EXODUS COMMUNICATIONS INC, 424B3, 2000-02-14

EXODUS COMMUNICATIONS INC
424B3, 2000-02-14
BUSINESS SERVICES, NEC

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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-95935
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PROSPECTUS

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$500,000,000

EXODUS COMMUNICATIONS, INC.

4 3/4% Convertible Subordinated Notes Due July 15, 2008 and 7,101,700 Shares
of Common Stock Issuable Upon Conversion of the Notes

Holders of our 4 3/4% Convertible Subordinated Notes due July 15, 2008 may
offer for sale the notes and the shares of our common stock into which the
notes are convertible at any time at market prices prevailing at the time of
sale or at privately negotiated prices. The selling holders may sell the notes
or the common stock directly to purchasers or through underwriters, broker-
dealers or agents, who may receive compensation in the form of discounts,
concessions or commissions.

The holders of the notes may convert the notes into shares of our common
stock at any time at a conversion rate of 14.2034 shares per $1,000 principal
amount of notes. Interest on the notes is payable on January 15 and July 15 of
each year, commencing on July 15, 2000. After January 20, 2002, we may redeem
the notes, in whole or in part, at the redemption prices set forth in this
prospectus. However, we may not redeem the notes on or after January 20, 2002
and before January 15, 2004 unless the closing price of our common stock is at
least 140% of the conversion price for a period of time.

In the event of a change in control, defined in this prospectus of Exodus,
each holder of notes may require us to repurchase the notes at 100% of the
principal amount of the notes plus accrued interest. At our option, we may
repurchase the notes for cash or common stock.

The notes are unsecured obligations that are subordinated in right of
payment to all of our existing and future senior indebtedness.

Our common stock currently trades on the Nasdaq National Market under the
symbol "EXDS." The last reported sale price on February 10, 2000 was $120.375
per share.

The notes are currently eligible for trading on the Portal Market of the
National Association of Securities Dealers, Inc.

Investing in our common stock or the notes involves a high degree of risk.
Please carefully consider the "Risk Factors" beginning on page 3 of this
prospectus.

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

The date of this prospectus is February 11, 2000.
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In connection with this offering, no person is authorized to give any
information or to make any representations not contained in this prospectus.
If information is given or representations are made, you may not rely on that
information or representations as having been authorized by us. This
prospectus is neither an offer to sell nor a solicitation of an offer to buy
any securities other than those registered by this prospectus, nor is it an
offer to sell or a solicitation of an offer to buy securities where an offer
or solicitation would be unlawful. You may not imply from the delivery of this
prospectus, nor from any sale made under this prospectus, that our affairs are
unchanged since the date of this prospectus or that the information contained
in this prospectus is correct as of any time after the date of this
prospectus.

TABLE OF CONTENTS

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<TABLE>
<S> <C>
Summary..................................................................... 1
Recent Events............................................................... 2
Risk Factors................................................................ 3
Ratio of Earnings to Fixed Charges.......................................... 14
Where You Can Find More Information......................................... 14
Documents Incorporated by Reference......................................... 15
Use of Proceeds............................................................. 15
Selling Holders............................................................. 16
</TABLE>

<TABLE>
<S> <C>
Plan of Distribution........................................................ 20
Description of Notes........................................................ 22
Material United States Federal Income Tax Considerations.................... 33
Other Indebtedness.......................................................... 38
Description of Capital Stock................................................ 40
Legal Matters............................................................... 42
Experts..................................................................... 42
Financial Statements........................................................ F-1
</TABLE>

This prospectus contains forward-looking statements relating to future
events or financial results, including statements indicating that "we
believe," "we expect" or "we anticipate" that various events may occur or
various trends may continue, and similar statements relating to future events
or financial results. These forward-looking statements are subject to material
risks and uncertainties as indicated under the caption "Risk Factors." Actual
results could vary materially as a result of a number of factors, including
those set forth in "Risk Factors" and elsewhere in this prospectus. We assume
no obligation to update the forward-looking information contained in this
prospectus.

Unless the context otherwise requires, the terms "we," "our," "us," "the
company" and "Exodus" refer to Exodus Communications, Inc., a Delaware
corporation.

All share numbers in this prospectus reflect the two-for-one stock split
effected by Exodus on December 14, 1999. The information incorporated by
reference into this prospectus, however, may not reflect the stock split.

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SUMMARY

Exodus Communications is a leading provider of Internet system and network
management solutions for enterprises with mission-critical Internet operations.
Our solutions include Internet Data Centers, network services, managed services
and professional services, which together provide the high performance,
scalability and expertise that enterprises need to optimize their complex
Internet operations. Exodus delivers its services from geographically
distributed, state-of-the-art Internet Data Centers that are connected through
a high performance dedicated and redundant backbone network. Our tailored
solutions are designed to integrate with existing enterprise systems
architectures and to enable customers to outsource the monitoring,
administration and optimization of their equipment, applications and overall
Internet operations. As of September 30, 1999, we had more than 1,700
customers, including installed and uninstalled customers under contract, and
managed over 16,000 customer servers worldwide. Our customers represent a
variety of industries, ranging from Internet companies such as Lycos, Inc.,
eBay Inc., MSN Hotmail (a subsidiary of Microsoft Corporation), Yahoo!GeoCities
and Inktomi Corporation, to media companies such as MSNBC, USA Today
Information Network, SportsLine USA, Inc. and E-Online!, to major enterprise
companies such as Applied Materials and Storage Networks.

Because Internet usage is growing rapidly, businesses are increasing the
breadth and depth of their Internet product and services offerings. These
Internet operations are mission-critical for Internet-centric businesses and
are becoming increasingly mission-critical for many 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 facilities, personnel, equipment and networks which must be
continuously upgraded to reflect changing technologies and must rapidly scale
as the enterprise grows. This recurring and significant investment is an
inefficient use of resources and, as a result, a significant need exists for
outsourcing arrangements that can increase performance, provide continuous
operation of Internet solutions and reduce Internet operating expenses. We
believe a significant opportunity exists for a highly focused company to
provide a combination of server hosting, Internet connectivity and managed and
professional services that will enable reliable, high performance of mission-
critical Internet operations.

Exodus offers an integrated portfolio of solutions that provides customers
with a scalable, secure and high performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers' redundant backbone network of multiple high speed OC-3
and OC-12 lines, along with our public and private network interconnections. We
continue to upgrade our network in order to accommodate expected traffic
growth. Our managed services include performance monitoring, site management
reports, data backup and content delivery and management services, security
services and professional services. These services provide the foundation for
high performance, availability, scalability and reliability of customers'
Internet operations. In addition, we integrate best-of-breed technologies from
leading vendors with our industry expertise and proprietary technology.

Our 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, we intend to:

. Position Exodus as the leader in this market;

. Focus on enhancing systems and network management, Internet technology
services and professional services;

. Accelerate our global expansion;

. Leverage our expertise to address new market opportunities; and

. Continue to establish strategic relationships for distribution and
technology.

We began offering server hosting and Internet connectivity services in late
1995, opened our first dedicated Internet Data Center in August 1996, and
introduced managed services in 1997 and professional services in 1998. We
currently operate 17 domestic Internet Data Centers located in nine
metropolitan areas:

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Atlanta, Austin, Boston, Chicago, Los Angeles, New York, Seattle, Silicon
Valley and Washington, D.C. In June 1999, we opened our first Internet Data
Center outside of the United States in the London metropolitan area. In
December 1999, we acquired Global OnLine Japan Co., Ltd. of Tokyo, Japan, which
has an Internet Data Center located in Tokyo. Our Internet Data Centers consist
of approximately 1,600,000 gross square feet.

Our principal executive offices are located at 2831 Mission College Blvd.,
Santa Clara, California 95054. Our telephone number is (408) 346-2200.

RECENT EVENTS

Acquisition of Service Metrics, Inc. In November 1999, we acquired Service
Metrics, Inc. Service Metrics is a leading provider of Internet monitoring
applications and services that measure the consistency, availability and
performance of Web sites. As a result, we issued approximately 7.0 million
shares of our Common Stock and Common Stock subject to options in exchange for
all of the outstanding shares of common stock of Service Metrics and shares of
Service Metrics common stock subject to outstanding options, representing an
aggregate consideration of approximately $280.0 million as of the signing of
the definitive agreement in October 1999. The transaction was accounted for as
a pooling of interests.

Acquisition of Global OnLine Japan Co., Ltd. In December 1999, we acquired
Global OnLine Japan Co., Ltd., an Internet solutions provider based in Tokyo.
As a result, we issued approximately 415,000 shares of our common stock in
exchange for 85% of the outstanding shares of Global OnLine Japan. The
transaction will be accounted for as a purchase.

Stock Split. On November 19, 1999, we announced a two-for-one stock split in
the form of a stock dividend, payable December 14, 1999 to holders of our
Common Stock of record as of November 30, 1999. Share and per share information
in this prospectus reflects this stock split.

Issuance of Debt. In December 1999, we issued $375.0 million aggregate
principal amount of 10 3/4% Senior Notes due 2009 and (Euro)125.0 million
aggregate principal amount of 10 3/4% Senior Notes due 2009 concurrently with
our issuance of $500.0 million aggregate principal amount of 4 3/4% Convertible
Subordinated Notes due July 15, 2008.

Acquisition of KeyLabs, Inc. In January 2000, we agreed to acquire KeyLabs,
Inc., a provider of e-business testing services based in Utah. The transaction
is expected to close by the end of February 2000 and will be accounted for as a
purchase.

Hiring of New Chief Financial Officer. Effective January 31, 2000, R.
Marshall Case was appointed Executive Vice President, Finance and Chief
Financial Officer of Exodus. Mr. Case's predecessor, Richard S. Stoltz, will
continue with Exodus as its Senior Adviser, Strategy and Finance.

Summary of 1999 Fourth Quarter and Annual Results. For the three months
ended December 31, 1999, our revenues were $101.4 million compared to revenues
of $21.1 million for the same period of the prior year. Our net loss for the
three months ended December 31, 1999 was $52.9 million, or $0.30 per share,
compared to a net loss of $21.9 million, or $0.14 per share, for the same
period of the prior year. EBITDA loss (loss before net interest expense, income
taxes, depreciation, amortization and other non-cash charges) for the three
months ended December 31, 1999 was $16.7 million compared to $12.1 million for
the same period of the prior year.

Revenues for the twelve months ended December 31, 1999 were $242.1 million
compared to $52.7 million for the same period of the prior year. Our net loss
attributable to common stockholders for the twelve months ended December 31,
1999 was $130.3 million, or $0.78 per share, compared to a net loss
attributable to common stockholders of $69.3 million, or $0.55 per share, for
the same period of the prior year. EBITDA loss for the twelve months ended
December 31, 1999 was $44.7 million compared to $41.9 million for the same
period of the prior year.

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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 Exodus and its business before purchasing
any of the notes or common stock. This prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of our
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. Our 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.

Our short operating history and heavy losses make our business difficult to
evaluate

Our limited operating history makes evaluating our business operations and
our prospects difficult. We began offering server hosting and Internet
connectivity services in 1995, opened our first dedicated Internet Data Center
in August 1996 and introduced managed services in 1997 and professional
services in 1998. Due to our short operating history, our business model is
still evolving. We have incurred operating losses and negative cash flows each
fiscal quarter and year since 1995. Our accumulated deficit was approximately
$175.3 million at September 30, 1999. We anticipate continuing to make
significant investments in new Internet Data Centers and network
infrastructure, product development, sales and marketing programs and
personnel. We believe that we will continue to experience net losses on a
quarterly and annual basis for the foreseeable future. We may also use
significant amounts of cash and/or equity to acquire complementary businesses,
products, services or technologies. Although we have experienced significant
growth in revenues in recent periods, this growth rate is not necessarily
indicative of future operating results. It is possible that we may never
achieve profitability on a quarterly or an annual basis.

Our operating results have fluctuated widely and we expect this to continue

We have experienced significant fluctuations in our results of operations on
a quarterly and an annual basis. We expect to continue to experience
significant fluctuations due to a variety of factors, many of which are outside
of our control, including:

. demand for and market acceptance of our services;

. reliable continuity of service and network availability;

. the ability to increase bandwidth as necessary, both on our network and
at our interconnection points with other networks;

. costs related to the acquisition of network capacity and arrangements
for interconnections with third-party networks;

. customer retention and satisfaction;

. capacity utilization of our Internet Data Centers;

. the timing, magnitude and integration of acquisitions of complementary
businesses and assets;

. the timing of customer installations;

. the provision of customer discounts and credits;

. the mix of services sold by us;

. the timing and success of marketing efforts and service introductions by
us and our competitors;

. the timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;

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. the timing of expansion of existing Internet Data Centers and completion
of new Internet Data Centers;

. the introduction by third parties of new Internet and networking
technologies;

. changes in our pricing policies and those of our competitors; and

. fluctuations in bandwidth used by customers.

In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications, depreciation,
substantial interest expenses, real estate and personnel. Therefore, our
results of operations are particularly sensitive to fluctuations in revenues.
Furthermore, if we were to become unable to continue leveraging third-party
products in our services offerings, our product development costs could
increase significantly. Finally, many of our customers are emerging growth
companies which may have negative cash flows, and there is the possibility that
we will not be able to collect receivables on a timely basis.

Our rapid expansion produces a significant strain on our business and requires
us to expend substantial resources

The expansion of our network through the opening of additional Internet Data
Centers in geographically diverse locations is one of our key strategies. We
currently have 17 Internet Data Centers located in nine metropolitan areas of
the United States: Atlanta, Austin, Boston, Chicago, Los Angeles, New York,
Seattle, Silicon Valley and Washington, D.C. In June, we opened our first
Internet Data Center outside of the United States in the London metropolitan
area. In December 1999, we acquired Global OnLine Japan Co., Ltd. of Tokyo,
Japan, which has an Internet Data Center located in Tokyo. To expand
successfully, we must be able to assess markets, locate and secure new Internet
Data Center sites, install telecommunications and Internet Data Center
facilities and establish additional peering interconnections with Internet
service providers. To manage this expansion effectively, we must continue to
improve our operational and financial systems and expand, train and manage our
employee base. Our inability to establish additional Internet Data Centers or
effectively manage our expansion would have a material adverse effect upon our
business.

We expect to expend substantial resources for leases and/or the purchase of
real estate, significant improvements of facilities, purchase of complementary
businesses, assets and equipment, implementation of multiple telecommunications
connections and hiring of network, administrative, customer support and sales
and marketing personnel with the establishment of each new Internet Data
Center. Moreover, we expect to make significant investments in sales and
marketing and the development of new services as part of our expansion
strategy. The failure to generate sufficient cash flows or to raise sufficient
funds may require us to delay or abandon some or all of our development and
expansion plans or otherwise forego market opportunities, making it difficult
for us to generate additional revenue and to respond to competitive pressures.

In general, it takes us at least six months to select the appropriate
location for a new Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure and hire operations and
sales personnel. Expenditures commence well before the Internet Data Center
opens, and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are opened. We
incur further expenses from sales personnel hired to test market our services
in markets where there is no Internet Data Center. Growth in the number of our
Internet Data Centers is likely to increase the amount and duration of losses.
In addition, if we do not attract customers to new Internet Data Centers in a
timely manner, or at all, our business would be materially adversely affected.

We compete with much larger companies and there are few barriers to entry, and
if we cannot compete effectively, we will lose business

Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. Many companies have

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announced recently that they intend to begin providing and/or greatly expand
their service offerings that are competitive with our services. The principal
competitive factors in this market include:

. Internet system engineering and other expertise;

. customer service;

. network capability, reliability, quality of service and scalability;

. the variety of services offered;

. access to network resources, including circuits, equipment and
interconnection capacity to other networks;

. broad geographic presence;

. price;

. the ability to maintain and expand distribution channels;

. brand name;

. the timing of introductions of new services;

. network security; and

. financial resources.

There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in
the market include:

. providers of server hosting services;

. national, foreign and regional ISPs;

. global, regional and local telecommunications companies and Regional
Bell Operating Companies;

. IT outsourcing firms; and

. other technology services and products companies.

Many of our competitors have substantially greater resources, more
customers, longer operating histories, greater name recognition and more
established relationships in the industry. As a result, these competitors may
be able to develop and expand their network infrastructures and service
offerings more quickly, devote greater resources to the marketing and sale of
their products and adopt more aggressive pricing policies. In addition, these
competitors have entered and will likely continue to enter into business
relationships to provide additional services competitive with those we provide.

Some of our 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 ours. We may not be able to offset
the effects of any price reductions. In addition, we believe our market is
likely to encounter consolidation in the near future, which could result in
increased prices and other competition.

Our market is new and our services may not be generally accepted by enterprises
looking to outsource their mission-critical Internet operations, which could
harm our operating results

The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and is characterized by an
increasing number of market entrants. This market may not prove to be viable
or, if it becomes viable, may not continue to grow. Our future growth depends
on the willingness of enterprises to outsource the system and network
management of their mission-critical Internet operations and our ability to
market our services in a cost-effective manner to a sufficiently large number
of customers. If this market fails to develop, or develops more slowly than
expected, or if our services do not achieve market acceptance, our business
would be adversely affected. In addition, in order to be successful we must be
able to differentiate ourselves from our competition through our service
offerings.

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The notes are subordinated to other debt

The notes are unsecured and subordinated in right of payment to all of our
existing and future senior indebtedness as defined in the indenture governing
the notes. As a result, in the event of bankruptcy, liquidation or
reorganization or upon acceleration of the notes due to an event of default, as
defined below, and in specific other events, our assets will be available to
pay obligations on the notes only after all senior indebtedness has been paid
in full in cash or other payment satisfactory to the holders of senior
indebtedness. There may not be sufficient assets remaining to pay amounts due
on any or all of the notes then outstanding. The notes also will be effectively
subordinated to the liabilities, including trade payables, of our subsidiaries.
The indenture governing the notes does not prohibit or limit the incurrence of
senior indebtedness or the incurrence of other debt and other liabilities by us
or our subsidiaries. The incurrence of additional debt and other liabilities by
us or our subsidiaries could impede our ability to pay obligations on the
notes. As of September 30, 1999, we had approximately $339.7 million of debt
outstanding that would have constituted senior indebtedness. As of September
30, 1999, our subsidiaries had $17.4 million of debt and other liabilities. In
addition, we incurred additional senior indebtedness of $375.0 million
aggregate principal amount of our 10 3/4% senior notes due 2009 and (Euro)125.0
million aggregate principal amount of our senior notes due 2009 that were
issued in December 1999. We anticipate that from time to time we will incur
additional debt, including senior indebtedness. See "Description of Notes--
Subordination".

There are limitations on redemption of notes upon change of control

Upon a change of control, as defined below, each holder of notes has rights,
at the holder's option, to require us to redeem all or a portion of the
holder's notes. Although the indenture governing the notes allows us, subject
to satisfaction of conditions, to pay the redemption price in shares of common
stock, if a change of control were to occur, we may not have sufficient funds
to pay the redemption price for all notes tendered by holders. Our indentures
relating to our 11 1/4% senior notes and 10 3/4% senior notes may prohibit the
payment of the redemption price of the notes while the 11 1/4% senior notes or
10 3/4% senior notes are outstanding. Any future credit agreements or other
agreements relating to other debt, including other senior indebtedness to which
we become a party, may contain similar restrictions and provisions. In the
event a change of control occurs at a time when we are prohibited from
purchasing or redeeming notes, we could seek the consent of lenders to the
purchase of notes or could attempt to refinance the borrowings that contain
such prohibition. If we do not obtain a consent or repay such borrowings, we
would remain prohibited from purchasing or redeeming notes. Our failure to
redeem tendered notes would constitute an event of default under the indenture
governing the notes, which might constitute a default under the terms of other
indebtedness that we may enter into from time to time. In these circumstances,
the subordination provisions in the indenture governing the notes would likely
restrict payments to the holders of notes. The term "change of control" is
limited to specified transactions and may not include other events that might
adversely affect our financial condition. In addition, the requirement that we
offer to repurchase the notes upon a change of control does not necessarily
afford holders of the notes protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction involving us. See
"Description of Notes--Repurchase at Option of Holders Upon a Change of
Control".

Our substantial leverage and debt service obligations adversely affect our cash
flow

We have substantial amounts of outstanding indebtedness, primarily from our
11 1/4% senior notes, 10 3/4% senior notes, 4 3/4% convertible subordinated
notes and 5% convertible subordinated notes. There is the possibility that we
may be unable to generate cash sufficient to pay the principal of, interest on
and other amounts due in respect of, our debt when due. As of September 30,
1999, we had debt of approximately $589.7 million and available borrowings of
up to an additional $1.2 million. In addition, in December 1999, we incurred
additional debt of $375.0 million aggregate principal amount of our 10 3/4%
senior notes and (Euro)125.0 million aggregate principal amount of the 10 3/4%
senior notes as well as $500.0 million aggregate principal amount of our 4 3/4%
convertible subordinated notes. We will also have the right to issue additional
10 3/4% senior notes on or prior to December 8, 2000 in an aggregate principal
amount not to exceed $100.0 million. In addition, we expect to add additional
equipment loans and lease lines to finance capital

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expenditures for our Internet Data Centers and to obtain additional long term
debt, working capital lines of credit and lease lines. We cannot be certain
that any financing arrangements will be available.

Our substantial leverage could have significant negative consequences,
including:

. increasing our vulnerability to general adverse economic and industry
conditions;

. limiting our ability to obtain additional financing;

. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;

. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and

. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.

We are subject to restrictive covenants in our note indentures that limit our
flexibility in managing our business

Our senior notes and convertible subordinated notes contain various
restrictions on our ability to incur debt, pay dividends or make other
restricted payments, sell assets, enter into affiliate transactions and take
other actions. Furthermore, our existing financing arrangements are, and future
financing arrangements are likely to be, secured by substantially all of our
assets. The existing financing arrangements require, and future financing
arrangements are likely to require, that we maintain specific financial ratios
and comply with covenants restricting our ability to incur debt, pay dividends
or make other restricted payments, sell assets, enter into affiliate
transactions or take other actions.

In addition, a number of instruments evidencing our debt restrict the manner
in which this debt and debt incurred in the future may be used.

We must manage growth effectively by expanding operating and financial
procedures, controls and systems or our business will be harmed

We are experiencing, and expect to continue experiencing, rapid growth with
respect to the building of our Internet Data Centers and network
infrastructure, expansion of our service offerings, geographic expansion,
expansion of our customer base and increases in the number of employees. This
growth has placed, and we expect it to continue to place, a significant strain
on our financial, management, operational and other resources, including our
ability to ensure customer satisfaction. This expansion also requires
significant time commitment from our senior management and places a significant
strain on their ability to manage the existing business. In addition, we are
required to manage multiple relationships with a growing number of third
parties as we seek to complement our service offerings. Our ability to manage
our growth effectively will require us to continue to expand operating and
financial procedures and controls, to replace or upgrade our operational,
financial and management information systems and to attract, train, motivate
and retain key employees. We have recently hired many key employees and
officers, and as a result, our entire management team has worked together for
only a brief time. In addition, we intend to hire additional senior management
personnel to support our growth and expansion of our business. If our
executives are unable to manage growth effectively, our business could be
materially adversely affected.

We may experience difficulty in integrating our recent acquisitions which could
harm our operating results

In October 1998 we acquired the assets of Arca Systems, Inc., in February
1999 we acquired American Information Systems, Inc., in July 1999 we acquired
Cohesive Technology Solutions, Inc, in November 1999 we acquired Service
Metrics, Inc. and in December 1999 we acquired Global Online Japan Co., Ltd.
Furthermore, in January 2000, we agreed to acquire KeyLabs, Inc. We continue to
expend resources integrating

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Cohesive and Service Metrics and the personnel hired in connection with
acquisitions. As we acquire additional companies, we may incur expenses to,
among other things, remediate Year 2000 problems relating to these acquired
companies.

We believe that our future growth depends, in part, upon the acquisition of
complementary businesses, products, services or technologies. After purchasing
a company, we could have difficulty in assimilating that company's technology,
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses. In addition, future acquisitions by us may require us to incur
additional debt, result in large one-time write-offs or create goodwill or
other intangible assets that could result in amortization expenses.

System failures could lead to significant costs

We must protect our network infrastructure and customers' equipment against
damage from human error, physical or electronic security breaches, power loss
and other facility failures, fire, earthquake, flood, telecommunications
failure, sabotage, vandalism and similar events. Despite precautions we have
taken, a natural disaster or other unanticipated problems at one or more of our
Internet Data Centers could result in interruptions in our services or
significant damage to customer equipment. In addition, failure of any of our
telecommunications providers, such as MCI WorldCom, Qwest Communications
Corporation and Global Crossing, to provide consistent data communications
capacity, and local exchange carriers to provide interconnection agreements,
could result in interruptions in our services. Any damage to or failure of our
systems or service providers could result in reductions in, or terminations of,
services supplied to our customers, which could have a material adverse effect
on our business. In the past, we have experienced interruptions in specific
circuits within our network resulting from events outside our control, which
led to short-term degradation in the level of performance of our network.

Customer satisfaction with our services is critical to our success

Our customers demand a very high level of service. Our customer contracts
generally provide a limited service level commitment related to the continuous
availability of service on a 24 hours per day, seven days per week basis. This
commitment is generally limited to a credit consisting of free service for a
short period of time for disruptions in Internet transmission services. To
date, only a limited number of customers have been entitled to this credit. If
we incur significant service level commitment obligations in connection with
system downtime, our liability insurance may not be adequate to cover these
expenses. As customers outsource more mission-critical operations to us, we are
subject to increased liability claims and customer dissatisfaction if our
systems fail or our customers otherwise become unsatisfied.

Our ability to expand our network is unproven and will require substantial
financial, operational and management resources

To satisfy customer requirements, we must continue to expand and adapt our
network infrastructure. We are dependent on MCI WorldCom, Qwest, Global
Crossing and other telecommunications providers for our network capacity,
including our dedicated clear channel network. The expansion and adaptation of
our telecommunications infrastructure will require substantial financial,
operational and management resources as we negotiate telecommunications
capacity with network infrastructure suppliers. Due to the limited deployment
of our services to date, our ability to connect and manage a substantially
larger number of customers at high transmission speeds is unknown. We have yet
to prove our network's ability to be scaled up to higher customer levels while
maintaining superior performance. Furthermore, it may be difficult for us to
increase quickly our network capacity in light of current necessary lead times
within the industry to purchase circuits and other critical items. If we fail
to achieve or maintain high capacity data transmission circuits, customer
demand could diminish because of possible degradation of service. In addition,
as we upgrade our telecommunications infrastructure to increase bandwidth
available to our customers, we expect to encounter equipment or software
incompatibility which may cause delays in implementation.

8
<PAGE>

We depend on network interconnections provided by third parties who may raise
their fees or deny access

We rely on a number of public and private network interconnections to allow
our customers to connect to other networks. If the networks with which we
interconnect were to discontinue their interconnections, our ability to
exchange traffic would be significantly constrained. Furthermore, our business
will be harmed if these networks do not add more bandwidth to accommodate
increased traffic. Many of the companies with which we maintain
interconnections are our competitors. There is nothing to prevent any networks,
many of which are significantly larger than we are, from charging high usage
fees or denying access. In the future, networks could refuse to continue to
interconnect directly with us, might impose significant costs on us or limit
our customers' access to their networks. In this event, we may not be able on a
cost-effective basis to access alternative networks to exchange our customers'
traffic. In addition, we may not be able to pass through to our customers any
additional costs of utilizing these networks. In these cases, our business
could be harmed.

Difficulties presented by international economic, political, legal, accounting
and business factors could harm our business in international markets

A component of our strategy is to expand into international markets. We
opened our first Internet Data Center outside of the United States in the
London metropolitan area in June 1999 and acquired an Internet Data Center in
Tokyo through our acquisition of Global OnLine Japan Co., Ltd. in December
1999. Furthermore, we plan to open additional international Internet Data
Centers by the end of 2000. In order to expand our international operations, we
may enter into joint ventures or outsourcing agreements with third parties,
acquire rights to high-bandwidth transmission capability, acquire complementary
businesses or operations, or establish and maintain new operations outside of
the United States. Thus, we may depend on third parties to be successful in our
international operations. In addition, the rate of development and adoption of
the Internet has been slower outside of the United States, and the cost of
bandwidth has been higher, which may adversely affect our ability to expand
operations and may increase our cost of operations internationally. The risks
inherent in conducting business internationally include:

. unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers;

. challenges in staffing and managing foreign operations;

. differences in technology standards;

. employment laws and practices in foreign countries;

. longer payment cycles and problems in collecting accounts receivable;

. political instability;

. fluctuations in currency exchange rates and imposition of currency
exchange controls; and

. potentially adverse tax consequences.

We might not be successful in our attempts to keep up with rapid technological
change and evolving industry standards

Our future success will depend on our ability to offer services that
incorporate leading technology and address the increasingly sophisticated and
varied needs of our current and prospective customers. Our market is
characterized by rapidly changing and unproven technology, evolving industry
standards, changes in customer needs, emerging competition and frequent new
service introductions. Future advances in technology may not be beneficial to,
or compatible with, our business. In addition, we may not be able to
incorporate advances on a cost-effective and timely basis. Moreover,
technological advances may have the effect of encouraging our current or future
customers to rely on in-house personnel and equipment to furnish the services
we currently provide. In addition, keeping pace with technological advances may
require substantial expenditures and lead time.

We believe that our ability to compete successfully is also dependent upon
the continued compatibility and interoperability of our services with products,
services and architectures offered by various vendors. Although

9
<PAGE>

we work with various vendors in testing newly developed products, these
products may not be compatible with our infrastructure or adequate to address
changing customer needs. For instance, existing networking hardware may not be
immediately compatible with leading edge telecommunications infrastructure
services. This incompatibility would require us to make significant investments
to achieve compatibility. Although we intend to support emerging standards,
industry standards may not be established or we may not be able to timely
conform to new standards. Our failure to conform to a prevailing standard, or
the failure of a common standard to emerge, could have a material adverse
effect on our business.

System security risks could disrupt our services

The ability to provide secure transmissions of confidential information over
networks accessible to the public is a significant barrier to electronic
commerce and communications. A portion of our services rely on encryption and
authentication technology licensed from third parties. Despite a variety of
network security measures taken by us, we cannot assure that unauthorized
access, computer viruses, accidental or intentional actions and other
disruptions will not occur. Our Internet Data Centers have 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 of Exodus or others. Furthermore, inappropriate use of the network by
third parties could also jeopardize the security of confidential information,
such as customer and Exodus passwords as well as credit card and bank account
numbers, stored in our computer systems or those of our customers. As a result,
we could become liable to others and lose existing or potential customers. The
costs required to eliminate computer viruses and alleviate other security
problems could be prohibitively expensive. In addition, the efforts to address
these problems could result in interruptions, delays or cessation of service to
our customers.

We depend on third-party equipment and software suppliers

We depend on vendors to supply key components of our telecommunications
infrastructure and system and network management solutions. Some of the
telecommunications services and networking equipment is available only from
sole or limited sources. For instance, the routers, switches and modems we use
are currently supplied primarily by Cisco Systems, Inc. We typically purchase
or lease all of our components under purchase orders placed from time to time.
We do not carry significant inventories of components and have no guaranteed
supply arrangements with vendors. If we are unable to obtain required products
or services on a timely basis and at an acceptable cost, our business would be
harmed. In addition, if our sole or limited source suppliers do not provide
products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components we use, our business would be harmed. For example, we have
experienced performance problems, including previously unknown software and
firmware bugs, with routers and switches that have caused temporary disruptions
in and impairment of network performance. In addition, we expect to depend for
a time on third parties to deliver and manage our services from certain
international operations.

Government regulation and legal uncertainties may harm our business

Laws and regulations directly applicable to communications and commerce over
the Internet are becoming more prevalent. The United States Congress has
recently considered enacting Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union also recently enacted its own privacy regulations. The law of
the Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. In addition, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business. We provide services over the Internet in all states in the
United States and in many foreign countries, and we facilitate the activities
of our customers in these jurisdictions. As a result we may be required to
qualify to do business, or be subject to taxation, or be subject to other laws
and regulations,

10
<PAGE>

in these jurisdictions even if we do not have a physical presence or employees
or property in these jurisdictions. The application of these multiple sets of
laws and regulations is uncertain, but we could find that Exodus is subject to
regulation, taxation, enforcement or other liability in unexpected ways, which
could materially adversely affect our business.

We could be held liable for the information disseminated through our 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. The Child Online Protection Act of 1998
imposes criminal penalties and civil liability on anyone engaged in the
business of selling or transferring material that is harmful to minors, by
means of the World Wide Web, without restricting access to this type of
material by underage persons. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon us and other
Internet network providers of potential liability for information carried on or
disseminated through systems could require us to implement measures to reduce
exposure to liability, which may require the expenditure of substantial
resources, or to discontinue various service or product offerings. Further, the
costs of defending against any claims and potential adverse outcomes of these
claims could have a material adverse effect on our business. While we carry
professional liability insurance, it may not be adequate to compensate or may
not cover us in the event we become liable for information carried on or
disseminated through our networks.

Some businesses, organizations and individuals have in the past sent
unsolicited commercial e-mail messages advertising sites hosted at our
facilities to a massive number of people. This practice, known as "spamming,"
has led to some complaints against us. In addition, some ISPs and other online
services companies could deny network access to us if we allow undesired
content or spamming to be transmitted through our networks. Although we
prohibit customers by contract from spamming, we cannot be sure that customers
will not engage in this practice, which could have a material adverse effect on
our business.

Our future success depends on our key personnel

Our success depends in significant part upon the continued services of our
key technical, sales and senior management personnel. Any officer or employee
can terminate his or her relationship at any time. If we lose the services of
one or more of our key employees or are unable to attract additional qualified
personnel, our business would be adversely affected. We do not carry key-person
life insurance for any of our employees.

If the Internet and Internet infrastructure development do not continue to
grow, our business will be harmed

Our success depends 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 our services. In addition, the rate
of development and adoption of the Internet has been slower outside of the
United States and the cost of bandwidth has been higher. 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 our
services. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
to alleviate overloading and congestion.

We face risks associated with protection and enforcement of intellectual
property rights

We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. We have no patented

11
<PAGE>

technology that would preclude or inhibit competitors from entering our market.
Although we have entered into confidentiality agreements with our employees,
contractors, suppliers, distributors and appropriate customers to limit access
to and disclosure of our proprietary information, these may prove insufficient
to prevent misappropriation of our technology or to deter independent third-
party development of similar technologies. In addition, the laws of various
foreign countries may not protect our products, services or intellectual
property rights to the same extent as do the laws of the United States.

In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim that our products or services infringe their intellectual
property. We expect that participants in our markets will be increasingly
subject to infringement claims. Any claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product installation delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at
all.

Potential risks related to the Year 2000 problem might harm our business

The Year 2000 problem stems from the use of a two digit date to represent
the year (for example, 85 = 1985) in computer software and firmware. As a
result, many currently installed computer systems are not capable of
distinguishing dates beginning with the Year 2000 from dates prior to the Year
2000. As a result, computer systems or applications used by many companies in a
wide variety of industries may experience operating difficulties unless the
systems or applications are modified to process adequately information related
to the date change. Significant uncertainty exists in the software and other
industries concerning the scope and magnitude of problems associated with the
century change. To the extent Year 2000 issues cause significant delay in, or
cancellation of decisions to purchase products or product support, due to the
reallocation of resources to address Year 2000 issues or otherwise, our
business could be materially adversely affected.

We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 issues. We have put into place a comprehensive Year 2000
Risk Management initiative that is adequately funded, staffed and managed. This
initiative's scope covers both our IT systems and non-IT systems and addresses
all areas of the Year 2000 issues as defined by the Information Technology
Association of America (ITAA). Our internal inventory audit was completed
January 1999. Due to our acquisition of Cohesive, we expanded the independent
review of our Year 2000 assessment. The review was completed in the third
quarter of 1999. Due to our recent acquisition of Service Metrics, Inc., we
performed an independent review of their Year 2000 program. The review was
completed in December 1999. We believe that their internal management
information systems and other systems are Year 2000 compliant. In December
1999, we acquired Global OnLine Japan. We believe that their internal
management information systems and other systems are Year 2000 compliant. We
continue to monitor their program.

We have determined that our Internet Data Center equipment is currently Year
2000 compliant. We will continue to monitor vendors and suppliers for any
potential Year 2000 issues. Likewise, based on the on-going assessment relative
to our current software service offerings, we believe that the current versions
of these products are Year 2000 compliant. We have reviewed, and continue to
review, internal management information and other systems in order to identify
and modify those products, services or systems to ensure that they remain Year
2000 compliant. We have completed the assessment of the Year 2000 compliance of
Cohesive's internal management information and other systems. Based on our
assessment to date, we believe that our internal management information and
other systems and Cohesive's internal management information and other systems
are Year 2000 compliant. We do not foresee any significant issues with internal
IT and internal non-IT systems remaining Year 2000 compliant.

Our Year 2000 initiative also addresses vendor relationships (both IT and
non-IT) and their readiness/preparedness relating to Year 2000 issues. IT
vendors include software providers, hardware providers, service providers, off
the shelf software publishers and IT consultants. Non-IT providers include
electric power

12
<PAGE>

suppliers, vendors of uninterruptable power supplies and generators,
telecommunications service providers, business partners, facilities maintainers
and other non-IT service contractors. In the event that third parties cannot
provide us with products, services or systems that are Year 2000 compliant on a
timely basis, our business could be materially adversely affected. To date, we
have not discovered nor do we anticipate any material issues with vendors and
service providers. Evaluation of vendor Year 2000 preparedness is an on-going
process. As our Year 2000 evaluation does not evaluate our vendors' vendors nor
our vendors' customer base viability issues, we have put in place contingency
plans. To minimize our risk, effective November 15, 1999 through January 4,
2000, we instituted a freeze on the introduction of new technology, new
software versions and new configurations. During that period, we utilized only
hardware approved for production.

Many of our customers maintain their Internet operations on servers which
may be impacted by Year 2000 complications. The failure of our customers to
ensure that their servers are Year 2000 compliant could have a material adverse
effect on our customers, which in turn could have a material adverse effect on
our business, if our customers are forced to cease or interrupt Internet
operations or experience malfunctions related to their equipment.

We have established procedures for evaluating and managing the risks and
costs associated with the Year 2000 problem. Funding and execution for this
initiative is within our existing business units and operating budgets and is
not viewed as material. Based on our current assessment, we believe the costs,
excluding employee personnel time and effort and unanticipated liabilities, to
resolve Year 2000 issues should not exceed $900,000, of which we have incurred
approximately $800,000 as of December 31,1999. We further estimate that the
time and effort required of our personnel to resolve Year 2000 issues will not
be material.

While we believe our Year 2000 initiative to be prudent, properly funded and
staffed and well-managed, there can be no assurance that we will identify and
remedy all Year 2000 problems in a timely fashion, that any remedial efforts in
this regard will not involve significant time and expense, or that these
problems will not have a material adverse effect on our business.

There will be no public market for the notes and restrictions on transfer of
the notes may significantly impair the liquidity of the notes

There is no public market for the notes, and there can be no assurance as
to:

. the liquidity of any such market that may develop;

. the ability of the holders to sell their notes; or

. the price at which the holders would be able to sell their notes.

If such a market were to exist, the notes could trade at prices that may be
higher or lower than the principal amount or purchase price, depending on many
factors, including prevailing interest rates, the market for similar notes and
our financial performance. We do not presently intend to apply for the listing
of the notes on any securities exchange or for inclusion of the notes in the
automated quotation system of the National Association of Securities Dealers,
Inc. The notes are eligible for trading on The Portal Market. Although the
initial purchasers of the notes have advised us that they intend to make a
market in the notes, they are not obligated to make a market in the notes, and
any market-making may be discontinued at any time at their sole discretion. In
addition, market-making activity will be subject to the limits imposed by the
Securities Act and the Exchange Act. Accordingly, no assurance can be given as
to the development or liquidity of any market for the notes.

Our stock price has been volatile in the past and is likely to continue to be
volatile

The notes are convertible into our common stock and the market price of our
common stock has been volatile in the past and is likely to continue to be
volatile. In addition, the securities markets in general, and Internet stocks
in particular, have experienced significant price volatility and accordingly
the trading price of the notes is likely to be volatile.

13
<PAGE>

RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------- --------------------
1995 1996 1997 1998 1998 1999
-------- -------------- --------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deficiency of earnings
available to cover
fixed charges......... $(1,311) $(4,133) $(25,298) $(67,316) $(45,392) $ (77,376)
</TABLE>

<TABLE>
<CAPTION>
Year Ended
December 31, 1994
-----------------
<S> <C>
Ratio of earnings to fixed
charges.......................... 26 x
</TABLE>

Earnings consist of income (loss) before provision for income taxes plus
fixed charges. Fixed charges consist of interest charges and amortization of
debt expense and discount or premium related to indebtedness, whether expensed
or capitalized, and that portion or rental expense we believe to be
representative of interest.

WHERE YOU CAN FIND MORE INFORMATION

We file reports, proxy statements and other information with the Securities
and Exchange Commission. You may inspect the documents we file with the SEC and
copy them, at prescribed rates, at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the public reference facilities by
calling the SEC at 1-800-SEC-0330. You may also read our filings at the SEC's
Web site at http://www.sec.gov.

We have filed with the SEC a registration statement on Form S-3 under the
Securities Act with respect to the notes and common stock offered by this
prospectus. This prospectus does not contain all of the information set forth
in the registration statement. We have omitted parts of the registration
statement as permitted by the rules and regulations of the SEC. Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete. You should refer to the copy of each
contract or document filed as an exhibit to the registration statement for
complete information. Copies of the registration statement, including exhibits,
may be inspected without charge at the SEC's public reference facilities or Web
site.

The SEC allows us to incorporate by reference into this prospectus
information that we file with the SEC. This means that we can disclose
important information to you by referring you to those documents. The
information we incorporate by reference is considered as part of this
prospectus, and later information we file with the SEC will automatically
update and supersede this information. We will furnish without charge to each
person to whom a copy of this prospectus is delivered, upon written or oral
request, a copy of any and all of the information that has been incorporated by
reference into this prospectus other than exhibits to these documents, unless
the exhibits are specifically incorporated by reference in the prospectus as
well. Requests for copies should be directed to 2831 Mission College Boulevard,
Santa Clara, California 95054, Attention: Adam W. Wegner, General Counsel,
telephone: (408) 346-2200.

14
<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

The following documents that we have filed with the SEC are incorporated by
reference into this prospectus:

. our annual report on Form 10-K for the year ended December 31, 1998;

. our quarterly reports on Form 10-Q, as amended, if applicable, for the
quarters ended March 31, 1999, June 30, 1999 and September 30, 1999;

. our current reports on Form 8-K filed January 29, 1999, February 22,
1999, March 2, 1999, June 18, 1999, August 11, 1999, as amended October
12, 1999 and November 29, 1999, November 29, 1999, and December 3, 1999;

. the description of our common stock on Form 8-A filed on February 13,
1998 and the description of our preferred stock purchase rights on Form
8-A filed on January 29, 1999, as amended November 29, 1999; and

. all other information that we file with the SEC pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this prospectus and prior to the termination of this offering.

USE OF PROCEEDS

We will not receive any proceeds from the sale of the notes or common stock
by the selling security holders.

15
<PAGE>

SELLING HOLDERS

The notes were originally issued by Exodus and sold by the initial
purchasers in a transaction exempt from the registration requirements of the
Securities Act to persons reasonably believed by the initial purchasers to be
qualified institutional buyers or other institutional accredited investors.
Selling holders, including their transferees, pledgees or donees or their
successors, may from time to time offer and sell pursuant to this prospectus
any or all of the notes and common stock into which the notes are convertible.

The following table sets forth information, as of February 11, 2000, with
respect to the selling holders and the principal amounts of notes beneficially
owned by each selling holder that may be offered under this prospectus. The
information is based on information provided by or on behalf of the selling
holders. The selling holders may offer all, some or none of the notes or common
stock into which the notes are convertible. Because the selling holders may
offer all or some portion of the notes or the common stock, no estimate can be
given as to the amount of the notes or the common stock that will be held by
the selling holders upon termination of any sales. In addition, the selling
holders identified below may have sold, transferred or otherwise disposed of
all or a portion of their notes since the date on which they provided the
information regarding their notes in transactions exempt from the registration
requirements of the Securities Act. No selling holder named in the table below
beneficially owns one percent or more of our common stock assuming conversion
of a selling holder's notes, except that Deutsche Bank Securities Inc.
beneficially owned 1.1% before the offering, assuming the conversion of their
notes.

16
<PAGE>

<TABLE>
<CAPTION>
Principal Amount Common
of Notes Common Stock Stock Owned
Beneficially Owned Prior Common After
Owned and to the Stock Completion of
Name Offered Offering(1)(2) Offered(2) the Offering
- ---- ---------------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Chilton Opportunity
International,
L.P.(4)................ 1,438,000 30,424 20,424 10,000
Chilton Opportunity
Trust, L.P.(4)......... 554,000 52,984 7,868 45,116
Chilton QP Investment
Partners, L.P.(4)...... 1,502,000 43,625 21,333 22,292
Christian Science
Trustees For Gifts and
Endowments............. 325,000 4,616 4,616 --
Chrysler Corporation
Master Retirement
Trust.................. 1,275,000 18,109 18,109 --
CIBC World Markets...... 7,675,000 109,011 109,011 --
City University of New
York................... 104,000 1,477 1,477 --
Class IC Company,
Ltd.(3)................ 1,500,000 65,090 21,305 43,785
Cova Bond-Debenture
Fund................... 1,000,000 14,203 14,203 --
Deeprock & Co........... 1,000,000 14,203 14,203 --
Delaware PERS(3)........ 1,700,000 45,161 24,145 21,016
Deutsche Bank Securities
Inc.(3)................ 9,455,000 1,903,215 134,293 1,768,922
Donaldson, Lufkin &
Jenrette Securities
Corp................... 8,000,000 113,627 113,627 --
DRT Capital, L.P........ 51,000 724 724 --
Elf Aquitaine........... 250,000 3,550 3,550 --
Ellsworth Convertible
Growth and Income Fund,
Inc.................... 750,000 10,652 10,652 --
Engineers Joint Pension
Fund................... 543,000 7,712 7,712 --
Forest Alternative
Strategies Fund II
Series ASI............. 550,000 7,811 7,811 --
Forest Alternative
Strategies Fund Series
II ASM................. 285,000 4,047 4,047 --
Forest Fulcrum Fund..... 1,280,000 18,180 18,180 --
Forest Global
Convertible Fund Series
A5..................... 5,980,000 84,936 84,936 --
Forum Capital Markets
LLC.................... 4,000,000 56,813 56,813 --
Fuji U.S. Income Open... 750,000 10,652 10,652 --
GCG Trust-Strategic
Equity Series Fund..... 210,000 2,982 2,982 --
General Motors Welfare
Benefit Trust.......... 1,000,000 14,203 14,203 --
Global Bermuda Limited
Partnership(4)......... 500,000 13,201 7,101 6,100
Goldman Sachs & Co.,
Inc.(3)................ 10,872,000 241,989 154,419 87,570
Grace Brothers, Ltd..... 3,000,000 42,610 42,610 --
Grady Hospital.......... 159,000 2,258 2,258 --
Harris Insight
Convertible Securities
Fund................... 500,000 7,101 7,101 --
ICI American Holdings
Trust(3)............... 825,000 20,474 11,717 8,757
IDEX JCC Balanced Fund.. 1,050,000 14,913 14,913 --
JMG Convertible
Investments L.P.(3).... 4,625,000 761,874 65,690 696,184
JMG Triton Offshore
Fund, Ltd.(3).......... 7,100,000 797,028 100,844 696,184
JWF Balanced Fund....... 1,500,000 21,305 21,305 --
Janus Balanced Fund..... 16,500,000 234,356 234,356 --
Janus Equity Income
Fund................... 4,795,000 68,105 68,105 --
Janus Global Technology
Fund................... 15,000,000 213,051 213,051 --
Jefferson Pilot Variable
Fund Balanced
Portfolio.............. 250,000 3,550 3,550 --
K.D. Offshore Fund
C.V.................... 1,000,000 14,203 14,203 --
Kaiser Hill-Rocky Flats
Retirement Plan........ 461,000 6,547 6,547 --
Kellner, DiLeo & Co..... 500,000 7,101 7,101 --
Key Asset Management,
Inc. as Agent for the
Victory Convertible
Securities Fund........ 250,000 3,550 3,550 --
L.A. Fire and Police
Pension Fund........... 6,250,000 88,771 88,771 --
Lakeshore International,
LTD.(4)................ 1,000,000 26,303 14,203 12,100
Lipper Convertibles,
L.P.(3)................ 6,500,000 1,252,629 92,322 1,160,307
Lipper Offshore
Convertibles, L.P...... 2,000,000 28,406 28,406 --
LLT Limited............. 415,000 5,894 5,894 --
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
Principal Amount Common
of Notes Common Stock Stock Owned
Beneficially Owned Prior Common After
Owned and to the Stock Completion of
Name Offered Offering(1)(2) Offered(2) the Offering
- ---- ---------------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Lord Abbett Bond
Debenture Fund......... 8,000,000 113,627 113,627 --
Lord Abbett Investment
Trust High Yield....... 100,000 1,420 1,420 --
Merrill Lynch Pierce
Fenner & Smith Inc..... 2,980,000 42,326 42,326 --
Michael Angelo, L.P..... 2,010,000 28,548 28,548 --
MIT Mid Cap Growth Trust
Fund................... 650,000 9,232 9,232 --
Morgan Stanley Dean
Witter Convertible
Securities............. 2,250,000 31,957 31,957 --
Motion Picture Industry
Health Plan--Active.... 145,000 2,059 2,059 --
Motion Picture Industry
Health Plan--Retiree
Member Fund............ 75,000 1,065 1,065 --
MSD Portfolio L.P.--
Investments............ 335,000 4,758 4,758 --
Nalco Chemical
Company(3)............. 375,000 9,704 5,326 4,378
New Orleans
Firefighters........... 163,000 2,315 2,315 --
New York Life Insurance
and Annuity Corporation
(NYLIA)................ 2,000,000 28,406 28,406 --
New York Life Insurance
Company (NYLIC)........ 14,000,000 198,847 198,847 --
Nicholas-Applegate
Convertible Fund....... 985,000 13,990 13,990 --
Nomura Securities
International,
Inc.(4)................ 7,500,000 197,625 106,525 91,100
Northern Income Equity
Fund................... 1,000,000 14,203 14,203 --
Occidental Petroleum.... 275,000 3,905 3,905 --
OCM Convertible Trust... 685,000 9,729 9,729 --
Onex Industrial Partners
Limited(3)............. 250,000 507,079 3,550 503,529
Oppenheimer Convertible
Securities Fund........ 5,000,000 71,017 71,017 --
Pacific Life Insurance
Company................ 1,500,000 21,305 21,305 --
Partner Reinsurance
Company Ltd............ 255,000 3,621 3,621 --
Pebble Capital Inc.(3).. 250,000 171,422 3,550 167,872
Physicians Life......... 358,000 5,084 5,084 --
Pilgrim Convertible
Fund................... 4,533,000 64,384 64,384 --
Pillar Equity Income
Fund................... 500,000 7,101 7,101 --
Pine Grove Equitized
Partners V, LLC........ 500,000 7,101 7,101 --
Pitney Bowes Retirement
Fund................... 750,000 10,652 10,652 --
Putnam Convertible
Income-Growth Trust.... 5,500,000 78,118 78,118 --
Putnam Convertible
Opportunities & Income
Trust.................. 424,000 6,022 6,022 --
Q Opportunity Fund,
Ltd.................... 15,100,000 214,471 214,471 --
Quattro Offshore Fund... 750,000 10,652 10,652 --
Ramius Capital Group
Holdings, Ltd.......... 2,100,000 29,827 29,827 --
Raphael II LTD.......... 595,000 8,451 8,451 --
RCG Multi Strategy
Account, L.P........... 260,000 3,692 3,692 --
San Diego City
Retirement............. 1,282,000 18,208 18,208 --
San Diego County
Convertible............ 3,475,000 49,356 49,356 --
Shell Pension Trust..... 217,000 3,082 3,082 --
State Employees'
Retirement Fund of the
State of Delaware...... 645,000 9,161 9,161 --
State of Connecticut
Combined Investment
Funds.................. 1,550,000 22,015 22,015 --
State of Maryland....... 2,201,000 31,261 31,261 --
State of Oregon
Equity(3).............. 8,315,000 170,643 118,101 52,542
Summer Hill Global
Partners L.P........... 175,000 2,485 2,485 --
Sylvan IMA Ltd. c/o
Forest Investment
Mgmt................... 490,000 6,959 6,959 --
TAL High Yield Debt
Fund................... 500,000 7,101 7,101 --
Talvert Hyperion High
Yield Bond Fund........ 500,000 7,101 7,101 --
TCW Group, Inc.......... 14,575,000 207,014 207,014 --
Transamerica Life
Insurance & Annuity
Company................ 2,000,000 28,406 28,406 --
</TABLE>

18
<PAGE>

(2) Assumes a conversion rate of 14.2034 shares per $1,000 principal amount of
notes and a cash payment in lieu of any fractional interest.

(3) Includes an additional number of shares of our common stock held by the
security holder subject to the conversion of our 5% convertible
subordinated notes due March 15, 2006 in an amount equal to the number set
forth in the column entitled "Common Stock Owned After Completion of the
Offering."

(4) Includes an additional number of shares of our common stock held by the
security holder equal to the amount set forth in the column entitled
"Common Stock Owned After Completion of the Offering."

(5) Information concerning other selling holders of notes will be set forth in
prospectus supplements from time to time, if required.

(6) Assumes that any other holders of notes or any future transferee from any
holder does not beneficially own any common stock other than common stock
into which the notes are convertible at the conversion rate of 14.2034
shares per $1,000 principal amount of notes.

None of the selling holders nor any of their affiliates, officers, directors
or principal equity holders has held any position or office or has had any
material relationship with Exodus within the past three years, except that
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and
Morgan Stanley were initial purchasers in connection with the offer and sale of
the notes in December 1999 and our 10 3/4% senior notes due 2009. In addition,
Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette were initial purchasers
in connection with the offer and sale of our 11 1/4% senior notes due 2008 in
June 1998 and our 5% convertible subordinated notes due March 15, 2006 in March
1999. Goldman, Sachs & Co. was the initial purchaser in connection with the
offer and sale of our 11 1/4% senior notes due 2008 in June 1999 and was the
lead underwriter for our initial public offering of common stock in March 1998.
The selling holders purchased all of the notes from Exodus in a private
transaction on December 8, 1999. All of the notes were "restricted securities"
under the Securities Act prior to this registration.

Information concerning the selling holders may change from time to time and
any changed information will be set forth in supplements to this prospectus if
and when necessary. In addition, the conversion rate, and therefore, the number
of shares of common stock issuable upon conversion of the notes, is subject to
adjustment under certain circumstances. Accordingly, the aggregate principal
amount of notes and the number of shares of common stock into which the notes
are convertible may increase or decrease.

19
<PAGE>

PLAN OF DISTRIBUTION

The selling holders and their successors, including their transferees,
pledgees or donees or their successors, may sell the notes and the common stock
into which the notes are convertible directly to purchasers or through
underwriters, broker-dealers or agents, who may receive compensation in the
form of discounts, concessions or commissions from the selling holders or the
purchasers. These discounts, concessions or commissions as to any particular
underwriter, broker-dealer or agent may be in excess of those customary in the
types of transactions involved.

The notes and the common stock into which the notes are convertible may be
sold in one or more transactions at fixed prices, at prevailing market prices
at the time of sale, at prices related to the prevailing market prices, at
varying prices determined at the time of sale, or at negotiated prices. These
sales may be effected in transactions, which may involve crosses or block
transactions:

. on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the notes or the
common stock may be listed or quoted at the time of sale;

. in the over-the-counter market;

. in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;

. through the writing of options, whether the options are listed on an
options exchange or otherwise; or

. through the settlement of short sales.

In connection with the sale of the notes and the common stock into which the
notes are convertible or otherwise, the selling holders may enter into hedging
transactions with broker-dealers or other financial institutions, which may in
turn engage in short sales of the notes or the common stock into which the
notes are convertible in the course of hedging the positions they assume. The
selling holders may also sell the notes or the common stock into which the
notes are convertible short and deliver these securities to close out their
short positions, or loan or pledge the notes or the common stock into which the
notes are convertible to broker-dealers that in turn may sell these securities.

The aggregate proceeds to the selling holders from the sale of the notes or
common stock into which the notes are convertible offered by them will be the
purchase price of the notes or common stock less discounts and commissions, if
any. Each of the selling holders reserves the right to accept and, together
with their agents from time to time, to reject, in whole or in part, any
proposed purchase of notes or common stock to be made directly or through
agents. Exodus will not receive any of the proceeds from this offering.

Exodus' outstanding common stock is listed for trading on the Nasdaq
National Market. We do not intend to list the notes for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the notes.

In order to comply with the securities laws of some states, if applicable,
the notes and common stock into which the notes are convertible may be sold in
these jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the notes and common stock into which the notes are
convertible may not be sold unless they have been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.

The selling holders and any underwriters, broker-dealers or agents that
participate in the sale of the notes and common stock into which the notes are
convertible may be "underwriters" within the meaning of Section 2(11) of the
Securities Act. Any discounts, commissions, concessions or profit they earn on
any resale of the shares may be underwriting discounts and commissions under
the Securities Act. Selling holders who are "underwriters" within the meaning
of Section 2(11) of the Securities Act will be subject to the prospectus
delivery requirements of the Securities Act. The selling holders have
acknowledged that they understand their obligations to comply with the
provisions of the Exchange Act and the rules thereunder relating to stock
manipulation, particularly Regulation M.

20
<PAGE>

In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling holder
may not sell any notes or common stock described in this prospectus and may not
transfer, devise or gift these securities by other means not described in this
prospectus.

To the extent required, the specific notes or common stock to be sold, the
names of the selling holders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a post-
effective amendment to the registration statement of which this prospectus is a
part.

Exodus entered into a registration rights agreement for the benefit of
holders of the notes to register their notes and common stock under applicable
federal and state securities laws under specific circumstances and at specific
times. The registration rights agreement provides for cross-indemnification of
the selling holders and Exodus and their respective directors, officers and
controlling persons against specific liabilities in connection with the offer
and sale of the notes and the common stock, including liabilities under the
Securities Act. Exodus will pay substantially all of the expenses incurred by
the selling holders of Exodus incident to the offering and sale of the notes
and the common stock.

21
<PAGE>

DESCRIPTION OF NOTES

The notes were issued under an indenture dated as of December 1, 1999
between Exodus and Chase Manhattan Bank and Trust Company, National
Association, as trustee. You may request a copy of the indenture from the
trustee at its offices in New York City. References in this section to "us" or
"Exodus" are solely to Exodus Communications, Inc. and not our subsidiaries.
This section summarizes the provisions of the notes and the indenture and the
related registration rights agreement. You should refer to these documents for
more detailed information.

General

We issued $500.0 million aggregate principal amount of the notes in December
1999. The notes are unsecured subordinated obligations of Exodus. The notes
will mature on July 15, 2008, when they will be payable at a price of 100% of
the principal amount. The notes bear interest beginning on December 8, 1999
at an annual rate of 4 3/4%, payable semiannually on January 15 and July 15 of
each year, commencing on July 15, 2000.

The notes are currently convertible into our common stock initially at the
conversion rate of 14.2034 shares per $1,000 principal amount, subject to
adjustment upon the occurrence of the specified events described below under
"Conversion Rights," at any time until the maturity date, unless previously
redeemed or repurchased.

Global Note; Book-Entry System

Notes held by qualified institutional buyers are evidenced by a global note
and were deposited with the trustee as custodian for the Depository Trust
Company, or DTC, and registered in the name of Cede & Co., as nominee of DTC.
Except as set forth below, record ownership of the global note may be
transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.

If a qualified institutional buyer is a participant in DTC, it may hold its
interest in the global note directly through DTC or indirectly through
organizations that are participants. Qualified institutional buyers who are not
participants may beneficially own interests in the global note held by DTC only
through participants in DTC or various banks, brokers, dealers, trust companies
and other parties that clear through or maintain a custodial relationship with
a participant. Transfers between participants will be effected in the ordinary
way in accordance with DTC's rules and will be settled in same-day funds. The
laws of some states require that specified persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer beneficial
interests in the global note to these persons may be limited.

We will pay interest on and principal of and the redemption or repurchase
price of the global note, as well as any payment of liquidated damages, as
described below, to Cede, the nominee for DTC, as the registered owner of the
global note, by wire transfer of immediately available funds on each relevant
payment date. We and the trustee have no responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the global note.

DTC has informed us that its practice is to credit participants' accounts on
the payment date with payments in amounts proportionate to their beneficial
interests in the global note, unless it has reason to believe that it will not
receive payment. Only the DTC participants are responsible for payments to
owners of beneficial interests held through them.

Redemption notices shall be sent to Cede. If less than all the notes are
being redeemed, DTC's practice is to determine by lot the amount of the
holdings of each participant in the issue to be redeemed.

Neither DTC nor Cede will consent or vote with respect to the notes. Under
its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date. The omnibus proxy assigns

22
<PAGE>

Cede's consenting or voting rights to those participants to whose accounts to
which the notes are credited on the record date are identified in a listing
attached to the omnibus proxy.

Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, a person or entity having a beneficial
interest in the global note may be unable to pledge its interest to persons or
entities that do not participate in the DTC book-entry system, and other
actions related to their interest may be affected, due to the lack of a
physical certificate evidencing their interest.

DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account with DTC interests in the global note are credited. DTC will only take
action in respect of the portion of the principal amount of the notes
represented by the global note as to which the participant or participants has
or have given direction.

DTC has advised us that it is a limited purpose trust company organized
under the laws of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code, as amended, and
a "clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include other organizations.
Various participants or their representatives, together with other entities,
own DTC. Indirect access to the DTC system is available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant.

Although DTC has agreed to the above procedures in order to facilitate
transfers of beneficial ownership interests in the global note among
participants, it has no obligation to perform or continue to perform these
procedures.

The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy of this information. We are not responsible for
the performance by DTC or its participants or indirect participants of their
obligations under the rules and procedures governing their operations,
including maintaining, supervising or reviewing the records relating to, or
payments made on account of, beneficial ownership interests in the global note.
The trustee is also not responsible for this performance.

So long as DTC is the registered owner of the global note, DTC will be
considered the sole legal owner or holder of the notes represented by the
global note. Except as set forth below, owners of beneficial interests in a
global note will not be entitled to have notes represented by the global note
registered in their names, will not receive or be entitled to receive physical
delivery of notes in definitive form and will not be considered the legal
owners or holder of the notes under the indenture. Accordingly, each person
owning a beneficial interest in the global note must rely on the procedures of
DTC and, if that person is not a participant, those of the participant through
which that person owns its interests, in order to exercise any rights of a
holder under the indenture or the holder's note.

A global note is exchangeable for definitive notes in registered
certificated form if:

. DTC notifies us that it is unwilling or unable to continue as depositary
for our global note and we fail to appoint a successor depository within
90 days of that notice, or DTC has ceased to be a clearing agency
registered under the Exchange Act;

. we notify the trustee in writing that we desire the issuance of the
notes in certificated form; or

. there shall have occurred and be continuing a default or an event of
default with respect to the notes.

In all cases, certificated notes delivered in exchange for any global note will
be registered in the names, and issued in any approved denominations, required
by or on behalf of the depositary.

23
<PAGE>

Conversion Rights

You may convert any portion of a note, in multiples of $1,000, into shares
of our common stock at any time until the maturity date, unless previously
redeemed or repurchased, at a conversion rate of 14.2034 shares of common stock
per $1,000 principal amount of notes. This is equivalent to an approximate
conversion price of $70.41 per share of common stock. This conversion rate is
subject to adjustment upon specific events as described below. The right to
convert a note called for redemption or delivered for repurchase will terminate
at the close of business on the business day immediately preceding the
redemption date or the repurchase date, as the case may be.

You may convert a note by delivering the note to the corporate trust office
of the trustee in New York City, accompanied by a duly signed and completed
notice of conversion. You may obtain this conversion notice at the office of
the trustee.

As promptly as practicable on or after the conversion date, we will issue
and deliver to the trustee a certificate or certificates for the number of full
shares of common stock issuable upon conversion, together with a cash payment
instead of any fraction of a share. The shares of common stock issuable upon
conversion of the notes will be fully paid and nonassessable and will rank
equal to the other shares of our common stock outstanding. If a note is
surrendered for conversion on or after a record date for interest payments, but
before the next interest payment date, and we have not called the note for
redemption on a redemption date during the period beginning on the record date
and ending on the third business day after the interest payment date, the note
must be accompanied by payment equal to the interest payable on the next
interest payment date. In the case of any note which has been converted after
any record date for interest payments but before the next succeeding interest
payment date, interest will be payable on that interest payment date
notwithstanding a conversion, and the interest shall be paid to the holder of
the converted note on the record date. If you surrender a note for conversion
on a date that is not after a record date and on or after an interest payment
date, you will not receive any interest for the period from the prior interest
payment date to the date of conversion or for any later period. No other
payment or adjustment for interest, or for any dividends in respect of common
stock, will be made upon conversion. Holders of common stock issued upon
conversion will not be entitled to receive any dividends payable to holders of
common stock as of any record time or date before the close of business on the
conversion date.

A holder delivering a note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of common stock on
conversion. However, if the common stock will be issued or delivered in a name
other than that of the holder of the note, the holder will be required to pay
any tax or duty which may be payable in respect of the transfer. Certificates
representing shares of common stock will not be issued or delivered unless all
taxes and duties, if any, payable by the holder have been paid.

We will adjust the conversion rate of the notes if we:

. issue dividends or other distributions, payable in common stock on
shares of our common stock;

. issue to all holders of our common stock rights to subscribe for or
purchase common stock at less than the then current market price;

. subdivide, combine or reclassify our common stock;

. distribute to all holders of common stock evidences of our indebtedness,
shares of capital stock, cash or assets, including securities, but
excluding:

. those dividends and rights, and distributions referred to above;

. dividends and distributions paid exclusively in cash;

. distributions upon mergers or consolidations resulting in a
reclassification, conversion, exchange or cancellation of our
common stock;

24
<PAGE>

. pay a cash dividend or distribution to the holders of our common stock,
if, when aggregated with all other all-cash distributions and cash and
consideration payable through a tender offer by us, or a subsidiary,
made during the prior 12 months for which an adjustment to the
conversion rate was not made, the dividend, distribution or repurchase
exceeds 10% of our market capitalization.

. complete a tender offer for our common stock which involves aggregate
consideration that together with (a) cash and other consideration
payable in a tender offer by us, or a subsidiary for our common stock
expiring within the 12 months preceding the expiration of that tender
offer for which no adjustment was made and (b) the amount of any all-
cash distributions referred to in the bullet point immediately above to
all holders of our common stock within the 12 months preceding the
expiration of that tender offer for which no adjustment was made,
exceeds 10% of our market capitalization on the expiration of the tender
offer.

We are not required to adjust the conversion rate until the cumulative
adjustments amount to 1.0% or more of the conversion rate. We will give notice
by mail of any adjustments.

If we are consolidated or merged with another entity that results in the
reclassification, conversion, exchange or cancellation of our common stock, or
if we sell or transfer all or substantially all of our assets, each note will
automatically become convertible only into the consideration receivable upon
this event by the holders of our common stock.

We may increase the conversion rate by any amount for any period of at least
20 days, upon at least 15 days notice, if our board of directors deems the
increase to be in the best interests of Exodus.

If we make a distribution of property to our stockholders which would be
taxable to them as a dividend for United States federal income tax purposes and
the number of shares into which notes are convertible is increased, the
increase may be deemed for federal income tax purposes to be the payment of a
taxable dividend to holders of notes.

Subordination

All payments on the notes are subordinated to the prior payment in full of
all our senior indebtedness. Senior indebtedness includes indebtedness
evidenced by a credit or loan agreement, note, bond or other written
obligation, all obligations for money borrowed and specified types of leases.
The principal amount of outstanding senior indebtedness was approximately
$339.7 million at September 30, 1999. In addition, the $375.0 million principal
amount of our 10 3/4% senior notes due 2009 and the (Euro)125.0 million
principal amount of our 10 3/4% senior notes due 2009 issued in December 1999
and the additional $100.0 million principal amount of 10 3/4% senior notes due
2009 that may be issued on or before December 8, 2000 constitute senior
indebtedness.

Our obligations under the notes is also effectively subordinated to all
liabilities of our subsidiaries. As of September 30, 1999, our subsidiaries had
approximately $17.4 million in liabilities. The indenture does not limit our
ability or our subsidiaries' ability to incur senior indebtedness or any other
indebtedness.

In addition, the subordination provisions of the indenture prevent us from
making any payments on the notes if:

. we fail to pay any amounts due on any designated senior debt, as defined
in the indenture, beyond the applicable grace period; or

. any other event of default occurs and is continuing under any designated
senior debt that permits its holders to accelerate the maturity of that
debt, and the trustee receives a payment blockage notice of the default
from us, from a holder of the designated senior debt or from other
persons permitted to give notice under the indenture.

25
<PAGE>

We may resume making payments on the notes once a payment default on the
designated senior debt is cured or waived.

We may also resume making payments on the notes following a nonpayment
default on the designated senior debt on the earlier of the date on which the
default is cured or waived or 179 days after the date on which the payment
blockage notice is received. No new payment blockage period may be commenced
unless:

. 365 days have passed since the trustee's receipt of the prior payment
blockage notice; and

. all scheduled payments of principal, premium, if any, and interest on
the notes that have come due have been paid in full in cash.

As a result of the subordination provisions, in the event of our
dissolution, winding up, liquidation, reorganization, bankruptcy, insolvency,
receivership or other similar proceedings, holders of the notes may receive
less than other creditors on a ratable basis.

In addition, the notes are structurally subordinated to all indebtedness and
other liabilities of our subsidiaries.

Optional Redemption

We may not redeem the notes prior to January 20, 2002. We may redeem the
notes on and after January 20, 2002, at our option, in whole or in part, upon
not less than 30 nor more than 60 days notice to each holder, at the prices set
forth below. However, we may not redeem the notes on or after January 20, 2002
and before January 15, 2004 unless the last reported bid price for our common
stock equals or exceeds 140% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending within five trading
days of the call for redemption.

The redemption price, expressed as a percentage of principal amount, is as
follows for the 12-month periods beginning on January 15 of the years indicated
below, other than the year 2002, which will be from January 20, 2002 to January
14, 2003 and 2008, which period will be from January 19, 2008 to July 14, 2008:

<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2002...................................................... 103.632%
2003...................................................... 103.074
2004...................................................... 102.515
2005...................................................... 101.956
2006...................................................... 100.397
2007...................................................... 100.838
2008...................................................... 100.279
</TABLE>

and thereafter is equal to 100% of the principal amount, in each case together
with accrued interest to the date of redemption.

Payment

The principal of notes will be payable in U.S. dollars, when the notes are
surrendered at the corporate trust office of the trustee in New York City.
Payment will be made by check drawn on a bank in New York City, or, if
requested by holders with more than $2,000,000 of notes, by transfer to an
account maintained by the holder with a bank in New York City. Interest
payments on each note will be made to the person in whose name the note is
registered at the close of business on the January 1 or the July 1 preceding
the relevant interest payment date. Interest payments are payable in U.S.
dollars and made by a check drawn on a bank in New York City mailed to the
holder at the holder's registered address. In addition, if requested by a
holder with more than

26
<PAGE>

$2,000,000 of notes, interest payments may be made by transfer to an account
maintained by the holder with a bank in New York City. No transfer to an
account will be made unless the trustee has received written wire instructions
at least 15 days prior to the relevant payment date.

Payments on any global note registered in the name of DTC or its nominee
will be payable by the trustee to DTC or its nominee. The trustee will not have
any responsibility or liability for the actions and practices of DTC or any of
its participants or indirect participants.

Any payment on the notes due on any day which is not a business day may be
made on the next business day.

We have initially appointed the trustee as paying agent and conversion
agent. We may at any time terminate the appointment of any paying agent or
conversion agent and appoint additional or other paying agents and conversion
agents. Notice of any termination or appointment and of any change in the
office through which any paying agent or conversion agent will act will be
given in accordance with "--Notices" below.

All moneys deposited by us with the trustee or any paying agent for any
payment on any notes which remain unclaimed at the end of two years after
payment has become due will be repaid to us, and the holder of the note must
then look only to us for payment.

Repurchase at Option of Holders Upon a Change in Control

If a change in control, as defined below, occurs, we must mail holders of
notes a notice within 30 days of the change in control describing the
transaction or transactions that constitute the change of control and offering
to purchase notes on the date specified in the notice. If a change in control
occurs, each holder of notes may require us to purchase the holder's notes in
integral multiples of $1,000. We will repurchase the notes for an amount of
cash equal to 100% of the principal amount plus accrued and unpaid interest, if
any, to the date of purchase.

Instead of repurchasing notes for cash, we may, at our option, deliver to
holders of notes shares of our common stock valued at 95% of the average of the
closing bid prices for the five trading days immediately preceding and
including the third day prior to the repurchase date. However, payment may not
be made in our common stock unless we satisfy specific conditions with respect
to the payment prior to the repurchase date.

A change in control means:

1. the acquisition by any person, including any group deemed to be a
"person" under Section 13(d)(3) of the Exchange Act, of beneficial
ownership, directly or indirectly, through a purchase, merger or other
acquisition transaction or series of transactions, of shares of our
capital stock entitling the person to exercise 50% or more of the total
voting power of all shares of our capital stock entitled to vote
generally in elections of directors, other than an acquisition of
capital stock by us, any subsidiary of us or any of our employee
benefit plans; or

2. any consolidation or merger of us with or into, any other person, any
merger of another person into us, or any conveyance, sale, transfer or
lease of all or substantially all of our assets to another person,
other than:

. a transaction which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of our
capital stock and where the holders of our common stock immediately
prior to the transaction have the entitlement to exercise, directly
or indirectly, 50% or more of the total voting power of all shares
of our capital stock entitled to vote generally in the election of
directors of the continuing or surviving corporation immediately
after the transaction; and

. any merger which is effected solely to change our jurisdiction of
incorporation and results in a reclassification, conversion or
exchange of outstanding shares of common stock only into shares of
common stock;

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A change in control is not deemed to have occurred if:

. the closing bid price per share of our common stock for any five trading
days within the period of 10 consecutive trading days ending immediately
after the later of the change in control or the public announcement of
the change in control, in the case of a change in control under the
first bullet point above, or the period of 10 consecutive trading days
ending immediately before the change in control, in the case of a change
in control under the second bullet point above, shall equal or exceed
105% of the conversion price of the notes in effect on each of these
trading days; or

. all of the consideration, excluding cash payments for fractional shares
and cash payments made pursuant to dissenters' appraisal rights, in a
merger or consolidation constituting the change of control consists of
shares of common stock traded on a national securities exchange or on
the Nasdaq National Market or will be so traded immediately following
the change of control.

In connection with any purchase offer, we will comply with the provisions of
Rule 13e-4, 14e-1 and any other tender offer rules under the Exchange Act which
may then be applicable.

The change in control feature of the notes would not necessarily afford
holders protection in the event of highly leveraged or other transactions
involving us that may adversely affect holders.

Our ability to repurchase notes upon the occurrence of a change in control
is subject to limitations. We may not have the financial resources, or may not
be able to arrange financing, to pay the repurchase price for all the notes
that might be delivered seeking to exercise the repurchase right. Moreover,
although we may elect to pay the repurchase price for the notes using shares of
our common stock, our ability to repurchase notes may be limited or prohibited
by the terms of borrowing arrangements, including the indentures governing our
11 1/4% senior notes due 2008 and our 10 3/4% senior notes due 2009 and other
senior indebtedness. Our ability to repurchase notes may also be limited by the
terms of our subsidiaries' borrowing arrangements due to dividend restrictions.
If we fail to repurchase the notes when required following a change in control
this would result in an event of default under the indenture. A default may, in
turn, cause a default under our senior indebtedness. In addition, the
occurrence of a change in control could result in an event of default under the
terms of the indentures governing our 11 1/4% senior notes due 2008 or our 10
3/4% senior notes due 2009 or under the terms of our other senior indebtedness.
As a result, any repurchase of the notes would, absent a waiver, be prohibited
under the subordination provisions of the indenture until the senior
indebtedness is paid in full. In addition, our repurchase of notes as a result
of the occurrence of a change in control may be prohibited or limited by, or
create an event of default under, the terms of agreements related to borrowings
which we may enter into from time to time, including agreements relating to
senior indebtedness. See "--Subordination."

Covenant Regarding Use of Proceeds

We will use the net proceeds of the sale of the notes, other than the first
$291.75 million, to finance the purchase or other acquisition of any property,
inventory, asset or business directly or indirectly, by us or any Restricted
Subsidiary used in, or to be used in, the System and Network Management
Business, or for other purposes as may be permitted by the indenture for our 11
1/4% senior note due 2008. "Restricted Subsidiary" shall mean any subsidiary
that has not been designated an "Unrestricted Subsidiary" pursuant to the
indenture for our 11 1/4% senior notes due 2008. "System and Network Management
Business" means:

. server and other hardware hosting;

. connectivity, data networking, telecommunications or content for
computer or data networks or systems;

. management of computer or data networks or systems;

. technology services, equipment sales or leasing or software licensing
for computer or data networks or systems, including Internet Protocol
and any successor protocol(s) based networks; and

. businesses reasonably related, complementary or incidental to the items
listed above.

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Mergers and Sales of Assets by Exodus

We may not consolidate with or merge into any other entity or convey,
transfer, sell or lease our properties and assets substantially as an entirety
to any entity unless:

. the surviving entity or the person to which our properties and assets
are so conveyed, transferred, sold or leased shall be a corporation,
limited liability company, partnership or trust organized under the laws
of the United States, any state or the District of Columbia and, if
other than us, shall expressly assume the payment of the notes and the
performance of our other covenants under the indenture; and

. immediately after giving effect to this transaction, no event of
default, and no event that, after notice or lapse of time or both, would
become an event of default, shall have occurred and be continuing.

Events of Default

The following are events of default under the indenture:

(1) failure to pay principal of or premium, if any, on any note when due,
whether or not the payment is prohibited by the subordination
provisions of the notes and the indenture;

(2) failure to pay any interest, including any liquidated damages, on any
note when due, continuing for 30 days, whether or not the payment is
prohibited by the subordination provisions of the notes and the
indenture;

(3) failure to provide an offer to purchase in the event of a change in
control whether or not the offer to purchase is prohibited by the
subordination provisions of the notes and the indenture;

(4) failure to perform any of our other covenants in the indenture,
continuing for 60 days after written notice as provided in the
indenture;

(5) any default by us or any significant subsidiary, in payment with
respect to amounts in excess of $10.0 million due under any other
indebtedness if the default shall have continued after any applicable
grace period and, if not already matured at its final maturity, the
holder of the indebtedness shall have the right to accelerate the
indebtedness;

(6) any event of default as defined in any of our other indebtedness in
excess of $10.0 million shall have occurred and the indebtedness, if
not already matured at its final maturity, shall have been
accelerated; and

(7) specified events of bankruptcy, insolvency or reorganization with
respect to us or any significant subsidiary.

Generally, the trustee will be under no obligation to exercise any of its
rights under the indenture, unless holders shall have offered reasonable
indemnity to the trustee. Upon providing for the indemnification of the
trustee, the holders of a majority in aggregate principal amount of the
outstanding notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee.

If an event of default, other than as specified in clause number 7 above,
occurs and is continuing, either the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes may, subject to the
subordination provisions of the indenture, accelerate the maturity of all
notes. However, after acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of
outstanding notes may rescind and annul the acceleration if all events of
default, other than the non-payment of principal of the notes which have become
due solely by declaration of acceleration, have been cured or waived as
provided in the indenture. If an event of default as specified in clause number
7 above occurs and is continuing, then the principal of, and accrued interest
on, all the notes shall automatically become immediately due and payable
without any declaration or other act on the part of the holders of the notes or
the trustee.

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No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy under the indenture, unless:

. the holder shall have previously given to the trustee written notice of
a continuing event of default; and

. the holders of at least 25% in aggregate principal amount of the
outstanding notes shall have made written request, and offered
reasonable indemnity, to the trustee to institute the proceeding as
trustee, and the trustee shall not have received from the holders of a
majority in aggregate principal amount of the outstanding notes a
direction inconsistent with the request and shall have failed to
institute the proceeding within 60 days.

However, these limitations do not apply to a suit instituted by a holder of a
note for the enforcement of payment on the note on or after the due dates
expressed in the note or of the right to convert the note in accordance with
the indenture.

Meetings, Modification and Waiver

The indenture contains provision for convening meetings of the holders of
notes to consider matters affecting their interests.

Limited modifications of the indenture may be made without obtaining the
consent of the holders of the notes. Other modifications and amendments of the
indenture may be made, and various past defaults by us may be waived, either:

. with the written consent of the holders of not less than a majority in
aggregate principal amount of the notes at the time outstanding; or

. by the adoption of a resolution, at a meeting of holders of the notes at
which a quorum is present, by the holders of at least 66 2/3% in
aggregate principal amount of the notes represented at the meeting.

However, the consent of the holder of each outstanding note affected is
required to approve modifications or amendments of the notes that would:

. change the stated maturity of the principal of, or any installment of
interest on, any note;

. reduce the principal amount of, or the premium, if any, or interest on,
any note;

. reduce the amount payable upon a redemption or mandatory repurchase;

. modify the provisions with respect to the repurchase right of the
holders in a manner adverse to the holders;

. change the place or currency of payment on any note;

. impair the right to institute suit for the enforcement of any payment on
any note;

. modify our obligation to maintain an office or agency in New York City;

. except as otherwise permitted or contemplated by specified provisions in
the indenture, adversely affect the right of holders to convert any of
the notes or to require us to repurchase any note other than as provided
in the indenture;

. modify the subordination provisions in a manner adverse to the holders
of the notes;

. reduce the above-stated percentage of outstanding notes necessary to
modify or amend the indenture;

. reduce the percentage of aggregate principal amount of outstanding notes
necessary for waiver;

. reduce the percentage in aggregate principal amount of outstanding notes
required for the adoption of a resolution or the quorum required at any
meeting of holders of notes; or

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<PAGE>

. modify our obligation to deliver information required under Rule 144A to
permit resales of notes and common stock issuable upon conversion of the
notes in the event we cease to be subject to reporting requirements
under the United States securities laws.

The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the notes
at the time outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of the aggregate principal amount.

The holders of a majority in aggregate principal amount of the outstanding
notes may waive compliance by us with various restrictive provisions of the
indenture by written consent or by the adoption of a resolution at a meeting.
The holders of a majority in aggregate principal amount of the outstanding
notes also may waive any past default under the indenture, except a default in
the payment of principal, premium, if any, or interest, by written consent.

Registration Rights

We have entered into a registration rights agreement with the initial
purchasers of the notes. Under this agreement we must, at our own expense:

. file with the SEC, within 90 days after the date of original issuance of
the notes, a shelf registration statement covering resales of the notes
and the common stock issuable on conversion of the notes;

. use all reasonable efforts to cause the shelf registration statement to
be declared effective under the Securities Act within 180 days after the
date of original issuance of the notes; and

. use all reasonable efforts to keep effective the shelf registration
statement until two years after the date it is declared effective or, if
earlier, until there are no outstanding unregistered notes or common
stock issuable on conversion of the notes.

We are permitted to suspend the use of the prospectus which is part of the
shelf registration statement during periods of time, not to exceed an aggregate
of 45 days in any 90-day period, or an aggregate of 90 days in any 365-day
period, under specific circumstances relating to pending corporate
developments, public filings with the SEC and other events.

We will provide to each holder copies of the prospectus that is a part of
the shelf registration statement, notify each holder when the shelf
registration statement has become effective and take other actions as are
required to permit public resales of the notes and the common stock issuable on
conversion of the notes.

If the shelf registration statement ceases to be effective, or the holders
are otherwise prevented or restricted by us from effecting sales while the
shelf registration statement is supposed to be effective, for more than 45 days
during any 90 day period, or for more than 90 days during any 12-month period
then, in either case, the interest rate borne by the notes will increase by an
additional 0.5% per annum until the time the failure is cured.

A holder who elects to sell any securities pursuant to the shelf
registration statement:

. will be required to be named as a selling security holder in the related
prospectus;

. may be required to deliver a prospectus to purchasers;

. may be subject to civil liability provisions under the Securities Act in
connection with the sales; and

. will be bound by the provisions of the registration rights agreement
which are applicable to a holder making the election, including
indemnification provisions.

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We have mailed a notice and questionnaire to the holders of the notes.
Unless a holder has returned a completed and signed notice and questionnaire to
us by the deadline for response set forth in the notice, that holder is not
entitled to:

. be named as a selling security holder in the shelf registration
statement as of the effective time of the shelf registration statement;
and

. use the prospectus forming a part of the shelf registration statement
for offers and resales of notes or common stock at any time.

We will, upon the request of any holder of securities that has not
previously elected to have their securities included, as promptly as reasonably
practicable, send a notice and questionnaire to the holder. We will not be
required to name that holder as a selling securityholder in the shelf
registration statement until that holder has returned a completed and signed
notice and questionnaire to us. Following our receipt of the notice and
questionnaire, we will as promptly as practicable include the securities listed
in the notice and questionnaire in the shelf registration statement, if not
previously included.

Title

Exodus, the trustee, any paying agent and any conversion agent may treat the
registered owner of any note as the absolute owner for the purpose of making
payment and for all other purposes.

Notices

Notice to holders of the notes will be given by mail to the addresses of the
holders as they appear in the security register. These notices will be deemed
to have been given on the date of mailing.

Replacement of Notes

We will replace notes that become mutilated, destroyed, stolen or lost at
the expense of the holder upon delivery to the trustee of the mutilated notes
or evidence of the loss, theft or destruction of the note satisfactory to us
and the trustee. If a note is lost, stolen or destroyed, indemnity satisfactory
to the trustee and us may be required at the expense of the holder before a
replacement note will be issued.

Governing Law

The indenture and the notes are governed by and construed in accordance with
the laws of the State of New York.

The Trustee

In case an event of default shall occur and shall not be cured, the trustee
will be required to use the degree of care of a prudent person in the conduct
of his own affairs in the exercise of its powers. The trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any of the holders of notes, unless they shall have offered to the
trustee reasonable security or indemnity.

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a general discussion of material U.S. federal income tax
considerations relevant to holders of the notes and common stock into which the
notes may be converted. This discussion is based upon the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue
Service ("IRS") rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. There can be no assurance that the IRS will not challenge one
or more of the tax consequences described in this section, and we have not
obtained, nor do we intend to obtain, a ruling from the IRS with respect to the
U.S. federal income tax consequences of acquiring or holding notes or common
stock. This discussion does not purport to deal with all aspects of U.S.
federal income taxation that may be relevant to a particular holder in light of
the holder's circumstances; for example, persons subject to the alternative
minimum tax provisions of the Code. Also, it is not intended to be wholly
applicable to all categories of investors, some of which, such as dealers in
securities, banks, insurance companies, tax-exempt organizations, and persons
holding notes or common stock as part of a hedging or conversion transaction or
straddle or persons deemed to sell notes or common stock under the constructive
sale provisions of the Code may be subject to special rules. The discussion
also does not discuss any aspect of state, local or foreign law, or U.S.
federal estate and gift tax law as applicable to U.S. Holders (as defined
below). In addition, this discussion is limited to original purchasers of notes
who acquire the notes at their original issue price within the meaning of
Section 1273 of the Code, and who will hold the notes and common stock as
"capital assets" within the meaning of Section 1221 of the Code.

All prospective purchasers of the notes are advised to consult their own tax
advisors regarding the federal, state, local and foreign tax consequences of
the purchase, ownership and disposition of the notes and the common stock.

U.S. Holders

As used herein, the term "U.S. Holder" means the beneficial owner of a note
or common stock that for United States federal income tax purposes is (i) a
citizen or resident (as defined in Section 7701(b) of the Code) of the United
States, (ii) a corporation, partnership or other entity formed under the laws
of the United States or any political subdivision thereof, (iii) an estate the
income of which is subject to U.S. federal income taxation regardless of its
source and (iv) in general, a trust subject to the primary supervision of a
court within the United States and the control of a United States person as
described in Section 7701(a)(30) of the Code. A "Non-U.S. Holder" is any holder
of a note or common stock other than a U.S. Holder.

Interest

Interest on the notes will generally be includable in a U.S. Holder's gross
income and taxable as ordinary income for U.S. federal income tax purposes at
the time it is paid or accrued in accordance with the U.S. Holder's regular
method of accounting.

Conversion of Notes into Common Stock

A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock except to the extent the common stock is
considered attributable to accrued interest not previously included in income
(which is taxable as ordinary income). Cash received in lieu of a fractional
share of common stock should generally be treated as a payment in exchange for
such fractional share rather than as a dividend. Gain or loss recognized on the
receipt of cash paid in lieu of such fractional share generally will equal the
difference between the amount of cash received and the amount of tax basis
allocable to the fractional shares. The adjusted basis of shares of common
stock received on conversion will equal the adjusted basis of the note
converted, reduced by the portion of adjusted basis allocated to any fractional
share of common stock exchanged for cash. The holding period of the common
stock received on conversion will generally include the

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<PAGE>

period during which the convertsed notes were held prior to conversion.
However, a U.S. Holder's tax basis in shares of common stock considered
attributable to accrued interest as described above, generally will equal the
amount of such accrued interest included in income, and the holding period for
such shares shall begin as of the date of the conversion.

The conversion price of the notes is subject to adjustment under certain
circumstances. Section 305 of the Code and the Treasury Regulations issued
thereunder may treat the holders of the notes as having received a construction
distribution, resulting in ordinary income, subject to a possible dividends
received deduction in the case of corporate holders, to the extent of Exodus'
current and/or accumulated earnings and profits, if, and to the extent that
certain adjustments in the conversion price, which may occur in limited
circumstances, particularly an adjustment to reflect a taxable dividend to
holders of common stock, increase the proportionate interest of a holder of
notes in the fully diluted common stock, whether or not such holder ever
exercises its conversion privilege. Moreover, if there is not a full adjustment
to the conversion ratio of the notes to reflect a stock dividend or other event
increasing the proportionate interest of the holders of outstanding common
stock in the assets or earnings and profits of Exodus, then such increase in
the proportionate interest of the holders of the common stock generally will be
treated as a distribution to such holders, taxable as ordinary income, subject
to a possible dividends received deduction in the case of corporate holders, to
the extent of Exodus' current and/or accumulated earnings and profits.
Therefore, U.S. Holders may recognize income in the event of a deemed
distribution even though they may not receive any cash or property.

Sale, Exchange or Retirement of the Notes

Each U.S. Holder generally will recognize gain or loss upon the sale,
exchange, redemption, retirement or other disposition of notes measured by the
difference (if any) between (i) the amount of cash and the fair market value of
any property received (except to the extent that such cash or other property is
attributable to the payment of accrued interest not previously included in
income, which amount will be taxable as ordinary income) and (ii) such holder's
adjusted tax basis in the notes. Any gain or loss recognized on the sale,
exchange, redemption, retirement or other disposition of a Note should be
capital gain or loss and will generally be long-term capital gain or loss if
the Note has been held or deemed held for more than 12 months at the time of
the sale or exchange. Generally, the long-term capital gain rate for
individuals is 20%. Capital gain that is not long-term capital gain is taxed at
ordinary income rates. A holder's initial basis in a note will be the amount
paid for the note.

The Common Stock

Distributions, if any, paid on the common stock after a conversion, to the
extent made from current and/or accumulated earnings and profits of Exodus, as
determined for U.S. federal income tax purposes, will be included in a U.S.
Holder's income as ordinary income (subject to a possible dividends received
deduction in the case of corporate holders) as they are paid. Gain or loss
realized on the sale or exchange of common stock will equal the difference
between the amount realized on such sale or exchange and the U.S. Holder's
adjusted tax basis in such common stock. Such gain or loss will generally be
long-term capital gain or loss if the holder has held or is deemed to have held
the common stock for more than one year. Generally, the long-term capital gains
rate for individuals is 20%. Capital gain that is not long-term capital gain is
taxed at ordinary income rates.

Information Reporting and Backup Withholding

A U.S. Holder of notes or common stock may be subject to "backup
withholding" at a rate of 31% with respect to certain "reportable payments,"
including interest payments, dividend payments and, under certain
circumstances, principal payments on the notes. These backup withholding rules
apply if the holder, among other things:

. fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury
within a reasonable time after the request therefore,

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. the IRS provides notification that the U.S. Holder has furnished us with
an incorrect TIN,

. fails to report properly interest or dividends, or

. under certain circumstances, fails to provide a certified statement,
signed under penalties of perjury, that the TIN furnished is the correct
number and that such holder is not subject to backup withholding. Any
amount withheld from a payment to a holder under the backup withholding
rules is creditable against the holder's federal income tax liability,
provided that the required information is furnished to the IRS. Backup
withholding will not apply, however, with respect to payments made to
certain holders, including corporations, tax-exempt organizations and
certain foreign persons, provided their exemptions from backup
withholding are properly established.

Exodus will report to the U.S. Holders of notes and common stock and to the
IRS the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to such payments.

Non-U.S. Holders

The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder.

For purposes of withholding tax on interest and dividends discussed below, a
Non-U.S. Holder (as defined above) includes a non-resident fiduciary of an
estate or trust. For purposes of the following discussion, interest, dividends
and gain on the sale, exchange or other disposition of a note or common stock
will be considered to be "U.S. trade or business income" if such income or gain
is (a) effectively connected with the conduct of a U.S. trade or business or
(b) in the case of a resident of a jurisdiction with a relevant income tax
treaty in force with the U.S., attributable to a permanent establishment (or,
in the case of an individual, a fixed base) in the United States.

Interest

Generally any interest paid to a Non-U.S. Holder of a note that is not U.S.
trade or business income will not be subject to U.S. tax if the interest
qualifies as "portfolio interest." Generally interest on the notes will qualify
as portfolio interest if

. the Non-U.S. Holder does not actually or constructively own 10% or more
of the total voting power of all voting stock of Exodus and is not a
"controlled foreign corporation" with respect to which we are a "related
person" within the meaning of the Code,

. the withholding agent receives a qualifying statement that the owner is
not a U.S. resident and does not have actual knowledge or reason to know
otherwise,

. the Non-U.S. Holder is not a bank receiving interest on an extension of
credit made pursuant to a loan agreement made in the ordinary course of
its trade or business, and

. the notes are in registered form.

The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exemption and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate withholding.
U.S. trade or business income will be taxed at regular U.S. rates rather than
the 30% of treaty reduced gross rate. In the case of a Non-U.S. Holder that is
a corporation, such U.S. trade or business income may also be subject to the
branch profits tax, which is generally imposed on a foreign corporation on the
actual or deemed repatriation from the United States of earnings and profits
attributable to U.S. trade or business income, at a 30% rate. The branch
profits tax may not apply, or may apply at a reduced rate, if a recipient is a
qualified resident of certain

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<PAGE>

countries with which the United States has an income tax treaty in force. To
claim the benefit of a tax treaty or to claim exemption from withholding
because the income is U.S. trade or business income, the Non-U.S. Holder must
provide a properly executed IRS Form 1001 or IRS Form 4224, or such successor
forms as the IRS designates, as applicable, prior to the payment of interest.
Under recently issued U.S. Treasury Regulations that will generally be
effective on and after January 1, 2001 (the "Withholding Regulations"), Forms
1001 and 4224 will be replaced by a new requirement to provide a properly
executed Form W-8. Under the Withholding Regulations, a Non-U.S. Holder may
under certain circumstances be required to obtain a U.S. taxpayer
identification number and make certain certifications to Exodus. Special
procedures are provided in the Withholding Regulations for payments through
qualified intermediaries. Prospective investors should consult their tax
advisors regarding the effect, if any, of the Withholding Regulations.

Dividends

In general, dividends paid to a Non-U.S. Holder of common stock will be
subject to withholding of U.S. federal income tax at a 30% rate, unless such is
reduced by an applicable income tax treaty. Dividends that are U.S. trade or
business income are generally subject to U.S. federal income tax at regular
rates, but are not generally subject to the 30% withholding tax if the Non-U.S.
Holder files the appropriate form with the payor, as discussed above. Any U.S.
trade or business income received by a Non-U.S. Holder that is a corporation
may also, under certain circumstances, be subject to an additional "branch
profits tax" at a 30% rate or such lower rate as may be applicable under an
income tax treaty. A Non-U.S. Holder of common stock who wishes to claim the
benefit of an applicable treaty rate would be required to satisfy applicable
certification and other requirements.

A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income treaty may obtain a refund of any
amounts currently withheld by filing an appropriate claim for a refund with the
IRS.

Conversion

A Non-U.S. Holder generally will not be subject to the U.S. federal income
tax on the conversion of notes into common stock, except with respect to cash,
if any, received in lieu of a fractional share or interest not previously
included in income. Cash received in lieu of a fractional share may give rise
to gain that would be subject to the rules described below for the sale of
notes. Cash or common stock treated as issued for accrued interest would be
treated as interest under the rules described above.

Sale, Exchange or Redemption of Notes or Common Stock

Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a note or common stock generally will not be subject to U.S.
federal income tax, unless:

. such gain is U.S. trade or business income,

. subject to certain exceptions, the Non-U.S. Holder is an individual who
holds the note or common stock as a capital asset and is present in the
United States for 183 days or more in the taxable year of the
disposition,

. the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates (including certain former
citizens or residents of the United States), or

. in the case of the disposition of common stock, Exodus is a U.S. real
property holding corporation. We do not believe that we are currently a
"United States real property holding corporation," or that it will
become one in the future.

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Information Reporting and Backup Withholding

Generally, we must report annually to the IRS and to each Non-U.S. Holder
any interest or dividend that is subject to withholding, that is exempt from
U.S. withholding tax pursuant to a tax treaty, or interest that is exempt from
U.S. tax under the portfolio interest exception or because it is U.S. trade or
business income. Copies of these information returns may also be made available
under the provisions of a specific treaty or agreement to the tax authorities
of the country in which the Non-U.S. Holder resides. Under certain
circumstances, Exodus will have to report to the IRS payments of principal.

Generally, information reporting and backup withholding of United States
federal income tax at a rate of 31% may apply to payments made by Exodus or any
agent thereof to Non-U.S. Holders if the payee fails to make the appropriate
certification that the holder is a non-U.S. person or if Exodus or its paying
agent has actual knowledge that the payee is a United States person.

The payment of the proceeds from the disposition of the notes or common
stock to or through the U.S. office of any broker, U.S. or foreign, will be
subject to information reporting and possible backup withholding unless the
owner certifies as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The payment of the proceeds from
the disposition of a note or common stock to or through a non-U.S. office of a
non-U.S. broker that is not a U.S. related person will generally not be subject
to backup withholding. However, if such broker is a U.S. person, a controlled
foreign corporation for United States tax purposes, or a foreign person 50% or
more of whose gross income from all sources for certain periods is effectively
connected with a United States trade or business, information reporting will
apply unless such broker has documentary evidence in its files of the Non-U.S.
Holder's foreign status and has no actual knowledge to the contrary or unless
the Non-U.S. Holder otherwise establishes an exemption. Both backup withholding
and information reporting will apply to the proceeds of such dispositions if
the broker has actual knowledge that the payee is a U.S. Holder. The
Withholding Regulations alter the foregoing rules in certain respects.
Investors should consult their tax advisors regarding the effect, if any, of
the Withholding Regulations.

Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.

THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR
TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND
THE COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.

37
<PAGE>

OTHER INDEBTEDNESS

The 11 1/4% Senior Notes

In July 1998 and July 1999, we issued an aggregate of $275.0 million of 11
1/4% senior notes due 2008 under an indenture between us and Chase Manhattan
Bank and Trust Company, National Association, as trustee. The 11 1/4% senior
notes are unsecured obligations, and mature on July 1, 2008. Interest on the 11
1/4% senior notes accrues at the rate of 11 1/4% per annum, payable semi-
annually on January 1 and July 1 of each year. We have placed in escrow enough
cash to meet the requirement of the first four interest payments due on the 11
1/4% senior notes.

The 11 1/4% senior notes will be redeemable at our option, in whole or in
part, at any time or from time to time, on or after July 1, 2003 at the
redemption prices set forth in the 11 1/4% senior notes indenture. In addition,
at any time prior to July 1, 2001, we may redeem up to 35% of the aggregate
principal amount of the 11 1/4% senior notes with the net proceeds of one or
more sales of certain types of its stock at a redemption price of 111.25%, plus
accrued and unpaid interest, if any, to the redemption date; provided that at
least 65% of the original principal amount of the 11 1/4% senior notes
initially issued remains outstanding. Upon a change of control, as defined in
the 11 1/4% senior notes indenture, we would be required to make an offer to
purchase the 11 1/4% senior notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest, if any. There can be no
assurance that we would have sufficient funds available at the time of any
change of control to make any required debt repayment including repurchases of
the 11 1/4% senior notes. The definition of change of control in the 11 1/4%
senior note indenture differs in a number of respects from the definition of
change of control in the indenture governing our 4 3/4% convertible
subordinated notes.

The indebtedness evidenced by the 11 1/4% senior notes ranks equally in
right of payment with all of our existing and future unsubordinated
indebtedness, including our 10 3/4% senior notes due 2009, and senior in right
of payment to all of our existing and future subordinated indebtedness,
including our 4 3/4% convertible subordinated notes and our 5% convertible
subordinated notes.

The 11 1/4% senior notes indenture restricts, among other things, our
ability to incur additional indebtedness and the use of proceeds in connection
therewith, pay dividends or make certain other restricted payments, incur
certain liens to secure indebtedness, or engage in merger transactions. There
are significant "carve-outs" and exceptions to these covenants.

The 10 3/4% Senior Notes

In December 1999, we issued an aggregate of $375.0 million of our 10 3/4%
senior notes due 2009 and (Euro)125.0 million of our 10 3/4% senior notes due
2009 under an indenture between us and Chase Manhattan Bank and Trust Company,
National Association, as trustee. We have the option to issue an additional
$100.0 million of 10 3/4% senior notes due 2009 at any time up to December 8,
2000. The 10 3/4% senior notes are unsecured obligations, and mature on
December 15, 2009. Interest on the 10 3/4% senior notes accrues at the rate of
10 3/4% per annum, payable semi-annually on June 15 and December 15 of each
year, commencing June 15, 2000.

The 10 3/4% senior notes are redeemable at our option, in whole or in part,
at any time or from time to time, on or after December 15, 2004 at the
redemption prices set forth in the 10 3/4% senior notes indenture. In addition,
at any time prior to December 15, 2002, we may redeem up to 35% of the
aggregate principal amount of each of the 10 3/4% dollar denominated senior
notes and the 10 3/4% euro denominated senior notes with the net proceeds of
one or more sales of specific types of our stock at a redemption price of
110.75%, plus accrued and unpaid interest, if any, to the redemption date;
provided that at least 65% of the original principal amount of each of the 10
3/4% dollar denominated senior notes and the 10 3/4% euro denominated senior
notes initially issued remain outstanding. Upon a change of control, as defined
in the 10 3/4% senior note indenture, we would be required to make an offer to
purchase the 10 3/4% senior notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest, if any. There can be no
assurance that we would have

38
<PAGE>

sufficient funds available at the time of any change of control to make any
required debt repayment including repurchases of the 10 3/4% senior notes. The
definition of change of control in the 10 3/4% senior note indenture differs in
a number of respects from the definition of change of control in the indentures
governing our 4 3/4% convertible subordinated notes.

The indebtedness evidenced by the 10 3/4% senior notes ranks equally in
right of payment with all of our existing and future unsubordinated
indebtedness, including the 11 1/4% senior notes, and senior in right of
payment to all of our existing and future subordinated indebtedness, including
our 4 3/4% convertible subordinated notes and our 5% convertible subordinated
notes.

The 10 3/4% senior notes indenture restricts, among other things, our
ability to incur additional indebtedness and the use of proceeds in connection
therewith, pay dividends or make certain other restricted payments, incur
certain liens to secure indebtedness, or engage in merger transactions. There
are significant "carve-outs" and exceptions to these covenants.

The 5% Convertible Subordinated Notes

In March 1999 we issued $250.0 million of 5% convertible subordinated notes
due March 15, 2006 under an indenture between us and Chase Manhattan Bank and
Trust Company, National Association, as trustee. The 5% convertible
subordinated notes are convertible into our common stock at a conversion ratio
of 87.5704 per $1,000 in principal amount of 5% convertible subordinated notes.
The 5% convertible subordinated notes are unsecured obligations, and mature on
March 15, 2006. Interest on the 5% convertible subordinated notes accrues at
the rate of 5% per annum, payable semi-annually on March 15 and September 15 of
each year.

The 5% convertible subordinated notes will be redeemable at our option, in
whole or in part, at any time or from time to time, on or after March 20, 2001
at the redemption prices set forth in the 5% convertible subordinated notes
indenture; provided, however, that the 5% convertible subordinated notes will
not be redeemable at our option on or after March 20, 2001 and before January
20, 2003 unless the last reported bid price for the common stock equals or
exceeds 140% of the conversion price for at least 20 trading days within a
period of 30 consecutive trading days ending within five trading days of the
call for redemption. Upon a change of control, as defined in the 5% convertible
subordinated notes indenture, we would be required to make an offer to purchase
the 5% convertible subordinated notes at a purchase price equal to 100% of the
principal amount, plus accrued and unpaid interest, if any. There can be no
assurance that we would have sufficient funds available at the time of any
change of control to make any required debt repayment. The definition of change
of control in the 5% convertible subordinated notes indenture is substantially
similar to the definition of change of control in the indenture governing our 4
3/4% convertible subordinated notes.

The indebtedness evidenced by the 5% convertible subordinated notes is
subordinated in right of payment with all of our existing and future senior
indebtedness, including the 11 1/4% senior notes and the 10 3/4% senior notes,
and ranks equally in right of payment to all of our existing and future
subordinated indebtedness, including our 4 3/4% convertible subordinated notes.

39
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 300,000,000 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, 1999, there were outstanding 177,914,376
shares of common stock held of record by approximately 659 stockholders,
warrants to purchase 506,664 shares of common stock and outstanding options to
purchase 55,135,487 shares of common stock. No shares of preferred stock are
outstanding.

Common Stock

Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of our common stock
are entitled to receive dividends out of assets legally available when and in
amounts as our 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 our 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. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Upon our
liquidation, dissolution or winding-up, 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.

Preferred Stock

Our board is authorized, subject to limitations prescribed by Delaware law,
to provide for the issuance of shares of preferred stock in one or more series,
to establish from time to time the number of shares to be included in each
series, to fix the powers, designations, preferences and rights of the shares
of each wholly unissued series and designate any qualifications, limitations or
restrictions and to increase or decrease the number of shares of any series,
but not below the number of shares of the 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 us. We have no current
plan to issue any shares of preferred stock.

Warrants

As of December 31, 1999, we had outstanding warrants to purchase 506,664
shares of common stock at a weighted average per share exercise price of $1.83.
A warrant for 480,000 shares of common stock will expire in April 2007 and a
warrant for 26,664 shares of common stock will expire in December 2004.

Anti-Takeover Provisions

Delaware Law

We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly-held Delaware
corporation from entering into a "business combination" with any "interested
stockholder" for a three-year period after the date of the transaction in which
the person became an interested stockholder unless the business combination is
approved in a prescribed manner. A "business combination" includes a merger,
asset sale or transaction resulting in a financial benefit to an interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior, did own, 15% or
more of Exodus' voting capital stock. Our certificate of incorporation and
bylaws do not exclude us from the restrictions imposed under Section 203. The
provisions of Section 203 may encourage companies interested in acquiring us to
negotiate in advance with our board since the stockholder approval requirement
would be avoided if a majority of the directors then in office approve

40
<PAGE>

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 Exodus,
which could depress the market price of our 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

Our certificate of incorporation and bylaws contain provisions that could
discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. For instance, our 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 our
stockholders may only be called by the Chairman of the board or a majority of
the board.

Stockholder Rights Plan

Our stockholder rights plan is designed to protect the long-term value of
Exodus for our stockholders during any future unsolicited acquisition attempt.
In connection with the plan, we declared a dividend of one preferred share
purchase right for each share of our common stock outstanding on February 11,
1999 and further directed the issuance of one right with respect to each share
of our common stock that is issued after February 11, 1999, except in specified
circumstances. The rights will expire on January 27, 2009. The rights are
initially attached to our common stock and will not trade separately. If a
person or a group acquires 15% (20% in the case of FMR Corp.) or more of our
common stock (an "Acquiring Person"), or announces an intention to make a
tender offer for our common stock the consummation of which would result in a
person or group becoming an Acquiring Person, then the rights will be
distributed (the "Distribution Date") and will thereafter trade separately from
the common stock. Upon the Distribution Date, each right may be exercised for
1/800th of a share of a newly-designated Series A Junior Participating
Preferred Stock at an exercise price of $43.75. The preferred stock has been
structured so that the value of 1/100th of a share of the preferred stock will
approximate the value of one share of common stock. Upon a person becoming an
Acquiring Person, holders of the rights (other than the Acquiring Person) will
have the right to acquire shares of our common stock at a substantially
discounted price, in lieu of the preferred stock. Additionally, if after the
Distribution Date, we are acquired in a merger or other business combination,
or 50% or more of our assets are sold in a transaction with an Acquiring
Person, the holders of rights (other than the Acquiring Person) will have the
right to receive shares of common stock of the acquiring corporation at a
substantially discounted price. After a person has become an Acquiring Person,
our board of directors may, at its option, require the exchange of outstanding
rights (other than those held by the Acquiring Person) for common stock at an
exchange ratio of one share of common stock per right. The board also has the
right to redeem outstanding rights at any time prior to the Distribution Date
(or later in specified circumstances) at a price of $0.001 per right. The terms
of the rights, including the period to redeem the rights, may be amended by the
board in specified circumstances.

Registration Rights

The shares of our common stock held by two members of our board of directors
have rights to require us to register those shares under the Securities Act. If
we propose to register any of our shares of common stock under the Securities
Act other than in connection with an employee benefit plan or corporate
acquisitions, mergers or reorganizations, the holders of stock with
registration rights may require us to include all or a portion of their shares
in the registration, subject to rights of any managing underwriter to limit the
number of shares in any offering.

All expenses incurred in connection with the registrations, other than
underwriters' discounts and commissions, will be borne by us. The registration
rights expire in March 2005. In addition, no holder of common stock will be
entitled to registration rights if and so long as the holder can sell all of
its shares in compliance with Rule 144 of the Securities Act during any 90-day
period.

The holders of common stock with registration rights have waived their
rights to include their common stock in this shelf registration.

41
<PAGE>

Transfer Agent and Registrar

The Transfer Agent and Registrar for our common stock is Boston EquiServe
Limited Partnership.

LEGAL MATTERS

Fenwick & West LLP, Palo Alto, California, will provide Exodus with an
opinion as to legal matters in connection with the notes and the common stock.
Winthrop, Stimson, Putnam & Roberts, New York, New York, will provide an
opinion as to legal matters related to the laws of the State of New York in
connection with the notes.

EXPERTS

Our consolidated financial statements and related schedule as of December
31, 1997 and 1998, and for each of the years in the three-year period ended
December 31, 1998 have been included in the registration statement in reliance
upon the report of KPMG LLP, independent auditors, appearing elsewhere in the
registration statement, and upon the authority of said firm as experts in
auditing and accounting.

Our supplemental consolidated financial statements and related schedule as
of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31, 1998, have been included in the registration
statement in reliance upon the report of KPMG LLP, independent auditors,
appearing elsewhere in the registration statement, and upon the authority of
said firm as experts in auditing and accounting.

The consolidated financial statements of Cohesive Technology Solutions, Inc.
as of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31, 1998, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.

42
<PAGE>

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

EXODUS COMMUNICATIONS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
Page
Supplemental Consolidated Financial Statements: ----

<S> <C>
Independent Auditors' Report.............................................. F-2
Supplemental Consolidated Balance Sheets.................................. F-3
Supplemental Consolidated Statements of Operations........................ F-4
Supplemental Consolidated Statements of Stockholders' (Deficit) Equity.... F-5
Supplemental Consolidated Statements of Cash Flows........................ F-7
Notes to Supplemental Consolidated Financial Statements................... F-8

<CAPTION>
Historical Consolidated Financial Statements:

<S> <C>
Independent Auditors' Report.............................................. F-27
Consolidated Balance Sheets............................................... F-28
Consolidated Statements of Operations..................................... F-29
Consolidated Statements of Stockholders' (Deficit) Equity................. F-30
Consolidated Statements of Cash Flows..................................... F-31
Notes to Consolidated Financial Statements................................ F-32

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES

Independent Auditors' Report.............................................. F-50
Consolidated Balance Sheets............................................... F-51
Consolidated Statements of Operations..................................... F-52
Consolidated Statements of Stockholders' Equity........................... F-53
Consolidated Statements of Cash Flows..................................... F-54
Notes to Consolidated Financial Statements................................ F-55
Condensed Consolidated Balance Sheets..................................... F-65
Condensed Consolidated Statements of Operations........................... F-66
Condensed Consolidated Statements of Cash Flows........................... F-67
Notes to Unaudited Condensed Consolidated Financial Statements............ F-68

PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

Unaudited Pro Forma Combined Condensed Financial Statements............... F-69
Unaudited Pro Forma Combined Condensed Statement of Operations............ F-70
Notes to Unaudited Pro Forma Combined Condensed Financial Statements...... F-72

FINANCIAL STATEMENT SCHEDULES

Supplemental Schedule II--Valuation and Qualifying Accounts............... S-1
Schedule II--Valuation and Qualifying Accounts............................ S-2
</TABLE>

F-1
<PAGE>

REPORT OF KPMG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying supplemental consolidated balance sheets of
Exodus Communications, Inc. and subsidiaries (the Company) as of December 31,
1997 and 1998, and the related supplemental consolidated statements of
operations, stockholders' (deficit) equity and cash flows for each of the years
in the three-year period ended December 31, 1998. In connection with our audits
of the supplemental consolidated financial statements, we have also audited the
supplemental financial statement schedule as listed in the index on page F-1.
These supplemental consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these supplemental consolidated financial
statements and financial statement schedule 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.

The supplemental consolidated financial statements and related supplemental
financial statement schedule give retroactive effect to the merger of the
Company and Service Metrics, Inc. on November 23, 1999, which has been
accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These supplemental consolidated
financial statements do not extend through the date of consummation. However,
they will become the historical consolidated financial statements of the
Company after financial statements covering the date of consummation of the
business combination are issued.

In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Exodus Communications, Inc. and subsidiaries as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination. Also, in our opinion, the related supplemental financial statement
schedule, when considered in relation to the supplemental consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

KPMG LLP

Mountain View, California
November 23, 1999, except as to Note 9,
which is as of December 14, 1999

F-2
<PAGE>

EXODUS COMMUNICATIONS, INC.

SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY

Current liabilities:
Bank borrowings............................... $ 3,000 $ -- $ --
Current portion of equipment loans and line
of credit facilities......................... 3,777 14,367 7,722
Current portion of capital lease
obligations.................................. 1,143 5,223 14,817
Accounts payable.............................. 6,252 9,208 34,141
Accrued expenses.............................. 3,019 6,876 20,294
Accrued interest payable...................... -- 11,563 8,074
-------- -------- ---------
Total current liabilities................... 17,191 47,237 85,048
Equipment loans and line of credit facilities,
less current portion.......................... 12,693 15,695 9,600
Capital lease obligations, less current
portion....................................... 2,442 11,589 32,201
Convertible subordinated notes................. -- -- 250,000
Senior notes................................... -- 200,000 275,375
-------- -------- ---------
Total liabilities........................... 32,326 274,521 652,224
======== ======== =========
Redeemable convertible preferred stock and
warrants, $0.001 par value: 74,960,124, no
shares, and no shares authorized as of
December 31, 1997 and 1998, and September 30,
1999 respectively; 34,117,371, no shares, and
no shares issued and outstanding as of
December 31, 1997 and 1998, and September 30,
1999, respectively; aggregate liquidation
preference of $39,640 as of
December 31, 1997............................. 39,247 -- --
-------- -------- ---------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value: no shares,
5,000,000 shares and 5,000,000 shares
authorized as of December 31, 1997 and 1998,
and September 30, 1999 and no shares issued
or outstanding as of December 31, 1997 and
1998, and September 30, 1999................. -- -- --
Convertible preferred stock of Service
Metrics, Inc.; no shares, 1,553,158, and
2,585,777 shares issued and outstanding as
of December 31, 1997 and 1998, and September
30, 1999, respectively; aggregate
liquidation preference of $0, $6,000, and
$15,500 as of December 31, 1997 and 1998,
and September 30, 1999, respectively......... -- 5,961 15,437
Common stock, $0.001 par value: 53,281,579,
50,000,000, and 300,000,000 shares
authorized as of December 31, 1997 and 1998,
and September 30 1999, respectively;
16,538,024, 161,670,932, and
170,084,342 shares issued and outstanding as
of December 31, 1997 and 1998, and September
30, 1999, respectively....................... 17 162 170
Additional paid-in capital.................... 2,493 117,127 195,166
Notes receivable from stockholders............ (140) -- --
Deferred stock compensation................... (2,393) (1,080) (2,903)
Accumulated deficit........................... (30,577) (97,893) (175,269)
-------- -------- ---------
Total stockholders' (deficit) equity........ (30,600) 24,277 32,601
======== ======== =========
$ 40,973 $298,798 $ 684,825
======== ======== =========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-3
<PAGE>

EXODUS COMMUNICATIONS, INC.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues............ $ 2,454 $ 11,588 $ 49,815
Equipment revenues.......... 676 820 2,930
------- -------- --------
Total revenues............ 3,130 12,408 52,745 $ 31,638 $140,754
------- -------- -------- -------- --------
Costs and expenses:
Cost of service revenues.... 2,538 16,228 59,280
Cost of equipment revenues.. 452 640 2,298
------- -------- --------
Total cost of revenue..... 2,990 16,868 61,578 39,291 118,827
Marketing and sales......... 2,734 12,702 29,034 20,576 42,473
General and administrative.. 1,056 5,983 16,058 9,664 25,548
Product development......... 444 1,647 3,507 2,389 5,641
Amortization of
intangibles................ -- -- 141 -- 4,674
Restructuring costs......... -- -- -- -- 923
------- -------- -------- -------- --------
Total expenses............ 4,234 20,332 48,740 32,629 79,259
------- -------- -------- -------- --------
Total costs and expenses.. 7,224 37,200 110,318 71,920 198,086
------- -------- -------- -------- --------
Operating loss............ (4,094) (24,792) (57,573) (40,282) (57,332)
Interest income............... 68 193 7,157 4,028 10,561
Interest expense.............. (107) (699) (16,900) (9,138) (30,605)
------- -------- -------- -------- --------
Net loss.................. (4,133) (25,298) (67,316) (45,392) (77,376)
Cumulative dividends and
accretion on redeemable
convertible preferred stock.. -- (1,413) (2,014) (2,014) --
------- -------- -------- -------- --------
Net loss attributable to
common stockholders.......... $(4,133) $(26,711) $(69,330) $(47,406) $(77,376)
======= ======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.27) $ (1.73) $ (0.55) $ (0.42) $ (0.47)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share........................ 15,312 15,428 125,808 114,088 165,974
======= ======== ======== ======== ========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-4
<PAGE>

EXODUS COMMUNICATIONS, INC.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands)

<TABLE>
<CAPTION>
Convertible
Preferred
Stock of
Services Notes Total
Metrics, Inc. Common Stock Additional Receivable Deferred Stockholders'
------------- -------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December
31, 1995............... -- $ -- 14,568 $15 $ 186 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock.................. -- -- 1,072 1 31 -- -- -- 32
Issuance of common stock
in connection with
stock purchase plan and
exercise of stock
options................ -- -- 128 -- 4 (3) -- -- 1
Repurchase of common
stock.................. -- -- (200) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- -- -- (4,133) (4,133)
----- ------ ------ --- ------ ----- ------- -------- --------
Balances as of December
31, 1996............... -- -- 15,568 16 215 (186) -- (5,279) (5,234)

Issuance of common stock
in connection with
exercise of stock
options and warrants... -- -- 1,378 1 221 -- -- -- 222
Repurchase of common
stock.................. -- -- (408) -- (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............... -- -- 16,538 17 2,493 (140) (2,393) (30,577) (30,600)

Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants............... -- -- 6,703 7 2,286 -- -- -- 2,293
Issuance of common stock
in conjunction with
initial public
offering, net of
offering costs of
$7,062................. -- -- 41,000 41 69,777 -- -- -- 69,818
Issuance of common stock
to an officer for
cash................... -- -- 400 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants............... -- -- -- -- 786 -- -- -- 786
Issuance of Service
Metrics, Inc.
convertible preferred
stock.................. 1,553 5,961 -- -- -- -- -- -- 5,961
Issuance of Service
Metrics, Inc. common
stock to founders...... -- -- 1,132 1 8 -- -- -- 9
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 140 -- -- 140
</TABLE>

(continued)

F-5
<PAGE>

EXODUS COMMUNICATIONS, INC.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--
(Continued)
(in thousands)

<TABLE>
<CAPTION>
Convertible
Preferred
Stock of
Services Notes Total
Metrics, Inc. Common Stock Additional Receivable Deferred Stockholders'
-------------- -------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
------ ------- ------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Conversion of redeemable
convertible preferred
stock into common
stock.................. -- $ -- 95,898 $ 96 $ 43,341 $ -- $ -- $ -- $ 43,437
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 1,313 -- 1,313
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (462) -- -- -- (462)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (1,552) -- -- -- (1,552)
Net loss................ -- -- -- -- -- -- -- (67,316) (67,316)
----- ------- ------- ---- -------- ----- ------- --------- --------

Balances as of December
31, 1998............... 1,553 5,961 161,671 162 117,127 -- (1,080) (97,893) 24,277
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants (unaudited)... -- -- 6,813 7 14,000 -- -- -- 14,007
Issuance of common stock
and assumption of
options in connection
with the acquisition of
Cohesive Technology
Solutions, Inc.
(unaudited)............ -- -- 1,600 1 61,261 -- -- -- 61,262
Issuance of Service
Metrics, Inc.
convertible preferred
stock (unaudited)...... 1,033 9,476 -- -- -- -- -- -- 9,476
Deferred stock
compensation related to
Service Metrics, Inc.
stock option grants
(unaudited)............ -- -- -- -- 2,778 -- (2,778) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- -- 955 -- 955
Net loss (unaudited).... -- -- -- -- -- -- -- (77,376) (77,376)
----- ------- ------- ---- -------- ----- ------- --------- --------

Balances as of September
30, 1999 (unaudited)... 2,586 $15,437 170,084 $170 $195,166 $ -- $(2,903) $(175,269) $ 32,601
===== ======= ======= ==== ======== ===== ======= ========= ========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-6
<PAGE>

EXODUS COMMUNICATIONS, INC.

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $(4,133) $(25,298) $(67,316) $(45,392) $ (77,376)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization............. 461 3,429 13,024 8,575 28,383
Loss on disposal of
property and equipment... -- -- 464 248 --
Noncash common stock and
warrant expense.......... -- -- 786 786 --
Amortization of deferred
stock compensation....... -- 1,089 1,354 1,081 955
Amortization of debt
issuance costs........... -- -- 846 274 1,063
Interest accretion on
restricted cash
equivalents and
investments.............. -- -- (1,088) (580) (1,068)
Changes in operating
assets and liabilities:
Accounts receivable..... (265) (1,316) (8,306) (7,127) (28,272)
Prepaid expenses and
other assets........... (189) (748) (4,193) (3,970) (17,516)
Accounts payable........ 671 5,089 2,791 4,981 22,980
Accrued expenses........ 339 2,237 2,763 3,806 5,798
Accrued interest
payable................ -- -- 11,563 5,750 (3,489)
------- -------- -------- -------- ---------
Net cash used for
operating activities.. (3,116) (15,518) (47,312) (31,568) (68,542)
------- -------- -------- -------- ---------
Cash flows from investing
activities:
Capital expenditures........ (3,499) (22,489) (44,564) (26,680) (160,624)
Proceeds from sale of
property and equipment..... -- -- 245 -- --
Businesses acquired, net of
cash received.............. -- -- (5,654) -- (70,398)
Release of restricted cash
and investments............ -- -- -- -- 24,938
Increase in restricted cash
equivalents and
investments................ (378) (1,375) (42,773) (43,562) (13,413)
Other assets................ -- -- (11) (81) (15,637)
------- -------- -------- -------- ---------
Net cash used for
investing activities.. (3,877) (23,864) (92,757) (70,323) (235,134)
------- -------- -------- -------- ---------
Cash flows from financing
activities:
Proceeds from issuance of
redeemable convertible
preferred stock and
warrants................... 9,409 23,320 2,176 2,176 --
Proceeds from issuance of
Service Metrics, Inc.
convertible preferred
stock...................... -- -- 5,961 982 9,477
Proceeds from issuance of
common stock, net.......... 32 222 72,530 71,362 14,006
Proceeds from issuance of
bridge financing
convertible notes.......... -- 3,975 -- -- --
Repayment of notes
receivable from
stockholders............... 7 34 140 90 --
Bank borrowings, net........ (100) 3,000 (3,000) (3,000) --
Proceeds from sale-leaseback
transactions............... 552 932 4,035 4,190 776
Payments on capital leases
obligations................ (154) (720) (3,020) (1,689) (6,468)
Proceeds from equipment
loans and line of credit
facilities................. 1,296 16,480 18,611 18,611 --
Repayment of equipment loans
and line of credit
facilities................. (497) (1,306) (5,019) (3,468) (13,529)
Proceeds from convertible
subordinated notes, net.... -- -- -- -- 242,124
Proceeds from senior notes,
net of discounts and
offering costs............. -- -- 193,400 194,000 73,246
------- -------- -------- -------- ---------
Net cash provided by
financing activities.. 10,545 45,937 285,814 283,254 319,632
------- -------- -------- -------- ---------
Net increase in cash and cash
equivalents................. 3,552 6,555 145,745 181,363 15,956
Cash and cash equivalents at
beginning of period......... 163 3,715 10,270 10,270 156,015
------- -------- -------- -------- ---------
Cash and cash equivalents at
end of period............... $ 3,715 $ 10,270 $156,015 $191,633 $ 171,971
======= ======== ======== ======== =========
Supplemental disclosures of
cash flow information:
Cash paid--interest......... $ -- $ 699 $ 4,923 $ 2,923 $ 34,010
======= ======== ======== ======== =========
Noncash investing and
financing activities:
Assets recorded under
capital leases........... $ 27 $ 2,700 $ 12,001 $ 6,848 $ 35,897
======= ======== ======== ======== =========
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 $ 2,014 $ 2,014 $ --
======= ======== ======== ======== =========
Deferred compensation on
grants of stock options.. $ -- $ 3,482 $ -- $ -- $ 2,778
======= ======== ======== ======== =========
Warrants issued for
financing commitments.... $ -- $ 730 $ -- $ -- $ --
======= ======== ======== ======== =========
Conversion of bridge
financing convertible
notes to redeemable
convertible preferred
stock.................... $ -- $ 3,975 $ -- $ -- $ --
======= ======== ======== ======== =========
Conversion of redeemable
convertible preferred
stock to common stock.... $ -- $ -- $ 43,437 $ 43,437 $ --
======= ======== ======== ======== =========
Issuance of common stock
and assumption of options
in connection with the
acquisition of Cohesive
Technology Solutions,
Inc. .................... $ -- $ -- $ -- $ -- $ 61,262
======= ======== ======== ======== =========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-7
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

(1) Summary of the Company and Significant Accounting Policies

The Company

Exodus Communications, Inc. ("Exodus" or "the Company") is a leading
provider of Internet system and network management solutions and technology
professional services for enterprises with mission-critical Internet
operations.

The accompanying supplemental consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The supplemental consolidated financial statements have been prepared to
give retroactive effect to the merger with Service Metrics, Inc. ("SMI" or
"Service Metrics") on November 23, 1999. The consolidated financial statements
have been restated for all periods presented as if SMI and the Company had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling-of-
interests method in financial statements that do not include the date of
consummation. These supplemental financial statements do not extend through the
date of consummation; however, they will become the historical consolidated
financial statements of the Company after financial statements covering the
date of consummation of the business combination are issued.

In recording the pooling-of-interests combination, the Company's
consolidated statement of operations for the year ended December 31, 1998 has
been combined with SMI's statement of operations for the period from May 19,
1998 ("inception") through December 31, 1998. The Company's consolidated
statements of operations for the nine-month periods ended September 30, 1998
and 1999 have been combined with SMI's statements of operations for the period
from inception through September 30, 1998, and the nine-month period ended
September 30, 1999, respectively. The consolidated balance sheets of the
Company as of December 31, 1998 and September 30, 1999, have been combined with
the balance sheets of Service Metrics as of the same dates.

Service Metrics, which was incorporated in May 1998, is a leading provider
of Internet monitoring applications and services that measure the consistency,
availability and performance of Web sites. SMI is based in Boulder, Colorado,
and had 79 employees as of November 1999.

In connection with the merger, the former shareholders and option holders of
SMI common stock received shares and options of Exodus common stock at the rate
of approximately 0.252 shares of Exodus common stock for each share of SMI
common stock. The Company issued a total of approximately 6,200,000 shares of
Exodus common stock in exchange for all outstanding shares of SMI common stock
and reserved approximately 760,000 shares of common stock for issuance upon the
exercise of SMI options the Company assumed pursuant to the merger agreement.

F-8
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

As SMI was incorporated in May 1998, supplemental results of operations for
the periods ended December 31, 1996 and 1997 are the same as Exodus' results of
operations. The results of operations previously reported by the separate
companies and the combined amounts presented in the supplemental consolidated
financial statements are summarized below.

<TABLE>
<CAPTION>
Nine Months Ended
Year September 30,
Ended ------------------
1998 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Exodus....................................... $ 52,738 $ 31,638 $140,186
Service Metrics.............................. 7 -- 568
-------- -------- --------
Combined..................................... $ 52,745 $ 31,638 $140,754
======== ======== ========
Net loss:
Exodus....................................... $(66,442) $(45,057) $(71,880)
Service Metrics.............................. (874) (335) (5,496)
-------- -------- --------
Combined..................................... $(67,316) $(45,392) $(77,376)
======== ======== ========
</TABLE>

Use of Estimates

The preparation of supplemental consolidated 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 supplemental consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Revenue Recognition

The Company's revenues consist of (i) monthly fees from customer use of
Internet Data Center sites, network services, managed services, and
professional services and use of equipment and software provided by the
Company, (ii) revenues from sales of third-party equipment to customers and
(iii) fees for installation and certain professional services. Currently,
substantially all of the Company's revenue is derived from services. Revenues
(other than installation fees, equipment sales to customers and certain
professional services) are generally billed and recognized ratably over the
term of the contract, which is generally one year. Installation fees are
typically recognized at the time the installation occurs, and equipment
revenues are typically recognized when the equipment is delivered to the
customer or placed into service at an Internet Data Center. The Company sells
third-party equipment to its customers as an accommodation to facilitate their
purchase of services. One-time professional service fees are typically
recognized when services are rendered.

Cash Equivalents and Investments

Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less. As of September 30, 1999, cash equivalents
consisted principally of money market funds at four financial institutions.

The Company classifies its investments as "held-to-maturity." As of
September 30, 1999, such investments consisted of U.S. Treasury Notes and are
recorded at amortized cost.

F-9
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

The components of restricted cash equivalents and investments are as follows
(in thousands):

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
U.S. treasury notes:
Due within one year........................... $10,733 $29,528
Due after one year through two years.......... 20,594 --
Money market funds.............................. 11,049 --
Cash collateral related to leases............... 3,238 5,916
------- -------
Total restricted cash equivalents and
investments.................................... $45,614 $35,444
======= =======
</TABLE>

See Notes 4 and 6 for additional information regarding restricted cash
equivalents and investments.

Financial Instruments and Concentration of Credit Risk

The carrying value of the Company's financial instruments, including cash
and cash equivalents, investments, 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, investments 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 losses.

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 system 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

F-10
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

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. Expense associated with stock-based
compensation is being amortized consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company evaluates its long-lived assets, including goodwill 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.

Unaudited Interim Financial Statements

The accompanying unaudited supplemental consolidated interim financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, the
accompanying unaudited supplemental consolidated financial statements have been
prepared on the same basis as the audited supplemental consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the Company's financial
position as of September 30, 1999, and the results of its operations and its
cash flows for the nine-month periods ended September 30, 1998 and 1999.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets are comprised primarily of amounts
recorded in business acquisitions and are included in intangibles and other
assets on the accompanying supplemental consolidated balance sheets. The
goodwill and other intangible amounts related to the acquisitions are being
amortized on a straight-line basis over periods generally ranging from 5 to 10
years (see Note 2).

F-11
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Net Loss Per Share

Basic and diluted net loss per share has been computed by dividing the net
loss attributable to holders of common stock by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per
share does not include the effect of the following common equivalent shares as
the effect of their inclusion is antidilutive during each period (in
thousands):

<TABLE>
<CAPTION>
Years Ended December Nine Months Ended
31, September 30,
---------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options... 2,336 13,672 38,594 26,810 51,940
Shares issuable pursuant to warrants
to purchase common stock and
redeemable convertible preferred
stock................................ 5,096 22,504 1,448 2,136 506
Shares of redeemable convertible
preferred stock and convertible
preferred stock of SMI on an "as if
converted" basis..................... 124,296 272,936 3,106 1,086 5,172
Shares of convertible subordinated
notes on an "as if converted" basis.. -- -- -- -- 21,892
</TABLE>

Comprehensive Loss

There are no differences between consolidated net loss and comprehensive
loss for any period presented.

Reclassifications

Certain prior period amounts have been reclassified to conform to the
current period presentation.

(2) Business Combinations

On October 2, 1998, the Company purchased substantially all of the assets,
including customer agreements, and assumed certain liabilities of Arca
Systems, Inc. ("Arca"), a wholly owned subsidiary of Cyberguard Corporation.
Arca, which has been in business for more than 10 years, is a provider of
advanced network and system security consulting services and designs and
develops security technology solutions for complex and sensitive information
systems. Arca operates as a wholly owned subsidiary of the Company. Total
consideration paid, including direct acquisition costs, aggregated
approximately $5,800,000. The acquisition was accounted for as a purchase and
the results of Arca have been included from the acquisition date. The excess
of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $5,000,000 and was attributed primarily to workforce
in place ($2,500,000) and goodwill ($2,400,000). These amounts are generally
being amortized on a straight-line basis over 10 years.

On February 1, 1999, the Company purchased all of the capital stock of
American Information Systems, Inc ("AIS"). AIS provides co-location services
as well as professional services. Total

F-12
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

consideration paid, including direct acquisition costs, aggregated
approximately $20,500,000. The acquisition was accounted for as a purchase with
the results of AIS included from the acquisition date. The excess of the
purchase price over the fair value of tangible net assets acquired amounted to
approximately $18,700,000 and was attributed primarily to goodwill
($15,000,000), customer lists ($3,200,000) and assembled workforce ($500,000).
These amounts are being amortized on a straight-line basis over periods ranging
from 5 to 7 years.

On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive"). Cohesive offers a variety of services
including network design and development, Internet-based and application
development and information technology strategy and project management.
Pursuant to the terms of the Agreement and Plan of Reorganization, each share
of Cohesive common stock was converted into the right to receive 0.10488 shares
of Exodus common stock and $1.338 in cash; each share of Cohesive Series A
preferred stock was converted into the right to receive $122.337 in cash; each
share of Cohesive Series B preferred stock was converted into the right to
receive $115.965 in cash; each share of Cohesive Series C preferred stock was
converted into the right to receive $5.00 in cash; and each share of Cohesive
Series D preferred stock, which automatically converted into Cohesive common
stock immediately prior to the merger, was converted into the right to receive
0.10488 shares of Exodus common stock and approximately $6.655 in cash. In
addition, the Company assumed each issued and outstanding option to purchase
shares of Cohesive common stock which was converted into an option to purchase
Exodus common stock using an exchange ratio of 0.14604.

Pursuant to the exchange ratios applied in the acquisition, the Company
issued 1,600,796 shares of Exodus common stock and paid approximately
$50,000,000 in cash and assumed options to purchase a total of 408,712 shares
of Exodus common stock for a total purchase price of approximately
$112,000,000. Of the cash consideration, $10,000,000 was deposited in an escrow
account to secure and collateralize the indemnification obligations of Cohesive
stockholders to Exodus and certain affiliates of Exodus. The acquisition was
accounted for as a purchase with the results of Cohesive included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately $107,900,000 and was
attributed primarily to goodwill ($69,300,000), customer lists ($32,300,000)
and workforce in place ($6,300,000). These amounts are being amortized on a
straight-line basis over periods ranging from 5 to 8 years.

The following summary, prepared on an unaudited pro forma basis, combines
the Company's supplemental consolidated results of operations with Arca's,
AIS', and Cohesive's results of operations, as if Arca, AIS, and Cohesive had
been acquired as of January 1, 1997 (in thousands, except per share data):

<TABLE>
<CAPTION>
Year Ended Nine Months Nine Months
December 31, Ended Ended
------------------ September 30, September 30,
1997 1998 1998 1999
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $ 41,004 $103,774 $ 69,208 $169,945
Net loss attributable to
holders of common stock... $(24,009) $(87,022) $(62,892) $(87,215)
Basic and diluted net loss
per share................. $ (1.41) $ (0.68) $ (0.54) $ (0.52)
Shares used in pro forma
per share calculation .... 17,028 127,408 115,688 167,188
</TABLE>

F-13
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.

In November 1999, the Company agreed to acquire Global OnLine Japan Co.,
Ltd., an Internet solutions provider based in Tokyo. The transaction is
expected to close by the end of December 1999 and will be accounted for as a
purchase.

(3) Financial Statement Components

Property and Equipment

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

<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Data centers and related equipment........... $16,316 $43,959 $150,239
Furniture, fixtures, computer equipment and
other....................................... 12,815 33,179 94,892
Construction in progress..................... -- 8,497 40,576
------- ------- --------
29,131 85,635 285,707
Less accumulated depreciation and
amortization................................ 3,961 17,063 40,315
------- ------- --------
$25,170 $68,572 $245,392
======= ======= ========
</TABLE>

Computer and other equipment and certain data center infrastructure are
recorded under capital leases that aggregated $4,492,000, $20,528,000, and
$56,425,000 as of December 31, 1997 and 1998, and September 30, 1999,
respectively. Accumulated amortization on the assets recorded under capital
leases aggregated $722,000, $4,452,000, and $12,621,000 as of December 31, 1997
and 1998, and September 30, 1999, respectively.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Accrued payroll and related expenses............. $1,183 $2,956 $ 9,074
Other............................................ 1,836 3,920 11,220
------ ------ -------
$3,019 $6,876 $20,294
====== ====== =======
</TABLE>

F-14
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

(4) Bank Borrowings and Debt

A summary of equipment loans and line of credit facilities follows (in
thousands):

<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
$1,800,000 equipment line of credit facility;
effective interest rate of 16.4%; principal
and interest due April 2000 through September
2000; collateralized by equipment............ $ 1,393 $ 981 $ 583
$3,000,000 equipment line of credit facility--
April 1997; effective interest rate of 12.9%;
principal and interest due monthly through
July 2001; collateralized by equipment....... 2,756 2,080 1,448
$6,500,000 equipment line of credit facility;
effective interest rate of 15.9%; principal
and interest due monthly through July 2001;
collateralized by equipment.................. 6,312 4,842 3,523
$3,000,000 equipment line of credit facility--
August 1997; effective interest rate of
16.2%; principal and interest due monthly
through May 2001; collateralized by
equipment.................................... 2,787 2,192 1,617
$5,000,000 equipment line of credit facility;
effective interest rate of 16.2%; principal
and interest due monthly through September
2001; collateralized by equipment............ 3,044 3,084 2,322
$10,000,000 equipment line of credit facility;
effective interest rate of 13.8%; principal
and interest due monthly through August 2002;
collateralized by equipment.................. -- 8,883 7,329
$8,000,000 line of credit facility; interest
rate of 12.8%; principal and interest due
March 1999; collateralized by all of the
Company's assets............................. -- 8,000 --
Other......................................... 178 -- 500
-------- -------- -------
16,470 30,062 17,322
Less current portion.......................... 3,777 14,367 7,722
-------- -------- -------
Equipment loans and line of credit facilities,
less current portion......................... $ 12,693 $ 15,695 $ 9,600
======== ======== =======
</TABLE>

As of December 31, 1998, aggregate maturities for outstanding equipment
loans and line of credit facilities, for fiscal 1999, 2000, 2001 and 2002 were
$14,367,000, $7,342,000, $5,943,000 and $2,410,000, respectively.

On July 1, 1998, the Company issued $200,000,000 of 11% Senior Notes
("Original Senior Notes") due 2008 for aggregate net proceeds of approximately
$193,400,000 (net of discounts to the initial purchasers and offering
expenses). Interest is payable semiannually on January 1 and July 1 of each
year commencing January 1, 1999. As of December 31, 1998, restricted cash
equivalents and investments include approximately $42,400,000 deposited with an
escrow agent that will be used to pay the first four semiannual interest
payments when due. Interest payments of $11,250,000 were made in January and
July 1999. Subject to significant exceptions, the Original Senior Notes
indenture restricts, among other things, the Company's ability to incur
additional indebtedness and the use of proceeds therefrom, pay dividends, make
certain other restricted payments, incur certain liens to secure indebtedness
or engage in merger transactions.

F-15
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

On March 3, 1999, the Company issued $250,000,000 of 5% Convertible
Subordinated Notes due March 15, 2006 (the "Convertible Notes") for aggregate
net proceeds of approximately $242,100,000 (net of offering expenses). Proceeds
from the sale of the Convertible Notes may be used only for limited purposes.
Proceeds in the amount of $48,500,000 may be used for general corporate
purposes. The remaining $193,600,000 may be used only to finance the purchase
of assets or other businesses to be used in the Company's business.

The Convertible Notes are convertible into the Company's common stock at a
conversion rate of 87.5704 shares per $1,000 principal amount of Convertible
Notes, subject to adjustment in certain events and at each holder's option. The
Convertible Notes will not be subject to redemption prior to March 20, 2001,
and generally will be redeemable on or after that date at the option of the
Company, at the redemption prices set forth in the indenture to the Convertible
Notes ("Convertible Notes Indenture"), subject to certain provisions. In the
event of a Change in Control (as defined in the Convertible Notes Indenture),
each holder of the Convertible Notes has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or any
part of the holder's Convertible Notes at a repurchase price of 100% of the
principal amount, plus accrued interest of the Convertible Notes being
repurchased. Interest on the Convertible Notes is payable on March 15 and
September 15 of each year, commencing on September 15, 1999. Accordingly, the
Company made its first interest payment in the amount of approximately
$6,700,000 on September 15, 1999. The Convertible Notes are unsecured
obligations of the Company and are subordinated to all existing and future
Senior Indebtedness (as defined in the Convertible Notes Indenture) and
effectively subordinated to all indebtedness and other liabilities of the
Company's subsidiaries.

On June 22, 1999, the Company issued an additional $75,000,000 of Senior
Notes due 2008 ("Additional Senior Notes") at 100.50% plus accrued interest, if
any, from June 22, 1999, for aggregate net proceeds of approximately
$73,200,000 (net of offering expenses). The Company issued the Additional
Senior Notes under the indenture dated July 1, 1998 under which it previously
issued the Original Senior Notes discussed above. The Additional Senior Notes
will be subject to substantially the same terms and conditions as the Original
Senior Notes. Interest is payable semi-annually on January 1 and July 1 of each
year commencing July 1, 1999. Concurrent with the closing of the offering, the
Company deposited approximately $8,400,000 with an escrow agent that would be
sufficient to pay when due the first three interest payments. An interest
payment of approximately $211,000 was made on July 1, 1999 representing
interest from June 22, 1999 to July 1, 1999.

On July 22, 1999, the Company amended its revolving line of credit agreement
with a financial institution, increasing the total commitment amount from
$7,000,000 to $10,000,000. Pursuant to the terms of the new amendment, the line
of credit can be used for working capital requirements, foreign exchange
forward contracts, and letters of credit. The amount available for working
capital borrowings is limited to $4,000,000. In addition, total foreign
exchange contracts at any one time cannot exceed 10 times the amount of the
foreign exchange sublimit, which is a maximum of $1,000,000. The line of credit
will expire in July 2000 and is subject to certain covenants.

(5) Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity

Redeemable Convertible Preferred Stock and Warrants

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

F-16
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

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.

In 1996, in connection with various financing arrangements, the Company
issued warrants to purchase an aggregate of 137,256 shares of the Company's
common stock at prices ranging from $0.30 to $0.34 per share. 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.

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. In April 1997, in connection with the $3,000,000 equipment
line of credit, the Company issued warrants to purchase 196,429 shares of the
Company's Series B1 redeemable convertible preferred stock at $0.84 per share.
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. In August and September 1997, in connection with the
$3,000,000 and the $6,500,000 equipment lines of credit, 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. In December 1997,
in connection with the $8,000,000 line of credit facility and the $5,000,000
equipment line of credit, 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.

In March 1998, in connection with a strategic alliance, the Company issued
warrants to purchase an aggregate of 480,000 shares of the Company's common
stock at a price of $1.88 per share.

The fair value of all warrant issuances, calculated using the Black-Scholes
option pricing model, with the following assumptions: dividends--none; expected
life--contractual term; risk-free interest rate of 5.7% to 6.7%; volatility of
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.

. 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 are being amortized on a straight-
line basis through the commitment periods of the credit facilities.

. The 480,000 warrants issued in connection with the strategic alliance for
which the value was determined to be $525,000. This amount was recorded
as marketing and sales expense in the accompanying supplemental
consolidated statement of operations for the year ended December 31,
1998.

F-17
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

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

<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock Warrants
----------------------- ----------------------
Shares Issued and Carrying Issued and Carrying
Series Designated Outstanding Value Outstanding Value
------ ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
A................. 7,798,483 7,798,483 $ 3,168,000 -- $ --
A1................ 7,798,483 -- -- -- --
B................. 8,600,000 7,775,930 6,473,000 160,862 --
B1................ 8,600,000 65,524 55,000 466,072 --
C................. 17,850,000 15,845,855 20,333,000 1,523,024 1,242,000
C1................ 17,850,000 -- -- 271,598 --
D................. 3,231,579 2,631,579 7,246,000 -- --
D1................ 3,231,579 -- -- 372,826 730,000
---------- ---------- ----------- --------- ----------
74,960,124 34,117,371 $37,275,000 2,794,382 $1,972,000
========== ========== =========== ========= ==========
</TABLE>

As of December 31, 1997 and 1998, the Company has 149,304 and 1,448,680
warrants to purchase common stock outstanding, respectively.

Convertible Preferred Stock of Service Metrics, Inc.

In May 1998, SMI issued 540,936 shares of Series A convertible preferred
stock for approximately $1,000,000 in cash. In December 1998, SMI issued
1,012,222 shares of Series B convertible preferred stock for approximately
$5,000,000 in cash. In January 1999, SMI issued an additional 303,667 shares of
Series B convertible preferred stock for approximately $1,500,000 in cash. In
July 1999, SMI issued 728,953 shares of Series C convertible preferred stock
for approximately $8,000,000 in cash.

The Series A, B, and C convertible preferred stock ("SMI Preferred Stock")
was convertible, at the option of the holder, into common stock of SMI based on
formulas specified in the preferred stock agreements. The SMI Preferred Stock
would automatically convert into common stock upon the closing of an initial
public offering of SMI, where the net cash proceeds were at least $15,000,000
and the public offering price would be at least $2.50 per share. The holders of
the SMI Preferred Stock were entitled to receive dividends at the rate of $0.16
for Series A, $0.48 for Series B, and $1.10 for Series C, when and if declared
by the Board of Directors. These dividends were noncumulative. Holders of the
SMI preferred stock were entitled to vote upon any matter submitted to the
stockholders for a vote and have one vote for each full share of common stock
into which their SMI Preferred Stock would be converted at the date of the
vote. The SMI Preferred Stock had liquidation privileges generally equal to the
SMI Preferred Stock purchase price per share plus any declared but unpaid
dividends and was in preference to shares of common stock.

In connection with the merger between Exodus and SMI on November 23, 1999,
all of the SMI preferred shareholders converted their SMI Preferred Stock into
SMI common stock which was converted into Exodus Common Stock based on a
specified exchange ratio.

F-18
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Initial Public Offering

On March 24, 1998, the Company completed its initial public offering ("IPO")
of 41,000,000 shares of its common stock. Net proceeds to the Company, after
deducting underwriting discounts and commissions and offering expenses,
aggregated approximately $69,800,000. At the closing of the IPO, all redeemable
convertible preferred stock was converted to common stock and all warrants to
purchase redeemable convertible preferred stock were converted to warrants to
purchase common stock on a one-for-three basis. In connection with the IPO,
certain warrant holders exercised their warrants to purchase redeemable
convertible preferred stock (which converted into common stock), which resulted
in additional proceeds of $1,842,000.

Stock Purchase and Stock Option Plans

During 1995, the Company adopted a Stock Purchase Plan under which 2,933,336
shares of common stock were authorized. Awards totaling 858,944 shares of
common stock were granted to individuals through 1996, at a price of $0.03 per
share, the estimated fair market value of the shares on the date of the award.
No awards were granted during the years ended December 31, 1997 and 1998.
Generally, the shares are subject to a 50-month vesting period. As of December
31, 1998, 34,408 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, 370,408 had been repurchased
by the Company as of December 31, 1998.

In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 4,800,000 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.
During 1998, 436,528 shares were issued under the Purchase Plan at a weighted-
average purchase price of $1.67 per share.

In January 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"), which served 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 6 months from the date of grant and 2% per month thereafter, and
generally are exercisable for a term of 10 years after the date of grant. Under
the 1997 Plan, the Company reserved 17,600,000 shares of its common stock for
issuance to employees and consultants to be granted as either incentive or
nonqualified stock options. Options granted under the 1997 Plan generally vest
12% after 6 months from the date of grant and 2% per month thereafter and are
generally exercisable for a term of 10 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 became
effective as the successor to the 1997 Plan. The Company has reserved
12,000,000 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 10 years and generally will vest over 50
months. The 1998 Plan will terminate in January 2008.

F-19
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

On June 2, 1999, the Company's stockholders approved an amendment to the
Company's 1998 Equity Incentive Plan to increase the number of shares of common
stock reserved for issuance thereunder by 8,000,000 shares, from 12,000,000
shares to 20,000,000 shares.

In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 1,600,000 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 40,000 shares of the Company's common stock and,
thereafter, an option to purchase an additional 10,000 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.

In January 1998, the Company granted stock options to purchase 2,666,672
shares of common stock to an officer of the Company, of which half have an
exercise price of $1.13 per share and vest 100% after 3 years and half have an
exercise price of $2.25 per share and vest 100% after 5 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 granted a stock option to an officer of the
Company to purchase 5,775,848 shares of common stock with an exercise price of
$1.13 per share (fair market value on the date of grant) that vests as to 12%
of such shares in September 1998 and vests as to an additional 2% per month
thereafter.

In January 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"). Under the 1999 Plan, the Company has reserved 16,000,000 shares of
common stock for issuance to employees, consultants, and to be used for
acquisitions, to be granted as nonqualified stock options. Options granted
under the 1999 Plan generally will vest over 50 months and are generally
exercisable for a term of 10 years from the date of grant.

Service Metrics, Inc. Stock Option Plan

In July 1998, the SMI Board of Directors adopted the 1998 Stock Option Plan.
Under the Plan, officers, employees and certain other individuals could be
granted options and rights to purchase shares of common stock. Options granted
could be either incentive stock options or non-statutory stock options. SMI had
reserved 512,624 shares of common stock for issuance of stock options. As of
December 31, 1998, 359,841 shares were available for future grant. Depending on
the type of option, the exercise price could not be less than the fair market
value per common share on the date of grant or as determined by the Board of
Directors. Options were exercisable over periods determined by the Board of
Directors, not to exceed 10 years, and generally were to vest ratably over 4
years. In the event of the termination of the optionee's relationship with SMI,
vested options yet to be exercised would remain exercisable for such period of
time ending on the earlier of 3 months after termination or the expiration of
the term of the option, or as determined by the Board of Directors.

In connection with the merger between Exodus and SMI on November 23, 1999,
all of the SMI stock options were assumed by Exodus and converted into Exodus
stock options based on a specified exchange ratio.

F-20
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Fair Value Disclosures

The Company uses the intrinsic value method in accounting for its employee
stock-based compensation 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 stock options granted by the
Company from March 1997 through December 1997 and stock options granted by SMI
from January 1999 to September 1999. With respect to the stock options granted
by the Company from March to December 1997, the Company 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.
With respect to the stock options granted by SMI from January 1999 to September
1999, SMI recorded deferred stock compensation of $2,778,000. These amounts are
being amortized consistent with the method described in FASB Interpretation No.
28 over the vesting period of the individual options, generally 48 to 50
months. Had compensation cost been determined in accordance with SFAS No. 123
for all of the Company's and SMI's stock-based compensation plans, net loss
attributable to holders of common stock and net loss per share would have been
changed to the amounts indicated below (in thousands, except per share data):

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss applicable to holders of common
stock:
As reported ............................... $(4,133) $(26,711) $(69,330)
Pro forma.................................. $(4,133) $(26,711) $(77,009)
Basic and diluted net loss per share:
As reported ............................... $ (0.27) $ (1.73) $ (0.55)
Pro forma ................................. $ (0.27) $ (1.73) $ (0.61)
</TABLE>

The fair value of each stock option is estimated on the date of grant using
the minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Expected life............................... 2.55 years 2.59 years 3.09 years
Risk-free interest rate..................... 6.28% 5.81% 4.98%
Volatility ................................. -- -- 80.00%
</TABLE>

The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants in 1998: no expected
dividends, expected volatility of 80%, risk-free interest rate of 5.26%, and
expected life of 1.33 years. The weighted-average fair value of purchase rights
granted under the Purchase Plan during 1998 was $1.25 per share.

F-21
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

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

<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1996 1997 1998
-------------------- --------------------- ---------------------
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................ 1,000,664 $0.03 2,336,264 $0.03 13,674,288 $0.10
Granted................. 1,797,872 0.04 12,894,400 0.11 31,594,374 2.84
Forfeited............... (422,800) 0.03 (846,880) 0.08 (2,311,752) 1.03
Exercised............... (39,472) 0.03 (709,496) 0.04 (4,367,032) 0.33
--------- ---------- ----------
Outstanding at end of
year .................. 2,336,264 0.03 13,674,288 0.10 38,589,878 2.26
--------- ---------- ----------
Exercisable at end of
year................... 645,336 0.03 1,791,600 0.06 3,076,720 0.61
========= ========== ==========
Weighted-average fair
value of options
granted during the year
at market.............. 1,797,872 0.01 2,666,136 0.01 28,560,800 1.57
Weighted-average fair
value of options
granted during the year
at less than market.... -- -- 10,228,264 0.29 366,914 0.78
Weighted-average fair
value of options
granted during the year
at greater than
market ................ -- -- -- -- 2,666,672 0.53
</TABLE>

The following table summarizes information about stock options outstanding
as of December 31, 1998:

<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Shares Life Price Shares Price
- --------------- ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.03 to 0.10.............. 8,789,854 8.51 years $0.07 1,992,688 $0.06
$0.47 to 1.13.............. 9,360,616 9.13 1.04 826,136 0.91
$1.88 to 3.03.............. 9,929,680 9.64 2.67 82,544 2.48
$3.84 to 5.00.............. 10,509,728 9.84 4.75 175,352 4.50
---------- ---------
38,589,878 9.31 2.26 3,076,720 0.61
========== =========
</TABLE>

Stockholder Rights Plan

In January 1999, the Company adopted a Stockholder Rights Plan ("the Rights
Plan"). The Rights Plan is designed to protect the long-term value of the
Company for its stockholders during any future unsolicited acquisition
attempt. In connection with the Rights Plan, the Company declared a dividend
of one preferred share purchase right for each share of the Company's common
stock outstanding on February 11, 1999 ("Record Date") and further directed
the issuance of one such right with respect to each share of the Company's
common stock that is issued after the Record Date, except in certain
circumstances.

F-22
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

On June 2, 1999, stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock issuable by the Company from 100,000,000 to 300,000,000.

Stock Splits

On April 12, 1999 and August 12, 1999, the Company completed two-for-one
stock splits accomplished in the form of stock dividends. Share and per share
amounts in the accompanying supplemental consolidated financial statements
reflect both two-for-one stock splits retroactively.

(6)Commitments and Contingencies

Leases

The Company has entered into a number of operating leases for its
facilities. The leases expire from 1999 through 2010. As of December 31, 1998,
the Company had collateralized letters of credit aggregating $3,238,000 for
these leases. The related funds are included in restricted cash equivalents and
investments on the accompanying supplemental consolidated balance sheet. The
Company also leases certain data center infrastructure and equipment under
capital leases. 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 were purchased until
the time of the sale-leaseback. Future minimum lease payments as of December
31, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999....................................................... $ 6,470 $ 9,206
2000....................................................... 6,720 9,892
2001....................................................... 6,009 9,964
2002....................................................... 676 9,508
2003....................................................... -- 9,271
Thereafter................................................. -- 43,994
------- -------
Total minimum lease payments............................... 19,875 $91,835
=======
Less amount representing imputed interest.................. 3,063
-------
Present value of minimum lease payments.................... 16,812
Less current portion....................................... 5,223
-------
Capital lease obligations, less current portion............ $11,589
=======
</TABLE>

The Company's rent expense was $248,000, $1,764,000, $5,583,000, $3,389,000
and $11,143,000 for the years ended December 31, 1996, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999, respectively.

F-23
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Telecommunications Agreements

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. In January 1999, this original agreement was replaced
with a new agreement for a period of 60 months with a minimum commitment of
$1,000,000 per month.

In July 1998, the Company entered into an agreement to obtain
telecommunications services for a period of 36 months with a minimum commitment
of approximately $500,000 per month.

In August 1999 the Company entered into capacity purchase agreements. The
agreements provide for a total potential outlay of approximately $105,000,000
for fiber capacity and related maintenance covering approximately 25 years.

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 have
not been significant to date.

In March 1999, this agreement was replaced with a new agreement that
obligates the Company to make certain future payments for the use of the
software license. These payments are not expected to have a material effect on
the consolidated financial statements.

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 consolidated financial position and results of operations.

(7) Income Taxes

The following table reconciles the expected corporate federal income tax
expense (benefit) (computed by multiplying the Company's loss before taxes by
34%) to the Company's actual income tax expense (benefit) (in thousands):

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(1,405) $(8,602) $(22,895)
Permanent differences........................... 2 15 81
Net operating loss not benefited................ 1,403 8,587 22,814
------- ------- --------
Actual income tax expense (benefit)........... $ -- $ -- $ --
======= ======= ========
</TABLE>

F-24
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $10,941 $35,137
Difference between book and tax depreciation............. -- 2,284
Reserves and accruals.................................... 195 1,234
Research and experimentation credit carryforwards........ 113 548
Deferred compensation.................................... 437 957
Other.................................................... 41 6
------- -------
Total gross deferred tax assets........................ 11,727 40,166
Less valuation allowance................................... 11,708 40,166
------- -------
19 --
Deferred tax liabilities:
Difference between book and tax depreciation............. (19) --
------- -------
Net deferred tax assets................................ $ -- $ --
======= =======
</TABLE>

As of December 31, 1998, the Company has a net operating loss carryforward
for federal and state purposes of $94,961,000 and $48,753,000, respectively.
The difference between the federal and state net operating loss carryforward is
due to the 50% limitation of net operating loss carryforwards for state
purposes. The federal net operating loss carryforward will expire from 2011
through 2018. The state net operating loss carryforward will expire from 2001
through 2003.

Gross deferred tax assets as of December 31, 1998 include approximately
$3,430,000 relating to the exercise of stock options, which will be credited to
equity when realized.

The net change in the valuation allowance was an increase of $9,654,000 and
$28,458,000 for the years ended December 31, 1997 and 1998, respectively.

Federal and state 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, which constitutes an "ownership change" as defined by
Internal Revenue Code, Section 382. The Company has not determined if an
ownership change, as defined, has occurred. The Company plans to compute exact
limitations upon realization of taxable earnings and associated utilization of
the net operating loss carryforwards.

(8) Segment Information

The Company operates a number of Internet Data Centers throughout the United
States and one in Europe. The Company establishes these Internet Data Centers
using a consistent investment and operating model. As a result, the expected
long-term economic characteristics and financial performance are similar. In
particular, each data center provides the same Internet related services to a
similar type of customer who may locate its servers in multiple Internet Data
Centers. As a result, the Company believes these Internet Data Centers
represent one reportable segment under the aggregation criteria of SFAS No.
131, Disclosures about Segments

F-25
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

of an Enterprise and Related Information. Internet Data Center operations
primarily include services such as server infrastructure support, Internet
connectivity, and managed services.

With the acquisition of Cohesive on July 27, 1999, management began
reviewing financial information and business performance and allocating
resources based on both Internet Data Center operations and by professional
services, given Cohesive's expertise in networking, Internet-based applications
and technology solutions. As a result, the Company identified professional
services as an additional reportable segment. Professional services primarily
include services such as network design and development, Internet-based and
application development, and information technology strategy.

Financial information for the Company's reportable segments is presented
below:

<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Internet Data Centers........ $ 3,130 $ 12,408 $ 52,263 $ 31,423 $119,650
Professional services........ -- -- 482 215 21,104
------- -------- -------- -------- --------
Total revenues............. $ 3,130 $ 12,408 $ 52,745 $ 31,638 $140,754
======= ======== ======== ======== ========
Operating profit (loss):
Internet Data Centers........ $ * $ (1,243) $ (1,492) $ (3,204) $ 23,166
Professional services........ * -- (351) 17 1,880
Corporate areas.............. * (23,549) (55,730) (37,095) (82,378)
------- -------- -------- -------- --------
Total operating loss....... $(4,094) $(24,792) $(57,573) $(40,282) $(57,332)
======= ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Total assets:
Internet Data Centers.......................... $ * $ 52,725 $200,616
Professional services.......................... * 212 3,011
Corporate assets............................... * 245,861 481,198
------- -------- --------
Total assets................................. $40,973 $298,798 $684,825
======= ======== ========
</TABLE>
- --------
*Information is not available.

(9) Stock Split

On December 14, 1999, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. Share and per share amounts in
the accompanying supplemental consolidated financial statements reflect this
two-for-one stock split retroactively.

F-26
<PAGE>

REPORT OF KPMG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Exodus
Communications, Inc. and subsidiaries (the Company) as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
(deficit) equity, and cash flows for each of the years in the three-year period
ended December 31, 1998. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule as
listed in the index on page F-1. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Exodus
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

KPMG LLP

Mountain View, California
January 26, 1999, except as to Note 9,
which is as of November 23, 1999, and
except as to Note 10, which is as of
December 14, 1999

F-27
<PAGE>

EXODUS COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 10,270 $150,891 $ 164,215
Accounts receivable, net of allowance for
doubtful accounts of $691, $1,821, and
$5,240 as of December 31, 1997 and 1998,
and September 30, 1999, respectively....... 1,837 9,648 47,449
Prepaid expenses and other current assets... 1,377 6,203 18,235
-------- -------- ---------
Total current assets...................... 13,484 166,742 229,899
Property and equipment, net.................. 25,170 68,306 241,180
Restricted cash equivalents and investments.. 1,753 45,614 35,444
Intangibles and other assets................. 566 12,624 164,873
-------- -------- ---------
$ 40,973 $293,286 $ 671,396
======== ======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank borrowings............................. $ 3,000 $ -- $ --
Current portion of equipment loans and line
of credit facilities....................... 3,777 14,367 7,722
Current portion of capital lease
obligations................................ 1,143 5,140 14,131
Accounts payable............................ 6,252 9,208 32,897
Accrued expenses............................ 3,019 6,771 19,757
Accrued interest payable.................... -- 11,563 8,074
-------- -------- ---------
Total current liabilities................. 17,191 47,049 82,581
Equipment loans and line of credit
facilities, less current portion............ 12,693 15,695 9,600
Capital lease obligations, less current
portion..................................... 2,442 11,401 30,772
Convertible subordinated notes............... -- -- 250,000
Senior notes................................. -- 200,000 275,375
-------- -------- ---------
Total liabilities......................... 32,326 274,145 648,328
Redeemable convertible preferred stock and
warrants, $0.001 par value: 74,960,124, no
shares, and no shares authorized as of
December 31, 1997 and 1998, and September
30, 1999 respectively; 34,117,371, no
shares, and no shares issued and outstanding
as of December 31, 1997 and 1998, and
September 30, 1999, respectively; aggregate
liquidation preference of $39,640 as of
December 31, 1997 .......................... 39,247 -- --
-------- -------- ---------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value: no
shares, 5,000,000 shares and 5,000,000
shares authorized as of December 31, 1997
and 1998, and September 30, 1999,
respectively; and no shares issued or
outstanding as of December 31, 1997 and
1998, and September 30, 1999 .............. -- -- --
Common stock, $0.001 par value: 53,281,579,
50,000,000, and 300,000,000 shares
authorized as of December 31, 1997 and
1998, and September 30, 1999,
respectively; 16,538,024, 160,538,816, and
168,981,250 shares issued and outstanding
as of December 31, 1997 and 1998, and
September 30, 1999, respectively .......... 17 161 169
Additional paid-in capital................... 2,493 117,079 192,339
Notes receivable from stockholders........... (140) -- --
Deferred stock compensation.................. (2,393) (1,080) (541)
Accumulated deficit.......................... (30,577) (97,019) (168,899)
-------- -------- ---------
Total stockholders' (deficit) equity...... (30,600) 19,141 23,068
-------- -------- ---------
$ 40,973 $293,286 $ 671,396
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-28
<PAGE>

EXODUS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues............ $ 2,454 $ 11,588 $ 49,808
Equipment revenues.......... 676 820 2,930
------- -------- -------- -------- --------
Total revenues............ 3,130 12,408 52,738 $ 31,638 $140,186
------- -------- -------- -------- --------
Costs and expenses:
Cost of service revenues.... 2,538 16,228 59,261
Cost of equipment revenues.. 452 640 2,298
------- -------- -------- -------- --------
Total cost of revenue..... 2,990 16,868 61,559 39,291 117,775
Marketing and sales......... 2,734 12,702 28,778 20,467 39,523
General and administrative.. 1,056 5,983 15,724 9,518 24,396
Product development......... 444 1,647 3,221 2,299 4,610
Amortization of
intangibles................ -- -- 141 -- 4,674
Restructuring costs......... -- -- -- -- 923
------- -------- -------- -------- --------
Total expenses............ 4,234 20,332 47,864 32,284 74,126
------- -------- -------- -------- --------
Total costs and expenses.. 7,224 37,200 109,423 71,575 191,901
------- -------- -------- -------- --------
Operating loss............ (4,094) (24,792) (56,685) (39,937) (51,715)
Interest income............... 68 193 7,137 4,016 10,353
Interest expense.............. (107) (699) (16,894) (9,136) (30,518)
------- -------- -------- -------- --------
Net loss.................. (4,133) (25,298) (66,442) (45,057) (71,880)
Cumulative dividends and
accretion on redeemable
convertible preferred stock.. -- (1,413) (2,014) (2,014) --
------- -------- -------- -------- --------
Net loss attributable to
common stockholders...... $(4,133) $(26,711) $(68,456) $(47,071) $(71,880)
======= ======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.27) $ (1.73) $ (0.55) $ (0.41) $ (0.44)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share ....................... 15,312 15,428 125,148 113,584 164,854
======= ======== ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-29
<PAGE>

EXODUS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands)

<TABLE>
<CAPTION>
Notes Total
Common Stock Additional Receivable Deferred Stockholders'
--------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Capital Stockholders Compensation Deficit Equity
------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December
31, 1995................ 14,568 $ 15 $ 186 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock................... 1,072 1 31 -- -- -- 32
Issuance of common stock
in connection with stock
purchase plan and
exercise of stock
options................. 128 -- 4 (3) -- -- 1
Repurchase of common
stock................... (200) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders............ -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- (4,133) (4,133)
------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1996................ 15,568 16 215 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants.... 1,378 1 221 -- -- -- 222
Repurchase of common
stock................... (408) -- (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................ 16,538 17 2,493 (140) (2,393) (30,577) (30,600)
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants................ 6,703 7 2,246 -- -- -- 2,253
Issuance of common stock
in conjunction with
initial public offering,
net of offering costs of
$7,062.................. 41,000 41 69,777 -- -- -- 69,818
Issuance of common stock
to an officer for cash.. 400 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants................ -- -- 786 -- -- -- 786
Repayment of notes
receivable from
stockholders............ -- -- -- 140 -- -- 140
Conversion of redeemable
convertible preferred
stock into common
stock................... 95,898 96 43,341 -- -- -- 43,437
Amortization of deferred
stock compensation...... -- -- -- -- 1,313 -- 1,313
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock................... -- -- (462) -- -- -- (462)
Accretion on Series C
and D redeemable
convertible
preferred stock......... -- -- (1,552) -- -- -- (1,552)
Net loss................ -- -- -- -- -- (66,442) (66,442)
------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1998................ 160,539 161 117,079 -- (1,080) (97,019) 19,141
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants (unaudited).... 6,842 7 13,999 -- -- -- 14,006
Issuance of common stock
and assumption of
options in connection
with the acquisition of
Cohesive Technology
Solutions, Inc.......... 1,600 1 61,261 -- -- -- 61,262
Amortization of deferred
stock compensation
(unaudited)............. -- -- -- -- 539 -- 539
Net loss (unaudited).... -- -- -- -- -- (71,880) (71,880)
------- ---- -------- ----- ------- --------- --------
Balances as of September
30, 1999 (unaudited).... 168,981 $169 $192,339 $ -- $ (541) $(168,899) $ 23,068
======= ==== ======== ===== ======= ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-30
<PAGE>

EXODUS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $(4,133) $(25,298) $(66,442) $(45,057) $(71,880)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization............. 461 3,429 12,997 8,568 28,045
Loss on disposal of
property and equipment... -- -- 464 248 --
Noncash common stock and
warrant expense.......... -- -- 786 786 --
Amortization of deferred
stock compensation....... -- 1,089 1,313 1,081 539
Amortization of debt
issuance costs........... -- -- 846 274 1,063
Interest accretion on
restricted cash
equivalents and
investments.............. -- -- (1,088) (580) (1,068)
Changes in operating
assets and liabilities:
Accounts receivable..... (265) (1,316) (8,301) (7,117) (27,865)
Prepaid expenses and
other assets........... (189) (748) (4,086) (3,970) (16,812)
Accounts payable........ 671 5,089 2,791 4,981 21,735
Accrued expenses........ 339 2,237 2,659 3,790 5,366
Accrued interest
payable................ -- -- 11,563 5,750 (3,489)
------- -------- -------- -------- --------
Net cash used for
operating activities.. (3,116) (15,518) (46,498) (31,246) (64,366)
------- -------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures........ (3,499) (22,489) (44,564) (26,523) (157,703)
Proceeds from sale of
property and equipment..... -- -- 245 -- --
Businesses acquired, net of
cash received.............. -- -- (5,654) -- (70,398)
Release of restricted cash
and investments............ -- -- -- -- 24,938
Increase in restricted cash
equivalents and
investments................ (378) (1,375) (42,773) (43,562) (13,413)
Other assets................ -- -- -- -- (15,405)
------- -------- -------- -------- --------
Net cash used for
investing activities.. (3,877) (23,864) (92,746) (70,085) (231,981)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
redeemable convertible
preferred stock and
warrants................... 9,409 23,320 2,176 2,176 --
Proceeds from issuance of
common stock, net.......... 32 222 72,521 71,353 14,006
Proceeds from issuance of
bridge financing
convertible notes.......... -- 3,975 -- -- --
Repayment of notes
receivable from
stockholders............... 7 34 140 90 --
Bank borrowings, net........ (100) 3,000 (3,000) (3,000) --
Proceeds from sale-leaseback
transactions............... 552 932 4,035 4,035 --
Payments on capital leases
obligations................ (154) (720) (2,999) (1,689) (6,176)
Proceeds from equipment
loans and line of credit
facilities................. 1,296 16,480 18,611 18,611 --
Repayment of equipment loans
and line of credit
facilities................. (497) (1,306) (5,019) (3,468) (13,529)
Proceeds from convertible
subordinated notes, net.... -- -- -- -- 242,124
Proceeds from senior notes,
net of discounts and
offering costs............. -- -- 193,400 194,000 73,246
------- -------- -------- -------- --------
Net cash provided by
financing activities.. 10,545 45,937 279,865 282,108 309,671
------- -------- -------- -------- --------
Net increase in cash and cash
equivalents................. 3,552 6,555 140,621 180,777 13,324
Cash and cash equivalents at
beginning of period......... 163 3,715 10,270 10,270 150,891
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ 3,715 $ 10,270 $150,891 $191,047 $164,215
======= ======== ======== ======== ========
Supplemental disclosures of
cash flow information:
Cash paid--interest......... $ -- $ 699 $ 4,917 $ 2,921 $ 33,910
======= ======== ======== ======== ========
Non cash investing and
financing activities:
Assets recorded under
capital leases............. $ 27 $ 2,700 $ 11,709 $ 6,691 $ 34,538
======= ======== ======== ======== ========
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 $ 2,014 $ 2,014 $ --
======= ======== ======== ======== ========
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 $ -- $ -- $ --
======= ======== ======== ======== ========
Conversion of redeemable
convertible preferred stock
to common stock............ $ -- $ -- $ 43,437 $ 43,437 $ --
======= ======== ======== ======== ========
Issuance of common stock and
assumption of options in
connection with the
acquisition of Cohesive
Technology Solutions,
Inc. ...................... $ -- $ -- $ -- $ -- $ 61,262
======= ======== ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-31
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

(1) Summary of the Company and Significant Accounting Policies

The Company

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Cash Equivalents and Investments

Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less. As of September 30, 1999 cash equivalents
consisted principally of money market funds at three financial institutions.

The Company classifies its investments as "held-to-maturity." As of
September 30, 1999 such investments consisted of United States Treasury Notes
and are recorded at amortized cost.

F-32
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

The components of restricted cash equivalents and investments are as follows
(in thousands):

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
United States treasury notes:
Due within one year............................ $10,733 $29,528
Due after one year through two years........... 20,594 --
Money market funds............................... 11,049 --
Cash collateral related to leases................ 3,238 5,916
------- -------
Total restricted cash equivalents and
investments................................. $45,614 $35,444
======= =======
</TABLE>

See Notes 4 and 6 for additional information regarding restricted cash
equivalents and investments.

Financial Instruments and Concentration of Credit Risk

Property and Equipment

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.

F-33
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Stock-Based Compensation

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Unaudited Interim Financial Statements

The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, the accompanying
unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's financial position as of September 30, 1999,
and the results of its operations and its cash flows for the nine-month periods
ended September 30, 1998 and 1999.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets are comprised primarily of amounts
recorded in business acquisitions and are included in intangibles and other
assets on the accompanying consolidated balance sheets. The goodwill and other
intangible amounts related to the acquisitions are being amortized on a
straight-line basis over periods generally ranging from 5 to 10 years (see Note
2).

F-34
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Net Loss Per Share

Basic and diluted net loss per share has been computed by dividing the net
loss attributable to common stockholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per
share does not include the effect of the following common equivalent shares as
the effect of their inclusion is antidilutive during each period (in
thousands):

<TABLE>
<CAPTION>
Nine Months
Year Ended December Ended
31, September 30,
---------------------- -------------
1996 1997 1998 1998 1999
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options... 2,336 13,672 38,288 26,760 51,282
Shares issuable pursuant to warrants
to purchase common and redeemable
convertible preferred stock.......... 5,096 22,504 1,448 2,136 506
Shares of redeemable convertible
preferred stock on an "as if
converted" basis..................... 124,296 272,936 -- -- --
Shares of convertible subordinated
notes on an "as if converted" basis.. -- -- -- -- 21,892
</TABLE>

Comprehensive Loss

There are no differences between consolidated net loss and comprehensive
loss for any period presented.

Reclassifications

Certain prior period amounts have been reclassified to conform to the
current period presentation.

(2) Business Combinations

On October 2, 1998, the Company purchased substantially all of the assets,
including customer agreements, and assumed certain liabilities of Arca
Systems, Inc. ("Arca"), a wholly owned subsidiary of Cyberguard Corporation.
Arca, which has been in business for more than ten years, is a provider of
advanced network and system security consulting services and designs and
develops security technology solutions for complex and sensitive information
systems. Arca operates as a wholly owned subsidiary of the Company. Total
consideration paid, including direct acquisition costs, aggregated
approximately $5,800,000. The acquisition was accounted for as a purchase and
the results of Arca have been included from the acquisition date. The excess
of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $5,000,000 and was attributed primarily to workforce
in place ($2,500,000) and goodwill ($2,400,000). These amounts are generally
being amortized on a straight-line basis over 10 years.

On February 1, 1999, the Company purchased all of the capital stock of
American Information Systems, Inc ("AIS"). AIS provides co-location services
as well as professional services. Total consideration paid, including direct
acquisition costs, aggregated approximately $20,500,000. The acquisition was
accounted for as a purchase with the results of AIS included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately $18,700,000 and was
attributed primarily to goodwill ($15,000,000), customer lists ($3,200,000)
and assembled workforce ($500,000). These amounts are being amortized on a
straight-line basis over periods ranging from 5 to 7 years.

F-35
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive"). Cohesive offers a variety of services
including network design and development, Internet-based and application
development and information technology strategy and project management.
Pursuant to the terms of the Agreement and Plan of Reorganization, each share
of Cohesive common stock was converted into the right to receive 0.10488 shares
of Exodus common stock and $1.338 in cash; each share of Cohesive Series A
Preferred Stock was converted into the right to receive $122.337 in cash; each
share of Cohesive Series B Preferred Stock was converted into the right to
receive $115.965 in cash; each share of Cohesive Series C Preferred Stock was
converted into the right to receive $5.00 in cash; and each share of Cohesive
Series D Preferred stock, which automatically converted into Cohesive common
stock immediately prior to the merger, was converted into the right to receive
0.10488 shares of Exodus common stock and approximately $6.655 in cash. In
addition, the Company assumed each issued and outstanding option to purchase
shares of Cohesive common stock which was converted into an option to purchase
Exodus common stock using an exchange ratio of 0.14604.

The following summary, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations with Arca's, AIS', and
Cohesive's results of operations, as if Arca, AIS, and Cohesive had been
consummated as of January 1, 1997 (in thousands, except per share data):

<TABLE>
<CAPTION>
Year Ended Nine Months Nine Months
December 31, Ended Ended
------------------ September 30, September 30,
1997 1998 1998 1999
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $ 41,004 $103,767 $ 69,208 $169,377
Net loss attributable to
common stockholders....... $(24,009) $(86,148) $(62,557) $(81,719)
Basic and diluted net loss
per share................. $ (1.41) $ (0.68) $ (0.54) $ (0.49)
Shares used in pro forma
per share calculation..... 17,028 126,748 115,184 166,068
</TABLE>

F-36
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

(3) Financial Statement Components

Property and Equipment

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

<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Data centers and related equipment........... $16,316 $43,959 $150,239
Furniture, fixtures, computer equipment and
other....................................... 12,815 32,887 90,319
Construction in progress..................... -- 8,497 40,576
------- ------- --------
29,131 85,343 281,134
Less accumulated depreciation and
amortization................................ 3,961 17,037 39,954
------- ------- --------
$25,170 $68,306 $241,180
======= ======= ========
</TABLE>

Computer equipment and certain data center infrastructure are recorded under
capital leases that aggregated $4,492,000, $20,236,000, and $54,774,000 as of
December 31, 1997 and 1998, and September 30, 1999, respectively. Accumulated
amortization on the assets recorded under capital leases aggregated $722,000,
$4,426,000, and $12,260,000 as of December 31, 1997 and 1998, and September 30,
1999, respectively.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Accrued payroll and related expenses............. $1,183 $2,956 $ 8,940
Other............................................ 1,836 3,815 10,817
------ ------ -------
$3,019 $6,771 $19,757
====== ====== =======
</TABLE>

F-37
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

(4) Bank Borrowings and Debt

A summary of equipment loans and line of credit facilities follows (in
thousands):

<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
$1,800,000 equipment line of credit facility;
effective interest rate of 16.4%; principal
and interest due April 2000 through
September 2000; collateralized by
equipment................................... $ 1,393 $ 981 $ 583
$3,000,000 equipment line of credit
facility--April 1997; effective interest
rate of 12.9%; principal and interest due
monthly through July 2001; collateralized by
equipment................................... 2,756 2,080 1,448
$6,500,000 equipment line of credit facility;
effective interest rate of 15.9%; principal
and interest due monthly through July 2001;
collateralized by equipment................. 6,312 4,842 3,523
$3,000,000 equipment line of credit
facility--August 1997; effective interest
rate of 16.2%; principal and interest due
monthly through May 2001; collateralized by
equipment................................... 2,787 2,192 1,617
$5,000,000 equipment line of credit facility;
effective interest rate of 16.2%; principal
and interest due monthly through September
2001; collateralized by equipment........... 3,044 3,084 2,322
$10,000,000 equipment line of credit
facility; effective interest rate of 13.8%;
principal and interest due monthly through
August 2002; collateralized by equipment.... -- 8,883 7,329
$8,000,000 line of credit facility; interest
rate of 12.8%; principal and interest due
March 1999; collateralized by all of the
Company's assets............................ -- 8,000 --
Other........................................ 178 -- 500
------- ------- ------
16,470 30,062 17,322
Less current portion......................... 3,777 14,367 7,722
------- ------- ------
Equipment loans and line of credit
facilities, less current portion............ $12,693 $15,695 $9,600
======= ======= ======
</TABLE>

On July 1, 1998, the Company issued $200,000,000 of 11 1/4% Senior Notes
("Original Senior Notes") due 2008 for aggregate net proceeds of approximately
$193,400,000 (net of discounts to the initial purchasers and offering
expenses). Interest is payable semi annually on January 1 and July 1 of each
year commencing January 1, 1999. As of December 31, 1998 restricted cash
equivalents and investments include approximately $42,400,000 deposited with an
escrow agent that will be used to pay the first four semiannual interest
payments when due. Interest payments of $11,250,000 were made in January and
July 1999. Subject to significant exceptions, the Original Senior Notes
Indenture restricts, among other things, the Company's ability to incur
additional indebtedness and the use of proceeds therefrom, pay dividends, make
certain other restricted payments, incur certain liens to secure indebtedness
or engage in merger transactions.

F-38
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

On June 22, 1999, the Company issued an additional $75,000,000 of Senior
Notes due 2008 ("Additional Senior Notes") at 100.50% plus accrued interest, if
any, from June 22, 1999, for aggregate net proceeds of approximately
$73,200,000 (net of offering expenses). The Company issued the Additional
Senior Notes under the Indenture dated July 1, 1998 under which it previously
issued the Original Senior Notes discussed above. The Additional Senior Notes
will be subject to substantially the same terms and conditions as the Original
Senior Notes. Interest is payable semi-annually on January 1 and July 1 of each
year commencing July 1, 1999. Concurrent with the closing of the offering, the
Company deposited approximately $8,400,000 with an escrow agent that would be
sufficient to pay when due the first three interest payments. An interest
payment of approximately $211,000 was made on July 1, 1999 representing
interest from June 22, 1999 to July 1, 1999.

On July 22, 1999, the Company amended its revolving line of credit agreement
with a financial institution, increasing the total commitment amount from
$7,000,000 to $10,000,000. Pursuant to the terms of the new amendment, the line
of credit can be used for working capital requirements, foreign exchange
forward contracts, and letters of credit. The amount available for working
capital borrowings is limited to $4,000,000. In addition, total foreign
exchange contracts at any one time cannot exceed ten times the amount of the
foreign exchange sublimit, which is a maximum of $1,000,000. The line of credit
will expire in July 2000 and is subject to certain covenants.

(5) Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity

Redeemable Convertible Preferred Stock and Warrants

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

F-39
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

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.

In March 1998, in connection with a strategic alliance, the Company issued
warrants to purchase an aggregate of 480,000 shares of the Company's common
stock at a price of $1.88 per share.

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

. The 480,000 warrants issued in connection with the strategic alliance for
which the value was determined to be $525,000. This amount was recorded
as marketing and sales expense in the accompanying consolidated statement
of operations for the year ended December 31, 1998.

F-40
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

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

<TABLE>
<CAPTION>
Redeemable convertible
preferred stock Warrants
----------------------- ----------------------
Shares Issued and Carrying Issued and Carrying
Series Designated Outstanding Value Outstanding Value
------ ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
A................. 7,798,483 7,798,483 $ 3,168,000 -- $ --
A1................ 7,798,483 -- -- -- --
B................. 8,600,000 7,775,930 6,473,000 160,862 --
B1................ 8,600,000 65,524 55,000 466,072 --
C................. 17,850,000 15,845,855 20,333,000 1,523,024 1,242,000
C1................ 17,850,000 -- -- 271,598 --
D................. 3,231,579 2,631,579 7,246,000 -- --
D1................ 3,231,579 -- -- 372,826 730,000
---------- ---------- ----------- --------- ----------
74,960,124 34,117,371 $37,275,000 2,794,382 $1,972,000
========== ========== =========== ========= ==========
</TABLE>

As of December 31, 1997 and 1998, the Company has 149,304 and 1,448,680
warrants to purchase common stock outstanding, respectively.

Initial Public Offering

Stock Purchase and Stock Option Plans

F-41
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 1,600,000 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 40,000 shares of the Company's common stock and,
thereafter, an option to purchase an additional 10,000 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.

In January 1999, the Company adopted the 1999 Stock Option Plan ("the 1999
Plan"). Under the 1999 Plan, the Company has reserved 16,000,000 shares of
common stock for issuance to employees, and consultants, and to be used for
acquisitions, to be granted as nonqualified stock options. Options granted
under the 1999 Plan generally will vest over 50 months and are generally
exercisable for a term of 10 years from the date of grant.

F-42
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Fair Value Disclosures

The Company uses the intrinsic value method in accounting for its employee
stock-based compensation 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 stock options granted by the
Company from March 1997 through December 1997. With respect to the stock
options granted by the Company from March to December 1997, the Company
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 for all of the Company's stock-based
compensation plans, net loss attributable to common stockholders and net loss
per share would have been changed to the amounts indicated below (in thousands,
except per share data):

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported.................................. $(4,133) $(26,711) $(68,456)
Pro forma.................................... $(4,133) $(26,711) $(76,134)
Basic and diluted net loss per share:
As reported.................................. $ (0.27) $ (1.73) $ (0.55)
Pro forma.................................... $ (0.27) $ (1.73) $ (0.61)
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Expected life............................... 2.55 years 2.59 years 3.09 years
Risk-free interest rate..................... 6.28% 5.81% 4.98%
Volatility.................................. -- -- 80.00%
</TABLE>

F-43
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

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

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1996 1997 1998
-------------------- --------------------- ---------------------
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................ 1,000,664 $0.03 2,336,264 $0.03 13,674,288 $0.10
Granted................. 1,797,872 0.04 12,894,400 0.11 31,288,808 2.86
Forfeited............... (422,800) 0.03 (846,880) 0.08 (2,311,752) 1.03
Exercised............... (39,472) 0.03 (709,496) 0.04 (4,367,032) 0.33
--------- ---------- ----------
Outstanding at end of
year................... 2,336,264 0.03 13,674,288 0.10 38,284,312 2.27
--------- ---------- ----------
Exercisable at end of
year................... 645,336 0.03 1,791,600 0.06 3,076,720 0.61
========= ========== ==========
Weighted average fair
value of options
granted during the year
at market.............. 1,797,872 0.01 2,666,136 0.01 28,560,800 1.57
Weighted average fair
value of options
granted during the year
at less than market.... -- -- 10,228,264 0.29 61,336 4.24
Weighted average fair
value of options
granted during the year
at greater than
market................. -- -- -- -- 2,666,672 0.53
</TABLE>

The following table summarizes information about stock options outstanding
as of December 31, 1998:

<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.03 to 0.10 8,484,288 8.47 years $0.07 1,992,688 $0.06
$0.47 to 1.13........... 9,360,616 9.13 1.04 826,136 0.91
$1.88 to 3.03........... 9,929,680 9.64 2.67 82,544 2.48
$3.84 to 5.00........... 10,509,728 9.84 4.75 175,352 4.50
---------- ---------
38,284,312 9.31 2.27 3,076,720 0.61
========== =========
</TABLE>

Stockholder Rights Plan

F-44
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

On June 2, 1999, stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of Common Stock issuable by the Company from 100,000,000 to 300,000,000.

Stock Splits

On April 12, 1999 and August 12, 1999, the Company completed two-for-one
stock splits accomplished in the form of stock dividends. Share and per share
amounts in the accompanying consolidated financial statements reflect both two-
for-one stock splits retroactively.

(6)Commitments and Contingencies

Leases

The Company has entered into a number of operating leases for its
facilities. The leases expire from 1999 through 2010. As of December 31, 1998,
the Company had collateralized letters of credit aggregating $3,238,000 for
these leases. The related funds are included in restricted cash equivalents and
investments on the accompanying consolidated balance sheet. The Company also
leases certain data center infrastructure and equipment under capital leases.
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 were purchased until the time of
the sale-leaseback. Future minimum lease payments as of December 31, 1998 are
as follows (in thousands):

<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999.................................................... $ 6,354 $ 9,065
2000.................................................... 6,604 9,726
2001.................................................... 5,920 9,803
2002.................................................... 676 9,325
2003.................................................... -- 9,176
Thereafter.............................................. -- 43,994
------- -------
Total minimum lease payments............................ 19,554 $91,089
=======
Less amount representing imputed interest............... 3,013
-------
Present value of minimum lease payments................. 16,541
Less current portion.................................... 5,140
-------
Capital lease obligations, less current portion......... $11,401
=======
</TABLE>

The Company's rent expense was $248,000, $1,764,000, $5,554,000, $3,376,000
and $11,007,000 for the years ended December 31, 1996, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999, respectively.

F-45
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

Telecommunications Agreements

In July 1998, the Company entered into an agreement to obtain
telecommunications services for a period of 36 months with a minimum commitment
of approximately $500,000 per month.

Royalty Agreement

Contingencies

(7) Income Taxes

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(1,405) $(8,602) $(22,591)
Permanent differences........................... 2 15 81
Net operating loss not benefited................ 1,403 8,587 22,510
------- ------- --------
Actual income tax expense (benefit)............. $ -- $ -- $ --
======= ======= ========
</TABLE>

F-46
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 10,941 $ 34,807
Difference between book and tax depreciation........... -- 2,284
Reserves and accruals.................................. 195 1,234
Research and experimentation credit carryforwards...... 113 548
Deferred compensation.................................. 437 957
Other.................................................. 41 6
-------- --------
Total gross deferred tax assets...................... 11,727 39,836
Less valuation allowance............................... (11,708) (39,836)
-------- --------
19 --
Deferred tax liabilities:
Difference between book and tax depreciation........... (19) --
-------- --------
Net deferred tax assets.............................. $ -- $ --
======== ========
</TABLE>

As of December 31, 1998, the Company has a net operating loss carryforward
for federal and California purposes of $94,087,000 and $48,316,000,
respectively. The difference between the federal and California net operating
loss carryforward is due to the 50% limitation of net operating loss
carryforwards for California purposes. The federal net operating loss
carryforward will expire from 2011 through 2018. The California net operating
loss carryforward will expire from 2001 through 2003.

Gross deferred tax assets as of December 31, 1998 include approximately
$3,430,000 relating to the exercise of stock options, which will be credited to
equity when realized.

The net change in the valuation allowance was an increase of $9,654,000 and
$28,128,000 for the years ended December 31, 1997 and 1998, 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, which constitutes an "ownership change" as defined by
Internal Revenue Code, Section 382. The Company has not determined if an
ownership change, as defined, has occurred. The Company plans to compute exact
limitations upon realization of taxable earnings and associated utilization of
the net operating loss carryforwards.

(8) Segment Information

The Company operates a number of Internet Data Centers throughout the United
States and one in Europe. The Company establishes these Internet Data Centers
using a consistent investment and operating model. As a result, the expected
long term economic characteristics and financial performance are similar. In
particular, each data center provides the same Internet related services to a
similar type of customer who may locate its servers in multiple Internet Data
Centers. As a result, the Company believes these Internet Data Centers
represent one reportable segment under the aggregation criteria of Statement of
Financial Accounting Standards

F-47
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Internet Data Center operations primarily include services such
as server infrastructure support, Internet connectivity, and managed services.

With the acquisition of Cohesive on July 27, 1999, Management began
reviewing financial information and business performance and allocating
resources based on both Internet Data Center operations and by professional
services, given Cohesive's expertise in networking, Internet-based applications
and technology solutions. As a result, the Company identified professional
services as an additional reportable segment. Professional services primarily
include services such as network design and development, Internet-based and
application development, and information technology strategy.

Financial information for the Company's reportable segments is presented
below:

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Internet Data Centers.... $ 3,130 $ 12,408 $ 52,256 $ 31,423 $119,082
------- -------- -------- -------- --------
Professional services.... -- -- 482 215 21,104
------- -------- -------- -------- --------
Total revenues......... $ 3,130 $ 12,408 $ 52,738 $ 31,638 $140,186
======= ======== ======== ======== ========
Operating profit (loss):
Internet Data Centers.... * $ (1,243) $ (604) $ (2,859) $ 28,783
Professional services.... * -- (351) 17 1,880
Corporate areas.......... * (23,549) (55,730) (37,095) (82,378)
------- -------- -------- -------- --------
Total operating loss... $(4,094) $(24,792) $(56,685) $(39,937) $(51,715)
======= ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Total assets:
Internet Data Centers....................... * $ 52,459 $196,404
Professional services....................... * 212 3,011
Corporate assets............................ * 240,615 471,981
------- -------- --------
Total assets.............................. $40,973 $293,286 $671,396
======= ======== ========
</TABLE>
- --------
* Information is not available.

(9) Subsequent Events

On November 23, 1999, the Company closed a merger with Service Metrics, Inc.
("SMI") pursuant to which Service Metrics became its wholly owned subsidiary.
SMI, which was incorporated in May 1998, is a leading provider of Internet
monitoring applications and services that measure the consistency, availability
and performance of web sites. SMI is based in Boulder, Colorado and has
79 employees as of November 1999.

F-48
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)

In connection with the merger, the former shareholders and option holders of
SMI common stock received shares and options of Exodus Common Stock at the rate
of approximately 0.252 shares of Exodus common stock for each share of SMI
common stock. The Company issued a total of approximately 6,200,000 shares of
Exodus Common Stock in exchange for all outstanding shares of SMI common stock
and reserved approximately 760,000 shares of Exodus Common Stock for issuance
upon the exercise of SMI options the Company assumed pursuant to the merger
agreement.

SMI's revenues for the period ended December 31, 1998 and the nine months
ended 1998 are not considered material. SMI's revenues for the nine months
ended 1999 were approximately $568,000. SMI's net losses for the period ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999 were
approximately $874,000, $335,000, and $5,496,000, respectively.

In November 1999, the Company agreed to acquire Global Online Japan Co.,
Ltd., an Internet solutions provider based in Tokyo. The transaction is
expected to close by the end of December 1999 and will be accounted for as a
purchase.

(10) Stock Split

On December 14, 1999, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. Share and per share amounts in
the accompanying consolidated financial statements reflect this two-for-one
stock split retroactively.

F-49
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors of
Cohesive Technology Solutions, Inc.:

We have audited the accompanying consolidated balance sheets of Cohesive
Technology Solutions, Inc. (formerly Cohesive Network Systems, Inc.) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 audits 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Cohesive Technology Solutions,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.

/s/ Deloitte & Touche LLP

April 8, 1999
(April 21, 1999 as to Note 10)

F-50
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,217,000 $ 3,580,000
Restricted cash..................................... 5,130,000 --
Short-term investments.............................. 15,784,000 --
Accounts receivable, net of allowance for doubtful
accounts of $250,000 and $962,000 in 1997 and 1998,
respectively....................................... 4,038,000 7,561,000
Income tax receivable............................... -- 1,984,000
Other receivables................................... 109,000 --
Inventory........................................... 393,000 422,000
Prepaid expenses.................................... 294,000 758,000
----------- -----------
Total current assets............................... 28,965,000 14,305,000
Property and equipment, net........................... 1,241,000 2,748,000
Other assets.......................................... 108,000 60,000
Intangibles, net...................................... 5,816,000 26,454,000
----------- -----------
Total.............................................. $36,130,000 $43,567,000
=========== ===========

LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit........................... $ 515,000 $ 6,997,000
Accounts payable.................................... 1,058,000 2,316,000
Amounts due under acquisition agreements............ 3,815,000 6,896,000
Accrued payroll and related expenses................ 1,026,000 2,224,000
Other accrued liabilities........................... 495,000 1,047,000
Income taxes payable................................ 2,125,000 --
Deferred revenue.................................... 719,000 276,000
Deferred gain....................................... 1,050,000 --
Current portion of long-term obligations (Note 2)... -- 440,000
----------- -----------
Total current liabilities.......................... 10,803,000 20,196,000
Long-term obligations (Note 2)........................ -- 349,000
----------- -----------
Total liabilities.................................. 10,803,000 20,545,000
----------- -----------
Commitments and contingencies (Notes 3 and 9)......... -- --
Redeemable preferred stock:
Preferred stock, $1.00 par value; 196,800 shares
authorized: Series A, 120,000 shares designated;
shares outstanding: 60,570 in 1997 and 1998........ 6,743,000 7,166,000
Series B, 76,800 shares designated; shares
outstanding: 28,800 in 1997 and 1998............... 3,000,000 3,202,000
Convertible Series D preferred stock, $1.00 par
value, none in 1997, 900,000 shares authorized,
designated and outstanding in 1998................. -- 7,906,000
Total redeemable preferred stock................... 9,743,000 18,274,000
Stockholders' equity:
Convertible Series C preferred stock, $1.00 par
value, 800,000 shares authorized, designated and
outstanding in 1997 and 1998....................... 4,000,000 4,000,000
Common stock $0.01 par value per share; 21,000,000
shares authorized; shares outstanding: 13,519,919
in 1997 and 13,902,769 in 1998..................... 135,000 139,000
Additional paid-in capital.......................... 3,169,000 3,364,000
Retained earnings (accumulated deficit)............. 8,280,000 (2,755,000)
----------- -----------
Total stockholders' equity......................... 15,584,000 4,748,000
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity.............................. $36,130,000 $43,567,000
=========== ===========
</TABLE>

See notes to consolidated financial statements.

F-51
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Service revenues.................... $ 3,494,000 $ 8,463,000 $ 26,328,000
Product revenues.................... 9,298,000 11,957,000 15,380,000
----------- ------------ ------------
Total revenues.................... 12,792,000 20,420,000 41,708,000
Costs of revenues:
Costs of service revenues........... 2,292,000 5,489,000 15,291,000
Costs of product revenues........... 6,693,000 9,577,000 13,033,000
----------- ------------ ------------
Total cost of revenues............ 8,985,000 15,066,000 28,324,000
----------- ------------ ------------
Gross profit...................... 3,807,000 5,354,000 13,384,000
----------- ------------ ------------
Operating expenses:
Sales and marketing................. 2,285,000 5,100,000 5,672,000
General and administrative.......... 4,229,000 6,528,000 10,219,000
Research and development............ 566,000 1,308,000 --
Amortization of intangibles......... 869,000 1,583,000 6,734,000
Acquisition related charges......... 964,000 1,917,000 4,463,000
----------- ------------ ------------
Total operating expenses............ 8,913,000 16,436,000 27,088,000
----------- ------------ ------------
Operating loss.................... (5,106,000) (11,082,000) (13,704,000)
----------- ------------ ------------
Other income (expense):
Gain on divestiture................. -- 37,966,000 --
Interest income, net................ 71,000 579,000 354,000
Other expense, net.................. -- -- (2,000)
----------- ------------ ------------
Total other income................ 71,000 38,545,000 352,000
----------- ------------ ------------
Income (loss) from continuing
operations before income taxes....... (5,035,000) 27,463,000 (13,352,000)
Provision for (benefit from) income
taxes................................ -- 11,450,000 (2,555,000)
----------- ------------ ------------
Income (loss) from continuing
operations........................... (5,035,000) 16,013,000 (10,797,000)
Loss from discontinued operations..... (135,000) (136,000) --
Gain on divestiture of discontinued
operations (Less income taxes of
$1,412,000 in 1997 and $380,000
in 1998)............................. -- 2,523,000 562,000
----------- ------------ ------------
Net income (loss)..................... (5,170,000) 18,400,000 (10,235,000)
Preferred dividends................... (639,000) (827,000) (625,000)
Accretion on preferred stock.......... -- -- (175,000)
----------- ------------ ------------
Net income (loss) applicable to common
stockholders......................... $(5,809,000) $ 17,573,000 $(11,035,000)
=========== ============ ============
</TABLE>

See notes to consolidated financial statements.

F-52
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
Series C Convertible
Preferred Stock Common Stock Additional Retained
-------------------- -------------------- Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
-------------------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996................... -- $ -- 10,700,031 $107,000 $ 805,000 $ (3,484,000) $ (2,572,000)
Exercise of options..... 129,850 1,000 12,000 13,000
Preferred dividends..... (639,000) (639,000)
Net loss................ (5,170,000) (5,170,000)
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1996................... -- -- 10,829,881 108,000 817,000 (9,293,000) (8,368,000)
Exercise of options..... 770,038 8,000 135,000 143,000
Sale of common stock.... 1,920,000 19,000 1,901,000 1,920,000
Issuance of preferred
stock.................. 800,000 4,000,000 4,000,000
Compensatory stock
arrangements (Note 3).. 316,000 316,000
Preferred dividends..... (827,000) (827,000)
Net income.............. 18,400,000 18,400,000
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1997................... 800,000 4,000,000 13,519,919 135,000 3,169,000 8,280,000 15,584,000
Repurchase of common
stock.................. (250,000) (3,000) (747,000) (750,000)
Exercise of options..... 632,850 7,000 352,000 359,000
Compensatory stock
arrangements (Note 6).. 590,000 590,000
Accretion on preferred
stock.................. (175,000) (175,000)
Preferred dividends..... (625,000) (625,000)
Net loss................ (10,235,000) (10,235,000)
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1998................... 800,000 $ 4,000,000 13,902,769 $139,000 $3,364,000 $ (2,755,000) $ 4,748,000
======== =========== ========== ======== ========== ============ ============
</TABLE>

See notes to consolidated condensed financial statements.

F-53
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $(5,170,000) $ 18,400,000 $(10,235,000)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization....... 1,033,000 1,893,000 7,034,000
Stock compensation expense.......... -- 281,000 590,000
Loss on disposal of property and
equipment.......................... -- 25,000 598,000
Interest income on restricted cash.. -- (80,000) (44,000)
Gain on divestiture................. -- (37,966,000) --
Results of discontinued operations
and gain on disposal............... 135,000 (2,387,000) (562,000)
Change in assets and liabilities, net
of effect of acquisitions and
divestitures:
Accounts receivable................. (692,000) (190,000) (1,317,000)
Other receivables................... (72,000) (64,000) 125,000
Inventory........................... (267,000) 311,000 (29,000)
Prepaid expenses.................... (166,000) (70,000) (449,000)
Other assets........................ (37,000) 17,000 105,000
Accounts payable.................... (43,000) (334,000) 942,000
Income taxes........................ 100,000 492,000 (4,341,000)
Amounts due under acquisition
agreements......................... 964,000 -- --
Accrued payroll and related
expenses........................... 467,000 424,000 586,000
Accrued liabilities................. 337,000 239,000 (2,159,000)
Other current liabilities........... 177,000 328,000 (452,000)
----------- ------------ ------------
Net cash used by continuing
operating activities............. (3,234,000) (18,681,000) (9,608,000)
Net cash used by discontinued
operations....................... (168,000) (72,000) --
----------- ------------ ------------
Net cash used by operating
activities....................... (3,402,000) (18,753,000) (9,608,000)
----------- ------------ ------------
Cash flows from investing activities:
Sale (purchase) of short-term
investments........................ -- (15,784,000) 15,784,000
Acquisitions, net of cash acquired.. (1,312,000) (4,507,000) (11,928,000)
Repayment of acquisition
obligations, net................... -- -- (3,556,000)
Purchases of property and
equipment.......................... (860,000) (745,000) (1,338,000)
Proceeds from divestitures.......... -- 34,210,000 4,124,000
Proceeds from sale of discontinued
operations......................... -- 4,830,000 942,000
Investing activities of discontinued
operations......................... (344,000) (260,000) --
----------- ------------ ------------
Net cash provided by (used by)
investing activities............. (2,516,000) 17,744,000 4,028,000
----------- ------------ ------------
Cash flows from financing activities:
Proceeds (repayments) on line of
credit, net........................ 110,000 (193,000) 6,482,000
Proceeds from issuance of common
stock.............................. 13,000 2,063,000 211,000
Proceeds from issuance of preferred
stock.............................. 4,420,000 6,880,000 --
Repurchase of common stock.......... -- -- (750,000)
Redemption of preferred stock....... -- (7,003,000) --
Financing activities of discontinued
operations......................... 512,000 226,000 --
----------- ------------ ------------
Net cash provided by financing
activities....................... 5,055,000 1,973,000 5,943,000
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... (863,000) 964,000 363,000
Cash and cash equivalents, beginning
of year............................. 3,116,000 2,253,000 3,217,000
----------- ------------ ------------
Cash and cash equivalents, end of
year................................ $ 2,253,000 $ 3,217,000 $ 3,580,000
=========== ============ ============
Non-cash investing and financing
activities:
Purchase of software under deferred
payment arrangement (Note 2)....... $ -- $ -- $ 769,000
Preferred stock issued in
acquisition (Note 3)............... -- -- 7,731,000
Tax benefit on stock option
exercises.......................... -- -- 148,000
Supplemental cash flow information:
Interest paid....................... $ -- $ 107,000 $ 96,000
Income taxes paid................... -- 10,862,000 1,787,000
</TABLE>

See notes to consolidated financial statements.

F-54
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 1996, 1997 and 1998

1. Business and Significant Accounting Policies

Business--The Company was incorporated in California in 1993 under the name
Global Internet Access Services, Inc. and reincorporated in Delaware in 1994,
subsequently changing its name to Cohesive Network Systems, Inc. During
September 1998, the Company merged with Business Technologies, Inc. and changed
its name to Cohesive Technology Solutions, Inc. Cohesive Technology Solutions,
Inc. and its wholly-owned subsidiaries (collectively, the "Company") are
primarily in the business of providing information technology related
consulting services to mid-tier customers and divisions of large corporations.
The Company has core competencies in the areas of business consulting,
application development and network integration.

The Company has incurred a net loss of $10,235,000 for the year ended
December 31, 1998. In addition, the Company has a negative working capital of
$5,891,000 and an accumulated deficit of $2,755,000 as of December 31, 1998.
Approximately $3 million of the Company's preferred stock is redeemable in
September 1999 while another $10.4 million is redeemable in January 2000. The
Company believes, to the extent existing resources and anticipated revenues are
insufficient to fund the Company's planned activities, that additional debt or
equity financing will be available from its majority stockholder. This
stockholder has indicated that to the extent that the Company is otherwise
unable to meets it obligation to repay its existing credit line at maturity in
December 1999, it will make an investment in debt or equity securities of the
Company in an amount sufficient to permit the Company to meet such obligation
up to a maximum of $15 million. In addition, the stockholder has agreed, to the
extent that the Company may not have capital legally available for the payment
of redemption amounts otherwise due in January 2000 in respect to preferred
stock held by the stockholder, to extend the redemption date of such preferred
stock until at least May 2000.

Consolidation--The consolidated financial statements include the accounts of
Cohesive Technology Solutions, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.

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.

Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist of cash
equivalents and accounts receivable. The Company invests its excess cash in
money market accounts and highly liquid government securities. The Company's
accounts receivable are generally derived from sales to customers in the United
States which require information technology and networking services. The
Company maintains reserves for potential credit losses.

Fair Value of Financial Instruments--As of December 31, 1997 and 1998, the
carrying amounts of cash and cash equivalents, accounts receivable and
borrowings under the Company's credit agreements approximate their respective
fair values.

Cash and Cash Equivalents--Cash equivalents are short-term, highly liquid
cash investments with an original maturity of less than 90 days.

F-55
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

Restricted Cash--Restricted cash represents cash in escrow related to the
divestiture of the Company's software development group and Internet services
division.

Short-Term Investments--While the Company's practice is to hold securities
to maturity, the Company has classified all securities as available-for-sale
securities, as the sale of such securities may be required prior to maturity to
implement management strategies. The carrying value of securities is adjusted
to fair market value, with unrealized gains and losses, net of deferred taxes,
being excluded from earnings and reported as a separate component of
stockholders' equity. Cost is based on the specific identification method for
purposes of computing realized gains or losses. At December 31, 1997, the
difference between fair value and amortized cost was not significant.

Inventory--Inventory consists primarily of computer hardware held for resale
and spare parts, and is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.

Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets, which are generally two to five
years.

Intangibles--Intangibles resulting from the acquisition of technology
service businesses are estimated by management to be primarily associated with
the acquired workforce and technological know-how. As a result of the limited
operating history of the entities acquired, the rapid technological changes
occurring in the industry and the intense competition for qualified engineering
professionals, recorded intangibles are amortized on the straight-line basis
over the estimated periods of benefit, generally two to seven years. At
December 31, 1997 and 1998, accumulated amortization was $2,493,000 and
$9,227,000, respectively.

At each balance sheet date, the Company assesses the value of recorded
intangibles for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.

Revenue Recognition--Revenue from services is recognized upon performance.
Revenue from hardware and software sales is recognized upon shipment.

Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."

Income Taxes--Deferred tax liabilities are recognized for future taxable
amounts and deferred tax assets are recognized for future deductions net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.

Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation. Other than the reclassification of
redeemable preferred stock, these reclassifications had no effect on total
stockholders' equity or net income (loss). Redeemable preferred stock has been
reclassified from stockholders' equity to mezzanine equity to comply with SEC
reporting requirements.

F-56
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

Recently Issued Accounting Standards--In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which requires an enterprise to report,
by major components and as a single total, the change in its net assets during
the period from nonowner sources. The Company adopted SFAS No. 130 in 1998. The
Company's comprehensive income is the same as its net income (loss).

In 1998, the AICPA issued a Statement of Position (SOP 98-1), which requires
companies to capitalize the costs incurred to develop and install software for
internal use. The Company adopted SOP 98-1 in 1998. Adoption of this statement
did not impact the Company's financial position, results of operations or cash
flows.

2. Property and Equipment

Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Computer and office equipment........................ $1,595,000 $2,877,000
Software............................................. 135,000 968,000
Furniture and fixtures............................... 223,000 389,000
Vehicles............................................. 73,000 91,000
Leasehold improvements............................... 52,000 86,000
---------- ----------
2,078,000 4,411,000
Accumulated depreciation and amortization............ (837,000) (1,663,000)
---------- ----------
Property and equipment, net.......................... $1,241,000 $2,748,000
========== ==========
</TABLE>

During 1998, the Company spent approximately $789,000 to purchase, install
and implement new back office systems software. Of this amount, approximately
$440,000 and $349,000 is payable in 1999 and 2000, respectively.

3. Acquisitions and Divestitures

During the years ended December 31, 1996, 1997 and 1998, the Company made
the following acquisitions:

<TABLE>
<CAPTION>
Total
Acquisition Purchase
Company Date Price
------- ----------- -----------
<S> <C> <C>
Forte Computer Services, Inc........................ 4/2/96 $ 2,020,000
The Leftbank Operations, Inc........................ 4/10/97 1,300,000
R&D Networking, Inc................................. 8/28/97 3,600,000
Computer Lanscapes, Inc............................. 12/19/97 4,770,000
Napier Corporation.................................. 1/28/98 3,500,000
I. Consulting Corporation........................... 3/19/98 717,000
Integrated Office Solutions, Inc.................... 7/1/98 6,000,000
Business Technologies, Inc.......................... 9/18/98 16,731,000
-----------
Total............................................. $38,638,000
===========
</TABLE>

F-57
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

The total purchase prices above consist of (i) nonrefundable cash payments
due on closing of the acquisition (approximately $18.1 million), (ii) 900,000
shares of Convertible Redeemable Series D preferred stock issued to the former
shareholders of Business Technologies, Inc. (valued at $7.7 million) and
(iii) probable amounts to be paid in cash to the former owners of the acquired
companies upon the attainment of certain performance criteria (the "Cash
Earnouts") (approximately $12.8 million). Of the Cash Earnouts, $9.3 million
were allocated to original purchase price as the performance criteria were
considered probable of occurring as of the acquisition date. The remaining of
Cash Earnouts were contingent upon continued employment and were recorded as
Acquisition Related Charges during the employment periods. As of December 31,
1998, no additional amounts are contingent upon continued employment.

During 1996, 1997 and 1998, the Company recognized Acquisition Related
Charges comprised of the following:

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Signing and retention bonuses............... $ -- $ 500,000 $1,818,000
Cash earnouts contingent upon continued
employment................................. 964,000 1,417,000 1,696,000
Reorganization expenses (primarily severance
and relocation costs)...................... -- -- 949,000
-------- ---------- ----------
$964,000 $1,917,000 $4,463,000
======== ========== ==========
</TABLE>

As of December 31, 1998, accrued liabilities included $283,000 of unpaid
Acquisition Related Charges that will be paid in 1999.

The acquisitions have been accounted for in accordance with the purchase
method of accounting and the accompanying consolidated financial statements
reflect the purchase price allocated to assets acquired and liabilities assumed
based upon their fair values as of the acquisition date. The $34.5 million
excess of the cash purchase price over the fair value of the net identifiable
assets has been allocated to intangibles. The Company's results of operations
include those of the acquired companies from their respective dates of
acquisition.

On July 25, 1997, the Company sold a portion of its software development
group to an unrelated third party for $40 million. As of December 31, 1997, all
of the proceeds except $4 million were available for operations. The remaining
amount was placed in escrow. During 1998, this entire amount and the related
accrued interest of $124,000 were released from escrow. In connection with this
sale, the vesting of options held by employees of the software development
division were accelerated by one year. This resulted in the Company recognizing
$281,000 in stock compensation expense during fiscal 1997. The Company recorded
a gain of $38 million during 1997 related to this sale.

On November 26, 1997, the Company sold its Internet services division to an
unrelated third party for $6 million. As of December 31, 1997, all of the
proceeds except $1,050,000 were available for operations. The $1,050,000 amount
was placed in escrow at the time of the sale and was recorded as a deferred
gain at December 31, 1997. Of this amount, $942,000 was released to the Company
and recognized as a gain on divestiture during 1998. The remaining $108,000 was
released to the third party purchaser. In connection with this sale, the
vesting of options held by employees of the Internet services division were
accelerated by

F-58
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

one year. This resulted in the Company recognizing $35,000 in stock
compensation expense during fiscal 1997. The Company recorded gains of $3.9
million and $0.9 million during 1997 and 1998, respectively, related to this
sale.

The operating results of the Internet services division have been segregated
from continuing operations and reported as discontinued operations in the
accompanying statement of operations. Revenues for the discontinued operations
were $3,721,000 and $3,805,000 for 1996 and 1997, respectively.

4. Lines of Credit

The Company has a revolving line of credit from a bank that provides for
borrowings up to $15 million through December 31, 1999. Borrowings under the
line are secured by substantially all of the Company's assets and bear interest
at varying rates based upon the bank's prime or LIBOR rate on the date of
borrowing. In addition, the line of credit restricts the payment by the Company
of cash dividends or distributions on its common stock. The agreements require,
among other things, that the Company satisfy certain financial covenants. As of
December 31, 1998, the Company was in compliance with such covenants.

As of December 31, 1997, the Company had two revolving lines of credit from
banks, which provided for borrowings up to $1,000,000 each through June 2,
1998, and July 1, 1998. All outstanding amounts were fully paid during 1998 and
the lines of credit were not renewed.

5. Redeemable Preferred Stock

Preferred Stock

Holders of Series A and B preferred stock are entitled to annual dividends
at the rate of $7 per share when and if declared by the Board of Directors.
Such dividends for Series A and B preferred stock shall be cumulative and shall
accrue on each share of preferred stock from the date of original issuance of
such share. Dividends for Series A and B are payable in preference and priority
to convertible Series C and D preferred stock.

In the event of a liquidation, dissolution or winding up of the Company, the
Series A and B preferred stockholders are entitled to a liquidation preference
of $100 per share plus all accrued but unpaid dividends. Upon payment of the
liquidation preference (aggregating $10,368,000 at December 31, 1998), the
remaining proceeds will be allocated to the convertible Series C and Series D
preferred stockholders.

The Company may redeem Series A and B preferred stock at any time.
Redemption is mandatory (1) on January 31, 2000 or (2) in the event of the
closing of a firm underwritten offering meeting certain criteria, if earlier.
The redemption price shall be equal to $100 per share plus all accrued but
unpaid dividends.

The holders of Series A and B preferred stock are not entitled to vote on
any matter to be voted on by the stockholders of the Company, except
liquidation, dissolution, winding up, consolidation or merger of the Company,
or sale of all or substantially all of the Company's assets, requires approval
of two-thirds of the Series A and B preferred stock voting as a single class.
Series A and B preferred stock is not convertible into common stock.

F-59
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

Convertible Series D Preferred Stock

Holders of redeemable convertible Series D preferred stock have the right to
require redemption of the Series D shares at a price of $10 per share plus all
declared but unpaid dividends. As of September 18, 1999, 2000 and 2001, the
redemption rights will apply to 300,000, 600,000 and 900,000 Series D shares,
respectively. The redemption rights expire as to all shares that have not been
redeemed as of September 19, 2002. The carrying value of the Series D preferred
stock is being accreted to its redemption price over the redemption period.

In the event of a liquidation, dissolution or winding up of the Company,
Series D preferred stockholders are entitled to a liquidation preference of $10
per share plus any declared and unpaid dividends. Upon payment of the Series D
liquidation preference (aggregating $9 million at December 31, 1998), the
remaining proceeds will be allocated to the preferred Series C, preferred
Series D and common stockholders on an as converted basis.

Each share of Series D preferred stock is convertible into one share of
common stock at the option of the holder, subject to adjustment for certain
dilutive issuances. Conversion of the Series D preferred stock is mandatory in
the event of the closing of a firm underwritten public offering under the
Securities Act of 1993.

The holders of Series D preferred stock are entitled to one vote for each
share of common stock into which the preferred stock is convertible.

6. Stockholders' Equity

Convertible Series C Preferred Stock

Holders of convertible Series C preferred stock are entitled to
noncumulative annual dividends of $0.50 per share, when and if declared, and
are payable in preference to any dividends on Series D preferred stock or
common stock.

In the event of a liquidation, dissolution or winding up of the Company,
Series C preferred stockholders are entitled to a liquidation preference of $5
per share plus any declared and unpaid dividends. Upon payment of the
liquidation preference (aggregating $4,000,000 at December 31, 1998), the
remaining proceeds will be allocated to the Series D preferred stockholders.

Each share of Series C preferred stock is convertible into one share of
common stock at the option of the holder, subject to adjustment for certain
dilutive issuances. Conversion of the Series C preferred stock is mandatory in
the event of the closing of a firm underwritten public offering under the
Securities Act of 1933, at a price of at least $5 per share and at an aggregate
gross offering price of not less than $10,000,000, or upon the consent of the
stockholders holding a majority of the outstanding Series C preferred stock.

The holders of Series C preferred stock are entitled to one vote for each
share of common stock into which the preferred stock is convertible.

Stock Option Plans

The Company has stock option plans (the "Plans") under which officers,
employees, directors and consultants may be granted options to purchase shares
of the Company's common stock. At

F-60
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

December 31, 1998, 5,560,000 shares of the Company's common stock have been
reserved for issuance under the Plans. The Plans permit incentive and
nonqualified stock options to be granted at an exercise price not less than the
fair market value on the date of grant with terms of up to ten years. Options
generally vest over a four-year period.

A summary of option activity under the Plans is as follows:

<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balances, January 1, 1996 (192,675 shares
exercisable at a weighted average price of $0.10).. 1,523,100 $0.12
Granted........................................... 933,500 0.32
Exercised......................................... (129,850) 0.13
Canceled.......................................... (328,925) 0.17
---------
Outstanding, December 31, 1996 (405,750 shares
exercisable at a weighted average price of $0.10) 1,997,825 0.21
Granted........................................... 1,409,850 1.14
Exercised......................................... (770,038) 0.18
Canceled.......................................... (567,637) 0.49
---------
Outstanding, December 31, 1997 (294,625 shares
exercisable at a weighted average price of $0.20).. 2,070,000 0.77
Granted........................................... 2,769,333 2.58
Exercised......................................... (632,850) 0.34
Canceled.......................................... (668,595) 1.82
---------
Outstanding, December 31, 1998...................... 3,537,888 $2.07
=========
</TABLE>

Additional information regarding options outstanding as of December 31, 1998
is as follows:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Prices
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.11............ 237,500 6.6 $0.10 181,250 $0.10
0.35 - 1.00............ 502,950 7.8 0.55 205,550 0.48
1.75 - 2.00............ 1,242,923 9.0 1.90 136,125 1.77
3.00.................... 1,554,515 9.6 3.00 -- --
--------- -------
$0.10 - $3.00............ 3,537,888 8.9 $2.07 522,925 $0.69
========= =======
</TABLE>

At December 31, 1998, 714,443 shares were available for future grants under
the Plans.

During 1998, in connection with the resignation of certain officers and
employees, the Company accelerated the vesting of options to purchase 244,000
shares of the Company's common stock. The Company recorded an associated
$590,000 charge to compensation expense.

F-61
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

Additional Stock Plan Information

As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations.

SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) had the Company adopted the fair
value method since the Company's inception. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values.

The Company's calculations were made using the minimum value method with the
following weighted average assumptions: expected life, one year following
vesting; risk free interest rate of 6%; and no dividends during the expected
term. The Company's calculations are based on a multiple award valuation
approach, and forfeitures are recognized as they occur. If the computed minimum
values of the Company's stock-based awards to employees had been amortized to
expense over the vesting period of the awards as specified under SFAS No. 123,
net income (loss) available to common stockholders would have been
$(5,226,000), $18,065,000 and $(10,562,000) in 1996, 1997 and 1998,
respectively. The estimated weighted-average minimum value per option as of the
grant date for the awards granted for the years ended December 31, 1996, 1997
and 1998 were $0.06, $0.24 and $0.47, respectively.

7. Income Taxes

The provision for (benefit from) income taxes on continuing operations
consists of:

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $ -- $ 9,124,000 $(2,513,000)
State................................ -- 2,326,000 (42,000)
----------- ----------- -----------
Total current income taxes............. -- 11,450,000 (2,555,000)
Deferred:
Federal.............................. 1,322,000 746,000 786,000
State................................ 125,000 48,000 291,000
----------- ----------- -----------
Total deferred income taxes............ 1,447,000 794,000 1,077,000
Valuation allowance.................... (1,447,000) (794,000) (1,077,000)
----------- ----------- -----------
Provision for (benefit from) income
taxes................................. $ -- $11,450,000 $(2,555,000)
=========== =========== ===========
</TABLE>

F-62
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

Deferred income tax assets are comprised of:

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deductible intangibles................................ $ 833,000 $ 1,968,000
Net operating losses.................................. -- 139,000
Deferred gain......................................... 461,000 113,000
Other................................................. 150,000 301,000
----------- -----------
Total................................................. 1,444,000 2,521,000
Valuation allowance................................... (1,444,000) (2,521,000)
----------- -----------
Total net deferred income tax assets.................. $ -- $ --
=========== ===========
</TABLE>

The Company has net operating loss carryforwards of approximately $2.3
million for state income tax purposes, which will expire in 2003. The Company
has deferred tax assets of approximately $1,444,000 and $2,521,000 as of
December 31, 1997 and 1998, respectively, resulting primarily from basis
differences in intangibles and other items. However, because realization of
these benefits depends on the generation of future taxable income, which is
subject to uncertainty, the Company has placed a full valuation allowance
against the deferred tax assets.

The Tax Reform Act of 1986 and California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating losses in the
event of an "ownership change" as defined in the Internal Revenue Code. Any
such ownership change could significantly limit the Company's ability to
utilize its tax carryforwards.

8. Employee Benefit Plan

The Company has a qualified employee salary savings plan (401(k) plan). The
401(k) plan allows the Company to make discretionary contributions of a certain
percentage of employees' contributions to the 401(k) plan. The Company made no
contributions during 1996 and 1997 and the Company made a $12,000 contribution
during 1998.

9. Commitments and Contingencies

The Company leases its facilities under various operating leases that extend
through February 2003. Rental expense for the Company's facilities was
$356,000, $530,000 and $987,000, for 1996, 1997 and 1998, respectively.

Future minimum operating lease payments at December 31, 1998 are
approximately as follows:

<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999........................................................... $ 802,000
2000........................................................... 595,000
2001........................................................... 428,000
2002........................................................... 67,000
2003........................................................... 10,000
----------
Total minimum lease payments................................... $1,902,000
==========
</TABLE>

F-63
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended December 31, 1996, 1997 and 1998

The Company is party to various litigation arising in the normal course of
its operations. In the opinion of management, the ultimate liability for these
matters, if any, will not have a material adverse effect on the Company's
financial position or results of operations.

10. Subsequent Events

On April 21, 1999, the Company entered into a definitive agreement to be
acquired by Exodus Communications, Inc. (Exodus) for cash and common stock
valued at approximately $100 million. The acquisition is expected to close in
mid-1999, subject to regulatory review and approval. Upon closing of the
acquisition, the Company will exchange all outstanding preferred and common
stock for cash and shares of Exodus common stock at that date.

F-64
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, June 30,
1998* 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents............................. $ 3,580,000 $ 1,558,000
Accounts receivable, net of allowance for doubtful
accounts of $962,000 and $1,098,000, respectively.... 7,561,000 10,300,000
Income tax receivable................................. 1,984,000 1,953,000
Inventory............................................. 422,000 129,000
Prepaid expenses...................................... 758,000 568,000
----------- -----------
Total current assets................................ 14,305,000 14,508,000
Property and equipment, net............................. 2,748,000 2,790,000
Other assets............................................ 60,000 147,000
Intangibles, net........................................ 26,454,000 22,179,000
----------- -----------
Total assets........................................ $43,567,000 $39,624,000
=========== ===========

LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Revolving line of credit and current portion of long-
term obligations..................................... $ 7,437,000 $ 9,680,000
Accounts payable...................................... 2,316,000 3,006,000
Amounts due under acquisition agreements.............. 6,896,000 4,371,000
Accruals and other current liabilities................ 3,547,000 4,057,000
----------- -----------
Total current liabilities........................... 20,196,000 21,114,000
Long-term obligations................................... 349,000 141,000
----------- -----------
Total liabilities................................... 20,545,000 21,255,000
----------- -----------
Commitments and contingencies........................... -- --
Redeemable preferred stock.............................. 18,274,000 18,919,000
----------- -----------
Stockholders' equity:
Convertible preferred stock........................... 4,000,000 4,000,000
Common stock.......................................... 139,000 140,000
Additional paid-in capital............................ 3,364,000 3,448,000
Accumulated deficit................................... (2,755,000) (8,138,000)
----------- -----------
Total stockholders' equity (deficit)................ 4,748,000 (550,000)
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)..................... $43,567,000 $39,624,000
=========== ===========
</TABLE>
- --------
* Derived from audited consolidated financial statements included elsewhere in
this registration statement.

See notes to consolidated condensed financial statements.

F-65
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Revenues:
Service revenues.................................. $10,762,000 $19,124,000
Product revenues.................................. 10,470,000 6,965,000
----------- -----------
Total revenues.................................. 21,232,000 26,089,000
Cost of revenues:
Costs of service revenues......................... 5,879,000 12,583,000
Costs of product revenues......................... 8,927,000 6,031,000
----------- -----------
Total cost of revenues.......................... 14,806,000 18,614,000
----------- -----------
Gross profit........................................ 6,426,000 7,475,000
----------- -----------
Operating expenses:
Sales and marketing............................... 2,712,000 3,064,000
General and administrative........................ 4,307,000 4,349,000
Amortization of intangibles....................... 2,710,000 4,300,000
Acquisition related charges....................... 2,425,000 --
----------- -----------
Total operating expenses........................ 12,154,000 11,713,000
----------- -----------
Operating loss...................................... (5,728,000) (4,238,000)
----------- -----------
Interest income (expense), net...................... 418,000 (495,000)
----------- -----------
Loss before income taxes............................ (5,310,000) (4,733,000)
Benefit from income taxes........................... 413,000 --
----------- -----------
Net loss............................................ (4,897,000) (4,733,000)
Dividends and accretion on redeemable preferred
stock.............................................. (311,000) (645,000)
----------- -----------
Net loss applicable to common stockholders.......... $(5,208,000) $(5,378,000)
=========== ===========
</TABLE>

See notes to consolidated condensed financial statements.

F-66
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(4,897,000) $(4,733,000)
Adjustments to reconcile net income to net cash used
by operating activities:
Loss on disposal of properties and equipment....... -- 52,000
Depreciation and amortization...................... 3,026,000 4,715,000
Stock compensation expense......................... -- 13,000
Interest income on restricted cash................. (40,000) --
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable............................... (1,992,000) (2,739,000)
Income taxes payable, net......................... (1,857,000) 31,000
Inventory......................................... 116,000 293,000
Prepaid expenses.................................. 7,000 190,000
Other assets...................................... 223,000 (87,000)
Accounts payables................................. 1,734,000 685,000
Amounts due under acquisition agreements.......... 2,138,000 (1,080,000)
Accruals and other current liabilities............ (2,522,000) 510,00
----------- -----------
Net cash used by operating activities............ (4,064,000) (2,150,000)
----------- -----------
Cash flows from investing activities:
Sales of short-term investments.................... 5,346,000 --
Acquisitions, net of cash received................. (1,538,000) --
Repayment of acquisition obligations............... (900,000) (1,470,000)
Purchase of property and equipment................. (975,000) (509,000)
Proceeds from divestitures......................... 2,000,000 --
----------- -----------
Net cash provided by (used for) investing
activities...................................... 3,933,000 (1,979,000)
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit........................ -- 2,900,000
Repayment on line of credit......................... (503,000) (597,000)
Repayments of long-term obligations................. -- (268,000)
Issuance of common stock............................ 132,000 72,000
----------- -----------
Net cash (used for) provided by financing
activities...................................... (371,000) 2,107,000
----------- -----------
Net decrease in cash................................. (502,000) (2,022,000)
Cash and cash equivalents--beginning of period....... 3,217,000 3,580,000
----------- -----------
Cash and cash equivalents--end of period............. $ 2,715,000 $ 1,558,000
=========== ===========
</TABLE>

See notes to consolidated condensed financial statements.

F-67
<PAGE>

COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared by Cohesive Technology Solutions, Inc. (the "Company") and do not
include all of the disclosures normally required by generally accepted
accounting principles. The unaudited financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results of
operations for the periods, have been included. Results of operations for the
interim periods are not necessarily indicative of results for the full year.

(2) Inventory

Inventory consists primarily of computer hardware held for sale and spare
parts, and is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.

(3) Litigation

(4) Subsequent Events

On July 27, 1999, the Company was acquired by Exodus Communications, Inc.
("Exodus") for a total purchase price valued at approximately $112,000,000. The
Company's shareholders received 1,600,796 shares of Exodus Common Stock and
approximately $50,000,000 in cash. In addition, option holders of Cohesive
common stock received a total of 408,712 shares of Exodus Common Stock in the
form of Exodus stock options.

F-68
<PAGE>

EXODUS COMMUNICATIONS, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily indicative
of the combined results of operations for future periods or the results of
operations that actually would have been realized had Exodus and Cohesive been
a combined company during the specified periods. The unaudited pro forma
combined condensed financial statements, including the related notes, are
qualified in their entirety by reference to, and should be read in conjunction
with, the supplemental consolidated financial statements and related notes
thereto of Exodus and the historical consolidated financial statements and
related notes thereto of Cohesive, included elsewhere in this registration
statement.

The following unaudited pro forma combined condensed financial statements
give effect to the merger between Exodus and Cohesive using the purchase method
of accounting. The pro forma combined condensed financial statements are based
on the audited and unaudited supplemental consolidated financial statements and
related notes of Exodus and the audited and unaudited historical consolidated
financial statements and related notes of Cohesive. The pro forma adjustments
are based on management's estimates of the value of the tangible and intangible
assets acquired. In addition, management is continuing to assess its
integration plans, which may result in further costs.

The pro forma combined condensed statements of operations assume the merger
took place as of January 1, 1998 and combine Exodus' audited supplemental
consolidated statement of operations for the year ended December 31, 1998 and
unaudited supplemental consolidated statement of operations for the nine months
ended September 30, 1999, with Cohesive's audited historical statement of
operations for the year ended December 31, 1998 and unaudited historical
statement of operations for the seven-month period ended July 27, 1999,
respectively.

A pro forma condensed balance sheet as of September 30, 1999 has not been
presented since the merger has already been reflected in such balance sheet.

F-69
<PAGE>

EXODUS COMMUNICATIONS, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------
Supplemental Historical Pro forma
------------ ---------- -----------------------
Exodus Cohesive Adjustments Combined
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues....................... $ 52,745 $ 41,708 $ $ 94,453
Costs and expenses:
Cost of revenues............. 61,578 28,324 89,902
Marketing and sales.......... 29,034 5,672 34,706
General and administrative... 16,058 10,219 26,277
Product development.......... 3,507 -- 3,507
Amortization of goodwill and
other intangible assets..... 141 6,734 (6,734)(a)
14,549 (a) 14,690
Acquisition related charges.. -- 4,463 4,463
-------- -------- -------- --------
Total costs and expenses... 110,318 55,412 7,815 173,545
-------- -------- -------- --------
Operating loss............. (57,573) (13,704) (7,815) (79,092)
Interest (expense) income ,
net........................... (9,743) 352 (2,510)(b) (11,901)
-------- -------- -------- --------
Loss from continuing
operations before taxes... (67,316) (13,352) (10,325) (90,993)
Income tax benefit............. -- 2,555 2,555
-------- -------- -------- --------
Loss from continuing
operations................ (67,316) (10,797) (10,325) (88,438)
Cumulative dividends and
accretion on redeemable
preferred stock............... (2,014) (800) 800 (c) (2,014)
-------- -------- -------- --------
Loss from continuing
operations attributable to
common stockholders....... $(69,330) $(11,597) $ (9,525) $(90,452)
======== ======== ======== ========
Basic and diluted loss per
share from continuing
operations.................... $ (0.55) $ (0.71)
======== ========
Shares used to compute basic
and diluted loss per share
from continuing operations.... 125,808 1,600 (d) 127,408
======== ======== ========
</TABLE>

See notes to unaudited pro forma combined condensed financial statements.

F-70
<PAGE>

EXODUS COMMUNICATIONS, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
----------------------------------------------
Supplemental Historical Pro forma
------------ ---------- ----------------------
Exodus Cohesive Adjustments Combined
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues....................... $140,754 $29,191 $ $169,945
Costs and expenses:
Cost of revenues............. 118,827 20,896 139,723
Marketing and sales.......... 42,473 3,594 46,067
General and administrative... 25,548 5,223 30,771
Product development.......... 5,641 -- 5,641
Amortization of goodwill and
other intangible assets..... 4,674 4,994 (4,994)(a)
8,486 (a) 13,160
Restructuring costs.......... 923 -- 923
-------- ------- ------- --------
Total costs and expenses... 198,086 34,707 3,492 236,285
-------- ------- ------- --------
Operating loss............. (57,332) (5,516) (3,492) (66,340)
Interest expense, net........ (20,044) (565) (1,464)(b) (22,073)
-------- ------- ------- --------
Loss from continuing
operations before taxes... (77,376) (6,081) (4,956) (88,413)
Income tax benefit........... -- 450 450
-------- ------- ------- --------
Loss from continuing
operations................ (77,376) (5,631) (4,956) (87,963)
Cumulative dividends and
accretion on redeemable
preferred stock............... -- (738) 738 (c) --
-------- ------- ------- --------
Loss from continuing
operations attributable to
common stockholders....... $(77,376) $(6,369) $(4,218) $(87,963)
======== ======= ======= ========
Basic and diluted loss per
share from continuing
operations.................... $ (0.47) $ (0.52)
======== ========
Shares used to compute basic
and diluted loss per share
from continuing operations.... 165,974 1,600 (d) 167,574
======== ======= ========
</TABLE>

See notes to unaudited pro forma combined condensed financial statements.

F-71
<PAGE>

EXODUS COMMUNICATIONS, INC.

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

On July 27, 1999, Exodus acquired all of the outstanding capital stock of
Cohesive in exchange for approximately $50 million in cash and 1,600,796 shares
of Exodus common stock. In addition, Exodus issued options to purchase a total
of 408,712 shares of Exodus common stock in exchange for all issued and
outstanding Cohesive options.

Under purchase accounting, the total purchase price was allocated to
Cohesive's assets and liabilities based on their relative fair values. The
amounts and components of the purchase price along with the allocation of the
purchase price to assets acquired were as follows (in thousands):

<TABLE>
<S> <C>
Cash............................................................... $ 46,500
Common stock....................................................... 52,000
Fair value of Cohesive stock options assumed....................... 9,300
Transaction costs.................................................. 3,700
--------
Total purchase price............................................. $111,500
========
Book value of net tangible assets of Cohesive...................... $ 3,500
Workforce in place................................................. 6,300
Customer lists..................................................... 32,300
Goodwill........................................................... 69,400
--------
Net assets acquired.............................................. $111,500
========
</TABLE>

The pro forma combined condensed statements of operations give effect to the
merger as if it had occurred at January 1, 1998. Cohesive's historical
statement of operations data for the nine months ended September 30, 1999
reflects its operating activity for the period January 1, 1999 through July 27,
1999, as Exodus acquired Cohesive on July 27, 1999.

The following adjustments have been reflected in the unaudited pro forma
combined condensed statements of operations:

(a) Adjustment to remove the amortization of historical goodwill and
other intangible assets previously recorded by Cohesive and to record the
amortization of goodwill and intangible assets resulting from the
allocation of the Cohesive purchase price. The pro forma adjustment assumes
goodwill and other intangible assets will be amortized on a straight-line
basis over the following estimated lives:

<TABLE>
<S> <C>
Workforce in place................................................. 5 years
Customer lists..................................................... 7 years
Goodwill........................................................... 8 years
</TABLE>

(b) To eliminate interest income earned by Exodus on cash paid at the
date of the merger assuming a 5% interest rate which approximates the
Company's actual rate of return during the periods presented.

(c) To remove Cohesive's historical cumulative dividends and accretion
on redeemable preferred stock which are settled in cash at the date of the
merger.

(d) To reflect the shares issued as consideration for the merger.

F-72
<PAGE>

EXODUS COMMUNICATIONS, INC.

SUPPLEMENTAL SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
Balance at Balance
Beginning at End of
Classification of Year Additions Deductions Year
- -------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996....... $-- $ 15 $ -- $ 15
Year ended December 31, 1997....... 15 742 (66) 691
Year ended December 31, 1998....... 691 1,410 (280) 1,821
</TABLE>

S-1
<PAGE>

EXODUS COMMUNICATIONS, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

S-2
<PAGE>

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

EXODUS COMMUNICATIONS, INC.

$500,000,000
4 3/4% Convertible Subordinated Notes
Due July 15, 2008
and
7,101,700 Shares of Common Stock
Issuable Upon Conversion of the Notes

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

PROSPECTUS

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

February 11, 2000

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