates. See "Risk Factors--Dependence on Third-
Party Suppliers." There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially
reasonable terms. The loss of such technology could require the Company to
obtain substitute technology of lower quality or performance standards or at
greater cost, which could materially adversely affect the Company's business,
results of operations and financial condition.

To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. The Company expects that participants
in its markets will be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows.
Any such claim, whether meritorious or not, could be time consuming, result in
costly litigation, cause product installation delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to the Company or at
all. As a result, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition.

51
<PAGE>

GOVERNMENT REGULATION

The Company is not currently subject to direct federal, state or local
government regulation, other than regulations applicable to businesses
generally. There is currently only a small body of laws and regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted at the federal, state and local
levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. The adoption of any such laws or regulations might
decrease the growth of the Internet, which in turn could decrease the demand
for the services of the Company or increase the cost of doing business or in
some other manner have a material adverse effect on the Company's business,
results of operations or financial condition. In addition, applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. In addition, as the Company's services are available over the
Internet in multiple states and foreign countries, and as the Company
facilitates sales by its customers to end users located in such states and
foreign countries, such jurisdictions may claim that the Company is required
to qualify to do business as a foreign corporation in each such state or
foreign country. The Company is qualified to do business in only a limited
number of states, and failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify and could result in
the inability of the Company to enforce contracts in such jurisdictions. See
"Risk Factors--Governmental Regulation."

The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both
United States and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of
the materials disseminated through their networks. Several private lawsuits
seeking to impose such liability upon online services companies and Internet
access providers are currently pending. Certain businesses, organizations and
individuals have in the past sent unsolicited commercial e-mails from servers
hosted at the Company's facilities to massive numbers of people, typically to
advertise products or services. This practice, known as "spamming," can lead
to complaints against service providers that enable such activities,
particularly where recipients view the materials received as offensive. In
addition, certain ISPs and other online services companies could deny network
access to companies that allow undesired content or spamming to be transmitted
through their networks. The Company has in the past received, and may in the
future receive, letters from recipients of information transmitted by the
Company's customers objecting to such transmission. Although the Company
prohibits its customers by contract from spamming, there can be no assurance
that its customers will not engage in this practice, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Risks Associated With Information
Disseminated Through the Company's Network."

EMPLOYEES

As of December 31, 1997, the Company had 220 employees, including 86 people
in sales, distribution and marketing, 10 people in product development, 93
people in customer service and network and backbone engineering and 31 people
in finance and administration. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. The competition for such personnel is intense, and there
can be no assurance that the Company will be able to identify, attract and
retain such personnel in the future. None of the

52
<PAGE>

Company's employees is represented by a labor union, and management believes
that its employee relations are good. See "Risk Factors--Dependence on Key
Personnel" and "--Management of Growth."

FACILITIES

The Company's executive offices are located in Santa Clara, California and
consist of approximately 36,000 square feet that are leased pursuant to an
agreement that expires in 2002. The Company leases the facilities for its
current Internet Data Centers in the following metropolitan areas and specific
cities, which cover an aggregate of approximately 110,000 gross square feet
and expire in the years indicated below:

<TABLE>
<CAPTION>
LEASE
METROPOLITAN AREA CITY AND STATE EXPIRATION
----------------- -------------- ----------
<S> <C> <C>
San Francisco Santa Clara, CA 2001
Santa Clara, CA 2002
New York Jersey City, NJ 2007
Seattle Seattle, WA 2007
Los Angeles Irvine, CA 2007
Washington, D.C. Herndon, VA 2004
</TABLE>

Most of the Company's leases provide for a renewal option upon the
expiration of the initial term. The Company currently maintains sales offices
in unutilized space in its Internet Data Centers. The Company intends to
expand domestically and internationally, including the expected addition of an
additional Internet Data Center in the San Francisco metropolitan area and a
new site in the London metropolitan area in the first half of 1998. The
Company has recently entered into a lease for the space needed for the
additional site in the San Francisco metropolitan area which covers 55,000
square feet and expires in 2009. The Company believes that it will be able to
lease the additional space required for the London facility on commercially
reasonable terms.

LEGAL PROCEEDINGS

On July 30, 1997, Michael Blackman ("Blackman"), a consultant to the Company
from October 1996 through January 1997, filed a complaint against the Company
in the Superior Court for the State of California in and for the County of
Santa Clara alleging damages in an unspecified amount suffered as a result of
the Company's failure to grant Blackman stock options for the Company's Common
Stock as additional compensation for consulting work he performed for the
Company pursuant to an alleged oral contract between Blackman and another
consultant to the Company. The Company believes that the suit is without merit
and intends to contest the suit vigorously. However, litigation is subject to
inherent uncertainties, and, therefore, there can be no assurance that this
lawsuit will be resolved in the Company's favor.

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
K.B. Chandrasekhar...... 37 Chief Executive Officer and
Chairman of the Board of Directors
Ellen M. Hancock........ 54 President
Richard S. Stoltz....... 53 Chief Operating Officer and Chief Financial Officer
Mark Bonham............. 38 Vice President, Marketing
B.V. Jagadeesh.......... 41 Vice President, Engineering
Sam S. Mohamad.......... 38 Vice President, Worldwide Sales
Louis J. Muggeo......... 46 Vice President, Customer Support and Services
Robert V. Sanford III... 49 Vice President, Operations
Frederick W.W. 36
Bolander(1)............ Director
John R. Dougery(2)...... 57 Director
Mark Dubovoy(3)......... 51 Director
Max D. Hopper........... 63 Director
Peter A. Howley(1)...... 58 Director
Daniel C. Lynch......... 56 Director
Thadeus J. 35
Mocarski(1)(3)......... Director
Kanwal S. Rekhi(2)...... 51 Director
</TABLE>
- --------
(1)Member of the Compensation Committee.
(2)Member of the Audit Committee.
(3)Member of the Finance Committee.

Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors (the "Board").

K.B. CHANDRASEKHAR has served as Chief Executive Officer and Chairman of the
Board of Directors of the Company since its incorporation in California in
February 1995 and as President from such incorporation until March 1998. From
1992 to May 1995, he served as President and a director of Fouress, Inc., a
network software design and development firm and the Company's predecessor,
which he co-founded. Mr. Chandrasekhar holds a B.S. degree in physics from
Madras University and a B.Tech. degree in electronics and communications from
the Madras Institute of Technology.

ELLEN M. HANCOCK has served as President of the Company since March 1998.
From July 1996 to July 1997, she served as Executive Vice President for
Research and Development and Chief Technology Officer of Apple Computer, Inc.
From September 1995 to May 1996, Mrs. Hancock served as an Executive Vice
President and Chief Operating Officer of National Semiconductor Corporation.
From 1966 to February 1995, she served in various staff, managerial and
executive positions at International Business Machines Corporation, most
recently as Senior Vice President and Group Executive. Mrs. Hancock is also a
director of Colgate-Palmolive Company, Siemens Business

54
<PAGE>

Communications, Inc. and Aetna Inc. She holds a B.A. degree in mathematics
from The College of New Rochelle and an M.A. degree in mathematics from
Fordham University.

RICHARD S. STOLTZ has served as Chief Operating Officer and Chief Financial
Officer of the Company since October 1995 and was a director of the Company
from January 1996 to October 1996. From February 1994 to September 1995, he
was an independent consultant specializing in financial and management
information system issues. From 1992 to January 1994, Mr. Stoltz served as
Vice President of Finance, Treasurer and Chief Financial Officer of Radius
Inc., a computer hardware company. Mr. Stoltz holds a B.S.B.A. degree in
marketing and an M.B.A. from The American University.

MARK BONHAM has served as Vice President, Marketing of the Company since
January 1997. From June 1995 to January 1997, he served as Group Marketing
Manager of Sun Microsystems, Inc. From March 1994 to June 1995, Mr. Bonham
served as Service Marketing Manager of 3Com, and from 1987 to March 1994, he
served in various positions at Hewlett-Packard Company, most recently as
Marketing Program Manager. Mr. Bonham holds a B.A. degree in political science
from Haverford College and an M.M. degree from the Kellogg Graduate School of
Management, Northwestern University.

B.V. JAGADEESH has served as Vice President, Engineering of the Company
since its incorporation in California in February 1995 and was a director of
the Company from February 1995 to February 1996. From February 1994 to May
1995, he served as Vice President, Engineering and a director of Fouress,
Inc., the Company's predecessor, which he co-founded, and, from January 1992
to January 1994, he served as a Senior Software Engineer for Novell, Inc. Mr.
Jagadeesh holds a B.S. degree in electrical engineering from Bangalore
University and an M.S. degree in computer science engineering from Bombay
University.

SAM S. MOHAMAD has served as Vice President, Worldwide Sales of the Company
since February 1997. From March 1996 to January 1997, he served as Vice
President of Sales and Marketing of Genuity, Inc., a provider of data center
products and services. From 1987 to February 1996, Mr. Mohamad held various
positions at Oracle Corporation, most recently as Vice President of Direct
Sales and Marketing.

LOUIS J. MUGGEO has served as Vice President, Customer Support and Services
of the Company since February 1998. From May 1993 to February 1998, he served
in various positions at Sybase, Inc., a client/server relational database
management software company, most recently as Vice President/General Manager
for Western Area Field Services. From 1990 to May 1993, Mr. Muggeo served in
various positions at ViewStar Corporation (now Mosaix, Inc.), a document
management and workflow software company, most recently as Director, Education
Services.

ROBERT V. SANFORD III has served as Vice President, Operations of the
Company since April 1997. From February 1994 to April 1997, he was an
independent consultant specializing in management information system issues,
and from October 1992 to February 1994, he served as Director of IS at Radius
Inc. Mr. Sanford holds a B.A. degree in business administration from
California State University, San Bernardino.

FREDERICK W. W. BOLANDER has served as a director of the Company since
October 1996. He has been associated with Apex Investment Partners, a venture
capital firm, in various capacities since October 1994 and has been a general
partner of the firm since April 1996. From May 1993 to September 1993, Mr.
Bolander was a consultant to the African Communications Group, a venture
capital and project management firm, and from September 1985 to
September 1992, Mr. Bolander held the position of manager for AT&T
Corporation. Mr. Bolander is also a director of Concord

55
<PAGE>

Communications, Inc. Mr. Bolander holds B.S. and M.S. degrees in electrical
engineering from the University of Michigan and an M.B.A. from Harvard
University.

JOHN R. DOUGERY has served as a director of the Company since February 1996.
He has been a general partner of Dougery & Wilder, a venture capital firm
since its formation in 1981. Mr. Dougery is also a director of Printronix,
Inc. Mr. Dougery holds an A.B. degree in mathematics from the University of
California, Berkeley and an M.B.A. from Stanford University.

MARK DUBOVOY has served as a director of the Company since October 1996. He
was a founder and has served as a general partner of Information Technology
Ventures since September 1994. Prior to that time, he was a general partner of
Grace/Horn Ventures from 1991 to August 1994. Mr. Dubovoy holds a B.S. degree
in physics from the National University of Mexico and an M.A. degree and Ph.D.
in physics from the University of California, Berkeley.

MAX D. HOPPER has served as a director of the Company since January 1998.
Mr. Hopper has been the Chief Executive Officer of Max D. Hopper Associates,
Inc., an IS management consulting firm, since January 1995. From 1985 to
January 1995, he served in various positions at American Airlines, a
subsidiary of AMR Corporation, most recently as Senior Vice President,
Information Systems and Chairman of the SABRE Group. Mr. Hopper is also a
director of Gartner Group, Inc., Scopus Technology, Inc., USData Corporation,
VTEL Corporation, Worldtalk Corporation, Metrocall, Inc. and Payless Cashways,
Inc. From April 1996 to August 1997, he served as a director of BBN
Corporation. From March 1995 to February 1998, he served as a director of
Centura Software Corporation. From August 1994 to February 1998, he served as
a director of Computer Language Research, Inc. He holds a B.S. degree in
mathematics and an M.B.A. from the University of Houston.

PETER A. HOWLEY has served as a director of the Company since September
1996. Mr. Howley has been a private consultant since May 1994. From 1985 until
April 1994, he served as Chairman of the Board, Chief Executive Officer and
President of Centex Telemanagement, Inc., a telecommunications management
company, which was acquired. Mr. Howley is also a director of FaxSAV, Inc. and
WorldPort Communications, Inc. Mr. Howley holds a B.I.E. degree and an M.B.A.
from New York University.

DANIEL C. LYNCH has served as director of the Company since January 1998.
Mr. Lynch has been the owner of Lynch Enterprises, a venture capital firm,
since August 1993. From April 1994 to August 1996, he was a director of UUNet
Technologies, Inc., an Internet service provider. From 1991 to August 1993, he
was the Chairman of the Board of Interop, a conference and trade show company,
which he founded and which is now a division of ZD Comdex Forums. Mr. Lynch
has also been Chairman of the Board of Directors of Cybercash, Inc. since
August 1994 when he founded the Company. He holds a B.S. degree in mathematics
from Loyola Marymount University and an M.A. degree in mathematics from the
University of California, Los Angeles.

THADEUS J. MOCARSKI has served as a director of the Company since June 1997.
Mr. Mocarski has been an officer of various entities affiliated with Fleet
Equity Partners since January 1994. Prior to joining Fleet Equity Partners,
Mr. Mocarski was an attorney with the law firm of Edwards & Angell from 1989
to January 1994. Mr. Mocarski is also a director of Dobson Communications
Corporation. Mr. Mocarski holds a B.A. in economics and government from Colby
College and a J.D. degree from the Washington College of Law.

KANWAL S. REKHI has served as a director of the Company since December 1995.
He has been retired since January 1995. He served as Executive Vice President
and a director at Novell Inc., a network software company, from 1989 to
December 1994. Mr. Rekhi is also a director of Cybermedia Inc., a consumer
software company. Mr. Rekhi holds a B.Tech. degree in electrical engineering
from

56
<PAGE>

the Indian Institute of Technology, Bombay and an M.S. degree in electrical
engineering from Michigan Technology Institute.

BOARD COMMITTEES

The Audit Committee of the Board consists of Mr. Dougery and Mr. Rekhi. The
Audit Committee reviews the Company's financial statements and accounting
practices, makes recommendations to the Board regarding the selection of
independent auditors and reviews the results and scope of the audit and other
services provided by the Company's independent auditors. The Compensation
Committee of the Board consists of Mr. Bolander, Mr. Howley and Mr. Mocarski.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees
and administers the Company's employee benefit plans. The Finance Committee of
the Board consists of Mr. Dubovoy and Mr. Mocarski. The Finance Committee
reviews, evaluates and makes recommendations regarding future financing
requirements of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the Compensation Committee of the Board was at any
time since the formation of the Company an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on the Board or the Compensation Committee of the
Board.

DIRECTOR COMPENSATION

Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board. In December 1995 and October 1996, Mr. Rekhi and Mr.
Howley were granted warrants to acquire 16,666 shares of Common Stock and
19,841 shares of Series B1 Preferred Stock (convertible into shares of Common
Stock at the closing of this offering), respectively, at an exercise price of
$2.40 and $2.52 per share, respectively, in connection with their service on
the Board. In addition, in October 1996, Mr. Howley was granted an option to
purchase 25,000 shares of Common Stock at an exercise price of $0.30 per
share, in connection with his service on the Board. In November 1997, Mr.
Rekhi exercised the Common Stock warrant in full. In October 1997, Mr. Howley
exercised the warrant for Series B1 Preferred Stock in full and exercised the
option for 13,000 of the shares of Common Stock subject thereto.

In January 1998, the Board adopted, and in February 1998 the stockholders
approved, the 1998 Directors Stock Option Plan (the "Directors Plan") and
reserved a total of 200,000 shares of the Company's Common Stock for issuance
thereunder. Members of the Board who are not employees of the Company, or any
parent or subsidiary of the Company, are eligible to participate in the
Directors Plan. Each eligible director who is or becomes a member of the Board
on or after the public offering ("Effective Date") will automatically be
granted an option for 20,000 shares (an "Initial Grant") on the earlier of the
Effective Date or the date such director first becomes a director; provided
that a director that was a member of the Board of Exodus Communications, Inc.,
a California corporation, is not eligible to receive an Initial Grant. Thus
Messrs. Lynch and Hopper are the only current directors who will receive an
Initial Grant. At each annual meeting of stockholders thereafter, each
eligible director will automatically be granted an additional option to
purchase 5,000 shares (an "Annual Grant") if such director has served
continuously as a member of the Board since the date of such director's
Initial Grant (or since the Effective Date if such director did not receive an
Initial Grant). Initial Grants will vest as to 33 1/3% of the total shares on
each annual anniversary of the date of grant, provided the optionee continues
as a member of the Board or as a consultant to the Company. Annual Grants will
vest as to 25% of the total shares on each annual anniversary of the date of
grant, provided the

57
<PAGE>

optionee continues as a member of the Board or as a consultant to the Company.
Options will cease vesting once the individual ceases to provide services as a
director or consultant. Following the individual's cessation of services to
the Company, he or she will have seven months in which to exercise the options
granted under the Directors Plan, twelve months if the cessation of services
resulted from the individual's death or disability. The exercise price of all
options granted under the Directors Plan will be the fair market value of the
Common Stock on the date of grant.

In February 1998, the Company sold shares of Series D Preferred Stock
convertible into 33,333 and 5,848 shares of Common Stock at a purchase price
per share of $8.55 to Messrs. Lynch and Hopper, respectively.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the year
ended December 31, 1997 by (i) the Company's chief executive officer and (ii)
the four other most highly compensated executive officers other than the chief
executive officer who were serving as executive officers as of December 31,
1997 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ---------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITIONS SALARY($) BONUS($) COMPENSATION($) UNDERLYING OPTIONS(#)
- ---------------------------- --------- -------- --------------- ---------------------
<S> <C> <C> <C> <C>
K.B. Chandrasekhar ..... $160,000 $75,000 $5,373(2) 250,002
President and Chief
Executive Officer(1)
Sam S. Mohamad.......... 273,626(3) 70,000 -- 166,668
Vice President,
Worldwide Sales
Richard S. Stoltz....... 147,500 40,000 -- 58,334
Chief Operating Officer
and Chief Financial
Officer
B.V. Jagadeesh.......... 135,000 40,000 -- 58,334
Vice President,
Engineering
Robert V. Sanford III... 101,250 35,000 -- 91,667
Vice President,
Operations
</TABLE>
- --------

(1) Mr. Chandrasekhar ceased serving as President of the Company in March 1998
when Ellen M. Hancock was appointed to that position.

(2) Represents a car allowance.

(3) Includes sales commissions of $130,542.

As indicated in the table above, in March 1998, Ellen M. Hancock was
appointed President of the Company. She will be compensated at an initial base
salary of $200,000 per year and is eligible for bonuses totalling up to
$100,000 for 1998. See "--Option Grants in 1997."

58
<PAGE>

The following table sets forth further information regarding option grants
to each of the Named Executive Officers during 1997. In accordance with the
rules of the Securities and Exchange Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective terms. These gains are based on assumed rates of
annual compound stock price appreciation of 5% and 10% from the date the
option was granted to the end of the option term using an assumed initial
public offering price of $10.00 per share as the base value.

OPTION GRANTS IN 1997

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF PERCENTAGE OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (2)
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) IN 1997 PER SHARE($) DATE 5% 10%
---- ------------- ------------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
K.B. Chandrasekhar...... 41,667 2.6% $0.30 6/26/07 $ 666,212 $1,068,235
83,334 5.2 0.75 10/15/07 1,294,922 2,098,968
83,334 5.2 0.75 10/15/07 1,294,922 2,098,968
41,667 2.6 0.75 10/15/07 647,462 1,049,484
Sam S. Mohamad.......... 66,667 4.1 0.30 2/17/07 1,065,935 1,709,170
8,334 0.5 0.30 6/26/07 133,252 213,663
25,000 1.6 0.75 10/15/07 388,474 629,686
66,667 4.1 0.75 10/15/07 1,035,935 1,679,170
Richard S. Stoltz....... 14,584 0.9 0.30 6/26/07 233,183 373,896
43,750 2.7 0.75 10/15/07 679,828 1,101,949
B.V. Jagadeesh.......... 14,584 0.9 0.30 6/26/07 233,183 373,896
43,750 2.7 0.75 10/15/07 679,828 1,101,949
Robert V. Sanford III... 75,000 4.7 0.30 2/17/07 1,199,171 1,922,801
4,167 0.3 0.30 6/26/07 66,626 106,831
12,500 0.8 0.75 10/15/07 194,237 314,843
</TABLE>
- --------
(1) These options generally are incentive stock options that were granted at
fair market value and vest over a 50-month period so long as the
individual is employed by the Company. With regard to Mr. Chandrasekhar,
both options for 83,334 shares vest in full on the fifth anniversary of
the date of grant, one of which will accelerate to start vesting at 2% per
month upon the closing of this offering and the other of which will
accelerate to start vesting at 2% per month upon the hiring of certain
additional executive management personnel. The potential realizable value
is based on the term of the option at the time of grant, which is ten
years for each of the options set forth in this table. All amounts have
been calculated using an assumed initial public offering price of $10.00
per share as the base value and assumed annual rates of stock price
appreciation of 5% and 10%
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.

In January 1998, Mr. Chandrasekhar was granted two options, each for 166,667
shares of Common Stock, at per share exercise prices of $9.00 and $18.00,
respectively, that vest in full upon the third and fifth anniversaries of the
date of grant, respectively. Both options will accelerate and become fully
vested if the Company is acquired or sells all or substantially all of its
assets or if Mr. Chandrasekhar is terminated other than for cause. The options
expire ten years from the date of grant.

In March 1998, Mrs. Hancock was granted an option for 721,981 shares of
Common Stock at a per share exercise price of $9.00 that vests as to 12% of
such shares in September 1998 and vests as to an additional 2% per month
thereafter. The option expires ten years from the date of grant. In addition,
she purchased 50,000 shares of Common Stock of the Company at a purchase price
of $9.00 per share.

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<PAGE>

The following table sets forth the number of shares acquired upon the
exercise of stock options during 1997 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named
Executive Officers at December 31, 1997. Also reported are values of
unexercised "in-the-money" options, which represent the positive spread
between the respective exercise prices of outstanding stock options and the
assumed initial public offering price of $10.00 per share.

AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT YEAR-END AT YEAR-END
ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
K.B. Chandrasekhar...... -- -- 18,334 231,668 $173,715 $2,157,554
Sam S. Mohamad.......... -- -- 18,668 148,000 178,980 1,396,450
Richard S. Stoltz....... 10,500 $1,181 2,334 45,500 21,852 425,993
B.V. Jagadeesh.......... -- -- 12,834 45,500 120,158 425,993
Robert V. Sanford III... -- -- 31,333 60,334 303,480 580,065
</TABLE>

EXECUTIVE EMPLOYMENT POLICY. In December 1997, the Board adopted a form of
Executive Employment Policy (the "Policy") to be entered into between the
Company and each of its executive officers and certain other officers of the
Company (together, the "Executives"). Pursuant to the Policy, in the event of
a "Termination" (as defined in the Policy) resulting from a "Change of
Control" (as defined in the Policy) of the Company, each Executive's base
salary and medical benefits would continue as follows: Chief Executive Officer
and President--18 months; Chief Operating Officer and Chief Financial
Officer--12 months; Vice President, Worldwide Sales--12 months; certain other
Vice Presidents--six months; and other Executives--three months. In addition,
in the event of a Change in Control, each Executive's options would become
exercisable with respect to 50% of such Executive's remaining unvested shares
subject to such options. In the event of an "Involuntary Termination" (as
defined in the Policy), base salary and medical benefits would generally
continue for shorter time periods than those set forth above and the
Executive's options would continue to vest during such period. An Executive
that "Voluntarily Terminates" (as defined in the Policy) or is terminated for
"Cause" (as defined in the Policy) would generally not receive any
compensation, additional stock option vesting or other benefits after the date
of termination. Pursuant to the Policy, during the term of any payments made
to an Executive after termination, such Executive would not be permitted to
manage, operate, control, participate in the management, operation or control
of or be employed by any other person or entity that is engaged in providing
services that are directly competitive with the services offered by the
Company.

EMPLOYEE BENEFIT PLANS

1997 EQUITY INCENTIVE PLAN. In January 1997, the Board adopted the 1997
Plan. In October 1997, the Board increased the number of shares of Common
Stock reserved for issuance under the 1997 Plan to a total of 2,200,000. The
stockholders approved the 1997 Plan and the share increase in October 1997.
The 1997 Plan became effective in January 1997 and serves as the successor to
the 1995 Stock Option Plan (the "1995 Plan"). Options granted under the 1995
Plan before its termination in January 1997 continue to remain outstanding in
accordance with their terms, but no further options may be granted under the
1995 Plan. The 1997 Plan provides for the grant of stock options and the
issuance of restricted stock by the Company to its employees, officers,
directors and consultants. The 1997 Plan permits the grant of options that are
either incentive stock options ("ISOs") (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")) or nonqualified stock
options ("NQSOs"), on terms (including the exercise price, which may not be
less

60
<PAGE>

than 85% of the fair market value of the Company's Common Stock, and the
vesting schedule) determined by the Board, subject to certain statutory and
other limitations in the 1997 Plan. In addition to, or in tandem with, stock
options under the 1997 Plan, the Board may grant participants restricted stock
awards to purchase the Company's Common Stock for not less than 85% of its
fair market value at the time of grant. The other terms of such restricted
stock awards may be determined by the Board.

On the effective date of the initial public offering, the 1997 Plan will
terminate. Options granted under the 1997 Plan before its termination will
continue to remain outstanding in accordance with their terms, but no further
options will be granted under the 1997 Plan after its termination.

1998 EQUITY INCENTIVE PLAN. In January 1998, the Board adopted, and in
February 1998 the stockholders approved, the 1998 Equity Incentive Plan (the
"1998 Plan") to provide for the grant of stock options, restricted stock and
stock bonuses to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any parent or subsidiary of the
Company. On the effective date of this offering, the 1998 Plan will become
effective as the successor to the 1997 Plan. Although the 1997 Plan will
terminate on the effective date of this offering, options granted thereunder
prior to the effective date of this offering will remain outstanding according
to their terms. The total number of shares reserved and available for grant
and issuance pursuant to the 1998 Plan is 1,500,000 plus shares that pour over
from the 1997 Plan. The shares that pour over from the 1997 Plan are shares
that (i) remain available for grant under the 1997 Plan on the effective date
of the 1998 Plan, (ii) are subject to issuance upon exercise of an option
granted under the 1997 Plan that cease to be subject to such option for any
reason other than exercise of such option and (iii) are issued under awards
granted under the 1997 Plan, but are repurchased by the Company at the price
at which the shares were originally issued. Shares that are subject to (x)
issuance upon exercise of an option granted under the 1998 Plan that cease to
be subject to such option for any reason other than exercise, (y) awards
granted under the 1998 Plan that are forfeited or are repurchased by the
Company at the original issue price and (z) awards that otherwise terminate
without shares being issued will again be available for grant and issuance in
connection with future awards under the 1998 Plan.

The 1998 Plan will terminate in January 2008, unless earlier terminated by
the Board. No person will be eligible to receive more than 750,000 shares in
any calendar year pursuant to equity awards under the 1998 Plan, other than a
new employee who will be eligible to receive no more than 1,250,000 shares in
the calendar year in which such employee commences employment. The 1998 Plan
will be administered by the Compensation Committee of the Board. The
Compensation Committee has the authority to construe and interpret the 1998
Plan and any agreement made thereunder, grant equity awards and make all other
determinations necessary or advisable for the administration of the 1998 Plan.
The 1998 Plan permits the grant of ISOs and NQSOs. ISOs may be granted only to
employees of the Company or of any parent or subsidiary of the Company. NQSOs,
stock bonuses and restricted stock may be granted to all individuals eligible
to receive grants under the 1998 Plan. The exercise price of ISOs must be at
least equal to the fair market value of the Company's Common Stock on the date
of grant. The exercise price of NQSOs must be at least equal to 85% of the
fair market value of the Company's Common Stock on the date of grant. The
purchase price of restricted stock will be determined by the Compensation
Committee. The maximum term of an option is ten years. Options typically vest
over a four-year period. Vesting will stop if the optionee ceases to provide
services to the Company or any parent or subsidiary of the Company, but
options will generally remain exercisable for a period of three months
following the termination of services. If the optionee's termination is for
cause, his or her options will generally terminate immediately. If the
optionee's termination is due to death or disability, the optionee or his or
her estate will generally have twelve months in which to exercise. In the
event of certain changes in control transactions, outstanding equity awards
may be assumed or substituted by the successor corporation, if the successor

61
<PAGE>

corporation does not assume or substitute the awards, the awards will
terminate prior to the effectiveness of the transaction.

1998 EMPLOYEE STOCK PURCHASE PLAN. In January 1998, the Board adopted and
subsequently amended, and in February 1998 the stockholders approved, the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan") and reserved a total
of 600,000 shares of the Company's Common Stock for issuance thereunder. The
Purchase Plan will become effective on the first business day on which price
quotations for the Company's Common Stock are available on the Nasdaq National
Market. The Purchase Plan permits eligible employees to acquire shares of the
Company's Common Stock through payroll deductions. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. Except for the initial offering, each offering under the Purchase
Plan will be for a period of 24 months (the "Offering Period") commencing on
May 1 and November 1 of each year and ending on October 31 and April 30 of the
second year thereafter. The first Offering Period will begin on the date on
which price quotations for the Company's Common Stock are first available on
the Nasdaq National Market and will end on April 30, 2000, unless otherwise
determined by the Board. Except for the first Offering Period, each Offering
Period will consist of four purchase periods, each six months in length
("Purchase Period"). The Board has the power to change the duration of
Offering Periods or Purchase Periods without stockholder approval, provided
that the change is announced at least 15 days prior to the scheduled beginning
of the first Offering Period or Purchase Period to be affected. Eligible
employees may select a rate of payroll deduction between 2% and 10% of their
base compensation, subject to certain limits set forth in the Purchase Plan.
The purchase price for the Company's Common Stock purchased under the Purchase
Plan is 85% of the lesser of the fair market value of the Company's Common
Stock on the first day of the applicable Offering Period or on the last day of
the respective Purchase Period.

401(K) PLAN. The Company sponsors the Exodus Communications, Inc. 401(k)
Plan (the "401(k) Plan"). Employees who complete three months of service with
the Company are eligible to participate ("Participants"). Participants may
contribute up to 20% of their current compensation, up to a statutorily
prescribed annual limit, to the 401(k) Plan. Each Participant is fully vested
in his or her salary reduction contributions. Participant contributions are
held in trust as required by law. Individual Participants may direct the
trustee to invest their accounts in authorized investment alternatives. The
Company may make discretionary matching contributions to the 401(k) Plan,
although it has not done so to date, in an amount equal to a percentage the
Company from time to time may deem advisable of the Participant's salary
reduction contributions. Salary reduction contributions in excess of 6% of the
Participant's compensation are disregarded for purposes of the match. The
Company may also make fully vested qualified non-elective contributions on
behalf of employees who are not "highly compensated." In addition, the Company
may make discretionary contributions, although it has not done so to date.
Discretionary and matching contributions are subject to a vesting schedule.
The 401(k) Plan is intended to qualify under Section 401(a) of the Internal
Revenue Code so that contributions to the 401(k) Plan, and income earned on
such contributions, are not taxable to Participants until withdrawn or
distributed from the 401(k) Plan.

62
<PAGE>

CERTAIN TRANSACTIONS

Since January 1, 1995, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or
is to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of the Common Stock of
the Company had or will have a direct or indirect interest other than (i)
compensation arrangements, which are described where required under
"Management" and (ii) the transactions described below.

For clarity of presentation, share numbers and per share prices for the
transactions described below assume a one-for-three reverse stock split for
the Common and Preferred Stock as each share of Preferred Stock, although not
actually split, will convert into Common Stock on a one-for-three basis upon
the closing of this offering.

Fouress, Inc., a Maryland corporation and the predecessor of the Company
("Fouress"), was incorporated in 1992. In February 1995, the Company was
incorporated in California as a wholly-owned subsidiary of Fouress, and
Fouress purchased 33 shares of the Company Common Stock for $100 in connection
therewith. In May 1995, Fouress merged with and into the Company in order to
reincorporate into California and canceled its 33 shares of Common Stock. In
connection with the reincorporation, K.B. Chandrasekhar, the current President
and Chief Executive Officer of the Company, and B.V. Jagadeesh, the current
Vice President, Engineering of the Company, the sole shareholders of Fouress,
exchanged their shares of Fouress common stock (which had been purchased for
an aggregate of $4,000) for 650,000 and 350,000 shares, respectively, of the
Company's Common Stock. In June 1995, Mr. Chandrasekhar and Mr. Jagadeesh
purchased 216,666 and 116,666 shares, respectively, of the Company's Common
Stock for a purchase price of $52,000 and $28,000, respectively, pursuant to
promissory notes, which remain outstanding.

In October 1995, Richard S. Stoltz, the current Chief Operating Officer and
Chief Financial Officer of the Company, and his wife purchased 250,000 shares
of the Company's Common Stock for a purchase price of $60,000 pursuant to two
promissory notes, of which $56,000 remains outstanding. Also in October 1995,
Fred R. Sibayan, Jr., a former Vice President, Sales of the Company, purchased
150,000 shares of the Company's Common Stock for a purchase price of $36,000
pursuant to a promissory note. 43,334 of such shares were repurchased by the
Company in connection with Mr. Sibayan's resignation in January 1997 and
$3,600 remains outstanding under the note.

In December 1995, Kanwal S. Rekhi, a director of the Company, loaned the
Company $200,000 in exchange for a promissory note. In February 1996, as part
of the financing described in the next paragraph, Mr. Rekhi converted the
promissory note into 161,459 shares of Series A Preferred Stock.

In February and March 1996, the Company sold shares of Series A Preferred
Stock convertible into 2,599,481 shares of Common Stock to a group of entities
and individuals for an aggregate purchase price of $3,219,994, which amount
was paid in cash and through the conversion of debt. These transactions
included sales to (i) Productivity Fund II, L.P. and Productivity Fund III,
L.P. (the "Productivity Funds"), partnerships associated with First Analysis
Corporation ("First Analysis"), a greater than 5% stockholder of the Company,
of shares convertible into 565,107 shares of Common Stock, (ii) J.F. Shea &
Co., Inc., a greater than 5% stockholder of the Company, of shares convertible
into 484,378 shares of Common Stock, (iii) John R. Dougery, a director of the
Company, and his wife and trusts for which Mr. Dougery or his wife is a
trustee (the "Dougery Trusts"), of shares convertible into 201,823 shares of
Common Stock, and (iv) the Rekhi Family Trust dated 12/15/89 (the "Rekhi
Family Trust"), for which Kanwal S. Rekhi is a trustee, of shares convertible
into 161,459 shares of Common Stock.

63
<PAGE>

In March 1996, the Rekhi Family Trust and two other trusts, for which Kanwal
S. Rekhi is a trustee, purchased an aggregate of 94,333 shares of the
Company's Common Stock for an aggregate purchase price of $22,640.

In April 1996, John R. Dougery purchased 40,000 shares of the Company's
Common Stock for a purchase price of $9,600.

In October 1996, the Company sold shares of Series B Preferred Stock
convertible into 2,579,355 shares of Common Stock to a group of entities and
individuals for an aggregate purchase price of $6,500,000, which amount was
paid in cash. This included sales to (i) Apex Investment Fund III, L.P., which
is affiliated with both Frederick W.W. Bolander, a director of the Company,
and First Analysis, of shares convertible into 694,444 shares of Common Stock,
(ii) Information Technology Ventures, L.P. and ITV Affiliates Fund, L.P. (the
"ITV Partnerships"), which are both associated with Mark Dubovoy, a director
of the Company, and which comprise a greater than 5% stockholder group of the
Company, of shares convertible into 694,444 shares of Common Stock, (iii) the
Productivity Funds of shares convertible into 277,777 shares of Common Stock,
(iv) J.F. Shea & Co., Inc., of shares convertible into 158,730 shares of
Common Stock, (v) John R. Dougery and his wife and the Dougery Trusts of
shares convertible into 39,680 shares of Common Stock and (vi) Peter A.
Howley, a director of the Company, of shares convertible into 39,682 shares of
Common Stock.

In March 1997, the Company obtained bridge loans of $2,473,866 pursuant to
convertible promissory notes due in September 1997 (the "First Bridge Notes")
from a group of entities and individuals, including (i) $517,895 from Apex
Investment Fund III, L.P. and Apex Strategic Partners, L.L.C. (the "Apex
Funds"), which are both associated with Frederick W.W. Bolander and First
Analysis, (ii) $496,000 from J.F. Shea & Co., Inc., as Nominee 1996-II, (iii)
$324,000 from the Productivity Funds, (iv) $268,000 from the ITV Partnerships,
(v) $96,000 from John R. Dougery and his wife and the Dougery Trusts, (vi)
$62,001 from the Rekhi Family Trust and (vii) $49,986 from Peter A. Howley.
The First Bridge Notes were unsecured and provided for automatic conversion
into Preferred Stock upon the closing of the next Preferred Stock financing to
occur prior to the September 1997 maturity date. In connection with obtaining
these bridge loans, the Company also sold to the holders of the First Bridge
Notes, for an aggregate purchase price of $1,039, five-year warrants, which
must be exercised before the closing of this offering, to purchase shares of
Series B Preferred Stock convertible into 41,240 shares of Common Stock at an
exercise price of $2.52 per share, including warrants for shares convertible
into 8,632, 8,267, 5,401, 4,466, 1,603, 1,034, and 833 shares of Common Stock
to the Apex Funds, J.F. Shea & Co., Inc., as Nominee 1996-II, the Productivity
Funds, the ITV Partnerships, John R. Dougery and his wife and the Dougery
Trusts, the Rekhi Family Trust and Peter A. Howley, respectively.

In June 1997, the Company obtained bridge loans of $1,500,000 pursuant to
convertible promissory notes due in September 1997 (the "Second Bridge Notes")
from a group of entities and individuals, including (i) $252,450 from the Apex
Investment Fund III, L.P., (ii) $243,000 from the Productivity Funds, (iii)
$207,463 from J.F. Shea & Co., Inc., as Nominee 1996-II, (iv) $201,000 from
the ITV Partnerships, (v) $163,690 from the Rekhi Family Trust, (vi) $96,000
from John R. Dougery and his wife and the Dougery Trusts, and (vii) $12,000
from Peter A. Howley. The Second Bridge Notes were unsecured and provided for
automatic conversion into Preferred Stock upon the closing of the next
Preferred Stock financing to occur prior to the September 1997 maturity date.
In connection with obtaining this bridge loan, the Company also sold to the
holders of the Second Bridge Notes, for an aggregate purchase price of $630,
five-year warrants, which must be exercised before the closing of this
offering, to purchase shares of Series B Preferred Stock convertible into
25,008 shares of Common Stock at an exercise price of $2.52 per share,
including warrants for shares convertible into 4,208, 4,050, 3,458, 3,348,
2,727, 1,603, and 200 shares of Common Stock, to Apex Investment Fund III,
L.P., the Productivity Funds, J.F. Shea & Co., Inc., as Nominee 1996-II, the
ITV Partnerships, the

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<PAGE>

Rekhi Family Trust, John R. Dougery and his wife and the Dougery Trusts and
Peter A. Howley, respectively.

In June 1997, the Company sold shares of Series C Preferred Stock
convertible into 5,263,270 shares of Common Stock and five-year warrants to
purchase shares of Series C Preferred Stock at an exercise price of $4.0869
per share, and convertible into 526,349 shares of Common Stock, at an
aggregate purchase price of $21,510,574 (including $37 for the warrants),
including $4,010,970 in principal and interest owed to the holders of the
First Bridge Notes and the Second Bridge Notes. This included issuances to (i)
Fleet Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm Partners III,
L.P. and Kennedy Plaza Partners, all of which are funds (the "Fleet Funds")
associated with Thadeus J. Mocarski, a director of the Company, and which
together comprise a greater than 5% stockholder group of the Company, of
shares convertible into 1,835,120 shares of Common Stock and warrants to
purchase shares convertible into 183,515 shares of Common Stock, (ii) Oak
Investment Partners VII and Oak VII Affiliate Fund (the "Oak Partnerships"), a
greater than 5% stockholder group of the Company, of shares convertible into
1,468,100 shares of Common Stock and warrants to purchase shares convertible
into 146,811 shares of Common Stock, (iii) JK&B Capital L.P. and JK&B Capital
II, L.P. (the "JK&B Partnerships"), a greater than 5% stockholder group of the
Company, of shares convertible into 611,705 shares and warrants to purchase
shares convertible into 61,172 shares of Common Stock, (iv) the Apex Funds of
shares convertible into 190,334 shares of Common Stock and warrants to
purchase shares convertible into 19,035 shares of Common Stock, (v) J.F. Shea
& Co., Inc., as Nominee 1996-II, of shares convertible into 173,884 shares of
Common Stock and warrants to purchase shares convertible into 17,389 shares of
Common Stock, (vi) the Productivity Funds of shares convertible into 139,945
shares of Common Stock and warrants to purchase shares convertible into 13,995
shares of Common Stock, (vii) the ITV Partnerships of shares convertible into
115,756 shares of Common Stock and warrants to purchase shares convertible
into 11,574 shares of Common Stock, (viii) the Rekhi Family Trust of shares
convertible into 55,521 shares of Common Stock and warrants to purchase shares
convertible into 5,552 shares of Common Stock, (ix) John R. Dougery and his
wife and the Dougery Trusts of shares convertible into 47,367 shares of Common
Stock and warrants to purchase shares convertible into 4,739 shares of Common
Stock and (x) Peter A. Howley of shares convertible into 15,337 shares of
Common Stock and warrants to purchase shares convertible into 1,534 shares of
Common Stock.

In October 1997, Peter A. Howley exercised warrants for an aggregate of
2,567 shares of Preferred Stock convertible into Common Stock at an aggregate
purchase price of $8,872.

In November 1997, the Rekhi Family Trust exercised warrants for an aggregate
of 25,979 shares of Common Stock and Preferred Stock convertible into Common
Stock at an aggregate purchase price of $72,171.

In December 1997, the Company sold shares of Series D Preferred Stock
convertible into 877,180 shares of Common Stock at an aggregate purchase price
of $7,500,000 which amount was paid in cash. This included sales to (i) the
Fleet Funds of shares convertible into 175,437 shares of Common Stock, (ii)
the Oak Partnerships of shares convertible into 114,764 shares of Common
Stock, (iii) the Apex Funds of shares convertible into 85,272 shares of Common
Stock, (iv) J.F. Shea & Co., Inc. of shares convertible into 78,710 shares of
Common Stock, (v) the Productivity Funds of shares convertible into 71,512
shares of Common Stock, (vi) the ITV Partnerships of shares convertible into
58,955 shares of Common Stock, (vii) the JK&B Partnerships of shares
convertible into 47,818 shares of Common Stock, (viii) the Rekhi Family Trust
and two other trusts, for which Mr. Rekhi is a trustee, of shares convertible
into 36,221 shares of Common Stock, (ix) Dougery Ventures LLC, of which John
R. Dougery is President, and one of the Dougery Trusts of shares convertible
into 31,331 shares of Common Stock and (x) Peter A. Howley of shares
convertible into 7,203 shares of Common Stock.

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<PAGE>

In December 1997, the ITV Partnerships exercised warrants for an aggregate
of 19,388 shares of Preferred Stock convertible into Common Stock at an
aggregate purchase price of $67,009.

In February 1998, the Company sold shares of Series D Preferred Stock
convertible into 33,333 and 5,848 shares of Common Stock at a purchase price
per share of $8.55 to two directors of the Company, Daniel C. Lynch and Max D.
Hopper, respectively.

In February 1998, the Company reincorporated into Delaware. In connection
with the reincorporation, the Company issued shares of Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series B1 Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock and options and warrants in
exchange for shares, options and warrants, respectively, in the predecessor
California entity. Each of the individuals and entities listed above received
the number of shares of such class or series identified in the preceding
paragraphs.

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<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

Except as otherwise noted, the following table sets forth certain
information known to the Company with respect to beneficial ownership of the
Company's Common Stock as of December 31, 1997 by (i) each stockholder known
by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, (ii) each director of the Company, (iii) each of the Named
Executive Officers and (iv) all current executive officers and directors as a
group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- ------------------------ --------------------- --------------- -----------------
<S> <C> <C> <C>
Thadeus J. Mocarski
Fleet Funds(3) ........ 2,194,072 16.1% 12.4%
First Analysis Corpora-
tion(4)................ 2,079,712 15.4 11.9
Oak Partnerships(5)..... 1,729,675 12.7 9.8
Frederick W.W. Bolander
Apex Funds(6) ......... 1,001,925 7.4 5.7
J.F. Shea & Co.,
Inc.(7)................ 924,816 6.8 5.3
Mark Dubovoy
ITV Partnerships(8) ... 888,543 6.6 5.1
K.B. Chandrasekhar(9)... 848,331 6.3 4.8
JK&B Partnerships(10)... 720,695 5.3 4.1
B.V. Jagadeesh(11)...... 482,999 3.6 2.8
John R. Dougery(12)..... 368,142 2.7 2.1
Kanwal S. Rekhi(13)..... 357,765 2.7 2.0
Richard S. Stoltz(14)... 249,667 1.9 1.4
Peter A. Howley(15)..... 117,503 * *
Robert V. Sanford
III(16)................ 43,666 * *
Daniel C. Lynch(17)..... 33,333 * *
Sam S. Mohamad(18)...... 26,002 * *
Max D. Hopper (19)...... 5,848 * *
All current executive
officers and directors
as a group (16 per-
sons)(20).............. 6,639,630 48.0 37.2
</TABLE>
- --------
* Represents less than 1% of the Company's outstanding Common Stock.

(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options or warrants that
are currently exercisable or exercisable within 60 days of December 31,
1997 are deemed to be outstanding and to be beneficially owned by the
person holding such options or warrants for the purpose of computing the
percentage ownership of such person but are not treated as outstanding
for the purpose of computing the percentage ownership of any other
person.

(2) Assumes that the Underwriters' over-allotment option to purchase up to
600,000 shares is not exercised. If the Underwriters' over-allotment
option is exercised in full, the Company would sell 550,000 shares and
Mr. Chandrasekhar and Mr. Jagadeesh would each sell 25,000 shares and
would beneficially own 4.6% and 2.5%, respectively, of the outstanding
Common Stock of the Company after the offering.

(3) Represents 1,105,214 shares and immediately exercisable warrants to
purchase 100,878 shares held by Fleet Venture Resources, Inc.; 473,662
shares and immediately exercisable warrants to purchase 43,234 shares
held by Fleet Equity Partners VI, L.P.; 402,110 shares and immediately
exercisable warrants to purchase 36,703 shares held by Chisholm Partners
III, L.P.; and 29,571 shares and immediately exercisable warrants to
purchase 2,700 shares held by Kennedy Plaza Partners. Mr. Mocarski, a
director of the Company, is a Senior Vice President of each of (i) Fleet
Venture Resources, Inc., (ii) Fleet Growth Resources II, Inc., a general
partner of Fleet Equity Partners VI, L.P. and (iii) Silverado III, Corp.,
the general partner of Silverado III, L.P., the general partner of
Chisholm Partners III, L.P. Mr. Mocarski is also a general partner of
Kennedy Plaza Partners. Mr. Mocarski may be deemed to share investment
and voting power in the aforementioned securities with Mr. Robert M. Van
Degna and Mr. Habib Y. Gorgi in their capacities as Chairman and Chief
Executive Officer, and President, respectively, of each of (i) Fleet
Venture Resources, Inc., (ii) Fleet Growth Resources II, Inc. and (iii)
Silverado III, Corp. and as managing general partners of Kennedy Plaza
Partners. Messrs. Mocarski, Van Degna and Gorgi disclaim beneficial
ownership of such securities except to the extent of their respective
pecuniary interests therein. The address of Mr. Mocarski and the Fleet
Funds is c/o Fleet Equity Partners, Mail Stop: RI MO F12C, 50 Kennedy
Plaza, Providence, Rhode Island 02903.

67
<PAGE>

(4) Represents 753,483 shares and immediately exercisable warrants to
purchase 16,788 shares held by Productivity Fund III, L.P.; 300,858
shares and immediately exercisable warrants to purchase 6,658 shares held
by Productivity Fund II, L.P.; and the shares and warrants held by the
Apex Funds described in footnote (6). First Analysis Corporation ("First
Analysis") is a general partner of the general partner of each of Apex
Investment Fund III, L.P., Productivity Fund II, L.P. and Productivity
Fund III, L.P. In addition, First Analysis is a managing member of Apex
Management III, L.L.C., the manager of Apex Strategic Partners, L.L.C.
First Analysis disclaims beneficial ownership of all shares directly
owned by the funds except to the extent of its proportionate pecuniary
interests therein. The address of First Analysis is 233 Wacker Drive,
Suite 9500, Chicago, Illinois 60606.

(5) Represents 1,544,087 shares and immediately exercisable warrants to
purchase 143,214 shares held by Oak Investment Partners VII; and 38,777
shares and immediately exercisable warrants to purchase 3,597 shares held
by Oak VII Affiliate Fund. Certain individuals are managing members of
the general partners of each of Oak Investment Partner VII and Oak VII
Affiliate Fund. The address of the Oak Partnerships is 525 University
Avenue, Suite 1300, Palo Alto, California 94301.

(6) Represents 928,830 shares and immediately exercisable warrants to
purchase 25,657 shares held by Apex Investment Fund III, L.P.; and 41,220
shares and immediately exercisable warrants to purchase 6,218 shares held
by Apex Strategic Partners, L.L.C. Mr. Bolander, a director of the
Company, is a general partner of the general partner of Apex Investment
Fund III, L.P. and a managing member of Apex Management III, L.L.C., the
manager of Apex Strategic Partners, L.L.C. The address of Mr. Bolander
and the Apex Funds is 233 Wacker Drive, Suite 9500, Chicago, Illinois
60606.

(7) Represents 721,818 shares held by J.F. Shea & Co., Inc.; and 173,884
shares and immediately exercisable warrants to purchase 29,114 shares
held by J.F. Shea & Co., Inc., as Nominee 1996-11. The address of these
entities is 655 Brea Canyon Road, Walnut, California 91788-0489.

(8) Represents 865,954 shares held by Information Technology Ventures, L.P.;
and 22,589 shares held by ITV Affiliates Fund, L.P. Mr. Dubovoy, a
director of the Company, is a principal member of ITV Management, LLC,
the general partner of Information Technology Ventures, L.P. and ITV
Affiliates Fund, L.P. The address of Mr. Dubovoy and the ITV Partnerships
is 3000 Sand Hill Road, Building 1, Suite 280, Menlo Park, California
94025.

(9) Includes 79,998 shares held by Mr. Chandrasekhar and his wife as trustees
for three trusts for their minor children and 23,334 shares subject to
options exercisable within 60 days of December 31, 1997, Mr.
Chandrasekhar is the President, Chief Executive Officer and Chairman of
the Board of Directors of the Company. The address of Mr. Chandrasekhar
is 2650 San Tomas Expressway, Santa Clara, California 95051.

(10) Represents 441,881 shares and immediately exercisable warrants to
purchase 40,985 shares held by JK&B Capital, L.P.; and 217,642 shares and
immediately exercisable warrants to purchase 20,187 shares held by JK&B
Capital II, L.P. JK&B Management L.L.C. is the general partner of JK&B
Capital, L.P. and JK&B Capital II, L.P. The address of the JK&B
Partnerships is 205 North Michigan Avenue, Suite 808, Chicago, Illinois
60601.

(11) Includes 33,332 shares held by Mr. Jagadeesh and his wife as trustees for
two trusts for their minor children and 16,334 shares subject to options
exercisable within 60 days of December 31, 1997. Mr. Jagadeesh is Vice
President, Engineering of the Company.

(12) Represents 214,514 shares held in the Dougery Revocable Trust, of which
Mr. Dougery and his wife are the trustees; immediately exercisable
warrants to purchase 5,293 shares held by Mr. Dougery and his wife;
109,794 shares and immediately exercisable warrants to purchase 1,989
shares held by Mr. Dougery as trustee of three trusts for his children;
25,490 shares and immediately exercisable warrants to purchase 663 shares
held by Mr. Dougery's wife as trustee for a separate trust; and 10,399
shares held by Dougery Ventures LLC, of which Mr. Dougery is President.
Mr. Dougery is a director of the Company.

(13) Represents 292,543 shares held by Mr. Rekhi and his wife as trustees for
the Rekhi Family Trust; 11,662 shares held by Mr. Rekhi as custodian for
minor children; and 53,560 shares held by Mr. Rekhi, his wife and one
other individual as trustees for two other trusts. Mr. Rekhi is a
director of the Company.

(14) Represents 243,833 shares held by Mr. Stoltz and his wife and 5,834
shares subject to options exercisable within 60 days of December 31,
1997. Mr. Stoltz is Chief Operating Officer and Chief Financial Officer
of the Company.

(15) Includes 4,000 shares subject to options exercisable within 60 days of
December 31, 1997. Mr. Howley is a director of the Company.

(16) Includes 35,333 shares subject to options exercisable within 60 days of
December 31, 1997. Mr. Sanford is Vice President, Operations of the
Company.

(17) Represents shares purchased by Mr. Lynch in February 1998. Mr. Lynch
became a director of the Company in January 1998.

(18) Represents shares subject to options exercisable within 60 days of
December 31, 1997. Mr. Mohamad is Vice President, Worldwide Sales of the
Company.

(19) Represents shares purchased by Mr. Hopper in February 1998. Mr. Hopper
became a director of the Company in January 1998.

(20) Includes 21,834 shares subject to options exercisable within 60 days of
December 31, 1997 held by an executive officer not named in this table
and the shares, warrants and options referenced in footnotes (3), (6),
(8), (9) and (11)-(19).

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

Immediately following the closing of this offering, the authorized capital
stock of the Company will consist of 50,000,000 shares of Common Stock, $0.001
par value per share, and 5,000,000 shares of Preferred Stock, $0.001 par value
per share. As of December 31, 1997, and assuming the conversion of all
outstanding Preferred Stock into Common Stock immediately prior to the closing
of this offering, there were outstanding 13,439,624 shares of Common Stock
held of record by 117 stockholders, warrants to purchase 950,163 shares of
Common Stock and options to purchase 1,709,286 shares of Common Stock.

COMMON STOCK

Subject to preferences that may apply to shares of Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board may from time to time determine. Each
stockholder is entitled to one vote for each share of Common Stock held on all
matters submitted to a vote of stockholders. Cumulative voting for the
election of directors is not provided for in the Company's Certificate of
Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The Common Stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon a liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock and any participating Preferred
Stock outstanding at that time after payment of liquidation preferences, if
any, on any outstanding Preferred Stock and payment of other claims of
creditors. Each outstanding share of Common Stock is, and all shares of Common
Stock to be outstanding upon completion of this offering will be, fully paid
and nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Preferred Stock
(the "Convertible Preferred") will be converted into shares of Common Stock.
See Note 5 of Notes to Financial Statements for a description of the
Convertible Preferred. The Board is authorized, subject to limitations
prescribed by Delaware law, to provide for the issuance of additional shares
of Preferred Stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the powers,
designations, preferences and rights of the shares of each wholly unissued
series and designate any qualifications, limitations or restrictions thereon
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. The issuance of Preferred Stock
with voting or conversion rights could adversely affect the voting power or
other rights of the holders of Common Stock and may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no current plan to issue any shares of Preferred Stock.

WARRANTS

As of December 31, 1997, the Company had outstanding warrants to purchase
950,163 shares of Common Stock at a weighted average per share exercise price
of $4.29 (of which warrants to purchase at least 615,454 shares of Common
Stock are expected to be exercised on or before the closing of the offering).
The warrants that remain outstanding after the offering will expire between
December 2000 and September 2004. In January 1998, the Company issued an
additional warrant to purchase 6,667 shares of Common Stock at a per share
exercise price of $8.55 that expires in December 2007.

69
<PAGE>

ANTI-TAKEOVER PROVISIONS

DELAWARE LAW

Section 203 ("Section 203") of the Delaware General Corporation Law is
applicable to corporate takeovers of Delaware corporations. Subject to certain
exceptions set forth therein, Section 203 provides that a corporation shall
not engage in any business combination with any "interested stockholder" for a
three-year period following the date that such stockholder becomes an
interested stockholder unless (a) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder, (b) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares) or (c) on or subsequent to such date, the
business combination is approved by the board of directors of the corporation
and by the affirmative votes of at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder. Except as specified in
Section 203, an interested stockholder is generally defined to include any
person that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, or is
an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation any time within three years
immediately prior to the relevant date, and the affiliates and associates of
such person. Under certain circumstances, Section 203 makes it more difficult
for an interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by
adopting an amendment to the corporation's certificate of incorporation or
bylaws, elect not to be governed by this section, effective 12 months after
adoption. The Company's certificate of incorporation and the bylaws do not
exclude the Company from the restrictions imposed under Section 203. It is
anticipated that the provisions of Section 203 may encourage companies
interested in acquiring the Company to negotiate in advance with the Board
since the stockholder approval requirement would be avoided if a majority of
the directors then in office approve either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder. These provisions may have the effect of deterring hostile
takeovers or delaying changes in control of the Company, which could depress
the market price of the Common Stock and which could deprive the stockholders
of opportunities to realize a premium on shares of the Common Stock held by
them.

CHARTER AND BYLAW PROVISIONS

The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. The Company's
Certificate of Incorporation provides that stockholders may not take action by
written consent but may only act at a stockholders' meeting, and that special
meetings of the stockholders of the Company may only be called by the Chairman
of the Board or a majority of the Board.

REGISTRATION RIGHTS

Beginning six months after the date of this offering (assuming no exercise
of the Underwriters' over-allotment option), the holders of 13,234,880 shares
of Common Stock and the holders of warrants to purchase 950,163 shares of
Common Stock (collectively, the "Registrable Securities") will have certain
rights with respect to the registration of those shares under the Securities
Act. If requested by at least 30% of the Registrable Securities (or at least
25% of the Registrable Securities issued upon

70
<PAGE>

conversion of the Series C Preferred Stock of the Company) the Company must
file a registration statement to register such securities so long as the
aggregate offering price, net of any underwriting discounts and commissions,
is at least $7.5 million. In addition, if the Company proposes to register any
of its shares of Common Stock under the Securities Act other than in
connection with a Company employee benefit plan or certain corporate
acquisitions, mergers or reorganizations, the holders of the Registrable
Securities may require the Company to include all or a portion of their shares
in such registration, subject to certain rights of the managing underwriter to
limit the number of shares in any such offering.

Further, holders of Registrable Securities holding at least 20% of the
Registrable Securities (or at least 15% of the Registrable Securities issued
upon conversion of the Series C Preferred Stock of the Company) may require
the Company to register all or any portion of their Registrable Securities on
Form S-3 when such form becomes available to the Company, subject to certain
conditions and limitations. The Company may be required to effect up to two
such registrations per year.

All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions) will be borne by the Company, except
that the holders of the Registrable Securities will bear the expenses of any
Form S-3 registrations after the first such registration. The registration
rights expire seven years after the closing of this offering. In addition, no
holder of Registrable Securities will be entitled to registration rights if
and so long as such holder can sell all of its Registrable Securities in
compliance with Rule 144 of the Securities Act during any 90-day period.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is Boston
EquiServe Limited Partnership.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company, and there can be no assurance that a significant public market for
the Common Stock will develop or be sustained after this offering. Future
sales of substantial amounts of Common Stock (including shares issued upon
exercise of outstanding options and warrants) in the public market after this
offering could adversely affect market prices prevailing from time to time and
could impair the Company's ability to raise capital through sale of its equity
securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering due to certain contractual
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.

Upon completion of this offering, the Company will have outstanding
17,439,624 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options or warrants that
do not expire upon the closing. Of these shares, the 4,000,000 shares sold in
this offering will be freely tradable without restriction under the Securities
Act unless purchased by "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act. The remaining 13,439,624 shares held by
existing stockholders (the "Restricted Shares") are subject to various lock-up
agreements providing that, with certain limited exceptions, the stockholder
will not offer, sell, contract to sell, grant an option to purchase, make a
short sale or otherwise dispose of or engage in any hedging or other
transaction that is designed or reasonably expected to lead to a disposition
of any shares of Common Stock or any option or warrant to purchase shares of
Common Stock or any securities exchangeable for or convertible into shares of
Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of Goldman, Sachs & Co.

71
<PAGE>

As a result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, none
of these shares will be salable until 181 days after the date of this
Prospectus. Beginning 181 days after the date of this Prospectus, 12,086,491
Restricted Shares will be eligible for sale in the public market, although all
but 3,526,872 shares will be subject to certain volume limitations.
Thereafter, 1,014,367 Restricted Shares will become eligible for sale between
the end of the lock-up period and December 31, 1998 and the remaining 338,766
Restricted Shares will become eligible for sale starting in 1999. In addition,
as of December 31, 1997, there were outstanding 1,709,286 options and 950,163
warrants to purchase Common Stock (of which warrants for 615,454 shares are
expected to be exercised on or before the closing of this offering). All of
such options and warrants will be subject to lock-up agreements. Goldman,
Sachs & Co. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 174,396 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144.

Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders
of Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, all shares issued pursuant to
Rule 701 are subject to lock-up agreements and will only become eligible for
sale at the earlier of the expiration of the 180-day lock-up agreements or no
sooner than 90 days after the offering upon obtaining the prior written
consent of Goldman, Sachs & Co.

Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the 1995 Plan and the 1997 Plan and reserved for
issuance under the 1998 Plan, the Directors Plan and the Purchase Plan, as
well as shares of Common Stock subject to outstanding options granted outside
of such plans. Based on the number of shares subject to outstanding options at
December 31, 1997 and currently reserved for issuance under all such plans, as
well as the number of shares subject to outstanding options granted outside of
such plans, such registration statement would cover approximately 5,705,530
shares. Such registration statement will automatically become effective upon
filing. Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates of the
Company, be available for sale in the open market immediately after the 180-
day lock-up agreements expire. Also beginning six months after the date of
this offering,

72
<PAGE>

holders of 13,234,880 Restricted Shares and warrants to purchase 950,163
shares of Common Stock of the Company will be entitled to certain rights with
respect to registration of such shares for sale in the public market. See
"Description of Capital Stock--Registration Rights."

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.

EXPERTS

The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three-year period ended December 31, 1997,
have been included in the Registration Statement in reliance on the report of
KPMG Peat Marwick LLP, independent auditors, appearing elsewhere herein, and
upon the authority of said firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement and the
exhibits thereto may be inspected without charge at the offices of the
Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and
copies of all or any part of the Registration Statement may be obtained from
the Public Reference Section of the Commission, Washington, D.C. 20549 upon
the payment of the fees prescribed by the Commission. The Commission maintains
a Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. Information concerning the
Company is also available for inspection at the offices of the Nasdaq National
Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.

The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent auditors and to make available
to its stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.

73
<PAGE>

EXODUS COMMUNICATIONS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors....................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' (Deficit) Equity................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Exodus Communications, Inc.:

We have audited the accompanying balance sheets of Exodus Communications,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' (deficit) equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Exodus Communications,
Inc. as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Mountain View, California

February 13, 1998,
except as to Note 8
which is as of March 6,
1998

F-2
<PAGE>

EXODUS COMMUNICATIONS, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, 1997
DECEMBER 31, --------------------
1996 ACTUAL PRO FORMA
------------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 3,715 $10,270 $10,270
Accounts receivable......................... 521 1,837 1,837
Prepaid expenses and other current assets... 121 1,377 1,377
------- ------- -------
Total current assets........................ 4,357 13,484 13,484
Property and equipment, net.................. 3,410 25,170 25,170
Restricted cash equivalents.................. 378 1,753 1,753
Other assets................................. 144 566 566
------- ------- -------
$ 8,289 $40,973 $40,973
======= ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank borrowings............................. $ -- $ 3,000 $ 3,000
Current portion of debt..................... 296 3,777 3,777
Current portion of capital lease
obligations................................ 224 1,143 1,143
Accounts payable............................ 1,163 6,252 6,252
Accrued expenses............................ 581 2,808 2,808
Deferred revenue............................ 201 211 211
------- ------- -------
Total current liabilities................... 2,465 17,191 17,191
Debt, less current portion................... 1,000 12,693 12,693
Capital lease obligations, less current
portion..................................... 449 2,442 2,442
------- ------- -------
Total liabilities........................... 3,914 32,326 32,326
------- ------- -------
Redeemable convertible preferred stock and
warrants, $0.001 par value: actual--
32,596,966 and 74,960,124 shares authorized
as of December 31, 1996 and 1997,
respectively; 15,536,578 and 34,117,371
shares issued and outstanding as of December
31, 1996 and 1997, respectively; aggregate
liquidation preference of $9,720 and $39,640
as of December 31, 1996 and 1997,
respectively; pro forma--no shares
authorized, issued and outstanding.......... 9,609 39,247 --
------- ------- -------
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value: actual--
no shares authorized, issued or
outstanding; pro forma--5,000,000 shares
authorized; no shares issued or
outstanding................................ -- -- --
Common stock, $0.001 par value: actual--
41,200,000 and 53,281,579 shares authorized
as of December 31, 1996 and 1997,
respectively; 1,945,966 and 2,067,253
shares issued and outstanding as of
December 31, 1996 and 1997, respectively;
pro forma--50,000,000 shares authorized;
13,439,624 shares issued and outstanding... 2 2 13
Additional paid-in capital.................. 229 2,508 41,744
Notes receivable from stockholders.......... (186) (140) (140)
Deferred stock compensation................. -- (2,393) (2,393)
Accumulated deficit......................... (5,279) (30,577) (30,577)
------- ------- -------
Total stockholders' (deficit) equity........ (5,234) (30,600) 8,647
------- ------- -------
$ 8,289 $40,973 $40,973
======= ======= =======
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

EXODUS COMMUNICATIONS, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues:
Service revenues................................. $ 1,068 $ 2,454 $ 11,588
Equipment revenues............................... 340 676 820
------- ------- --------
Total revenues................................. 1,408 3,130 12,408
------- ------- --------
Cost and expenses:
Cost of service revenues......................... 846 2,538 16,228
Cost of equipment revenues....................... 282 452 640
Marketing and sales.............................. 1,056 2,734 12,702
General and administrative....................... 427 1,056 5,983
Product development.............................. 70 444 1,647
------- ------- --------
Total cost and expenses........................ 2,681 7,224 37,200
------- ------- --------
Operating loss................................. (1,273) (4,094) (24,792)
Net interest expense............................... 38 39 506
------- ------- --------
Net loss....................................... (1,311) (4,133) (25,298)
Cumulative dividends and accretion on redeemable
convertible preferred stock....................... -- -- (1,413)
------- ------- --------
Net loss attributable to common stockholders....... $(1,311) $(4,133) $(26,711)
======= ======= ========
Basic and diluted net loss per share............... $ (1.00) $ (2.16) $ (13.85)
======= ======= ========
Pro forma basic and diluted net loss per share..... $ (2.56)
========
Shares used in computing basic and diluted net loss
per share......................................... 1,315 1,914 1,928
======= ======= ========
Shares used in computing pro forma basic and
diluted net loss per share........................ 9,878
========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

EXODUS COMMUNICATIONS, INC.

STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
NOTES RETAINED TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS STOCKHOLDERS'
-------------- PAID-IN FROM DEFERRED STOCK (ACCUMULATED (DEFICIT)
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) EQUITY
------ ------ ---------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AS OF DECEMBER
31, 1994............... 1,000 $ 1 $ 3 $ -- $ -- $ 165 $ 169
Sale of common stock to
officers............... 734 1 175 (176) -- -- --
Issuance of common stock
in connection with
stock purchase plan.... 96 -- 23 (21) -- -- 2
Repurchase of common
stock.................. (9) -- (2) -- -- -- (2)
Repayment of notes
receivable from
stockholders........... -- -- -- 2 -- -- 2
Net loss................ -- -- -- -- -- (1,311) (1,311)
----- ---- ------ ----- ------- -------- --------
BALANCES AS OF DECEMBER
31, 1995............... 1,821 2 199 (195) -- (1,146) (1,140)
Issuance of common
stock.................. 134 -- 32 -- -- -- 32
Issuance of common stock
in connection with
stock purchase plan.... 11 -- 3 (3) -- -- --
Issuance of common stock
in connection with
exercise of stock
options................ 5 -- 1 -- -- -- 1
Repurchase of common
stock.................. (25) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- (4,133) (4,133)
----- ---- ------ ----- ------- -------- --------
BALANCES AS OF DECEMBER
31, 1996............... 1,946 2 229 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants... 172 -- 222 -- -- -- 222
Repurchase of common
stock.................. (51) -- (12) 12 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- 34 -- -- 34
Deferred stock
compensation related to
stock option grants.... -- -- 3,482 -- (3,482) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 1,089 -- 1,089
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- (750) -- -- -- (750)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- (663) -- -- -- (663)
Net loss................ -- -- -- -- -- (25,298) (25,298)
----- ---- ------ ----- ------- -------- --------
BALANCES AS OF
DECEMBER 31, 1997...... 2,067 $ 2 $2,508 $(140) $(2,393) $(30,577) $(30,600)
===== ==== ====== ===== ======= ======== ========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

EXODUS COMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(1,311) $(4,133) $(25,298)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization..................... 65 461 3,429
Amortization of deferred stock compensation....... -- -- 1,089
Changes in operating assets and liabilities:
Accounts receivable.............................. (13) (265) (1,316)
Prepaid expenses and other current assets........ (50) (71) (326)
Accounts payable................................. 420 671 5,089
Accrued expenses................................. 201 373 2,227
Deferred revenue................................. 235 (34) 10
------- ------- --------
Net cash used for operating activities.......... (453) (2,998) (15,096)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment............... (69) (3,499) (22,489)
Other assets...................................... (8) (118) (422)
------- ------- --------
Net cash used for investing activities.......... (77) (3,617) (22,911)
------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible
preferred stock and warrants..................... -- 9,409 23,320
Proceeds from issuance of common stock............ -- 32 222
Proceeds from issuance of bridge financing
convertible notes................................ -- -- 3,975
Repayment of notes receivable from stockholders... 2 7 34
Bank borrowings, net.............................. 100 (100) 3,000
Proceeds from sale-leaseback transactions......... -- 552 932
Payments on capital leases obligations............ (47) (154) (720)
Proceeds from debt................................ 497 1,296 16,480
Repayment of debt................................. (60) (497) (1,306)
Restricted cash................................... -- (378) (1,375)
Proceeds from note payable to stockholder......... 200 -- --
------- ------- --------
Net cash provided by financing activities....... 692 10,167 44,562
------- ------- --------
Net increase in cash and cash equivalents.......... 162 3,552 6,555
Cash and cash equivalents at beginning of year..... 1 163 3,715
------- ------- --------
Cash and cash equivalents at end of year........... $ 163 $ 3,715 $ 10,270
======= ======= ========
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Assets recorded under capital leases.............. $ 283 $ 27 $ 2,700
======= ======= ========
Conversion of note payable to stockholder to
preferred stock.................................. $ -- $ 200 $ --
======= ======= ========
Cumulative dividends and accretion on Series C
and D redeemable convertible preferred stock..... $ -- $ -- $ 1,413
======= ======= ========
Deferred compensation on grants of stock options.. $ -- $ -- $ 3,482
======= ======= ========
Warrants issued for financing commitments......... $ -- $ -- $ 730
======= ======= ========
Conversion of bridge financing convertible notes
to redeemable convertible preferred stock........ $ -- $ -- $ 3,975
======= ======= ========
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Unless the context otherwise requires, the term "Company" or "Exodus" refers
to Exodus Communications, Inc. and its Maryland predecessor. Exodus is a
leading provider of Internet system and network management solutions for
enterprises with mission-critical Internet operations.

INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET

In January 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC")
that would permit the Company and certain stockholders of the Company to sell
shares of the Company's common stock in connection with a proposed initial
public offering ("IPO"). If the offering is consummated under the terms
presently anticipated, all the then outstanding shares of the Company's
redeemable convertible preferred stock will automatically convert into shares
of common stock on a one-for-three basis upon the closing of the proposed IPO.
The conversion of the redeemable convertible preferred stock has been
reflected in the accompanying unaudited pro forma balance sheet as if it had
occurred on December 31, 1997.

USE OF ESTIMATES

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

REVENUE RECOGNITION

Service revenues consist of monthly fees for server hosting, Internet
connectivity, collaborative systems management and Internet technology
services and one-time fees for installation. Service revenues (other than
installation fees) are generally billed and recognized ratably over the term
of the contract, generally one year. Installation fees are typically
recognized at the time that installation occurs. Equipment revenues consist of
payments from customers for third-party equipment sold by the Company.
Revenues from equipment sales are recognized at the time the equipment is
shipped to the customer or placed into service at the Internet Data Center.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, bank borrowings and debt
approximates fair market value. Financial instruments that potentially expose
the Company to a concentration of credit risk principally consist of cash and
cash equivalents and accounts receivable.

The Company's customer base is primarily composed of businesses throughout
the United States. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses. To date, such
losses have not been significant. The balance of the allowance for bad debts
was $22,000, $15,000 and $187,000 as of December 31, 1995, 1996 and 1997,
respectively. In 1995, revenues from a single customer comprised 24% of total
revenues.

F-7
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated on a straight-line
basis over their respective estimated useful lives, which are generally three
to five years. Equipment recorded under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the respective lease term or estimated useful life of the asset.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes software development costs incurred to develop
certain of the Company's collaborative systems management services that are
included in the Company's co-location services in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are
capitalized after technological feasibility is achieved; generally upon the
development of a working model. To date, software development costs
capitalizable under SFAS No. 86 have not been material.

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be recovered.

STOCK-BASED COMPENSATION

The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets or intangibles may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.

NET LOSS PER SHARE

On October 1, 1997, the Company adopted SFAS No. 128, Earnings Per Share. In
accordance with SFAS No. 128, basic earnings per share is computed using the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period,
using either the as if converted method for convertible preferred stock or the
treasury stock method for options and warrants. See Note 5 for information on
securities that could potentially

F-8
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

dilute basic earnings per share in the future but that were not included in
the computation of diluted net loss per share as their effect would have been
antidilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock
and convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of the IPO, are included in the calculation of
basic and diluted net loss per share, as if they were outstanding for all
periods presented. To date, the Company has not had any issuances or grants
for nominal consideration.

Pro forma basic and diluted net loss per share is presented to reflect per
share data assuming the conversion of all outstanding shares of redeemable
convertible preferred stock into common stock on a one-for-three basis as if
the conversion had taken place at the beginning of 1997 or at the date of
issuance, if later. This data is unaudited.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") recently issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. It does not, however, require a specific format, but requires the
Company to display an amount representing total comprehensive income for the
period in its financial statements. The Company is in the process of
determining its preferred format. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997.

F-9
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) FINANCIAL STATEMENT COMPONENTS

Property and Equipment

Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ -------
<S> <C> <C>
Data centers and related equipment........................... $2,278 $16,316
Furniture, fixtures, computer equipment and other............ 690 12,815
Construction in progress..................................... 974 --
------ -------
3,942 29,131
Less accumulated depreciation and amortization............... 532 3,961
------ -------
$3,410 $25,170
====== =======
</TABLE>

Computer equipment and certain data center infrastructure are recorded under
capital leases that aggregated $860,000 and $4,492,000 as of December 31, 1996
and 1997, respectively. Accumulated amortization on the assets recorded under
capital leases aggregated $221,000 and $722,000 as of December 31, 1996 and
1997, respectively.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
-------------
<S> <C> <C>
Accrued payroll and related expenses.......................... $ 239 $ 1,183
Other......................................................... 342 1,625
----- -------
$ 581 $ 2,808
===== =======
</TABLE>

Net Interest Expense

Net interest expense consisted of the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Interest expense................................... $ 38 $ 107 $ 699
Interest income.................................... -- (68) (193)
------- ------- --------
$ 38 $ 39 $ 506
======= ======= ========
</TABLE>

(3) BANK BORROWINGS AND DEBT

During 1997, the Company had a $1,000,000 bank line of credit bearing
interest at the bank's prime rate plus 1% and collateralized by accounts
receivable. In December 1997, the line of credit was amended to increase the
available line to $5,000,000. The Company then drew down $3,000,000 on this
line. The line of credit expires in December 1998.

F-10
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The Company has an agreement for an $8,000,000 line of credit facility,
bearing interest at 12.95% and expiring in January 1999. No amount is
outstanding as of December 31, 1997 (see Note 5).

A summary of debt follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ -------
<S> <C> <C>
$850,000 equipment term loan with a financial institution;
prime rate plus 2.5% (11.0% as of December 31, 1997);
principal and interest due monthly for 42 months........... $ 267 $ 178
$1,800,000 equipment line of credit facility; effective
interest rate of approximately 16.4%; principal and
interest due April 2000 through September 2000;
collateralized by equipment (see Note 5)................... 1,029 1,393
$3,000,000 equipment line of credit facility--April 1997;
effective interest rate of approximately 12.9%; principal
and interest due monthly through July 2001; collateralized
by equipment (see Note 5).................................. -- 2,756
$6,500,000 equipment line of credit facility; effective
interest rate of approximately 15.9%; principal and
interest due monthly through July 2001; collateralized by
equipment (see Note 5)..................................... -- 6,312
$3,000,000 equipment line of credit facility--August 1997;
effective interest rate of approximately 16.2%; principal
and interest due monthly through May 2001; collateralized
by equipment (see Note 5).................................. -- 2,787
$5,000,000 equipment line of credit facility; effective
interest rate of 16.4%; principal and interest due monthly
through July 2001; collateralized by equipment (see Note
5)......................................................... -- 3,044
------ -------
1,296 16,470
Less current portion...................................... 296 3,777
------ -------
Debt, less current portion................................ $1,000 $12,693
====== =======
</TABLE>

Aggregate maturities for 1998, 1999, 2000 and 2001 are $3,777,000,
$4,478,000, $4,979,000 and $3,236,000, respectively.

(4) NOTE PAYABLE TO STOCKHOLDER

As of December 31, 1995, the Company had a $200,000 note payable to a
stockholder bearing interest at the prime rate plus 2.5%. During 1996, this
note was converted into 484,378 shares of Series A preferred stock.

F-11
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY

The Company is authorized to issue 53,281,579 shares of common stock,
7,798,483 shares each of Series A and A1, 8,600,000 shares each of Series B
and B1, 17,850,000 shares each of Series C and C1 and 3,231,579 shares each of
Series D and D1 redeemable convertible preferred stock.

Redeemable Convertible Preferred Stock

In February and March 1996, the Company issued 7,798,483 shares of Series A
redeemable convertible preferred stock at $0.413 per share. In October 1996,
the Company issued 7,738,095 shares of Series B redeemable convertible
preferred stock at $0.84 per share. In March and June 1997, the Company
received a total of approximately $3,975,000 in cash in exchange for bridge
financing convertible promissory notes. In June 1997, the Company issued
15,789,868 shares of Series C redeemable convertible preferred stock for
$1.362 per share in exchange for approximately $17,500,000 in cash and the
conversion of the bridge financing notes. In December 1997, the Company issued
2,631,579 shares of Series D redeemable convertible preferred stock at $2.85
per share for aggregate cash proceeds of $7,500,000.

The rights, preferences, privileges and restrictions of the redeemable
convertible preferred stock are as follows:

. Shares of Series A, A1, B, B1, C, C1, D and D1 preferred stock are
convertible at the option of the holder into an equal number of shares of
common stock subject to certain price-based antidilution adjustments for
the Series A, B, C and D redeemable convertible preferred stock. Such
price-based antidilution adjustments will be made on a weighted average
formula basis upon certain issuances of Common Stock by the Company made
below the respective conversion price of the Series A, B, C or D
preferred stock, as applicable.

. Conversion is automatic upon either (i) the closing of a public offering
of the Company's common stock at an offering price of not less than $8.55
per share and aggregate proceeds of at least $30,000,000 (a "Qualified
IPO") or (ii) the election of the majority of the stockholders of Series
A, A1, B and B1 and two-thirds of the stockholders of Series C, C1, D and
D1 redeemable convertible preferred stock, with the A and A1, B and B1, C
and C1 and D and D1 voting as four separate classes.

. The holders of Series A, A1, B and B1 redeemable convertible preferred
stock are entitled to noncumulative dividends at annual rates of $0.04,
$0.04, $0.084 and $0.084 per share, respectively, when and if declared by
the Board of Directors. The holders of Series C, C1, D and D1 redeemable
convertible preferred stock are entitled to cumulative dividends at the
annual rate of $0.095, $0.095, $0.20 and $0.20 per share, respectively.
In the event of a Qualified IPO or conversion, all accrued but unpaid
dividends with respect to the Series C, C1, D and D1 preferred stock will
be forfeited.

. Shares of Series A, A1, B, B1, C, C1, D and D1 redeemable convertible
preferred stock have liquidation preferences of $0.413, $0.413, $0.84,
$0.84, $1.362, $1.362, $2.85 and $2.85 per share, respectively, plus all
declared but unpaid dividends.

. After payment has been made to the holders of redeemable convertible
preferred stock of the full preferential amounts, holders of common stock
will receive all remaining assets pro rata based on the number of shares
of common stock held.

. At any time after June 25, 2002, upon notification by not less than a
majority of the holders of Series A, A1, B and B1 redeemable convertible
preferred stock, the Company must redeem up to 50% of the outstanding
shares of Series A, A1, B and B1 redeemable convertible preferred

F-12
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

stock by paying in cash a sum per share equal to the original issue price
(as adjusted for any stock dividends, combinations or splits with respect
to such shares) plus all declared but unpaid dividends. The holders of
Series A, A1, B and B1 redeemable convertible preferred stock can request
redemption of any remaining shares at any time after June 25, 2003. At the
option of the holders of the Series C, C1, D and D1 redeemable convertible
preferred stock, up to one-half of the Series C, C1, D and D1 redeemable
convertible preferred stock must be redeemed after June 25, 2002 and any
remaining shares after June 25, 2003 at a redemption price equal to the
greater of $1.362 and $2.85 per share, respectively, plus cumulative
dividends, or their fair market values. As of December 31, 1997, the
Company had accreted $663,000 towards the fair market values of the Series
C and D redeemable convertible preferred stock.

. Each share of Series A, A1, B, B1, C, C1, D and D1 redeemable convertible
preferred stock has voting rights on an "as if converted" basis.

. In the event the Company proposes to issue additional shares of any
series of preferred stock, the current holders of such shares will have
the right of first refusal to participate on a pro rata basis. In the
event of a dilutive subsequent financing, the holders of Series A, B, C
and D redeemable convertible preferred stock are provided with
antidilution protection if they purchase their pro rata share of such
dilutive financing. If they do not purchase their pro rata share, their
Series A, B, C and D redeemable convertible preferred stock will convert
to Series A1, B1, C1 and D1 redeemable convertible preferred stock,
respectively, which will have no such antidilution protection.

Redeemable convertible preferred stock and warrants issued and outstanding
as of December 31, 1997 was as follows:

Redeemable convertible preferred stock:

<TABLE>
<CAPTION>
SHARES ISSUED AND CARRYING
SERIES DESIGNATED OUTSTANDING VALUE
------ ---------- ----------- -----------
<S> <C> <C> <C>
A........................................ 7,798,483 7,798,483 $ 3,168,000
A1....................................... 7,798,483 -- --
B........................................ 8,600,000 7,775,930 6,473,000
B1....................................... 8,600,000 65,524 55,000
C........................................ 17,850,000 15,845,855 20,333,000
C1....................................... 17,850,000 -- --
D........................................ 3,231,579 2,631,579 7,246,000
D1....................................... 3,231,579 -- --
---------- ---------- -----------
74,960,124 34,117,371 $37,275,000
========== ========== ===========

Warrants:

<CAPTION>
ISSUED AND CARRYING
SERIES OUTSTANDING VALUE
------ ----------- -----------
<S> <C> <C> <C>
B................................................... 160,862 $ --
B1.................................................. 466,072 --
C................................................... 1,523,024 1,242,000
C1.................................................. 271,598 --
D1.................................................. 372,826 730,000
---------- -----------
Total............................................... 2,794,382 $ 1,972,000
========== ===========
</TABLE>

F-13
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

STOCK PURCHASE PLANS

During 1995, the Company adopted a Stock Purchase Plan under which 366,667
shares of common stock are authorized. Awards totaling 96,334 and 11,034
shares of common stock were granted to individuals in 1995 and 1996,
respectively, at an exercise price of $0.24 per share, the estimated fair
market value of the shares on the date of the award. No awards were granted
during the year ended December 31, 1997. Generally, the shares are subject to
a 50-month vesting period. As of December 31, 1997, 14,434 shares remained
unvested. Unvested shares are subject to repurchase, at the Company's option,
at the original purchase price upon a participant's termination. Of the shares
granted, 41,734 had been repurchased by the Company as of December 31, 1997.

In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 600,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.

STOCK OPTIONS

In January 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"), which serves as the successor to the Company's 1995 Stock Option
Plan (the "1995 Plan"). Options granted under the 1995 Plan before its
termination continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1995 Plan. Options granted under
the 1995 Plan were granted with exercise prices not less than fair market
value at the date of grant as determined by the Board of Directors, generally
vested 12% after six months from the date of grant and 2% per month
thereafter, and generally are exercisable for a term of ten years after the
date of grant. Under the 1997 Plan, the Company has reserved 2,200,000 shares
of the Company's common stock for issuance to employees and consultants which
may be granted as either incentive or nonqualified stock options. Options
granted under the 1997 Plan generally vest 12% after six months from the date
of grant and 2% per month thereafter and are generally exercisable for a term
of ten years after the date of grant.

In January 1998, the Company adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). On the effective date of the Company's IPO, the 1998 Plan will
become effective as the successor to the 1997 Plan. The Company has reserved
1,500,000 shares of common stock for issuance under the 1998 Plan in addition
to the shares that remain from the 1997 Plan. The 1998 Plan permits the grant
of either incentive or nonqualified stock options. Options granted under the
1998 Plan will have a maximum term of ten years and generally will vest over
four years. The 1998 Plan will terminate in January 2008.

In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 200,000 shares of the Company's
common stock for issuance thereunder. Each nonemployee director who is or
becomes a member of the Board of Directors on or after the effective date of
the Company's IPO, with certain limited exceptions, will initially be granted
an option for 20,000 shares of the Company's common stock and, thereafter, an
option to purchase an additional 5,000 shares of the Company's common stock
annually. Initial options granted under the Directors Plan will vest as to 33
1/3% of the shares on each annual anniversary of the date of grant. Annual
grants will vest 25% on each annual anniversary of the date of grant. The
exercise price of the options granted under the Directors Plan will be at the
fair market value of the Company's common stock on the date of grant.

F-14
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The Company uses the intrinsic value method in accounting for its plans.
Accordingly, no compensation cost has been recognized for any of its stock
options because the exercise price of each option equaled or exceeded the fair
value of the underlying common stock as of the grant date for each stock
option, except for options granted subsequent to March 1997. With respect to
the options granted subsequent to March 1997, the Company has recorded
deferred stock compensation of $3,482,000 for the difference at the grant date
between the exercise price and the fair value of the common stock underlying
the options. This amount is being amortized consistent with the method
described in FASB Interpretation No. 28 over the vesting period of the
individual options, generally 50 months. Had compensation cost been determined
in accordance with SFAS No. 123, the Company's 1995, 1996 and 1997 net loss
would not have been significantly affected.

The fair value of each option is estimated on the date of grant using the
minimum value method with the following weighted average assumptions:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Dividends................................... None None None
Expected life............................... 3.20 years 2.55 years 2.59 years
Risk free interest rates.................... 5.71% 6.28% 5.91%
</TABLE>

A summary of the status of the Company's stock option plans is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997
------------------ ------------------ --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 125,083 $0.24 292,033 $ 0.25
Granted............... 131,467 0.24 224,734 0.26 1,611,800 0.82
Forfeited............. (6,384) 0.24 (52,850) 0.24 (105,860) 0.64
Exercised............. -- -- (4,934) 0.25 (88,687) 0.32
------- ------- ---------
Outstanding at end of
period................. 125,083 0.24 292,033 0.25 1,709,286 0.76
======= ======= =========
Options exercisable at
end of year............ 35,667 0.24 80,667 0.25 223,950 0.45
======= ======= =========
Weighted-average fair
value of options
granted during the year
at market.............. 131,407 0.05 224,734 0.04 333,267 0.04
Weighted-average fair
value of options
granted during the year
at less than market.... -- -- 1,278,533 2.30
</TABLE>

F-15
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes information about stock options outstanding
as of December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------- -----------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
OPTIONS CONTRACTUAL EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
------------------------ ----------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.24 to 0.30......... 1,003,228 9.14 years $0.29 186,423 $0.28
$0.75................. 569,725 9.79 0.75 30,860 0.75
$3.75 to 5.25......... 136,333 9.86 4.32 6,667 3.75
--------- -------
1,709,286 9.42 0.77 223,950 0.45
========= =======
</TABLE>

WARRANTS

In 1995, in connection with various financing arrangements and the
appointment of a director, the Company issued warrants to purchase an
aggregate of 85,173 shares of the Company's common stock at prices ranging
from $2.40 to $4.50 per share. These warrants expire at various dates through
December 1997.

In 1996, in connection with various financing arrangements, the Company
issued warrants to purchase an aggregate of 17,157 shares of the Company's
common stock at prices ranging from $2.40 to $2.67 per share. These warrants
expire at various dates in 2001. Also in 1996, in connection with various
lease agreements and other matters, the Company issued warrants to purchase
329,167 shares of the Company's Series B1 redeemable convertible preferred
stock at $0.84 per share. These warrants expire at various dates from June
2003 through August 2004.

In March and June 1997, in connection with the bridge financing convertible
promissory notes discussed above, the Company issued warrants to purchase
198,697 shares of the Company's Series B redeemable convertible preferred
stock at $0.84 per share. The warrants expire in 2002 or upon the closing of
an IPO. In April 1997, in connection with the $3,000,000 equipment line of
credit (see Note 3), the Company issued warrants to purchase 196,429 shares of
the Company's Series B1 redeemable convertible preferred stock at $0.84 per
share. These warrants expire in April 2007. In June 1997, in connection with
the issuance of the Company's Series C redeemable convertible preferred stock,
the Company issued warrants to purchase 1,579,011 shares of the Company's
Series C redeemable convertible preferred stock at $1.362 per share. These
warrants expire the earlier of June 2002 or immediately prior to the closing
of a Qualified IPO. In August and September 1997, in connection with the
$3,000,000 and the $6,500,000 equipment lines of credit (see Note 3), the
Company issued warrants to purchase a total of 271,598 shares of the Company's
Series C1 redeemable convertible preferred stock at $1.362 per share. These
warrants expire through September 2004. In December 1997, in connection with
the $8,000,000 line of credit facility and the $5,000,000 equipment line of
credit (see Note 3), the Company issued warrants to purchase 247,826 and
125,000 shares, respectively, of the Company's Series D1 redeemable
convertible preferred stock at $2.85 per share, expiring in December 2007 and
June 2003, respectively.

F-16
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The fair value of all warrant issuances, calculated using the Black-Scholes
option pricing module, using the following assumptions: dividends--none;
expected life--contractual term; risk free interest rates--5.7% to 6.7%;
volatility--60%, was not material except as follows:

. The 1,579,011 warrants issued in connection with the sale of the Series
C redeemable convertible preferred stock for which the fair value was
determined to be $1,200,000. This amount was recorded as a reduction in
the carrying value of the Series C redeemable convertible preferred
stock and recorded as the carrying value of the Series C warrants as
reflected in the accompanying December 31, 1997 balance sheet, to be
accreted to the redemption price through June 2003.

. The 247,826 and 125,000 warrants issued in connection with the
$8,000,000 line of credit facility and $5,000,000 equipment line of
credit, respectively, for which the values were determined to be
$530,000 and $200,000, respectively. These amounts will be amortized on
a straight-line basis through the commitment periods of the credit
facilities.

(6) COMMITMENTS AND CONTINGENCIES

Leases

The Company has entered into a number of operating leases for its
facilities. The leases expire from 1998 through 2007. The Company has
collateralized letters of credit with certificates of deposit aggregating
$1,753,000 for these leases. The Company also leases certain data center
infrastructure and equipment under capital leases (see Note 5). Certain of
these capital leases were entered into as sales-leaseback transactions. No
gain or loss was recorded in any such transaction due to the short holding
period from the time the assets was purchased until the time of the sale-
leaseback. Future minimum lease payments as of December 31, 1997 were as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1998..................................................... $1,543 $3,160
1999..................................................... 1,476 3,282
2000..................................................... 1,357 3,366
2001..................................................... -- 3,316
2002..................................................... -- 2,702
Thereafter............................................... -- 10,910
------ -------
Total minimum lease payments............................. 4,376 $26,736
=======
Less amount representing imputed interest................ 791
------
Present value of minimum lease payments.................. 3,585
Less current portion..................................... 1,143
------
Capital lease obligations, less current portion.......... $2,442
======
</TABLE>

In December 1997, the Company entered into an agreement for a 42-month
$4,000,000 equipment lease facility for equipment delivered no later than
March 31, 1998. No related equipment had been delivered as of December 31,
1997.

The Company's rent expense was $85,000, $248,000, and $1,764,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.

F-17
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Telecommunications Agreement

In September 1997, the Company entered into an agreement to obtain
telecommunications services for a period of 60 months with a minimum
commitment of $230,000 per month.

Royalty Agreement

In April 1997, the Company entered into an agreement with a software company
under which the Company licensed certain software for a royalty based on 1% of
the Company's gross revenues. Royalty expenses related to this agreement were
not significant for the year ended December 31, 1997.

Contingencies

The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses
and that the ultimate outcome of these actions will not have a material effect
on the Company's financial position and results of operations.

(7) INCOME TAXES

As of December 31, 1997, the Company had federal and California net
operating loss carryforwards of approximately $29,600,000 and $14,800,000,
respectively, which can be used to offset the Company's future tax
liabilities. The federal and California net operating loss carryforwards will
begin expiring in 2011 and 2001, respectively.

Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company that constitutes an "ownership change" as defined by
Section 382 of the Internal Revenue Code. As stated in Note 5, the Company has
had numerous equity transactions. These transactions most likely have
subjected its net operating loss to the aforementioned restrictions. The
Company plans to compute exact limitations upon realization of taxable
earnings and associated utilization of the net operating loss carryforwards.

The Company has deferred tax assets as of December 31, 1996 and 1997 of
approximately $2,000,000 and $11,700,000, respectively, which have been fully
offset by valuation allowances. The deferred tax assets principally resulted
from the net operating loss carryforwards. The Company has provided a
valuation allowance due to the uncertainty of generating future profits that
would allow for the realization of such deferred tax assets. Accordingly, no
tax benefit was recorded in the accompanying statements of operations.

(8) SUBSEQUENT EVENTS

Reincorporation and Reverse Stock Split

In February 1998, the Company reincorporated in the state of Delaware.
Following the closing of the Company's IPO, the Certificate of Incorporation
of the Delaware successor corporation will authorize 50,000,000 shares of
common stock, $0.001 par value per share, and 5,000,000 shares of preferred
stock, $0.001 par value per share. The reincorporation resulted in a one-for-
three reverse stock split of the Company's common stock. The accompanying
financial statements have been retroactively restated to give effect to the
reincorporation and reverse stock split but the numbers of shares of
redeemable convertible preferred stock have not been adjusted as the reverse
stock split adjusts the conversion ratio but not the number of outstanding
preferred shares.

F-18
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Leases

In February 1998, the Company entered into an additional facility operating
lease with a 120-month term. Future minimum lease payments commence at
approximately $20,000 per month and increases to approximately $60,000 per
month upon completion of construction of the related facility.

In February 1998, the Company increased its collateralized letters of credit
to $2,178,000.

In February 1998, the Company drew down $1,005,000 under its $4,000,000
equipment lease facility.

Stock Options

In January 1998, the Company granted stock options to purchase 333,334
shares of Common Stock to an officer of the Company, of which half have an
exercise price of $9.00 per share and vest 100% after three years and half
have an exercise price of $18.00 per share and vest 100% after five years. The
stock options accelerate and become fully vested if the company is acquired or
sells all or substantially all of its assets.

In March 1998, the Company plans to grant a stock option to an officer of
the Company to purchase 721,981 shares of Common Stock with an exercise price
of $9.00 per share that vests as to 12% of such shares in September 1998 and
vests as to an additional 2% per month thereafter.

Debt

In February 1998, the Company borrowed an additional $823,000 under the
$5,000,000 equipment line of credit facility.

In March 1998, the Company borrowed $8,000,000 under its $8,000,000 line of
credit facility.

F-19
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of such Underwriters, for whom Goldman, Sachs & Co.,
BT Alex. Brown Incorporated and NationsBanc Montgomery Securities LLC are
acting as representatives, has severally agreed to purchase from the Company,
the respective number of shares of Common Stock set forth opposite its name
below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co. ...........................................
BT Alex. Brown Incorporated.....................................
NationsBanc Montgomery Securities LLC ..........................
---------
Total....................................................... 4,000,000
=========
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession of not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.

The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 600,000 additional shares of Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments, if any. If the Underwriters exercise their over-
allotment option, the Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 4,000,000 shares of Common Stock offered hereby.

The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than pursuant to
employee stock option or stock purchase plans existing, or on the conversion
or exchange of convertible or exchangeable securities outstanding, on the date
of this Prospectus) which are substantially similar to the Common Stock or
which are convertible into or exchangeable for securities which are
substantially similar to the Common Stock without the prior written consent of
the representatives, except for the shares of Common Stock offered in
connection with the offering.

In addition, the Company's officers and directors and all holders of shares
of capital stock and warrants of the Company have agreed that, subject to
certain limited exceptions, they will not offer, sell or otherwise dispose of
any shares of Common Stock owned of record or beneficially as of the date of
the Prospectus, including securities convertible into or exercisable or
exchangeable for shares of Common Stock as of said date, as well as any shares
of Common Stock later acquired by reason

U-1
<PAGE>

of the conversion, exercise or exchange of such securities, or enter into any
hedging or other transaction with respect to the shares that would transfer
the economic consequences of ownership of the Common Stock to another person,
for a period of 180 days following the date of this Prospectus, except that
such persons may dispose of shares of Common Stock as bona fide gifts if the
recipient of any such gift agrees in writing with the Underwriters to be bound
by the terms of this 180-day transfer restriction.

At the request of the Company, the Underwriters have reserved up to 300,000
shares of Common Stock for sale, at the initial public offering price, to
directors, officers, employees and friends of the Company through a directed
share program and an additional approximately 100,000 shares of Common Stock
for sale to At Home Corporation. The number of shares of Common Stock
available for sale to the general public in the public offering will be
reduced to the extent such persons purchase such reserved shares.

The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered by them.

First Analysis Corporation is the beneficial owner of securities convertible
into 2,079,712 shares of Common Stock, which will be 11.9% of the Common Stock
outstanding after the offering. See "Principal and Selling Stockholders."
First Analysis Securities Corporation is a subsidiary of First Analysis
Corporation and is expected to be included in the underwriting syndicate.
Under Rule 2720 of the National Association of Securities Dealers, Inc. (the
"NASD"), the Company may be deemed an affiliate of First Analysis Securities
Corporation. This offering is being conducted in accordance with Rule 2720,
which provides that, among other things, when an NASD member participates in
the underwriting of an affiliate's equity securities, the initial public
offering price can be no higher than that recommended by a "qualified
independent underwriter"' meeting certain standards. In accordance with this
requirement, Goldman, Sachs & Co. will serve in such role and will recommend a
price in compliance with the requirements of Rule 2720. Goldman, Sachs & Co.
will receive compensation in the amount of $10,000 for serving in such role.
In connection with the offering, Goldman, Sachs & Co. in its role as qualified
independent underwriter has performed due diligence investigations and
reviewed and participated in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part.

Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company, the
representatives of the Underwriters and the representatives of the Selling
Stockholders. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related business.

In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock
than they are required to purchase from the Company in the offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
securities sold in the offering for their account may be reclaimed by the
syndicate if such shares of Common Stock are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize,

U-2
<PAGE>

maintain or otherwise affect the market price of the Common Stock which may be
higher than the price that might otherwise prevail in the open market; and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "EXDS" subject to official notice of issuance. The
Company and, to the extent the over-allotment option is exercised, the Selling
Stockholders have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.

U-3
<PAGE>

[LOGO OF EXODUS]
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

----------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 21
Capitalization............................................................ 22
Dilution.................................................................. 23
Selected Financial Data................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 35
Management................................................................ 54
Certain Transactions...................................................... 63
Principal and Selling Stockholders........................................ 67
Description of Capital Stock.............................................. 69
Shares Eligible for Future Sale........................................... 71
Legal Matters............................................................. 73
Experts................................................................... 73
Additional Information.................................................... 73
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>

THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

4,000,000 SHARES

EXODUS COMMUNICATIONS, INC.

COMMON STOCK
(PAR VALUE, $0.001 PER SHARE)

----------------

[LOGO OF EXODUS]

----------------

GOLDMAN, SACHS & CO.

BT ALEX. BROWN

NATIONSBANC MONTGOMERY SECURITIES LLC

REPRESENTATIVES OF THE UNDERWRITERS

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses to be paid by the
Company in connection with the sale of the shares of Common Stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 14,927
NASD filing fee.................................................. 5,560
Nasdaq National Market filing fee................................ 90,000
Accounting fees and expenses..................................... 450,000
Legal fees and expenses.......................................... 550,000
Road show expenses............................................... 50,000
Printing and engraving expenses.................................. 180,000
Blue sky fees and expenses....................................... 5,000
Transfer agent and registrar fees and expenses................... 5,000
Custodian fees................................................... 5,000
Miscellaneous.................................................... 44,513
----------
Total.......................................................... $1,400,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to
repay such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in, or not opposed to, the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and
the Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnity; and (vi) to
the fullest extent permitted by the Delaware General Corporation Law, a
director or executive officer will be deemed to have acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the
best interests of the Registrant and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that his or her conduct
was unlawful if his or her action is based on the records or books of account
of the corporation or on information supplied to him or her by officers of the
corporation in the course of

II-1
<PAGE>

their duties or on the advice of legal counsel for the corporation or on
information or records given or reports made to the corporation by independent
certified public accountants or appraisers or other experts.

The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers. The indemnification agreements
provide that directors and executive officers will be indemnified and held
harmless to the fullest possible extent permitted by law including against all
expenses (including attorneys' fees), judgments, fines and settlement amounts
paid or reasonably incurred by them in any action, suit or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors, officers, employees or agents of the
Registrant or as directors, officers, employees or agents of any other company
or enterprise when they are serving in such capacities at the request of the
Registrant. The Registrant will not be obligated pursuant to the agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims (i) initiated or brought voluntarily by the indemnified
party and not by way of defense, except with respect to a proceeding to
establish or enforce a right to indemnify under the indemnification agreements
or any other agreement or insurance policy or under the Registrant's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
indemnification, or authorized by the Board of Directors or as otherwise
required under Delaware statute or law, regardless of whether the indemnified
party is ultimately determined to be entitled to such indemnification, (ii)
for expenses and the payment of profits arising from the purchase and sale by
the indemnified party of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934 or any similar successor statute or (iii) if a
final decision by a court having jurisdiction in the matter shall determine
that such indemnification is not lawful.

The indemnification agreement also provides for contribution in certain
situations in which the Registrant and a director or executive officer are
jointly liable but indemnification is unavailable, such contribution to be
based on the relative benefits received and the relative fault of the
Registrant and the director or executive officer. No contribution is allowed
to a person found guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act of 1933) from any person who was not
found guilty of such fraudulent misrepresentation.

The indemnification agreement requires a director or executive officer to
reimburse the Registrant for all expenses advanced only to the extent it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, the indemnification agreement or otherwise, to
be indemnified for such expenses. The form of indemnification agreement
provides that it is not exclusive of any rights a director or executive
officer may have under the Certificate of Incorporation, Bylaws, other
agreements, any majority-in-interest vote of the stockholders or vote of
disinterested directors, Delaware law or otherwise.

The indemnification provision in the Bylaws, and the form of indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's executive officers and directors for liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act").

As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Board, expects to purchase director and officer liability insurance.

In addition, Mr. Mocarski is indemnified in certain circumstances by Fleet
Financial Group, Inc.

See also the undertakings set out in response to Item 17.

II-2
<PAGE>

Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:

<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Underwriting Agreement ..................................... 1.01
Form of Registrant's Amended and Restated Certificate of
Incorporation to be filed immediately following the
offering................................................... 3.04
Registrant's Bylaws......................................... 3.06
Form of Indemnification Agreement........................... 10.08
</TABLE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following table sets forth information regarding all securities sold by
the Registrant since January 1, 1995.

<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PURCHASE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SHARES PRICE CONSIDERATION
- ------------------- -------------- ------------------- --------- ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Fouress, Inc. (1) February 16, Common Stock 33 $ 100 Cash
1995
K.B. Chandrasekhar May 15, 1995 Common Stock 1,000,000 -- -- (2)
and B.V.
Jagadeesh,
officers/founders
of Registrant
K.B. Chandrasekhar June 20, 1995 Common Stock 333,332 80,000 Notes (3)
and B.V. Jagadeesh
Semi-Custom Logic, August 15, Warrant to purchase N/A -- -- (5)
Inc. 1995 66,666 shares of
Common Stock (4)
Richard S. Stoltz, October 3, Common Stock 400,000 96,000 Notes (3)
an officer of 1995
Registrant, and
Fred R. Sibayan,
Jr.
Prasad Kaipa December 1, Warrant to purchase N/A -- -- (7)
1995 333 shares of
Common Stock (6)
First Portland December 20, Warrant to purchase N/A -- -- (5)
Leasing 1995 1,506 shares of
Corporation Common Stock
Kanwal Rekhi, a December 21, Warrant to purchase N/A -- -- (9)
director of 1995 16,666 shares of
Registrant Common Stock (8)
Suhas Patil February 1, Warrant to purchase N/A -- -- (7)
1996 16,667 shares of
Common Stock
First Portland February 14, Warrant to purchase N/A -- -- (5)
Leasing 1996 490 shares of
Corporation Common Stock
22 investors February 29 Series A Preferred 2,599,481 3,219,994 Cash and con-
and March 15, Stock version of out-
1996 standing notes (3) (10)
3 trusts for which March 30, 1996 Common Stock 94,333 22,640 Cash (3)
Kanwal S. Rekhi is
a trustee
John R. Dougery, a April 29, 1996 Common Stock 40,000 9,600 Cash (3)
director of
Registrant
3 individuals August 30, Warrants to N/A -- -- (5)
1996 purchase 20,834
shares of
Series B1 Preferred
Stock
24 investors October 2, Series B Preferred 2,579,355 6,500,000 Cash (3)
1996 Stock
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PURCHASE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SHARES PRICE CONSIDERATION
- ------------------- -------------- ------------------- --------- ---------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter A. Howley, a October 2, Warrant to purchase N/A -- -- (9)
director of 1996 19,841 shares
Registrant of Series B1
Preferred Stock
(11)
Venture Lending and October 2, Warrant to purchase N/A -- -- (5)
Leasing 1996 57,143 shares of
Corporation Series B1 Preferred
Stock
3 individuals November 6, Warrants to N/A -- -- (5)
1996 purchase 11,906
shares of Series B1
Preferred Stock
27 investors March 31, 1997 Convertible N/A 2,473,866 -- (3) (12)
Promissory Notes
27 investors March 31, 1997 Warrants to N/A 1,039 Cash (3) (16)
purchase 41,240
shares of Series B
Preferred Stock
(13)(14)(15)
MMC/GATX April 11, 1997 Warrants to N/A -- -- (5)
Partnership No. 1 purchase 65,477
and Silicon shares of Series B1
Valley Bank Preferred Stock
25 investors June 4 and Convertible N/A 1,500,000 -- (3) (17)
June 19, 1997 Promissory Notes
25 investors June 4 and Warrants to N/A 630 -- (3) (21)
June 19, 1997 purchase 25,008
shares of Series B
Preferred Stock
(18)(19)(20)
43 investors June 25, 1997 Series C Preferred 5,263,270 21,510,537 Cash and con-
Stock version of notes (3) (12) (17)
43 investors June 25, 1997 Warrants to N/A 37 Cash (3)
purchase 526,349
shares of Series C
Preferred Stock
(22)(23)(24)
David A. Sabey July 21, 1997 Series B1 Preferred 2,000 5,040 Cash (5)
Stock
Venture Lending and August 31, Warrant to purchase N/A -- -- (5)
Leasing 1997 58,724 shares of
Corporation Series C1 Preferred
Stock
Meier Mitchell & September 30, Warrants to 31,810 -- -- (5)
Company and 1997 purchase 31,810
Transamerica shares of Series C1
Business Credit Preferred Stock
Corporation
Peter A. Howley October 10, Series B1 Preferred 19,841 50,000 Cash (3)
1997 Stock (11)
Peter A. Howley October 10, Series B Preferred 1,033 2,603 Cash (3)
1997 Stock (14)(19)
Peter A. Howley October 10, Series C Preferred 1,534 6,269 Cash (3)
1997 Stock (23)
Rekhi Family Trust November 19, Common Stock (8) 16,666 40,000 Cash (3)
dated 12/15/89, 1997
for which Kanwal
S. Rekhi is
trustee
Rekhi Family Trust November 19, Series B Preferred 3,761 9,479 Cash (3)
dated 12/15/89 1997 Stock (13)(18)
Rekhi Family Trust November 19, Series C Preferred 5,552 22,692 Cash (3)
dated 12/15/89 1997 Stock (22)
40 investors December 17, Series D Preferred 877,180 7,500,000 Cash (3)
1997 Stock
</TABLE>

II-4
<PAGE>

In connection with the planned Delaware reincorporation of the Company, the
Company plans to issue shares of Common Stock, Series A Preferred Stock,
Series B Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock and options and warrants in exchange for shares,
options and warrants, respectively, in the predecessor California entity. Each
of the individual and entities listed above will receive the number of shares
of such class or series identified above.

- --------
(1) Purchased in connection with the incorporation of the Registrant as a
wholly-owned subsidiary of Fouress, Inc., the predecessor of the
Registrant ("Fouress"). These shares were canceled in May 1995 upon the
closing of the merger of Fouress with and into the Registrant.
(2) Represents shares of the Registrant exchanged for an aggregate of 5,000
shares originally purchased from Fouress for an aggregate purchase price
of $4,000 in connection with the merger of Fouress with and into the
Registrant.
(3) See "Certain Transactions."
(4) The warrant was exercised by the three principals of the leasing company
on December 30, 1997 at an exercise price of $2.40 per share.
(5) Issued as additional consideration for an equipment lease line of
credit.
(6) The warrant was exercised on December 30, 1997 at an exercise price of
$4.50 per share.
(7) The warrant was issued as additional consideration for a loan to the
Registrant.
(8) The warrant was exercised on November 19, 1997 at an exercise price of
$2.40 per share.
(9) The warrant was issued as consideration for serving as a member of the
Board of Directors.
(10) In December 1995, Kanwal S. Rekhi loaned Exodus California $200,000, all
of which was converted into Series A Preferred Stock on February 29,
1996.
(11) The warrant was exercised on October 10, 1997 at an exercise price of
$2.52 per share.
(12) The entities and individuals loaned an aggregate of $2,473,866, all of
which was converted into Series C Preferred Stock on June 25, 1997.
(13) One trust, for which Kanwal S. Rekhi is a trustee, exercised one such
warrant for 1,034 shares of Series B Preferred Stock on November 19, 1997
at an exercise price of $2.52 cents per share.
(14) Peter A. Howley exercised one such warrant for 833 shares of Series B
Preferred Stock on October 10, 1997 at an exercise price of $2.52 per
share.
(15) The ITV Partnerships exercised two such warrants for 4,466 shares of
Series B Preferred Stock on December 23, 1997 at an exercise price of
$2.52 per share.
(16) Issued in connection with the March 31, 1997 bridge financing of
$2,473,866.

II-5
<PAGE>

(17) The entities and individuals loaned an aggregate of $1,500,000, all of
which was converted into Series C Preferred Stock on June 25, 1997.
(18) One trust, for which Kanwal S. Rekhi is a trustee, exercised two such
warrants for 2,727 shares of Series B Preferred Stock on November 19,
1997 at an exercise price of $2.52 cents per share.
(19) Peter A. Howley exercised two such warrants for 200 shares of Series B
Preferred Stock on October 10, 1997 at an exercise price of $2.52 per
share.
(20) The ITV Partnerships exercised four such warrants for 3,348 shares of
Series B Preferred Stock on December 23, 1997 at an exercise price of
$2.52 per share.
(21) Issued in connection with the June 4 and June 19, 1997 bridge financing
of $1,500,000.
(22) One trust, for which Kanwal S. Rekhi is a trustee, exercised one such
warrant for 5,552 shares of Series C Preferred Stock on November 19, 1997
at an exercise price of $4.0869 per share.
(23) Peter A. Howley exercised one such warrant for 1,534 shares of Series C
Preferred Stock on October 10, 1997 at an exercise price of $4.0869 per
share.
(24) The ITV Partnerships exercised six such warrants for 11,574 shares of
Series C Preferred Stock on December 23, 1997 at an exercised price of
$4.0869 per share.
(25) Includes 41,732 shares subsequently repurchased from certain terminated
employees pursuant to the terms of the 1995 Employee Stock Purchase Plan.
- --------

The securities acquired by the Registrant's officers, directors, employees
and consultants were made in reliance on Rule 701 under the Securities Act.
All sales of Preferred Stock, warrants and notes were made in reliance on
Section 4(2) of the Securities Act and/or Regulation D promulgated or Rule 701
under the Securities Act. The securities were sold to a limited number of
people with no general solicitation or advertising.

II-6
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following exhibits are filed herewith:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
+1.01 Form of Underwriting Agreement.
+2.01 Agreement and Plan of Merger between Fouress, Inc. and Registrant
dated April 26, 1995.
+2.02 Form of Agreement and Plan of Merger by and between Registrant and
Exodus Communications, Inc., a California Corporation.
+3.01 Amended and Restated Articles of Incorporation of Exodus
Communications, Inc., a California corporation.
+3.02 Registrant's Certificate of Incorporation, as currently in effect.
+3.03 Registrant's Certificate of Designation.
+3.04 Form of Registrant's Amended and Restated Certificate of Incorporation
to be filed immediately following the offering.
+3.05 Bylaws of Exodus Communications, Inc., a California Corporation.
+3.06 Registrant's Bylaws.
+4.01 Form of Specimen Certificate for Registrant's Common Stock.
+5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
+10.01 Amended and Restated Investors Rights Agreement, dated as of June 25,
1997 between the Registrant and certain investors, as amended December
15, 1997.
+10.02 Registrant's 1995 Stock Option Plan and related forms of agreements.
+10.03 Registrant's 1995 Stock Purchase Plan and related forms of agreements.
+10.04 Registrant's 1997 Equity Incentive Plan and related forms of
agreements.
+10.05 Registrant's 1998 Equity Incentive Plan and related forms of
agreements.
+10.06 Registrant's 1998 Directors Stock Option Plan and related forms of
agreements.
+10.07 Registrant's 1998 Employee Stock Purchase Plan.
+10.08 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers, as amended.
+10.09 Facility Lease between Washcop Associates Limited Partnership and the
Registrant dated April 18, 1996.
+10.10 Facility Lease between Cal-Harbor II & III Urban Renewal Associates
and Registrant dated December 30, 1996, as amended April 29, 1997 and
January 27, 1998.
+10.11 Facility Lease between McCandless-San Tomas N. 2 and Registrant dated
April 18, 1997.
+10.12 Facility Lease between Sabey Corporation and Registrant dated April
24, 1997.
+10.13 Facility Lease between The Manufacturers Life Insurance Company and
Registrant dated June 27, 1997.
+10.14 Facility Lease between JBG/Spring Park Limited Partnership and
Registrant dated June 30, 1997.
+10.15 Application for Data Services between WorldCom, Inc. and the
Registrant dated September 18, 1997.
+10.16 Software License and Marketing Agreement between Computer Associates
International, Inc. and the Registrant dated April 1997.
+10.17 Form of Executive Employment Policy to be entered into between the
Registrant and certain officers.
+10.18 Equipment Lease Line of Credit between Transamerica Business Credit
Corporation and Registrant dated August 28, 1997.
+10.19 Loan and Security Agreement between Silicon Valley Bank and Registrant
dated June 14, 1996, as amended on March 25, 1997, June 13, 1997,
November 24, 1997 and December 8, 1997.
+10.20 Loan and Security Agreement among MMC/GATX Partnership No. 1,
Transamerica Business Credit Corporation and Registrant dated December
31, 1997.
</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
+10.21 Equipment Lease Line of Credit between Venture Lending & Leasing II,
Inc. and Registrant dated December 23, 1997.
+10.22 Equipment Lease Line of Credit Commitment ("Commitment Letter")
between Finova Technology Finance, Inc. ("Finova") and Registrant
dated December 17, 1997; Master Lease Agreement ("Master Lease")
between Finova and Registrant dated December 19, 1997; and
Modification to Commitment Letter and Master Lease between Finova and
Registrant dated February 6, 1998.
+10.23 Sublease Agreement dated January 12, 1998 between Amdahl Corporation
and Registrant.
+10.24 Nonqualified Stock Option Agreements between Registrant and K.B.
Chandrasekhar dated January 27, 1998.
10.25 Form of Nonqualified Stock Option Agreement between Registrant and
Ellen M. Hancock dated March 10, 1998.
10.26 Form of Agreement used to sell stock to certain directors and an
officer of the Registrant.
+23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG Peat Marwick LLP, independent accountants.
+24.01 Power of Attorney.
+27.01 Financial Data Schedule.
</TABLE>
- --------

+ Previously filed.

(b) Financial statement schedules are omitted because the information called
for is not required or is shown either in the Financial Statements or the
notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-8
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA CLARA, STATE OF CALIFORNIA, ON
THE 10TH DAY OF MARCH, 1998.

Exodus Communications, Inc.

By /s/ K.B. Chandrasekhar
--------------------------------
K.B. CHANDRASEKHAR PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.

NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:

President, Chief March 10, 1998
/s/ K.B. Chandrasekhar Executive Officer
- ------------------------------------- and Chairman of the
K.B. CHANDRASEKHAR Board of Directors

PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER:

Chief Financial March 10, 1998
/s/ Richard S. Stoltz Officer and Chief
- ------------------------------------- Operating Officer
RICHARD S. STOLTZ

ADDITIONAL DIRECTORS:

* Director March 10, 1998
- -------------------------------------
KANWAL S. REKHI

* Director March 10, 1998
- -------------------------------------
PETER A. HOWLEY

* Director March 10, 1998
- -------------------------------------
THADEUS MOCARSKI

* Director March 10, 1998
- -------------------------------------
JOHN R. DOUGERY

* Director March 10, 1998
- -------------------------------------
MARK DUBOVOY

* Director March 10, 1998
- -------------------------------------
FREDERICK W.W. BOLANDER

</TABLE>

II-9
<PAGE>

NAME TITLE DATE
---- ----- ----
<S> <C> <C>
ADDITIONAL DIRECTORS:

* Director March 10, 1998
- ------------------------------------
MAX D. HOPPER

* Director March 10, 1998
- ------------------------------------
DANIEL C. LYNCH

*By /s/ Richard S. Stoltz
---------------------------------
RICHARD S. STOLTZ
ATTORNEY-IN-FACT
</TABLE>

II-10
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
+10.22 Equipment Lease Line of Credit Commitment ("Commitment Letter")
between Finova Technology Finance, Inc. ("Finova") and Registrant
dated December 17, 1997; Master Lease Agreement ("Master Lease")
between Finova and Registrant dated December 19, 1997; and
Modification to Commitment Letter and Master Lease between Finova and
Registrant dated February 6, 1998.
+10.23 Sublease Agreement dated January 12, 1998 between Amdahl Corporation
and Registrant.
+10.24 Nonqualified Stock Option Agreements between Registrant and K.B.
Chandrasekhar dated January 27, 1998.
10.25 Form of Nonqualified Stock Option Agreement between Registrant and
Ellen M. Hancock dated March 10, 1998.
10.26 Form of Agreement used to sell stock to certain directors and an
officer of the Registrant.
+23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG Peat Marwick LLP, independent accountants.
+24.01 Power of Attorney.
+27.01 Financial Data Schedule.
</TABLE>
- --------

+ Previously filed.

<PAGE>

EXHIBIT 10.25

EXODUS COMMUNICATIONS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT

This Stock Option Agreement ("Agreement") is made and entered into as
---------
of the Date of Grant set forth below (the "Date of Grant") by and between Exodus
-------------
Communications, Inc., a Delaware corporation (the "Company"), and the Optionee
-------
named below ("Optionee").
--------

Optionee: Ellen Hancock

Social Security Number:

Address: 165 Altura Vista
Los Gatos, CA 95030

Total Option Shares: 721,981

Exercise Price Per Share: $9.00

Date of Grant: March 10, 1998

Vesting Commencement Date: March 10, 1998

Expiration Date: March 10, 2008

1. Grant of Option. The Company hereby grants to Optionee an option
---------------
(this "Option") to purchase the total number of shares of Common Stock of the
------
Company set forth above as Total Option Shares (the "Shares") at the Exercise
------
Price Per Share set forth above (the "Exercise Price"), subject to all of the
--------------
terms and conditions of this Agreement. This Option is intended to be a
"nonqualified stock option."

2. Vesting and Exercise Periods
----------------------------

2.1 Exercise Period of Option. This Option shall become exercisable
-------------------------
as to portions of the Shares as follows: (a) This Option shall not be
exercisable with respect to any of the Shares until the expiration of six (6)
months from the Vesting Commencement Date or September 10, 1998 (the "First
-----
Vesting Date"); (b) if Optionee has been continuously employed by the Company
- ------------
(as defined below) at all times during the time period beginning on the Vesting
Commencement Date set forth above and ending on the First Vesting Date, then on
the First Vesting Date this Option shall become exercisable as to twelve percent
(12%) of the Shares; and (c) thereafter this Option shall become exercisable as
to an additional two percent (2%) of the Shares upon the expiration of each full
calendar month for the next succeeding forty-four (44) months provided that
Optionee has remained continuously employed by the Company at all times during
the relevant month; provided that Optionee shall in no event be entitled under
--------
this Option to purchase a number of shares of the Company's common stock greater
than the "Total Option Shares" indicated above. Notwithstanding anything herein
to the contrary, this Option
<PAGE>

shall expire on the Expiration Date set forth above and must be exercised, if at
all, on or before the Expiration Date. For purposes of this Section 2.1,
Optionee shall be deemed to be continuously employed by the Company for so long
as Optionee renders services as the full time President or Chief Executive
Officer of the Company (or such other position as determined by the Board of
Directors of the Company).

2.2 Expiration. This Option shall expire on the Expiration Date set
----------
forth above and must be exercised, if at all, on or before the Expiration Date.

3. Termination. The following provisions shall govern the exercise of
-----------
this Option in the event the Optionee is Terminated. For purposes of the
foregoing, Optionee shall be deemed Terminated when Optionee ceases to be
continuously employed by the Company as defined above.

3.1 Termination for Any Reason Except Death or Disability. If
-----------------------------------------------------
Optionee is Terminated for any reason, except death or Disability,
notwithstanding any other provision in this Agreement to the contrary, this
Option, to the extent that it would have been exercisable by Optionee on the
date of Termination pursuant to this Agreement, may be exercised by Optionee no
later than ninety (90) days after the date of Termination, but in any event no
later than the Expiration Date.

3.2 Termination Because of Death or Disability. If Optionee is
------------------------------------------
Terminated because of death or Disability of Optionee, this Option, to the
extent that it is exercisable by Optionee on the date of Termination, may be
exercised by Optionee (or Optionee's legal representative) no later than ninety
(90) days after the date of Termination, but in any event no later than the
Expiration Date.

3.3 No Obligation to Employ. Nothing in this Agreement shall confer
-----------------------
on Optionee any right to continue in the employ of, or other relationship with,
the Company or any Parent or Subsidiary of the Company, or limit in any way the
right of the Company or any Parent or Subsidiary of the Company to terminate
Optionee's employment or other relationship at any time, with or without Cause.

3.4 For purposes of this Section 3, Optionee shall not be deemed
Terminated nor shall a Termination be deemed to have occurred for so long as
Optionee continues to render services as an employee, director or independent
consultant to the Company or any Subsidiary or Parent of the Company.

4. Manner of Exercise
------------------

4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed document in a form acceptable to the Company (the
"Exercise Agreement"), which shall set forth inter alia Optionee's election to
- ------------------- ----------
exercise this Option and the number of Shares being purchased. If someone other
than Optionee exercises this Option, then such person must submit documentation
reasonably acceptable to the Company that such person has the right to exercise
this Option.

2
<PAGE>

4.2 Limitations on Exercise. This Option may not be exercised unless
-----------------------
such exercise is in compliance with all applicable federal and state securities
laws, as they are in effect on the date of exercise.

4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:

(a) by cancellation of indebtedness of the Company to the Optionee;

(b) by waiver of compensation due or accrued to Optionee for services
rendered;

(c) provided that a public market for the Company's stock exists, (1)
through a "same day sale" commitment from Optionee and a broker-dealer
that is a member of the National Association of Securities Dealers (a
"NASD Dealer") whereby Optionee irrevocably elects to exercise this
-----------
Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the Exercise Price directly to the
Company, or (2) through a "margin" commitment from Optionee and a NASD
--
Dealer whereby Optionee irrevocably elects to exercise this Option and
to pledge the Shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer in the amount of
the Exercise Price, and whereby the NASD Dealer irrevocably commits
upon receipt of such Shares to forward the Exercise Price directly to
the Company; or

(d) by any combination of the foregoing.

4.4 Tax Withholding. In connection with the issuance of the Shares
---------------
upon exercise of this Option, Optionee must pay or provide for any applicable
federal or state withholding obligations of the Company. If the Committee
permits, Optionee may provide for payment of withholding taxes upon exercise of
this Option by requesting that the Company retain Shares with a Fair Market
Value equal to the minimum amount of taxes required to be withheld. In such
case, the Company shall issue the net number of Shares to Optionee by deducting
the Shares retained from the Shares issuable upon exercise.

4.5 Issuance of Shares. Upon the exercise of this Option in
------------------
accordance with this Section 4, the Company shall issue the purchased Shares
registered in the name of Optionee, Optionee's authorized assignee, or
Optionee's legal representative, and shall deliver certificates representing the
Shares with the appropriate legends affixed thereto.

5. Compliance with Laws and Regulations. The exercise of this Option and
------------------------------------
the issuance and transfer of Shares shall be subject to compliance by the
Company and Optionee with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the time of such issuance or
transfer.

6. Nontransferability of Option. This Option may not be transferred in
----------------------------
any manner other than by will or by the laws of decent and distribution and may
be exercised during the

3
<PAGE>

lifetime of Optionee only by Optionee. The terms of this Option shall be binding
upon the executors, administrators, successor and assigns of Optionee.

7. Tax Consequences. Set forth below is a brief summary as of the Date
----------------
of Grant of some of the federal and California tax consequences of exercise of
this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.

7.1 Exercise of Nonqualified Stock Option. Optionee will be treated
-------------------------------------
as having received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price. The Company will be required to withhold
from Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.

7.2 Disposition of Shares. If the Shares are held for more than
---------------------
twelve (12) months but less than eighteen (18) months after the date of the
transfer of the Shares pursuant to the Exercise of this Option, any gain
realized on disposition of the Shares will be treated as mid-term capital gain
for federal income tax purposes. If the Shares are held for more than eighteen
(18) months after the date of the transfer of the Shares pursuant to the
exercise of this Option, any gain realized on this position of the Shares will
be treated as a long-term capital gain for federal income tax purposes.

8. Privileges of Stock Ownership. Optionee shall not have any of the
-----------------------------
rights of a stockholder with respect to any Shares until Optionee exercises this
Option and pays the Exercise Price.

9. S-8 Registration. The Company shall register the Shares issuable
----------------
under this Option on a Form S-8 Registration Statement within ninety (90) days
following the Company's initial public offering of Common Stock pursuant to an
effective registration statement filed under the Securities Act and shall keep
such Registration Statement in effect for the entire period that this Option
thereafter remains outstanding.

10. Entire Agreement. This Agreement constitutes the entire agreement of
----------------
the parties and supersede all prior undertakings and agreements with respect to
the subject matter hereof.

11. Notices. Any notices required to be given or delivered to the Company
-------
under the terms of this Agreement shall be in writing and addressed to the
Corporate Secretary of the Company at the Company's principal corporate offices.
Any notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated above or to such other address as
such party may designate in writing from time to time to the Company. All
notices shall be deemed to have been given or delivered upon; personal delivery;
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); one (1) business day after deposit
with any return receipt express courier (prepaid); or one (1) business day after
transmission by facsimile.

4
<PAGE>

12. Successor and Assigns. The Company any assign any of its rights under
---------------------
this Agreement. This Agreement shall be binding upon and inure to the benefit
of the successors and assigns the Company. Subject to the restrictions on
transfer set forth herein, this Agreement shall be binding upon Optionee and
Optionee's heirs, executors, administrators, legal representatives, successors
and assigns.

13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California.

14. Acceptance. Optionee hereby acknowledges receipt of this Agreement.
----------
Optionee has read and understands the terms and provisions thereof, and accepts
this Option subject to all the terms and conditions of this Agreement. Optionee
acknowledges that there may be adverse tax consequences upon exercise of this
Option or disposition of the Shares and that Optionee should consult a tax
advisor prior to such exercise or disposition.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Optionee has executed this
Agreement in duplicate as of the Date of Grant.

EXODUS COMMUNICATIONS, INC. OPTIONEE

By: ______________________________ ________________________________
(Signature)

__________________________________ ________________________________
(Please print name) (Please print name)

__________________________________
(Please print name)

<PAGE>

EXHIBIT 10.26

___________, 1998

Exodus Communications, Inc.
2650 San Tomas Expressway
Santa Clara, CA 95051

Investment Representation Letter
--------------------------------

Gentlemen:

On this date the undersigned ("Purchaser") has acquired from Exodus
---------
Communications, Inc., a California corporation (the "Company"), an aggregate of
-------
_________________ (________) shares of the Company's ___________ Stock (the
"Shares") in consideration of Purchaser's delivery to the Company of $________
- -------
in cash.

1. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
-------------------------------------------

Purchaser represents and warrants to the Company that:

(a) Purchase for Own Account for Investment. Purchaser is
---------------------------------------
purchasing the Shares for Purchaser's own account for investment purposes only
and not with a view to, or for sale in connection with, a distribution of the
Shares within the meaning of the Securities Act of 1933, as amended (the "1933
Act"). Purchaser has no present intention of selling or otherwise disposing of
- ---
all or any portion of the Shares.

(b) Access to Information. Purchaser has had access to all
---------------------
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.

(c) Understanding of Risks. Purchaser is a director and/or officer
----------------------
of the Company and is fully aware of: (i) the highly speculative nature of the
investment in the Shares; (ii) the financial hazards involved; (iii) the lack of
liquidity of the Shares and the restrictions on transferability of the Shares
(e.g., that Purchaser may not be able to sell or dispose of the Shares or use
- -----
them as collateral for loans); (iv) the qualifications and backgrounds of the
management of the Company; and (v) the tax consequences of investment in the
Shares.
<PAGE>

(d) Purchaser's Qualifications. Purchaser is a director and/or
--------------------------
officer of the Company and has a preexisting personal or business relationship
with the Company and/or certain of its officers and/or directors of a nature and
duration sufficient to make Purchaser aware of the character, business acumen
and general business and financial circumstances of the Company and/or such
officers and directors. By reason of Purchaser's business or financial
experience, Purchaser is capable of evaluating the merits and risks of this
investment, has the ability to protect Purchaser's own interests in this
transaction and is financially capable of bearing a total loss of this
investment.

(e) No General Solicitation. At no time was Purchaser presented
-----------------------
with or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.

(f) Compliance with Securities Laws. Purchaser understands and
-------------------------------
acknowledges that, in reliance upon the representations and warranties made by
Purchaser herein, the Shares are not being registered with the Securities and
Exchange Commission ("SEC") under the 1933 Act or being qualified under the
---
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
---
are being issued under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law or other applicable state
securities laws which impose certain restrictions on Purchaser's ability to
transfer the Shares.

(g) Restrictions on Transfer. Purchaser understands that Purchaser
------------------------
may not transfer any Shares unless such Shares are registered under the 1933 Act
or qualified under the Law or unless, in the opinion of counsel to the Company,
exemptions from such registration and qualification requirements are available.
Purchaser understands that only the Company may file a registration statement
with the SEC or the California Commissioner of Corporations and that the Company
is under no obligation to do so with respect to the Shares. Purchaser has also
been advised that exemptions from registration and qualification may not be
available or may not permit Purchaser to transfer all or any of the Shares in
the amounts or at the times proposed by Purchaser.

(h) Rule 144. In addition, Purchaser has been advised that SEC Rule
--------
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be held for a minimum of one year,
and in certain cases two years, after they have been purchased and paid for
------------
(within the meaning of Rule 144), before they may be resold under Rule 144.
Purchaser understands that Shares paid for with a Note may not be deemed to be
fully "paid for" within the meaning of Rule 144 unless certain conditions are
met and that, accordingly, the Rule 144 holding period of such Shares may not
begin to run until such Shares are fully paid for within the meaning of Rule
144. Purchaser understands that Rule 144 may indefinitely restrict transfer of
the Shares so long as Purchaser remains an "affiliate" of the Company and
"current public information" about the Company (as defined in Rule 144) is not
publicly available.

2
<PAGE>

(i) Rule 701. Purchaser is purchasing the Shares as part of
--------
Purchaser's compensation from the Company in connection with Purchaser becoming
a director and/or officer of the Company. The Shares will become freely
tradeable by non-affiliates under SEC Rule 701 promulgated under the 1933 Act,
subject to limited conditions regarding the method of sale, 90 days after the
first sale of common stock of the Company to the general public pursuant to a
registration statement filed with and declared effective by the SEC, subject to
the lengthier market standoff agreement contained in this Agreement or any other
agreement entered into by Purchaser. Affiliates must comply with the provisions
(other than the holding period requirements) of Rule 144.

2. LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------

(a) LEGENDS. Purchaser understands and agrees that the Company will
-------
place the legends set forth below or similar legends on any stock certificate(s)
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws, the Company's Bylaws, any other agreement
between Purchaser and the Company or any agreement between Purchaser and any
third party:

THESE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM, INVESTORS SHOULD BE
AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE
SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR
RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.

THE SHARES EVIDENCED BY THIS CERTIFICATE: (1) ARE CONVERTIBLE INTO
SHARES OF COMMON STOCK OF THE ISSUER AT THE OPTION OF THE HOLDER AT ANY
TIME PRIOR TO AUTOMATIC CONVERSION THEREOF; (2) AUTOMATICALLY CONVERT
INTO COMMON STOCK OF THE ISSUER EITHER IN THE EVENT OF A PUBLIC OFFERING
MEETING CERTAIN REQUIREMENTS OR UPON THE CONSENT OF CERTAIN HOLDERS OF
THE PREFERRED STOCK OF THE COMPANY; AND (3) ARE REDEEMABLE; ALL PURSUANT
TO AND UPON THE TERMS AND CONDITIONS SPECIFIED IN THE ISSUER'S ARTICLES
OF INCORPORATION. A COPY OF SUCH ARTICLES OF INCORPORATION MAY BE
OBTAINED, WITHOUT CHARGE, AT THE COMPANY'S PRINCIPAL OFFICE.

(b) STOP-TRANSFER INSTRUCTION. Purchaser agrees that, in order to
-------------------------
ensure

3
<PAGE>

and enforce compliance with the restrictions imposed by applicable law and those
referred to in the foregoing legends, or elsewhere herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, with
respect to any certificate or other instrument representing Securities, or if
the Company transfers its own securities, that it may make appropriate notation
to the same effect in the Company's records.

(c) REFUSAL TO TRANSFER. The Company will not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote or pay dividends, to any
purchaser or other transferee to whom such Shares have been so transferred.

3. MARKET STANDOFF AGREEMENT
-------------------------

Purchaser agrees in connection with any registration of the
Company's securities under the 1933 Act that, upon the request of the Company or
the underwriters managing any registered public offering of the Company's
securities, Purchaser will not sell or otherwise dispose of any Shares without
the prior written consent of the Company or such managing underwriters, as the
case may be, for a period of time (not to exceed 180 days) after the effective
date of such registration requested by such managing underwriters and subject to
all restrictions as the Company or the managing underwriters may specify.

Very truly yours,

________________________________________
Name

________________________________________
Address

________________________________________
City, State, Zip Code

________________________________________
Social Security Number
(or tax I.D. Number, if an entity)

<PAGE>

EXHIBIT 23.02

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the use of our report included herein and to the references to
our firm under the headings "Experts," "Summary Financial Information" and
"Selected Financial Data" in the Prospectus.

KPMG PEAT MARWICK LLP

Mountain View, California

March 10, 1998