DIGITAL ISLAND INC, 424B3, 1999-12-10

DIGITAL ISLAND INC
424B3, 1999-12-10
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

Previous: VILLA PASTA INC, 10SB12G, 1999-12-10

Next: INSIGHT COMMUNICATIONS CO INC, 4, 1999-12-10

<PAGE>

Filed pursuant to Rule 424(b)(3)
Registration No. 333-92393
DIGITAL ISLAND, INC.
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100

December 9, 1999

Dear Digital Island Stockholders:

I am writing to you today about our proposed merger with Sandpiper Networks,
Inc. This merger will create a combined company to offer comprehensive network
solutions for Internet-based marketing, sales, fulfillment and support
applications worldwide.

In the merger, each share of Sandpiper capital stock will be exchanged for
1.0727 shares of Digital Island common stock, par value $0.001 per share. We
expect to issue approximately 24.5 million shares of our common stock in the
merger. Digital Island common stock is traded on the Nasdaq National Market
under the symbol "ISLD," and closed at $114.94 per share on December 8, 1999.
The merger is described more fully in this joint proxy statement/prospectus.

You will be asked to vote upon the issuance of shares of Digital Island
common stock pursuant to a merger agreement with Sandpiper, at a special
meeting of Digital Island stockholders to be held on December 28, 1999 at
8:30 a.m., local time, at 45 Fremont Street, 11th floor, San Francisco,
California. The merger cannot be consummated unless the holders of a majority
of the shares of Digital Island common stock present in person or by proxy and
entitled to vote at the special meeting approve the issuance of these shares.
Only stockholders who hold shares of Digital Island common stock at the close
of business on November 29, 1999 will be entitled to vote at the special
meeting.

We are very excited by the opportunities we envision for the combined
company. Your board of directors has determined that the terms and conditions
of the merger are fair to you and in your best interests, and unanimously
recommends that you approve the issuance of the shares of Digital Island common
stock in connection with the merger.

This joint proxy statement/prospectus provides detailed information about
the two companies and the merger. Please give all of this information your
careful attention. In particular, you should carefully consider the discussion
in the section entitled "Risk Factors" beginning on page 16 of this joint proxy
statement/prospectus.

Holders of over 45% of the outstanding common stock of Digital Island as of
October 24, 1999 have entered into voting agreements with Sandpiper whereby
they have agreed to vote all of their Digital Island common stock "FOR" the
issuance of shares of Digital Island common stock pursuant to the merger
agreement and have appointed representatives of Sandpiper as proxies to vote
their Digital Island common stock at the meeting.

Your vote is very important regardless of the number of shares you own. To
vote your shares, you may use the enclosed proxy card or attend the special
stockholders meeting. To approve the issuance of shares of Digital Island
common stock pursuant to the merger agreement, you MUST vote "FOR" the proposal
by following the instructions stated on the enclosed proxy card. We urge you to
vote FOR this proposal, a necessary step in the merger of Digital Island and
Sandpiper.

Sincerely,

/s/ Ruann F. Ernst

Ruann F. Ernst
Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the Digital
Island common stock to be issued in the merger, or determined if this joint
proxy statement/prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.

This joint proxy statement/prospectus is dated December 9, 1999, and was
first mailed to Digital Island stockholders on or about December 10, 1999.
<PAGE>

DIGITAL ISLAND, INC.
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100

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

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON December 28, 1999

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

We will hold a special meeting of stockholders of Digital Island, Inc., a
Delaware corporation, at 8:30 a.m., local time, on December 28, 1999 at 45
Fremont Street, 11th floor, San Francisco, California:

1. To consider and vote upon a proposal to approve the issuance of
shares of common stock, par value $0.001 per share, of Digital Island
pursuant to a merger agreement among Digital Island, Sandpiper Networks,
Inc. and Beach Acquisition Corp., a wholly owned subsidiary of Digital
Island, under which Sandpiper will become a wholly owned subsidiary of
Digital Island,

2. To grant the Digital Island board of directors discretionary
authority to adjourn the special meeting to solicit additional votes for
approval of the share issuance, and

3. To transact such other business as may properly come before the
special meeting or any adjournment or postponement.

Only Digital Island stockholders of record at the close of business on
November 29, 1999 are entitled to notice of and to vote at the special meeting
or any adjournment or postponement.

For more information about the merger, the merger agreement and related
matters, please review the accompanying joint proxy/prospectus.

By Order of the Board of Directors

/s/ T.L. Thompson

T.L. Thompson
Secretary

San Francisco, California
December 9, 1999

YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE
YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN
THE POSTAGE-PAID ENVELOPE PROVIDED, OR CALL THE TOLL-FREE TELEPHONE NUMBER
OR USE THE INTERNET BY FOLLOWING THE INSTRUCTIONS INCLUDED WITH YOUR PROXY
CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU
MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. YOU MAY VOTE IN PERSON AT THE SPECIAL MEETING EVEN IF YOU HAVE
RETURNED A PROXY.
<PAGE>

SANDPIPER NETWORKS, INC
225 West Hillcrest Drive, Suite 250
Thousand Oaks, CA 91360
(805) 370-2100

December 9, 1999

Dear Sandpiper Shareholders:

I am writing to you today about our proposed merger with Digital Island,
Inc. This merger will create a combined company to offer comprehensive network
solutions for Internet-based marketing, sales, fulfillment and support
applications worldwide.

In the merger, each share of Sandpiper capital stock will be exchanged for
1.0727 shares of Digital Island common stock. Digital Island expects to issue
approximately 24.5 million shares of its common stock in the merger. Digital
Island common stock is traded on the Nasdaq National Market under the trading
symbol "ISLD," and closed at $114.94 per share on December 8, 1999. The merger
is described more fully in this joint proxy statement/prospectus.

Sandpiper has scheduled a special meeting of the Sandpiper shareholders to
vote on the matters described in this document. You will be asked to vote upon
the merger at a special meeting of Sandpiper shareholders to be held on
December 28, 1999 at 9:00 a.m., local time, at 225 West Hillcrest Drive, Suite
250, Thousand Oaks, California. At the special meeting, you will be asked to
(i) approve and adopt the merger agreement, and (ii) approve the merger.

The merger cannot be consummated unless the merger agreement and the merger
are approved by the affirmative vote of (i) the holders of record of at least a
majority of the outstanding shares of Sandpiper common stock and preferred
stock, voting together as a single class, (ii) the holders of record of at
least a majority of the outstanding shares of (a) Sandpiper common stock,
voting as a separate class, and (b) Sandpiper preferred stock, voting as a
separate class. Only shareholders who hold shares of Sandpiper common stock or
preferred stock at the close of business on December 3, 1999 will be entitled
to vote at the special meeting.

Holders owning approximately 76% of the outstanding capital stock of
Sandpiper as of October 24, 1999 have entered into a shareholder agreement with
Digital Island and Sandpiper whereby they have agreed to vote all of their
Sandpiper capital stock "FOR" the merger agreement and the merger; accordingly,
shareholder approval is assured.
<PAGE>

To vote your shares, you may use the enclosed proxy card or attend the
special stockholders meeting. To approve the merger agreement and the merger
and, you MUST vote "FOR" the proposals by following the instructions stated on
the enclosed proxy card. If you do not vote at all, it will, in effect, count
as a vote against the merger. We urge you to vote FOR this proposal, a
necessary step in the merger of Sandpiper and Digital Island. Pursuant to a
shareholder agreement between Digital Island and certain shareholders of
Sandpiper, we are assured of receiving the requisite votes in favor of the
merger agreement and the merger.

Sincerely,

/s/ Leo Spiegel

Leo Spiegel
President and Chief Executive
Officer

This joint proxy statement/prospectus is dated December 9, 1999, and was
first mailed to Sandpiper shareholders on or about December 10, 1999.
<PAGE>

SANDPIPER NETWORKS, INC
225 West Hillcrest Drive, Suite 250
Thousand Oaks, CA 91360
(805) 370-2100

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

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON December 28, 1999

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

We will hold a special meeting of stockholders of Sandpiper Networks, Inc.,
a California corporation, at 9:00 a.m., local time, on December 28, 1999 at 225
West Hillcrest Drive, Suite 250, Thousand Oaks, California:

1. To consider and vote upon a proposal to approve and adopt the merger
agreement among Digital Island, Inc., Beach Acquisition Corp. and Sandpiper
Networks, Inc., under which each outstanding share of Sandpiper capital
stock will be converted into the right to receive 1.0727 shares of Digital
Island common stock, and Sandpiper will become a wholly owned subsidiary of
Digital Island, and to approve the merger; and

2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement.

Only Sandpiper shareholders of record at the close of business on December
3, 1999 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement.

For more information about the merger, the merger agreement and related
matters, please review the accompanying joint proxy/prospectus.

By Order of the Board of Directors

/s/ Thomas Govreau

Thomas Govreau
Secretary

Thousand Oaks, California
December 9, 1999

YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE
YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN
THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER
DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT
HAS BEEN VOTED AT THE SPECIAL MEETING. YOU MAY VOTE IN PERSON AT THE
SPECIAL MEETING EVEN IF YOU HAVE RETURNED A PROXY.
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... 1
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS............................ 2
The Companies............................................................ 2
The Merger............................................................... 2
United States Federal Income Tax Consequences of the Merger.............. 2
Ability to Sell Digital Island Stock After the Merger.................... 3
Dissenters' Rights....................................................... 3
Opinion of Digital Island's Financial Advisor............................ 3
Recommendations of the Boards of Directors............................... 4
Shareholder and Stockholder Approvals.................................... 4
Interests of Officers and Directors in the Merger........................ 4
Conditions to Completion of the Merger................................... 5
Restrictions on Alternative Transactions................................. 6
Termination of the Merger Agreement...................................... 6
Termination Fee and Expenses............................................. 6
Indemnification by Sandpiper Shareholders and Escrow of Shares........... 7
Anticipated Accounting Treatment of the Merger........................... 7
Compliance with Antitrust Laws........................................... 7
Recent Developments...................................................... 7
DIVIDEND POLICIES.......................................................... 9
DIGITAL ISLAND SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA.............. 10
SANDPIPER SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA................... 11
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........................ 12
COMPARATIVE PER SHARE DATA................................................. 14
MARKET PRICE INFORMATION................................................... 15
Recent Closing Prices.................................................... 15
RISK FACTORS............................................................... 16
Risks Related to the Merger.............................................. 16
Risks Related to Digital Island.......................................... 20
Risks Related to Sandpiper............................................... 28
Risks Related to the Industry of Digital Island and Sandpiper............ 34
FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS........ 40
THE SPECIAL MEETINGS....................................................... 41
General.................................................................. 41
Date, Time and Place..................................................... 41
Matters to be Considered at the Special Meetings......................... 41
Record Dates............................................................. 42
Voting of Proxies........................................................ 42
Votes Required........................................................... 43
Quorum; Abstentions and Broker Non-Votes................................. 43
Solicitation of Proxies and Expenses..................................... 44
Board Recommendations.................................................... 44
THE MERGER................................................................. 45
Background of the Merger................................................. 45
Joint Reasons for the Merger; Recommendations of Boards of Directors..... 47
Opinion of Digital Island's Financial Advisor............................ 51
Interests of Officers and Directors in the Merger........................ 56
Excess Parachute Payments................................................ 58
Regulatory Approvals..................................................... 59
Material Federal Income Tax Considerations............................... 59
</TABLE>

i
<PAGE>

TABLE OF CONTENTS--(Continued)

<TABLE>
<S> <C>
Anticipated Accounting Treatment......................................... 61
Dissenters' Rights....................................................... 61
Listing of Digital Island Common Stock to be Issued in the Merger........ 63
Restrictions on Sale of Shares by Affiliates of Digital Island and
Sandpiper............................................................... 63
Operations Following the Merger.......................................... 64
THE MERGER AGREEMENT AND RELATED AGREEMENTS................................ 65
The Merger............................................................... 65
Effective Time........................................................... 65
Conversion of Sandpiper Shares in the Merger............................. 65
Sandpiper Stock Plan..................................................... 65
Fractional Shares........................................................ 66
The Exchange Agent....................................................... 66
Exchange of Sandpiper Stock Certificates for Digital Island Stock
Certificates............................................................ 66
Transfers of Ownership................................................... 66
Distributions with Respect to Unexchanged Shares......................... 66
Representations and Warranties........................................... 67
Merger Integration Committee............................................. 69
Sandpiper's Conduct of Business Before Completion of the Merger.......... 69
Digital Island's Conduct of Business Before Completion of the Merger..... 71
No Solicitation of Takeover Proposals by Sandpiper....................... 72
No Solicitation of Certain Contingent Business Combination Transactions
by Digital Island....................................................... 72
Additional Agreements of Sandpiper and Digital Island.................... 73
Director and Officer Indemnification..................................... 74
Conditions to the Merger................................................. 74
Termination of the Merger Agreement...................................... 76
Payment of Costs and Expenses; Termination Fees.......................... 76
Extension, Waiver and Amendment of the Merger Agreement.................. 77
Escrow and Indemnification............................................... 77
Related Agreements....................................................... 78
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.......................... 82
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF DIGITAL ISLAND AND SHAREHOLDERS
OF SANDPIPER.............................................................. 86
Comparison of Authorized and Outstanding Capital Stock................... 86
Comparison of Rights of Common Stock..................................... 86
Comparison of Rights and Preferences of Preferred Stock.................. 87
Comparison of Stockholder Rights Under Delaware and California Law....... 88
BUSINESS OF DIGITAL ISLAND................................................. 95
Overview................................................................. 95
Industry Background...................................................... 95
The Digital Island Solution.............................................. 96
Business Strategy........................................................ 97
Network Architecture..................................................... 98
Services................................................................. 100
Customers................................................................ 101
Sales and Marketing...................................................... 102
Customer Support......................................................... 102
Competition.............................................................. 103
Intellectual Property Rights............................................. 103
Government Regulation.................................................... 104
Employees................................................................ 107
</TABLE>

ii
<PAGE>

TABLE OF CONTENTS--(Continued)

<TABLE>
<S> <C>
Facilities.............................................................. 108
Legal Proceedings....................................................... 108
DIGITAL ISLAND SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............ 109
DIGITAL ISLAND MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 110
Overview................................................................ 110
Fiscal Years Ended September 30, 1999 and 1998.......................... 111
Quarterly Results of Operations......................................... 112
Liquidity and Capital Resources......................................... 113
Recent Accounting Pronouncements........................................ 114
Year 2000 Compliance.................................................... 114
Qualitative and Quantitative Disclosure About Market Risk............... 116
BUSINESS OF SANDPIPER..................................................... 117
Sandpiper Networks...................................................... 117
Industry Background..................................................... 117
The Sandpiper Solution.................................................. 118
The Sandpiper Strategy.................................................. 120
Services................................................................ 120
Customers............................................................... 120
Strategic Relationships................................................. 120
Network Deployment and Operations....................................... 121
Technology.............................................................. 122
Research and Development................................................ 123
Sales and Marketing..................................................... 124
Competition............................................................. 124
Intellectual Property and Licensing..................................... 125
Employees............................................................... 125
Facilities.............................................................. 125
Legal Proceedings....................................................... 125
SANDPIPER SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA................. 126
SANDPIPER MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 127
Overview................................................................ 127
Revenues................................................................ 128
Gross Profit............................................................ 128
Operating Expenses...................................................... 129
Quarterly Results of Operations......................................... 130
Liquidity and Capital Resources......................................... 130
Year 2000............................................................... 131
Recent Accounting Pronouncements........................................ 132
Quantitative and Qualitative Disclosures About Market Interest Rate
Sensitivity............................................................ 133
Exchange Rate Sensitivity............................................... 133
MANAGEMENT OF DIGITAL ISLAND.............................................. 134
Officers, Directors and Senior Management............................... 134
Director Compensation................................................... 137
Classified Board........................................................ 137
Board Committees........................................................ 138
Compensation Committee Interlocks and Insider Participation............. 138
DIGITAL ISLAND EXECUTIVE COMPENSATION AND OTHER INFORMATION............... 139
Summary of Cash and Certain Other Compensation.......................... 139
</TABLE>

iii
<PAGE>

TABLE OF CONTENTS--(Continued)

<TABLE>
<S> <C>
Stock Options and Stock Appreciation Rights............................... 140
Aggregated Option/SAR Exercises and Fiscal Year-End Values................ 141
Employee Benefit Plans.................................................... 141
Employment Contracts and Change of Control Arrangements................... 146
Limitation of Liability and Indemnification............................... 147
CERTAIN TRANSACTIONS RELATING TO DIGITAL ISLAND............................. 148
Preferred Stock Financings................................................ 148
Investors' Rights Agreement............................................... 149
Employment and Indemnification Agreements................................. 149
Director Arrangements and Stockholder Notes............................... 149
Officer Loans............................................................. 149
E*TRADE Agreements........................................................ 150
PRINCIPAL STOCKHOLDERS OF DIGITAL ISLAND.................................... 151
PRINCIPAL SHAREHOLDERS OF SANDPIPER......................................... 154
DESCRIPTION OF DIGITAL ISLAND CAPITAL STOCK................................. 156
Common Stock.............................................................. 156
Preferred Stock........................................................... 156
Anti-Takeover, Limited Liability and Indemnification Provisions........... 156
Transfer Agent and Registrar.............................................. 158
EXPERTS..................................................................... 159
LEGAL MATTERS............................................................... 159
WHERE YOU CAN FIND MORE INFORMATION......................................... 159
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-1
ANNEX A--MERGER AGREEMENT AND EXHIBITS...................................... A-1

ANNEX B--FAIRNESS OPINION................................................... B-1

ANNEX C--DISSENTERS' RIGHTS................................................. C-1
</TABLE>

iv
<PAGE>

QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are the companies proposing the merger?

A: Digital Island and Sandpiper are merging to provide comprehensive network
services for globalizing e-business applications. By combining Digital
Island's global network capabilities, hosting and application services with
Sandpiper's comprehensive content delivery network, we expect that the
combined company will be able to provide a global commerce platform for
content delivery services, rich media services, hosting, applications
services and professional services.

Q: What will Sandpiper shareholders receive in the merger?

A: If the merger is completed, Sandpiper shareholders will receive 1.0727
shares of Digital Island common stock for each share of Sandpiper capital
stock they own. Digital Island will not issue fractional shares of common
stock. Instead of a fractional share, Sandpiper shareholders will receive
cash based on the market price of Digital Island common stock.

Q: When do you expect to complete the merger?

A: We are working to complete the merger in the winter of 1999/spring of 2000.
Because the merger is subject to governmental and other regulatory
approvals, however, we cannot predict the exact timing.

Q: Should Sandpiper shareholders send in their stock certificates now?

A: No. After we complete the merger, Digital Island will send instructions to
Sandpiper shareholders explaining how to exchange their shares of Sandpiper
common stock for the appropriate number of shares of Digital Island common
stock.

Q: Should Digital Island stockholders send in their stock certificates?

A: No. Digital Island stockholders will continue to own their shares of Digital
Island common stock after the merger and should continue to hold their stock
certificates.

Q: How do I vote?

A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the special stockholders
meeting. You may also attend the meeting in person instead of submitting a
proxy. If your shares are held in "street name" by your broker, your broker
will vote your shares only if you provide instructions on how to vote. You
should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares.

Q: Can I change my vote after mailing my proxy?

A: Yes. You may change your vote by delivering a signed notice of revocation or
a later-dated, signed proxy card to the corporate secretary of Digital
Island or Sandpiper, as appropriate, before the appropriate stockholder
meeting, or by attending the stockholder meeting and voting in person.

Q: Are there risks I should consider in deciding whether to vote for the
merger?

A: Yes. We have set out under the heading "Risk Factors" beginning on page 16
of this joint proxy statement/prospectus a number of risk factors that you
should consider.

Q: Who can I call with questions?

A: If you are a Sandpiper shareholder with questions about the merger, please
call Sandpiper's chief financial officer, Thomas R. Govreau, at (805) 370-
2130.

If you are a Digital Island stockholder with questions about the merger,
please call Traci M. McCarty or Christine Belonogoff at Digital Island's
investor relations firm, The Financial Relations Board at (415) 986-1591.
<PAGE>

SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS

The following summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. You should carefully read this entire joint proxy
statement/prospectus, including the appendices, and the other documents we
refer to for a more complete understanding of the merger.

The Companies

DIGITAL ISLAND, INC.
45 Fremont Street, Suite 1200
San Francisco, CA 94105
(415) 738-4100

SANDPIPER NETWORKS, INC.
225 West Hillcrest Drive, Suite 250
Thousand Oaks, CA 91360
(805) 370-2100

Sandpiper is a leading provider of Internet content delivery services that
significantly improve website performance, reliability and scalability.
Sandpiper's solution is designed to improve website performance and reliability
by delivering content from a globally distributed server network, that
intelligently avoids Internet congestion, and serves content closer to users.
Sandpiper's customers include AOL, Blue Mountain Arts, CNBC.com, Intuit,
Microsoft and PBS.org. In addition, Sandpiper recently entered into agreements
with a number of strategic partners, including AOL, Inktomi, Microsoft, NBC,
RealNetworks and Vignette.

The Merger (See page 45)

Sandpiper and Digital Island have entered into a merger agreement that
provides for the merger of Sandpiper and a newly formed subsidiary of Digital
Island. Sandpiper will be the surviving corporation and will become a wholly
owned subsidiary of Digital Island. Shareholders of Sandpiper will become
stockholders of Digital Island following the merger, and each share of
Sandpiper capital stock will be exchanged for 1.0727 shares of Digital Island
common stock. We urge you to read the merger agreement, which is attached as
Annex A to this joint proxy statement/prospectus, carefully and in its
entirety.

United States Federal Income Tax Consequences of the Merger (See page 59)

Sandpiper and Digital Island intend that the merger will qualify as a
reorganization within the meaning of the Internal Revenue Code. If the merger
qualifies as a reorganization, Sandpiper shareholders will generally not
recognize gain or loss for United States federal income tax purposes upon the
receipt of Digital Island common stock in the merger, although Sandpiper
shareholders will recognize gain or loss upon the receipt of

2
<PAGE>

any cash instead of a fractional share of Digital Island common stock. It is a
condition to completion of the merger that Sandpiper and Digital Island each
receive a legal opinion from its counsel that the merger will constitute a
reorganization within the meaning of the Internal Revenue Code.

Tax matters are very complicated and the tax consequences of the merger to
you will depend upon the facts of your situation. You should consult your own
tax advisors for a full understanding of the tax consequences of the merger to
you.

Ability to Sell Digital Island Stock After the Merger (See page 63)

All shares of Digital Island common stock that Sandpiper shareholders
receive in connection with the merger will be freely transferable unless the
holder is considered an "affiliate" of either Digital Island or Sandpiper for
purposes of the Securities Act. Shares of Digital Island common stock held by
these affiliates may be sold only under a registration statement or exemption
under the Securities Act.

In addition, in connection with the merger, Digital Island stockholders
holding approximately 45% of the outstanding common stock of Digital Island and
Sandpiper shareholders holding approximately 76% of the outstanding capital
stock of Sandpiper, have entered into reciprocal market standoff agreements
pursuant to which they have agreed not to sell their shares of Digital Island
common stock from the time of the merger until the earliest to occur of :

. the sale by Digital Island of Digital Island common stock for its own
account in a bona fide, firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act;

. July 15, 2000;

. the effective date of a merger of Digital Island with or into another
corporation in which fifty (50%) or more of the voting power of Digital
Island is disposed of, or the sale of all or substantially all of the
assets of Digital Island; or

. such other date, and with such limitations, as may be approved by
unanimous vote of the board of directors of Digital Island.

The form of market standoff letter agreement is attached as an exhibit to
the shareholder agreement and voting agreement attached as exhibits to the
merger agreement in Annex A to this joint proxy statement/prospectus.

Dissenters' Rights (See page 61)

Shareholders of Sandpiper who do not vote in favor of the merger agreement
and the merger and who otherwise comply with the requirements of the California
Corporations Code relating to dissenters' rights will be entitled to receive an
amount in cash equal to the fair market value of their Sandpiper capital stock.
The fair market value of shares of Sandpiper may be more or less than the value
of Digital Island common stock to be paid to the other Sandpiper shareholders
in the merger. Dissenting Sandpiper shareholders must precisely follow specific
procedures to exercise this right, or the right may be lost. These procedures
are described in this joint proxy statement/prospectus, and the relevant
provisions of California law are attached as Annex C to this joint proxy
statement/prospectus.

Opinion of Digital Island's Financial Advisor (See page 51)

In deciding to approve the merger, Digital Island's board of directors
considered the opinion issued by its financial advisor, Bear, Stearns & Co.,
Inc. Bear Stearns opined that the share exchange ratio was fair from a
financial point of view to Digital Island. The full text of the written opinion
of Bear Stearns, dated October 23, 1999, is attached as Annex B to this joint
proxy statement/prospectus. You should read this opinion in its entirety.

3
<PAGE>

Recommendations of the Boards of Directors (See page 47)

The Sandpiper and Digital Island boards of directors each have determined
that the terms and conditions of the merger are fair to, and in the best
interests of, its company's shareholders and stockholders, respectively. The
Sandpiper board unanimously recommends that Sandpiper shareholders vote FOR
approval of the merger agreement and the merger, and the Digital Island board
unanimously recommends that Digital Island stockholders vote FOR issuing the
shares of Digital Island common stock required to be issued in the merger.

Shareholder and Stockholder Approvals (See page 43)

Sandpiper Shareholders

The holders of a majority of the outstanding shares of Sandpiper common
stock and preferred stock, each voting as a separate class, must approve the
merger agreement and the merger. Sandpiper shareholders are entitled to cast
one vote per share of Sandpiper capital stock owned at the close of business on
December 3, 1999. Under a shareholder agreement in the form attached as an
exhibit to the merger agreement in Annex A to this joint proxy
statement/prospectus, Sandpiper shareholders owning approximately 76% of
Sandpiper's common stock and preferred stock outstanding as of October 24,
1999, excluding any shares issuable upon the exercise of options, have agreed
to vote all of their shares of Sandpiper common stock or preferred stock for
approval of the merger agreement and the merger; accordingly, such approvals
are assured.

Digital Island Stockholders

The holders of a majority of the shares of Digital Island common stock
entitled to vote and that are present or represented by proxy at the Digital
Island meeting must approve the issuance of Digital Island common stock in the
merger. Digital Island stockholders are entitled to cast one vote per share of
Digital Island common stock owned at the close of business on November 29,
1999. Under a voting agreement in the form attached as an exhibit to the merger
agreement in Annex A to this joint proxy statement/prospectus, Digital Island
stockholders owning approximately 45% of Digital Island's common stock
outstanding as of October 24, 1999, excluding any shares issuable upon the
exercise of options, have agreed to vote all of their shares of Digital Island
common stock for approval of the issuance of Digital Island common stock in the
merger.

Interests of Officers and Directors in the Merger (See page 56)

When considering the recommendation of the Sandpiper board, Sandpiper
shareholders should be aware that directors and officers of Sandpiper have the
following interests in the merger that may be different from, or in addition
to, those of Sandpiper shareholders:

. As of December 3, 1999, the executive officers and directors of Sandpiper
owned an aggregate of 5,833,541 shares of Sandpiper common stock, of
which 1,682,519 shares are unvested and subject to repurchase by
Sandpiper at a repurchase price of $0.07 per share pursuant to restricted
stock purchase agreements. Additionally, as of such date the executive
officers and directors of Sandpiper held options to purchase an aggregate
of 630,000 shares of Sandpiper common stock, of which 605,417 are
unvested. If the merger is completed, all of the 858,917 unvested shares
issued to Leo Spiegel, the chief executive officer and a director of
Sandpiper, pursuant to a restricted stock purchase agreement will,
subject to certain conditions, vest free from such repurchase rights in
two equal portions in March and November 2000, respectively. All of the
unvested shares held by Messrs. Swart, Farber, Govreau and Lachman will
vest in full upon the termination of such individual's employment or
service following the merger.

. Upon completion of the merger, Digital Island and Sandpiper will enter
into employment agreements with the following executive officers of
Sandpiper: Leo Spiegel, Andrew Swart, and David Farber. Digital Island
will also enter into a sixty day retention agreement with Thomas Govreau.

4
<PAGE>

. Digital Island has agreed to honor and not modify any rights to
indemnification or exculpation from liabilities for acts or omissions
occurring at or prior to the consummation of the merger as existed at the
time the merger agreement was signed in favor of officers and directors
of Sandpiper and its subsidiaries as provided in their respective
charters or bylaws as in effect at the time the merger agreement was
signed.

. The merger agreement provides that, upon completion of the merger, the
board of directors of Digital Island shall consist of four designees of
Digital Island, three designees of Sandpiper and two mutually acceptable
outside directors. The parties plan to identify this board slate prior to
mailing of this joint proxy statement/prospectus.

As a result, Sandpiper's directors and officers may be more likely to vote
to approve the merger than Sandpiper shareholders generally.

When considering the recommendation of the Digital Island board, Digital
Island stockholders should be aware that Charlie Bass, a director of Digital
Island, owns 71,429 shares of Sandpiper Series A preferred stock and holds a
warrant to purchase up to an additional 14,286 shares of Sandpiper Series A
preferred stock. As a result, Mr. Bass may be more likely, in his capacity as a
director of Digital Island or shareholder of Sandpiper, to vote to approve the
issuance of Digital Island common stock pursuant to the merger than Digital
Island stockholders generally.

Conditions to Completion of the Merger (See page 74)

We will complete the merger only if we satisfy or agree to waive several
conditions, some of which are:

. the merger agreement and the merger must be approved by Sandpiper's
shareholders, and the issuance of Digital Island common stock in the
merger must be approved by Digital Island's stockholders;

. any agreements or arrangements that may constitute excess parachute
payments under Section 280G of the Internal Revenue Code must have been
approved by such number of Sandpiper shareholders as is required under
applicable law;

. all necessary consents, approvals and authorizations from governmental
entities must be obtained except where a failure to obtain the consent,
approval or authorization could not be reasonably expected to have a
material adverse effect on Digital Island or Sandpiper;

. no court of competent jurisdiction or governmental entity has issued or
entered any order, writ, injunction or decree making the merger illegal
or otherwise preventing its completion;

. we must receive opinions from each of our tax counsels stating that the
merger will qualify as a tax-free reorganization;

. our representations and warranties in the merger agreement must be true
and correct except where failures to be true and correct could not
reasonably be expected to have a material adverse effect on the other
party or, in the case of Sandpiper, on the surviving corporation; and

. Leo Spiegel, Andrew Swart and David Farber, currently executive officers
of Sandpiper, must have accepted employment by Digital Island and their
employment and non-competition agreements with Digital Island must be in
full force and effect.

If either of us waives any conditions, we will consider the facts and
circumstances at that time and determine whether completion of the merger
requires a resolicitation of proxies.

5
<PAGE>

Restrictions on Alternative Transactions (See page 72)

The merger agreement prohibits Sandpiper and Digital Island from soliciting
or participating in discussions with third parties about transactions
alternative to the merger. However, Digital Island is not prohibited from
taking a position regarding certain unsolicited tender offers, exchange offers
or takeover proposals in accordance with the fiduciary duties of Digital
Island's board. For a more complete description of those instances where
Digital Island may engage in alternative transactions, see "No Solicitation of
Transactions by Digital Island" on page 72.

Termination of the Merger Agreement (See page 76)

We may mutually agree to terminate the merger agreement at any time before
the merger is completed. The merger agreement may also be terminated by either
of us for several other reasons, some of which are:

. if the merger is not completed, without the fault of the terminating
party, by May 31, 2000;

. if the conditions to completion of the merger would not be satisfied
because of either (a) a breach of an agreement in the merger agreement by
the other party or (b) a breach of a representation or warranty in the
merger agreement by the other party, if the breaching party does not cure
the breach within 20 business days after receiving notice of the breach
from the other party;

. if the Digital Island stockholders do not approve the issuance of Digital
Island common stock at the Digital Island special meeting; or

. if the Sandpiper shareholders do not approve the merger agreement, the
merger and the related transactions at the Sandpiper special meeting.

The merger agreement may be terminated by Digital Island if the following
occurs:

. Sandpiper's board withdraws or modifies in a manner adverse to Digital
Island its recommendation as to the merger agreement or the merger; or

. Sandpiper fails to comply with the nonsolicitation provisions of the
merger agreement, which are discussed in more detail on page 72.

The merger agreement may be terminated by Sandpiper if the following occurs:

. Digital Island's board withdraws or modifies in a manner adverse to
Sandpiper its recommendation as to the merger agreement or the merger; or

. Digital Island fails to comply with the nonsolicitation provisions of the
merger agreement, which are discussed in more detail on page 72.

Termination Fee and Expenses (See page 76)

Each party shall pay its own costs and expenses incurred in connection with
the merger, whether or not the merger is consummated. However, in the event of
certain terminations of the merger agreement, including those related to a
prohibited alternative transaction, then the party at fault shall promptly pay
the other party the sum of $5 million, and, if the prohibited alternative
transaction is consummated within twelve months after the termination of the
merger agreement, the party at fault shall pay the additional sum of $25
million.

6
<PAGE>

Indemnification by Sandpiper Shareholders and Escrow of Shares (See pages 77
and 78)

Under the merger agreement, Sandpiper shareholders are required to indemnify
Digital Island for damages, including as a result of any breach, default or
misrepresentation regarding any representation, warranty, covenant or agreement
given or made by Sandpiper in or pursuant to:

. the merger agreement;

. any schedule or exhibit to the merger agreement;

. any agreement entered into by Sandpiper and Digital Island in connection
with the merger agreement; and

. any certificates delivered to Digital Island in connection with the
merger.

To secure the indemnification obligation of Sandpiper shareholders, an
escrow fund comprised of ten percent (10%) of the shares of Digital Island
common stock issued in the merger to Sandpiper shareholders will be
established. No indemnification claim may be made by Digital Island until the
aggregate amount of indemnification claimed exceeds $2,000,000 and then only to
the extent that the aggregate amount claimed exceeds $2,000,000. If the merger
is completed, recovery from the escrow fund will be the sole and exclusive
remedy, absent fraud, intentional misrepresentation or willful breach. In
general, the escrow period will terminate on the first anniversary of the
completion of the merger.

The indemnification provisions are set forth in the section entitled "Escrow
and Indemnification" in the merger agreement attached to this joint proxy
statement/prospectus in Annex A and the form of escrow agreement attached as an
exhibit to the merger agreement in Annex A.

Anticipated Accounting Treatment of the Merger (See page 61)

Digital Island intends to treat the merger as a purchase transaction for
accounting and financial reporting purposes, which means that Digital Island
will treat Sandpiper as a separate entity for periods prior to the closing, and
thereafter, as a wholly owned subsidiary of Digital Island.

Compliance with Antitrust Laws (See page 59)

The merger is subject to United States antitrust laws. We have made the
required filings with the Department of Justice and Federal Trade Commission.
The applicable waiting period expired on December 5, 1999. The Department of
Justice and Federal Trade Commission, as well as a state or private person, may
challenge the merger at any time before or after its completion.

Recent Developments

Strategic Alliance with SRI International

Effective November 22, 1999, Digital Island and SRI International, a
California nonprofit public benefit corporation, entered into an agreement
pursuant to which Digital Island will obtain ownership of certain SRI
International proprietary materials. In consideration of this intellectual
property transfer, Digital Island has agreed to pay $6,000,000 to SRI
International. Additionally, pursuant to the agreement, Digital Island has the
option to obtain consulting services from SRI International for an additional
$4,000,000. Payments for the SRI International proprietary materials and the
consulting services shall be made in shares of Digital Island common stock. SRI
International, however, may select to receive up to $1,000,000 of the
$6,000,000 intellectual property purchase payment in cash.

7
<PAGE>

Strategic Relationship with Sun Microsystems and Inktomi

On December 7, 1999, Digital Island entered into a memoranda of
understanding with Sun Microsystems, Inc. and Inktomi Corporation providing for
a joint strategic relationship. Under the relationship, Digital Island has
agreed to purchase, over a two year period, up to $150 million of Sun servers,
storage operating systems and server software, using Inktomi network caching
applications. The total purchase would consist of 5,000 Sun servers. Sun and
Inktomi also agreed to participate and invest in joint marketing and sales
activities with Digital Island to support broadband and streaming media content
delivery over the Internet. Sun agreed to provide $100 million of lease
financing for the acquisition of the equipment, consisting of:

. a $30 million initial line of credit;

. a $30 million line of credit available in nine months upon meeting
certain working capital maintenance and financing milestones; and

. a $40 million line of credit available in fifteen months upon meeting
certain additional working capital maintenance and financing milestones.

For extending this lease financing, Digital Island agreed to grant Sun
warrants to purchase up to $10 million of Digital Island Common Stock in three
tranches corresponding on a pro rata basis with the above three lines of
credit; the warrants will be exercisable at the five-day average trading price
preceding the grant dates, and will expire in 48 months (in the case of the
first warrant) and 36 months (in the case of the second and third warrant). The
lease financing facility and the marketing and sales relationship are subject,
in part, to definitive documentation.

In connection with the relationship, Sun has agreed to make a $20 million
investment, and Inktomi has agreed to make a $6 million investment, in Digital
Island common stock at a price per share equal to the lesser of the average
closing price of the common stock as quoted on the Nasdaq National Market for
the ten trading days before December 7, 1999 or for the five trading days
before closing of the investment. Sun and Inktomi have agreed to not sell or
otherwise dispose of such shares until the first anniversary of their purchase.
The Sun investment is conditioned, among other things, upon customary
governmental approvals and the Inktomi investment is conditioned upon
consummation of the Sun investment.

8
<PAGE>

DIVIDEND POLICIES

Neither Digital Island nor Sandpiper has ever declared or paid cash
dividends on shares of its common stock. Holders of Sandpiper's Series A
preferred stock and Series B preferred stock are entitled to receive dividends
at rates determined by the Sandpiper board of directors out of funds legally
available therefor, payable when and as declared by the Sandpiper board of
directors. Sandpiper has never declared or paid dividends on shares of its
preferred stock.

Digital Island currently intends to retain all of its earnings to finance
the development and expansion of its business and therefore does not intend to
declare or pay cash dividends on its common stock in the foreseeable future.
The Digital Island board, in its discretion, will determine whether to declare
and pay dividends in the future. Any future declaration and payment of
dividends will depend upon:

. Digital Island's results of operations;

. Digital Island's earnings and financial condition;

. contractual limitations;

. cash requirements;

. future prospects;

. applicable law; and

. other factors deemed relevant by Digital Island's board of directors.

9
<PAGE>

DIGITAL ISLAND

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(In thousands, except share and per share data)

The following summary historical consolidated financial information should
be read in conjunction with Digital Island's consolidated financial statements
and related notes and Digital Island's "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The consolidated statement of
operations information for each of the years in the three year period ended
September 30, 1999, and the balance sheet data at September 30, 1998 and 1999,
are derived from Digital Island's financial statements that have been audited
by PricewaterhouseCoopers LLP, independent accountants, included elsewhere in
this filing. The statement of operations data for the years ended September 30,
1995 and 1996, and the balance sheet data at September 30, 1995, 1996, and
1997, are derived from Digital Island's audited financial statements that are
not included in this filing. Historical results are not necessarily indicative
of the results to be expected in the future.

<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1995 1996 1997 1998 1999
------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue.................. $ -- $ -- $ 218 $ 2,343 $ 12,431
Total costs and
expenses................ 7 26 5,594 19,458 64,918
Loss from operations..... (7) (26) (5,376) (17,116) (52,487)
Net loss................. $ (10) $ (27) $ (5,289) $ (16,764) $ (50,938)
======= ======= ========= ========= ==========
Basic and diluted loss
per share............... $ (0.04) $ (0.10) $ (3.53) $ (7.50) $ (4.58)
======= ======= ========= ========= ==========
Shares used in basic and
diluted loss per share
calculation............. 275,000 275,000 1,497,711 2,236,452 11,127,462
</TABLE>

<TABLE>
<CAPTION>
September 30,
------------------------------------
1995 1996 1997 1998 1999
---- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............... $ 7 $ 344 $ 4,584 $ 5,711 $ 43,315
Investments............................. -- -- 1,983 10,123 31,691
Working capital......................... 5 76 4,613 12,883 59,506
Total assets............................ 93 432 9,223 22,617 107,648
Long-term obligations, including current
portion................................ -- -- 705 3,992 11,092
Total stockholders' equity.............. $ 86 $ 84 $ 6,265 $ 15,490 $ 79,218
</TABLE>

10
<PAGE>

SANDPIPER NETWORKS

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following summary historical consolidated financial data should be read
in conjunction with Sandpiper's consolidated financial statements and related
notes and Sandpiper's "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for each of the two years ended December 31, 1998 and 1997 (no operating
activities occurred from December 26, 1996 (inception) to December 31, 1996)
and the consolidated balance sheet data at December 31, 1998 and 1997, are
derived from the consolidated financial statements of Sandpiper which have been
audited by Ernst & Young, independent accountants. The summary financial data
for the nine month periods ended September 30, 1999 and 1998 and as of
September 30, 1999 and 1998 have been derived from Sandpiper's unaudited
financial statements and in the opinion of Sandpiper's management include all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results of operations and financial position of
Sandpiper for those periods in accordance with generally accepted accounting
principles. Historical results are not necessarily indicative of the results to
be expected in the future.

<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------ -------------------------
1997 1998 1998 1999
----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues................. $ -- $ 5,700 $ -- $ 242,954
Cost of revenues......... -- 1,695,057 850,200 2,641,767
----------- ----------- ----------- ------------
Gross profit............. -- (1,689,357) (850,200) (2,398,813)
----------- ----------- ----------- ------------
Operating expenses:
Marketing and selling
expenses, net........... -- 1,272,441 547,203 4,056,155
Product development
expenses, net........... 1,159,715 1,382,635 1,121,722 1,820,986
General and
administrative
expenses................ 28,149 876,093 677,626 1,480,912
Amortization of deferred
compensation............ -- -- -- 580,827
----------- ----------- ----------- ------------
Total operating
expenses................ 1,187,864 3,531,169 2,346,551 7,938,880
Operating loss........... (1,187,864) (5,220,526) (3,196,751) (10,337,693)
Interest income, net..... 19,325 126,374 125,418 287,671
Provision for income
taxes................... -- -- 800 2,856
----------- ----------- ----------- ------------
Net loss................. $(1,168,539) $(5,094,152) $(3,072,133) $(10,052,878)
=========== =========== =========== ============
Basic and diluted net
loss per share.......... $ (0.23) $ (0.79) $ (0.48) $ (1.46)
=========== =========== =========== ============
Pro forma basic and
diluted net loss per
share................... $ (0.32) $ (0.60)
=========== ============
Weighted average number
of shares used in
computing basic and
diluted net loss per
share................... 5,095,658 6,418,159 6,354,306 6,872,465
Weighted average number
of shares used in
computing pro forma
basic and diluted net
loss per share.......... 16,021,472 16,856,112

<CAPTION>
December 31, September 30,
------------------------ -------------------------
1997 1998 1998 1999
----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash
equivalents............. $ 5,728,826 $ 603,812 $ 2,583,048 $ 10,853,468
Working capital.......... 5,342,053 98,466 1,988,706 7,810,700
Total assets............. 5,774,176 1,824,720 3,893,036 17,750,798
Long term obligations.... -- 1,300,586 792,945 1,666,173
Redeemable preferred
stock................... 6,552,920 6,674,442 6,674,442 28,101,208
Shareholders' deficit.... (1,167,539) (6,150,308) (4,169,602) (15,475,754)
</TABLE>

11
<PAGE>

SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

In the table below, we provide you summary unaudited pro forma combined
financial data to give effect to the proposed merger of Digital Island and
Sandpiper as if the merger had been completed on October 1, 1998 for statement
of operations purposes and on September 30, 1999 for balance sheet purposes.
This summary unaudited pro forma combined financial data should be read in
conjunction with the separate historical financial statements and accompanying
notes of Digital Island and of Sandpiper, which are incorporated in this joint
proxy statement/prospectus. You should not rely on the summary unaudited pro
forma combined financial information as an indication of the results of
operations or financial position that would have been achieved if the
transaction had taken place earlier.

The summary unaudited pro forma combined financial information gives effect
to the proposed merger of Digital Island and Sandpiper on a purchase accounting
basis. The Digital Island and Sandpiper unaudited pro forma combined balance
sheet data assume that the merger of Digital Island and Sandpiper took place on
September 30, 1999, and combines the Digital Island historical consolidated
balance sheet with Sandpiper's historical consolidated balance sheet as of this
date. The Digital Island and Sandpiper unaudited pro forma combined statements
of operations data assume that the merger of Digital Island and Sandpiper took
place as of the beginning of the period presented and combines Digital Island's
historical consolidated statements of operations data for the year ended
September 30, 1999 and Sandpiper's historical consolidated statements of
operations data for the 12-month period ended September 30, 1999. This
presentation is consistent with the periods expected to be combined after the
date of the closing of the merger.

The summary unaudited pro forma combined financial data are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during this period. The summary unaudited pro forma combined financial data as
of September 30, 1999 and for the year then ended, is derived from the
unaudited pro forma condensed combined financial statements included elsewhere
in this joint proxy statement/prospectus and should be read in conjunction with
those statements and the related notes. See "Unaudited Pro Forma Condensed
Combined Financial Statements."

12
<PAGE>

DIGITAL ISLAND AND SANDPIPER

SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
Year Ended
September 30, 1999
------------------
<S> <C>
Unaudited Pro Forma Combined Statement of Operations
Data:
Revenue................................................. $ 12,680
Total costs and expenses................................ 274,241
Loss from operations.................................... (261,561)
Net loss................................................ (259,729)
----------
Basic and diluted net loss per share.................... $ (14.15)
----------
Shares used in basic and diluted loss per share
calculation............................................ 18,354,758
<CAPTION>
September 30, 1999
------------------
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 54,168
Investments............................................. 31,691
Working capital......................................... 52,017
Total assets............................................ 912,265
Long-term obligations, including current portion........ 13,808
Total stockholders' equity.............................. 863,410
</TABLE>

13
<PAGE>

COMPARATIVE PER SHARE DATA

The following tables reflect (a) the historical net loss and book value per
share of Digital Island common stock and the historical net income and book
value per share of Sandpiper common stock in comparison with the unaudited pro
forma net loss and book value per share after giving effect to the proposed
merger of Digital Island with Sandpiper and (b) the equivalent historical net
loss and book value per share attributable to 1.0727 shares of Digital Island
common stock that will be received for each share of Sandpiper capital stock in
the merger. The pro forma information assumes that for purposes of reporting
combined information, historical financial information of Sandpiper will be
restated to conform with Digital Island's fiscal year-end of September 30. The
information presented in the following tables should be read in conjunction
with the unaudited pro forma condensed combined financial statements included
in this joint proxy statement/prospectus and the historical consolidated
financial statements and related notes of Digital Island and Sandpiper.

<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Digital Island Historical Per Share:
Net loss per share--basic and diluted............................ $ (4.58)
Book value per share(1).......................................... $ 2.20
Sandpiper Historical Per Share:
Net loss per share--basic and diluted............................ $ (1.67)
Book value per share(1).......................................... $ (2.21)
Digital Island and Sandpiper Pro Forma Combined Per Share:
Net loss per Digital Island share--basic and diluted............. $(14.15)
Net loss per equivalent Sandpiper share--basic and diluted(2).... $(15.18)
Book value per Digital Island share(1)........................... $ 24.02
Book value per equivalent Sandpiper share(2)..................... $ 25.77
</TABLE>
- --------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at September 30,
1999. The pro forma combined book value per share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of common
stock outstanding at September 30, 1999.

(2) The Sandpiper equivalent pro forma combined per share amounts are
calculated by multiplying the Digital Island combined pro forma share
amounts by the exchange ratio of 1.0727.

14
<PAGE>

MARKET PRICE INFORMATION

Digital Island's common stock has traded on the Nasdaq National Market under
the symbol "ISLD" since June 29, 1999. The following table sets forth the range
of high and low sales prices reported on the Nasdaq National Market for Digital
Island common stock for the periods indicated.

<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal 1999
Third Quarter............................................ $ 20.50 $ 8.66
Fourth Quarter........................................... $ 40.44 $12.75
Fiscal 2000
First Quarter (through December 8, 1999)................. $114.94 $20.44
</TABLE>

There is no established public trading market for Sandpiper's common stock.

Recent Closing Prices

As of October 22, 1999, the last trading day before announcement of the
proposed merger, the closing price per share on the Nasdaq National Market of
Digital Island common stock was $23. On December 8, 1999, the latest
practicable trading day before the printing of this joint proxy
statement/prospectus, the closing price per share of Digital Island common
stock was $114.94.

Because the market price of Digital Island common stock is subject to
fluctuation, the market value of the shares of Digital Island common stock that
Sandpiper shareholders will receive in the merger may increase or decrease
prior to and following the merger. We urge you to obtain current market
quotations for Digital Island common stock. We cannot assure you as to the
future prices for Digital Island common stock.

15
<PAGE>

RISK FACTORS

By voting in favor of the merger, Sandpiper shareholders will be choosing to
invest in Digital Island common stock. An investment in Digital Island common
stock involves a high degree of risk. In addition to the other information
contained in this joint proxy statement/prospectus, investors in Digital Island
common stock should carefully consider the following risk factors. If any of
the following risks actually occur, the business and prospects of Sandpiper or
Digital Island may be seriously harmed. In this case, the trading price of
Digital Island common stock may decline, and you may lose all or part of your
investment.

Risks Related To The Merger

Sandpiper shareholders will receive a fixed number of shares of Digital Island
common stock and as a result, they will bear all the market risk of a decrease
of the value of Digital Island shares issued in the merger.

Upon the merger's completion, each share of Sandpiper capital stock will be
exchanged for 1.0727 shares of Digital Island common stock. There will be no
adjustment for changes in the market price of Digital Island common stock. In
addition, neither Sandpiper nor Digital Island may terminate the merger
agreement or "walk away" from the merger or resolicit the vote of its
shareholders or stockholders solely because of changes in the market price of
Digital Island common stock. Accordingly, the specific dollar value of Digital
Island common stock that Sandpiper shareholders will receive upon the merger's
completion will depend on the market value of Digital Island common stock when
the merger is completed and may decrease from the date you submit your proxy.
The share price of Digital Island common stock is by nature subject to the
general price fluctuations in the market for publicly traded equity securities
and has experienced significant volatility. We urge you to obtain recent market
quotations for Digital Island common stock. We cannot predict or give any
assurances as to the market price of Digital Island common stock at any time
before or after the completion of the merger.

If we do not successfully integrate Sandpiper's operations and personnel or
effectively manage the combined company, we may not achieve the benefits of the
merger and may lose key personnel and customers.

We entered into the merger agreement with the expectation that the merger
will result in significant benefits. Achieving the benefits of the merger
depends on the timely, efficient and successful execution of a number of post-
merger events, including integrating the operations and personnel of the two
companies. We will need to overcome significant obstacles, however, in order to
realize any benefits or synergies from the merger. The successful execution of
these post-merger events will involve considerable risk and may not be
successful. Furthermore, Sandpiper's principal offices are located in Thousand
Oaks, California while Digital Island's principal offices are located in San
Francisco, California. There are currently plans to relocate Sandpiper's
principal offices to San Francisco, California. However, in order for the
merger to be successful, we must successfully integrate Sandpiper's operations
and personnel with Digital Island's operations and personnel. Our failure to
complete the integration successfully could result in the loss of key personnel
and customers.

If we fail to cross-market successfully our products or develop new products,
we will not increase or maintain our customer base or our revenues.

We initially intend to offer our products and services to each other's
customers. We cannot assure you that either of our respective customers will
have any interest in the other company's products and services. The failure of
these cross-marketing efforts would diminish the benefits realized by this
merger.

In addition, we intend after the merger to develop new products and services
that combine the knowledge and resources of the Digital Island and Sandpiper
businesses. We cannot offer any assurances that these products or services will
be successful or that we can successfully integrate or realize the anticipated
benefits of

16
<PAGE>

the merger. As a result, we may not be able to increase or maintain our
customer base. We cannot assure you that the transactions or other data in
Sandpiper's database will be predictive or useful in other sales channels,
including systems integrators, web site designers and Internet service
providers. To date, the companies have not thoroughly investigated the
obstacles, technological, market-driven or otherwise, to developing and
marketing these new products and services in a timely and efficient way. We
cannot assure you that we will be able to overcome the obstacles in developing
new products and services, or that there will be a market for the new products
or services we develop after the merger. A failure or inability like this could
have a material adverse effect on the combined company's business, financial
condition and operating results or could result in loss of key personnel. In
addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could seriously harm the combined company.

If the costs associated with the merger exceed the benefits realized, Digital
Island may experience increased losses.

If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to Digital Island's stockholders resulting from
the issuance of shares in connection with the merger, Digital Island's
financial results could be adversely affected, including increased losses.

If we do not successfully integrate Sandpiper or the merger's benefits do not
meet the expectations of financial or industry analysts, the market price for
Digital Island's common stock may decline.

The market price of Digital Island common stock may decline as a result of
the merger if:

. the integration of Digital Island and Sandpiper is unsuccessful;

. Digital Island does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial or industry analysts;
or

. the effect of the merger on Digital Island's financial results is not
consistent with the expectations of financial or industry analysts.

Sandpiper's officers and directors have conflicts of interest that may
influence them to support or approve the merger.

The directors and officers of Sandpiper participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, yours. The directors
and officers of Sandpiper could therefore be more likely to vote to approve the
merger agreement than if they did not hold these interests. Sandpiper
shareholders should consider whether these interests may have influenced these
directors and officers to support or recommend the merger.

For example:

. The Sandpiper board, in connection with approving the merger, approved
the accelerated vesting of shares of Sandpiper common stock subject to
repurchase rights of Sandpiper held by certain officers of Sandpiper.

. Upon the effectiveness of the merger, certain current officers of
Sandpiper will enter into employment agreements with Digital Island
pursuant to which such officers will receive base salaries ranging from
$170,000 to $240,000 and will become eligible to receive an annual bonus
and severance payments if terminated by Digital Island prior to the
expiration of the term of the employment agreement. Certain of the
employment agreements also provide for the grant of options to purchase
shares of Digital Island's common stock at the time of effectiveness of
the merger.

17
<PAGE>

. Because the number of shares of Digital Island's common stock outstanding
is larger than the number of shares of Sandpiper capital stock
outstanding, certain officers, directors and affiliates of Sandpiper who
receive shares of Digital Island's common stock in the merger may be
allowed to sell or transfer a greater number of shares in a single
transaction than would be possible prior to the merger pursuant to the
volume restrictions of Rule 144 of the Securities Act.

. Digital Island has agreed to cause the surviving corporation in the
merger to indemnify each present and former Sandpiper officer and
director against liabilities arising out of his or her service as an
officer or director.

See "The Merger Agreement and Related Agreements--Related Agreements--
Employment Agreements" and "The Merger--Interests of Officers and Directors in
the Merger."

Failure to complete the merger could negatively impact Sandpiper's operating
results and its ability to enter into an alternative transaction.

If the merger is not completed for any reason, Sandpiper may be subject to a
number of material risks, including the following:

. Sandpiper may be required to pay Digital Island an aggregate of $30.0
million in termination fees; and

. Sandpiper's costs related to the merger, such as legal and accounting
fees, must be paid even if the merger is not completed.

If the merger is terminated and Sandpiper's board of directors determines to
seek another merger or business combination, there can be no assurance that it
will be able to find a partner willing to pay an equivalent or more attractive
price than the price to be paid in the merger. In addition, while the merger
agreement is in effect, Sandpiper is prohibited from soliciting, initiating or
encouraging or entering into extraordinary transactions, such as a merger, sale
of assets or other business combination, with any party other than Digital
Island. As a result of this prohibition, Sandpiper will be precluded from
discussing potential transactions should the merger not occur, and may lose an
opportunity for a transaction with another potential partner at a favorable
price if the merger is not completed.

Uncertainties associated with the merger may cause Sandpiper customers to delay
or defer decisions concerning Sandpiper or may cause Sandpiper to lose
customers.

Sandpiper customers may, in response to the announcement of the merger,
delay or defer decisions concerning Sandpiper. Any delay or deferral in those
decisions by Sandpiper customers could have a material adverse effect on
Sandpiper's business. For example, Sandpiper could experience a decrease in
expected revenue as a consequence of the uncertainties associated with the
merger.

Uncertainties associated with the merger may cause Sandpiper to lose key
personnel.

Current and prospective Sandpiper employees may experience uncertainty about
their future roles with Digital Island until Digital Island's strategies with
regard to Sandpiper are announced or executed. Any uncertainty may adversely
affect Sandpiper's ability to attract and retain key management, sales,
marketing and technical personnel.

If Digital Island does not effectively manage the integration of acquired
companies other than Sandpiper, it could disrupt its business and cause
increased losses.

As a part of its business strategy, Digital Island expects to enter into
additional business combinations and acquisitions. Acquisition transactions
require a significant commitment of resources and are accompanied by a number
of risks, including:

. the difficulty of assimilating the operations and personnel of the
acquired companies;

18
<PAGE>

. the potential disruption of Digital Island's ongoing business and
distraction of management;

. the difficulty of incorporating acquired technology and rights into
Digital Island's products and services;

. unanticipated expenses related to technology integration;

. the maintenance of uniform standards, controls, procedures and policies;

. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and

. potential unknown liabilities associated with acquired businesses.

The combined company may not succeed in addressing these risks or any other
problems encountered in connection with these potential business combinations
and acquisitions, which could disrupt Digital Island's business and cause
increased losses.

Method of accounting for the merger may delay profitability of Digital Island.

The merger will be accounted for under the "purchase" method of accounting,
meaning that the purchase price for Sandpiper must be allocated to the acquired
assets and assumed liabilities of Sandpiper. The combined company's
profitability is expected to be delayed beyond the time frame in which Digital
Island or Sandpiper, as independent entities, may have otherwise achieved
profitability because of the use of the purchase method of accounting. Any
amount allocated to goodwill, preliminarily estimated at approximately $971
million, must be amortized ratably over five years. Additionally, the merger
may result in an in-process research and development charge recorded in the
quarter the merger is completed and deducted from net income in determining the
profitability of Digital Island for that quarter. Digital Island has not yet
completed an evaluation of Sandpiper's in-process research and development
projects to determine the amount, if any, of the charge.

Issuance of additional shares of Digital Island may reduce the Digital Island
stock price.

In connection with the merger, Digital Island estimates that approximately
24.5 million newly-issued shares of Digital Island common stock will be issued
to current Sandpiper shareholders. The issuance of Digital Island common stock
in the merger will reduce Digital Island's earnings per share, if any. This
dilution could reduce the market price of Digital Island common stock unless
and until the combined company achieves revenue growth or cost savings and
other business economies sufficient to offset the effect of this issuance.
There can be no assurance that Digital Island will achieve revenue growth, cost
savings or other business economies or that you will achieve greater returns as
a Digital Island stockholder than as a Sandpiper shareholder. In addition, the
immediate availability of this substantial number of additional shares of
Digital Island common stock for sale in the market could decrease the per share
market price of Digital Island common stock.

Shares eligible for future sale in the open market could depress the Digital
Island stock price.

Sales of substantial amounts of Digital Island common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market following the merger, or the appearance that a large number of
shares is available for sale, could depress the market price for Digital
Island's common stock. The number of shares of common stock available for sale
in the public market is limited by agreements under which Digital Island and
its executive offices, directors and certain other holders of outstanding
shares of common stock and options and warrants to purchase common stock have
agreed not to sell or otherwise dispose of any of their shares until December
26, 1999. In addition, Digital Island stockholders holding approximately 45% of
the outstanding common stock of Digital Island and Sandpiper shareholders
holding approximately 76% of the outstanding capital stock of Sandpiper, have
agreed not to sell their shares of Digital Island common stock from the time of
the merger until the earliest to occur of (a) the sale by Digital Island of
Digital Island common stock for its own account in a bona fide, firm commitment
underwritten public offering

19
<PAGE>

pursuant to a registration statement under the Securities Act, (b) July 15,
2000, (c) the effective date of a merger of Digital Island with or into another
corporation in which fifty (50%) or more of the voting power of Digital Island
is disposed of, or the sale of all or substantially all of the assets of
Digital Island; or (d) such other date, and with such limitations, as may be
approved by unanimous vote of the board of directors of Digital Island.

Furthermore, the holders of approximately 25 million restricted shares of
Digital Island stock are entitled to certain rights with respect to
registration of such shares for sale in the public market. If these holders
sell in the public market, such sales could have a material adverse effect on
the market price of Digital Island's common stock. In addition to the adverse
effect a price decline could have on holders of Digital Island's common stock,
that decline would likely impede Digital Island's ability to raise capital
through the issuance of additional shares of common stock or other equity
securities. See "Digital Island Shares Eligible for Future Sale" and "Certain
Transactions--Investors' Rights Agreement."

Risks Related To Digital Island

Digital Island has a short operating history upon which to base your investment
decision.

Digital Island's limited operating history makes it difficult for it to
predict future results of operations, and makes it difficult to evaluate
Digital Island or its prospects. Digital Island was incorporated in 1994, and
began offering its global applications network services in January 1997. Prior
to such time, Digital Island was engaged in activities unrelated to its current
operations, and as a result, the results of operations for such periods are not
comparable to its results of operations for 1997 or any subsequent periods.

Digital Island has incurred operating losses since its inception and expects
future operating losses for the foreseeable future.

The revenue and income potential of Digital Island's business and market is
unproven. From inception, Digital Island has experienced operating losses,
negative cash flow from operations and net losses in each quarterly and annual
period. For the fiscal year ended September 30, 1998, its operating loss,
negative cash flow from operations and net loss were $17.1 million, $15.7
million and $16.8 million, respectively. For the fiscal year ended September
30, 1999, its operating loss, negative cash flow from operations and net loss
were $52.5 million, $39.7 million and $50.9 million, respectively. As of
September 30, 1999, Digital Island had an accumulated deficit of approximately
$73.1 million.

Currently, Digital Island anticipates making significant investments in its
network infrastructure and product development as well as its sales and
marketing programs and personnel. For example, Digital Island has substantially
increased the level of its anticipated capital expenditures for network
expansion, facilities and related costs over the next 12 months to
approximately $80.0 million to $100.0 million; this increased level of
anticipated capital expenditures will require significant additional financing,
as further described in Digital Island's "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Therefore, Digital Island believes that it will continue to
experience significant losses on a quarterly and annual basis for the
foreseeable future. You must consider Digital Island and its prospects in light
of the risks and difficulties encountered by companies in new and rapidly
evolving markets. Digital Island's ability to address these risks depends on a
number of factors which include its ability to:

. market its brand name effectively to companies in its target markets;

. provide reliable and cost-effective services to attract and retain its
target customers;

. continue to grow its infrastructure to accommodate new Internet
developments and increase utilization of its network to maintain and
increase its ability to service new and existing customers; and

. expand its channels of distribution to increase its presence in its
target markets.

Digital Island may not be successful in meeting these challenges and
addressing these risks and uncertainties. If Digital Island is unable to do so,
its business will not be successful and the value of your investment in Digital
Island will decline.

20
<PAGE>

Although Digital Island has experienced growth in revenues in recent
periods, this growth rate may not be indicative of future operating results.
Digital Island may never be able to achieve or sustain profitability.

Digital Island's operating results may fluctuate in future periods which may
cause volatility or a decline in the price of its stock.

Due to a variety of factors, Digital Island expects to experience
significant fluctuations in its future results of operations, and shortfalls in
revenue may cause significant variations in its operating results in any
quarter. Such fluctuations may cause the price of Digital Island's stock to
fall. Factors, many of which are out of Digital Island's control, that could
cause its operating results to fluctuate and its stock price to fall include:

. demand for and market acceptance of its products and services may decline
or fail to increase enough to offset Digital Island's costs;

. introductions of new products and services or enhancements by Digital
Island and its competitors may increase Digital Island's costs or make
its existing products or services obsolete;

. the prices Digital Island can charge its customers may decline due to
price competition with its competitors;

. utilization of Digital Island's global network may increase beyond its
capacity and Digital Island may incur expenses to increase such capacity;

. continuity of its service and network availability could be interrupted,
reducing revenue;

. the availability and cost of bandwidth may reduce Digital Island's
ability to increase bandwidth as necessary, reducing Digital Island's
revenue;

. the timing of customer installations and the timing of expansion of
Digital Island's network infrastructure may vary from quarter to quarter;

. the mix of products and services Digital Island sells may change and the
new mix may generate less revenue;

. the timing and magnitude of Digital Island's capital expenditures,
including costs relating to the expansion of operations, may vary from
quarter to quarter;

. bandwidth used by customers may fluctuate from quarter to quarter
affecting Digital Island's profits from such customers; and

. conditions specific to the Internet industry and other general economic
factors may affect the prices Digital Island can charge or the expenses
it incurs.

In addition, a relatively large portion of Digital Island's expenses are
fixed in the short-term, particularly with respect to telecommunications
capacity, depreciation, real estate, interest and personnel, and therefore its
results of operations are particularly sensitive to fluctuations in revenues.
Due to the foregoing, Digital Island believes that period-to-period comparisons
of its operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future performance. See
Digital Island's "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Results of Operations."

Digital Island must offer services priced above the overall cost of bandwidth,
and any failure to do so will jeopardize its operating results.

If Digital Island does not obtain adequate bandwidth capacity on acceptable
terms and realize appropriate customer volume for such bandwidth, it will not
achieve positive gross profit. Digital Island purchases its bandwidth capacity
on a fixed-price basis in advance of the sale of its services for such
bandwidth. Digital Island sells its services, by contract, on the basis of
actual usage. Digital Island's bandwidth costs currently are exceeding its
revenues from the sale of services, which results in negative gross profit. In
the future, it must obtain enough bandwidth to meet its projected customer
needs, and it must realize adequate volume from its customers to support and
justify such bandwidth capacity and expense.

21
<PAGE>

Digital Island expects that its cost to obtain bandwidth capacity for the
transport of data over its network will decline over time as a result of, among
other things, the large amount of capital currently being invested to build
infrastructure providing additional bandwidth. Digital Island expects the
prices it charges for data transported over its network will also decline over
time as a result of, among other things, the lower cost of obtaining bandwidth
and existing and new competition in the markets it addresses. As a result,
Digital Island's historical revenue rates are not indicative of future revenue
based on comparable traffic volumes. If Digital Island fails to accurately
predict the decline in costs of bandwidth or, in any event, if Digital Island
is unable to sell its services at acceptable prices relative to its bandwidth
costs, or if it fails to offer additional services from which it can derive
additional revenues, Digital Island's revenues will decrease and its business
and financial results will suffer.

Digital Island's data replication (mirroring) and storage (caching) business
is attractive to customers primarily because these services eliminate a
significant portion of the cost of transporting data by deploying data in close
proximity to the end users. To the extent bandwidth costs decrease, the prices
Digital Island may charge for these services will decrease as well. If the cost
of bandwidth decreases in excess of Digital Island's expectations, the value of
these services could be substantially reduced, which would harm Digital
Island's business and financial results.

Digital Island must retain and expand its customer base or else it will
continue to be unprofitable.

Digital Island currently incurs costs greater than its revenues, and needs
to increase customer revenue in order to become profitable. Digital Island
incurs significant fixed costs to purchase its bandwidth capacity and maintain
its network. Digital Island also has payroll and other working capital needs.
If Digital Island is unable to retain or grow its customer base, it will not be
able to increase its sales and revenues or create economies of scale to offset
its fixed and other operating costs. Digital Island's ability to attract new
customers depends on a variety of factors, including:

. the willingness of businesses to outsource their Internet operations;

. the reliability and cost-effectiveness of Digital Island's services; and

. Digital Island's ability to effectively market such services.

To attract new customers Digital Island intends to significantly increase
its sales and marketing expenditures. However, Digital Island's efforts might
not result in more sales as a result of the following factors:

. Digital Island may be unsuccessful in implementing its marketing
strategies;

. Digital Island may be unsuccessful in hiring a sufficient number of
qualified sales and marketing personnel; and

. any implemented strategies might not result in increased sales.

Any failure of Digital Island's network infrastructure could lead to
significant costs and disruptions which could reduce its revenues and harm its
business and financial results.

Digital Island's business is dependent on providing its customers with fast,
efficient and reliable network services. To meet these customer requirements it
must protect its network infrastructure against damage from:

. human error;

. fire;

. natural disasters;

. power loss;

22
<PAGE>

. telecommunications failures; and

. similar events.

Despite precautions taken by Digital Island, the occurrence of a natural
disaster or other unanticipated problems at one or more of its data centers
could result in service interruptions or significant damage to equipment.
Digital Island has experienced temporary service interruptions in the past, and
it could experience similar interruptions in the future.

Any failure of Digital Island's telecommunications providers to provide
required data communications capacity to Digital Island could result in
interruptions in its services.

Digital Island's operations are dependent upon data communications capacity
provided by third-party telecommunications providers. Any failure of such
telecommunications providers to provide the capacity Digital Island requires
may result in a reduction in, or termination of, services to its customers.
This could cause Digital Island to lose customers or fees charged to such
customers, and Digital Island's business and financial results could suffer.

Future customer warranty claims based on service failures could exceed Digital
Island's insurance coverage.

Digital Island's customer contracts currently provide limited service level
warranties related to the availability of service on a 24 hours a day, seven
days per week basis, except for certain scheduled maintenance periods, and for
packet losses. This warranty is limited to a credit for a limited amount for a
period of time for disruptions in Internet transmission services and/or certain
levels of packet losses. To date, Digital Island has had no material expense
related to such service level warranties. Should Digital Island incur
significant obligations in connection with system downtime, Digital Island's
liability insurance may not be adequate to cover such expenses. Although
Digital Island's customer contracts typically provide for no recovery with
respect to incidental, punitive, indirect and consequential damages resulting
from damages to equipment or disruption of service, in the event of such
damages, Digital Island may be found liable, and, in such event, such damages
may exceed its liability insurance.

Digital Island's failure to make timely upgrades to increase the capacity of
its network may reduce demand for its services.

Due to the limited deployment of Digital Island's services to date, the
ability of its network to connect and manage a substantially larger number of
customers at high transmission speeds is as yet unknown. Digital Island's
network may not be able to be scaled up to expected customer levels while
maintaining superior performance or that additional network capacity will be
available from third-party suppliers as it is needed by Digital Island. In
addition, as customers' usage of bandwidth increases, Digital Island will need
to make additional investments in its infrastructure to maintain adequate
downstream data transmission speeds, the availability of which may be limited
or the cost of which may be significant. Upgrading Digital Island's
infrastructure may cause delays or failures in its network. As a result,
Digital Island's network may be unable to achieve or maintain a sufficiently
high capacity of data transmission as usage by its customers increases. Digital
Island's failure to achieve or maintain high capacity data transmission could
significantly reduce demand for its services, reducing its revenues and causing
its business and financial results to suffer.

Digital Island cannot accurately predict the size of its market, and if its
market does not grow as it expects, Digital Island's revenues will be below its
expectations and its business and financial results will suffer.

Digital Island is a new company engaging in a developing business with an
unproven market. Accordingly, Digital Island cannot accurately estimate the
size of its market or the potential demand for its services. If Digital
Island's customer base does not expand or if there is not widespread acceptance
of Digital Island's

23
<PAGE>

products and its services, its business and prospects will be harmed. For the
fiscal year ended September 30, 1999, it had 83 billing customers, of which
one, E*TRADE, accounted for approximately 35% of its revenues. Digital Island
believes that its potential to grow and increase its market acceptance depends
principally on the following factors, some of which are beyond its control:

. the effectiveness of its marketing strategy and efforts;

. its product and service differentiation and quality;

. the extent of its network coverage;

. its ability to provide timely, effective customer support;

. its distribution and pricing strategies as compared to its competitors;

. its industry reputation; and

. general economic conditions such as downturns in the computer or software
markets.

Digital Island will require significant additional capital, which it may not be
able to obtain.

The expansion and development of Digital Island's business will require
significant capital in the future to fund its operating losses, working capital
needs and capital expenditures. Digital Island may not be able to obtain future
equity or debt financing on satisfactory terms or at all. Digital Island's
failure to generate sufficient cash flows from sales of services or to raise
sufficient funds may require it to delay or abandon some or all of its
development and expansion plans or otherwise forego market opportunities. In
addition, Digital Island's credit agreements contain covenants restricting its
ability to incur further indebtedness, and future borrowing instruments such as
credit facilities and lease agreements are likely to contain similar or more
restrictive covenants and will likely require Digital Island to pledge assets
as security for borrowings thereunder. Digital Island's inability to obtain
additional capital on satisfactory terms may delay or prevent the expansion of
its business, which could cause its business and financial results to suffer.

Digital Island's principal capital expenditures and lease payments include
the purchase, lease and installation of network equipment such as switches,
routers, servers and storage devices. Digital Island's working capital is
primarily comprised of accounts receivable, accounts payable and accrued
expenses. The timing and amount of Digital Island's future capital requirements
may vary significantly depending on numerous factors, including regulatory,
technological, competitive and other developments in its industry. Due to the
uncertainty of these factors, Digital Island's actual revenues and costs may
vary from expected amounts, possibly to a material degree, and such variations
are likely to affect its future capital requirements. See Digital Island's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

Rapid growth in Digital Island's business could strain its resources and harm
its business and financial results.

The planned expansion of Digital Island's operations will place a
significant strain on its management, financial controls, operations systems,
personnel and other resources. Digital Island expects that its customers
increasingly will demand additional information and reports with respect to the
services it provides. To handle these demands and enable future traffic growth,
Digital Island must develop and implement an automated customer service system.
In addition, if Digital Island is successful in implementing its marketing
strategy, Digital Island also expects the demands on its network infrastructure
and technical support resources to grow rapidly, and it may experience
difficulties responding to customer demand for its services and providing
technical support in accordance with its customers' expectations. Digital
Island expects that these demands will require not only the addition of new
management personnel, but also the development of additional expertise by
existing management personnel and the establishment of long-term relationships
with third-party service vendors. Digital Island may not be able to keep pace
with any growth, successfully implement and maintain its

24
<PAGE>

operational and financial systems or successfully obtain, integrate and utilize
the employees, facilities, third-party vendors and equipment, or management,
operational and financial resources necessary to manage a developing and
expanding business in its evolving and increasingly competitive industry. If
Digital Island is unable to manage growth effectively, it may lose customers or
fail to attract new customers and its business and financial results will
suffer. See Digital Island's "Business--Business Strategy."

Digital Island could lose customers and expose the company to liability if
breaches of its network security disrupt service to its customers or jeopardize
the security of confidential information stored in its computer systems.

Despite the implementation of network security measures, Digital Island's
network infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by its customers or Internet users. Any of these
acts could lead to interruptions, delays or cessation in service to Digital
Island's customers and subscribers. Furthermore, such inappropriate use of the
network by third parties could also potentially jeopardize the security of
confidential information stored in its computer systems and its customers
computer systems, which may result in liability to and may also deter potential
customers. Although Digital Island intends to continue to implement industry-
standard security measures, any measures it implements may be circumvented in
the future. The costs and resources required to eliminate computer viruses and
alleviate other security problems may result in interruptions or delays to its
customers that could cause its business and financial results to suffer.

The integration of key new employees and officers into Digital Island's
management team has interfered, and will continue to interfere, with its
operations.

Digital Island has recently hired a number of key employees and officers
including its chief financial officer, vice president of sales and vice
president of corporate development, each of whom has been with Digital Island
for less than a year. To integrate into Digital Island, such individuals must
spend a significant amount of time learning its business model and management
system, in addition to performing their regular duties. Accordingly, the
integration of new personnel has resulted and will continue to result in some
disruption to Digital Island's ongoing operations. If Digital Island fails to
complete this integration in an efficient manner, its business and financial
results will suffer.

Digital Island must retain and attract key employees or else it may not grow or
be successful.

Digital Island is highly dependent on key members of its management and
engineering staff, including, without limitation, its president and chief
executive officer, chief technology officer and vice president of marketing.
The loss of one or more of these officers might impede the achievement of
Digital Island's business objectives. Furthermore, recruiting and retaining
qualified technical personnel to perform research, development and technical
support work is critical to its success. If Digital Island's business grows, it
will also need to recruit a significant number of management, technical and
other personnel for its business. Competition for employees in Digital Island's
industry is intense. Digital Island may not be able to continue to attract and
retain skilled and experienced personnel on acceptable terms. See Digital
Island's "Business--Employees" and "Management."

Digital Island depends on a limited number of third party suppliers for key
components of its network infrastructure, and the loss of one or more suppliers
may slow its growth or cause it to lose customers.

Digital Island is dependent on other companies to supply key components of
its infrastructure, including bandwidth capacity leased from telecommunications
network providers and networking equipment that, in the quantities and quality
demanded by it, are available only from sole or limited sources. While Digital
Island has entered into various agreements for carrier line capacity, any
failure to obtain additional capacity, if required, would impede the growth of
its business and cause its financial results to suffer. The routers and
switches used in its infrastructure are currently supplied primarily by Cisco
Systems. Digital Island purchases these

25
<PAGE>

components pursuant to purchase orders placed from time to time, it does not
carry significant inventories of these components and it has no guaranteed
supply arrangements with this vendor. Any failure to obtain required products
or services on a timely basis and at an acceptable cost would impede the growth
of its business and cause its financial results to suffer. In addition, any
failure of Digital Island's sole or limited source suppliers to provide
products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components used by Digital Island in its communications infrastructure could
cause its business and financial results to suffer.

Digital Island's failure to adequately protect its proprietary rights may harm
its competitive position.

Digital Island relies on a combination of copyrights, trademark, service
mark and trade secret laws and contractual restrictions to establish and
protect proprietary rights in its products and services. However, Digital
Island will not be able to protect its intellectual property if it is unable to
enforce its rights or if it does not detect unauthorized use of its
intellectual property.

Although Digital Island has filed a patent application with respect to its
TraceWare technology with the United States Patent and Trademark Office, such
application is pending and Digital Island currently has no patented technology
that would preclude or inhibit competitors from entering its market. Moreover,
none of Digital Island's technology is patented abroad, nor does it currently
have any international patent applications pending. Digital Island cannot be
certain that any pending or future patent applications will be granted, that
any future patent will not be challenged, invalidated or circumvented, or that
rights granted under any patent that may be issued will provide competitive
advantages to Digital Island.

Digital Island has applied for trademarks and service marks on certain terms
and symbols that it believes are important for its business. In addition, it
generally enters into confidentiality or license agreements with its employees
and consultants and with its customers and corporations with whom Digital
Island has strategic relationships, and Digital Island attempts to maintain
control over access to and distribution of its software documentation and other
proprietary information. However, the steps Digital Island has taken to protect
its technology or intellectual property may be inadequate. Digital Island's
competitors may independently develop technologies that are substantially
equivalent or superior to Digital Island's. Moreover, in other countries where
Digital Island does business, there may not be effective legal protection of
patents and other proprietary rights that Digital Island believes are important
to Digital Island's business. See Digital Island's "Business--Intellectual
Property Rights."

Digital Island may be unable to license necessary technology and it may be
subject to infringement claims by third parties.

Digital Island's commercial success will also depend in part on not
infringing the proprietary rights of others and not breaching technology
licenses that cover technology used in its products. It is uncertain whether
any third party patents will require Digital Island to develop alternative
technology or to alter its products or processes, obtain licenses or cease
activities that infringe on third party's intellectual property rights. If any
such licenses are required, Digital Island may not be able to obtain such
licenses on commercially favorable terms, if at all. Digital Island's failure
to obtain a license to any technology that it may require to commercialize its
products and services could cause its business and prospects to suffer.
Litigation, which could result in substantial cost to Digital Island, may also
be necessary to enforce any patents issued or licensed to it or to determine
the scope and validity of third party proprietary rights. See Digital Island's
"Business--Intellectual Property Rights."

Digital Island is subject to risks associated with entering into joint
ventures, including inconsistent goals and exposure to unknown liabilities and
unexpected obligations.

Digital Island's strategy is to pursue international expansion through
relationships and joint ventures with local Internet service providers and
telecommunications carriers in other countries. Digital Island may not have a
majority interest or control of the governing body of any such local operating
joint venture. In any such joint

26
<PAGE>

venture in which Digital Island may participate, there will be a risk that the
other joint venture partner may at any time have economic, business or legal
interests or goals that are inconsistent with those of the joint venture or of
Digital Island. The risk also will be present that a joint venture partner may
be unable to meet its economic or other obligations and that Digital Island may
be required to fulfill those obligations. In addition, in any joint venture in
which Digital Island does not have a majority interest, it may not have control
over the operations or assets of such joint venture. Digital Island may not be
able to establish peering relationships or joint ventures with local Internet
service providers and telecommunications carriers in other countries on
favorable terms or at all. Digital Island's failure to establish these
relationships may cause Digital Island to lose customers or slow its growth and
its business and financial results would suffer.

Acquisitions Digital Island makes could disrupt its business and harm its
financial condition.

Digital Island intends to make investments in other complementary companies,
products and technologies in the future. In the event of any future purchases,
Digital Island could:

. issue stock that would dilute the ownership of its then existing
shareholders, including investors who purchase common stock in this
offering;

. incur debt;

. assume liabilities;

. incur amortization expenses related to goodwill and other intangible
assets; or

. incur large and immediate write-offs.

These purchases also involve numerous risks, including:

. problems integrating the operations, technologies or products purchased
with those Digital Island already has;

. unanticipated costs;

. diversion of management's attention from Digital Island's core business;

. adverse effects on existing business relationships with suppliers and
customers;

. risks associated with entering markets in which Digital Island has no or
limited prior experience; and

. potential loss of key employees, particularly those of the purchased
organizations.

Digital Island has anti-takeover defenses that could delay or prevent a
takeover that stockholders may consider favorable.

Certain provisions of Digital Island's certificate of incorporation and
bylaws and the provisions of Delaware law could have the effect of delaying,
deferring or preventing an acquisition of Digital Island. For example, its
board of directors is divided into three classes to serve staggered three-year
terms, Digital Island may authorize the issuance of up to 10,000,000 shares of
"blank check" preferred stock, Digital Island's stockholders may not take
actions by written consent and its stockholders are limited in their ability to
make proposals at stockholder meetings. See Digital Island's "Description of
Capital Stock" for a further discussion of these provisions.

Digital Island stock will likely be subject to substantial price and volume
fluctuations due to a number of factors, some of which are beyond Digital
Island's control.

Stock prices and trading volumes for many Internet companies fluctuate
widely for a number of reasons, including some reasons which may be unrelated
to their businesses or results of operations. This market volatility, as well
as general domestic or international economic, market and political conditions,
could materially adversely affect the price of Digital Island's common stock
without regard to its operating performance. In addition, Digital Island's
operating results may be below the expectations of public market analysts and
investors. If this were to occur, the market price of Digital Island's common
stock would likely significantly decrease.

27
<PAGE>

Risks Related To Sandpiper

Sandpiper has a limited operating history, which may limit your ability to
evaluate its business.

Sandpiper commenced operations in December 1996 and introduced its service
in September 1998, and therefore has a limited operating history. This may
limit your ability to evaluate its prospects and performance, and an investment
in its common stock, due to:

. its limited historical financial data;

. its unproven potential to generate profits; and

. its limited experience in addressing emerging trends that may affect
Sandpiper's business.

You should consider Sandpiper's prospects in light of the risks, expenses
and difficulties it may encounter as an early stage company in the new and
rapidly evolving market for Internet content delivery solutions. As a result of
such risks, expenses and difficulties, Sandpiper may not be able to:

. successfully market its content delivery solution;

. maintain and expand its market share in the highly competitive market for
Internet content delivery solutions;

. timely and effectively introduce new services and service enhancements
that are responsive to the needs of its customers; and

. attract, train and retain qualified sales, technical and customer support
personnel.

Sandpiper discusses these and other risks in more detail below.

Sandpiper has a history of losses, expects continuing losses and may never
achieve profitability.

Sandpiper has never been profitable. Sandpiper has incurred significant
losses since inception and expects to continue to incur significant losses for
the foreseeable future. Sandpiper reported a net loss of approximately $5.1
million for the year ended December 31, 1998, and approximately $10.1 million
for the nine months ended September 30, 1999. As of September 30, 1999,
Sandpiper had an accumulated deficit of $15.5 million. Sandpiper cannot be
certain that its revenue will grow or that it will achieve sufficient revenue
to achieve profitability. Sandpiper's failure to significantly increase its
revenue would seriously harm its business and operating results. Sandpiper's
operating expenses are largely based on anticipated revenue trends, and a high
percentage of its expenses are, and will continue to be, fixed in the short
term. In addition, Sandpiper expects to continue to incur significant and
increasing sales and marketing, product development, administrative and other
expenses, including fees to obtain access to bandwidth for the transport of
data over its network. As a result, Sandpiper will need to generate
significantly higher revenues to achieve and maintain profitability. If
Sandpiper's revenue grows more slowly than it anticipates or if its operating
expenses increase more than it expects or cannot be reduced in the event of
lower revenue, Sandpiper's business will be materially and adversely affected.

Sandpiper's quarterly financial performance is likely to be unpredictable in
the future.

Sandpiper's revenue and operating results will vary significantly from
quarter to quarter due to a number of factors, many of which are outside of its
control. The primary factors that may affect Sandpiper include the following:

. the timing and size of sales of its services;

. changes in its pricing policies or the pricing policies of its
competitors;

. the length of the sales cycle and implementation periods for its
services;

28
<PAGE>

. increases in the prices of, and the availability of, the products and
services it purchases, including bandwidth;

. new product and service introductions and enhancements by its competitors
and Sandpiper itself;

. its ability to attain and maintain quality levels for its services;

. costs related to acquisitions of technology or businesses; and

. general economic conditions as well as those specific to the Internet and
related industries.

In addition, Sandpiper's quarterly operating results have been, and are
likely to continue to be, influenced by seasonal fluctuations in its sales.
Because its sales have grown in each quarter since its inception, these
fluctuations may not be apparent from its historical financial statements.
However, Sandpiper believes that its sales and sales growth from period to
period have been, and will continue to be, affected by the seasonal demand for
Sandpiper's services from its customers, which will be in turn primarily
dependent upon the demand for their services from their customers. For example,
Sandpiper believes that Internet usage will continue to peak, at least in the
next several years, in the fourth quarter of each calendar year as a result of
the increase in e-commerce transactions resulting from the holiday season. As a
result, Sandpiper anticipates that its revenue may peak in the first quarter of
each calendar year due to the nature of its deferred billing cycles. Due to the
above factors, Sandpiper believes that quarter-to-quarter comparisons of its
operating results are not a good indication of its future performance.

Sandpiper's business will suffer if it does not anticipate and meet specific
customer requirements.

In general, Sandpiper enters into 12-month contracts with its customers to
provide Internet content delivery services. These contracts typically include
specific performance requirements, including the features provided,
reliability, processing speed and similar requirements. In addition,
Sandpiper's current and prospective customers may require features and
capabilities that its current service offering does not have. To achieve market
acceptance for its service, it must effectively and timely anticipate and adapt
to customer requirements and offer services that meet customer demands.
Sandpiper's failure to offer services that satisfy customer requirements would
seriously harm its business, results of operations and financial condition.

Sandpiper intends to continue to invest in technology development. The
development of new or enhanced services is a complex and uncertain process that
requires the accurate anticipation of technological and market trends.
Sandpiper may experience design, manufacturing, marketing and other
difficulties that could delay or prevent the development, introduction or
marketing of new services as well as enhancements. The introduction of new or
enhanced services also requires that Sandpiper manage the transition from older
services in order to minimize disruption in customer ordering patterns and
ensure that it can deliver services to meet anticipated customer demand.
Sandpiper's inability to effectively manage this transition would materially
adversely affect its business, results of operations and financial condition.

Sandpiper's business will suffer if it is not able to scale its network as
demand increases.

Sandpiper has had only limited deployment of its Internet content delivery
service to date, and Sandpiper cannot be certain that its network can connect
and manage a substantially larger number of customers at high transmission
speeds. Sandpiper may not be able to scale its network to expected customer
levels while maintaining superior performance. In addition, as customers' usage
of bandwidth increases, Sandpiper will need to make additional investments in
its infrastructure to maintain adequate downstream data transmission speeds.
Sandpiper cannot assure you that it will be able to make these investments
successfully or at an acceptable cost. Upgrading Sandpiper's infrastructure may
cause delays or failures in its network. As a result, in the future Sandpiper's
network may be unable to achieve or maintain a sufficiently high transmission
capacity. Sandpiper's failure to achieve or maintain high capacity data
transmission could significantly reduce demand for its service, reducing its
revenue and causing its business and financial results to suffer.

29
<PAGE>

A limited number of customers will account for a high percentage of Sandpiper's
revenue, and the loss of a key customer would adversely affect its revenues and
be perceived as a loss of momentum in its business.

Sandpiper expects that a small number of its customers will account for a
substantial portion of its revenues for the foreseeable future. As a result of
this concentration of Sandpiper's customer base, a loss of or decrease in
business from one or more of these customers would materially adversely affect
its revenues, business and prospects. Similarly, if Sandpiper's customers are
unsuccessful in competing for end users in their own intensely competitive
markets or experience other financial or operating difficulties, its revenues,
business and prospects would be materially adversely affected. Potential
customers of Sandpiper and public market analysts or investors may perceive any
loss of a customer as a loss of momentum in Sandpiper's business, which may
adversely affect future opportunities to sell its products and services and
cause its stock price to decline. Also, Sandpiper cannot be sure that its major
customers, individually or as a group, will continue to generate revenues in
any future period.

Sandpiper's operating results may fluctuate because the sales cycle for its
services is long.

To date, Sandpiper's customers have taken a long time to evaluate its
services, and many people within its customers' organizations have been
involved in the process. Along with Sandpiper's distribution partners, it
spends a significant amount of time educating and providing information to its
prospective customers regarding the use and benefits of Sandpiper's services.
Even after purchase, Sandpiper's customers tend to deploy Footprint and its
other services slowly and deliberately, depending on the skill set of the
customer, the size of the deployment, the complexity of the customer's network
environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy its services. The long sales and
implementation cycles for Sandpiper's services may cause license revenues and
operating results to vary significantly from period to period.

Because Sandpiper's Internet content delivery service is complex and is
deployed in complex environments, it may have errors or defects that could
seriously harm Sandpiper's business.

Sandpiper's Internet content delivery service is highly complex and is
designed to be deployed in very large and complex networks. Because of the
nature of Sandpiper's service, it can only fully test it when it is fully
deployed in very large networks with high traffic. As of October 1, 1999,
Sandpiper's network of Sun SPARC servers were located across 25 distinct
networks in more than five countries worldwide. Sandpiper and its customers
have from time to time discovered errors and defects in its software. In the
future, there may be additional errors and defects in Sandpiper's software that
may adversely affect its service. If Sandpiper is unable efficiently to fix
errors or other problems that may be identified, it could experience:

. loss of or delay in revenue and loss of market share;

. loss of customers;

. failure to attract new customers or achieve market acceptance;

. diversion of development resources;

. loss of reputation and credibility;

. increased service costs; and

. legal actions by Sandpiper's customers.

Sandpiper's business will suffer if it does not respond rapidly to
technological changes.

The market for Internet content delivery services is likely to be
characterized by rapid technological change, frequent new product introductions
and changes in customer requirements. Sandpiper may be unable to

30
<PAGE>

respond quickly or effectively to these developments. If existing or
prospective competitors introduce products, services or technologies that are
better than Sandpiper's or that gain greater market acceptance, or if new
industry standards emerge, Sandpiper's service may become obsolete, which would
materially and adversely affect its business, results of operations and
financial condition.

In developing Sandpiper's service, it has made, and will continue to make,
assumptions about the standards that its customers and competitors may adopt.
If the standards adopted are different from those which Sandpiper has chosen to
support, market acceptance of its service may be significantly reduced or
delayed and its business will be seriously harmed. In addition, the
introduction of services or products incorporating new technologies and the
emergence of new industry standards could render Sandpiper's existing service
obsolete.

Sandpiper's brand is not well-known, and failure to develop brand recognition
could hurt its ability to compete effectively.

To successfully execute Sandpiper's strategy, it must strengthen its brand
awareness. If Sandpiper does not build its brand awareness, its ability to
realize its strategic and financial objectives could be hurt. Many of
Sandpiper's competitors and potential competitors have well-established brands
associated with the provision of Internet services. To date, Sandpiper's market
presence has been limited principally to the Atlanta, Boston, Chicago, Dallas,
London, Los Angeles, New York, San Francisco and Washington, D.C. metropolitan
areas. To date, Sandpiper has attracted its existing customers primarily
through a relatively small sales force, word of mouth, and targeted media
advertising. In order to build Sandpiper's brand awareness, it intends to
significantly increase its marketing efforts, which may not be successful, and
it must continue to provide high quality services. As part of Sandpiper's brand
building efforts, it expects to increase its marketing budget substantially as
well as its marketing activities, including advertising, tradeshows, direct
response programs and new launch events. Sandpiper may not succeed as planned.

Sandpiper is dependent on certain members of its senior management, the loss of
whom would negatively affect its business.

Sandpiper's future success depends in large part on the continued services
of its senior management and key personnel. In particular, Sandpiper is highly
dependent on the services of Leo Spiegel, its chief executive officer and
president, David Farber, its chief technology officer, and Andrew Swart, its
vice president of engineering. Sandpiper does not have employment contracts
with any member of its senior management. Any loss of the services of Messrs.
Spiegel, Farber or Swart, other members of senior management or other key
personnel would negatively affect Sandpiper's business.

Any failure of Sandpiper's network infrastructure could lead to significant
costs and disruptions that could reduce its revenue and harm its business,
financial results and reputation.

Sandpiper's business is dependent on providing its customers with fast,
efficient and reliable Internet content delivery. To meet these customer
requirements, Sandpiper must protect its network infrastructure, including in
particular its network operations center, against damage from:

. human error;

. physical or electronic security breaches;

. fire, earthquake, flood and other natural disasters;

. power loss;

. sabotage and vandalism; and

. similar events.

31
<PAGE>

Despite precautions Sandpiper has taken, the occurrence of a natural
disaster or other unanticipated problems at its network operations center or at
one or more of its servers or server clusters could result in service
interruptions or significant damage to equipment. Sandpiper provides a service
guarantee that its networks will deliver Internet content 24 hours a day, seven
days a week, 365 days a year. If Sandpiper does not provide this service, the
customer does not pay for its services on that day. Any widespread loss of
services would reduce Sandpiper's revenue, and could harm its business,
financial results and reputation.

If any of Sandpiper's strategic alliances terminate, then its business could be
adversely affected.

Sandpiper entered into a strategic alliance with AOL in April 1999 and with
Microsoft in August 1999. Under each of these agreements, Sandpiper seeks to
jointly develop technology, services and/or products with its strategic
alliance partners. Sandpiper may not be successful in developing these
products. The AOL agreement expires in December 2001, and the agreement with
Microsoft expires in August 2002. Each agreement may be terminated by either
party if the other party materially breaches the agreement. A termination of,
or significant adverse change in, Sandpiper's relationship with AOL or
Microsoft could have a material adverse effect on its business.

Sandpiper's business will suffer if it fails to manage its growth properly.

Since Sandpiper's inception, it has continued to increase the scope of its
operations and has grown its headcount substantially. Sandpiper's total number
of employees has grown from 41 as of January 1, 1999 to 86 as of October 31,
1999. This growth has placed, and Sandpiper's anticipated growth will continue
to place, a significant strain on its management systems and resources.
Sandpiper plans to continue to hire a significant number of key officers and
other employees this year and to increase significantly its operating expenses
to fund greater levels of engineering and development, expand its sales and
marketing operations, broaden its customer support capabilities and develop new
distribution channels.

Sandpiper has recently hired and plans to hire in the near future a number
of key employees and officers. To be integrated into Sandpiper, these
individuals must spend a significant amount of time learning its business model
and management system, in addition to performing their regular duties.
Accordingly, the integration of new personnel has resulted and will continue to
result in some disruption to ongoing operations. If Sandpiper fails to complete
this integration in an efficient manner, its business and financial results
will suffer.

Sandpiper's historical revenue rates may not be indicative of future revenue
rates because the rates it charges for its services may decline over time.

Sandpiper expects that its cost to obtain bandwidth capacity for the
transport of data over its network will decline over time as a result of, among
other things, the large amount of capital currently being invested to build
infrastructure providing additional bandwidth. Sandpiper expects the prices it
charges for data transported over its network will also decline over time as a
result of, among other things, the lower cost of obtaining bandwidth and
existing and new competition in the markets it addresses. As a result,
Sandpiper's historical revenue rates are not indicative of future revenue based
on comparable traffic volumes. If Sandpiper fails to accurately predict the
decline in the costs of bandwidth or, in any event, if Sandpiper is unable to
sell its services at acceptable prices relative to its bandwidth costs, or if
Sandpiper fails to offer additional services from which it can derive
additional revenue, its revenue will decrease and Sandpiper's business and
financial results will suffer.

Sandpiper has limited sales and marketing experience, and its business will
suffer if it does not expand its direct and indirect sales organizations and
its customer service and support operations.

Sandpiper currently has limited sales and marketing experience. Sandpiper's
limited experience may restrict its success in commercializing its service.
Sandpiper's service requires a sophisticated sales effort targeted at a limited
number of key people within its prospective customers' organizations. This
sales effort

32
<PAGE>

requires the efforts of trained sales personnel. Sandpiper needs to expand its
marketing and sales organization in order to increase market awareness of its
services to a greater number of organizations and generate increased revenue.
Sandpiper is in the process of developing its direct sales force and plans to
hire additional qualified sales personnel. Competition for these individuals is
intense, and Sandpiper might not be able to hire the kind and number of sales
personnel it needs. In addition, Sandpiper believes that its future success is
dependent upon its ability to establish successful relationships with a variety
of distribution partners. If Sandpiper is unable to expand its direct and
indirect sales operations, it may not be able to increase market awareness or
sales of its service, which may prevent it from achieving and maintaining
profitability.

Similarly, the complexity of Sandpiper's service and the difficulty of
implementing it requires highly trained customer service and support personnel.
Hiring such personnel is very competitive in Sandpiper's industry because there
is a limited number of people available with the necessary technical skills and
understanding of its market. Once Sandpiper hires them, they require extensive
training in Sandpiper's Internet content delivery service. If Sandpiper is
unable to expand its customer service and support organization and train them
as rapidly as necessary, Sandpiper may not be able to increase sales of its
service, which would seriously harm its business.

Sandpiper could incur substantial costs defending its intellectual property
from infringement or a claim of infringement.

Other companies, including Sandpiper's competitors, may obtain patents or
other proprietary rights that would prevent, limit or interfere with
Sandpiper's ability to make, use or sell its service. As a result, Sandpiper
may be found to infringe on the proprietary rights of others. In the event of a
successful claim of infringement against Sandpiper and its failure or inability
to license the infringed technology, Sandpiper's business and operating results
would be significantly harmed. Companies in the Internet market are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. Any litigation or claims, whether or not valid,
could result in substantial costs and diversion of resources. Intellectual
property litigation or claims could force Sandpiper to do one or more of the
following:

. cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;

. obtain a license from the holder of the infringed intellectual property
right, which license, if available at all, may not be available on
reasonable terms; and

. redesign products or services.

If Sandpiper is forced to take any of the foregoing actions, its business
may be seriously harmed. Sandpiper expects that its insurance may not cover
potential claims of this type or may not be adequate to indemnify it for all
liability that may be imposed.

Sandpiper's failure to protect its intellectual property rights could adversely
affect its ability to compete.

Sandpiper's success and ability to compete are substantially dependent upon
its internally developed technology, which it protects through a combination of
patent, copyright, trade secret and trademark law. Sandpiper generally enters
into confidentiality or license agreements with its employees, consultants and
strategic affiliates, and generally controls access to and distribution of its
software, documentation and other proprietary information. Despite Sandpiper's
efforts to protect Sandpiper's proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use its products and technology.
Policing unauthorized use of Sandpiper's products is difficult, and it cannot
be sure that the steps it has taken will prevent misappropriation of its
technology, particularly in foreign countries where the laws may not protect
proprietary rights as fully as in the United States.

33
<PAGE>

Sandpiper may be subject to regulation, taxation, enforcement or other
liabilities in unexpected jurisdictions.

Sandpiper provides its Internet content delivery service to customers
located throughout the United States and in several foreign countries. As a
result, Sandpiper may be required to qualify to do business, or be subject to
tax or other laws and regulations, in these jurisdictions even if it does 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
Sandpiper could find it is subject to regulation, taxation, enforcement or
other liability in unexpected ways, which could materially adversely affect its
business, financial condition and results of operations.

Risks Related To The Industry Of Digital Island And Sandpiper

We may not be able to compete in our market since it is highly competitive and
has many more established competitors, and we may lose market share as a
result.

Our market is highly competitive and this competition could harm our ability
to sell our services and products on prices and terms favorable to us. Some of
our current or potential competitors have the financial resources to withstand
substantial price competition, and many may be able to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. Moreover, many of our competitors have more extensive customer
bases, broader customer relationships and broader industry alliances that they
could use to their advantage in competitive situations, including relationships
with many of our current and potential customers. In particular, certain
Sandpiper competitors have strategic alliances with entities that have entered
into similar alliances with Sandpiper, including Microsoft.

There are few substantial barriers to entry and we expect that we will face
additional competition from existing competitors and new market entrants in the
future. We compete against information technology and Internet outsourcing
firms, national and regional Internet service providers, and global, regional
and local telecommunications companies.

Digital Island's competitors include companies such as Metromedia/AboveNet
Communications, Inc., AT&T Corp., Exodus Communications, Inc., GTE Corporation,
MCI WorldCom, Inc. and Qwest. Many of our competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than we do. Our larger competitors may be able to
provide customers with additional benefits in connection with their Internet
systems and network solutions, including reduced communications costs. As a
result, these companies may be able to price their products and services more
competitively than we can and respond more quickly than us to new or emerging
technologies and changes in customer requirements. If we are unable to compete
successfully against our current or future competitors, we may lose market
share, and our business and prospects would suffer.

As competition in the Internet content delivery market continues to
intensify, new solutions will come to market. Sandpiper is aware of at least
one company, Akamai Technologies, Inc., that competes directly with its
Footprint solution platform. Sandpiper also believes that it may face
competition from other providers of competing Internet content delivery
services, including networking hardware and software manufacturers, content
distribution providers, traditional hardware manufacturers, telecommunications
providers, software database companies, and large diversified software and
technology companies. Some of these competitors may bundle their services with
other software or hardware in a manner that may discourage website owners from
purchasing any service Sandpiper offers or Internet service providers from
installing its servers. In addition, if those third party telecommunications
providers upon which Sandpiper is currently dependent for transmission capacity
determine to compete with Sandpiper in the Internet content delivery market,
their refusal to provide it with capacity, at the points of presence required
in order to deploy Sandpiper's network and service its customers efficiently,
could result in a degradation or termination of service to certain of its
customers. As a result, Sandpiper could lose customers or fees charged to such
customers, and its business and financial results could suffer.

34
<PAGE>

In addition, no assurances can be given that the Internet content delivery
market will develop in a way that Sandpiper currently anticipates. For example,
while Sandpiper currently intends to offer its customers the most comprehensive
solution available in the marketplace today, there currently exists an array of
competitors that offer partial solutions to the problems that Sandpiper intends
to address, and a number of these companies have been and are likely to
continue to be quite successful. Examples of products and services that address
Internet performance problems include Internet content delivery services and
streaming content delivery services, as well as equipment and software based
solutions such as caching, load balancers and server switches. Sandpiper cannot
assure you that these solutions will not remain more cost effective than its
service or will not continue to be the service of choice for many of its
potential customers.

Increased competition could result in:

. price and revenue reductions and lower profit margins;

. increased cost of service from telecommunications providers;

. loss of customers or failure to obtain additional customers; and

. loss of market share.

Any one of these could materially and adversely affect Sandpiper's business,
financial condition and results of operations.

Our market changes rapidly due to changing technology and evolving industry
standards. If we do not adapt to meet the sophisticated needs of our customers,
our business and prospects will suffer.

The market for our services is characterized by rapidly changing technology,
evolving industry standards and frequent new service introductions. Digital
Island's and Sandpiper's future success will depend to a substantial degree on
our ability to offer services that incorporate leading technology, address the
increasingly sophisticated and varied needs of our current and prospective
customers and respond to technological advances and emerging industry standards
and practices on a timely and cost-effective basis. You should be aware that:

. our technology or systems may become obsolete upon the introduction of
alternative technologies;

. we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and

. the price of the services provided by us is expected to decline as
rapidly as the cost of any competitive alternatives.

We may not be able to effectively respond to the technological requirements
of the changing market. To the extent we determine that new technologies and
equipment are required to remain competitive, the development, acquisition and
implementation of such technologies and equipment are likely to continue to
require significant capital investment by us. Sufficient capital may not be
available for this purpose in the future, and even if it is available,
investments in new technologies may not result in commercially viable
technological processes and there may not be commercial applications for such
technologies. However, if we do not develop and introduce new products and
services and achieve market acceptance in a timely manner, our business and
prospects may suffer.

Our business and prospects depend on demand for and market acceptance of the
Internet and its infrastructure development.

The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners, and for
Internet content delivery services has only begun to develop in recent years.
Our success will depend in large part on continued growth in the use of the
Internet. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of access, quality of service,
regulatory initiatives and necessary increases in bandwidth availability,
remain unresolved and are

35
<PAGE>

likely to affect the development of the market for our services. The adoption
of the Internet for information retrieval and exchange, commerce and
communications generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand for and market
acceptance of the Internet are subject to a high level of uncertainty and are
dependent on a number of factors, including:

. the growth in consumer access to and market acceptance of new interactive
technologies;

. emergence of a viable and sustainable market for Internet content
delivery services;

. the development of technologies that facilitate interactive communication
between organizations; and

. increases in user bandwidth.

If the market for Internet content delivery services or the Internet as a
commercial or business medium does not develop, or develops more slowly than
expected, our business, results of operations and financial condition will be
seriously harmed.

Specifically, even if Internet content delivery services market does
develop, services that Sandpiper currently offers or may offer in the future
may not achieve widespread market acceptance. Failure of Sandpiper's current
and planned services to operate as expected could delay or prevent their
adoption. If Sandpiper's target customers do not adopt, purchase and
successfully deploy its current and planned services, its revenue will not grow
significantly and its business, results of operations and financial condition
will be seriously harmed. Sandpiper has not taken any steps to mitigate the
risks associated with reduced demand for its existing Internet content delivery
services.

Liability laws are unsettled in our industry and potential liability associated
with information disseminated through our network could harm our business and
prospects.

The law relating to the liability of online services companies and Internet
access providers for communications and commerce carried on or disseminated
through their networks is currently unsettled. The most recent session of the
United States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations, and is currently
considering copyright legislation that may extend the right of reproduction
held by copyright holders to include the right to make temporary copies for any
reason. It is possible that claims could be made against online services
companies and Internet access providers under both United States and foreign
law for defamation, negligence, copyright or trademark infringement, or other
theories based on the nature of the data or the content of the materials
disseminated through their networks. Several private lawsuits seeking to impose
such liability upon online services companies and Internet access providers are
currently pending. In addition, 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, which may impose additional burdens on
companies conducting business online. Some countries, such as China, regulate
or prohibit the transport of telephony data in their territories. The
imposition upon us and other Internet network providers of potential liability
for information carried on or disseminated through our systems could require us
to implement measures to reduce our exposure to such liability, which may
require the expenditure of substantial resources, or to discontinue some of our
service or product offerings. Our ability to limit the types of data or content
distributed through our network is limited. Failure to comply with such
regulation in a particular jurisdiction could result in fines or penalties or
the termination of our service in such jurisdiction. The increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could impact the growth of Internet use. Our professional liability
insurance 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.
Any costs not covered by insurance incurred as a result of such liability or
asserted liability could harm our business and prospects.

36
<PAGE>

Risks associated with operating in international markets could restrict our
ability to expand globally and harm our business and prospects.

We market and sell our network services and products in the United States
and internationally. While the United States represented the majority of our
revenues for fiscal year 1999, we expect the percentage of international sales
to increase over time. We expect to commit significant resources to expand our
international sales and marketing activities throughout year 2000. However, we
may not be able to successfully market, sell, deliver and support our
networking services and products internationally. Furthermore, we may not be
able to maintain or increase market demand for our services, which may harm our
business. However, we may not be able to successfully market, sell, deliver and
support our networking services and products internationally. We presently
conduct our international sales through local subsidiaries in the United
Kingdom, Switzerland, Germany, the Netherlands, Japan, Malaysia and China and
through distributor relationships with third parties in countries where we have
no physical presence. Our failure to manage our international operations
effectively could limit the future growth of our business, increase our costs,
lengthen our sales cycle and require significant management attention. There
are certain risks inherent in conducting our business internationally, such as:

. changes in telecommunications regulatory requirements could restrict our
ability to deliver services to our international customers;

. export restrictions, tariffs, differing regulatory regimes and other
trade barriers could impede us from adequately equipping our network
facilities;

. challenges in recruiting, retaining, and managing qualified staff who
understand the highly technical aspects of our business could hinder our
ability to grow and compete;

. differing technology standards across countries may impede our ability to
integrate our product offerings across international borders;

. our United States centered accounting operations have limited
international collection experience and we could have longer accounts
receivable payment cycles and difficulties in collecting accounts
receivable in foreign jurisdictions;

. political and economic instability in international markets could lead to
appropriation of our physical assets, impeding our ability to deliver our
services to customers and harming our financial results;

. protectionist laws and business practices favoring local competition may
give unequal bargaining leverage to key vendors in countries where
competition is scarce, significantly increasing our operating costs;

. increased expenses associated with marketing services in foreign
countries;

. potentially adverse tax consequences, including restrictions on the
repatriation of earnings due to unfavorable changes in tax laws or our
physical presence in foreign countries; and

. the risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.

Any of these risks could harm our international operations. For example,
some European countries already have laws and regulations related to content
distributed on the Internet and technologies used on the Internet that are more
strict than those currently in force in the United States. Furthermore, there
is an on-going debate in Europe as to the regulation of certain technologies we
use, including caching and mirroring. The European Parliament has recently
adopted a directive relating to the reform of copyright in the European
Community which will, if made into law, restrict caching and mirroring. Any or
all of these factors could cause our business and prospects to suffer. In
addition, we may not be able to obtain the necessary telecommunications
infrastructure in a cost-effective manner or compete effectively in
international markets. See Digital Island's "Business--Business Strategy" and
"--Government Regulation."

37
<PAGE>

Foreign exchange fluctuations could decrease our revenues or cause us to lose
money, especially since we do not hedge against currency fluctuations.

Although, to date, all of our customers have paid for our services in U.S.
dollars, we currently pay some of our suppliers in foreign currencies which
subjects us to currency fluctuation risks. For fiscal 1998 and fiscal 1999,
costs denominated in foreign currencies were nominal and we had no foreign
currency losses during those periods. However, we believe that in the future an
increasing portion of our revenues and costs will be denominated in foreign
currencies. In particular, we expect that with the introduction of the Euro, an
increasing portion of our international sales may be Euro-denominated.
Fluctuations in the value of the Euro or other foreign currencies may cause our
business and prospects to suffer. We currently do not engage in foreign
exchange hedging activities and, although we have not yet experienced any
material losses due to foreign currency fluctuation, our international revenues
are currently subject to the risks of foreign currency fluctuations and such
risks will increase as our international revenues increase.

Year 2000 computer complications could disrupt our operations and harm our
business.

The "year 2000 issue" is the result of computer systems and programs using
two digits rather than four to identify a given year. Computer systems or
programs that have date sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations or other computer errors causing
disruptions of operations. The potential for failures encompasses all aspects
of our business, including our services, suppliers and customers. These
failures could cause, among other things, disruptions in our operations and a
temporary inability to engage in normal business activities.

The year 2000 issue creates significant risks for us including:

. potential warranty or other claims arising from our services;

. damage to our reputation;

. litigation costs;

. impairment of the systems we use to run our business; and

. impairment of the systems used by our suppliers and customers.

Although we believe our products are year 2000 compliant, we may see an
increase in warranty and other claims as a result of the year 2000 issues
arising from undetected defects or the non-compliance of the suppliers upon
whom we rely.

We believe that the most reasonably likely worst-case year 2000 scenario is
the non-compliance of the third-party telecommunications carriers, vendors and
other significant suppliers upon whom we depend for transmission capacity. If
these providers do not achieve year 2000 compliance, we cannot be certain that
we will have sufficient transmission capacity to continue our service without
interruption. However, in the event that any of our other suppliers do not
achieve year 2000 compliance in a timely manner, and we are unable to replace
them with alternate sources, our business and financial results would also be
harmed.

In addition, virtually all businesses face year 2000 compliance issues and
may require hardware and software upgrades or modifications to their computer
systems and applications. Companies owning and operating these systems may plan
to devote a substantial portion of their information systems' spending to fund
these upgrades and modifications and divert spending away from Internet content
delivery solutions as the year 2000 approaches. Such changes in customers'
spending patterns may reduce our revenues for the next few quarters. Please see
Digital Island's and Sandpiper's "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance" for
information on their state of readiness, potential risks and contingency plans
regarding the year 2000 issue.

38
<PAGE>

Government regulation and legal uncertainties could limit our business or slow
our growth.

Our services include the transmission of data over public telephone lines.
These transmissions are subject to the regulatory authority of the Federal
Communications Commission and the state public utility commissions. However, to
date, neither the FCC nor the state public utility commissions has elected to
exercise such authority. Our services could be affected by changes in federal
and state law or regulation in the telecommunications arena, especially changes
relating to telecommunications markets in general and the Internet in
particular. Such changes could directly or indirectly affect our costs, limit
usage or subscriber-related information, and increase the likelihood or scope
of competition from Regional Bell Operating Companies or other
telecommunications companies.

As our services become available over the Internet in foreign countries, and
as we facilitate sales by our customers to end users located in such foreign
countries, these foreign jurisdictions may decide that we are required to
qualify to do business in the particular foreign country. Such decisions could
subject us to taxes and other costs. It is also possible that claims could be
made against online service companies and Internet service providers under
foreign law for defamation, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials disseminated
through their networks.

Implementation of any future changes in law or regulation, including those
discussed herein, could cause our business and prospects to suffer. Our
business and prospects may also be harmed by the imposition of certain tariffs,
duties and other import restrictions on facilities and resources that we obtain
from non-domestic suppliers. As a result, changes in law or regulation in the
United States or elsewhere could cause our business and prospects to suffer.
For a more detailed discussion of the possible risks associated with changes in
law or regulation, please see Digital Island's "Business--Government
Regulation."

39
<PAGE>

FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS

This joint proxy statement/prospectus contain forward-looking statements
within the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995 with respect to Digital Island's and Sandpiper's financial
conditions, results of operations and businesses and the expected impact of the
merger on Digital Island's financial performance. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions indicate forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements. In evaluating the
merger, you should carefully consider the discussion of risks and uncertainties
in the immediately preceding section entitled "Risk Factors."

40
<PAGE>

THE SPECIAL MEETINGS

General

Digital Island

We are furnishing this joint proxy statement/prospectus to Digital Island
stockholders in connection with the solicitation of proxies by the Digital
Island board of directors for use at the special meeting of stockholders of
Digital Island to be held on December 28, 1999, and any adjournment or
postponement.

This joint proxy statement/prospectus is first being furnished to Digital
Island stockholders on or about December 10, 1999.

Sandpiper

We are furnishing this joint proxy statement/prospectus to Sandpiper
shareholders in connection with the solicitation of proxies by the Sandpiper
board of directors for use at the special meeting of shareholders of Sandpiper
to be held on December 28, 1999, and any adjournment or postponement.

This joint proxy statement/prospectus is first being furnished to Sandpiper
shareholders on or about December 10, 1999. This joint proxy
statement/prospectus is also furnished to Sandpiper shareholders as a
prospectus in connection with the issuance by Digital Island of shares of
Digital Island common stock as contemplated by the merger agreement.

Date, Time and Place

Digital Island

The special meeting will be held on December 28, 1999 at 8:30 a.m., local
time, at 45 Fremont Street, 11th floor, San Francisco, California.

Sandpiper

The special meeting will be held on December 28, 1999 at 9:00 a.m., local
time, at 225 West Hillcrest Drive, Suite 250, Thousand Oaks, California.

Matters to be Considered at the Special Meetings

Digital Island

At the Digital Island special meeting and any adjournment or postponement,
Digital Island stockholders will be asked:

. to consider and vote upon the approval of the issuance of Digital Island
common stock as contemplated by the merger agreement;

. to grant the Digital Island board of directors discretionary authority to
adjourn the special meeting to solicit additional votes for approval of
the share issuance; and

. to transact such other business as may properly come before the special
meeting.

Sandpiper

At the Sandpiper special meeting and any adjournment or postponement,
Sandpiper shareholders will be asked:

. to consider and vote upon the approval and adoption of the merger
agreement pursuant to which Sandpiper will become a wholly owned
subsidiary of Digital Island and the outstanding shares of

41
<PAGE>

Sandpiper capital stock, other then shares held by shareholders who
perfect their dissenters' rights under California law, will be converted
into the right to receive shares of Digital Island common stock, and to
approve the merger; and

. to transact such other business as may properly come before the special
meeting.

Record Dates

Digital Island

Digital Island's board has fixed the close of business on November 29,
1999, as the record date for determining of Digital Island stockholders
entitled to notice of and to vote at the special meeting.

Sandpiper

Sandpiper's board has fixed the close of business on December 3, 1999, as
the record date for determining of Sandpiper shareholders entitled to notice
of and to vote at the special meeting. At the close of business on that date,
7,005,236 shares of Sandpiper common stock, 9,607,141 shares of Sandpiper
Series A preferred stock and 4,820,628 shares of Sandpiper Series B preferred
stock were outstanding and entitled to vote at the special meeting. Each
holder of Sandpiper common stock and Sandpiper preferred stock on that date
will be entitled to one vote for each share held.

Voting of Proxies

Digital Island

We request that Digital Island stockholders complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Digital Island. Brokers holding shares in "street name"
may vote the shares only if the beneficial stockholder provides instructions
on how to vote. Brokers will provide beneficial owners instructions on how to
direct the brokers to vote the shares. All properly executed proxies that
Digital Island receives prior to the vote at the special meeting, and that are
not revoked, will be voted in accordance with the instructions indicated on
the proxies. If no direction is indicated, the proxies will be voted (A) to
approve the issuance of shares of Digital Island as contemplated by the merger
agreement, and (B) to approve the proposal to grant the board discretionary
authority to adjourn the special meeting. Digital Island's board does not
currently intend to bring any other business before the special meeting.
Digital Island's board is unaware of any other matters that are to be brought
before the special meeting. If other business properly comes before the
special meeting or any postponement or adjournment, the proxies will vote in
accordance with their own judgment.

Stockholders may revoke their proxies at any time prior to its use:

. by delivering to the Secretary of Digital Island a signed notice of
revocation or a later-dated, signed proxy; or

. by attending the special meeting and voting in person.

Attendance at the special meeting does not in itself constitute the
revocation of a proxy.

Sandpiper

If you complete, date, sign and return a proxy, the persons named as
proxyholders therein will vote your shares as you indicate on the proxy. If
you do not specify on the proxy how to vote your shares, the proxy holders
will vote your shares in favor of the merger agreement and the merger. The
inspector of elections appointed for the meeting will separately tabulate
affirmative and negative votes and abstentions. Abstentions will have the same
effect as negative votes.

42
<PAGE>

You may revoke your proxy before it is voted by filing with Sandpiper's
corporate secretary a written notice of revocation or a duly executed proxy
bearing a later date. You may also revoke your proxy by attending the meeting
and voting in person. Attending the meeting will not, by itself, revoke a
proxy.

Votes Required

Digital Island

As of the close of business on November 29, 1999, there were 35,999,068
shares of Digital Island common stock outstanding and entitled to vote. The
holders of a majority of the shares of Digital Island common stock entitled to
vote and that are present or represented by proxy at the Digital Island meeting
must (A) approve the issuance of Digital Island common stock in the merger, and
(B) approve the proposal to grant the board discretionary authority to adjourn
the special meeting. Digital Island stockholders have one vote per share of
Digital Island common stock owned on the record date.

As of November 29, 1999, directors and executive officers of Digital Island
and their affiliates beneficially owned an aggregate of 3,869,429 shares of
Digital Island common stock (exclusive of any shares issuable upon the exercise
of options) or approximately 10.7% of the shares of Digital Island common stock
outstanding on that date. The directors and executive officers of Digital
Island have indicated their intention to vote their shares of Digital Island
common stock in favor of the issuance of the shares of Digital Island common
stock as contemplated by the merger agreement. As of November 29, 1999,
directors and executive officers of Sandpiper owned no shares of Digital Island
common stock.

Sandpiper

The merger cannot be completed unless the merger agreement and the merger
are approved by the affirmative vote or consent of each of (i) the holders of
record of at least a majority of the outstanding shares of Sandpiper common
stock, voting as a separate class, and (ii) the holders of record of at least a
majority of the outstanding shares of Sandpiper preferred stock, voting as a
separate class.

At December 3, 1999, executive officers, directors and affiliates of
directors of Sandpiper owned approximately 70% of the outstanding shares of
Sandpiper common stock, assuming full conversion of all Sandpiper preferred
stock into shares of Sandpiper common stock.

The directors and executive officers of Sandpiper have indicated their
intention to vote their shares of Sandpiper common stock in favor of the merger
agreement, the merger, and related transactions. Under a shareholder agreement
in the form attached as an exhibit to the merger agreement in Annex A to this
joint proxy statement/prospectus, certain directors, executive officers and
other shareholders of Sandpiper owning approximately 76% of Sandpiper's capital
stock outstanding as of October 24, 1999, excluding any shares issuable upon
the exercise of options, have agreed to vote all of their shares of Sandpiper
capital stock for approval of the merger agreement, the merger and related
transactions. As of December 3, 1999, Charlie Bass, a director of Digital
Island, owned 71,429 shares of Sandpiper capital stock and also holds a warrant
to purchase up to an additional 14,246 shares of Sandpiper capital stock. As of
December 3, 1999, no other directors or executive officers of Digital Island
owned any shares of Sandpiper capital stock. See "The Merger--Interests of
Officers and Directors in the Merger."

In accordance with the terms of the shareholder agreement, we are assured of
receiving the requisite votes in favor of the merger agreement and the merger.

Quorum; Abstentions and Broker Non-Votes

Digital Island

The required quorum for the transaction of business at the special meeting
is a majority of the shares of Digital Island common stock issued and
outstanding on the record date. Abstentions and broker non-votes each

43
<PAGE>

will be included in determining the number of shares present and voting at the
meeting for the purpose of determining the presence of a quorum. Brokers
holding shares for beneficial owners cannot vote on the actions proposed in
this joint proxy statement/prospectus without the owners' specific
instructions. Accordingly, Digital Island stockholders are urged to return the
enclosed proxy card marked to indicate their vote. Broker non-votes will not be
included in vote totals and will have no effect on the outcome of the votes on
the issuance of the shares in the merger or the proposal to grant the board
discretionary authority to adjourn the special meeting. Abstentions, however,
will have the same effect as a vote against these proposals.

Sandpiper

The required quorum for the transaction of business at the special meeting
is a majority of the shares of Sandpiper capital stock issued and outstanding
on the record date. Abstentions will be included in determining the number of
shares present and voting at the meeting for the purpose of determining the
presence of a quorum. Abstentions will have the same effect as a vote against
these proposals.

Solicitation of Proxies and Expenses

Digital Island and Sandpiper will each bear its own expenses in connection
with the solicitation of proxies for their special meetings, except that each
will pay one-half of all printing and filing costs and expenses incurred in
connection with the registration statement and this joint proxy
statement/prospectus. In addition to solicitation by mail, the directors,
officers and employees of Digital Island and Sandpiper may each solicit proxies
from their stockholders and shareholders by telephone, facsimile, e-mail or in
person. No additional compensation will be paid to these individuals for any
such services. Brokerage houses, nominees, fiduciaries and other custodians
will be requested to forward soliciting materials to beneficial owners of
Digital Island common stock and will be reimbursed for their reasonable
expenses incurred in sending proxy materials to beneficial owners.

Board Recommendations

Digital Island

The Digital Island board of directors has determined that the merger
agreement and the merger are fair to, and in the best interests of, Digital
Island and its stockholders. Accordingly, the board of directors has
unanimously approved the merger agreement and unanimously recommends that
stockholders vote for approval of the issuance of shares of Digital Island
common stock as contemplated by the merger agreement.

The matters to be considered at the special meeting are of great importance
to Digital Island stockholders. Accordingly, Digital Island stockholders are
urged to read and carefully consider the information presented in this joint
proxy statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.

Digital Island stockholders should not send any stock certificates with their
proxy cards.

Sandpiper

The Sandpiper board of directors unanimously has approved the merger
contemplated by the merger agreement and has determined that (i) the merger
agreement and the merger are advisable and in the best interests of Sandpiper
and its shareholders and (ii) the consideration to be paid to holders of
Sandpiper common stock and Sandpiper preferred stock in the merger is fair to
such holders. After careful consideration, the Sandpiper board of directors
unanimously recommends that you vote "FOR" the merger agreement and the merger.

44
<PAGE>

THE MERGER

This section of the joint proxy statement/prospectus describes material
aspects of the proposed merger, including the merger agreement. While we
believe that the description covers the material terms of the merger and the
related transactions, this summary may not contain all of the information that
is important to Digital Island stockholders and Sandpiper shareholders. You
should read the merger agreement and the other documents we refer to carefully
and in their entirety for a more complete understanding of the merger.

Background of the Merger

As one of its core strategies for continued growth, Digital Island
continually evaluates acquisitions of, or combinations with, complementary
businesses. In September 1999, Digital Island identified Sandpiper's Internet
content delivery services, as well as strategic relationships and brand
awareness, as complementary to Digital Island's content distribution efforts.
As a result, Digital Island determined that it should approach Sandpiper to
evaluate a potential partnership.

On September 18, 1998 Credit Suisse First Boston entered into an engagement
letter with Sandpiper, which entitled Credit Suisse First Boston to receive a
fee and to act as exclusive financial adviser to Sandpiper in the event of a
business combination between Sandpiper and another company. In addition, Credit
Suisse First Boston has from time to time provided financial advisory services
to Digital Island in connection with other possible transactions. In view of
Credit Suisse First Boston's relationship with both Sandpiper and Digital
Island, Credit Suisse First Boston was asked by Digital Island and Sandpiper to
act in an intermediary capacity in connection with the parties' discussions
rather than as financial adviser to either party exclusively. Pursuant to
separate engagement letters with Sandpiper and Digital Island, each dated
October 8, 1999, Credit Suisse First Boston agreed to act in an intermediary
capacity in connection with the merger. As part of such engagement letters,
Digital Island, Sandpiper and Credit Suisse First Boston agreed to a new fee
arrangement to replace the fee arrangement under Credit Suisse First Boston's
old engagement letter with Sandpiper.

At the request of Digital Island, and with Sandpiper's consent, Credit
Suisse First Boston arranged a meeting between the two parties on September 21,
1999 at Digital Island's San Francisco headquarters. Present at the meeting
were Ruann Ernst, president and chief executive officer of Digital Island,
Chris Albinson, vice president of corporate development for Digital Island, Leo
Spiegel, president and chief executive officer of Sandpiper, Scott Yara, vice
president of marketing at Sandpiper, and a representative of Credit Suisse
First Boston. At the outset of the meeting, Digital Island and Sandpiper
entered into mutual nondisclosure agreements. In addition, both parties made
general presentations covering corporate strategic directions, products and
strategic partnerships. The parties also discussed, on a preliminary basis, the
potential for a combination of Digital Island and Sandpiper.

At a regularly scheduled Digital Island executive committee meeting on
September 23, 1999, attended by Ms. Ernst, Mr. Albinson, and T.L. Thompson,
chief financial officer of Digital Island and Charlie Bass, Marcelo Gumicio,
Cliff Higgerson, Shahan Soghikian, and David Spreng from Digital Island's board
of directors and a representative from Brobeck, Phleger & Harrison, outside
legal counsel to the Company, there was a discussion, on a preliminary basis,
of the potential benefits to Digital Island of a merger with Sandpiper.

On October 1, 1999, Ms. Ernst, Mr. Albinson, and Mr. Thompson of Digital
Island met with Mr. Spiegel and Thomas Govreau, chief financial officer of
Sandpiper at Credit Suisse First Boston's offices in Palo Alto, California.
Also attending the meeting were representatives from Credit Suisse First
Boston. The parties discussed the historical and projected financial results,
organizational issues, potential synergies and potential cultural and technical
integration issues that would result from a combination of Digital Island and
Sandpiper. In addition, the parties agreed upon a timeline and schedule for due
diligence meetings to further explore the potential for a merger of the two
companies.

45
<PAGE>

During the meeting on October 1, 1999 Sandpiper disclosed its intent to file
a registration statement for an initial public offering of its common stock
before the end of calendar 1999, which Digital Island management viewed as a
strategic alternative for Sandpiper to a merger with Digital Island, and which
contributed in part to Digital Island management's decision to move ahead
quickly with the exploration of a potential merger with Sandpiper.

Working with Credit Suisse First Boston, Mr. Albinson developed a term sheet
outlining the major terms of a merger of the two companies. That term sheet was
sent to Mr. Spiegel on October 8, 1999. The term sheet proposed a stock-for-
stock merger at a fixed exchange rate to be determined. There were to be no
collars or walk away provisions. For tax purposes, the transaction was to be
treated as a tax-free reorganization. For accounting purposes, the transaction
was to be treated as a purchase. Mutual exclusivity arrangements pertained for
a period of two weeks from signing preventing each party from negotiating a
merger, sale or similar transaction with any third party.

In the period between October 5, 1999 and October 14, 1999, a series of
meetings were held at Sandpiper's offices in Thousand Oaks, California and at
Digital Island's facilities in San Francisco and Santa Clara, California
between marketing, financial, operations, and technical executives of both
companies for the purpose of conducting due diligence.

On October 8, 1999, Ms. Ernst, Mr. Albinson, and Mr. Thompson held a
conference call with members of the Digital Island board of directors to review
developments on the merger. The Digital Island board approved the engagement of
Bear Stearns to provide financial advisory services to Digital Island in
connection with a potential transaction with Sandpiper. Also on October 8,
1999, both Sandpiper and Digital Island engaged Credit Suisse First Boston to
act as intermediary between Digital Island and Sandpiper to facilitate a
combination of the two parties.

On October 9, 1999, the Sandpiper board of directors held a special meeting.
The meeting covered the proposed terms of the merger, a review of due diligence
results, and the schedule for proceeding.

On October 10, 1999, Mr. Thompson phoned a representative of Bear Stearns to
discuss the proposed transaction and to retain their services as financial
advisor.

On October 12, 1999, the management of Sandpiper met to review the due
diligence results, the proposed terms of the merger and the schedule to
complete the transaction.

On October 14, 1999, Ms. Ernst, Mr. Albinson, and Mr. Thompson held a
conference call with members of the Digital Island board of directors and
representatives from Bear Stearns. Ms. Ernst reported on overall transaction
progress. Mr. Albinson reviewed the results of Digital Island's due diligence
review of Sandpiper and the principal proposed deal terms. The representatives
from Bear Stearns reported on their financial analysis to date.

On October 15, 1999 at the San Francisco offices of Brobeck, Phleger &
Harrison LLP, a meeting was held attended by Ms. Ernst, Mr. Spiegel, Mr.
Albinson, Mr. Thompson, Mr. Govreau, and several directors of both companies.
Representatives from Bear Stearns and Credit Suisse First Boston attended. Also
attending for part of the meeting were certain other members of the management
teams of both companies. Mr. Spiegel and Ms. Ernst reviewed the market
opportunity for a combined company and the business and strategic rationale for
merging the companies. The meeting was informational in content, and no actions
or decisions were taken.

On October 16, 1999 a draft merger agreement and other transaction documents
were circulated by Brobeck, Phleger & Harrison LLP.

From October 17, 1999 to October 23, 1999, members of the Digital Island and
Sandpiper management teams, together with their respective legal advisors and
representatives of Credit Suisse First Boston, held extensive negotiations
regarding the terms and conditions of the definitive agreements relating to the
proposed

46
<PAGE>

transaction. During this same period, Ms. Ernst and Mr. Spiegel had extensive
negotiations on the organization of the combined companies and the definition
of the integration plan for the merger.

On October 22, 1999, the board of directors of Sandpiper met and unanimously
approved the merger, the merger agreement and related documentation, subject to
satisfactory resolution of items relating to terms that remained under
negotiation in the merger agreement, as discussed at that meeting.

On October 23, 1999, the board of directors of Digital Island held a special
meeting. Also attending were representatives from Brobeck and Bear Stearns. A
representative from Brobeck outlined the directors' legal duties and
responsibilities in connection with considering the merger and reviewed the
principal terms of the merger agreement and related agreements. A
representative from Bear Stearns summarized the material financial analyses
that it performed with respect to the proposed merger. Bear Stearns then
delivered its oral opinion to the Digital Island board that, as of October 23,
1999, the proposed share exchange ratio was fair from a financial point of view
to Digital Island stockholders. Bear Stearns subsequently confirmed its oral
opinion by delivery of a written opinion to the same effect, dated October 23,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion.

Following those presentations, Digital Island's board engaged in a
discussion of the business, financial and legal terms of the proposed merger,
the strategic benefits of the combination, the terms and conditions of the
proposed merger agreement and the analyses and opinion of Bear Stearns.
Following the discussion, the Digital Island board unanimously approved the
merger agreement and related agreements, and the issuance of Digital Island
common stock in the merger, subject to final negotiation of open issues and
definitive documentation. In addition, the Digital Island board determined to
recommend that Digital Island stockholders approve issuance of shares of
Digital Island common stock in the merger.

Also on October 23, 1999, Ms. Ernst reviewed with the compensation committee
of the Digital Island board certain employment contract issues related to the
merger.

Following the Digital Island board meeting on October 23 and on October 24,
Digital Island and Sandpiper, and their respective legal and financial
advisors, worked towards resolving outstanding details and finalizing the
definitive merger agreement and related documents. Sandpiper and Digital Island
entered into the merger agreement as of October 24, 1999. Also on October 24,
certain shareholders of Sandpiper entered into the shareholder agreement with
Sandpiper and Digital Island and certain stockholders of Digital Island entered
into the voting agreement with Sandpiper. On October 25, 1999, Digital Island
and Sandpiper issued a joint press release announcing the proposed business
combination.

Joint Reasons for the Merger; Recommendations of Boards of Directors

The Digital Island and Sandpiper boards of directors unanimously concluded
that the merger and merger agreement were advisable and fair to, and in the
best interests of, the stockholders of their respective companies. They
concluded that the combined company following the merger would have the
potential to realize long-term improved operating and financial results and a
stronger competitive position. Potential mutual benefits identified by the
boards of directors include:

. the creation of a strong market position in the content delivery network
services market by combining Digital Island's global network and related
services with Sandpiper's proven Internet content delivery services;

. the complementary business models and customer bases of Digital Island
and Sandpiper, providing an opportunity to offer a broader range of
complementary products to both new and existing customers;

. the immediate international network reach of the combined company,
enhancing the ability to sell bundles of products and services across an
increased customer base;

47
<PAGE>

. the increased capitalization of the combined company, allowing for
increased access to capital markets and potentially reducing the cost of
capital;

. the synergies of the combined company, including improved market position
through expanded product offerings, global reach and expanded network
coverage, the ability to offer one-stop network outsourcing solutions and
the ability to offer new, innovative application services solutions; and

. the creation of a combined company with an experienced management team
that has the breadth and depth to effectively lead and manage the
combined company's growth.

Digital Island's Reasons for the Merger; Recommendation of the Board of
Directors of Digital Island

The board of directors of Digital Island unanimously concluded that the
merger was advisable and fair to, and in the best interests of, Digital Island
and its stockholders and determined to recommend that the Digital Island
stockholders approve the issuance of the shares of Digital Island common stock
in the merger.

Digital Island's board of directors reviewed a number of factors in
evaluating the merger, including, but not limited to, the following:

. historical information concerning Digital Island's and Sandpiper's
businesses, financial performance and condition, operations, technology
and management;

. Digital Island's management's view of the financial condition, results of
operations and businesses of Digital Island and Sandpiper before and
after giving effect to the merger and the Digital Island board's
determination of the merger's effect on stockholder value;

. current financial market conditions and historical stock market prices,
volatility and trading information of Digital Island common stock;

. the determination of Sandpiper's senior management to enter new
employment agreements and non-competition and non-disclosure agreements
to be effective upon consummation of the merger;

. the opinion of Bear Stearns that, as of the date of its opinion and
subject to the assumptions made, matters considered and limitations of
the review undertaken in connection with the opinion as set forth in the
opinion, the share exchange ratio in the merger was fair from a financial
point of view to Digital Island stockholders;

. the belief that the proposed terms of the merger agreement and the stock
option agreement were reasonable;

. the expected impact of the merger on Digital Island's customers and
employees; and

. results of the due diligence investigation of Sandpiper conducted by
Digital Island's management, accountants and outside legal counsel.

The Digital Island board of directors also identified and considered a
number of potentially negative factors in its deliberations concerning the
merger including the following:

. the risk that the potential benefits of the merger may not be realized;

. the possibility that the merger may not be consummated, even if approved
by Digital Island's and Sandpiper's stockholders;

. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company; and

. other applicable risks described in this joint proxy statement/prospectus
under "Risk Factors."

48
<PAGE>

Digital Island's board of directors concluded that, on balance, the merger's
potential benefits to Digital Island and its stockholders outweighed the
associated risks. This discussion of the information and factors considered by
Digital Island's board of directors is not intended to be exhaustive. In view
of the variety of factors considered in connection with its evaluation of the
merger, Digital Island's board did not find it practicable to, and did not
quantify or otherwise assign relative weight to, the specific factors
considered in reaching its determination.

For the reasons discussed above, Digital Island's board of directors has
determined the merger agreement and the merger to be advisable and fair to, and
in the best interests of, Digital Island's stockholders. In connection with the
merger, Digital Island's board of directors unanimously recommends approval of
the issuance of shares of Digital Island common stock as contemplated by the
merger agreement.

Sandpiper's Reasons for the Merger; Recommendation of the Board of Directors
of Sandpiper

In addition to the anticipated joint benefits described above, Sandpiper's
board of directors believes that the following are additional reasons the
merger will be beneficial to Sandpiper and for shareholders of Sandpiper to
vote for approval of the merger agreement and the merger:

. the merger provides Sandpiper shareholders with the opportunity to
receive an amount of Digital Island shares, in a tax-free exchange, which
based on the Digital Island share price at the time of signing of the
merger agreement, represented a significant premium over the most recent
price at which Sandpiper sold shares of its capital stock;

. Sandpiper shareholders will have the ability to continue to participate
in the growth of the business conducted by Digital Island and Sandpiper
after the merger and to benefit from the potential appreciation in the
value of Digital Island common shares;

. the liquidity afforded the Sandpiper shareholders upon exchange of their
shares in Sandpiper, which are not publicly traded, for their shares in
Digital Island, which are publicly traded; and

. the greater liquidity anticipated to be afforded to Sandpipers
shareholders upon the closing of the merger as compared to the closing of
Sandpiper's own previously proposed initial public offering because a
larger number of shares of Digital Island are anticipated to be
outstanding after the merger than would be outstanding after a Sandpiper
initial public offering and the resulting likelihood of greater trading
volume and increased coverage by investment research and analyst reports.

In reaching its decision to approve the merger agreement and the proposed
merger, the Sandpiper board of directors consulted with Sandpiper's management,
as well as with its legal and financial advisors, and considered a number of
factors, including the following:

. historical information concerning Digital Island's and Sandpiper's
respective businesses, financial performance and condition, operations,
technology, management and competitive position;

. Sandpiper management's view as to the financial condition, results of
operations and businesses of Digital Island and Sandpiper before and
after giving effect to the merger based on management due diligence and
publicly available financial estimates for Digital Island. The Sandpiper
board of directors believed that, in light of, among other things, market
and industry conditions and the potential synergy and compatibility
between Sandpiper and Digital Island, the long-term financial condition,
results of operations, prospects and competitive position of the combined
company would be better than the long-term financial condition, results
of operations, prospects and competitive position of Sandpiper on a stand
alone basis;

. current financial market conditions and historical stock market prices,
volatility and trading information of Digital Island common stock;

49
<PAGE>

. the belief that the terms of the merger agreement, including the
representations, warranties and covenants, the conditions to the parties'
respective obligations, are reasonable in light of the entire
transaction;

. the impact of the merger on Sandpiper's customers and employees; and

. results of the due diligence investigation of Digital Island conducted by
Sandpiper's management, accountants and outside legal counsel.

The Sandpiper board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger. The negative
factors considered by the Sandpiper board of directors included:

. the risk to Sandpiper's shareholders that the value to be received in the
merger could decline significantly from the indicated value on the date
of the merger agreement due to potential declines in the trading price of
Digital Island common stock, which has been volatile since Digital
Island's initial public offering;

. the risk that the potential benefits of the merger may not be realized;

. the possibility that the merger might not be completed in a timely manner
and the effect of the public announcement on:

-Sandpiper's ability to expand its existing strategic relationships and
attract new strategic partners;

-Sandpiper's ability to attract and retain key management, sales and
marketing and technical personnel; and

-the progress of potential and actual strategic relationships with third
parties who may view working with Digital Island differently than
working with Sandpiper;

. various other applicable risks described in this joint proxy
statement/prospectus under "Risk Factors."

The Sandpiper board also considered what alternatives existed to the merger,
including reviewing the prospects for Sandpiper as an independent company. In
light of the factors described above, the Sandpiper board determined that the
value and benefits available to Sandpiper shareholders from the merger exceeded
the potential they might realize from Sandpiper continuing as an independent
company.

The foregoing discussion of the information and factors considered by the
Sandpiper board is not intended to be exhaustive but is believed to include all
material factors considered by Sandpiper's board. In view of the complexity and
wide variety of information and factors, both positive and negative, considered
by the Sandpiper board, it did not find it practical to quantify, rank or
otherwise assign relative or specific weights to the factors considered. In
addition, the Sandpiper board did not reach any specific conclusion with
respect to each of the factors considered, or any aspect of any particular
factor, but, rather, conducted an overall analysis of the factors described
above, including discussions with Sandpiper's management and legal and
financial advisors. In considering the factors described above, individual
members of the Sandpiper may have given different weight to different factors.
The Sandpiper board considered all these factors as a whole and believed the
factors supported its determination to approve the merger. After taking into
consideration all of the factors set forth above, Sandpiper's board concluded
that the merger was advisable fair to, and in the best interests of, Sandpiper
and its shareholders and that Sandpiper should proceed with the merger.

The Sandpiper board has unanimously determined that the merger was advisable
and fair to, and in the best interest of, Sandpiper and its shareholders and
unanimously recommends that you vote for the approval and adoption of the
merger agreement.

50
<PAGE>

Opinion of Digital Island's Financial Advisor

Digital Island retained Bear Stearns to act as its financial advisor in
connection with the merger. Bear Stearns delivered its written opinion, dated
October 23, 1999, to the Digital Island board of directors to the effect that,
and based upon and subject to the assumptions, limitations and qualifications
set forth therein, the exchange ratio of 1.0727 shares of Digital Island common
stock for each share of Sandpiper capital stock outstanding immediately prior
to the merger was fair, from a financial point of view, to the holders of
Digital Island common stock.

The full text of the Bear Stearns opinion, which sets forth a description of
the assumptions made, general procedures followed, matters considered and
limitations on the review undertaken, is attached as Annex B to this joint
proxy statement/prospectus. Holders of Digital Island common stock are urged to
read the Bear Stearns opinion carefully in its entirety, especially with regard
to the assumptions made and matters considered by Bear Stearns, as well as the
limitations on the information considered and analysis presented. The summary
of the Bear Stearns opinion set forth in this document is qualified in its
entirety by reference to the full text of the opinion.

The Bear Stearns opinion, intended for the benefit and use of the Digital
Island board of directors, did not constitute a recommendation to the Digital
Island board of directors in connection with the merger agreement or the merger
and does not constitute a recommendation to any holder of Digital Island common
stock as to how to vote on the issuance of shares of Digital Island common
stock in connection with the merger agreement and the merger. Bear Stearns is
not expressing any opinion as to the price or range of prices at which Digital
Island common stock may trade subsequent to the consummation of the merger. The
Bear Stearns opinion is necessarily based upon economic, monetary, market and
other conditions, and the information made available to it, as of the date of
such opinion.

The exchange ratio and the form of consideration were determined by arm's-
length negotiations between Digital Island and Sandpiper and were not based on
any recommendation by Bear Stearns. Except as noted below, no limitations were
imposed by Digital Island on Bear Stearns with respect to the investigation
made or the procedures followed by Bear Stearns in rendering the Bear Stearns
opinion.

In arriving at the Bear Stearns opinion, Bear Stearns, among other things:

. reviewed a draft of the merger agreement in substantially final form
dated October 21, 1999;

. reviewed Digital Island's Registration Statement on Form S-1 dated June
29, 1999 and its Quarterly Report on Form 10-Q for the period ended June
30, 1999;

. reviewed Sandpiper's audited financial statements for the years ended
December 31, 1998 and December 31, 1997 and interim unaudited statements
through August 31, 1999;

. reviewed a draft Registration Statement on Form S-1 prepared by Sandpiper
dated October 13, 1999;

. reviewed certain operating and financial information relating to
Sandpiper's business and prospects, including projections, prepared and
provided to Bear Stearns by Digital Island management (the "Sandpiper
Projections");

. reviewed certain estimates of cost savings and other combination benefits
or synergies expected to result from the merger, prepared and provided by
Digital Island management (the "Combination Benefits");

. met with certain members of Sandpiper's senior management to discuss
Sandpiper's business, operations, historical and projected financial
results and future prospects;

. reviewed certain operating and financial information relating to Digital
Island's business and prospects, including projections prepared and
provided to Bear Stearns by Digital Island management (the "Digital
Island Projections" and, together with the Sandpiper Projections, the
"Projections");

. met with certain members of Digital Island's senior management to discuss
Digital Island's business, operations, historical and projected financial
statements and future prospects;

51
<PAGE>

. reviewed the historical prices, valuation parameters and trading volumes
of shares of Digital Island common stock;

. reviewed publicly available financial data, stock market performance data
and valuation parameters of companies which Bear Stearns deemed generally
comparable to Digital Island and Sandpiper;

. performed discounted cash flow analyses based on the Projections and the
Combination Benefits furnished to Bear Stearns; and

. conducted such other studies, analyses, inquiries and investigations as
were deemed appropriate.

In connection with its review, and with the consent of Digital Island, Bear
Stearns did not assume any responsibility for, and did not undertake any
independent verification of, any of the information reviewed by or provided to
it and relied on its being complete and accurate in all material respects. In
addition, Bear Stearns did not make or receive any independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Digital
Island or Sandpiper, nor was Bear Stearns furnished with any such evaluation or
appraisal.

With respect to the Projections, Combination Benefits and contemplated tax
and accounting impacts relied upon or provided to Bear Stearns, it assumed, at
the direction of Digital Island, that they had been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Digital Island as to the future performance of Digital Island and
Sandpiper and that they will be achieved in the amounts and at the times
specified therein. Therefore, Bear Stearns did not make any independent
assessment of the assumptions contained therein. Bear Stearns was not provided
with, nor was it asked to obtain, any financial forecasts, estimates,
projections, pro forma financial effects and calculations of cost savings or
synergies prepared by the management of Sandpiper. At the direction of Digital
Island, in rendering the Bear Stearns opinion, Bear Stearns relied upon the
Sandpiper Projections prepared by Digital Island management and provided to
Bear Stearns. Bear Stearns also assumed, with Digital Island's consent, that:

. Digital Island and Sandpiper will comply with all the material terms and
conditions of the merger agreement and all applicable laws and
regulations;

. the merger will be consummated in accordance with the terms thereof and
that Sandpiper will become a wholly owned subsidiary of Digital Island;
and

. the merger will be afforded purchase treatment under generally accepted
accounting principles in the United States.

Bear Stearns has also relied upon the representations of Digital Island in
respect of the tax treatment of the merger. Other than as described herein,
Digital Island did not place any limitations on Bear Stearns regarding the
procedures to be followed and the factors to be considered in rendering the
Bear Stearns opinion.

In arriving at the Bear Stearns opinion, Bear Stearns did not assign any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments based upon its experience in providing such opinions and
on then-existing economic, monetary, market and other conditions as to the
significance of each analysis and factor. Bear Stearns believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered, without considering all of the analyses
and factors, could create a misleading or incomplete view of the processes
underlying the Bear Stearns opinion. In its analyses, Bear Stearns, at Digital
Island's direction and with Digital Island's consent, made numerous assumptions
with respect to industry performance, general business conditions and other
matters, many of which are beyond the control of Digital Island, Sandpiper or
Bear Stearns. Any assumed estimates implicitly contained in the Bear Stearns
opinion or relied upon by it in rendering the Bear Stearns opinion, are not
necessarily reflective of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. Any estimates relating to the value of a business or securities do not
purport to be appraisals or necessarily reflections of the prices at which
companies or securities may actually be sold.

52
<PAGE>

Bear Stearns is an internationally recognized investment banking firm which,
as part of its investment banking business, regularly engages in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes. The Digital Island board of directors selected
Bear Stearns on the basis of its experience and independence. Bear Stearns has
previously rendered investment banking and financial advisory services to
Digital Island in connection with Digital Island's initial public offering, for
which Bear Stearns received customary compensation. In the ordinary course of
its business, Bear Stearns may actively trade the equity and debt securities of
Digital Island for its own account or for accounts of its customers and,
accordingly, Bear Stearns may at any time hold a long or short position in such
securities.

Pursuant to the terms of the engagement letter between Digital Island and
Bear Stearns dated October 19, 1999, Digital Island agreed to pay to Bear
Stearns: (a) a success fee of $2,500,000 upon consummation of the merger and
(b) upon the earlier of (x) the execution by Digital Island and Sandpiper of a
definitive agreement or (y) the rendering by Bear Stearns of a fairness
opinion, from a financial point of view, of the consideration for the merger, a
cash fee of $625,000, which will be credited against the success fee. In
addition, Digital Island has agreed to reimburse Bear Stearns for all out-of-
pocket expenses incurred by it in connection with the proposed transaction,
including fees and disbursements of its legal counsel. Digital Island has also
agreed to indemnify Bear Stearns against specific liabilities in connection
with its engagement, including liabilities under the federal securities laws.

The following is a summary of the material valuation, financial and
comparative analyses performed by Bear Stearns in arriving at the Bear Stearns
opinion dated October 23, 1999.

Discounted Cash Flow Analysis of Combined Company. Bear Stearns performed a
discounted cash flow analysis on the after-tax cash flows of Digital Island on
a stand-alone basis and on a pro forma basis giving effect to the merger with
Sandpiper based on the Projections and Combination Benefits provided to Bear
Stearns by Digital Island. After-tax cash flows for the five-year period
beginning January 1, 2000 and ending on December 31, 2004 were calculated as
after-tax earnings before depreciation and amortization less changes in working
capital and capital expenditures. Bear Stearns calculated a terminal value for
Digital Island on a stand-alone basis and on a pro forma basis by applying to
projected earnings before interest, taxes, depreciation and amortization
("EBITDA") in 2004 a range of multiples of 12.0x to 16.0x for Digital Island on
a stand-alone basis and of 14.0x to 18.0x for Digital Island on a pro forma
basis. Bear Stearns' determination of the appropriate ranges of multiples was
based on comparisons of multiples for certain selected Internet-related
companies with growth rates generally similar to Digital Island's and
Sandpiper's at the end of the projected period and on Bear Stearns' general
experience in valuing companies. In addition, Bear Stearns compared the
expected perpetual growth rates in after-tax cash flow with those implied by
the selected multiples. Weighted average costs of capital ranging from 16.0% to
20.0% were chosen based on several assumptions regarding factors such as the
inflation rate, interest rates and the inherent business risk of the combined
company.

The discounted cash flow analysis of Digital Island on a stand-alone basis
generated per share equity values ranging from a low of $34.67 per share
(assuming a 12.0x multiple and a 20.0% weighted average cost of capital), to a
mid-point of $44.55 per share (assuming a 14.0x multiple and a 18.0% weighted
average cost of capital), to a high of $55.96 per share (assuming a 16.0x
multiple and a 16.0% weighted average cost of capital). The discounted cash
flow analysis of Digital Island on a pro forma basis generated per share equity
values ranging from a low of $40.30 per share (assuming a 14.0x multiple and a
20.0% weighted average cost of capital), to a mid-point of $50.36 per share
(assuming a 16.0x multiple and a 18.0% weighted average cost of capital), to a
high of $61.96 per share (assuming a 18.0x multiple and a 16.0% weighted
average cost of capital).

Bear Stearns compared the range of per share equity values for Digital
Island on a pro forma basis to the range of per share equity values for Digital
Island on a stand-alone basis, in each case assuming a mid-point weighted
average cost of capital of 18%. The premium/(discount) of the per share equity
value for Digital

53
<PAGE>

Island on a pro forma basis compared to the per share equity value for Digital
Island on a stand-alone basis at certain points in the analysis are set forth
in the following table:

<TABLE>
<CAPTION>
EBITDA terminal multiples for
Digital Island on a pro forma basis
-----------------------------------
14.0x 16.0x 18.0x
----------- ----------- -----------
<S> <C> <C> <C> <C>
EBITDA terminal multiples 12.0x $ 6.05 $ 12.42 $ 18.80
for Digital Island on a stand-
alone basis 14.0x $ (0.56) $ 5.82 $ 12.19
16.0x $ (7.16) $ (0.79) $ 5.59
</TABLE>
The following table sets forth the premiums/(discounts) in the table above
as a percentage of the per share value for Digital Island on a stand-alone
basis at certain points in the analysis, in each case assuming a mid-point
weighted average cost of capital of 18%:

<TABLE>
<CAPTION>
EBITDA terminal multiples
for Digital Island on a pro forma basis
---------------------------------------
14.0x 16.0x 18.0x
------------- ------------- -------------
<S> <C> <C> <C> <C>
EBITDA terminal
multiples 12.0x 15.9 % 32.7 % 49.6%
for Digital Island on a
stand-alone basis 14.0x (1.3)% 13.1 % 27.4%
16.0x (14.0)% (1.5)% 10.9%
</TABLE>

Illustrative Value Creation Analysis Based on Trading Multiples of
Comparable Companies. Bear Stearns noted that, based on the implied enterprise
value of Digital Island on a pro forma basis as of October 21, 1999, the
implied multiple of estimated pro forma 2001 revenue was 6.7x. The implied
enterprise value was calculated by adding the pro forma debt of the combined
company to the pro forma market capitalization of the combined company on a
fully-diluted basis (based on Digital Island's closing stock price on October
21, 1999 and based on the number of shares to be issued to the Sandpiper
shareholders pursuant to the exchange ratio), and subtracting cash and cash
equivalents from that amount.

Bear Stearns calculated a range of implied values of Digital Island common
stock on a pro forma basis by applying a range of multiples of estimated 2001
revenue and estimated cost savings. The multiples of estimated 2001 revenue
ranged from 4.7x to 10.0x, which range was based on (i) Digital Island's
current trading multiple of estimated 2001 revenue (4.7x), (ii) the implied
multiple of estimated 2001 revenue (6.7x) and (iii) an assumed high multiple of
estimated 2001 revenue (10.0x). Bear Stearns analyzed the implied values
against a range of potential annual cost savings from $0 to $10.0 million in
increments of $2.5 million, which cost savings were capitalized at a multiple
of 20.0x. The range of implied pro forma values of Digital Island common stock
based on these multiples and potential annual cost savings are set forth in the
following table:

<TABLE>
<CAPTION>
Multiple of 2001E
revenue
--------------------
Cost Savings (in $ millions) 4.7x 6.7x 10.0x
---------------------------- ------ ------ ------
<S> <C> <C> <C>
$0.0................................................... $15.35 $21.13 $31.02
2.5................................................... 16.09 21.86 31.75
5.0................................................... 16.82 22.60 32.49
7.5................................................... 17.56 23.33 33.22
10.0................................................... 18.29 24.07 33.96
</TABLE>

The following table sets forth the percentage premium or discount of the
implied values set forth in the above table to the closing price of $21.13 of
Digital Island common stock on October 21, 1999, two business days prior to the
date of the Bear Stearns opinion:

<TABLE>
<CAPTION>
Multiple of 2001E revenue
-------------------------------
Cost Savings (in $ millions) 4.7x 6.7x 10.0x
---------------------------- --------- -------- ---------
<S> <C> <C> <C>
$0.0........................................ (27.3)% 0.0% 46.8%
2.5........................................ (23.9) 3.5 50.3
5.0........................................ (20.4) 7.0 53.8
7.5........................................ (16.9) 10.4 57.3
10.0........................................ (13.4) 13.9 60.8
</TABLE>

54
<PAGE>

Bear Stearns compared the implied multiple of estimated 2001 revenues of
Digital Island on a pro forma basis to trading multiples of estimated 2001
revenues, based on publicly available information, including estimates in
published third party research reports, of 22 selected data hosting, Internet
access, commerce enablers, Internet infrastructure and Internet service
provider companies (based on closing stock prices as of October 15, 1999)
which, in Bear Stearns' judgment, were comparable to the operations of the
combined company for purposes of this analysis. Because Sandpiper is not a
publicly-trade company, no trading multiples were available with respect to it.
The companies included:

<TABLE>
<CAPTION>
Commerce Internet Internet Service
Data Hosting Internet Access Enablers Infrastructure Providers
- ------------ --------------- -------- -------------- ----------------
<S> <C> <C> <C> <C>
Exodus Communications, Inc. Excite/@Home Broadvision RealNetworks PSINet Inc.
Internap Covad Verisign Inktomi Verio Inc.
Digex Northpoint Marimba F5 Concentric Network
Globix Corp. Rhythms Packateer Foundry Corporation
NetConnections Inc. Vignette
NAS Akamai
Technologies Inc.
</TABLE>

Bear Stearns compared the implied multiple of 6.7x estimated pro forma 2001
revenue for Digital Island on a pro forma basis to the trading multiples of the
comparable companies. The following table sets forth the arithmetic means of
the trading multiples of estimated 2001 revenues for each of the above groups
of companies:

<TABLE>
<CAPTION>
Implied multiple of
2001E revenues
-------------------
<S> <C>
Data hosting........................................... 17.1x
Internet access........................................ 10.0x
Commerce enablers...................................... 21.9x
Internet infrastructure................................ 29.3x
Internet service provides.............................. 4.1x
</TABLE>

While Bear Stearns determined that the comparable companies are comparable
in some respects, none is comparable in all respects. Of the groups of
companies in the above table, Bear Stearns deemed the Internet infrastructure
companies to be the most comparable to Digital Island.

Relative Contribution Analysis. Bear Stearns also performed an analysis of
the relative contributions by Digital Island and Sandpiper to the pro forma
combined company with respect to projected 1999 to 2004 revenues and projected
2002 to 2004 EBITDA based upon the Projections and Combination Benefits
provided by Digital Island. Bear Stearns compared this analysis to the relative
contributions to combined enterprise value by Digital Island and Sandpiper.
Based on the closing price of Digital Island common stock on October 21, 1999
and the number of shares to be issued to the Sandpiper shareholders pursuant to
the exchange ratio, Digital Island would contribute 57.0% of the combined
enterprise value and Sandpiper would contribute 43.0% of the combined
enterprise value.

The following table sets forth the relative contributions to projected
revenues during the periods indicated by Digital Island and Sandpiper:

<TABLE>
<CAPTION>
1999E 2000E 2001E 2002E 2003E 2004E
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Digital Island........................ 96.6% 84.0% 80.3% 74.1% 67.2% 60.5%
Sandpiper............................. 3.4% 16.0% 19.7% 25.9% 32.8% 39.5%
</TABLE>

55
<PAGE>

The following table sets forth the relative contributions to projected
EBITDA, without giving effect to projected Combination Benefits, by Digital
Island and Sandpiper:

<TABLE>
<CAPTION>
2002E 2003E 2004E
----- ----- -----
<S> <C> <C> <C>
Digital Island.......................................... 84.6% 73.4% 64.0%
Sandpiper............................................... 15.4% 26.6% 36.0%
</TABLE>

The following table sets forth the relative contributions to projected
EBITDA giving effect to projected cost savings by Digital Island and Sandpiper
and the relative contribution to EBITDA by the projected Combination Benefits:

<TABLE>
<CAPTION>
2002E 2003E 2004E
----- ----- -----
<S> <C> <C> <C>
Digital Island.......................................... 68.1% 69.5% 61.2%
Sandpiper............................................... 12.5% 25.1% 34.4%
Combination Benefits.................................... 19.4% 5.4% 4.4%
</TABLE>

Bear Stearns noted that Digital Island's relative contribution to pro forma
combined revenue and EBITDA (both with and without the Combination Benefits)
exceeded its contribution to pro forma combined enterprise value in each year
throughout the projected period. However, Bear Stearns noted that such
unfavorable comparisons diminished substantially over time due to the higher
growth rates of revenue and EBITDA inherent in the Sandpiper Projections. In
addition, Bear Stearns believes that less emphasis should be placed on this
relative contribution analysis than on other analyses herein due to the
material differential between the trading multiple of Digital Island and
trading multiples of companies comparable to Sandpiper.

Other Analyses. Bear Stearns conducted such other analyses as it deemed
necessary, including reviewing historical and projected financial and operating
data for Digital Island and Sandpiper.

Interests of Officers and Directors in the Merger

Concurrently with the effectiveness of the merger, Digital Island and
Sandpiper plan to enter into employment agreements with Leo Spiegel, Andrew
Swart and David Farber, all current employees of Sandpiper. The proposed term
of Mr. Spiegel's employment agreement is through November 24, 2000 unless
terminated earlier by Digital Island, and the term of Mr. Swart's and Mr.
Farber's employment agreements is for one year following the closing the
merger, unless terminated earlier by Digital Island. Pursuant to the employment
agreements, Mr. Spiegel's annual base salary will be $240,000 with an annual
bonus target of $48,000, and he will participate in all employee benefit plans
for which he is eligible. Each of Mr. Swart's and Mr. Farber's annual base
salary will be $170,000 with an annual bonus target of $50,000, and each will
participate in all employee benefit plans for which he is eligible.

If the employee is terminated without cause during the term of the
employment agreement, the employee is eligible to receive his base salary as a
severance payment until the earlier of one year following the closing of the
merger (or until November 24, 2000 in the case of Mr. Spiegel) or the date the
employee begins employment with another employer. Mr. Swart's and Mr. Farber's
employment agreements also provide for the grant to each of a stock option for
150,000 shares of Digital Island's common stock, which will vest over 50 months
of successive employment with Digital Island, subject to acceleration in the
event of a change in control. See "The Merger Agreement and Related
Agreements--Related Agreements--Employment Agreements."

Digital Island entered into a retention agreement with Thomas Govreau for a
sixty day period following the closing of the merger. During the retention
period, Mr. Govreau's monthly rate of base salary will be $11,040. At the end
of the retention period, Mr. Govreau is eligible to receive salary continuation
payments at the monthly rate of base salary in effect at that time for a six
month period.

56
<PAGE>

As of December 3, 1999, the executive officers and directors of Sandpiper
owned an aggregate of 5,833,541 shares of Sandpiper common stock, of which
1,682,519 shares are unvested and subject to repurchase by Sandpiper at a
repurchase price of $0.07 per share pursuant to restricted stock purchase
agreements. Additionally, as of such date the executive officers and directors
of Sandpiper held options to purchase an aggregate of 630,000 shares of
Sandpiper common stock, of which 605,417 are unvested.

If the merger is completed, all of the 858,917 unvested shares (determined
as of October 31, 1999) issued to Mr. Spiegel pursuant to a restricted stock
purchase agreement will vest free from such repurchase rights in two equal
portions on March 24 and November 24, 2000. In the event that Mr. Spiegel is
terminated by Digital Island without cause, all of his shares will vest in full
at that time. All of the unvested shares, including 298,096 shares each with
respect to Mr. Swart and Mr. Farber and 100,894 shares with respect to
Ronald Lachman, a director of Sandpiper (determined as of October 31, 1999),
issued to Messrs. Swart, Farber and Lachman pursuant to restricted stock
purchase agreements will immediately vest free from such repurchase rights in
the event that such individual's employment or service with Digital Island is
terminated following the merger. All 116,250 unvested shares (determined as of
October 31, 1998) issued to Thomas Govreau pursuant to a restricted stock
purchase agreement will vest free from such repurchase rights upon his
continuation of employment with Digital Island for a period of sixty days
following the effective date of the merger.

Any accelerated vesting of the shares held by Messrs. Swart, Farber and
Lachman is in accordance with the original terms of their restricted stock
purchase agreements, which provided for such full acceleration upon the
individual's termination following a transaction such as the merger. Mr.
Spiegel's agreement provided for full acceleration upon a transaction such as
the merger, but he has agreed to amend his agreement to conform to the terms
described above. The accelerated vesting of Mr. Govreau's shares is in
accordance with the terms of his retention agreement with Digital Island. Each
of these individuals agreed to waive any acceleration resulting from the merger
unless the acceleration was approved by the shareholders of Sandpiper pursuant
to Section 280G of the Internal Revenue Code, and the shareholders gave their
approval on December 8, 1999.

Directors of Sandpiper and their affiliates will be subject (other than with
respect to the surrender of Sandpiper capital stock in exchange for Digital
Island's common stock pursuant to the merger) to certain volume limitations
imposed by Rule 144 under the Securities Act which restrict the number of
shares of Digital Island common stock held following the merger that each may
transfer at any given time.

Charlie Bass, a director of Digital Island, owns 71,429 shares of Sandpiper
Series A preferred stock and also holds a warrant to purchase up to an
additional 14,286 shares of Sandpiper Series A preferred stock. As a result,
Mr. Bass may be more likely, in his capacity as a director of Digital Island or
shareholder of Sandpiper, to vote to approve the issuance of Digital Island
common stock pursuant to the merger than Digital Island stockholders generally.

57
<PAGE>

Excess Parachute Payments

Each of the Sandpiper executives named below acquired Sandpiper common stock
under agreements which give Sandpiper the right to repurchase their shares at
the original $0.07 purchase price paid by the shareholder, upon any termination
of such executive's employment (in the case of Mr. Lachman, upon a termination
of service as a director). Each agreement provides that the shares will vest
free from this repurchase right, prorated during a stated period, if the
executive continues to provide services to Sandpiper. Mr. Spiegel's agreement
originally provided that all of the shares would vest free of Sandpiper's
repurchase right upon any merger, reorganization or sale of substantially all
of the assets of Sandpiper (this would include the merger). Mr. Spiegel waived
this acceleration and his shares will now vest in accordance with the revised
vesting schedule summarized below. The vesting acceleration provisions for
Mr. Swart, Mr. Farber and Mr. Lachman will remain in effect in accordance with
their original terms, as summarized below. The following table sets forth the
number of currently unvested Sandpiper shares, and the number of shares of
Digital Island which will be received in the merger and will be subject to such
acceleration, for each of these executives:

<TABLE>
<CAPTION>
Number of
Currently Unvested Number of
Sandpiper Shares Digital Island
(determined as of Shares Subject
Name Position October 31, 1999) to Acceleration
- ---- -------- ------------------ ---------------
<S> <C> <C> <C>
Leo Spiegel............. President and CEO 858,917 921,360

Andrew Swart............ VP Engineering and Co-Founder 298,096 319,767

David Farber............ Chief Technology Officer and Co-Founder 298,096 319,767

Ronald Lachman.......... Director and Co-Founder 100,894 108,229

Thomas Govreau.......... Chief Financial Officer 116,250 124,701
</TABLE>

The particular vesting acceleration provisions which will be in effect for
the unvested shares of Digital Island common stock these executives will
receive for their unvested Sandpiper shares in the merger may be summarized as
follows:

. Mr. Spiegel:

--Revised Vesting Schedule. Fifty percent (50%) of his unvested Digital
Island shares will vest if he continues his employment with Digital
Island through March 24, 2000. The remaining fifty percent (50%) of
his unvested shares will vest if he continues his employment with
Digital Island through November 24, 2000.

--Acceleration upon Termination of Employment. All of his unvested
shares will immediately vest should his employment be terminated by
Digital Island without cause or should he terminate his employment
for good reason within one year after the merger.

. Messrs. Swart, Farber and Lachman:

--Should the employment of any of these executives terminate for any
reason following the merger, then any unvested Digital Island shares
received by that executive in the merger will, to the extent those
shares remain unvested at the time of such termination, immediately
vest.

. Mr. Govreau:

--Mr. Govreau will enter into a retention agreement with Digital Island
under which he will agree to continue in employment with Digital
Island for a period of at least sixty days following the effective
date of the merger. Upon his completion of that retention period, all
of the Digital Island shares he receives in exchange for his unvested
Sandpiper shares in the merger will vest.

The number of shares potentially subject to accelerated vesting in
accordance with these vesting acceleration provisions is at sufficiently high
levels for each of the named Sandpiper executives that any actual

58
<PAGE>

accelerated vesting of those shares could have triggered an excess parachute
payment under Internal Revenue Code Section 280G. In such event, the value of
any accelerated vesting, as determined under applicable federal tax laws and
regulations, would have triggered adverse tax consequences for both the
executive and Digital Island, to the extent that value exceeded the average W-2
wages which the named executive received from Sandpiper for the five calendar
years (or such lesser number of calendar years of actual employment with
Sandpiper) immediately preceding the calendar year in which the merger occurs
(the "Excess Parachute Payment"). The adverse tax consequences which would have
resulted from such an Excess Parachute Payment may be summarized as follows:

. The executive would have incurred a 20% excise tax on the Excess
Parachute Payment attributable to the accelerated vesting of his
shares. This excise tax would have been in addition to any federal
and state income taxes which the executive might otherwise have
incurred in connection with the vesting of the shares.

. Digital Island would not have been entitled to any income tax
deduction it may have otherwise been eligible for with respect to the
Excess Parachute Payment.

However, these adverse tax consequences will be avoided because the vesting
acceleration described above has, in accordance with the requirements of
Internal Revenue Code Section 280G and the applicable regulations thereunder,
been approved by Sandpiper shareholders holding more than 75% of the total
voting power of all of Sandpiper's outstanding voting shares (excluding shares
held by Messrs. Spiegel, Swart, Farber, Govreau and Lachman). As part of that
shareholder approval process, Messrs. Spiegel, Swart, Farber, Govreau and
Lachman each agreed that none of their shares would have vested on an
accelerated basis, had the requisite 75% shareholder approval not been
obtained.

Regulatory Approvals

The merger is subject to U.S. antitrust laws. We have made the required
filings with the Department of Justice and the Federal Trade Commission. The
applicable waiting period expired on December 5, 1999. The Department of
Justice and the Federal Trade Commission, as well as a state or private person,
may challenge the merger at any time before or after its completion. Neither
Digital Island nor Sandpiper is aware of any other material governmental or
regulatory approval required for completion of the merger, other than
compliance with applicable corporate law of Delaware and California.

Material Federal Income Tax Considerations

The following discussion describes the material United States federal income
tax consequences of the exchange of shares of Sandpiper capital stock for
Digital Island common stock pursuant to the merger that are generally
applicable to holders of Sandpiper capital stock. Riordan & McKinzie, legal
counsel to Sandpiper, is of the opinion that the following discussion
accurately describes such material United States federal income tax
consequences. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended, or Code, existing and proposed
Treasury regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or
may not be retroactive, could alter the tax consequences to Sandpiper
shareholders as described below.

Sandpiper shareholders should be aware that this discussion does not address
all United States federal income tax considerations that may be relevant to
particular Sandpiper shareholders in light of their particular circumstances,
such as shareholders who are dealers in securities or foreign currency, who are
subject to the alternative minimum tax provisions of the Code, who are foreign
persons, who do not hold their Sandpiper capital stock as capital assets, who
hold their Sandpiper capital stock as part of a straddle, pledge against
currency risk, constructive sale or conversion transaction, or who acquired
their shares in connection with stock option or stock purchase plans or in
other compensatory transactions. In addition, the following discussion does not
address the tax consequences of the merger under foreign, state or local tax
laws, the tax consequences of other transactions effectuated prior or
subsequent to, or concurrently with, the merger (whether or not any such
transactions are undertaken in connection with the merger), including without
limitation any transaction in

59
<PAGE>

which shares of Sandpiper capital stock are acquired or shares of Digital
Island common stock are disposed of,
or the tax consequences of the assumption by Digital Island of the Sandpiper
options. Accordingly, Sandpiper shareholders are urged to consult their own tax
advisors as to the specific tax consequences to them of the merger, including
the applicable united states federal, state, local and foreign tax
consequences.

The merger is intended to constitute a reorganization within the meaning of
the Code. Provided that the merger qualifies as a reorganization, then, subject
to the limitations and qualifications referred to below, the merger will
generally result in the following United States federal income tax consequences
to the Sandpiper shareholders:

. No gain or loss will be recognized by holders of Sandpiper capital stock
upon their receipt of Digital Island common stock in exchange for
Sandpiper capital stock in the merger (except to the extent of cash
received in lieu of fractional shares of Digital Island common stock).

. The aggregate tax basis of the Digital Island common stock received by
Sandpiper shareholders in the merger, together with any tax basis
attributable to fractional shares deemed to be disposed of, will be the
same as the aggregate tax basis of the Sandpiper capital stock
surrendered in exchange therefor.

. The holding period of the Digital Island common stock received by each
Sandpiper shareholder in the merger will include the period for which the
Sandpiper capital stock surrendered in exchange therefor was considered
to be held.

. Cash payments received by holders of Sandpiper capital stock in lieu of
fractional shares of Digital Island common stock will be treated as if
such fractional shares of Digital Island common stock had been issued in
the merger and then redeemed by Digital Island. A Sandpiper shareholder
receiving cash in lieu of a fractional share of Digital Island common
stock will recognize gain or loss upon such payment measured by the
difference, if any, between the amount of cash received and such
shareholder's basis in such fractional share.

The parties have not and will not request a ruling from the Internal Revenue
Service as to the tax consequences of the merger. The consummation of the
merger is conditioned upon Sandpiper's receipt of an opinion from Riordan &
McKinzie and Digital Island's receipt of an opinion from Brobeck, Phleger &
Harrison LLP, to the effect that the merger will constitute a reorganization
within the meaning of the Code. Sandpiper shareholders should be aware that the
tax opinions do not bind the Internal Revenue Service, and the Internal Revenue
Service is therefore not precluded from successfully asserting a contrary
position. The tax opinions will be subject to certain assumptions and
qualifications, including but not limited to the truth and accuracy of certain
representations made by Digital Island and Sandpiper.

A successful Internal Revenue Service challenge to the reorganization status
of the merger would result in Sandpiper shareholders recognizing taxable gain
or loss with respect to each share of Sandpiper capital stock surrendered equal
to the difference between the shareholder's basis in such share and the fair
market value as of the completion of the merger of the Digital Island common
stock received in exchange. In such event, a shareholder's aggregate basis in
the Digital Island common stock so received would equal the fair market value
of such stock, and the shareholder's holding period for such stock would begin
the day after the merger.

Tax Consequences of the Escrow. Under the merger agreement, 10% of the
aggregate number of shares of Digital Island common stock issuable in the
merger will be placed in escrow. The return of any escrow shares to Digital
Island in satisfaction of an indemnifiable claim should not result in the
recognition of gain or loss to the holders of escrow shares. The return of any
escrow shares to Digital Island should be characterized as an adjustment to the
exchange terms of the merger agreement. Accordingly, the basis of each share of
Digital Island common stock received in the merger by holders of escrow shares
would be adjusted. Shareholders of Sandpiper are urged to consult their tax
advisors regarding the tax consequences to them of the transfer of the escrow
shares.

Backup withholding with respect to cash paid instead of fractional shares of
Digital Island common stock. Certain non-corporate Sandpiper shareholders may
be subject to backup withholding at a 31% rate on cash payments received
instead of fractional shares of Digital Island common stock. Backup withholding
will

60
<PAGE>

not apply, however, to a Sandpiper shareholder who (a) furnishes a correct
taxpayer identification number and certifies that he, she or it is not subject
to backup withholding on the substitute Form W-9 or successor form included in
the letter of transmittal to be delivered to Sandpiper shareholders following
the date of the merger, (b) provides a certification of foreign status on Form
W-8 or successor form or (c) is otherwise exempt from backup withholding.

Anticipated Accounting Treatment

Digital Island intends to treat the merger as a purchase for accounting and
financial reporting purposes, which means that Digital Island will treat
Sandpiper as a separate entity for periods prior to the closing and,
thereafter, as a wholly owned subsidiary of Digital Island.

Dissenters' Rights

The following summary of the statutory procedure to be followed by a
dissenting Sandpiper shareholder in order to exercise his, her or its
Dissenters' Rights under Chapter 13 of the California Corporations Code, or
CCC, is not a complete statement of the law relating to Dissenters' Rights and
is qualified in its entirety by reference to the full text of Chapter 13 of the
CCC. This discussion and Chapter 13 of the CCC should be reviewed carefully by
any Sandpiper shareholder who wishes to exercise statutory Dissenters' Rights
or who wishes to preserve the right to do so, since failure to comply with the
procedures set forth in Chapter 13 of the CCC will result in the loss or waiver
of Dissenters' Rights. A copy of Chapter 13 of the CCC is attached as Annex C
to this joint proxy statement/prospectus and is incorporated herein by
reference.

If the merger is approved by the required vote of Sandpiper shareholders,
each Sandpiper shareholder who does not vote in favor of the merger and who
follows the procedures set forth in Chapter 13 of the CCC will be entitled to
exercise dissenters' rights under the CCC and thereby have Sandpiper shares
purchased by Sandpiper for cash at the fair market value of the Sandpiper
shares. A failure to vote affirmatively against the merger will not constitute
a waiver of dissenters' rights set forth in Chapter 13 of the CCC. Any
Sandpiper shares as to which such dissenters' rights are exercised will not be
converted into the right to receive shares of Digital Island common stock but
instead will be converted into the right to receive such consideration as may
be determined to be due with respect to such Sandpiper shares pursuant to the
CCC.

Upon approval of the merger, a shareholder of Sandpiper on the record date
for such approval may, by complying with the provisions of Chapter 13 of the
CCC, require Sandpiper to purchase for cash at fair market value the shares
owned by such holder and that were not voted to approve and adopt the merger
agreement and approve the merger. The fair market value of Sandpiper shares
will be determined as of the day before the first announcement of the terms of
the proposed merger, excluding any appreciation or depreciation in consequence
of the proposed merger (i.e., valuing the Sandpiper shares as if the merger had
not occurred) but adjusted for any stock split, reverse stock split or stock
dividend that becomes effective thereafter.

Shares of Sandpiper capital stock must satisfy each of the following
requirements to qualify as dissenting shares under California law:

. the shares of Sandpiper capital stock must have been outstanding on the
record date;

. the shares of Sandpiper capital stock must not have been voted in favor
of the merger;

. the holder of such shares of Sandpiper capital stock must make a written
demand that Sandpiper repurchase such shares of Sandpiper capital stock
at fair market value; and

. the holder of such shares of Sandpiper capital stock must submit share
certificates for endorsement.

Within ten days after the date of the approval of the merger, Sandpiper must
mail a notice of the approval of the merger to each shareholder who has not
voted to approve and adopt the merger, together with a statement of the price
determined by Sandpiper to represent the fair market value of the Sandpiper
shares, a

61
<PAGE>

brief description of the procedure to be followed in order for the shareholder
to pursue dissenters' rights, and a copy of Sections 1300 to 1304 of Chapter 13
of the CCC. The statement of price by Sandpiper constitutes an offer by
Sandpiper to purchase all properly dissenting shares at the stated amount.

In order to exercise rights as a dissenting shareholder, within 30 days
after the date on which notice of the approval of the merger by the outstanding
shares of Sandpiper capital stock is mailed to dissenting shareholders,
Sandpiper must receive a dissenting shareholder's written demand that Sandpiper
repurchase such dissenting shareholder's dissenting shares setting forth the
number and class of dissenting shares held of record by such dissenting
shareholder that the dissenting shareholder demands that Sandpiper purchase,
and a statement of what the dissenting shareholder claims to be the fair market
value of the dissenting shares as of the day before the announcement of the
proposed merger. The statement of fair market value in such demand by the
dissenting shareholder constitutes an offer by the dissenting shareholder to
sell the dissenting shares at such price to Sandpiper. Such holder must also
submit to Sandpiper, within 30 days after the date on which notice of the
approval by the outstanding shares was mailed to shareholders, share
certificates representing any dissenting shares that the dissenting shareholder
demands that Sandpiper purchase, so that such dissenting shares may either be
stamped or endorsed with the statement that the shares are dissenting shares or
exchanged for certificates of appropriate denomination so stamped or endorsed.

If the dissenting shareholder and Sandpiper agree that the shares qualify as
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed upon price plus the legal rate of
interest on judgments from the date of such agreement, to be paid to the
dissenting shareholder within the later of 30 days after the date of such
agreement or 30 days after any statutory or contractual conditions to the
consummation of the merger are satisfied or waived subject to surrender, by the
dissenting shareholder, of his, her or its certificates representing the
dissenting shares to Sandpiper.

If the dissenting shareholder and Sandpiper fail to agree upon the fair
market value of the dissenting shares or whether the shares qualify as
dissenting shares, the dissenting shareholder may file a complaint in
California superior court within six months after the date on which notice of
the approval of the merger is mailed to shareholders requesting that the court
determine the fair market value of the dissenting shares and/or whether the
shares qualify as dissenting shares. California law provides, among other
things, that a dissenting shareholder may not withdraw the demand for payment
of the fair market value of dissenting shares unless Sandpiper consents to such
request for withdrawal.

Under the provisions of Section 500 and following and Section 1306 of the
CCC, a California corporation is legally prohibited from purchasing shares of
stock through the payment of cash or other property, even if all dissenters'
rights conditions are fulfilled, unless the corporation satisfies certain
financial conditions. Due to these legal restrictions, Sandpiper may not
legally be able to repurchase all or any dissenting shares of the dissenting
shareholders for cash following the merger.

To the extent that the above-mentioned provisions of the CCC prohibit cash
payments to holders of dissenting shares who exercise and perfect their
dissenters' rights, such dissenting shareholders will become creditors of
Sandpiper for an amount equal to the fair market value of their shares as to
which the dissenters' rights are perfected plus interest accrued thereon at the
legal rate on judgments until the date of payment. The rights of such
dissenting shareholders, however, will be subordinate to the rights of all
other creditors of Sandpiper in any liquidation proceeding.

Dissenting shareholders considering seeking appraisal should be aware that
the fair market value of their shares of capital stock, as determined under
Chapter 13 of the CCC, could be more than, the same as or less than the amount
that would be paid to them pursuant to the merger agreement. The costs and
expenses of the appraisal proceeding will be determined by the court and
assessed against Sandpiper unless the court determines that the dissenting
shareholder did not act in good faith in demanding payment of the fair market
value of his, her or its shares, in which case such costs and expenses may be
assessed against the dissenting shareholder.

62
<PAGE>

If any Sandpiper shareholder who demands the purchase of his, her or its
shares under Chapter 13 of the CCC fails to perfect, or effectively withdraws
or loses his, her or its right to such purchase, the shares of such holder will
be converted into a right to receive the applicable merger consideration with
respect thereto in accordance with the terms of the merger agreement.
Dissenting shares lose their status as dissenting shares and the holders of
dissenting shares cease to be dissenting shareholders and cease to be entitled
to require Sandpiper to purchase their shares if:

. the merger is abandoned;

. the shares are transferred prior to their submission for the required
endorsement or are surrendered for conversion into shares of another
class in accordance with the amended and restated articles of
incorporation of Sandpiper;

. the dissenting shareholder and Sandpiper do not agree upon the status of
the shares as dissenting shares or do not agree on the purchase price,
but neither Sandpiper nor the shareholder files a complaint or intervenes
in a pending action within six months after mailing of the notice of
approval of the merger; or

. with Sandpiper's consent, the shareholder delivers to Digital Island a
written withdrawal of such shareholder's demand for purchase of his, her
or its shares.

Except as expressly limited by provisions of California law pertaining to
dissenters' rights, holders of dissenting shares, continue to have all the
rights and privileges incident to their shares until the fair market value of
their shares is agreed upon or determined.

Failure to follow the steps required by Chapter 13 of the CCC for perfecting
Dissenters' Rights may result in the loss of such rights (in which event a
shareholder will be entitled to receive the applicable merger consideration
with respect to such dissenting shares in accordance with the merger
agreement). In view of the complexity of the provisions of Chapter 13,
Sandpiper shareholders who are considering objecting to the merger should
consult their own legal advisors.

For more information on the rights of Sandpiper shareholders, see
"Comparison of Rights of Stockholders of Digital Island and Shareholders of
Sandpiper" beginning on page 86.

Listing of Digital Island Common Stock to be Issued in the Merger

The filing of an application with the Nasdaq National Market for the listing
of the shares of Digital Island common stock to be issued in the merger and the
shares of Digital Island common stock to be reserved for issuance in connection
with the assumption of outstanding Sandpiper stock options is a condition to
the consummation of the merger.

Restrictions on Sale of Shares by Affiliates of Digital Island and Sandpiper

The shares of Digital Island common stock to be issued in connection with
the merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of Digital Island
common stock issued to any person who is deemed to be an affiliate of either
Digital Island or Sandpiper at the time of the special meetings. Persons who
may be deemed to be affiliates include individuals or entities that control,
are controlled by, or are under common control of either Digital Island or
Sandpiper and may include some of the officers, directors, or principal
stockholders or shareholders of Digital Island or Sandpiper. Affiliates may not
sell their shares of Digital Island common stock acquired in connection with
the merger except under:

. an effective registration statement under the Securities Act covering the
resale of those shares;

. an exemption under paragraph (d) of Rule 145 under the Securities Act; or

. another applicable exemption under the Securities Act.

63
<PAGE>

In addition, Digital Island stockholders holding approximately 45% of the
outstanding common stock of Digital Island and Sandpiper shareholders holding
approximately 76% of the outstanding capital stock of Sandpiper, have agreed
not to sell their shares of Digital Island common stock from the time of the
merger until the earliest to occur of :

. July 15, 2000;

. such other date, and with such limitations, as may be approved by
unanimous vote of the board of directors of Digital Island.

The market standoff agreements are discussed in more detail in "The Merger
Agreement and Related Agreements--Market Standoff Agreements."

Digital Island's registration statement on Form S-4, of which this joint
proxy statement/prospectus forms a part, does not cover the resale of shares of
Digital Island common stock to be received by affiliates in the merger.

Operations Following the Merger

The merger agreement provides that, upon completion of the merger, the board
of directors of Digital Island shall consist of four designees of Digital
Island, who shall be Ruann Ernst, Cliff Higgerson, Marcelo Gumucio and Shahan
Soghikian; three designees of Sandpiper, who shall be Leo Spiegel, Robert
Kibble and G. Bradford Jones; and two mutually acceptable outside directors,
one of whom shall be Christos Cotsakos and the other of whom shall be mutually
agreed to at a later date. Upon completion of the merger, the shareholders of
Sandpiper will become stockholders of Digital Island, and their rights as
stockholders will be governed by Digital Island's certificate of incorporation,
Digital Island's bylaws and the laws of the State of Delaware.

64
<PAGE>

THE MERGER AGREEMENT AND RELATED AGREEMENTS

The following is a brief summary of the material provisions of the merger
agreement and related agreements, copies of which are attached as Annex A to
this joint proxy statement/prospectus and incorporated by reference in this
joint proxy statement/prospectus. We urge you to read the merger agreement and
the related agreements in their entirety for a more complete description of the
merger. In the event of any discrepancy between the terms of the merger
agreement or other agreements and the following summary, the applicable
agreement will control.

The Merger

Sandpiper will merge with Beach Acquisition Corp., a newly formed, wholly
owned subsidiary of Digital Island, following:

. the approval and adoption of the merger agreement and the merger by the
shareholders of Sandpiper;

. the approval of the issuance of Digital Island common stock in the merger
by the stockholders of Digital Island;

. the receipt of all necessary governmental consents, authorizations,
filings, approvals and registrations; and

. the satisfaction or waiver of the other conditions to the merger.

Sandpiper will be the surviving corporation and will become a wholly owned
subsidiary of Digital Island following the merger.

Effective Time

Digital Island and Sandpiper are working toward completing the merger as
soon as possible and hope to complete the merger before the first quarter of
calendar year 2000. Because the merger is subject to governmental and other
regulatory approvals, however, we cannot predict the exact timing.

Conversion of Sandpiper Shares in the Merger

At the effective time, each outstanding share of Sandpiper capital stock
(other than shares, if any, held by persons who have perfected, and not
withdrawn or otherwise forfeited dissenters' or appraisal rights under
California law) will automatically be converted into the right to receive
1.0727 shares of Digital Island common stock. The number of shares of Digital
Island common stock issuable in the merger will be proportionately adjusted:

. for any stock split, reverse split, stock dividend, reorganization,
recapitalization or similar event with respect to Sandpiper capital stock
or Digital Island common stock effected between the date of the merger
agreement and the completion of the merger; or

. if prior to the completion of the merger, the number of shares of
Sandpiper capital stock or Digital Island common stock, each outstanding
on a fully diluted basis, exceeds the number disclosed or permitted to be
issued by either party under the merger agreement.

Sandpiper Stock Plan

At the effective time, each outstanding option to purchase shares of
Sandpiper common stock issued under Sandpiper's 1997 Stock Plan will be assumed
by Digital Island regardless of whether the option is exercisable. Each
Sandpiper stock option assumed by Digital Island will continue to have the same
terms, and be subject to the same conditions, that were applicable to the
option immediately prior to the effective time, except that:

. each Sandpiper stock option will be exercisable for shares of Digital
Island common stock;

65
<PAGE>

. the number of whole shares of Digital Island common stock issuable upon
exercise of any given Sandpiper option will be determined by multiplying
1.0727 by the number of shares of Sandpiper common stock underlying the
option, rounded down to the next whole number; and

. the per share exercise price of any given option will be determined by
dividing the exercise price of the option immediately prior to the
effective time by 1.0727, rounded up to the next whole cent.

The parties intend for the Sandpiper stock options assumed by Digital Island
to qualify as incentive stock options to the extent the Sandpiper stock options
qualified as incentive stock options prior to the effective time.

Fractional Shares

No fractional shares of Digital Island common stock will be issued in
connection with the merger. Instead Sandpiper shareholders will receive an
amount of cash, in lieu of a fraction of a share of Digital Island common
stock, equal to the product of (A) this fraction multiplied by (B) the average
of the closing bid prices for a share of Digital Island common stock as quoted
on the Nasdaq National Market for the twenty trading days prior to the date on
which the effective time occurs.

The Exchange Agent

Digital Island is required to make available to its transfer agent, or
another institution selected by Digital Island and reasonably acceptable to
Sandpiper, promptly after the effective time:

. certificates representing the shares of Digital Island common stock to be
exchanged for shares of Sandpiper capital stock (less the number of
shares, if any, of Digital Island common stock to be deposited into the
escrow fund); and

. cash in an amount sufficient to pay for fractional shares and any
dividends or distributions that holders of Sandpiper common stock may be
entitled to receive under the merger agreement.

Exchange of Sandpiper Stock Certificates for Digital Island Stock Certificates

Promptly after the effective time, Digital Island will cause to be mailed to
each Sandpiper shareholder of record a letter of transmittal and instructions
for surrendering his, her or its Sandpiper stock certificates in exchange for
Digital Island stock certificates (less the number of shares, if any, to be
deposited in the escrow fund on the holder's behalf) and cash in lieu of
fractional shares.

Sandpiper shareholders should not submit their stock certificates for
exchange until they have received the letter of transmittal and instructions
referred to above.

Digital Island stockholders should not submit their stock certificates for
exchange.

Transfers of Ownership

Digital Island will issue a Digital Island stock certificate or a check in
lieu of a fractional share in a name other than the name registered for the
surrendered Sandpiper stock certificate only if the exchange agent is given all
documents required, including documents:

. to show and effect the unrecorded transfer of ownership; and

. to show that any applicable stock transfer taxes have been paid or that
such tax is not payable.

Distributions with Respect to Unexchanged Shares

Sandpiper shareholders are not entitled to receive any dividends or other
distributions on Digital Island common stock with a record date after the
merger is completed until they have surrendered their Sandpiper stock
certificates in exchange for Digital Island stock certificates.

66
<PAGE>

Subject to applicable law, if there is any dividend or other distribution on
Digital Island common stock with a record date after the merger, former
Sandpiper shareholders will receive, only following surrender of their
Sandpiper stock certificates, the dividend or other distribution payable with
respect to the whole shares of Digital Island common stock issued in exchange
for their Sandpiper stock certificates, without interest.

Representations and Warranties

Digital Island and Sandpiper each made a number of representations and
warranties in the merger agreement about their authority to enter into the
merger agreement and to consummate the other transactions contemplated by the
merger agreement and about aspects of their business, financial condition,
structure and other facts pertinent to the merger.

Sandpiper's representations and warranties included the following topics:

. Sandpiper's organization, qualification to do business and good standing;

. Sandpiper's capitalization;

. Sandpiper's corporate power to enter into, and its authorization of, the
merger agreement and the transactions contemplated by the merger
agreement, subject only to approval of the merger by Sandpiper's
shareholders;

. the effect of the merger agreement and the merger on obligations of
Sandpiper;

. Sandpiper's possession of consents and permits required in connection
with the merger agreement and transactions contemplated by the merger
agreement;

. Sandpiper's financial statements;

. changes in Sandpiper's business since September 30, 1999;

. the absence of undisclosed liabilities;

. litigation involving Sandpiper;

. restrictions on Sandpiper's business activities;

. possession of, and compliance with, permits and governmental
authorizations required to conduct Sandpiper's business;

. Sandpiper's title to the properties it owns and leases;

. intellectual property used or owned by Sandpiper;

. environmental laws that apply to Sandpiper;

. Sandpiper's tax liabilities and returns;

. Sandpiper's employee benefit plans;

. the effect of the merger on agreements between Sandpiper and its
directors and employees;

. matters relating to Sandpiper's employees;

. the absence of indebtedness between directors, officers, employees or
agents of Sandpiper and Sandpiper;

. Sandpiper's insurance;

. Sandpiper's compliance with applicable laws, rules and regulations of
governmental entities;

. the accuracy and completeness of Sandpiper's corporate minute books;

. Sandpiper's accounts receivable;

67
<PAGE>

. Sandpiper's customers and suppliers;

. Sandpiper's material contracts and obligations;

. the absence of any breach of Sandpiper's material contracts and
obligations;

. the effect of the year 2000 on Sandpiper's business, products and
services;

. Sandpiper's compliance with applicable export control laws;

. Sandpiper's scheduled product releases;

. that Sandpiper delivered or made available true and complete copies of
each material document requested in writing by Digital Island or its
counsel;

. the execution and delivery of the shareholder agreements, irrevocable
proxies and market standoff agreements;

. the percentage vote of Sandpiper shareholders required to approve the
merger, the merger agreements, and related transactions;

. the unanimous approval of the merger agreement and the merger by
Sandpiper's board of directors;

. the treatment of the merger as a tax-free reorganization;

. the accuracy of the information included in this joint proxy
statement/prospectus;

. Sandpiper's affiliates;

. Sandpiper's brokers' and finders' fees in connection with the merger; and

. the completeness of Sandpiper's representations and warranties.

Digital Island's representations and warranties included the following
topics:

. Digital Island's organization, qualification to do business and good
standing;

. Digital Island's capitalization;

. Digital Island's corporate power to enter into, and its authorization of,
the merger agreement and the transactions contemplated by the merger
agreement;

. the effect of the merger agreement and the merger on obligations of
Digital Island;

. Digital Island's possession of consents and permits required in
connection with the merger agreement and transactions contemplated by the
merger agreement;

. Digital Island's financial statements;

. Digital Island's filings and reports with the Securities and Exchange
Commission;

. changes in Digital Island's business since June 30, 1999;

. the absence of undisclosed liabilities;

. litigation involving Digital Island;

. restrictions on Digital Island's business activities;

. intellectual property used or owned by Digital Island;

. the effect of the merger on agreements between Digital Island and its
directors or employees;

. Digital Island's principal contracts and obligations;

. the percentage vote of Digital Island's stockholders required to approve
the issuance of Digital Island common stock in the merger and the
execution and delivery of the voting agreements;

68
<PAGE>

. the approval of the Digital Island board of directors.

. the accuracy of the information included in this joint proxy
statement/prospectus;

. the treatment of the merger as a tax-free reorganization;

. Digital Island's brokers' and finders' fees in connection with the
merger;

. access to true and complete copies of each material document requested in
writing by Sandpiper or its counsel; and

. the completeness of Digital Island's representations and warranties.

The representations and warranties in the merger agreement are lengthy,
detailed and not easily summarized. We urge Sandpiper shareholders and Digital
Island stockholders to read carefully the articles in the merger agreement
entitled "Representations and Warranties of Company" and "Representations and
Warranties of Parent."

Merger Integration Committee

Sandpiper and Digital Island have established a merger integration committee
consisting of seven members, four of whom are members of the Digital Island
board of directors designated by Digital Island and three of whom are members
of the Sandpiper board of directors designated by Sandpiper. The purpose of the
merger integration committee is to plan for the integration of Sandpiper and
Digital Island following the consummation of the merger and to assist in
carrying out various provisions of the merger agreement, including approval of
proposals by the parties to take actions that would otherwise be prohibited or
restricted by the merger agreement. All determinations of the merger
integration committee shall be made on the basis of what is in the best
interests of Digital Island and Sandpiper as a combined company following the
consummation of the merger.

Sandpiper's Conduct of Business Before Completion of the Merger

Sandpiper has agreed that, until the completion or termination of the
merger, unless Digital Island consents in writing or unless otherwise approved
by a majority of the merger integration committee, Sandpiper and its
subsidiaries will conduct their businesses in the ordinary course of business
in substantially the manner conducted prior to the date of the merger
agreement, or as otherwise contemplated in Sandpiper's budget for October 1,
1999 through June 30, 2000 as furnished to Digital Island. Sandpiper has also
agreed to, and cause its subsidiaries to, pay debts and taxes when due, pay or
perform other obligations when due, and use reasonable efforts consistent with
past practice and policies to preserve intact its present business
organizations, keep available the services of its present officers and key
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with
it.

Except as expressly contemplated by the merger agreement or the other
agreements related thereto, Sandpiper has further agreed, until the completion
or termination of the merger, unless Digital Island consents in writing or
unless otherwise approved by a majority of the merger integration committee
(including the approval of at least one member thereof designated by Digital
Island), Sandpiper and its subsidiaries will not do, cause or permit any of the
following:

. amend, modify, alter or rescind its charter, bylaws or organizational
documents;

. declare or pay dividends or make any other distribution on its capital
stock, or split, combine or reclassify any of its capital stock, or
repurchase or otherwise acquire any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service;

. grant any options or other rights to acquire securities (except grants of
options in the ordinary course of business consistent with past practice,
exercisable for a total of not more than 1,333,000 shares of

69
<PAGE>

Sandpiper common stock), or accelerate, amend or change the exercisability
or vesting of options or authorize cash payments in exchange for any
options;

. propose or actually issue, deliver or sell or purchase any shares of its
capital stock or securities convertible or subscriptions, rights,
warrants, options or similar agreements or commitments to acquire shares
of its capital stock, other than pursuant to the exercise of options or
warrants outstanding and disclosed as of the date of the merger agreement
and option grants permitted under the merger agreement;

. enter into or modify, terminate or violate material contracts other than
in the ordinary course of business consistent with past practice;

. transfer to any person or entity any rights to Sandpiper's intellectual
property other than in the ordinary course of business consistent with
past practice;

. enter into or amendment of any agreements with any other party granting
exclusive marketing or other exclusive rights with respect to Sandpiper's
products or technology;

. sell, lease or otherwise dispose or encumber any material (individually
or in the aggregate) properties or assets other than sales, leases or
licenses of products in the ordinary course of business;

. incur or guarantee any indebtedness, issue or sell any debt security or
guarantee any debt securities of others, except in accordance with
Sandpiper's budget as furnished to Digital Island;

. enter into any operating lease, except in accordance with Sandpiper's
budget as furnished to Digital Island;

. pay, discharge or satisfy any claim, liability or obligation arising
other than in the ordinary course of business, except in accordance with
Sandpiper's budget as furnished to Digital Island;

. make any capital expenditures, capital additions or capital improvements,
except in accordance with Sandpiper's budget as furnished to Digital
Island;

. materially reduce the amount of any material insurance coverage provided
by existing insurance policies;

. terminate or waive any right of substantial value, other than in the
ordinary course of business;

. adopt or amend any employee benefit plan or stock purchase or option
plan, elect or appoint any new director, or hire any new officer level
employee, pay any special bonus or remuneration to any employee or
director or, other than in the ordinary course of business consistent
with past practice, increase the salaries or wage rates of employees;

. grant any severance arrangements or termination pay to any officer or
director or to any other employee except payments made pursuant to
written agreements outstanding on the date of the merger agreement and
specifically identified and provided to Digital Island prior to the date
of the merger agreement;

. commence any lawsuit, other than (a) for the collection of bills, (b)
where Sandpiper, after consulting with Digital Island, in good faith
determines that failure to commence litigation would result in material
impairment of a valuable aspect of its business, or (c) for a breach of
the merger agreement;

. acquire or agree to acquire, in any manner, any other entity, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to Sandpiper's business, taken as a
whole;

. make or change any material tax elections, change any accounting method
in respect of taxes, file or amend any material tax return, enter into
any closing arrangement, settle any material claim or assessment in
respect of taxes, or consent to any extension or waiver of the limitation
period applicable to any claim or assessment in respect of taxes;

. fail to give all notices and other information required to be given to
employees, any collective bargaining unit representing employees and any
applicable government authority under any applicable law in connection
with the merger;

70
<PAGE>

. revalue any assets, including without limitation writing down the value
of inventory or writing off notes or accounts receivable other than in
the ordinary course of business;

. change domain names or fail to renew existing domain name registrations
on a timely basis; or

. authorize, agree to take or take any action described in the bullet
points above or any action that would (a) make materially untrue or
materially incorrect any of the representations or warranties of
Sandpiper in the merger agreement or prevent it from performing or
causing it not to perform its covenants in the merger agreement in any
material respect, (b) result in any of the conditions to the merger as
set forth in the merger agreement not being satisfied or in violation of
the merger agreement or any related agreement, except in every case, as
may be required by applicable law, or (c) materially adversely impair the
ability of Sandpiper to consummate the merger or the transactions
contemplated by the merger agreement.

Digital Island's Conduct of Business Before Completion of the Merger

Digital Island has agreed that, until the completion or termination of the
merger, unless Sandpiper consents in writing or unless otherwise approved by a
majority of the merger integration committee, and except further as required by
the fiduciary duties of the Digital Island board of directors, Digital Island
and its subsidiaries will conduct their businesses in the ordinary course of
business in substantially the manner conducted prior to the date of the merger
agreement or as otherwise contemplated in Digital Island's fiscal year 2000
plan.

Except as expressly contemplated by the merger agreement or the other
agreements related thereto, Digital Island has further agreed, until the
completion or termination of the merger unless Sandpiper consents in writing or
unless otherwise approved by a majority of the merger integration committee
(including the approval of at least one member thereof designated by
Sandpiper), Digital Island and its subsidiaries will not do, cause or permit
any of the following:

. authorize, agree to take or take any action described in the bullet
points below or any action that would (a) make materially untrue or
materially incorrect any of the representations or warranties of Digital
Island in the merger agreement or prevent it from performing or causing
it not to perform its covenants in the merger agreement in any material
respect (b) result in any of the conditions to the merger as set forth in
the merger agreement not being satisfied or in violation of the merger
agreement or any related agreement, except in every case, as may be
required by applicable law, or (c) materially adversely impair the
ability of Sandpiper to consummate the merger or the transactions
contemplated by the merger agreement.

. amend, modify, alter or rescind its charter, bylaws or organizational
documents;

. transfer to any person or entity any rights to Digital Island's
intellectual property other than in the ordinary course of business
consistent with past practice;

. change domain names or fail to renew existing domain name registrations
on a timely basis; or

71
<PAGE>

Digital Island common stock), or accelerate, amend or change the
exercisability or vesting of options or authorize cash payments in
exchange for any options;

. acquire or agree to acquire by merging or consolidating with any entity,
or by purchasing a substantial portion of the assets thereof, or by any
other manner.

The agreements related to the conduct of business of Sandpiper and Digital
Island in the merger agreement are lengthy, detailed and not easily summarized.
We urge Sandpiper shareholders and Digital Island stockholders to carefully
read the article in the merger agreement entitled "Conduct Prior to the
Effective Time."

No Solicitation of Takeover Proposals by Sandpiper

Until the merger agreement is terminated or as otherwise provided in the
merger agreement, Sandpiper has agreed that neither it nor its subsidiaries nor
any of their respective officers, directors, employees or representatives will
take any of the following actions, directly or indirectly:

. solicit, initiate, encourage or agree to any "company takeover proposal"
by a third party; or

. engage in any negotiations concerning, or disclose any nonpublic
information relating to Sandpiper or any of its subsidiaries to, allow
access to any of their properties, books or records to or have
discussions with any person relating to a company takeover proposal or
otherwise facilitate any effort or attempt to make or implement a company
takeover proposal.

A "company takeover proposal" includes any offer or proposal for, or any
indication of interest in:

. a merger or other business combination involving Sandpiper;

. the acquisition of 10% or more of Sandpiper's outstanding capital stock,
or a material portion of the assets of Sandpiper (other than the
transactions contemplated by the merger agreement with Digital Island);
or

. any other transaction inconsistent with the consummation of the
transactions contemplated by the merger agreement with Digital Island.

Sandpiper has agreed to provide Digital Island prompt notice and detailed
information of any company takeover proposal it receives. In addition, Digital
Island and Sandpiper have agreed that Digital Island shall be entitled, in
addition to any other remedies to which it may be entitled, to seek an
injunction or injunctions to prevent breaches of the section of the merger
agreement entitled "No Solicitation by Company."

No Solicitation of Certain Contingent Business Combination Transactions by
Digital Island

Until the merger agreement is terminated or as otherwise provided in the
merger agreement, Digital Island has agreed that neither it nor its
subsidiaries nor any of their respective officers, directors, employees or
representatives will take any of the following actions, directly or indirectly:

. solicit, initiate, encourage or agree to any "parent takeover proposal"
by a third party; or

. engage in any negotiations concerning, or disclose any nonpublic
information relating to Digital Island or any of its subsidiaries to,
allow access to any of their properties, books or records to or have
discussions with any person relating to a parent takeover proposal or
otherwise facilitate any effort or attempt to make or implement a parent
takeover proposal.

72
<PAGE>

A "parent takeover proposal" means any offer or proposal for, or any
indication of interest in any of the following types of transactions that is
conditioned on the denial by the stockholders of Digital Island of the issuance
of shares of Digital Island common stock to Sandpiper shareholders pursuant to
the merger agreement with Sandpiper:

. a merger or other business combination involving Digital Island;

. the acquisition of a majority of Digital Island's outstanding capital
stock, or all or substantially all of the assets of Digital Island; or

. any other transaction inconsistent with the consummation of the
transactions contemplated by the merger agreement with Sandpiper.

The Digital Island board of directors is not prohibited, however, from
taking and disclosing to Digital Island's stockholders a position with respect
to a tender or exchange offer under Rules 14d-9 and 14e-2(a) under the Exchange
Act not made in violation of the merger agreement. The Digital Island board of
directors may also provide information in connection with, and negotiate
concerning, an unsolicited, bona fide parent takeover proposal (as defined
above) if the Digital Island board of directors:

. concludes in good faith, after considering applicable state law, on the
basis of written advice from independent outside legal counsel, that
failure to take such action would not be a proper exercise of the
fiduciary duties of Digital Island's board of directors to its
stockholders under applicable law; and

. shall have determined in the exercise of its fiduciary duties to Digital
Island stockholders (taking into account the advice of Digital Island's
independent financial advisor) that the parent takeover proposal provides
materially greater value to Digital Island or its stockholders than the
merger.

Digital Island has agreed to provide Sandpiper prompt notice and detailed
information of any "parent takeover proposal" it receives. In addition,
Sandpiper and Digital Island have agreed that Sandpiper shall be entitled, in
addition to any other remedies to which it may be entitled, to seek injunctions
to prevent breaches of the section of the merger agreement entitled "No
Solicitation by Parent."

Additional Agreements of Sandpiper and Digital Island

Each of Sandpiper and Digital Island has further agreed, among other things
specifically identified in the merger agreement:

. that the mutual confidentiality agreement executed by each party shall
continue in full force and effect;

. to notify the other promptly of any event or occurrence not in the
ordinary course of business, and of any event which could have a material
adverse effect on the other;

. to provide reasonable access to the other to its facilities, records and
all other information as the other may reasonably request;

. subject to compliance with applicable law, to confer on a regular and
frequent basis with one or more representatives of the other to report
material operational matters and the general status of ongoing
operations;

. to make all necessary filings and obtain any consents and approvals as
may be required in connection with the merger agreement and the merger;
and

. to consult with each other and obtain prior approval of the other before
issuing any press release or making any other public disclosure regarding
the merger agreement or the transactions contemplated thereby, except as
may be required by law or by obligations of Digital Island pursuant to
any listing agreement with any national securities exchange or the
National Association of Securities Dealers after consultation with
Sandpiper.

73
<PAGE>

Director and Officer Indemnification

The merger agreement provides that, after the completion of the merger,
Digital Island shall honor and not modify any rights to indemnification or
exculpation from liabilities for acts or omissions occurring at or prior to the
consummation of the merger as existed at the time the merger agreement was
signed in favor of officers and directors of Sandpiper and its subsidiaries as
provided in their respective charters or bylaws as in effect at the time the
merger agreement was signed.

Conditions to the Merger

Digital Island's and Sandpiper's obligations to complete the merger and the
related transactions are subject to the satisfaction or waiver of each of the
following conditions before completion of the merger:

. the merger agreement and the merger must have been approved by the
affirmative vote of the holders of record of more than 50% of the issued
and outstanding shares of Sandpiper common stock and each series of
Sandpiper preferred stock, each voting as a separate class, and the
Digital Island share issuance must be approved by Digital Island's
stockholders;

. no order, writ, injunction or decree is in force that makes the merger
illegal or otherwise prohibits completion of the merger;

. all consents, approvals and authorization legally required to consummate
the merger and the other transactions contemplated by the merger
agreement must have been obtained from all governmental entities,
including such approvals, waivers and consents as may be required under
the antitrust laws;

. Digital Island, Sandpiper, the escrow agent and the Sandpiper
shareholders' agent must have entered into the escrow agreement; and

. the registration statement relating to the issuance of shares of Digital
Island common stock as contemplated by the merger agreement must have
been declared effective by the Securities and Exchange Commission, or
alternatively, the shares of Digital Island common stock to be issued in
the merger shall be exempt from registration under the Securities Act of
1933, as amended, by reason of Section 3(a)(10) or Section 4(2) thereof;

Sandpiper's obligations to complete the merger are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the merger, any of which may be waived, in writing, by Sandpiper:

. Digital Island's representations and warranties must be true and correct
when made and as of the closing of the merger, except where failures to
be true and correct could not reasonably be expected to have a material
adverse effect on Digital Island;

. Digital Island must have complied in all material respects with all of
its covenants in the merger agreement, except, in the case of covenants
of Digital Island identified in the sections of the merger agreement
entitled "General Conduct of Business" and "Conduct of Parent," where the
failure to perform or comply with such covenants could not reasonably be
expected to have a material adverse effect on Digital Island;

. Sandpiper must receive a certificate executed on behalf of Digital Island
by its president and chief financial officer to the effect that the
conditions set forth in the immediately preceding bullet points have been
satisfied;

. all third-party consents or approvals required under any principal
contract of Digital Island in connection with the merger must be
obtained, if the failure to obtain such consent or approval could
reasonably be expected to have a material adverse effect on Sandpiper or
the surviving corporation;

74
<PAGE>

. no proceedings by a governmental entity seeking to prevent the merger are
pending and no injunctions or restraints seeking to limit or restrict
Digital Island's conduct or operation of the business of Sandpiper
following the merger are in effect;

. Sandpiper must have received a legal opinion from Digital Island's legal
counsel, Brobeck, Phleger & Harrison LLP, dated the closing date, in
substantially the form attached as an exhibit to the merger agreement;
and

. Sandpiper must have received the opinion of its legal counsel, Riordan &
McKinzie, dated the closing date, to the effect that the merger will
constitute a reorganization within the meaning of Section 368(a) of the
Code.

Digital Island's and Beach Acquisition Corp.'s obligations to complete the
merger are subject to the satisfaction or waiver of each of the following
additional conditions before completion of the merger, any of which may be
waived, in writing, by Digital Island:

. Sandpiper's representations and warranties must be true and correct when
made and as of the closing of the merger, except where failures to be
true and correct could not reasonably be expected to have a material
adverse effect on Sandpiper or the surviving corporation;

. Sandpiper must have complied in all material respects with all of its
covenants in the merger agreement, except, in the case of covenants of
Sandpiper identified in the sections of the merger agreement entitled
"General Conduct of Business" and "Conduct of Company," where the failure
to perform or comply with such covenants could not reasonably be expected
to have a material adverse effect on Sandpiper or the surviving
corporation;

. Digital Island must receive a certificate executed on behalf of Sandpiper
by its president and chief financial officer to the effect that the
conditions set forth in the immediately preceding bullet points have been
satisfied;

. all third-party consents or approvals required under any material
contract of Sandpiper or its subsidiaries in connection with the merger
must be obtained, if the failure to obtain such consent or approval could
reasonably be expected to have a material adverse effect on Sandpiper,
Digital Island or the surviving corporation;

. no proceedings by a governmental entity seeking to prevent the merger
shall be pending and no injunctions or restraints seeking to limit or
restrict Digital Island's conduct or operation of the business of
Sandpiper following the merger shall be in effect;

. Digital Island must have received a legal opinion from Sandpiper's legal
counsel, Riordan & McKinzie, dated the closing date, in substantially the
form attached as an exhibit to the merger agreement;

. Digital Island must have received the opinion of its legal counsel,
Brobeck, Phleger & Harrison LLP, dated the closing date, to the effect
that the merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;

. each of the employment and non-competition agreements executed by the
employees of Sandpiper specifically identified in the merger agreement
must be in full force and effect; and

. Sandpiper must, prior to the completion of the merger, provide Digital
Island with a certificate from the Secretary of State of California and
the California Franchise Tax Board as to Sandpiper's good standing and
payment of all applicable taxes, and such other customary certificates
and closing documents reasonably requested by Digital Island.

75
<PAGE>

Termination of the Merger Agreement

The merger agreement may be terminated at any time before the completion of
the merger, whether before or after approval of the matters presented in
connection with the merger by the shareholders of Sandpiper, as summarized
below:

. the merger agreement may be terminated by mutual consent; or

. the merger agreement may also be terminated by either Digital Island or
Sandpiper if the conditions to completion of the merger would not be
satisfied because of either (a) a breach of an agreement or obligation in
the merger agreement by the other party or (b) a breach of a
representation or warranty of the other party in the merger agreement,
and such breach shall not have been cured within 20 business days
following receipt of written notice by the non-breaching party.

In addition, the merger agreement may be terminated by either Digital Island
or Sandpiper under any of the following circumstances:

. if the merger is not completed, without the fault of the terminating
party, by May 31, 2000;

. if a final court or governmental order prohibiting the merger is issued
and is not appealable;

. if the Digital Island stockholders do not approve the issuance of Digital
Island common stock at the Digital Island special meeting; or

. if the Sandpiper shareholders do not approve the merger agreement and the
merger at the Sandpiper special meeting.

The merger agreement may be terminated by Digital Island if the following
occurs:

. the Sandpiper board of directors shall have omitted, withdrawn or
modified its recommendation of the merger agreement or the merger in a
manner adverse to Digital Island or recommended, endorsed, accepted or
agreed to a company takeover proposal or shall have resolved to do any of
the foregoing. These actions by Sandpiper would also be a breach of
Sandpiper's obligations under the merger agreement.

The merger agreement may be terminated by Sandpiper if the following occurs:

. the Digital Island board of directors shall have omitted, withdrawn or
modified its recommendation of the merger agreement or the merger in a
manner adverse to Sandpiper or recommended, endorsed, accepted or agreed
to a parent takeover proposal or shall have resolved to do any of the
foregoing.

Payment of Costs and Expenses; Termination Fees

Subject to the termination fees set forth below, all costs and expenses
incurred in connection with the merger agreement, the related agreements and
the transactions contemplated thereby, including the fees and expenses of
advisers, accountants and legal counsel, will be paid by the party incurring
the expense.

Sandpiper's Termination Fee Obligations

In addition to any other remedies Digital Island may have, Sandpiper is
required to promptly pay Digital Island a fee of $5,000,000 (and an additional
fee of $25,000,000 if a company takeover proposal is consummated within twelve
months of the termination of the merger agreement) if any of the following
occur:

. If a company takeover proposal is made and not withdrawn before the
Sandpiper shareholder meeting, and the Sandpiper shareholders fail to
approve the merger agreement, and:

-- Digital Island terminates the merger agreement because the Sandpiper
board of directors has omitted, withdrawn or modified its
recommendation of the merger agreement or the merger in a manner
adverse to Digital Island or recommended, endorsed, accepted or agreed
to a company takeover proposal or has resolved to do any of the
foregoing; or

76
<PAGE>

-- Either Digital Island or Sandpiper terminates the merger agreement due
to the failure to obtain the required approval of Sandpiper
shareholders at the Sandpiper shareholder meeting.

. Sandpiper breaches a representation or warranty in the merger agreement
after a company takeover proposal has been made, the breach is not cured
within 20 business days following Sandpiper's receipt of written notice
of the breach, and Digital Island terminates the merger agreement on the
basis of the breach.

Digital Island's Termination Fee Obligations

In addition to any other remedies Sandpiper may have, Digital Island is
required to promptly pay Sandpiper a fee of $5,000,000 (and an additional fee
of $25,000,000 if a parent takeover proposal is consummated within twelve
months of the termination of the merger agreement) if any of the following
occur:

. If a parent takeover proposal is publicly announced and not publicly
withdrawn before the Digital Island stockholder meeting and the Digital
Island stockholders fail to approve the issuance of Digital Island common
stock in connection with the merger, and:

-- Sandpiper terminates the merger agreement because the Digital Island
board of directors' has omitted, withdrawn or modified its
recommendation of the merger agreement or the merger in a manner
adverse to Sandpiper or recommended, endorsed, accepted or agreed to a
parent takeover proposal or has resolved to do any of the foregoing; or

-- either Sandpiper or Digital Island terminates the merger agreement due
to the failure to obtain the required approval of Digital Island
stockholders at the Digital Island stockholder meeting.

. Digital Island breaches a representation or warranty in the merger
agreement after a parent takeover proposal has been made, the breach is
not cured within 20 business days following Digital Island's receipt of
written notice of the breach, and Sandpiper terminates the merger
agreement on the basis of the breach.

Extension, Waiver and Amendment of the Merger Agreement

Digital Island and Sandpiper may amend the merger agreement before
completion of the merger, but after the Sandpiper shareholders adopt the merger
agreement, no change may be made to the amount or type of consideration into
which Sandpiper common stock will be converted.

Either Digital Island or Sandpiper may, in writing, extend the other's time
for the performance of any of the obligations or other acts under the merger
agreement, waive any inaccuracies in the other's representations and warranties
and waive compliance by the other with any of the agreements or conditions
contained in the merger agreement.

Escrow and Indemnification

Under the merger agreement, Sandpiper shareholders are required to indemnify
and hold harmless Digital Island and certain related parties from and against
any and all losses, costs, damages, liabilities and expenses arising out of any
misrepresentation, breach of or default in any of the representations,
warranties, covenants and agreement given or made by Sandpiper in or pursuant
to the merger agreement, any schedule or exhibit to the merger agreement, any
agreement entered into by Sandpiper and Digital Island in connection with the
merger agreement and any certificate delivered to Digital Island in connection
with the merger.

77
<PAGE>

exceeds $2,000,000. If the merger is consummated, recovery from the escrow fund
will be the sole and exclusive remedy, absent fraud, intentional
misrepresentation or willful breach.

The shareholders' agent will have sole and exclusive power to act and bind
Sandpiper shareholders in all maters relating to the escrow. Initially, Thomas
R. Govreau will act as the shareholders' agent.

The escrow period will terminate on the following dates: (a) for matters
expected to be encountered and resolved in the audit of Digital Island's
financial statements for its fiscal year ending September 30, 2000, the earlier
of the first anniversary of the closing date or the date on which Digital
Island publishes the combined audited financial statements of Digital Island
and Sandpiper for such fiscal year and (b) for all other matters, the first
anniversary of the closing date. If necessary to satisfy any unsatisfied claims
relating to facts and circumstances existing prior to the expiration of the
escrow period, a portion of the escrow shares may be retained in the escrow
fund until such claims are resolved.

Related Agreements

Declaration of Registration Rights

Digital Island has agreed, by way of a declaration of registration rights
for the benefit of Sandpiper shareholders, to grant customary demand and
piggyback registration rights covering the shares of Digital Island common
stock to be issued in the merger, upon the same terms as Digital Island's
existing Amended and Restated Investors' Rights Agreement. The declaration of
registration rights provides that if at any time Digital Island shall determine
to register any of its equity securities for its own account or for the account
of certain other holders of Digital Island common stock in an underwritten
public offering, Digital Island must give notice to the holders and at the
holders' written request pursuant to proper notice, include in the registration
and underwriting all registrable securities, subject to limitation by the
managing underwriter of such registration. The rights of all of the holders
under the declaration of registration rights terminate on July 15, 2006. In
addition, the right of any holder to receive notification and to participate in
any registration terminates at such time as such holder (a) owns less than 1%
of the outstanding Digital Island common stock and (b) could sell all of the
registrable securities held by such holder in any one three-month period
pursuant to Rule 144 under the Securities Act. The form of declaration of
registration rights is attached as an exhibit to the merger agreement attached
as Annex A to this joint proxy statement/prospectus.

Escrow Agreement

Under the merger agreement, 10% of the total number of shares of Digital
Island common stock issuable in the merger will be placed in escrow and shall
be available to compensate Digital Island pursuant to the indemnification
obligations of the shareholders of Sandpiper. Only shares issuable to Sandpiper
shareholders who are parties to the shareholder agreement will be placed in the
escrow fund. The escrow fund shall be governed by the terms of the merger
agreement and the escrow agreement. The escrow agreement is attached as an
exhibit to the merger agreement attached as Annex A to this joint proxy
statement/prospectus.

Digital Island Voting Agreements and Irrevocable Proxies

Concurrently with the execution of the Merger agreement, stockholders of
Digital Island holding approximately 45% of the Digital Island common stock
issued and outstanding as of October 24, 1999 entered into a voting agreement,
pursuant to which the Digital Island stockholders agreed to vote their
respective shares of Digital Island common stock in favor of the issuance of
Digital Island common stock in the merger and in favor of any matter that could
reasonably be expected to facilitate the merger and the other transactions

78
<PAGE>

contemplated by the merger agreement, and against any "acquisition proposal"
(which is defined as any proposal, plan or offer to acquire all or any
substantial part of the business, assets or capital stock of Digital Island, or
to liquidate Digital Island or otherwise distribute to the stockholders of
Digital Island all or any substantial part of the business, assets or capital
stock of Sandpiper), or other transaction or occurrence which if publicly
proposed and offered to Sandpiper and its stockholders (or any of them) would
be the subject of an acquisition proposal, or a "frustrating transaction" (as
defined below). In addition, the Digital Island stockholders granted an
irrevocable proxy to the directors of Sandpiper, or any other designee of
Sandpiper, as the sole and exclusive attorneys and proxies to vote all shares
of Digital Island common stock held by the Digital Island stockholders in the
manner required by the voting agreement. The Digital Island Proxy is limited in
scope to these matters. The forms of voting agreement and the Digital Island
irrevocable proxy are attached as an exhibit to the merger agreement attached
as Annex A to this joint proxy statement/prospectus.

The voting agreement also provides that the Digital Island stockholders who
are party to the agreement shall not (a) sell, transfer, pledge, assign or
otherwise dispose of or encumber (including by gift), or consent to any such
transfer of, any shares of Digital Island common stock held by such Digital
Island stockholders or any interest therein or enter into any contract, option,
or other arrangement (including any profit sharing or other derivative
arrangement) with respect to the Digital Island common stock held by them with
any person other than pursuant to the merger agreement, unless prior to any
such transfer the transferee enters into and is bound by a voting agreement
with Sandpiper on terms substantially identical to the terms of the voting
agreement, or (b) enter into any voting arrangement, whether by proxy, voting
agreement or otherwise, in connection with, directly or indirectly, any
amendment of Digital Island's certificate of incorporation or bylaws or other
proposal, action or transaction involving Digital Island or any of its
subsidiaries, which amendment or other proposal, action or transaction would or
could reasonably be expected to prevent or materially impede, interfere with,
hinder or delay the consummation of the merger or any of the other transactions
contemplated by the merger agreement (collectively, "frustrating
transactions"), in each case until the earlier of (x) the effective time of the
merger or (y) the valid termination of the merger agreement in accordance with
its terms.

Sandpiper Shareholder Agreements and Irrevocable Proxies

Also concurrently with the execution of the Merger agreement, shareholders
of Sandpiper holding approximately 76% of the Sandpiper capital stock issued
and outstanding as of October 24, 1999 entered into a shareholder agreement,
pursuant to which the Sandpiper shareholders agreed to vote their respective
shares of Sandpiper capital stock in favor of the merger agreement, the merger
and the transactions contemplated thereby. The shareholder agreement has terms
substantially parallel to the Digital Island voting agreement. In connection
with the shareholder agreement, the Sandpiper shareholders who are party to the
agreement granted an irrevocable proxy to the directors of Digital Island, or
any other designee of Digital Island, with terms substantially parallel to the
Digital Island irrevocable proxy. The forms of shareholder agreement and
Sandpiper irrevocable proxy are attached as an exhibit to the merger agreement
attached as Annex A to this joint proxy statement/prospectus.

Market Standoff Agreements

In connection with the execution of the Digital Island voting agreement and
the Sandpiper shareholder agreement, the Digital Island stockholders and
Sandpiper shareholders party to those agreements entered into reciprocal market
standoff letter agreements providing that, from the time of the merger until
the earliest to occur of (a) the sale by Digital Island of Digital Island
common stock for its own account in a bona fide, firm commitment underwritten
public offering pursuant to a registration statement under the Securities Act,
(b) July 15, 2000, (c) the effective date of a merger of Digital Island with
or into another corporation in which fifty (50%) or more of the voting power of
Digital Island is disposed of, or the sale of all or substantially all of the
assets of Digital Island; or (d) such other date, and with such limitations, as
may be approved by unanimous vote of the board of directors of Digital Island,
the Digital Island stockholders and the Sandpiper shareholders agreed not
directly or indirectly to (x) issue, sell or otherwise dispose of or transfer
any shares of Digital Island common stock or any securities convertible into or
exchangeable or exercisable for Digital Island common

79
<PAGE>

stock, or (y) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Digital Island common stock or any securities
convertible into or exchangeable for the Digital Island stock. The form of
market standoff letter agreement is attached as an exhibit to the merger
agreement attached as Annex A to this joint proxy statement/prospectus.

Employment Agreements

Concurrently with the effectiveness of the merger, Digital Island and
Sandpiper plan to enter into employment agreements with Leo Spiegel, Andrew
Swart, and David Farber. Under the terms of the proposed employment agreements,
Mr. Swart and Mr. Farber each agree to remain with Digital Island for a period
of one year from the closing of the merger unless Digital Island terminates
them earlier. In Mr. Spiegel's case, he agrees to remain with Digital Island
until November 24, 2000 unless Digital Island terminates him earlier.

If the employee's employment is terminated by Digital Island "without cause"
prior to the end of the one-year period following the closing of the merger (or
prior to November 24, 2000 in Mr. Spiegel's case), then the employee will be
entitled to receive his base salary as a severance payment until the earlier of
(1) one year after the termination of his employment or (2) the date the
employee begins employment with another employer. If the employment is
terminated for "cause" prior to the end of the one-year period following the
closing of the merger (or prior to November 24, 2000 in Mr. Spiegel's case),
then the employee will be paid all salary, bonus and benefits earned through
the date of termination of employment, but nothing else.

As to Mr. Swart and Mr. Farber, "cause" shall mean the employee's
termination as a result of: (a) the employee's failure to perform the duties of
his position after receipt of a written warning; (b) engaging in serious
misconduct; (c) being convicted of a felony; (d) committing an act of fraud
against, or the misappropriation of property belonging to, Digital Island; or
(e) material breach of the employment agreement or the confidentiality or
proprietary information agreement between the employee and Digital Island.

In Mr. Spiegel's case, a termination for "cause" shall mean a termination
for any of the following reasons: (a) willful and repeated failure or refusal
to comply in any material respect with reasonable directives from the CEO which
are consistent with his job responsibilities and stature, provided that such
failure or refusal continues for 45 days after written notice is given to him
describing such failure or refusal in reasonable detail and stating the
company's intention to terminate his employment if such continues, (b)
conviction of a felony which has a material adverse impact on Digital Island or
(c) the intentional and known unauthorized use or disclosure of the
confidential proprietary information of Digital Island or any Digital Island
subsidiary, including Sandpiper after the merger, which has a material adverse
impact on Digital Island. Mr. Spiegel will also be entitled to severance as
provided for above if he terminates his employment for "good reason" before
November 24, 2000. A termination for "good reason" shall mean a termination by
him of his employment for any of the following reasons: (x) diminution of
responsibilities consistent with his position of president as agreed upon at
the time of merger, after providing notice to the CEO and allowing for
reasonable opportunity to cure the diminution of responsibilities; (y) change
in title or reporting relationship; or (z) involuntary relocation from his
principal place of employment in San Diego, California.

As of October 31, 1999, Mr. Spiegel held 858,917 shares of common stock,
issued pursuant to a restricted stock purchase agreement, which are subject to
repurchase by Sandpiper at $0.07 per share upon a termination of his
employment. Although his restricted stock purchase agreement provided that all
of these shares would vest free of this repurchase right upon certain events
such as the merger, in connection with his employment agreement described
above, Mr. Spiegel waived these acceleration rights and instead agreed that 50%
of his unvested shares would vest on March 24, 2000 and the balance on November
24, 2000, unless he terminates his employment without "good reason" or is
terminated by Sandpiper for "cause" prior to vesting. This accelerated vesting
schedule, together with the accelerated vesting of common stock of certain
other Sandpiper executives, was approved by the Sandpiper shareholders pursuant
to Section 280G of the Internal Revenue Code on December 8, 1999.

80
<PAGE>

Mr. Swart and Mr. Farber will each be granted a stock option for 150,000
shares of Digital Island's common stock following the closing of the merger.
The option will vest over 50 months of successive employment with Digital
Island. In the event of a change in control following the closing of the
merger, the employee's option will accelerate in full unless the acquiring
company assumes the option. If the employee's employment is terminated by the
employee or by the acquiring company upon or within eighteen (18) months
following a change in control but more than twelve months (12) after the date
the employee commences employment with Digital Island, the employee's option
will immediately vest and become exercisable for all the shares at the time
subject to that option.

A "change in control" shall mean any of the following transactions effecting
a change in ownership or control of Digital Island:

(a) a merger, consolidation or reorganization approved by the Digital
Island's shareholders in which securities representing more than fifty
percent (50%) of the total combined voting power of Digital Island's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or

(b) any shareholder-approved transfer or other disposition of all or
substantially all of Digital Island's assets in complete liquidation or
dissolution of Digital Island, or

(c) the acquisition, directly or indirectly by any person or related
group of persons (other than Digital Island or a person that directly or
indirectly controls, is controlled by, or is under common control with,
Digital Island), of beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) of securities
possessing more than fifty percent (50%) of the total combined voting power
of Digital Island's outstanding securities pursuant to a tender or exchange
offer made directly to Digital Island's shareholders.

The employment agreements contain non-competition provisions that require
each employee during his employment and continuing until the latter of (1) one
year after the Closing Date (or November 24, 2000 in Mr. Spiegel's case) or (2)
one year after the date of termination, to not render any services to any
content distribution company that operates networks which serve content in one
or two ways to multiple devices distributed throughout deployed networks of
distributed servers (including without limitation Adero, Akamai, Real Broadcast
Networks, Exodus, AT&T) in the United States or throughout the world.

Non-Disclosure Agreements

Concurrently with the execution of employment agreements, Leo Spiegel,
Andrew Swart, and David Farber will be required to execute non-disclosure
agreements with Digital Island. The non-disclosure agreements require the
employee:

(i) during his employment and thereafter, not to divulge or disclose
any confidential information of Digital Island without the written consent
of Digital Island; and

(ii) during his employment and for one year thereafter, not to engage,
individually or on behalf of other persons, in soliciting any employees or
consultants of Digital Island to leave their employment with Digital Island
or any affiliate, in order to accept a position of any kind with another
employer.

81
<PAGE>

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements have been
prepared to give effect to the merger, to be accounted for using the purchase
method of accounting. These financial statements reflect certain assumptions
deemed probable by management regarding the Merger (e.g., that share
information used in the unaudited pro forma information approximates actual
share information at the effective date). No adjustments to the unaudited pro
forma combined financial statements have been made to account for different
possible results in connection with the foregoing, as management believes that
the impact on such information of varying outcomes, individually or in the
aggregate, would not be material.

The unaudited pro forma combined balance sheet as of September 30, 1999
gives effect to the merger as if it had occurred on September 30, 1999, and
combines the historical consolidated balance sheet of Digital Island and the
historical unaudited consolidated balance sheet of Sandpiper as of such date.

The unaudited pro forma combined statement of operations for the year ended
September 30, 1999 combines the historical consolidated statement of operations
of Digital Island for the year ended September 30, 1999 with the unaudited
historical consolidated results of operations of Sandpiper for the twelve-month
period ended September 30, 1999. The historical pro forma information assumes
that for purposes of reporting combined information, the historical
consolidated financial information of Sandpiper will be restated to conform
Sandpiper's fiscal year-end of December 31 to Digital Island's fiscal year-end
of September 30.

The total purchase price of approximately $983.5 million consists of
approximately 24.5 million shares of Digital Island's common stock with an
estimated fair value of $856.6 million, 5.0 million vested and unvested stock
options with an estimated fair value of $111.7 million, and estimated direct
transaction costs of approximately $15.3 million. The fair value of Digital
Island's common stock was determined as the average market price from October
21, 1999 to October 27, 1999, which includes two days prior and two days
subsequent to the public announcement of the merger. The fair value of the
common stock options was estimated using the Black Scholes model with the
following weighted-average assumptions: risk-free interest rate of 5.8%,
expected life of 4 years, expected dividend rate of 0%, and volatility of 80%.
The total purchase price is expected to be allocated to intangible assets,
including goodwill, and amortized over five years. In addition, it is expected
that following the merger, the combined company will incur additional costs,
which cannot currently be estimated, associated with the integration of the
operations of the two companies.

The unaudited pro forma combined financial statements are based on estimates
and assumptions. These estimates and assumptions are preliminary and have been
made solely for purposes of developing this pro forma information. Unaudited
pro forma combined financial information is presented for illustrative purposes
only and is not necessarily indicative of the combined financial position or
results of operations of future periods or the results that actually would have
been realized had the entities been a single entity during this period. These
unaudited pro forma combined financial statements are based upon the respective
historical consolidated financial statements of Digital Island and Sandpiper
and notes thereto, included elsewhere in this joint proxy statement/prospectus
and should be read in conjunction with those statements and the related notes.

82
<PAGE>

DIGITAL ISLAND, INC. AND SANDPIPER NETWORKS, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in thousands)

September 30, 1999

<TABLE>
<CAPTION>
Digital
Island, Sandpiper Pro forma Pro forma
Inc. Networks, Inc. adjustments combined
--------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents............. $ 43,315 $ 10,853 $ -- $ 54,168
Investments.............. 31,691 -- -- 31,691
Accounts receivable,
net..................... 3,557 121 -- 3,678
Restricted cash.......... 763 -- -- 763
Prepaid expenses and
other................... 1,825 296 -- 2,121
--------- -------- --------- ---------
Total current assets... 81,151 11,270 -- 92,421
Property and equipment,
net....................... 25,273 6,047 -- 31,320
Intangible assets.......... -- -- 786,866 (1) 786,866
Other assets............... 1,224 434 -- 1,658
--------- -------- --------- ---------
Total assets......... $ 107,648 $ 17,751 $ 786,866 $ 912,265
========= ======== ========= =========
LIABILITIES, REDEEMABLE
PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
(DEFICIT)
-----------------------
Current liabilities:
Bank borrowings.......... $ 801 $ 39 $ -- $ 840
Capital lease
obligations............. 3,916 1,011 -- 4,927
Accounts payable......... 8,621 2,015 -- 10,636
Accrued liabilities...... 4,931 394 -- 5,325
Accrued transaction
costs................... -- -- 15,300 (1) 15,300
Cash overdraft........... 3,058 -- -- 3,058
Deferred revenue......... 318 -- -- 318
--------- -------- --------- ---------
Total current
liabilities........... 21,645 3,459 15,300 40,404
Bank borrowings, less
current portion........... 314 45 -- 359
Capital lease obligations,
less current portion...... 6,061 1,621 -- 7,682
Deferred revenue........... 410 -- -- 410
--------- -------- --------- ---------
Total liabilities...... 28,430 5,125 15,300 48,855
========= ======== ========= =========
Redeemable convertible
preferred stock........... -- 28,101 (28,101) --
Stockholders' equity
(deficit):
Convertible preferred
stock................... -- -- -- --
Common stock............. 36 4,413 25 (1) 4,474
Additional paid-in
capital................. 156,791 -- 996,358 (1) 1,153,149
Deferred compensation.... (4,033) (3,572) -- (7,605)
Stockholder note
receivable.............. (514) -- -- (514)
Accumulated deficit...... (73,062) (16,316) (196,716)(1) (286,094)
--------- -------- --------- ---------
Total stockholders'
equity (deficit)...... 79,218 (15,475) 799,667 863,410
--------- -------- --------- ---------
Total liabilities,
redeemable preferred
stock, and
stockholders' equity
(deficit)........... $ 107,648 $ 17,751 $ 786,866 $ 912,265
========= ======== ========= =========
</TABLE>

See accompanying notes to unaudited pro forma combined financial statements

83
<PAGE>

DIGITAL ISLAND, INC. AND SANDPIPER NETWORKS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)

Year Ended September 30, 1999

<TABLE>
<CAPTION>
Digital Sandpiper Pro forma Pro forma
Island, Inc. Networks, Inc. adjustments combined
------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................ $ 12,431 $ 249 $ $ 12,680
Costs and expenses:
Cost of revenue....... 29,496 3,346 32,842
Sales and marketing... 16,010 4,592 20,602
Product development... 6,357 2,357 8,714
General and
administrative....... 9,848 1,731 11,579
Amortization of
intangible assets.... 196,716(1) 196,716
Stock compensation
expense.............. 3,207 581 3,788
---------- ---------- -------- ----------
Total costs and
expenses........... 64,918 12,607 196,716 274,241
---------- ---------- -------- ----------
Loss from operations.... (52,487) (12,358) (196,716) (261,561)
---------- ---------- -------- ----------
Interest income, net.... 1,551 286 1,837
---------- ---------- -------- ----------
Loss before income
taxes.................. (50,936) (12,072) (196,716) (259,724)
Provision for income
taxes.................. 2 3 5
---------- ---------- -------- ----------
Net loss................ $ (50,938) $ (12,075) (196,716) $ (259,729)
Basic and diluted net
loss per share......... $ (4.58) $ (1.67) $ (14.15)
Weighted average shares
outstanding used in per
share calculation...... 11,127,462 7,227,296 18,354,758
Pro forma basic and
diluted net loss per
share.................. $ (2.02) $ (0.59) $ (5.70)
Weighted average shares
outstanding used in per
share calculation...... 25,233,080 20,335,742 45,568,822
</TABLE>

See accompanying notes to unaudited pro forma combined financial statements

84
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

(1) The total purchase price of approximately $983.5 million consists of
approximately 24.5 million shares of Digital Island's common stock with an
estimated fair value of $856.6 million, 5.0 million vested and unvested stock
options with an estimated fair value of $111.7 million, and estimated direct
transaction costs of approximately $15.3 million. The total purchase price is
expected to be allocated to intangible assets, including goodwill, and
amortized over five years. One year of estimated amortization of goodwill and
other intangible assets is included. The transaction costs consist of fees for
investment bankers, attorneys, accountants, financial printing, and other
related costs.

The following table reconciles the number of shares used in the pro forma
loss per share computations for year ended September 30, 1999 to the numbers
set forth in Digital Island's and Sandpiper's historical statements of
operations:

<TABLE>
<CAPTION>
Shares used in basic and diluted per share computation:
-------------------------------------------------------
<S> <C>
Historical Sandpiper.............................................. 6,737,481
Exchange ratio.................................................... 1.0727
----------
7,227,296
Historical Digital Island......................................... 11,127,462
----------
Combined.......................................................... 18,354,758
==========

Historical pro forma Sandpiper(1)................................. 18,957,530
Exchange ratio.................................................... 1.0727
----------
20,335,742
Historical pro forma Digital Island(1)............................ 25,233,080
----------
Pro forma combined................................................ 45,568,822
==========
</TABLE>
- --------
(1) Historical pro forma Digital Island and Sandpiper weighted average share
amounts are computed using the weighted average number of common shares
outstanding, adjusted to include the pro forma effects of the conversion of
preferred stock to common stock as if the conversion had occurred on
October 1, 1998, or at the date of original issuance, if later.

85
<PAGE>

COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF DIGITAL ISLAND
AND SHAREHOLDERS OF SANDPIPER

The rights of Sandpiper's shareholders are governed by its amended and
restated articles of incorporation, its amended and restated bylaws and the
laws of the State of California. The rights of Digital Island's stockholders
are governed by its restated certificate of incorporation, its amended and
restated bylaws and the laws of the State of Delaware. After the completion of
the merger, Sandpiper shareholders will become Digital Island stockholders and
will be governed by Digital Island's restated certificate of incorporation, its
amended and restated bylaws and the laws of the State of Delaware.

The following is a summary of the material differences between the rights of
holders of Digital Island common stock and the rights of holders of Sandpiper
capital stock at the date hereof. These differences arise from differences
between the Delaware General Corporation Law, or DGCL, and the California
Corporations Code, or CCC, and between the respective corporate charters and
bylaws of Digital Island and Sandpiper. This summary is not a complete
comparison of rights that may be of interest to you, and you should therefore
read the full text of the states' corporate statutes and the respective
corporate charters and bylaws of Digital Island and Sandpiper. For information
as to how these documents may be obtained, see "Where You Can Find More
Information" on page 159.

Comparison of Authorized and Outstanding Capital Stock

Digital Island

The authorized capital stock of Digital Island consists of 100,000,000
shares of common stock, par value $0.001 per share, and 10,000,000 shares of
preferred stock, par value $0.01 per share. As of November 29, 1999, 35,999,068
shares of Digital Island common stock were outstanding and no shares of Digital
Island preferred stock were outstanding.

Sandpiper

The authorized capital stock of Sandpiper consists of 40,000,000 shares of
common stock par value $0.001 per share, 9,885,981 shares of Series A preferred
stock par value of $0.001 per share, and 6,026,694 shares of Series B preferred
stock par value $0.001 per share. As of December 3, 1999, there were 7,005,236
shares of common stock outstanding, 9,607,141 shares of Series A preferred
stock outstanding, and 4,820,628 shares of Series B preferred stock
outstanding.

Comparison of Rights of Common Stock

Digital Island

Holders of common stock are entitled to one vote per share. The holders of
common stock are entitled to receive dividends when and as declared by the
board of directors out of funds legally available for the payment of dividends.
The holders of common stock do not have any cumulative voting rights,
preemptive rights, conversion rights, redemption rights or similar rights. In
the event of a liquidation, dissolution or winding up of Digital Island,
holders of common stock are entitled to share equally and ratably in the assets
of Digital Island, if any, remaining after the payment of all liabilities to
its creditors and on the liquidation preference payable to any outstanding
class or series of preferred stock. The rights, preferences and privileges of
holders of common stock are subject to the rights of any series of preferred
stock that may be issued in the future.

Sandpiper

Holders of Sandpiper common stock are entitled to one vote per share.
Subject to the preferences of the holders of preferred stock, the holders of
common stock are entitled to receive dividends as may be declared from time to
time by the Sandpiper board of directors. The holders of common stock have no
preemptive rights, conversion rights, redemption rights or other rights.

86
<PAGE>

Comparison of Rights and Preferences of Preferred Stock

Digital Island Preferred Stock

There are currently no shares of preferred stock outstanding, and Digital
Island has no current plans to issue shares of preferred stock. However, if the
board of directors of Digital Island issues preferred stock in the future, this
may have the effect of delaying or preventing a change in control of Digital
Island, may discourage bids for Digital Island's common stock at a premium over
the market price of the common stock and may adversely affect the market price
of, and the voting and other rights of the holders of common stock.

Sandpiper Preferred Stock

When the merger becomes effective, the holders of Sandpiper preferred stock
will become holders of Digital Island common stock. By approving the merger,
the holders of preferred stock will relinquish the following rights, privileges
and preferences:

Dividend Preference. Holders of Sandpiper preferred stock are entitled to
dividends when and as declared by the Sandpiper board of directors.

Liquidation Preference. In the event of a liquidation, dissolution or
winding up of Sandpiper, the holders of Series A preferred stock are entitled
to receive $0.70 per share and the holders of Series B preferred stock are
entitled to receive $4.46 per share, plus any declared but unpaid dividends on
the shares of preferred stock, prior and in preference to any distribution of
assets or funds of Sandpiper to the holders of common stock.

After the liquidation preference has been paid to the holders of preferred
stock, any remaining assets of Sandpiper legally available for distribution
will be distributed in the following order: (a) on a pro rata basis among the
holders of common stock until they have received $0.70 per share, plus all
declared and unpaid dividends; (b) on a pro rata basis among the holders of
common stock and Series A preferred stock (on an as-converted basis), until
they have received a total of $4.46 per share, plus all declared and unpaid
dividends, and (c) on a pro rata basis among holders of common stock and
preferred stock (on an as-converted basis).

Conversion Rights. Holders of preferred stock may convert their stock into
shares Sandpiper common stock at any time.

Automatic Conversion. Each share of preferred stock automatically converts
into a share of Sandpiper common stock upon the closing of an initial public
offering at a price per share of not less than $5.00 per share and with an
aggregate offering price of at least $10,000,000.

Voting Rights. The holders of preferred stock are entitled to the number of
votes equal to the number of shares of common stock that the preferred stock is
convertible into as of the record date. The holders of preferred stock have the
same voting rights as the holders of common stock, except with respect to the
election of directors or as otherwise required by the Sandpiper articles of
incorporation or by law.

Election of Directors. The holders of preferred stock, voting together as a
single class, are entitled to elect 3 members to the Sandpiper board of
directors. The holders of common stock are entitled to elect all remaining
members to the board of directors.

Redemption. Sandpiper cannot redeem the preferred stock, unless, after
November 17, 2004, the holders of a majority of the preferred stock then
outstanding demand that Sandpiper repurchase all outstanding shares of
preferred stock for their original purchase price.

87
<PAGE>

Protective Provisions. As long as 500,000 shares of preferred stock remain
outstanding, Sandpiper must obtain the approval of the holders of preferred
stock convertible into at least a majority of the common stock into which all
outstanding shares of preferred stock are convertible, before taking any of the
following acts:

. enter into a merger or reorganization (except with a wholly owned
subsidiary), a sale of control transaction or sell or otherwise dispose
of all or substantially all of its assets;

. change the authorized number of shares of its common or preferred stock;

. change the size of the board of directors;

. purchase or redeem any shares of common stock;

. declare or pay any dividends; or

. permit a subsidiary to sell shares of stock to a third party.

In addition to any class vote required by law or the Sandpiper articles of
incorporation, as long as 500,000 shares of each of the Series A preferred
stock or Series B preferred stock remain outstanding, Sandpiper must obtain the
approval of a majority of the holders of the outstanding shares of the affected
class of preferred stock before Sandpiper may take any of the following acts:

. alter or change the rights, preferences or privileges of the Series A
Preferred Stock or the Series B Preferred Stock; or

. create any new class or series of stock or convertible securities having
rights, preferences or privileges superior to or on parity with the
shares of the Series A preferred stock or Series B preferred stock.

Also, in addition to any class vote required by law or the Sandpiper
articles of incorporation, as long as 500,000 shares of Series B preferred
stock remain outstanding, Sandpiper must obtain the approval of a majority of
the outstanding shares of Series B preferred stock before it may take any
action that results in any acquisition if the terms of the acquisition do not
provide for certain distributions to the holders of Series B preferred stock
and a certain number of significant holders of Series B preferred stock have
voted against such acquisition.

A liquidation, dissolution or winding up of Sandpiper includes a merger or
other form of corporate reorganization, or a sale of all or substantially all
of the assets of Sandpiper in which the shareholders of Sandpiper do not own a
majority of the outstanding shares of the surviving corporation.

Contractual Rights. Certain contractual rights presently possessed by
holders of Sandpiper preferred stock will cease to exist after the merger.
These rights include information rights, registration rights, rights of
representation on the Sandpiper board of directors, rights to attend meetings
of the Sandpiper board of directors and other rights granted by Sandpiper in
connection with its capital financing.

Comparison of Stockholder Rights Under Delaware and California Law

Stockholder Approval of Certain Business Combinations

Delaware. Digital Island is subject to Section 203 of the DGCL, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless:

. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;

88
<PAGE>

employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or

. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.

Section 203 defines business combinations to include:

. any merger or consolidation involving the corporation and any interested
stockholder;

. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;

. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;

. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or

. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

Although Digital Island may elect not to be governed by Section 203, the
board of directors intends that the company be governed by Section 203. Digital
Island believes that most Delaware corporations have availed themselves of the
protections of the statute and have not opted out of Section 203. Digital
Island believes that Section 203 will encourage any potential acquiror to
negotiate with its board of directors. Section 203 also might have the effect
of limiting the ability of a potential acquiror to make a two-tiered bid for
Digital Island in which all stockholders would not be treated equally.
Shareholders should note, however, that the application of Section 203 to
Digital Island will give the board the power to reject a proposed business
combination, even though a potential acquiror may be offering a substantial
premium for the shares of Digital Island stock over the then-current market
price. Section 203 would also discourage certain potential acquirors unwilling
to comply with its provisions.

California. California law requires that holders of common stock receive
common stock in a merger of the corporation with the holder of more than fifty
percent (50%) but less than ninety percent (90%) of the target's common stock
or its affiliate unless all of the target company's shareholders consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Although Delaware law does not parallel California law in this respect, under
some circumstances Section 203 does provide similar protection to shareholders
against coercive two-tiered bids for a corporation in which the stockholders
are not treated equally.

Corporate Charter and Bylaw Provisions

The Digital Island certificate of incorporation and bylaws include
provisions that may have the effect of discouraging, delaying or preventing a
change of control of Digital Island or an unsolicited acquisition proposal that
a stockholder might consider favorable, including a proposal that might result
in the payment of a premium over the market price for the shares held by
stockholders. These provisions are summarized in the following paragraphs.
Unless discussed below, Sandpiper's articles of incorporation and bylaws
contain no comparable provisions.

Classified Board of Directors. A classified board is one on which a certain
number, but not all, of the directors are elected on a rotating basis each
year. Delaware law permits a corporation to have a classified board of
directors, where the directors can be divided into as many as three classes
with staggered terms of office, with only one class of directors standing for
election each year.

89
<PAGE>

Digital Island's certificate of incorporation and bylaws provide for its
board to be divided into three classes of directors serving staggered, three
year terms. The classification of the board has the effect of requiring at
least two annual stockholder meetings, instead of one, to replace a majority of
the members of the board of directors. The Sandpiper charter and bylaws do not
provide for a classified board.

Supermajority Voting Requirements. Digital Island's certificate of
incorporation requires the approval of the holders of at least 66 2/3% of the
combined voting power of our stockholders to effect certain amendments to the
certificate of incorporation with respect to the bylaws, directors, stockholder
meetings and indemnification. Digital Island's bylaws may be amended by either
a majority of the board of directors, or by stockholders the approval of at
least 66 2/3% of the outstanding shares of stock entitled to vote.

Special Meetings of Stockholders. Digital Island's bylaws provide that
special meetings of stockholders of Digital Island may be called only by the
board of directors, or by the Chairman of its board of directors or our
President. The bylaws of Sandpiper provide that special meetings of the
shareholders may be called only by the board of directors, by the chairman of
the board, by the president, or by one or more shareholders entitled to cast
10% or more of the votes at that meeting.

No Stockholder Action by Written Consent. Digital Island's certificate of
incorporation and bylaws provide that an action required or permitted to be
taken at any annual or special meeting of the stockholders of Digital Island
may only be taken at a duly called annual or special meeting of stockholders.
This provision prevents stockholders from initiating or effecting any action by
written consent. The bylaws of Sandpiper allow shareholder action by written
consent.

Notice Procedures. Digital Island's bylaws establish advance notice
procedures with regard to all stockholder proposals to be brought before
meetings of stockholders, including proposals relating to the nomination of
candidates for election as directors, the removal of directors and amendments
to Digital Island's certificate of incorporation or bylaws. These procedures
provide that notice of such stockholder proposals must be timely given in
writing to the Secretary of Digital Island prior to the meeting. Generally, to
be timely, notice must be received by Digital Island's Secretary not less than
120 days prior to the meeting. The notice must contain certain information
specified in the bylaws. The bylaws of Sandpiper require that advance notice
regarding the subject of any special meeting called by any qualified
shareholder or shareholders, be delivered to the chairman of the board, the
president, any vice president or the secretary of the corporation at least 60
days before any such meeting.

Other Anti-Takeover Provisions. See Digital Island's "Executive Compensation
and Other Information--Employee Benefit Plans" for a discussion of certain
provisions of the 1999 stock incentive plan which may have the effect of
discouraging, delaying or preventing a change in control of Digital Island or
unsolicited acquisition proposals.

Removal of Directors. Under Delaware law, any director or the entire board
of directors (in circumstances where the corporation does not have a classified
board or cumulative voting) may be removed with or without cause with the
approval of a majority of the outstanding shares entitled to vote at an
election of directors. Because Digital Island has a classified board, the
directors may only be removed for cause.

California. Under California law, any director or the entire board of
directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual
director may be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the director under
cumulative voting.

Indemnification and Limitation of Liability

California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a

90
<PAGE>

corporation to adopt charter provisions eliminating the liability of a director
to the corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty. There are nonetheless certain differences between
the laws of the two states respecting indemnification and limitation of
liability which are summarized below.

Delaware. The Digital Island certificate of incorporation eliminates the
liability of directors to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permissible under Delaware law, as such law exists currently and as it may be
amended in the future. Under Delaware law, such provision may not eliminate or
limit director monetary liability for: (a) breaches of the director's duty of
loyalty to the corporation or its stockholders; (b) acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law;
(c) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (d) transactions in which the director received an improper
personal benefit. Such limitation of liability provisions also may not limit a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with federal or state securities laws, or
affect the availability of nonmonetary remedies such as injunctive relief or
rescission.

California. The Sandpiper Articles of Incorporation eliminate the liability
of directors to the fullest extent permissible under California law. California
law does not permit the elimination of monetary liability where such liability
is based on: (a) acts or omissions or intentional misconduct or knowing and
culpable violation of law; (b) acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director; (c) receipt of
an improper personal benefit; (d) acts or omissions that show reckless
disregard for the director's duty to the corporation or its shareholders, where
the director in the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its shareholders; (e)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) transactions between the corporation and a director who has a
material financial interest in such transaction; and (g) liability for improper
distributions, loans or guarantees.

Director Indemnification Compared. California law requires indemnification
when the individual has defended successfully the action on the merits while
Delaware law requires indemnification whether there has been a successful
defense on the merits or otherwise. Delaware law generally permits
indemnification of expenses, including attorneys' fees, actually and reasonably
incurred in the defense or settlement of a derivative or third-party action,
provided there is a determination by a majority vote of disinterested
directors, by independent legal counsel or by a majority vote of the
stockholders that the person seeking indemnification acted in good faith and in
a manner reasonably believed to be in best interests of the corporation.
Without court approval, however, no indemnification may be made in respect of
any derivative action in which such person is adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation. Delaware
law requires indemnification of expenses when the individual being indemnified
has successfully defended any action, claim, issue or matter therein, on the
merits or otherwise. Expenses incurred by an officer or director in defending
an action may be paid in advance, under Delaware law and California law, if
such director or officer undertakes to repay such amounts if it is ultimately
determined that he or she is not entitled to indemnification. In addition, the
laws of both states authorize a corporation's purchase of indemnity insurance
for the benefit of its officers, directors, employees and agents whether or not
the corporation would have the power to indemnify against the liability covered
by the policy.

A California corporation can provide rights to indemnification beyond those
provided under California law to the extent such additional indemnification is
authorized in the corporation's articles of incorporation. If such
indemnification is authorized, rights to indemnification may be provided
pursuant to side agreements or by-law provisions which make mandatory the
permissive indemnification provided by California law. Sandpiper's articles of
incorporation permit indemnification beyond that expressly mandated by
California law and limit director monetary liability to the extent permitted by
California law.

91
<PAGE>

Delaware law also permits a Delaware corporation to provide indemnification
in excess of that provided by statute. In contrast to California law, Delaware
law does not require authorizing provisions in the certificate of
incorporation. Limitations on indemnification may be imposed by a court based
on principles of public policy.

Inspection of Shareholder List

Both California and Delaware law allow any shareholder to inspect the
shareholder list for a purpose reasonably related to such person's interest as
a shareholder. California law provides, in addition, for an absolute right to
inspect and copy the corporation's shareholder list by persons holding an
aggregate of five percent (5%) or more of the corporation's voting shares, or
shareholders holding an aggregate of one percent (1%) or more of such shares
who have made certain filings with the Securities and Exchange Commission.
Delaware law also provides for inspection rights as to a list of stockholders
entitled to vote at a meeting within a ten day period preceding a stockholders'
meeting for any purpose germane to the meeting. However, Delaware law contains
no provisions comparable to the absolute right of inspection provided by
California law to certain large shareholders.

Dividends and Repurchases of Shares

California law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. The concepts of par
value, capital and surplus exist under Delaware law.

Delaware. Delaware law permits a corporation to declare and pay dividends
out of surplus or, if there is no surplus, out of net profits for the fiscal
year in which the dividend is declared and/or for the preceding fiscal year as
long as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law generally
provides that a corporation may redeem or repurchase its shares only if the
capital of the corporation is not impaired and such redemption or repurchase
would not impair the capital of the corporation.

California. Under California law, a corporation may not make any
distribution to its shareholders unless either: (a) the corporation's retained
earnings immediately prior to the proposed distribution equal or exceed the
amount of the proposed distribution; or (b) immediately after giving effect to
such distribution, the corporation's assets (exclusive of goodwill, capitalized
research and development expenses and deferred charges) would be at least equal
to 1 1/4 times its liabilities (not including deferred taxes, deferred income
and other deferred credits), and the corporation's current assets would be at
least equal to its current liabilities (or 1 1/4 times its current liabilities
if the average pre-tax and pre-interest expense earnings for the preceding two
fiscal years were less than the average interest expense for such years). Such
tests are applied to California corporations on a consolidated basis.

Shareholder Voting

Both California and Delaware law generally require that a majority of the
shareholders of both acquiring and target corporations approve statutory
mergers.

Delaware. Delaware law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if: (a) the merger agreement does not amend the
existing certificate of incorporation; (b) each share of stock of the surviving
corporation outstanding immediately before the effective date of the merger is
an identical outstanding share after the merger and; (c) either no shares of
common stock of the surviving corporation and no shares, securities or
obligations convertible into such stock are to be issued or delivered under the
plan of merger, or the authorized unissued shares or shares of common stock of
the surviving corporation to be issued or delivered under the plan of merger
plus those initially issuable upon conversion of any other shares, securities
or obligations to be

92
<PAGE>

issued or delivered under such plan do not exceed twenty percent (20%) of the
shares of common stock of such constituent corporation outstanding immediately
prior to the effective date of the merger.

California. California law contains a similar exception to its voting
requirements for reorganizations where shareholders or the corporation itself,
or both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than 83.3% (or five-sixths)
of the voting power of the surviving or acquiring corporation or its parent
entity.

Appraisal Rights

Under both California and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights which may entitle the dissenting
shareholder to receive cash equal to the fair market value of his or her shares
in lieu of the consideration he or she would otherwise receive in the
transaction.

Delaware. Under Delaware law, such fair market value is determined exclusive
of any element of value arising from the accomplishment or expectation of the
merger or consolidation, and such appraisal rights are not available: (a) with
respect to the sale, lease or exchange of all or substantially all of the
assets of a corporation; (b) with respect to a merger or consolidation by a
corporation the shares of which are either listed on a national securities
exchange or are held of record by more than 2,000 holders if such stockholders
receive only shares of the surviving corporation or shares of any other
corporation that are either listed on a national securities exchange or held of
record by more than 2,000 holders, plus cash in lieu of fractional shares of
such corporations; or (c) to stockholders of a corporation surviving a merger
if no vote of the stockholders of the surviving corporation is required to
approve the merger under Delaware law.

California. The limitations on the availability of appraisal rights under
California law are different from those under Delaware law. Shareholders of a
California corporation whose shares are listed on a national securities
exchange generally do not have such appraisal rights unless the holders of at
least five percent (5%) of the class of outstanding shares claim the right or
the corporation or any law restricts the transfer of such shares. Appraisal
rights are also unavailable if the shareholders of a corporation or the
corporation itself, or both, immediately prior to the merger will own
immediately after the reorganization equity securities constituting more than
83.3% (or five-sixths) of the voting power of the surviving or acquiring
corporation or its parent entity. California law generally affords appraisal
rights in sale of asset reorganizations.

Dissolution

Under California law, shareholders holding fifty percent (50%) or more of
the total voting power may authorize a corporation's dissolution, with or
without the approval of the corporation's board of directors, and this right
may not be modified by the articles of incorporation. Under Delaware law,
unless the board of directors approves the proposal to dissolve, the
dissolution must be unanimously approved by all the stockholders entitled to
vote thereon. Only if the dissolution is initially approved by the board of
directors may the dissolution be approved by a simple majority of the
outstanding shares of the corporation's stock entitled to vote. In the event of
such a board-initiated dissolution, Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority (greater than a
simple majority) voting requirement in connection with dissolutions. Digital
Island's certificate of incorporation contains no such supermajority voting
requirement.

Interested Director Transactions

Under both California and Delaware law, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable because of such interest, provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain minor exceptions, the conditions are
similar under California and Delaware law.

93
<PAGE>

Shareholder Derivative Suits

California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Delaware
law, a stockholder may bring a derivative action on behalf of the corporation
only if the stockholder was a stockholder of the corporation at the time of the
transaction in question or if his or her stock thereafter devolved upon him or
her by operation of law. California law also provides that the corporation or
the defendant in a derivative suit may make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bonding requirement.

94
<PAGE>

BUSINESS OF DIGITAL ISLAND

Overview

Digital Island offers a global network and related services for companies
that are using the Internet to deploy key business applications worldwide.
Digital Island's services make it easier for companies to globalize their
operation and to provide a higher quality of service and more functions than in
the public Internet. Digital Island targets corporations that are increasingly
relying on the Internet to conduct business but are constrained by its
unreliability, slow performance and limited range of functions. Digital
Island's global private network and expert services enable customers to
effectively deploy and manage global applications by combining the reliability,
performance and broad range of functions available in private intranets
operated by individual companies for their own users, with the global access of
the public Internet. Digital Island also offers service level guarantees,
customized billing, security services to protect the integrity of data
transmissions, network management and other high quality services designed to
improve the applications deployed on Digital Island's network. Digital Island's
customers, which include multinational corporations such as Autodesk, Cisco
Systems, E*TRADE Group and National Semiconductor, use Digital Island's
services and proprietary technology to facilitate the deployment of a wide
variety of electronic commerce applications, including online marketing and
sales customer service, software, document and multimedia distribution and
online training. As of September 30, 1999, Digital Island had contracts with
111 customers, of which 83 were deployed and generating revenues.

Digital Island developed its global network to help companies globalize
their applications. It operates Web sites and Internet applications, manages
computer servers and maintains networking equipment for its customers in its
state-of-the-art network data centers, and provides network management
expertise to its customers for their own network data centers. The business
applications delivered through Digital Island's network services are accessed
globally in the same way as any Web site, but with a significant difference:
these business applications are highly available and are designed to operate
substantially faster and with a greater range of functions than sites that rely
solely on the public Internet.

Digital Island's global network consists of a centralized high-speed private
network which acts as a backbone connecting five strategically located data
centers in Hong Kong, Honolulu, London, New York City and Santa Clara,
California. This core network architecture connects over dedicated lines
directly to local Internet service providers in 21 countries. This enables
Digital Island's customers to transmit Internet traffic seamlessly over Digital
Island's network with dedicated capacity and to connect directly to
international users through local Internet service providers. Digital Island
also helps its customers distribute content over the Internet by replicating
(mirroring) and storing (caching) their applications in multiple locations
close to their end-users. This allows Digital Island's customers to benefit
from the lower overall cost of data storage versus transport and to provide a
better online experience for their end-users. For example, Digital Island Local
Content Managers enable Digital Island to help customers store text, graphics,
software, audio/video streams and other bandwidth intensive files which are
repeatedly accessed in specific geographic regions.

Digital Island's services are designed to allow customers to outsource
Internet activities to Digital Island, thereby transferring to Digital Island
the burden of attracting and retaining scarce technical staff and adopting
continuously changing technologies, while lowering their operating costs and
speeding deployment.

Industry Background

The Internet continues to experience rapid growth and expansion as an
important global medium for communications and electronic business.
International Data Corporation, known as IDC, has estimated that the total
number of Internet users in the world reached approximately 69 million in 1997
and will increase to approximately 319 million in 2002, a 36% compound annual
growth rate. As the numbers of Internet users has grown, enterprises have
increasingly viewed the Internet as an opportunity to interact rapidly with a
larger number of geographically distributed offices, employees, customers,
suppliers and partners. Many enterprises

95
<PAGE>

that focus solely on delivering services over the Internet have emerged as well
as offline businesses that have implemented Internet sites incorporating e-
commerce applications. As the Internet has emerged as a strategic component of
business, investment in Internet services has begun to increase dramatically.
According to IDC, the demand for U.S. Internet and e-commerce services was $2.9
billion in 1997 and is expected to grow to $22.1 billion by 2002, a 50%
compound annual growth rate.

Increasing Reliance on Internet Business Applications. As use of the
Internet grows, enterprises are increasing the breadth and depth of their
Internet product and service offerings. Businesses have begun to use the
Internet for an expanding variety of commercial applications, including online
marketing and sales, customer service, software and document and multimedia
distribution, electronic commerce and online training. For many enterprises,
loss of the availability of such business-critical applications often results
in loss of revenue and impairment of customer good will. As a result,
enterprises are increasingly demanding that their networks deliver fast,
consistent, reliable, secure and relevant end user experiences globally, remain
easy to upgrade as the scale and complexity of applications grows and
technologies change, operate continuously 24 hours per day, seven days per
week, and offer the applications support and functionality (e.g. security, user
location, identification and usage patterns) previously provided only in
private corporate wide area networks.

Inherent Problems with the Internet/Need for a Robust Global Solution. The
public Internet infrastructure was designed for applications requiring limited
communications bandwidth capacity and was not designed with the quality
necessary for core business uses such as electronic commerce. For enterprises
requiring global solutions, the U.S.-centric nature of the public Internet
results in poor response times, particularly for applications requiring large
file transfers, instantaneous interaction between networked users and overseas
transport. This occurs because data transmittal between countries must travel
through telecommunications lines in the U.S. where the Internet originated and
where most of its infrastructure is still located, and make a large number of
connections through various regional and national Internet service providers
before reaching its destination. Data packets often become lost in the transfer
process, especially for data-intensive transfers involving large software
downloads, multimedia document distribution and audio or video content. The
response time for users is also often slow.

Trend Toward Outsourcing of Internet Operations. In seeking to address the
performance issues of the public Internet, enterprises have increasingly found
that investing in the resources and personnel required to maintain in-house
private networks is cost-prohibitive and extremely difficult given the shortage
of technical talent and risk of technological obsolescence. With the failure of
in-house solutions to address their needs, today's enterprises have
increasingly sought third party providers to support their Internet
applications deployment, operations and ongoing maintenance. Regional and
national Internet service providers, however, often fail to provide an adequate
solution because they lack the geographically distributed network capability
necessary to deliver content globally using replication and caching
technologies, which are becoming increasingly important as the Internet usage
and bandwidth demand increase. IDC estimates that corporate spending on web
hosting services will increase from approximately $414 million in 1997 to $11.8
billion by 2002, a 95% compound annual growth rate. Enterprises are
increasingly seeking companies that combine intelligent networking, regional
hosting services and geographically dispersed content distribution to deploy
the enterprise's applications closer to the end-user.

The Digital Island Solution

Digital Island offers a global private network and related services for
companies that need worldwide deployment of key business applications over the
Internet. Digital Island's solution provides the following key advantages:

Global Connectivity and Availability. The Digital Island Global IP
Applications Network currently has connection point in 21 countries in Asia,
Europe, North America, South America and Australia. It believes that this
global reach provides its customers with local access to the majority of
existing Internet users.

96
<PAGE>

High Performance and Scalability. The Digital Island Global IP Applications
Network bypasses the primary congestion points of the public Internet to
provide fast, consistent performance for its customers. By routing and managing
Internet traffic over a centralized high-speed network directly between its
strategic, globally distributed data centers and local points of presence, its
solution avoids transmission of data over multiple routers and switches
(systems that relay data in networks) and network access points (locations at
which Internet service providers exchange traffic) in the public Internet,
thereby substantially reducing transmission time and improving network security
and performance. Digital Island's network architecture is reliable, can scale
to many users and enables a consistent end user experience independent of time
of day and geography.

Local Content Management. Digital Island owns and operates a growing number
of Digital Island Local Content Managers in high volume markets around the
world. It has created "digital warehouses" where it helps customers readily
store text, graphics, software, audio/video and other bandwidth intensive files
which are repeatedly accessed within the regional area. This solution is a more
cost effective and scalable solution when supporting high volume global access
to information. It also allows for a more geographically localized experience
(e.g. language and currency). It currently operates Digital Island Local
Content Manager sites in Brazil, Germany, Japan, Singapore, Netherlands, Hong
Kong, France, Australia, the U.S., and the United Kingdom and plans to continue
its current expansion program.

Cost-Effective Outsourcing Solution. Digital Island's customers directly
benefit from the significant investments of technical expertise and other
resources that it has made to develop its unique Digital Island Global IP
Applications Network. Most enterprises today do not have the infrastructure
that mission-critical Internet operations require, including strategic,
globally distributed data centers, 24 hours per day, seven days per week
operations and specialized Internet technology expertise. Digital Island's
solution allows customers to address shortages of technical resources and
continuously changing technologies, while substantially lowering the
application deployment and operational costs of new Internet applications.
Digital Island believes that its solutions and economies of scale are
significantly more cost-effective than most in-house alternatives.

Innovative Solutions. Digital Island believes that, as a result of its
advanced network architecture and highly experienced product development team,
it is able to provide a unique set of value-added product offerings. For
example, it offers open, reserved and managed bandwidth products that enable
its customers to allocate their bandwidth purchases according to their changing
needs. In addition, its proprietary technology enables it to bill its customers
according to the number of bits of data transmitted over its network,
geographic destination of transmission and time of day, as opposed to
traditional flat-rate billing. This allows Digital Island to provide more
flexible service pricing, and benefits the customer by more accurately
correlating network cost to actual network utilization by geography.
TraceWare(TM) technology is a geographic atlas of the Internet. This software
maps an Internet address to a country where the user resides in with over 90%
accuracy. Customers are currently using TraceWare for a range of applications.
For example, Financial Times uses TraceWare to target ad banner services
specifically to different geographic regions. Digital River adopted TraceWare
in its fraud detection algorithms which help it reduce losses from credit card
by detecting the country where the user is accessing the system and matching
this information against known credit card history and user address. TraceWare
also has applications in helping to create flexible pricing plans, localization
of content and currency, assistance in fraud detection, authentication and
compliance with export regulations and the enhancement of other applications
deployed across Digital Island's network.

Business Strategy

Digital Island's objective is to be the leader in offering network services
for globalizing Internet business applications. In order to achieve this
objective, it is implementing a business strategy focused on the following key
elements:

Target Multinational Corporations. Digital Island has designed its network
to address the sophisticated needs of multinational customers, who are
increasingly relying on the Internet to conduct business and require

97
<PAGE>

consistent levels of high performance and reliability. It primarily targets
leading customers in industries which are early adopters of Internet
technologies, such as the financial services, technology, media publishing,
entertainment and other Internet-centric sectors. Digital Island has tailored
its services to enhance the performance of its customers in electronic commerce
and services, such as digital media distribution. The Digital Island Global IP
Applications Network has connection points in 21 countries worldwide, providing
its customers with access to a significant majority of existing Internet users,
and it plans to expand its global reach through additional connection points in
the future.

Expand Customer Relationships. Digital Island plans to extend its leadership
in the market for global Internet application services by continuing to expand
its base of customers. By integrating other Internet services into the Digital
Island Global IP Applications Network, and by providing high-quality customer
support, Digital Island believes that businesses will increasingly rely on it
for their Internet business needs, which in turn should enhance customer
retention and increase demand for both application services and network usage.
For example, Autodesk initially used Digital Island's network to deploy
applications in a single country; subsequently, Autodesk chose to deploy
applications in other countries served by Digital Island and added additional
applications and extended usage of Digital Island's services to key
subsidiaries.

Develop Additional Network Services. Digital Island seeks to be a leader in
designing and deploying a global business network that enables customers to
capture the benefits of ubiquitous access to applications and the performance
and range of functions of private intranets operated by individual companies
for their own users. It is committed to investing resources to implement new
Internet technology and services that will allow its customers to optimize
their deployment and operation of applications globally. To this end, it
collaborates with providers of leading Internet technologies to develop and
deploy proprietary technologies in order to enhance its service offerings and
to address its customers' evolving needs. Some of Digital Island's innovations
have included reserved and managed bandwidth technologies that allow customers
to tailor bandwidth to their individual needs and benefit from usage-based
billing, and its TraceWare technology that enables customers to identify the
source of Internet traffic. The Digital Island Local Content Managers enable
customers to readily store files which are repeatedly accessed within specific
geographical regions. Digital Island believes that continuing leading edge
innovation is the key to differentiating Digital Island's products and services
in the long term.

Expand Strategic Relationships. Digital Island believes that strategic
relationships should enhance its ability to reach new customers. Potential
partners include system integrators, software vendors and application service
providers that provide network equipment and services to companies. Further,
strategic relationships with its customers in its target markets, such as with
E*TRADE, bring not only a high level of understanding of the specific needs of
that market but also credibility and visibility with potential new customers.
Digital Island is also targeting partners which can enhance its ability to
develop and deliver new application services. Through these relationships it
hopes to leverage these enterprises' research and development expertise to cost
effectively develop new network services.

Expand Global Sales Capabilities. Digital Island targets its customers
predominately through a direct sales channel complimented by a range of
external alliances and channels. It currently has 79 professionals in its sales
organization in offices in the U.S., Asia and Europe and intends to grow its
sales organization substantially over the next year. Its Global Partner Program
is targeted at increasing the effectiveness of its direct channel. In addition
to co-marketing, it has a growing number of sales channel partners which
represent its products and services either as a sales agent or a reseller.

Network Architecture

The Digital Island Intelligent Network consists of an asynchronous transfer
mode, or ATM, backbone that connects five geographically dispersed data
centers. This ATM backbone router core is a centralized high-speed network that
connects to local Internet service providers in 21 countries forming a
distributed network architecture that minimizes the number of separate
transmissions, necessary to transmit data, resulting in greater

98
<PAGE>

speed and reliability for our customers' end-users. Digital Island's five
distributed data centers permit it to disseminate information reliably on a
global basis and, using its sophisticated data tracking capability, allows it
to optimize data transmissions internationally, minimizing the use of expensive
transoceanic fiber optic circuits. The Digital Island network is designed to
increase the speed and reliability of data transmission and circumvents a
design weakness of the public Internet, which requires transmission of
information over numerous routers and network inter-exchange points, often
leading to delays and loss of data. Local Content Managers, where customers can
store files which are repeatedly accessed within the regional area, are located
in Brazil, Singapore, Hong Kong, France, Australia, Japan, Germany, South
Africa, the United Kingdom and all three U.S. data centers. Digital Island
believes its architecture is superior to traditional networks for the
distribution of applications because of its manageability, ability to scale to
many users and connectivity over dedicated lines to local Internet service
providers and network service providers through dedicated connection points.

Digital Island currently has direct connections in 21 countries with one or
more local Internet service providers, providing customers with direct access
to local markets worldwide. Currently, it purchases transit from AT&T, GTE,
Sprint and MCI WorldCom in the United States and has established transport
relationships in 7 other countries, giving it a total of 28 different direct
points of connection to the Internet. Unlike traditional peering relationships,
these network service providers carry the Internet traffic of its customers
without any reciprocal transit agreement. While Digital Island pays a fee to
the network service providers for this arrangement, it gives Digital Island
access to thousands of Internet service providers without the obligation of
carrying traffic originating outside of its network. Both the Santa Clara and
New York data centers have direct connections through circuits with each of the
four network service providers. In addition to the U.S., it has established
private Internet connection relationships in 20 other countries as listed
below:

<TABLE>
<S> <C> <C>
Australia Israel South Korea
Brazil Japan Sweden
Canada Mexico Switzerland
China Netherlands Taiwan
France Russia United Kingdom
Germany Singapore Italy
Spain South Africa
</TABLE>

In China, Digital Island has connections in both Hong Kong and Beijing. With
28 different connection points to the Internet, Digital Island believes it
offers its customers one of the most diverse, redundant and reliable networks
for the deployment of business applications globally.

Digital Island currently has state-of-the-art network operations centers in
Honolulu, Hawaii and London, UK. Each center provides real time end-to-end
monitoring of our network 24 hours per day, seven days a week, 365 days per
year and operate as fully redundant network operation sites. The network
operations center helps it to ensure the efficient and reliable performance of
its network, enabling it to identify, and often prevent, potential network
disruptions and to respond immediately to actual disruptions. In addition,
through traffic management and forecasting, line performance reporting and
alarm monitoring, remote link restoration and coordination, and provisioning of
network services, the network operations center enables it to schedule and
conduct maintenance with minimal interferences to the network. In addition to
the two network operations centers, Digital Island maintains a Level 2 Support
Center located in San Francisco. Level 2 Support acts as an escalation point
for each of the primary network operations centers as well as a third redundant
location capable of managing the worldwide network.

Digital Island currently leases lines or bandwidth from multiple
telecommunications carriers. These carriers include MCI WorldCom, GTE and
Sprint, as well as several international carriers such as Cable & Wireless,
IDC, Telstra and Singapore Telecom. Leasing from multiple carriers assists it
in achieving competitive pricing, provides it with diversity of routes and
redundancy and provides access to multiple sources of bandwidth on different
cable systems globally. Digital Island's lease contract term with a carrier is
typically one year, which allows it to benefit from declining bandwidth costs
over time. In some cases the term may

99
<PAGE>

extend to three years where Digital Island determines there is a significant
cost advantage implicit in such arrangement or that the route served by such
line is bandwidth constrained.

Services

Digital Island offers a family of services designed to allow companies to
deploy their Internet applications globally without developing or acquiring
their own global network hosting centers or content management capability.
Digital Island's services are especially suited to Internet applications
requiring a high performance end user experience which is consistent and
reliable when downloading files (e.g., software, documentation and video
clips), downloading graphic-intensive web content or engaging in real-time
transactions (e.g., transaction clearing and video conferencing) across a range
of access speeds. Digital Island works with each of its customers to optimize
cost and performance requirements. Its content hosting, mirroring and caching
services allow customer applications to be replicated throughout the network to
lower costs and improve response times and its transport services guarantee
bandwidth into local markets. Digital Island's network engineering team
provides its customers with global networking expertise and consultation in the
design and deployment of their applications on the Digital Island Global IP
Applications Network. Digital Island also provides 24 hours per day, seven days
per week, 365 days per year operations support and security experts to keep
their applications up and running on a global basis.

Digital Island currently offers service level guarantees, customized
billing, network security services, network management and other application
services designed to improve the performance of applications deployed on its
network. Digital Island plans to continue to develop or acquire extensions to
its application services to fuel ongoing product and service delivery. For
example, Digital Island believes that its proprietary TraceWare technology,
which is not yet commercially released, enables its customers to identify the
source of Internet protocol requests as well as the destinations of Internet
traffic. This technology will be predominantly used for targeted advertising
and local language content delivery.

Application Hosting and Content Distribution Services

Digital Island's application hosting and content distribution services,
including mirroring and caching, enable customers to gain the benefit of having
their application (whether on a server on their site or on a server in one of
its data centers) appear to be located in every country where it has a
connection point. Leveraging its network architecture and technologies, Digital
Island's application hosting services provide end users globally with what it
believes, based on its past experience, to be fast, reliable and seamless
access to its customers' content. Each of its data centers has state-of-the-art
power management, security, and fire suppression systems. Customers have access
to its network operations center and its on-site personnel for ongoing
maintenance services. Customers can choose from the following packages:

Server Management Package. This is an all-inclusive solution for customers
seeking to outsource their day-to-day hardware and server administration.
Digital Island operates two production-ready environments: Sun Solaris(TM) and
Windows NTTM operating on Compaq servers. Digital Island hosts these servers,
as well as servers provided by its customers, in its data centers and provide
the network infrastructure as well as application monitoring, performance
optimization, server administration and security services. This package
provides a production-ready environment with maximum uptime.

Hardware Management Package. This enables Digital Island's customers to
outsource day-to- day hardware maintenance, while allowing its customers' IT
staff unhindered access to perform any needed system administration functions.
This package includes services from Digital Island's data center personnel for
hardware management and repair plus access to its network infrastructure.
Digital Island's centrally managed network architecture provides optimized
routing, resulting in the uptime, performance, and reliability required by its
customers.

100
<PAGE>

Co-location Package. This allows Digital Island's customers to house their
own servers in one of its data centers, and provides a secure environment
designed to deliver maximum uptime for the server plus access to its Global IP
Applications Network.

Globeport. For customers choosing to maintain content at their own data
centers, Digital Island will arrange dedicated connections from the client's
site to its closest point of presence. This package includes network services
enabling Digital Island's customers to extend their reach globally.

Network Services

Digital Island offers a range of network services to be used with its
Application Hosting and Content Distribution Services:

Open Bandwidth. Customers pay a minimum monthly fee for access to Digital
Island's network and are charged based on actual usage (per gigabit) above
these minimum levels. Customers may also pay for services based on distance
traveled. Customers can generate utilization reports which allow them to
determine usage flows by country.

Reserved Bandwidth. Reserved Bandwidth is a network service that guarantees
a minimum throughput level, expressed in kilobytes per second to a specified
connection point. Digital Island's customer is billed for a pre-specified
minimum amount of data transfer to that specified connection point. Unlike
other methods of relaying Internet traffic such as frame relay services,
Digital Island's network is engineered to accommodate peaks in traffic above
the minimum guaranteed levels. Gigabytes in excess of the reserved monthly
amount are billed at the applicable data transfer rate.

Managed Bandwidth. Managed Bandwidth is Digital Island's premium network
transport service offering. Using a web browser interface, IT professionals can
readily allocate bandwidth by geographic region at any time from any location.
Through this service, IT professionals can configure the Digital Island network
to meet their organization's international throughput requirements.

Streaming Services. Digital Island offers a full range of encoding and
streaming services targeted for on demand audio and video delivery of
audio/video content. Through a strategic partnership with RealNetworks and
Inktomi, Digital Island has deployed a global streaming network fully capable
of delivering audio/video streams in over 10 countries. Backed by unmatched
service level agreements, this service will continue to be expanded through the
support of additional media formats and geographies.

Professional Services

Digital Island augments its primary product and service offerings with a
range of professional service options for customers. Professional services
include helping its customers to provide security on their networks, making
recommendations for network equipment and consulting as to Internet application
deployment.

Customers

Digital Island primarily targets leading customers in industries which are
early adopters of Internet technologies, such as the financial services,
technology, media and other Internet-centric sectors. Within Digital Island's
target markets, it has tailored its services to enhance the performance of its
customers in electronic commerce, electronic services and electronic
fulfillment, such as digital media distribution. Digital Island's customers use
its services and proprietary technology to facilitate the deployment of
commercial applications, including electronic commerce, online customer
service, software distribution, multimedia document distribution, sales
management and distance learning. As of September 30, 1999, Digital Island had
contracts with 111 customers including Autodesk, Cisco Systems, E*TRADE,
Mastercard International, National Semiconductor and Novell.

101
<PAGE>

Sales and Marketing

Digital Island's sales and marketing strategy is designed to target
multinational businesses that depend on the Internet for core business
operations.

To reach these enterprises, Digital Island utilizes a multi-tiered channel
approach. In North America, it primarily relies on direct sales and augments
this effort with resellers, agents or co-marketing partners where appropriate.
In Europe, Asia and Latin America, Digital Island is hiring direct sales
personnel and developing agents and reseller channels. Digital Island's channel
partners also provide services to it in the form of connectivity to local
backbones or service providers and router installation/repair.

Digital Island is actively seeking to increase its sales and distribution
capabilities globally. Currently, most of its sales are derived from the
efforts of its direct sales force. Digital Island has begun developing indirect
sales channels targeting content developers (such as firms that develop web
sites), system integrators, consulting companies, suppliers and international
Internet service providers. As of September 30, 1999, it had five channel
partners in Europe and Asia to whom it pays commissions to refer customers.

Digital Island's marketing organization is responsible for product
management, product marketing, public relations and marketing communications.
Product management includes defining the product plan and bringing to market
its products and services. These activities include product strategy and
definition, pricing, competitive analysis, product launches, channel program
development and product life cycle management. Digital Island stimulates
product demand through a broad range of marketing communications and public
relations activities. Primary marketing communications activities include
public relations, collateral, advertising, direct response programs and
management of its web site. Digital Island's public relations focuses on
cultivating industry analyst and media relationships with the goal of securing
broad media coverage and recognition as a leader and innovator in global
Internet application deployment.

While it has not entered into any material partnering arrangements, a key
element of its marketing strategy includes identifying and partnering with
component suppliers, customers and other application service companies. It has
a dedicated team focused on creating new, and expanding existing, relationships
which will be critical to the ongoing success of future product developments.

Customer Support

Digital Island seeks to provide superior customer service by understanding
the technical requirements and business objectives of its customers and
fulfilling their needs proactively on an individual basis. By working closely
with the customer, it seeks to optimize the performance of its customers'
Internet operations, avoid downtime, resolve quickly any problems that may
arise and make adjustments in services as customer needs change over time.

Before sales are made, Digital Island provides technical advice to customers
in order to help them understand their Internet applications related needs and
how its products and services can provide solutions for particular needs.
During the installation phase, it assigns a support team led by its Customer
Advocacy group which also retains support responsibility for the account after
the customer's application is installed and operational, to assist the customer
through the installation process. After commencing services, primary technical
support is provided by its network operation centers, which are operated 24
hours per day, seven days per week by highly trained technicians who respond to
customer calls, monitor site and network operations and escalate problems to
engineering to solve problems quickly and professionally. Digital Island's
Customer Advocacy personnel are also available to assist with billing and
business issues and to assist in planning for additional customer applications
usage on the network.

Finally it employs network engineers who collaborate with customers to
design and maintain their application across the network. Digital Island's
network engineers are trained on Windows NT, Solaris and

102
<PAGE>

other UNIX platforms, as well as Cisco routers and switches, and they serve as
the escalation path to resolve customer problems. Digital Island also employs a
team of network backbone engineers that constantly monitor the network design
and effectiveness to optimize performance for customers, rerouting and
redesigning their applications as conditions require.

Competition

Digital Island's market is highly competitive. There are few substantial
barriers to entry and it expects that it will face additional competition from
existing competitors and new market entrants in the future. The principal
competitive factors in this market include Internet system engineering
expertise, customer service, network capability, reliability, quality of
service and ability to scale to many users, broad geographic presence, brand
name recognition, technical expertise and range of functions, the variety of
services offered, the ability to maintain and expand distribution channels,
price, the timing of introductions of new services, network security, financial
resources and conformity with industry standards. It may not have the resources
or expertise to compete successfully in the future.

Digital Island's current and potential competitors in the market include:

. information technology and Internet outsourcing firms;

. national and regional Internet service providers; and

. global, regional and local telecommunications companies.

Digital Island's competitors may operate in one or more of these areas and
include companies such as AboveNet Communications, Inc., AT&T Corp., Exodus
Communications, Inc., GTE Corporation, MCI WorldCom, Inc. and business units of
Frontier GlobalCenter, Inc. In particular, Exodus and GlobalCenter provide
services that are directly competitive with services that it provides.

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

Some of its competitors may be able to provide customers with additional
benefits in connection with their Internet system and global applications
network solutions, including reduced communications costs, which could reduce
the overall costs of their services relative to the cost of Digital Island's
services. Digital Island may not be able to offset the effects of any such
price reductions. In addition, it believes that the businesses in which it
competes are likely to encounter consolidation in the near future, which could
result in increased price and other competition that could cause its business
and prospects to suffer.

Intellectual Property Rights

Digital Island relies on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect
proprietary rights in its products and services. Although it has filed a patent
application with respect to its TraceWare technology with the United States
Patent and Trademark Office, such application is pending and it currently has
no patented technology that would preclude or inhibit competitors from entering
its market. In addition, it has registered the mark "Digital Island" with the
Patent and Trademark Office, and it has a pending trademark application for the
mark "TraceWare" with the Patent and Trademark Office. Its "Digital Island"
mark is either registered or pending in several foreign countries. It has
entered into confidentiality and invention assignment agreements with its
employees, and nondisclosure

103
<PAGE>

agreements with its suppliers, distributors and appropriate customers in order
to limit access to and disclosure of its proprietary information. These
contractual arrangements or the other steps that it takes to protect its
intellectual property may not be sufficient to prevent misappropriation of its
technology or to deter independent third-party development of similar
technologies. The laws of foreign countries may not protect its products,
services or intellectual property rights to the same extent as do the laws of
the United States.

To date, Digital Island has not been notified that its products infringe the
proprietary rights of third parties, but third parties may in the future claim
that its current or future products infringe upon their proprietary rights. It
expects that participants in its markets will be increasingly subject to
infringement claims as the number of products and competitors in its industry
segment grows. Any such claim, whether meritorious or not, could be time
consuming, result in costly litigation, cause product installation delays or
require it to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to it, or at
all. As a result, any such claim could harm its business and prospects.

Government Regulation

Federal Regulation. The FCC does not currently regulate network software or
computer equipment-related services that transport data or voice messages on
telecommunications facilities, except when provided by any of the Regional Bell
Operating Companies. However, Digital Island provides network services
including transmitting data over public telephone lines, and those
transmissions are governed to some extent by federal regulatory policies
establishing charges and terms for wireline communications. Operators of those
types of networks that provide access to regulated transmission facilities only
as part of a data services package currently are not subject to direct
regulation as "telecommunications carriers" by the FCC or any other federal
agency, other than regulations generally applicable to businesses.

The absence of direct FCC regulation reflects, in part, the status of
Internet services as a relatively recent phenomenon. The federal legal and
regulatory framework for such services is therefore in its nascent state of
development.

The evolving state of federal law and regulation is reflected in the FCC's
April 10, 1998 Report to Congress. In the April 1998 Report, the FCC discussed
whether Internet service providers should be classified as telecommunications
carriers, and, on that basis, be required to contribute to the Universal
Service Fund which was created by federal statute and funded by interstate
telecommunications carriers for the purpose of ensuring that all segments of
the population of the United States have access to basic telecommunications
services. The report concluded that Internet access service which the FCC
defined as an offering combining computer processing, information storage,
protocol conversion, and routing transmissions is an "information service"
under the Telecommunications Act of 1996 and thus not subject to regulation. In
contrast, the FCC found that the provision of transmission capabilities to
Internet service providers and other information service providers does
constitute "telecommunications services" under the Telecommunications Act of
1996. Consequently, parties providing those latter services are presently
subject to FCC regulation (and the corresponding Universal Service Fund
obligations).

New federal laws and regulations may be adopted in the future that would
subject the provision of Digital Island's Internet services to government
regulation. Legislative initiatives currently being considered in Congress, for
example, may require taxation of Internet-related services like those that it
offers or impose access charges on Internet service providers. Any new laws
regarding the Internet, particularly those that impose regulatory or financial
burdens, could cause its business and prospects to suffer. It cannot predict
the impact, if any, that any future changes in law or regulation may have on
its business.

Certain changes in federal law and regulations could cause Digital Island's
business and prospects to suffer. Changes of particular concern include those
that directly or indirectly affect the regulatory status of Internet services,
increase the cost telecommunications services (including the application of
access charges or Universal Service Fund contribution obligations to Internet
services), or increase the competition from the

104
<PAGE>

RBOCs and other telecommunications companies. It cannot predict the impact, if
any, that such legislative or regulatory changes may have on its business. For
instance, the FCC could determine through any one of its ongoing or future
proceedings that the Internet is subject to regulation. In that event, it could
be required to comply with:

. FCC entry or exit regulations;

. tariff filing, reporting, fee, and record-keeping requirements;

. marketing restrictions;

. access charge obligations; and

. contributions to the Universal Service Fund obligations.

Any one or more of those changes could adversely impact Digital Island's
ability to provide services. The FCC could similarly conclude that providing
Internet transport or telephony services over an Internet protocol-based
network is subject to regulation. For example, the FCC currently has ongoing
proceedings in which it is considering whether to regulate certain
transmissions provided via the Internet, such as services functionally
equivalent to traditional two-way voice telephony. Such determination could
cause its business and prospects to suffer.

Another major and unresolved regulatory issue concerns the obligation of
information service providers, including Internet service providers, to pay
access charges to Incumbent Local Exchange Carriers. A proceeding initiated by
the FCC in December 1996 that raises the issue whether Incumbent Local Exchange
Carriers, which are local telephone companies that began providing service
prior to the enactment of the Telecommunications Act of 1996, can assess
interstate access charges on information service providers, including Internet
service providers. Unlike basic services, enhanced services, which the FCC has
concluded are synonymous with information services and include Internet access
services, are exempt from interstate access charges. The FCC has reaffirmed
that information service providers are exempt from access charges, and a United
States Court of Appeals has affirmed this decision by the FCC.

Another major regulatory issue concerns Internet-based telephony. In its
April 1998 Report, the FCC observed that Internet protocol telephony appears to
be a telecommunications service rather than an unregulated information service.
The FCC explained that it would determine on a case-by-case basis whether to
regulate the service and thereby require providers of Internet protocol
telephony to contribute to the Universal Service Fund. The ultimate resolution
of Internet protocol telephony issues could negatively impact the regulatory
status, cost and other aspects of Digital Island's service offerings.

Another major and unresolved regulatory proceeding that could affect the
benefit and cost of Digital Island's service offerings (to the extent it
becomes involved in the exchange of communications traffic) involves reciprocal
compensation. Reciprocal compensation relates to the fees paid by one carrier
to terminate traffic on another carrier's network. In July 1997, the FCC was
asked to determine whether Competitive Local Exchange Carriers (local telephone
companies that provide service in competition with Incumbent Local Exchange
Carriers) that serve Internet service providers are entitled to reciprocal
compensation under the Telecommunications Act of 1996 for calls originated by
customers of an Incumbent Local Exchange Carriers to an Internet service
provider served by a Competitive Local Exchange Carriers within the same local
calling area. Prior to the time the FCC addressed the issue, every state that
addressed the issue from an intrastate perspective (at least 29 in number)
determined that calls to Internet service providers are to be treated as local
for purposes of reciprocal compensation. In February 1999, the FCC concluded
that it would regulate in the future calls to Internet service providers as
interstate traffic. The FCC sought comment on how this traffic should be
compensated prospectively between carriers. The FCC's ultimate resolution of
the compensation issue could increase Internet service provider costs in the
future by increasing telephone charges if the FCC adopts a rule that precludes
compensation for calls to Internet service providers or prescribes a rate that
is substantially less than the reciprocal compensation rates that were paid in
the past and are being paid under some existing inter-carrier agreements.

105
<PAGE>

Digital Island could also be harmed by federal (as well as state) laws and
regulations relating to the liability of on-line services companies and
Internet access providers for information carried on or disseminated through
their networks. Several private lawsuits seeking to impose such liability upon
on-line services companies and Internet access providers are currently pending.
In addition, legislation has been enacted and new legislation has imposed
liability for the transmission of, or prohibits the transmission of certain
types of, information on the Internet, including sexually explicit and gambling
information. The United States Supreme Court has already held unconstitutional
certain sections of the Communications Decency Act of 1996 that, among other
provisions, proposed to impose criminal penalties on anyone distributing
"indecent" material to minors over the Internet. Congress subsequently enacted
legislation that imposes both criminal and civil penalties on persons who
knowingly or intentionally make available materials through the Internet that
are "harmful" to minors. However, the new law generally excludes from the
definition of "person" Internet service providers that are not involved in the
selection of content disseminated through their networks. Congress also enacted
legislation recently that limits liability for online copyright infringement.
That latter law includes exemptions which enable Internet service providers to
avoid copyright infringement if they merely transmit material produced and
requested by others. It is possible that other laws and regulations could be
enacted in the future that would place copyright infringement liability more
directly on Internet service providers. The imposition of potential liability
on Digital Island and other Internet access providers for information carried
on or disseminated through their systems could require it to implement measures
to reduce its exposure to such liability, which may in turn require it to
expend substantial resources or to discontinue service or product offerings.
The increased attention to liability issues as a result of lawsuits and
legislative action, could similarly impact the growth of Internet use. While it
carries professional liability insurance, such insurance may not be adequate to
compensate claimants or may not cover Digital Island in the event it becomes
liable for information carried on or disseminated through its networks. Any
costs not covered by insurance incurred as a result of such liability or
asserted liability could cause its business and prospects to suffer.

State Regulation. The proliferation of Internet use in the past several
years has prompted state legislators and regulators to consider the adoption of
laws and regulations to govern Internet usage. Much of the legislation that has
been proposed to date may, if enacted, handicap further growth in the use of
the Internet. It is possible that state legislatures and regulators will
attempt to regulate the Internet in the future, either by regulating
transactions or by restricting the content of the available information and
services. While state public utility commissions generally have declined to
directly regulate enhanced or information services, some states have continued
to regulate particular aspects of enhanced services in limited circumstances,
such as where they are provided by local telecommunications carriers. Moreover,
the public utility commissions of several states continue to consider potential
regulation of such service. Enactment of such legislation or adoption of such
regulations could cause Digital Island's business and prospects to suffer.

Another area of adverse potential state regulation concerns taxes. The
United States Congress recently enacted a three-year moratorium on new state
and local taxes on the Internet (those not generally imposed or actually
enforced prior to October 1, 1998) as well as on taxes that discriminate
against commerce through the Internet. Congress also established an advisory
commission to study and make recommendations on the federal, state and local
taxation of Internet-related commerce. These recommendations are due to
Congress by April 2000 and could serve as the basis for additional legislation.
Previous to the enactment of the tax moratorium a significant number of bills
had been introduced in state legislatures that would have taxed commercial
transactions on the Internet. Future laws or regulatory changes that lead to
state taxation of Internet transactions could cause Digital Island's business
and prospects to suffer.

One issue of growing importance revolves around contract law. Although
customer-level use of the Internet to conduct commercial transactions is still
in its infancy, a growing number of corporate entities are engaging in Internet
transactions. This Internet commerce has spawned a number of state legal and
regulatory issues, such as whether and how provisions of the Uniform Commercial
Code (adopted by 49 states) apply to transactions carried out on the Internet
and how to decide which jurisdiction's laws are to be applied to a particular
transaction. It is not possible to predict how state law will evolve to address
new transactional

106
<PAGE>

circumstances created by Internet commerce or whether the evolution of such
laws will cause Digital Island's business and prospects to suffer.

State legislators and regulators have also sought to restrict the transition
or limit access to certain materials on the Internet. For example, in the past
several years, various state legislators have sought to limit or prohibit:

. certain communications between adults and minors;

. anonymous and pseudonymous use of the Internet;

. on-line gambling; and

. the offering of securities on the Internet.

Enforcement of such limitations or prohibitions in some states could affect
transmission in other states. State laws and regulations that restrict access
to such materials on the Internet could inadvertently block access to other
permissible sites. Digital Island cannot predict the impact, if any, that any
future laws or regulatory changes in this area may have on its business.

Some states have also sought to impose tort liability or criminal penalties
on certain conduct involving the Internet, such as the use of "hate" speech,
invasion of privacy, and fraud. The adoption of such laws could adversely
impact the transmission of non-offensive material on the Internet and, to that
extent, could cause Digital Island's business and prospects to suffer.

Local Regulation. Although local jurisdictions generally have not sought to
regulate the Internet and related services, it is possible that such
jurisdictions will seek to impose regulations in the future. In particular,
local jurisdictions may attempt to tax various aspects of Internet access or
services, such as transactions handled through the Internet or subscriber
access, as a way of generating municipal revenue. The imposition of local taxes
and other regulatory burdens by local jurisdictions could cause Digital
Island's business and prospects to suffer. Its networks may also be subject to
numerous local regulations such as building codes and licensing. Such
regulations vary on a city by city and county by county basis.

Foreign Regulation. As Digital Island's services become available over the
Internet in foreign countries, and as it facilitates sales by its customers to
end users located in such foreign countries, these foreign jurisdictions may
decide that it is required to qualify to do business in the particular foreign
country or to obtain permits or licenses to provide permits or licenses to
provide value- added network services. Such decisions could subject it to taxes
and other costs and could result in its inability to enforce contracts in such
jurisdictions. It is possible that claims could be made against online service
companies and Internet service providers under foreign law for defamation,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their networks. Any
such new legislation or regulation, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to Digital Island's
business, could cause its business and prospects to suffer.

Employees

As of September 30, 1999, Digital Island had 267 employees, including 117
people in sales and marketing, 56 people in engineering, 68 people in
operations and 26 people in finance and administration. It believes that its
future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. The competition for such personnel is intense,
and there can be no assurance that it will be able to identify, attract and
retain such personnel in the future. None of its employees is represented by a
labor union, and management believes that its employee relations are good.

107
<PAGE>

Facilities

Digital Island currently has the following facilities: its corporate
headquarters in San Francisco, and data centers in Honolulu, Santa Clara
(California), New York City, Hong Kong, and London. In addition, it has sales
offices in Boston, New York City, Minneapolis, Chicago, Philadelphia, Dallas,
Houston, St. Louis, Atlanta, Reston (Virginia), Japan, Malaysia, the
Netherlands, Switzerland and the United Kingdom.

Legal Proceedings

Digital Island is not party to any material legal proceedings.

108
<PAGE>

DIGITAL ISLAND

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)

The following selected historical consolidated financial information should
be read in conjunction with Digital Island's consolidated financial statements
and related notes and Digital Island's "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The consolidated statement of
operations information for each of the years in the three year period ended
September 30, 1999, and the balance sheet data at September 30, 1998 and 1999,
are derived from our financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this
filing. The statement of operations data for the years ended September 30, 1995
and 1996, and the balance sheet data at September 30, 1995, 1996, and 1997, are
derived from our audited financial statements that are not included in this
filing. Historical results are not necessarily indicative of the results to be
expected in the future.

<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1995 1996 1997 1998 1999
------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue.................... $ -- $ -- $ 218 $ 2,343 $ 12,431
Total costs and expenses... 7 26 5,594 19,458 64,918
Loss from operations....... (7) (26) (5,376) (17,116) (52,487)
Net loss................... $ (10) $ (27) $ (5,289) $ (16,764) $ (50,938)
------- ------- --------- --------- ----------
Basic and diluted loss
per share............... $ (0.04) $ (0.10) $ (3.53) $ (7.50) $ (4.58)
======= ======= ========= ========= ==========
Shares used in basic and
diluted loss per share
calculation............. 275,000 275,000 1,497,711 2,236,452 11,127,462
</TABLE>

<TABLE>
<CAPTION>
September 30,
------------------------------------
1995 1996 1997 1998 1999
---- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................ $ 7 $ 344 $ 4,584 $ 5,711 $ 43,315
Investments.............................. -- -- 1,983 10,123 31,691
Working capital.......................... 5 76 4,613 12,883 59,506
Total assets............................. 93 432 9,223 22,617 107,648
Long-term obligations, including current
portion................................. -- -- 705 3,992 11,092
Total stockholders' equity............... $ 86 $ 84 $ 6,265 $ 15,490 $ 79,218
</TABLE>

109
<PAGE>

DIGITAL ISLAND MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of Digital Island should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Digital Island's actual results could differ from
those anticipated in these forward-looking statements as a result of various
factors including but not limited to, those discussed in "Risk Factors,"
"Business" and elsewhere in this joint proxy statement/prospectus.

Overview

Digital Island offers a global network and related services for companies
that are using the Internet to deploy key business applications worldwide. It
targets corporations that are increasingly relying on the Internet to conduct
business but are constrained by the unreliability, slow performance and limited
range of functions of the public Internet. The Digital Island Global IP
Applications Network and its services enable customers to effectively deploy
and manage global Internet applications by combining the reliability,
performance and broad range of functions of private intranets with the global
access of the public Internet. It also offers service level guarantees,
customized billing, security services, network management and other application
services designed to improve the performance of applications deployed on its
network.

Digital Island did not begin offering its Global IP Applications Network
services until January 1997; prior to such time it was engaged in activities
unrelated to its current operations and, accordingly, comparisons for the
period ended September 30, 1997 are not meaningful and have not been made.
Since inception, it has incurred net losses and experienced negative cash flow
from operations. It expects to continue to operate at a net loss and to
experience negative cash flows at least through the year 2000. Its ability to
achieve profitability and positive cash flow from operations will be dependent
upon its ability to grow its revenues substantially and achieve other operating
efficiencies.

Digital Island derives its revenues from a family of services, which include
Application Hosting and Content Distribution Services, consisting of server
management, hardware management and co-location services, and Network Services,
consisting of the sale of open, reserved and managed bandwidth. It currently
sells its services under contracts having terms of one or more years.

Cost of revenues consists primarily of the cost of contracting for lines
from telecommunication providers worldwide and, to a lesser extent, the cost of
Digital Island's network operations. Digital Island leases lines under
contracts of one year or more. The leasing of transoceanic lines comprises the
largest component of its telecommunications expense, with additional costs
arising from leasing local circuits between its data centers and points of
presence in the United States and international markets. In the future, it
expects to increase the size and number of circuits leased based on increases
in network volume and geographic expansion. The cost of its network operations
is comprised primarily of data centers, equipment maintenance, personnel and
related costs associated with the management and maintenance of the network.

Some options granted and common stock issued from May 1, 1998 to June 30,
1999 have been considered to be compensation. Total deferred compensation
associated with such equity transactions as of September 30, 1999 amounted to
$7.7 million. These amounts are being amortized over the vesting periods of
such securities. Of the total deferred compensation, $487,000 was amortized in
the year ended September 30, 1998 and $3.2 million was amortized in the year
ended September 30, 1999. Digital Island expects amortization of $2.4 million
and $1.2 million in the years ending September 30, 2000 and 2001, respectively,
relating to these grants.

110
<PAGE>

Fiscal Years Ended September 30, 1999 and 1998

Revenue. Revenue increased to $12.4 million for the year ended September 30,
1999 from $2.3 million for the year ended September 30, 1998. The increase in
revenue was due primarily to an increase in the number of billing customers to
83 from 31.

Cost of Revenue. Cost of revenue increased to $29.5 million for the year
ended September 30, 1999 from $9.0 million for the year ended September 30,
1998. The increase in cost of revenue was due to $17.5 million of spending for
additional network capacity and $3.0 million in recruitment and compensation
costs relating to the addition of network operations personnel.

Sales and Marketing. Sales and marketing expenses increased to $16.0 million
for the year ended September 30, 1999 from $4.8 million for the year ended
September 30, 1998. This increase was due to $10.6 million of growth in
personnel and related costs and $0.6 million of program expenses.

Product Development. Product development expenses increased to $6.3 million
for the year ended September 30, 1999 from $1.7 million for the year ended
September 30, 1998. This increase was due to $3.7 million in growth of
personnel and related costs and $0.9 million of costs arising from new product
initiatives, including TraceWare, mirroring and caching technologies.

General and Administrative. General and administrative expenses increased to
$9.8 million for the year ended September 30, 1999 from $3.4 million for the
year ended September 30, 1998. This increase was due to $2.4 million of
depreciation of network equipment, $2.4 million of growth in personnel and
related expenses, and $1.6 million office facility expenses, legal and
accounting fees and other administrative related expenses.

Interest Income, net. Interest income, net, increased to $1.6 million for
the year ended September 30, 1999 from $354,000 for the year ended September
30, 1998. This increase was due to a higher average cash balance as a result of
the proceeds of the issuance of shares of Digital Island's preferred stock, and
also common stock in its initial public offering.

111
<PAGE>

Quarterly Results of Operations

The following tables set forth certain unaudited statements of operations
data for the eight quarters ended September 30, 1999. This data has been
derived from the unaudited interim financial statements prepared on the same
basis as the audited consolidated financial statements contained in this
prospectus, and, in the opinion of management, include all adjustments
consisting only of normal recurring adjustments that we consider necessary for
a fair presentation of such information when read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus. The operating results for any quarter should not be considered
indicative of results of any future period.

<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------
Dec. Mar. June Sept. Dec. Mar. Sept.
31, 31, 30, 30, 31, 31, June 30, 30,
1997 1998 1998 1998 1998 1999 1999 1999
------- ------- ------- ------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 277 $ 414 $ 725 $ 927 $ 1,385 $ 2,411 $ 3,700 $ 4,935
Costs and expenses:
Cost of Revenue....... 1,961 2,065 2,267 2,746 2,923 4,827 8,055 13,691
Sales and Marketing... 860 927 1,296 1,764 2,046 3,125 4,525 6,314
Product development... 214 357 538 585 843 1,167 1,853 2,494
General and
Administrative....... 531 632 902 1,326 1,260 1,703 2,469 4,416
Stock compensation
expense.............. -- -- 132 355 346 680 1,248 933
------- ------- ------- ------- ------- ------- -------- --------
Total cost and
expenses........... 3,566 3,981 5,135 6,776 7,418 11,502 18,150 27,848
Loss from operations.... (3,289) (3,567) (4,410) (5,849) (6,033) (9,091) (14,450) (22,913)
Other income (expense),
net.................... 45 19 123 166 96 160 387 908
------- ------- ------- ------- ------- ------- -------- --------
Loss before income
taxes.................. (3,244) (3,548) (4,287) (5,683) (5,937) (8,931) (14,063) (22,005)
------- ------- ------- ------- ------- ------- -------- --------
Provision for income
taxes.................. -- 1 -- 1 2 -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net loss............ $(3,244) $(3,549) $(4,287) $(5,684) $(5,939) $(8,931) $(14,063) $(22,005)
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>

Digital Island expects to experience significant fluctuations in its future
results of operations due to a variety of factors, many of which are outside of
its control, including:

. demand for and market acceptance of its products and services may decline
or fail to increase enough to offset its costs;

. introductions of new products and services or enhancements by Digital
Island and its competitors may increase its costs or make its existing
products or services obsolete;

. the prices it can charge its customers may decline due to price
competition with its competitors;

. utilization of its global network may increase beyond its capacity and it
may incur expenses to increase such capacity;

. continuity of its service and network availability could be interrupted,
reducing revenue;

. the availability and cost of bandwidth may reduce its ability to increase
bandwidth as necessary, reducing its revenue;

. the timing of customer installations and the timing of expansion of its
network infrastructure may vary from quarter to quarter;

112
<PAGE>

. the mix of products and services it sells may change and the new mix may
generate less revenue;

. the timing and magnitude of its capital expenditures, including costs
relating to the expansion of operations may vary from quarter to quarter;

. bandwidth used by customers may fluctuate from quarter to quarter
affecting its profits from such customers; and

. conditions specific to the Internet industry and other general economic
factors may affect the prices it can charge or the expenses it incurs.

In addition, a relatively large portion of Digital Island's expenses are
fixed in the short-term, particularly with respect to telecommunications
capacity, depreciation, real estate and interest expenses and personnel, and
therefore its results of operations are particularly sensitive to fluctuations
in revenues. Due to the foregoing factors, Digital Island believes that period-
to-period comparisons of its operating results are not necessarily meaningful
and that such comparisons cannot be relied upon as indicators of future
performance.

Liquidity and Capital Resources

From inception through its initial public offering on June 29, 1999, Digital
Island financed its operations primarily through private equity placements of
$86.9 million dollars and borrowings under notes payable and capital leases
from financial institutions of $5.7 million. Digital Island raised $63.1
million in net proceeds from its initial public offering. At September 30,
1999, Digital Island had cash and cash equivalents and short-term investments
of $75.0 million.

Net cash used in Digital Island's operating activities for fiscal 1999 was
$39.7 million. The net cash used by operations was primarily due to working
capital requirements and net losses, offset by increases in accounts payable
and accrued expenses. Net cash used in investing activities was $35.6 million
for fiscal 1999 and was comprised primarily of equipment purchases of $14.3
million and investments of $52.2 million in commercial paper with maturities of
less than one year, which was offset by proceeds from investments which matured
of $31.5 million. Net cash provided by financing activities was $112.9 million
and was related primarily to the issuance of Digital Island's Series E
Preferred Stock and its initial public offering.

Digital Island has a $750,000 revolving line of credit with a commercial
bank for the purpose of financing equipment purchases. As of September 30,
1999, $323,000 was outstanding thereunder. The loan contains standard covenants
including minimum working capital, minimum tangible net worth, debt to equity
ratio and financial reporting requirements. Interest on borrowings thereunder
accrues at the lender's prime rate plus 0.75% (which was 9.00% at September 30,
1999), and is payable monthly. No further advances were permitted following
October 18, 1997, and any outstanding amounts are payable on or before October
18, 2000.

Digital Island also has a $7.5 million line of credit with a commercial
bank, consisting of a revolving credit facility of up to $5 million and other
facilities of up to $2.5 million. As of September 30, 1999, approximately
$230,000 was outstanding under the revolving credit facility, and approximately
$562,000 was outstanding under equipment loan facilities. No further amounts
may be borrowed under the equipment loan facilities. Advances under the line of
credit are limited to a percentage of our recurring contract revenue. The loan
contains standard covenants, including minimum working capital, minimum
tangible net worth, debt to equity ratio and financial reporting requirements.
Interest on borrowings thereunder accrues at the lender's prime rate plus 0.25%
(which was 8.50% at September 30, 1999), and is payable monthly. Under the
terms of the equipment loan facilities, interest is charged at the lender's
prime rate plus 0.75%, which was 9.00% at September 30, 1999. The loans mature
at various times in 2001. Between October 1, 1998 and January 31, 1999, Digital
Island did not comply with the minimum tangible net worth and financial
reporting covenants. However, Digital Island obtained waivers for all covenant
violations. Digital Island has complied with all covenants since January 31,
1999. Additionally, Digital Island has several lease lines of credit. Total
borrowings under these lease lines of credit were $10.0 million at September
30, 1999.

113
<PAGE>

The execution of Digital Island's business plan will require substantial
additional capital to fund Digital Island's operating losses, working capital
needs, sales and marketing expenses, lease payments and capital expenditures.
In order to rapidly improve its competitive position, Digital Island
anticipates making up to approximately $80.0 million to $100.0 million of
capital expenditures for network expansion, facilities and related costs in the
next 12 months. This substantial increase in the level of Digital Island's
anticipated capital expenditures will require up to $100.0 million to $150.0
million of additional financing. Digital Island intends to consider its future
financing alternatives, which may include the incurrence of indebtedness,
additional public or private equity offerings or an equity investment by a
strategic partner. Actual capital requirements may vary based upon the timing
and success of the expansion of its operations. Digital Island's capital
requirements may change based upon technological and competitive developments.
In addition, several factors may affect its capital requirements:

. demand for its services or its anticipated cash flow from operations
being less than expected;

. its development plans or projections proving to be inaccurate;

. its engaging in acquisitions or other strategic transactions; or

. its accelerating deployment of its network services or otherwise altering
the schedule of its expansion plan.

Other than the current bank note payable and lease financing, Digital Island
has no present commitments or arrangements assuring it of any future equity or
debt financing, and there can be no assurance that any such equity or debt
financing will be available to it on favorable terms, or at all. If it does not
obtain additional financing, it believes that its existing cash resources will
be adequate to continue expanding operations on a reduced scale.

Recent Accounting Pronouncements

On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants, or AICPA, issued Statement
of Position No. 98-1, or SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires computer
software costs related to internal software that are incurred in the
preliminary project stage should be expensed as incurred. Once the
capitalization criteria of SOP 98-1 have been met, external direct costs of
materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project); and
interest costs incurred when developing computer software for internal use
should be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Accordingly, Digital Island
will adopt SOP 98-1 in our consolidated financial statements for the year
ending September 30, 2000.

On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5, or SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. As Digital Island have not capitalized such costs, the adoption of
SOP 98-5 is not expected to have a material impact on its consolidated
financial statements.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is effective for
fiscal years beginning after June 15, 2000. Digital Island does not believe the
adoption of SFAS 133 will have a material effect on its consolidated results of
operations or financial condition.

114
<PAGE>

Year 2000 Compliance

Many currently installed computer systems are not able to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software that fail to recognize the proper date at the end of this year may
suffer major system failures or miscalculations. If Digital Island or its key
third party suppliers fail to achieve year 2000 compliance, it may experience
operating difficulties, including impaired ability to transport data over its
network and impaired ability to bill for its services. It recognizes the need
to ensure that its operations will not be adversely affected by year 2000
software failures. It is assessing the potential overall impact of the
impending century change on its operations.

Based on Digital Island's assessment to date, it believes the current
versions of its software products and services are year 2000 compliant, that
is, they are capable of adequately distinguishing 21st century dates from 20th
century dates. However, its products are generally integrated into enterprise
systems involving sophisticated hardware and complex software products, which
may not be year 2000 compliant. It may in the future be subject to claims based
on year 2000 problems in others' products, or issues arising from the
integration of multiple products within an overall system. Although it has not
been a party to any litigation or arbitration proceeding to date involving our
products or services and related to year 2000 compliance issues, there can be
no assurance that it will not in the future be required to defend our products
or services in such proceedings, or to negotiate resolutions of claims based on
year 2000 issues. The costs of defending and resolving year 2000-related
disputes, regardless of the merits of such disputes, and any potential
liability on its part for year 2000-related damages, including consequential
damages, could cause its business and financial results to suffer. In addition,
it believes that purchasing patterns of customers and potential customers may
be affected by year 2000 issues as companies expend significant resources to
correct or upgrade their current software systems for year 2000 compliance.
These expenditures may reduce funds available to purchase software products
such as those offered by Digital Island. To the extent that year 2000 issues
cause significant delay in, or cancellation of, decisions to purchase its
products or services, its business and financial results could suffer.

Digital Island has formulated a contingency plan should it or any of its key
third parties sustain business interruptions caused by year 2000 problems. It
is reviewing its internal management information and other systems in order to
identify and modify any products, services or systems that are not year 2000
compliant. To date, it has not encountered any material year 2000 problems with
its computer systems, applications or any other equipment which might be
subject to these problems. In addition, it received an independent third-party
evaluation of the year 2000 compliance of its network equipment and carriers in
March 1999 and of its computer systems and applications in October 1999. It
will continue to monitor year 2000 compliance for our new products and services
as they arise throughout the remainder of the year.

Digital Island's plan for the year 2000 calls for compliance verification of
external vendors supplying software and information systems to it and
communication with significant suppliers to determine their ability to
remediate their own year 2000 issues. As part of its assessment, it is
evaluating the level of validation it will require of third parties to ensure
their year 2000 readiness. In the event that any of these third parties cannot
timely provide it with products, services or systems that meet the year 2000
requirements, it may incur unexpected expenses to remedy any problems. These
expenses could potentially include purchasing replacement hardware or software.
In addition, its business and its ability to deliver its products and services
could be severely affected, at least for a certain period of time, in the event
that year 2000 related problems were to cause disruption or failure in the
Internet as a means of delivery of its products and services or more generally,
disruption to the infrastructure. The total cost of these year 2000 compliance
activities has not been, and is not anticipated to be, material to its
business, results of operations and financial condition. These costs and the
timing in which it plans to complete its year 2000 modification and testing
processes are based on its management's estimates. Digital Island may not be
able to remediate all significant year 2000 problems on a timely basis. Its
remediation efforts may involve significant time and expense, and could cause
its business and prospects to suffer.

115
<PAGE>

Qualitative and Quantitative Disclosure About Market Risk

Digital Island develops global network and related services and sell such
services in North America, Asia and Europe. As a result, its financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. As all sales are currently made
in U.S. dollars, a strengthening of the dollar could make its services less
competitive in foreign markets. It does not use derivative instruments to hedge
its foreign exchange risks. Its interest income is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of its
investments are in short-term instruments. Due to the nature of its short-term
investments, it has concluded there is no material market risk exposure.
Therefore, no quantitative tabular disclosures are required.

116
<PAGE>

BUSINESS OF SANDPIPER

Sandpiper Networks

Sandpiper provides Internet content delivery services. Sandpiper's solution
is designed to improve website performance, reliability and scalability by
delivering content from a globally distributed server network, that
intelligently avoids Internet congestion, and serves content closer to users.
Sandpiper's customers include Blue Mountain Arts, CNBC.com, Intuit, Microsoft,
PBS.org and Value America. In addition, Sandpiper recently entered into
agreements with a number of strategic partners, including AOL, Inktomi,
Microsoft, RealNetworks and Vignette.

Industry Background

Use of the Internet has grown rapidly in recent years. This growth has been
driven by a number of factors, including the growing installed base of powerful
personal computers, faster and cheaper access capabilities, an increasing
selection of network-enabled applications, and the emergence of media-rich
content and electronic commerce-enabling technologies. International Data
Corporation, or IDC, predicts Internet users will grow from approximately 142
million at the end of 1998 to approximately 502 million by the end of 2003. IDC
also expects the number of computers and other devices accessing the World Wide
Web to grow from approximately 150 million at the end of 1998 to approximately
722 million by the end of 2003.

As a result of this growing use, the Internet has become an important global
communications and commerce medium, and represents a compelling opportunity for
enterprises to interact in new and different ways with their customers,
suppliers, partners and employees. IDC expects worldwide e-commerce sales to
grow from approximately $50 billion at the end of 1998 to approximately $1.3
trillion by the end of 2003. Given this significant opportunity, Internet
operations are becoming mission-critical for Internet-based and most other
mainstream businesses. Companies are responding to this opportunity by
increasing their investments in Internet operations and enhancing the breadth
and depth of content offered on their websites.

Historically, websites primarily contained text and simple graphics. Today,
organizations are seeking to differentiate themselves by offering richer,
multimedia content in an increasing variety of forms. For example, some
organizations want to cover high profile events on-line, and create an
interactive experience for end users who want to access complex graphics, sound
files, live video streams and other forms of content. Others want to offer on-
demand event coverage containing both video and audio feeds that can be played
live, or archived for play at another desired time. And some want to offer
dynamic, customized applications, such as personalized web pages that feature
customized real-time stock quotes, personalized news feeds, targeted
advertising or premium service offerings that require authentication for
access. The effective delivery of this increasingly complex content requires
significantly greater bandwidth, a distributed computing infrastructure, and
enhanced network capabilities.

The Internet, a network of hundreds of interconnected, separately
administered public and private networks, was not originally designed to handle
either the large traffic levels or the vast array of content types being
transmitted today. The Internet provides any-to-any connectivity, but does not
intelligently monitor and optimize the distribution of media-rich content.
Organizations cannot predict or control the network path that their data will
travel over the Internet and are unable to avoid network congestion or
bottlenecks that degrade performance. Thus, organizations face challenges in
predicting and controlling the quality of their end-users' experience. This
problem is exacerbated during the peak periods of network usage and bursts in
traffic volumes that result from news and other significant one-time events.

For companies conducting business over the Internet, poor website
performance, such as slow downloads or site crashes, can create dissatisfied
users and result in lost revenue opportunities. In June 1999, Jupiter
Communications concluded that if website response time did not meet users'
expectations, 37% of those users visited an alternative website. And for 24% of
these dissatisfied users, the decision to use an alternative website
was permanent. In December 1998, Zona Research Group estimated that e-commerce
revenue was being lost at

117
<PAGE>

the rate of $362 million per month, and perhaps as much as $4.35 billion per
year, due to loading failures and unacceptable download times. Thus, it has
become critical for organizations to continually expand and enhance their
Internet capabilities, in order to manage the infrastructure requirements of
their increasing content and to deliver a superior website experience for their
end users.

Sandpiper views all creators and distributors of content as "content
providers." Content providers have had only limited options available to ensure
high website performance. Current options include web-hosting, in-house
developed solutions, caching and broadband technologies. These options have
been limited in their ability to provide content providers with a complete
solution for their website performance problems.

. Web-hosting. Some organizations have attempted to address these problems
by locating their servers in hosted Internet networks, which generally
only provide access to the hosting network's servers. However, these
offerings focus more on expanding network capacity, rather than
addressing how to optimally route content across the Internet.

. In-house Developed Solutions. Some organizations have built their own
Internet content delivery systems. However, this approach requires a
significant ongoing investment of both capital and technical personnel,
is generally incapable of handling unpredictable network demands, and is
often an inefficient use of a content provider's overall resources.

. Caching. Caching is a technology that stores frequently requested
information in proximity to users, thereby reducing the amount of
Internet traffic. However, if organizations create new content, caching
does not enable them to send this new content out across the network;
instead, they must generally wait for that information to be requested
again before the update will be cached. Furthermore, organizations
typically cannot be guaranteed placement in the cache. Finally, caching
does not enable organizations to efficiently collect end user, buying and
usage patterns and other demographic data.

. Broadband Technologies. Many content providers are hoping that broadband
technologies being introduced will improve content delivery speed.
However, while these technologies may solve delivery speed over the
"local loop" segment of an end user's Internet connection, they only
increase the network capacity and computing requirements of content
providers.

Organizations typically want to focus on content development rather than
content delivery, and want to outsource solutions for their content delivery.
Sandpiper believes that content providers are increasingly seeking a
comprehensive, flexible outsourced solution that significantly enhances website
performance and reliability, offers control and manageability of content,
provides a scalable, cost-effective solution, and offers Internet broadcasting
and production capabilities.

The Sandpiper Solution

Sandpiper addresses the needs of content providers by providing a
comprehensive set of services for content delivery. Sandpiper's solution is
designed to improve website performance and reliability by moving content
closer to end-users from a globally distributed server network that
intelligently avoids Internet congestion. Based upon Sandpiper's patent-pending
Adaptive Content Distribution technology, Sandpiper's content delivery network
is able to monitor Internet traffic conditions in real-time, so that network
bottlenecks can be intelligently avoided, and content can be efficiently
routed.

Sandpiper believes that its solution provides the following benefits to its
customers:

. Comprehensive Outsourced Scalable Solution for Content
Distribution. Sandpiper allows customers to easily outsource more of
their content delivery needs, which enables them to focus on their
content development. By employing Sandpiper's solution, Sandpiper's
customers can avoid the capital and administrative expense of building,
operating and maintaining their own content delivery systems, and do not
need to commit the extra resources needed to scale their solution in
order to manage unpredictable network demands. In addition, Sandpiper's
solution includes streaming media production, Internet broadcasting and
other complementary services.

118
<PAGE>

. Flexible and Global Solution. Sandpiper's variable pricing structure
allows customers to subscribe on an annual or event basis. Customers pay
based on their bandwidth usage. Customers who subscribe on an annual
basis have the option to modify their service, daily or otherwise, should
their requirements change. Additionally, Sandpiper's customers can take
advantage of Sandpiper's extensive global infrastructure, which is
deployed through 25 distinct networks across five countries.

. Improved Website Performance for Multiple Content Types. Sandpiper's
solution significantly increases the speed at which websites deliver
content to end users. By intelligently avoiding Internet congestion and
moving content closer to users, Sandpiper's solution can improve content
delivery speed by two and in some cases up to ten times. Sandpiper's
solution supports a broad array of rich media types, including Hyper Text
Markup Language, or HTML, complex graphics such as images and logos,
dynamic content for personalized web pages, on-line event coverage
utilizing streaming audio and video media, and authenticated content for
premium service offerings. Sandpiper believes that maximizing both
website performance and the types of content that Sandpiper can deliver
enables content providers to deliver more media-rich content. Sandpiper
believes that this attracts more end users and generates more page views,
and ultimately results in increased advertising and e-commerce revenues.

. Protection of Customer Brand Identity. The unique architecture of
Sandpiper's solution enables customers to maintain the brand identity of
their websites, because our content delivery solution is transparent to
the end user. For example, Sandpiper does not make a material change to
Sandpiper's customer's universal resource locator, or URL. Therefore,
customers do not experience any brand degradation if they outsource their
content delivery to Sandpiper. Sandpiper believes that due to the
investments that Sandpiper's customers typically make to create and
manage their brand identity, the virtual transparency of Sandpiper's
solution is extremely important.

In addition to these benefits, Sandpiper's solution includes the following
technological features, which Sandpiper believes enables it to deliver a more
comprehensive solution than those offered by others:

. Open Architecture and Value-Added Services. Sandpiper's open architecture
enables customers to easily integrate their existing application and
publishing environment with Sandpiper's global network, providing users
with a cost-effective, scalable, and open solution. Sandpiper offers an
application programmers' interface, or API, that enables the integration
of Sandpiper's solution with other value-added services and applications,
whether created by Sandpiper, customers or third parties. Content
providers benefit from several third party applications that have been
integrated into Sandpiper's content delivery network. These applications
enable services such as global ad-delivery, turnkey publishing networks,
advanced reporting services, broadcast quality streaming services, and
content transformation services.

. Manageability and Flexibility. Sandpiper's solution enables content
providers to manage and control the content that they distribute. When
customers change any of their content, they have the capability to update
across Sandpiper's delivery network instantly. Sandpiper's solution also
enables customers to collect end-user usage patterns and other
demographic data. Sandpiper's solution requires no additional hardware,
software or technical personnel, can generally be deployed in less than a
day, and requires little or no maintenance.

. Reliability and Availability. Sandpiper's scalable, fault-tolerant
network consists of a number of enterprise class server clusters located
around the world. Sandpiper's clusters typically are configured with
fail-over switches, high-end Sun SPARC servers and RAID disk arrays, with
extensive storage capabilities and interconnected in a redundant
configuration. If one server should fail for any reason, other servers in
the cluster are available to provide the identical information and
functionality. Footprint also provides wide-area failover capability, so
if one entire cluster fails, it redirects users to a different cluster
site. Sandpiper manages this network on a 24x7 basis through its Network
Operations Center.

119
<PAGE>

The Sandpiper Strategy

Sandpiper's objective is to become the leading provider of comprehensive
global content delivery solutions. Key elements of Sandpiper's strategy are:

Provide a Comprehensive Solution for All Content Types. Sandpiper intends to
support the widest range of content types in order to provide our customers
with a comprehensive outsourced solution and the ability to maximize their
website performance improvements. Sandpiper currently supports the delivery of
multiple content types, such as graphics, HTML, streaming media, authenticated
content and dynamic content. Sandpiper will continue to develop technologies to
support new content types as they develop in order to provide our customers
with the most comprehensive content delivery solution available in the market.

Add Services and Applications to Sandpiper's Platform. Sandpiper plans to
provide additional applications and services that complement our content
delivery platform in order to adapt to changing customer requirements and
market conditions.

Leverage Sandpiper's Partnerships to Facilitate Broad Market
Acceptance. Sandpiper expects to expand upon its existing strategic
relationships in order to establish Sandpiper's solution as the de facto
industry standard for Internet content delivery. Sandpiper has established
strategic relationships with a number of industry leaders, including AOL,
Inktomi, Microsoft, Real Networks and Vignette. Sandpiper anticipates that it
will enter into relationships with other strategic partners that can help
validate Sandpiper's content delivery solution and provide Sandpiper with
access to new markets and customers.

Expand Sandpiper's Geographic Coverage and Distribution Channels. Sandpiper
intends to expand its network operations both domestically and internationally
in order to improve its network's performance by establishing relationships
with additional network service providers. Sandpiper plans to enhance its
direct sales effort. For example, Sandpiper recently opened a sales office in
the United Kingdom and established a European sales organization. In addition,
Sandpiper plans to develop its indirect sales channels worldwide by entering
into agreements with new partners that will enable them to market and sell
Sandpiper's services.

Services

Sandpiper's Internet content delivery services are a new type of
subscription-based service that improves speed, reliability and scalability of
even the most sophisticated websites. Sandpiper's infrastructure approach is to
optimize the delivery of web content by replicating it through a global network
of servers. Sandpiper has developed software that monitors Internet traffic and
delivers content quickly by avoiding Internet bottlenecks. Subscriptions for
Sandpiper's content delivery services are based on network usage. Sandpiper's
content delivery service adds value by serving multiple content types,
providing an open architecture to allow easy integration to other complementary
technologies and offering comprehensive publishing and management tools.

Customers

Sandpiper's customers include many of the Internet's leading content
providers such as AOL, Blue Mountain Arts, CNBC.com, Intuit, Microsoft, PBS.org
and Value America.

Strategic Relationships

Sandpiper has developed strategic relationships with companies such as
Alteon WebSystems, AOL, Inktomi, Microsoft, NBC, Real Networks, Sun
Microsystems, Times Mirror and Vignette. Sandpiper believes that these
strategic relationships, and others that we intend to develop in the future,
will assist Sandpiper's penetration of the Internet content delivery market,
enhance the capabilities of Sandpiper's solution, increase the visibility of
Sandpiper's brand, and improve access to additional sales channels, customers
and markets.

120
<PAGE>

Significant investments that have been made by certain of Sandpiper's
strategic partners are described below:

<TABLE>
<CAPTION>
Investment
(millions) Description
---------- -----------
<C> <C> <S>
America Online Corporation.. $3.0 Interactive services, web brands,
Internet technologies and e-commerce
services
Inktomi Corporation......... 2.0 Scalable software applications for
large-scale networks, including
network products and portal services
NBC......................... 2.0 Media distribution
Times Mirror Corporation.... 2.0 Media distribution
</TABLE>

Certain of Sandpiper's strategic relationships are described below:

America Online. AOL is the world's leader in interactive services, Web
brands, Internet technologies, and e-commerce services. In April 1999 Sandpiper
entered into a strategic relationship with AOL, allowing Sandpiper to deploy
servers directly inside the AOL Network and allowing AOL to refer its content
partners to Sandpiper to optimize delivery of those partners' content outside
of the AOL network. In August 1999, Sandpiper deployed streaming media servers
inside the AOL Network. These installations provide high-quality content
delivery and streaming media services to AOL's more than approximately 19
million subscribers. Sandpiper's customers can update their content that is
stored in AOL caches, and receive accurate AOL traffic reports, through the
coupling of AOL's caching servers into Sandpiper's network.

Inktomi. In May 1999, Sandpiper entered into a strategic relationship with
Inktomi, the leading provider of Internet infrastructure software and services.
Sandpiper works with Inktomi to provide content delivery solutions to Internet
content providers, Internet access providers and Internet hosting companies. As
a result of this non-exclusive relationship, Sandpiper is now able to integrate
Inktomi's caching software, Traffic Server, into Sandpiper's solution. Through
this relationship, Sandpiper is now able to make available to its customers
what it believes is the industry's most advanced caching technology. As Inktomi
adds additional features to its caching software, Sandpiper will have the
opportunity to integrate such features into our solution. We have also engaged
in joint sales, marketing, and development activities with Inktomi.

Microsoft. In September 1999, Sandpiper entered into a strategic
relationship with Microsoft, the leading provider of Internet streaming media
technologies. Sandpiper is integrating Windows Media Technologies into
Sandpiper's content delivery solution, and is working with Microsoft to build
the Internet's first million-user streaming network. Sandpiper also joined
Microsoft's Windows Media Broadband Jumpstart program, a consortium of more
than 30 companies focused on accelerating the availability of broadband media
to the Internet community at-large. As part of Sandpiper's agreement, Microsoft
has also agreed to purchase Sandpiper's streaming services, and has selected us
as their content delivery partner for Windowsmedia.com. Sandpiper will engage
in joint sales and marketing activities with Microsoft, and will have the
opportunity to incorporate additional Microsoft technologies into Sandpiper's
solution.

Network Deployment and Operations

Sandpiper's network consists of two major components:

Server Network. Sandpiper has deployed a worldwide network of powerful
servers, which are deployed through 25 distinct networks across five countries.
Sandpiper's network currently offers over 8 gigabits of bandwidth and 4.5
terabytes of storage. The sites where Sandpiper deploys its servers are chosen
for their geographic and network topological proximity to Internet users. By
serving Sandpiper's customers' content from locations closer to end users,
Sandpiper can deliver a higher quality end-user experience, both in terms of
performance and reliability.

121
<PAGE>

Sandpiper's sites are comprised of one or more server clusters, each of
which consists of two to sixteen servers. A high-performance network switch
provides load balancing and fail-over support for each cluster.

Sandpiper's servers are a combination of high-end Sun SPARC servers with one
gigabyte of main memory and a minimum of 40 gigabytes of reliable disk storage.
Sandpiper also serves Microsoft's streaming technology using similarly
configured Intel Pentium-based servers running Windows NT. Sandpiper also
deploys remote console/remote power control devices to permit complete remote
control of Sandpiper's server clusters from its network operations center.

Sandpiper has servers deployed at the following geographic sites:

<TABLE>
<S> <C> <C>
Arlington, VA Herndon, VA Reston, VA
Burbank, CA Irvine, CA San Jose, CA
Cambridge, MA London, UK Santa Clara, CA
Charlestown, MA Los Angeles, CA Seattle, WA
Chicago, IL Melbourne, Australia Sunnyvale, CA
Dallas, TX New York, NY Tokyo, Japan
Dulles, VA Palo Alto, CA Vienna, VA
Frankfurt, Germany Pasadena, CA
</TABLE>

Network Operations Center. Sandpiper's network operations center is staffed
on a continuous basis (24x7) and enables Sandpiper to respond promptly to
customer inquiries or network events that require manual intervention. The
center is comprised of high-end servers that are connected to the Internet via
dedicated redundant high-speed access lines. Sandpiper uses a comprehensive
suite of automated monitoring and reporting tools, providing real-time
visibility into the stability of Sandpiper's network and Sandpiper's customers'
web sites. Sandpiper employs procedures that enable Sandpiper to ensure that
the appropriate levels of technical support can be applied to any problem
within a few minutes, at any time of the day or night.

To ensure uninterrupted operation of Sandpiper's network operations center,
Sandpiper's facilities have extensive back-up power capabilities. Sandpiper
also has redundant access to our network through multiple Internet access
providers. In the event of a catastrophic failure, backup functions can be
established from one of several alternate sites.

Technology

The proprietary technologies that Sandpiper deploys throughout its network
incorporate the following:

Network Mapping and Sensing. Sandpiper has developed a map of the Internet's
topology that can identify where a user is connected to the Internet. This map
is updated regularly to take into account changes in traffic routing policies
that the major Internet access providers make from time to time. For
efficiency, Sandpiper organizes related users into groups, where the sizes of
the groups depend on the characteristics of the network in which they reside
and the routing relationships among such networks. Sandpiper's network map also
contains proprietary network topology and routing policy information, some of
which is provided to Sandpiper by its network partners.

Real Time Monitoring and Content Routing. Sandpiper's software continuously
monitors the state of the Internet, and develops estimates of the speed of
delivery of content among all of Sandpiper's servers and the tens of thousands
of user address groups that Sandpiper has identified. This performance
information is gathered by more than 200 probes located around the world, and
accurately identifies current points of network congestion and failure,
enabling Sandpiper to route Sandpiper's customer's traffic around hot spots and
black holes that have become commonplace in the Internet.

Sandpiper's software also continuously monitors the availability of all of
its servers, in order to ensure that the best site for a user, from a network
performance perspective, also has sufficient resources to handle

122
<PAGE>

additional traffic. This information is used for global load balancing, and
prevents an individual site from becoming overloaded if its neighboring sites
are suffering from network problems. Sandpiper tracks all critical server
resources such as CPU utilization, number of concurrent sessions, disk space,
and local bandwidth in order to efficiently utilize Sandpiper's content
delivery system.

Application Programming Interface. Sandpiper has developed the industry's
first open content delivery platform, and have developed an API to create a
plug-in interface to our network. This extensible framework will enable
Sandpiper to quickly incorporate new third party technologies into Sandpiper's
network. Through Sandpiper's API, customers, technology vendors, and Internet
access providers can obtain our key content delivery technologies and develop
value-added service offerings.

Cache Coupling. Caching servers that store frequently requested information
are being deployed widely by Internet access providers as a means of reducing
bandwidth costs and improving their end user performance. From a content
provider's perspective, caching has historically presented several challenges,
especially with respect to issues such as stale content and traffic reporting.
Sandpiper's cache coupling technology addresses these concerns, and enables
Sandpiper's customers to control, manage and monitor the content that they
place inside the caches of Internet access providers. Sandpiper's technology
enables all types of caches (including those of Inktomi, Network Applications,
Cache Flow and Squid) deployed by Internet access providers to become servers
within Sandpiper's network.

Content Delivery Management. Sandpiper's customers require comprehensive
control over the content delivered from its servers. Sandpiper's service
includes technology that enables its customers to manage their content in many
ways, including publishing management tools, logs and statistics. Sandpiper's
technology enables its customers to efficiently ensure that only fresh content
is served to end users, no matter how often the content on their website may
change.

Sandpiper's customers also take advantage of Sandpiper's ability to serve
HTML resources. As a result, Sandpiper's customers need the ability to track
the traffic metrics (hit counts) from the delivery of those pages. Sandpiper's
service automatically accumulates the traffic logs generated by each customer,
and makes summary or detailed log information available to the subscriber on
demand.

Sandpiper's service allows subscribers to monitor the status of their
content as it is being delivered by Sandpiper's network. Sandpiper's software
tools continuously report key utilization statistics that can be made available
to Sandpiper's customers on a real-time basis.

Research and Development

Sandpiper believes that strong product development capabilities are
essential to its strategy of enhancing its core technology, developing
additional applications incorporating that technology, and maintaining the
competitiveness of its service offerings. Sandpiper has invested significant
time and resources in creating a structured process for undertaking all product
development projects. This involves all functional groups and all levels within
Sandpiper and is designed to provide the framework for defining and addressing
the steps, tasks and activities to bring service concepts and development
projects to market successfully. In addition, Sandpiper has actively recruited
key computer scientists, engineers and software developers with expertise and
degrees in the areas of Internet content delivery and has complemented these
individuals by hiring senior management with extensive backgrounds in the
Internet network infrastructure, enterprise software and related Internet
industries. Through this mix of personnel, Sandpiper strives to create and
maintain an environment of rapid innovation and service release.

Since inception, Sandpiper has focused its research and development efforts
on developing and enhancing the content delivery technology. Sandpiper is
currently working to add features and new functionality to its existing
services. Sandpiper's research and development expenses totaled $4.4 million
since inception. As of October 31, 1999, Sandpiper had 22 individuals engaged
in research and development efforts.

123
<PAGE>

Sales and Marketing

Sandpiper sells its services through both direct and indirect sales
channels. Currently, Sandpiper's sales efforts focus upon the Internet's 500
most visited websites, websites with rich content, and companies with
substantial global operations and distribution requirements.

Sandpiper maintains its own direct sales force in order to introduce and
inform prospective customers and partners about its services. Region managers
are assigned to various geographic territories and are responsible for direct
and indirect sales within those territories. Region managers are supported by
sales engineers, inside sales personnel and an administrative staff. At October
31, 1999, Sandpiper had 21 employees in its direct sales organization.
Sandpiper is also expanding its direct international sales efforts. For
example, Sandpiper recently opened a sales office in the United Kingdom, and
established a European sales organization.

Additionally, Sandpiper has developed multiple partner programs for web
developers, hosting companies and other Internet access providers which enable
these companies to either bundle and resell Sandpiper's services directly to
their customers, or to refer their customers to Sandpiper. Partners who resell
Sandpiper's services directly to their customers have the option of maintaining
full account control, including billing and collection, and can use their own
brand names, together with Sandpiper's, when they sell Sandpiper's services.

Sandpiper's marketing organization is dedicated to supporting its sales
efforts, promoting its name and services, and generally increasing public
awareness of the services Sandpiper offers. Sandpiper marketing efforts include
public relations, which has resulted in recognition in numerous industry and
financial publications, public speaking and conference participation, and
extensive print advertising.

Competition

Sandpiper competes in a market that is new, intensely competitive, highly
fragmented and rapidly evolving. Sandpiper competes primarily with companies
offering products and services that partially address Internet performance
problems, including companies that provide web-hosting and caching.

Sandpiper believes that it competes primarily on the basis of a number of
factors, including:

. performance of Sandpiper's service, including speed of delivery,
reliability, capability during unanticipated network demands, and global
content delivery capabilities;

. the ability to address multiple content types;

. the ability to protect a customer's brand identity;

. price; and

. the ease of implementation and use of Sandpiper's service.

In addition, with respect to Sandpiper's direct competitors such as Akamai
Technologies, Inc., Sandpiper believes that price plays an increased role in
customers' decision-making processes.

Many of Sandpiper's competitors have longer operating histories, greater
name recognition and substantially greater financial, technical and marketing
resources than we do. Some of Sandpiper's current or potential competitors have
the financial resources to withstand substantial price competition, and many
may be able to respond more quickly than Sandpiper can to new or emerging
technologies and changes in customer requirements. Moreover, many of
Sandpiper's competitors have more extensive customer bases, broader customer
relationships and broader industry alliances that they could use to their
advantage in competitive situations, including relationship with many of
Sandpiper's current and potential customers.

Increased competition could result in, among other things, price and revenue
reductions, increased costs, loss of customers and loss of market share, any of
which could materially and adversely affect Sandpiper's business, financial
condition and operations.

124
<PAGE>

Intellectual Property and Licensing

Sandpiper's success and ability to compete are dependent on its ability to
develop and maintain the proprietary aspects of its technology and operate
without infringing on the proprietary rights of others. Sandpiper relies and
expects to rely on a combination of patent, trademark, trade secret and
copyright laws and contractual restrictions to protect the proprietary aspects
of its technology. These legal protections afford only limited protection for
Sandpiper's technology. Sandpiper has no patents, but has filed patent
applications with the United States Patent and Trademark Office with respect to
its Internet content delivery service.

Sandpiper seeks to limit disclosure of its intellectual property by
requiring employees and consultants with access to its proprietary information
to execute confidentiality agreements with Sandpiper and by restricting access
to its source code. Due to rapid technological change, Sandpiper believes that
factors such as the technological and creative skills of its personnel, new
product developments and enhancements to existing products are more important
than the various legal protections of Sandpiper's technology to establishing
and maintaining a technology leadership position. Despite our efforts to
protect Sandpiper's proprietary rights, unauthorized parties may attempt to
copy aspects of Sandpiper's products or to obtain and use information that
Sandpiper regards as proprietary. The laws of many countries do not protect
Sandpiper's proprietary rights to as great an extent as do the laws of the
United States. Litigation may be necessary in the future to enforce Sandpiper's
intellectual property rights, to protect Sandpiper's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on Sandpiper's business, operating results
and financial condition. There can be no assurance that Sandpiper's means of
protecting Sandpiper's proprietary rights will be adequate or that Sandpiper's
competitors will not independently develop similar technology. Any failure by
Sandpiper to meaningfully protect its property could have a material adverse
effect on Sandpiper's business, operating results and financial condition.

Employees

As of October 31, 1999, Sandpiper had a total of 86 full-time employees. Of
these employees, 22 were engaged in research and development, 27 in sales and
marketing, 17 in customer support and network operations, seven in professional
services, and 13 in finance, business development and administration. None of
Sandpiper's employees is represented by a labor union. Sandpiper has not
experienced any work stoppages and it considers its relations with its
employees to be good. Sandpiper expects to hire a significant number of key
officers and other employees this year.

Sandpiper's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel,
none of whom is bound by an employment agreement requiring service for any
defined period of time. The loss of the services of one or more of Sandpiper's
key employees could have a material adverse effect on Sandpiper's business,
financial condition and results of operations. Sandpiper's future success also
depends on its continuing ability to attract, train and retain highly qualified
technical, sales and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that Sandpiper can retain its key
personnel in the future.

Facilities

Sandpiper's principal executive offices are located in Thousand Oaks,
California, in a 13,000 square foot facility under a lease expiring in March
2005. Sandpiper believes that its facilities will need to be expanded within
the next 12 months. However, Sandpiper may not be able to lease additional
space on commercially reasonable terms or at all.

Legal Proceedings

Sandpiper currently is not subject to any material legal proceedings.

125
<PAGE>

SANDPIPER SELECTED FINANCIAL DATA

The following selected historical consolidated financial data should be read
in conjunction with Sandpiper's consolidated financial statements and related
notes and Sandpiper's "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for each of the two years ended December 31, 1998 and 1997 (no operating
activities occurred from December 26, 1996 (inception) to December 31, 1996)
and the consolidated balance sheet data at December 31, 1998 and 1997, are
derived from the consolidated financial statements of Sandpiper which have been
audited by Ernst & Young, independent accountants. The selected financial data
for the nine month periods ended September 30, 1999 and 1998 and as of
September 30, 1999 and 1998 have been derived from Sandpiper's unaudited
financial statements and in the opinion of Sandpiper's management include all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results of operations and financial position of
Sandpiper for those periods in accordance with generally accepted accounting
principles. Historical results are not necessarily indicative of the results to
be expected in the future.

<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
------------------------ ---------------------------------
1997 1998 1998 1999
----------- ----------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ -- $ 5,700 $ -- $ 242,954
Cost of revenues........ -- 1,695,057 850,200 2,641,767
----------- ----------- --------------- ----------------
Gross profit............ -- (1,689,357) (850,200) (2,398,813)
----------- ----------- --------------- ----------------
Operating expenses:
Marketing and selling
expenses, net........ -- 1,272,441 547,203 4,056,155
Product development
expenses, net........ 1,159,715 1,382,635 1,121,722 1,820,986
General and
administrative
expenses............. 28,149 876,093 677,626 1,480,912
Amortization of deferred
compensation........... -- -- -- 580,827
----------- ----------- --------------- ----------------
Total operating
expenses........... 1,187,864 3,531,169 2,346,551 7,938,880
----------- ----------- --------------- ----------------
Operating loss.......... (1,187,864) (5,220,526) (3,196,751) (10,337,693)
Interest income, net.... 19,325 126,374 125,418 287,671
Provision for income
taxes.................. -- -- 800 2,856
----------- ----------- --------------- ----------------
Net loss.............. $(1,168,539) $(5,094,152) $(3,072,133) $ (10,052,878)
=========== =========== =============== ================
Basic and diluted net
loss per share......... $ (0.23) $ (0.79) $ (0.48) $ (1.46)
=========== =========== =============== ================
Pro forma basic and
diluted net loss per
share.................. $ (0.32) $ (0.60)
=========== ================
Weighted average
number of shares used
in computing basic
and diluted net loss
per share............ 5,095,658 6,418,159 6,354,306 6,872,465
Weighted average
number of shares used
in computing pro
forma basic and
diluted net loss per
share................ 16,021,472 16,856,112

<CAPTION>
December 31, September 30,
------------------------ ---------------------------------
1997 1998 1998 1999
----------- ----------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 5,728,826 $ 603,812 $ 2,583,048 $ 10,853,468
Working capital......... 5,342,053 98,466 1,988,706 7,810,700
Total assets............ 5,774,176 1,824,720 3,893,036 17,750,798
Long term obligations... -- 1,300,586 792,945 1,666,173
Redeemable preferred
stock.................. 6,552,920 6,674,442 6,674,442 28,101,208
Shareholders' deficit... (1,167,539) (6,150,308) (4,169,602) (15,475,754)
</TABLE>

126
<PAGE>

SANDPIPER MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus,
including the "Unaudited Pro Forma Financial Statements." This discussion
contains forward-looking statements based on current expectations, which
involve risks and uncertainties. Actual results and the timing of certain
events could differ materially from the forward-looking statements as a result
of a number of factors, including those referred to in the section entitled
"Risk Factors."

Overview

Sandpiper was incorporated in December 1996 and began offering its service
in September 1998. From December 1996 to September 1998, Sandpiper had no
revenues. Sandpiper's operations consisted primarily of startup activities,
including the development of its core technology and network infrastructure,
the recruiting of personnel, and the raising of capital. Since launching its
service, Sandpiper has continued these operating activities and has also
focused on building sales momentum, cultivating partnering and other strategic
relationships, promoting its brand name and establishing network and customer
service operations. Sandpiper's cost of sales and operating expenses have
increased significantly since inception. This trend reflects the costs
associated with Sandpiper's formation, as well as increased efforts to promote
its brand, build market awareness, attract new customers, recruit personnel,
build operating infrastructure and develop its network and the associated
systems that Sandpiper uses to monitor the activities of its customers'
websites and the general conditions of the Internet.

Sandpiper has incurred significant losses since inception and, as of
September 30, 1999, had an accumulated deficit of $15.5 million. Sandpiper
expects operating losses and negative cash flow to continue for the foreseeable
future. Sandpiper anticipates its losses will increase significantly from
current levels, because it expects to incur additional costs and expenses
related to brand development, marketing and other promotional activities, the
expansion of its content delivery network, and the development of relationships
with certain strategic business partners.

Sandpiper derives its revenue from the sale of its content delivery services
under contracts with terms typically ranging from three to 12 months. Sandpiper
recognizes revenue based on fees for the amount of Internet content delivered
through its services. Generally speaking, customers pay based on their
bandwidth usage. Customers who subscribe on an annual basis have the option to
modify their service, daily or otherwise, should their requirements change.
Because of the increased cost of international connectivity, there is a
separate international pricing structure for Sandpiper's subscribers that is
similar to the pricing structure for its domestic subscribers. Revenue is
recognized over the period that services are provided, and generally begin in
the month for which such services are billed, which generally occurs 30 days
after such services have begun.

To date, most of Sandpiper's direct sales have been in North America, but
Sandpiper expects that revenue from customers based outside the United States
will increase in future periods. In particular, Sandpiper plans to develop its
indirect sales channels worldwide by entering into agreements with new partners
that will enable them to market and sell its services. Sandpiper expects that
revenue from indirect sales channels will increase in future periods, and that
a small number of customers will account for a substantial portion of its
revenues for the foreseeable future. While Sandpiper is seeking to diversify
its customer base, there can be no assurance that these efforts will be
successful.

127
<PAGE>

Sandpiper has a limited operating history on which to base an evaluation of
its business and prospects. You must consider its prospects in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in a new and rapidly
evolving market such as content delivery services. Such risks for Sandpiper
include, but are not limited to, an evolving and unpredictable business model,
and management of growth. To address these risks, Sandpiper must, among other
things, maintain and expand its customer base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade
its technology and systems that it uses to deliver customers' content, provide
superior customer service, respond to competitive developments and attract,
retain and motivate qualified personnel. Sandpiper cannot assure that it will
be successful in addressing such risks, and its failure to do so could have a
material adverse effect on its business, prospects, financial condition and
results of operations.

Options granted in the fiscal year ended December 31, 1998, and the nine
months ended September 30, 1999 have been considered to be compensatory.
Deferred compensation associated with such options for the year ended December
31, 1998 was not material and no deferred compensation was recorded. Deferred
compensation associated with such options for the nine months ended September
30, 1999 amount to $4.2 million. Of this amount, $581,000 million was charged
to operations for the nine months ended September 30, 1999, and $3.6 million
will be amortized over the vesting periods of the applicable options through
September 30, 2003. Through September 30, 1999, Sandpiper granted options to
purchase an aggregate of 1.6 million shares of Sandpiper common stock at
exercise prices ranging from $1.00 to $5.00 per share. Sandpiper granted most
of these options to new employees.

As of September 30, 1999, Sandpiper had $17.9 million of federal and state
net operating loss carry forwards for tax reporting purposes available to
offset future taxable income. Such net operating loss carry forwards expire at
various dates beginning in 2004 to the extent that they are not utilized. In
addition, as of September 30, 1999, Sandpiper had $0.2 million of federal and
state research tax credit carry forwards that expire beginning in 2013.
Sandpiper has not recognized any benefit from the future use of loss or credit
carry forwards for these periods or for any other periods, since inception.
Management's evaluation of all available evidence for assessing realizability
of the tax benefits of such loss carry forwards indicates that the underlying
assumptions of future profitable operations contain risks that do not provide
sufficient assurance to recognize the tax benefits currently. Furthermore,
utilization of the tax loss carryforwards may be subject to significant
utilization limitations which may inhibit the ability to use carryforwards in
the future.

Revenues

Revenues as reported for the nine months ended September 30, 1999 increased
to $242,954 from $5,700 in the year ended December 31, 1998. The increase in
revenue is attributable to the commercial introduction of Sandpiper's service
to customers in September 1998.

Gross Profit

Gross profit for the nine months ended September 30, 1999 decreased to a
$2.4 million gross deficit from a gross deficit of approximately $1.7 million
for the fiscal year ended December 31, 1998. The gross deficit resulted from
the initial installation of Sandpiper's test network in early 1998 and the
installation of Sandpiper's operating network in July 1998, in anticipation of
the introduction of its service in September 1998. Gross profit is affected by
the cost of revenues, which consists primarily of bandwidth cost, rack space
rentals for the servers at Internet access providers' facilities, depreciation
of network equipment and internal labor costs associated with the managing of
Sandpiper's network.

Operating Expenses

Marketing and sales. Marketing and sales expenses consist of salaries and
related expenses associated with implementing Sandpiper's sales and marketing
programs, public relations expenses and advertising

128
<PAGE>

expenses. During the nine months ended September 30, 1999, marketing and sales
expenses increased to approximately $4.1 million from approximately $1.3
million for the fiscal year ended December 31, 1998, primarily as a result of
the establishment of both functions during 1998 to prepare for and direct the
launch of Sandpiper's service in 1998 and the launch of a significant marketing
campaign in the third quarter of 1999. Sandpiper believes that the development
of both the domestic and international sales functions for its service and the
associated need to develop the marketplace for this new service is critical to
its success. As a result, Sandpiper expects that these expenses will continue
to increase in absolute dollars in future periods.

Product development. Product development expenses consist primarily of
salaries and related expenses associated with the development, testing,
deployment and enhancement of Sandpiper's technology and network. These costs
increased to approximately $1.8 million for the nine months ended September 30,
1999 from approximately $1.4 million for the fiscal year ended December 31,
1998, primarily as a result of adding additional personnel to the product
development team during the latter half of 1998. Sandpiper believes that
continued investment in product development is critical to attaining its
strategic objectives and, as a result, expects product development expenses to
increase significantly in absolute dollars in future periods.

General and administrative expenses. General and administrative expenses
consist of salaries and related expenses for executive and administrative
personnel, facilities expenses, professional services expenses, travel and
other general corporate expenses. General and administrative expenses increased
to $1.5 million during the nine months ended September 30, 1999 from
approximately $0.9 million for the fiscal year ended December 31, 1998. This
increase was primarily attributable to increased headcount and related expenses
associated with the hiring of additional personnel, and increased professional
services expenses. Sandpiper expects general and administrative expenses to
increase in absolute dollars as it expands its staff and incurs additional
costs related to the growth of its business.

Interest income (expense), net. Interest income (expense), net, consists of
earnings on Sandpiper's cash and cash equivalents, net of interest expense
attributable to lease and term debt associated with the financing of Sandpiper
assets, primarily network equipment. Net interest income increased to $287,671
for the nine months ended September 30, 1999 from $126,374 for the fiscal year
ended December 31, 1998, and was primarily attributable to earnings on higher
average cash and cash equivalent balances during 1998.

Income taxes. As of September 30, 1999, Sandpiper had $17.9 million of net
operating loss carryforwards for federal and state income tax purposes, which
expire beginning in 2004. Sandpiper has provided a full valuation allowance on
the deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its realizability. Changes in
the ownership of Sandpiper's common stock, as defined in the Internal Revenue
Code of 1986, as amended, may restrict the utilization of such carryforwards.
See Note 4 of the notes to Sandpiper's financial statements.

129
<PAGE>

Quarterly Results of Operations

The following tables set forth certain unaudited quarterly statement of
operations data of Sandpiper, on an unaudited combined basis, for the seven
quarters ended September 30, 1999. This unaudited quarterly information has
been derived from Sandpiper unaudited financial statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods covered. The quarterly data should be read in conjunction with
Sandpiper financial statements and related notes. The operating results for any
quarter are not necessarily indicative of the operating results for any future
period.

<TABLE>
<CAPTION>
March 31, June 30, Sept. 30, Dec. 31, March June 30, Sept. 30,
1998 1998 1998 1998 31, 1999 1999 1999
--------- --------- --------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sandpiper:
Revenues............... $ -- $ -- $ -- $ 5,700 $ 36,726 $ 74,689 $ 131,539
Operating loss......... (83,668) (234,967) (531,565) (698,067) (593,973) (616,165) (1,188,675)
Operating margin....... -- -- -- (12,247%) (1,617%) (825%) (904%)
</TABLE>

Sandpiper's revenue and operating results will vary significantly from
quarter to quarter due to a number of factors, many of which are outside of its
control and any of which may cause its stock price to fluctuate. The primary
factors that may affect Sandpiper's revenue and operating results include the
following:

. the timing and size of sales of its services;

. changes in its pricing policies or the pricing policies of its
competitors;

. the length of the sales cycle and implementation periods for its
services;

. increases in the prices of, and the availability of, the products and
services it purchases, including bandwidth;

. new product and service introductions and enhancements by its competitors
and itself;

. its ability to attain and maintain quality levels for its services;

. costs related to acquisitions of technology or businesses; and

. general economic conditions as well as those specific to the Internet and
related industries.

In addition, Sandpiper's quarterly operating results have been, and are
likely to continue to be, influenced by seasonal fluctuations in its sales.
Because its sales have grown in each quarter since inception, these
fluctuations may not be apparent from its historical financial statements.
However, Sandpiper believes that its sales and sales growth from period to
period have been, and will continue to be, affected by the seasonal demand for
its services from its customers, which will be in turn primarily dependent upon
the demand for their services from their customers. For example, Sandpiper
believes that Internet usage will continue to peak, at least in the next
several years, in the fourth quarter of each calendar year as a result of the
increase in e-commerce transactions resulting from the holiday season. As a
result, Sandpiper anticipates that its revenue may peak in the first quarter of
each calendar year due to the nature of its deferred billing cycles.

Due to the above factors, Sandpiper believes that quarter-to-quarter
comparisons of its operating results are not a good indication of its future
performance. It is likely that in some future quarters, Sandpiper's operating
results may be below the expectations of public market analysts and investors.

Liquidity and Capital Resources

Since inception, Sandpiper has financed its operations primarily through
private sales of preferred stock that, through October 31, 1999, have totaled
$28.1 million.

Net cash used in operating activities was $6.6 million in the nine months
ended September 30, 1999, $4.8 million in the year ended December 31, 1998, and
$0.9 million in the year ended December 31, 1997. Net

130
<PAGE>

cash used in operating activities for each of these periods primarily consisted
of net losses, partially offset by increases in depreciation and amortization
of deferred compensation. The significant increase in working capital during
the fiscal year ended December 31, 1998 was primarily due to significant growth
in Sandpiper's operations.

Net cash used in investing activities was $6.4 million in the nine months
ended September 30, 1999, $1.5 million in the year ended December 31, 1998, and
$0.04 million in the year ended December 31, 1997. Net cash used in investing
activities for each of these periods primarily consisted of purchases of
equipment and systems, including computer equipment, fixtures and furniture.

Net cash provided by financing activities was $23.2 million in the nine
months ended September 30, 1999, $1.2 million in the year ended December 31,
1998, and $6.7 million in the year ended December 31, 1997. Net cash provided
by financing activities during the nine months ended September 30, 1999
primarily consisted of proceeds of $21.4 million from the issuance of preferred
stock, during the fiscal year ended December 31, 1998 primarily consisted of
proceeds of $1.1 million from the financing of capital expenditures under
capital lease agreements, and during the year ended December 31, 1997,
primarily consisted of proceeds of $6.6 million from the issuance of preferred
stock.

As of September 30, 1999, Sandpiper had $10.9 million of cash and cash
equivalents. As of that date, Sandpiper's principal commitments consisted of
obligations outstanding under operating leases. Although Sandpiper has no
material commitments for capital expenditures, Sandpiper anticipates a
substantial increase in its capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.

Sandpiper currently anticipates that its available funds will be sufficient
to meet its anticipated needs for working capital through the expected
completion of the merger with Digital Island. Sandpiper cannot be certain that
additional financing will be available to it on favorable terms when required,
or at all.

Year 2000

Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. Sandpiper uses software, computer technology and other services
internally developed and provided by third-party vendors that may fail due to
the year 2000 phenomenon. For example, Sandpiper is dependent on the financial
institutions involved in processing its customers' payments for Internet
services and third parties that host its servers. It is also dependent on
telecommunications vendors to maintain its network to deliver content through
its network on behalf of its customers.

Sandpiper has reviewed the year 2000 compliance of its internally developed
proprietary software. This review included testing to determine how its systems
will function at and beyond the year 2000. Since inception, Sandpiper has
internally developed substantially all of the systems for the operation of its
network. These systems include the software used to provide its distribution
and monitoring functions on its network, as well as back-up capabilities. Based
upon its assessment, Sandpiper believes that its internally developed
proprietary software is year 2000 compliant.

Sandpiper has assessed the year 2000 readiness of its third-party supplied
software, computer technology and other services, which include software for
use in its accounting, database and security systems. The failure of such
software or systems to be year 2000 compliant could have a material negative
impact on Sandpiper's corporate accounting functions and the operation of its
network. As part of the assessment of the year 2000 compliance of these
systems, Sandpiper has sought assurances from these vendors that their
software, computer technology and other services are year 2000 compliant. Based
upon the results of this assessment, Sandpiper developed and completed, as
necessary, a remediation plan with respect to third-party software, third-party

131
<PAGE>

vendors and computer technology and services that may fail to be year 2000
compliant. The failure of Sandpiper's software and computer systems and of its
third-party suppliers to be year 2000 complaint would have a material adverse
effect on Sandpiper.

The year 2000 readiness of the general infrastructure necessary to support
Sandpiper's operations is difficult to assess. For instance, Sandpiper depends
on the integrity and stability of the Internet to provide its services.
Sandpiper also depends on the year 2000 compliance of the computer systems and
financial services used by its bandwidth providers and its customers. Thus, the
infrastructure necessary to support its operations consists of a network of
computers and telecommunications systems located throughout the world and
operated by numerous unrelated entities and individuals, none of which has the
ability to control or manage the potential year 2000 issues that may impact the
entire infrastructure. Sandpiper's ability to assess the reliability of this
infrastructure is limited and relies solely on generally available news
reports, surveys and comparable industry data. Based on these sources,
Sandpiper believes most entities and individuals that rely significantly on the
Internet are carefully reviewing and attempting to remediate issues relating to
year 2000 compliance, but it is not possible to predict whether these efforts
will be successful in reducing or eliminating the potential negative impact of
year 2000 issues. A significant disruption in the ability of consumers to
reliably access the Internet or portions of it would have an adverse effect on
demand for Sandpiper's services and would have a material adverse effect on
Sandpiper.

At this time, Sandpiper has not yet developed a contingency plan to address
situations that may result if Sandpiper or its vendors are unable to achieve
year 2000 compliance because Sandpiper currently does not believe that such a
plan is necessary. The cost of developing and implementing such a plan, if
necessary, could be material. Any failure of Sandpiper's material systems, its
vendors' material systems or the Internet to be year 2000 compliant could have
material adverse consequences for Sandpiper. Such consequences could include
difficulties in operating Sandpiper's network effectively, taking customer
orders, making content deliveries or conducting other fundamental parts of its
business.

Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. Sandpiper expects that the adoption of SOP
No. 98-1 will not have a material impact on its financial position or results
of operations. Sandpiper adopted SOP No. 98-1 effective January 1, 1999.

In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. Sandpiper expects that the adoption of SOP No. 98-5 will not have a
material impact on its financial position or results of operations. Sandpiper
adopted SOP No. 98-5 effective January 1, 1999.

In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because Sandpiper does not currently hold any derivative
instruments and does not engage in hedging activities, it expects that the
adoption of FAS No. 133 will not have a material impact on its financial
position or results of operations. Sandpiper adopted FAS No. 133 effective
January 1, 1999.

Quantitative and Qualitative Disclosures About Market Interest Rate Sensitivity

The primary objective of Sandpiper's investment activities is to preserve
principal while at the same time maximizing the income it receives from its
investments without significantly increasing risk. Some of the securities that
Sandpiper has invested in may be subject to market risk. This means that a
change in prevailing

132
<PAGE>

interest rates may cause the principal amount of the investment to fluctuate.
For example, if Sandpiper holds a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the principal amount of its investment will probably decline. To
minimize this risk, Sandpiper maintains its portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds and government and non-government debt securities. In
general, money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate. In addition,
Sandpiper invests in relatively short-term securities. As of September 30,
1999, all of Sandpiper's investments mature in less than one year. See Note 2
to the notes to Sandpiper's financial statements.

Exchange Rate Sensitivity

Sandpiper operates primarily in the United States, and all sales to date
have been made in U.S. dollars. Accordingly, Sandpiper has had no material
exposure to foreign currency rate fluctuations.

133
<PAGE>

MANAGEMENT OF DIGITAL ISLAND

Officers, Directors and Senior Management

The following table sets forth the names and ages of our executive officers
and directors and certain members of our senior management as of November 30,
1999.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ruann F.
Ernst(1)(4)(5)......... 53 Chief Executive Officer, President and Director
T.L. Thompson........... 53 Chief Financial Officer
Chris Albinson.......... 32 Vice President of Corporate Development
Paul Evenson............ 39 Vice President of Operations
Allan Leinwand.......... 33 Vice President of Engineering and Chief Technology Officer
Bruce Pinsky............ 36 Vice President of Solutions Engineering and Chief Information Officer
Michael T. Sullivan..... 48 Vice President of Finance
Rick Schultz............ 41 Vice President North American Sales
Tim Wilson.............. 40 Vice President of Marketing and International Sales
Charlie Bass(2)......... 57 Director
Christos Cotsakos(4).... 50 Director
Marcelo A.
Gumucio(2)(3)(4)....... 61 Director
Cliff Higgerson (1)(3).. 57 Director
Shahan Soghikian(1)..... 40 Director
David Spreng............ 37 Director
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Nominating Committee
(5) Member of Special Stock Option Committee

Upon consummation of the merger, Leo S. Spiegel, who is currently the
president and chief executive officer of Sandpiper, will become the president
and director of Digital Island, and Scott Darling, Eric Shepcaro and Andrew
Swart, who are officers of Sandpiper, will become vice president of
professional services, vice president of international and channel sales and
vice president of software engineering, respectively, of Digital Island.

Each director will hold office for the term described below in "--Classified
Board" and until such director's successor is elected and qualified or until
such director's earlier resignation or removal. Each officer serves at the
discretion of the board of directors of Digital Island.

Ruann F. Ernst has served as president and chief executive officer and as a
director since June 1998. Prior to joining Digital Island, Ms. Ernst served
with Hewlett Packard, a computer equipment and services company, for over ten
years, most recently as general manager of the Financial Services Business
Unit. Ms. Ernst has also served as Director, Medical Computing Services
Division and Assistant Professor, Medicine and Computer Science at The Ohio
State University and as a Congressional Fellow in the Office of Technology
Assessment. Ms. Ernst serves on the board of directors of The Institute for the
Future, Phoenix International and Advanced Fibre Communications, Inc. Ms. Ernst
holds a B.S. in Mathematics, a Masters Degree in Computer Science and a Ph.D.
in Technology and Organizational Change from The Ohio State University.

134
<PAGE>

Leo S. Spiegel has served as Sandpiper's president and chief executive
officer and as a director of Sandpiper since January 1998. From February 1996
to January 1998, Mr. Spiegel served as senior vice president and chief
technology officer of Donnelley Enterprise Solutions, Inc., an information
management firm. From June 1995 to February 1996, Mr. Spiegel serves as a
senior vice president of Donnelley Business Services, a subsidiary of R.R.
Donnelley and Sons Company. From May 1991 to June 1995, Mr. Spiegel was the
executive vice president and chief technology officer of LANSystems, a network
utilities software developer and international systems integration firm which
he co-founded. Mr. Spiegel holds a B.A. from the University of California, San
Diego.

T.L. Thompson has served as chief financial officer since January 1999. Mr.
Thompson served as chief financial officer of Narrowline, an Internet marketing
firm, from October 1996 to November 1998. From 1989 to 1996 he served in
various financial capacities at Ziff-Davis Publishing Company, most recently as
vice president of business development. Mr. Thompson holds a B.S. in Economics
and an M.B.A. from Northwestern University.

Chris Albinson has served as vice president of corporate development since
September 1999. From 1993 to August 1999 Mr. Albinson served as assistant vice
president at Newbridge Networks Corp., manufacturer of digital electronic
network products. Mr. Albinson holds an M.B.A. from the University of Western
Ontario.

Paul Evenson has served as vice president of operations since November 1998.
From 1996 to 1998, Mr. Evenson served as vice president of sales and operations
at Westech Communications, Inc., a communications services firm. From 1986 to
1996, Mr. Evenson served as vice president of information technology at
Montgomery Securities, an investment banking firm. Mr. Evenson studied
Engineering at Oregon State University.

Scott Darling has served as Sandpiper's vice president of business
development and professional services since May 1999. Mr. Darling has over 18
years of management consulting and business development expertise with such
firms as Andersen Consulting, Price Waterhouse and MCI Systemhouse. Most
recently, Mr. Darling was the managing director for the Worldwide Consumer
Products and Retail and Financial Services vertical practices at MCI
Systemhouse with a heavy focus on e-commerce and web enablement services. Mr.
Darling holds a B.S. in Economics and Business Administration from the
University of Nebraska and an M.B.A. from Colorado State University.

Allan Leinwand has served as vice president of engineering and chief
technology officer of Digital Island since January 1997 and as a director from
January 1997 to February 1999. Prior to joining Digital Island, from August
1990 to February 1997, Mr. Leinwand served as manager, consulting engineer at
Cisco Systems, a network equipment provider, where he designed and deployed
global internetworks for large corporations, governments and institutions. Mr.
Leinwand also served as a network design and implementation engineer at Hewlett
Packard from 1988 to 1990. Mr. Leinwand holds a B.S. in Computer Science from
the University of Colorado, Boulder.

Bruce Pinsky has served as vice president of solutions engineering and chief
information officer since March 1997. From August 1992 to March 1997, Mr.
Pinsky worked in Customer Engineering and Global Support Engineering for Cisco
Systems. Mr. Pinsky holds a B.S. in Computer Science from California State
University, Hayward.

Michael T. Sullivan has served as vice president of finance since May 1997
and served as chief financial officer from October 1997 to January 1999. From
July 1993 to May 1996 Mr. Sullivan served as vice president of operations and
chief financial officer for Tut Systems, a network equipment provider.
Mr. Sullivan holds a B.S. in Business Administration from the University of
California, Berkeley. Mr. Sullivan is a certified public accountant.

Rick Schultz has served as vice president of north american sales since
March 1999. From December 1995 to February 1999, Mr. Schultz served as vice
president of sales at Pacific Bell Network Integration, a subsidiary

135
<PAGE>

of Pacific Bell, a telecommunications company. Mr. Schultz also held various
senior management positions at AT&T from June 1980 to November 1995 in sales,
product management and sales management. Mr. Schultz holds a B.S. in Commerce
from De Paul University and an M.B.A. from the University of San Francisco.

Eric Shepcaro has served as Sandpiper's vice president of sales since
January 1998. Mr. Shepcaro has more than 20 years of technical sales and
marketing experience. Prior to joining Sandpiper, Mr. Shepcaro spent over 17
years at Sprint Corporation. Most recently, he served as vice president of
sales engineering and application support, where he led the organization
responsible for technical sales, business development, network engineering,
program, management, and service implementation for business and government
customers. Mr. Shepcaro holds a B.S. in Business from the State University of
New York at Albany and an M.B.A. from San Francisco State University.

Andrew Swart has served as Sandpiper's vice president of engineering since
January 1998 and as a director of Sandpiper since December 1996. Mr. Swart also
served as Sandpiper's president and chief executive officer from December 1996
to January 1998. From November 1994 to December 1996, Mr. Swart was a managing
director of Sandpiper Consulting LLC. Mr. Swart holds a B.S. in Management
Information Systems from the University of Texas at Dallas.

Tim Wilson has served as vice president of marketing and international sales
since March 1998. From January 1996 to March 1998, Mr. Wilson served as general
manager within the Business Communications Systems Division of Lucent
Technologies, a telecommunications equipment supplier. Mr. Wilson also served
as executive director and general manager of the Business Communications
Systems Division of AT&T Australia from November 1993 to December 1995. From
August 1983 to October 1993, Mr. Wilson held several management positions in
engineering, sales and marketing at AT&T Corp. and AT&T Bell Laboratories. Mr.
Wilson holds a B.A. in Physics from Bowdoin College and an M.B.A. from the
Fuqua School of Business at Duke University.

Charlie Bass has served as a director since March 1997. Dr. Bass is trustee
of The Bass Trust, general partner of Bass Associates and a consulting
professor of Electrical Engineering at Stanford University. He is also chairman
of the board of directors of Meridian Data, Inc., Socket Communications, Inc.
and SoloPoint, Inc. and serves on the board of directors of several private
communications companies. Prior to co-founding Ungermann-Bass in 1979, Dr. Bass
was at Zilog, Inc., and prior to the formation of Zilog, Inc. in 1975, he was
on the Electrical Engineering and Computer Sciences faculty at the University
of California at Berkeley from 1972 to 1975. Dr. Bass holds a Ph.D. in
Electrical Engineering from the University of Hawaii where he participated in
the Aloha System research in radio frequency-based computer networks.

Christos Cotsakos has served as a director of Digital Island since July
1998. Mr. Cotsakos joined E*TRADE, an online financial services company, in
March 1996 as the president and chief executive officer and as a director.
Before joining E*TRADE, he served as president, chief operating officer, co-
chief executive officer and a director of AC Nielsen Inc., a marketing research
company. Prior to joining AC Nielsen, Mr. Cotsakos spent 19 years with Federal
Express Corporation, where he held a number of senior executive positions. In
addition to E*TRADE, Mr. Cotsakos serves on the boards of directors of Fox
Entertainment Group, Inc., National Processing, Inc., Omega Research, Inc. and
Critical Path, Inc., as well as several private companies. A decorated Vietnam
veteran, he received a B.A. from William Paterson College and an M.B.A. from
Pepperdine University. Mr. Cotsakos is currently pursuing a Ph.D. degree in
economics at the University of London.

Marcelo A. Gumucio has served as a director since January 1998, and served
as chairman of the board of directors from January 1998 until May 1998. He is
the managing partner of Gumucio Burke & Associates, a private investment firm.
In April 1996, Mr. Gumucio joined Micro Focus PLC, an enterprise software
provider, as its chief executive officer. He had served as a non-executive
director of Micro Focus' board of directors since January 1996. Prior to
joining Micro Focus, from 1992 to 1996, Mr. Gumucio was president, chief
executive officer and chairman of the board of directors of Memorex Telex NV.
Mr. Gumucio's professional

136
<PAGE>

experience in the computer and communications industry spans almost 30 years
and includes senior management positions at Cray Research, Inc., Northern
Telecom Limited, Memorex Corporation and Hewlett- Packard Company. Mr. Gumucio
serves on the board of directors of BidCom Inc., E-Stamp Corporation and Burr
Brown Corporation. Mr. Gumucio graduated cum laude with a B.S. in mathematics
from the University of San Francisco in 1961. He received an M.S. in applied
mathematics and operations research in 1963 from the University of Idaho, where
he was named a National Science Fellow and graduated with honors. In 1982, he
graduated from the Harvard Business School Advanced Management Program.

Cliff Higgerson has served as a director since March 1997. Mr. Higgerson has
over 20 years experience with venture capital investments. Prior to forming
Communications Ventures II in the summer of 1997, he was a general partner of
Vanguard Venture Partners, where he has been since 1993 and where he continues
to manage several portfolio companies. His 25 years of involvement in the
communications field include research, consulting, planning, investment
banking, and venture capital. Mr. Higgerson serves on the board of directors of
Advanced Fibre Communications, Inc., Ciena Corp. and Digital Microwave Corp.,
as well as several private companies. Mr. Higgerson holds a B.S. in electrical
engineering and an M.B.A. from the Haas School of Business at the University of
California at Berkeley.

Shahan Soghikian has served as a director since February 1999. Mr. Soghikian
has over nine years experience with venture capital investments and is a
general partner of Chase Capital Partners, where he has been since 1990, and
where he develops, executes and monitors investments in private companies.
Mr. Soghikian serves on the board of directors of two private companies, Nextec
Applications, Inc. and AFS Holdings. Mr. Soghikian graduated with a B.A. in
Biology from Pitzer College and an M.B.A. from Anderson School of Business at
the University of California at Los Angeles.

David Spreng has served as a director since July 1997. Mr. Spreng has over
10 years of venture capital investment experience, primarily in communications,
and served as president of IAI Ventures, the private equity arm of Investment
Advisers, Inc. from 1992 until September 1998, when Mr. Spreng became the
managing member of the general partners of the successor in interest to IAI
Ventures and IAI, the Crescendo Funds and its management company. Mr. Spreng
serves on the board of directors of Tut Systems, Inc. and several private
companies. Mr. Spreng graduated from the University of Minnesota with a B.S. in
Accounting.

Director Compensation

Digital Island's directors do not currently receive compensation for their
services as members of the board of directors. All directors are reimbursed for
their reasonable out-of-pocket expenses in serving on the board of directors or
any committee thereof. Employee directors are eligible to participate in
Digital Island's 1998 stock option/stock issuance plan and will also be
eligible to receive equity incentives, in the form of stock option grants or
direct stock issuances, under Digital Island's 1999 stock incentive plan.

Non-employee board members will receive option grants at periodic intervals
under the automatic option grant program of the 1999 stock incentive plan and
will also be eligible to receive discretionary option grants under the
discretionary option grant program of such plan. See "Executive Compensation
and Other Information--Employee Benefit Plans."

Classified Board

Digital Island's certificate of incorporation provides for a classified
board of directors consisting of three classes of directors, each serving
staggered three-year terms. As a result, a portion of Digital Island's board of
directors will be elected each year. Ron Higgins and David Spreng have been
designated Class I directors whose term expires at the 2000 annual meeting of
stockholders. Charlie Bass, Cliff Higgerson and Shahan Soghikian have been
designated Class II directors whose term expires at the 2001 annual meeting of
stockholders. Christos Cotsakos, Ruann Ernst and Marcelo Gumucio have been
designated Class III directors whose term expires at the 2002 annual meeting of
stockholders. See Digital Island's "Description of Capital Stock--Antitakeover
Effects of Provisions of Certain Charter Provisions, Bylaws and Delaware Law."

137
<PAGE>

Board Committees

The executive committee of Digital Island's board of directors consists of
Ruann Ernst, Cliff Higgerson and Shahan Soghikian. The executive committee,
subject to the following limitations, acts upon all matters concerning Digital
Island's interests, and manages Digital Island's business when the full board
of directors is not in session. Digital Island's executive committee may not:

. adopt, amend or repeal the bylaws;

. elect directors to fill vacancies on the board;

. fill vacancies on the executive committee, or change its membership;

. elect to remove officers of Digital Island;

. amend the corporate charter;

. act on matters assigned to other committees of the board;

. appoint standing committees of the board;

. recommend to the stockholders any action requiring their approval; or

. approve the acquisition or disposal of any capital asset or assets to be
used by us or any subsidiary in an amount exceeding an aggregate
$3,000,000 in any interim period between meetings of the board.

The audit committee of Digital Island's board of directors consists of
Marcelo Gumucio and Cliff Higgerson. The audit committee reviews Digital
Island's financial statements and accounting practices, makes recommendations
to the board of directors regarding the selection of independent auditors and
reviews the results and scope of Digital Island's annual audit and other
services provided by Digital Island's independent auditors.

The compensation committee of Digital Island's board of directors consists
of Charlie Bass and Marcelo Gumucio. The compensation committee makes
recommendations to the board of directors concerning salaries and incentive
compensation for Digital Island's officers and employees and administers
Digital Island's employee benefit plans including the grant of options under
those plans.

The nominating committee of Digital Island's board of directors consists of
Christos Cotsakos, Ruann Ernst and Marcelo Gumucio. The nominating committee
makes recommendations to the board of directors concerning candidates for
directorships.

The special stock option committee of Digital Island's board of directors
consists solely of Ruann Ernst. The special stock option committee has the
authority, separate from the compensation committee, to make discretionary
option grants to eligible individuals other than officers or non-employee
members of the board of directors.

Compensation Committee Interlocks and Insider Participation

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

138
<PAGE>

DIGITAL ISLAND EXECUTIVE COMPENSATION AND OTHER INFORMATION

Summary of Cash and Certain Other Compensation

The following table sets forth the compensation earned by our named
executive officers which include Digital Island's chief executive officer and
Digital Island's four other executive officers whose salary and bonus for
services rendered in all capacities to Digital Island for the fiscal year ended
September 30, 1999 exceeded $100,000. For a list of Digital Island's current
executive officers and certain members of senior management, see "Management."

The options listed in the following table were originally granted under
either Digital Island's 1997 stock option and incentive plan or Digital
Island's 1998 stock option/stock issuance plan. These options have been
incorporated into the new 1999 stock incentive plan, but will continue to be
governed by their existing terms. See "Executive Compensation and Other
Information--Employee Benefit Plans."

<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
---------------------------------- ------------
Number of
Securities
Other Annual Underlying
Name and Principal Position(s) Year Salary Bonus Compensation Options
------------------------------ ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ruann F. Ernst...................................... 1999 $185,961 $64,250 $24,620(1) 1,044,159
President and Chief Executive Officer
Allan Leinwand...................................... 1999 163,333 44,000 -- 323,000
Chief Technology Officer
Ron Higgins (2)..................................... 1999 150,000 40,000 -- 400,000
Chairman of the Board of Directors
Tim Wilson.......................................... 1999 180,446 51,250 -- 280,000
Vice President of Marketing and International Sales
Paul Evenson........................................ 1999 146,635 27,222 -- 200,000
Vice President of Operations
</TABLE>
- --------
(1) Consists of reimbursement of rent for Ms. Ernst's apartment in San
Francisco, California.
(2) Mr. Higgins served as President and Chief Executive Officer of Digital
Island from February 1994 until June 1998 and Chairman of the Board of
Directors from June 1998 to September 1999.

139
<PAGE>

Stock Options and Stock Appreciation Rights

The following table sets forth information regarding option grants to each
of the named executive officers during the fiscal year ended September 30,
1999. No stock appreciation rights were granted to the named executive officers
during the 1999 fiscal year.

Stock Option Grants in Fiscal Year 1999

<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed
Percentage Annual Rates
Number of of Total of Stock Price
Securities Options Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Per Expiration -------------------
Name Granted (#) in 1999 Share ($/Sh) Date 5% 10%
---- ----------- ---------- ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 250,000 10.4% $4.25 3/18/09 $668,201 $1,693,351
Allan Leinwand.......... 35,000 1.5% 4.25 3/18/09 93,548 237,069
Ron Higgins............. -- -- -- -- -- --
Tim Wilson.............. 40,000 1.7% 3.50 10/16/08 88,045 223,124
Tim Wilson.............. 100,000 4.1% 4.25 3/18/09 267,280 677,341
Paul Evenson............ 150,000 6.2% 3.50 10/26/08 330,170 836,715
Paul Evenson............ 50,000 2.1% 4.25 3/18/09 133,640 338,670
</TABLE>

The exercise price per share of each option was determined by Digital
Island's board of directors in its good faith judgment and generally reflects
its best estimate of the fair value of Digital Island's common stock on the
date of each grant, taking into account factors such as Digital Island's
operating performance, recent sales of securities, and market conditions.

Each option has a maximum term of 10 years, subject to earlier termination
upon the optionee's cessation of service with Digital Island. Ms. Ernst was
granted an option for 250,000 shares with an exercise price of $4.25 per share.
The first 234,373 shares, subject to her options, will vest in a series of 45
successive equal monthly installments upon her completion of each month of
service over the 45-month period measured from March 18, 1999, and the
remaining 15,627 shares will vest in a series of 3 successive equal monthly
installments over the 3-month period measured from December 18, 2002. The
option granted to Mr. Leinwand for 35,000 shares began to vest starting March
18, 1999 in 48 successive equal monthly installments. The option granted Mr.
Wilson for 40,000 shares is vested for 9,600 shares on October 16, 1999, and
vests in a series of 38 successive equal monthly installments upon his
completion of service measured from October 16, 1999. The option Mr. Wilson was
granted for 100,000 shares began to vest starting March 18, 1999 in
48 successive equal monthly installments. The option granted Mr. Evenson for
150,000 shares is vested for 36,000 shares on October 26, 1999 and vests in a
series of 38 successive equal monthly installments upon his completion of
service measured from October 29, 1999. The option Mr. Evenson was granted for
50,000 shares began to vest starting October 26, 1999 in 48 successive equal
monthly installments.

The actual stock price appreciation over the 10-year option term may not be
at the above 5% and 10% assumed annual rates of compounded stock price
appreciation or at any other defined level. Unless the market price of common
stock appreciates over the option term, no value will be realized from the
option grant made to the named executive officer.

140
<PAGE>

Aggregated Option/SAR Exercises and Fiscal Year-End Values

The following table sets forth information with respect to the named
executive officers concerning their exercise of stock options during the fiscal
year ended September 30, 1999 and the number of shares subject to unexercised
stock options held by them as of the close of such fiscal year. No stock
appreciation rights were exercised during the fiscal year ended September 30,
1999, and no stock appreciation rights were outstanding at the close of such
year. In the following table, "Value Realized" is equal to the difference
between the fair value of the shares at the time of exercise ($9.90 per share)
and the exercise price paid for the shares and the "Value of Unexercised In-
The-Money Options at Year-End" is based upon the fair value per share at the
close of the 1999 fiscal year ($26.00 per share) less the exercise price
payable per share.

Aggregated Option Exercises in 1999 and Year-End Values

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at Year-End at Year-End
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ruann F. Ernst.......... 133,332 $1,119,989 392,076 418,751 $9,519,925 $9,657,837
Allan Leinwand.......... 163,733 1,555,464 14,775 144,492 361,396 3,528,289
Ron Higgins............. 216,000 2,052,000 42,333 141,667 1,083,725 3,626,675
Tim Wilson.............. 53,249 445,307 49,649 177,102 1,134,256 4,152,129
Paul Evenson............ -- -- -- 200,000 -- 4,462,500
</TABLE>

Employee Benefit Plans

1999 Stock Incentive Plan

Digital Island's 1999 stock incentive plan is the successor equity incentive
program to Digital Island's 1998 stock option/stock issuance plan which was the
successor equity incentive program to Digital Island's 1997 stock option and
incentive plan. The 1999 stock incentive plan became effective on June 29,
1999, the effective date of Digital Island's initial public offering. All
outstanding options under Digital Island's predecessor plan were at that time
incorporated into the 1999 stock incentive plan, and no further option grants
will be made under such predecessor plan. The incorporated options will
continue to be governed by their existing terms, unless the plan administrator
elects to extend one or more features of the 1999 stock incentive plan to those
options. Except as otherwise noted below, the incorporated options have
substantially the same terms as will be in effect for grants made under the
discretionary option grant program of the 1999 stock incentive plan.

An initial reserve of 7,544,000 shares of common stock has been authorized
for issuance under the 1999 stock incentive plan. This share reserve consists
of (i) the number of shares estimated to remain available for issuance under
Digital Island's predecessor plan, including the shares subject to outstanding
options thereunder, plus (ii) an additional increase of approximately 2,500,000
shares. The number of shares of common stock reserved for issuance under the
1999 stock incentive plan will automatically increase on the first trading day
in January each calendar year, beginning in calendar year 2000, by an amount
equal to four percent (4%) of the total number of shares of common stock
outstanding on the last trading day in December in the preceding calendar year,
but in no event will this annual increase exceed 2,000,000 shares. In addition,
no participant in the 1999 stock incentive plan may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 750,000 shares of common stock in the aggregate per calendar year.

The 1999 stock incentive plan is divided into five separate components:

. the discretionary option grant program, under which eligible individuals
in Digital Island's employ or service (including officers, non- employee
board members and consultants) may, at the discretion of the plan
administrator, be granted options to purchase shares of common stock at
an exercise price not less than 100% of the fair market value of those
shares on the grant date;

141
<PAGE>

. the stock issuance program under which eligible individuals may, in the
plan administrator's discretion, be issued shares of common stock
directly, upon the attainment of designated performance milestones or
upon the completion of a specified service requirement or as a bonus for
past services;

. the salary investment option grant program, which may, at the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow executive officers and other key
executives selected by the plan administrator the opportunity to apply a
portion of their base salary each year to the acquisition of special
below-market stock option grants;

. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and

. the director fee option grant program, which may, in the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow non-employee board members the
opportunity to apply all or a portion of the annual retainer fee
otherwise payable to them in cash each year to the acquisition of special
below-market option grants.

The discretionary option grant program and the stock issuance program are
administered by the compensation committee. However, a secondary committee of
one or more board members also has concurrent authority to administer those
programs with respect to individuals who are neither officers nor directors.
The compensation committee or secondary committee as plan administrator have
complete discretion to determine which eligible individuals are to receive
option grants or stock issuances under those programs, the time or times when
the grants or issuances are to be made, the number of shares subject to each
grant or issuance, the status of any granted option as either an incentive
stock option or a non-statutory stock option under the Federal tax laws, the
vesting schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. However,
the board acting by a disinterested majority has the exclusive authority to
make any discretionary option grants or stock issuances to members of the
compensation committee. The compensation committee has the exclusive authority
to select the executive officers and other highly compensated employees who may
participate in the salary investment option grant program in the event that
program is activated for one or more calendar years. Neither the compensation
committee nor the board will exercise any administrative discretion with
respect to option grants under the salary investment option grant program or
under the automatic option grant or director fee option grant program for the
non-employee board members. All grants under those latter three programs will
be made in strict compliance with the express provisions of each program.

The exercise price for the shares of common stock subject to option grants
made under the 1999 stock incentive plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by
the optionee.

The plan administrator has the authority to effect the cancellation of
outstanding options under the discretionary option grant program (including
options incorporated from our predecessor plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the common stock on the new
grant date.

Stock appreciation rights are authorized for issuance under the
discretionary option grant program. These rights will provide the holders with
the election to surrender their outstanding options for an appreciation
distribution from us equal to the excess of (a) the fair market value of the
vested shares of common stock subject to the surrendered option over (b) the
aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. None of the
incorporated options from Digital Island's predecessor plan contain any stock
appreciation rights.

142
<PAGE>

In the event that Digital Island is acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the discretionary option grant and stock issuance
programs will immediately vest, except to the extent Digital Island's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The plan administrator has complete discretion to grant
one or more options under the discretionary option grant program which will
vest and become exercisable for all the option shares in the event those
options are assumed in the acquisition and the optionee's service with Digital
Island or the acquiring entity is terminated within a designated period (not to
exceed eighteen months) following that acquisition. The vesting of outstanding
shares under the stock issuance program may be accelerated upon similar terms
and conditions.

The plan administrator is also authorized to grant options and structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in ownership or
control (whether by successful tender offer for more than fifty percent of
Digital Island's outstanding voting stock or by a change in the majority of our
board through one or more contested elections for board membership). Such
accelerated vesting may occur either at the time of such change or upon the
subsequent termination of the individual's service within a designated period
(not to exceed eighteen months) following the change.

The options to be incorporated from Digital Island's predecessor plan will
immediately vest and become exercisable for all the option shares if Digital
Island is acquired by merger or asset sale, unless the options are assumed by
the successor corporation and Digital Island's repurchase rights with respect
to the unvested shares subject to those options are concurrently assigned to
the successor entity. For some of these options, the board also has the
authority to provide for their cancellation in return for a cash payment to the
option holders in an amount per cancelled option share equal to the excess of
the price to be paid per share of Digital Island's common stock in the
acquisition over the option exercise price payable per share under the
cancelled option. Other of these options contain a special acceleration
feature. Under that feature, should the optionee's service be terminated within
a designated period following an acquisition in which the option is assumed and
Digital Island's repurchase rights are assigned, then the option will vest at
that time and become immediately exercisable for all the option shares, and all
unvested shares held by such individual will also vest at that time. There are
no other change in control provisions currently in effect for the outstanding
options under the predecessor plan. However, the plan administrator will have
the discretion to extend the acceleration provisions of the 1999 stock
incentive plan to any or all of the options outstanding under Digital Island's
predecessor plan.

In the event the plan administrator elects to activate the salary investment
option grant program for one or more calendar years, each executive officer and
other key employee selected for participation may elect, prior to the start of
the calendar year, to reduce his or her base salary for that calendar year by a
specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files this timely election will automatically be
granted, on the first trading day in January of the calendar year for which
that salary reduction is to be in effect, a non-statutory option to purchase
that number of shares of common stock determined by dividing the salary
reduction amount by two-thirds of the fair market value per share of common
stock on the grant date. The option will be exercisable at a price per share
equal to one-third of the fair market value of the option shares on the grant
date. As a result, the total spread on the option shares at the time of grant
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
of salary invested in that option. The option will vest and become exercisable
in a series of twelve equal monthly installments over the calendar year for
which the salary reduction is to be in effect.

Under the automatic option grant program, eligible non-employee board
members will receive a series of option grants over their period of board
service. Each individual who first becomes a non-employee board member at any
time at or after the effective date of this offering will receive an option
grant for 15,000 shares of common stock on the date such individual joins the
board, provided such individual has not been in Digital Island's prior employ.
In addition, on the date of each annual stockholders meeting held after the

143
<PAGE>

effective date of this offering, each non-employee board member who is to
continue to serve as a non-employee board member (including the individuals who
are currently serving as non-employee board members) will automatically be
granted an option to purchase 5,000 shares of common stock, provided such
individual has served on the board for at least six months. There will be no
limit on the number of such 5,000 share option grants any one eligible non-
employee board member may receive over his or her period of continued board
service, and non-employee board members who have previously been in Digital
Island's employ will be eligible to receive one or more such annual option
grants over their period of board service.

Each automatic grant will have an exercise price per share equal to the fair
market value per share of common stock on the grant date and will have a term
of 10 years, subject to earlier termination following the optionee's cessation
of board service. Each automatic option will be immediately exercisable for all
of the option shares; however, any unvested shares purchased under the 15,000-
share option will be subject to repurchase by Digital Island, at the exercise
price paid per share, should the optionee cease to serve on the board prior to
vesting in those shares. The shares subject to each initial 15,000-share
automatic option grant will vest in a series of six successive equal semi-
annual installments upon the optionee's completion of each month of board
service over the 36 month period measured from the grant date. However, the
shares will immediately vest in full upon certain changes in control or
ownership or upon the optionee's death or disability while a board member. The
shares subject to each annual 5,000-share automatic grant will be fully-vested
when granted. Following the optionee's cessation of board service for any
reason, each option will remain exercisable for a 12-month period and may be
exercised during that time for any or all shares in which the optionee is
vested at the time of such cessation of service.

If the director fee option grant program is activated in the future, each
non-employee board member will have the opportunity to apply all or a portion
of any annual retainer fee otherwise payable in cash to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will vest and become exercisable for the option shares in a series of twelve
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable and
vested for all the option shares upon (a) certain changes in the ownership or
control or (b) the death or disability of the optionee while serving as a board
member.

The shares subject to each option under the salary investment option grant,
automatic option grant and director fee option grant programs will immediately
vest upon (a) an acquisition of Digital Island by merger or asset sale or (b)
the successful completion of a tender offer for more than 50% of Digital
Island's outstanding voting stock or a change in the majority of Digital
Island's board effected through one or more contested elections for board
membership.

Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, salary investment option
grant and director fee option grant programs and may be granted to one or more
officers as part of their option grants under the discretionary option grant
program. Options with this limited stock appreciation right may be surrendered
to Digital Island upon the successful completion of a hostile tender offer for
more than 50% of Digital Island's outstanding voting stock. In return for the
surrendered option, the optionee will be entitled to a cash distribution from
Digital Island in an amount per surrendered option share equal to the excess of
(a) the highest price per share of common stock paid in connection with the
tender offer over (b) the exercise price payable for such share.

144
<PAGE>

The board may amend or modify the 1999 stock incentive plan at any time,
subject to any required stockholder approval. The 1999 stock incentive plan
will terminate on the earliest of (a) April 15, 2009, (b) the date on which all
shares available for issuance under the 1999 stock incentive plan have been
issued as fully-vested shares or (c) the termination of all outstanding options
in connection with certain changes in control or ownership.

1999 Employee Stock Purchase Plan

Digital Island's 1999 employee stock purchase plan became effective on June
29, 1999, the date of execution of the underwriting agreement relating to
Digital Island's initial public offering. The plan is designed to allow Digital
Island's eligible employees and those of Digital Island's participating
subsidiaries to purchase shares of common stock, at semi- annual intervals,
through their periodic payroll deductions under the plan. 300,000 shares of
common stock will initially be reserved for issuance under the plan. The
reserve will automatically increase on the first trading day in January each
year, beginning in calendar year 2000, by an amount equal to one percent (1%)
of the total number of outstanding shares of Digital Island's common stock on
the last trading day in December in the prior year. In no event will any such
annual increase exceed 500,000 shares.

The plan will be implemented in a series of successive offering periods,
each with a maximum duration of 24 months. However, the initial offering period
began on the execution date of the underwriting agreement for Digital Island's
initial public offering and will end on the last business day in July 2001. The
next offering period will commence on the first business day in August 2001,
and subsequent offering periods will commence as designated by the plan
administrator.

Individuals who are eligible employees (employees scheduled to work more
than 20 hours per week for more than five calendar months per year) on the
start date of any offering period may enter the plan on that start date or on
any subsequent semi-annual entry date (the first business day of February or
August each year). Individuals who become eligible employees after the start
date of the offering period may join the plan on any subsequent semi-annual
entry date within that offering period.

Payroll deductions may not exceed 15% of the participant's base salary, and
the accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in January and July each year) at a purchase price per share
equal to 85% of the lower of (a) the fair market value of the common stock on
the participant's entry date into the offering period or (b) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 1,200 shares on any semi-annual purchase date,
nor may all participants in the aggregate purchase more than 200,000 shares on
any semi-annual purchase date. The initial purchase date under the plan will
occur on January 31, 2000.

If the fair market value per share of Digital Island's common stock on any
purchase date is less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day, with all participants in the terminated offering to be automatically
transferred to the new offering period.

Should Digital Island be acquired by merger, sale of substantially all
Digital Island's assets or sale of securities possessing more than fifty
percent of the total combined voting power of Digital Island's outstanding
securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of that acquisition. The
purchase price will be equal to 85% of the lower of (a) the fair market value
per share of common stock on the participant's entry date into the offering
period in which the acquisition occurs or (b) the fair market value per share
of common stock immediately prior to the acquisition. The limitation on the
maximum number of shares purchasable in the aggregate on any one purchase date
will not be in effect for any purchase date attributable to such an
acquisition.

145
<PAGE>

The plan will terminate on the earlier of (a) the last business day of July
2009, (b) the date on which all shares available for issuance under the plan
shall have been sold pursuant to purchase rights exercised thereunder or (c)
the date on which all purchase rights are exercised in connection with an
acquisition of Digital Island by merger or asset sale.

The board may at any time alter, suspend or discontinue the plan. However,
certain amendments, such as increasing the number of shares reserved for
issuance under the plan, require stockholder approval.

401(k)Plan

Digital Island sponsors the Digital Island, Inc. 401(k) Plan. Employees who
complete three months of service with Digital Island are eligible to
participate in the 401(k) Plan and may contribute up to 15% of their current
compensation, but in no event may they contribute more than the maximum dollar
amount allowable per calendar year under the federal tax laws. Each participant
is fully vested in his or her salary reduction contributions. Participant
contributions are held in trust and the individual participants may direct the
trustee to invest their accounts in a number of investment alternatives.
Digital Island may make contributions to the 401(k) Plan which match a
percentage of each participant's contributions for the year, with the actual
percentage match (if any) for one or more plan years to be determined by
Digital Island in its discretion. In addition, Digital Island may make
discretionary contributions for one or more plan years which would be allocated
to participants on the basis of their compensation for the plan year. Any
discretionary and matching contributions which Digital Island may make to the
401(k) Plan would be subject to a vesting schedule tied to the participant's
years of service with us. To date, Digital Island has not made any matching or
discretionary contributions to the 401(k) Plan. Digital Island may also make
fully vested qualified non-elective contributions to the 401(k) Plan on behalf
of participants who are not "highly compensated," but have not done so to date.

Employment Contracts and Change of Control Arrangements

Digital Island has entered into employment agreements with Ms. Ernst, Mr.
Leinwand, Mr. Wilson and Mr. Evenson, each of whom is an officer of Digital
Island. All outstanding options held by the foregoing officers will
automatically vest in full upon an acquisition of Digital Island by merger,
sale of substantially all the assets or sale of more than 50% of its
outstanding voting securities, unless those options are assumed or otherwise
continued in effect by a successor entity or our repurchase rights for any
unvested shares subject to those options are to remain in force following such
acquisition. The exercise price per share of the options below were determined
by Digital Island's board of directors as described in "--Stock Options and
Stock Appreciation Rights."

Ruann F. Ernst. On May 20, 1998, Ruann F. Ernst, Digital Island's chief
executive officer and president, entered into an employment agreement with
Digital Island. This agreement provided for an annual salary of $150,000. Ms.
Ernst is also entitled to incentive compensation in an amount not less than
forty percent (40%) of her base salary upon the achievement of performance
milestones mutually agreed upon with Digital Island's board of directors. On
March 1, 1999, Ms. Ernst's annual salary was increased to $200,000. In
connection with her employment agreement Digital Island granted Ms. Ernst
options to purchase up to 794,159 shares of Digital Island's common stock at a
per share exercise price of $1.50 per share.

Allan Leinwand. On February 3, 1997, Allan Leinwand, Digital Island's vice
president of engineering and chief technology officer, entered into an
employment agreement with Digital Island. This agreement provided for an annual
salary of $105,000. Mr. Leinwand is also eligible for a discretionary quarterly
bonus of up to $10,000. Should Digital Island terminate Mr. Leinwand for any
lawful reason, Digital Island must pay Mr. Leinwand a severance payment equal
to one hundred percent of his then current annual base salary. Currently,
Mr. Leinwand's annual salary is $170,000, and he is eligible for a
discretionary quarterly bonus of up to $12,500. In connection with his
employment agreement, Digital Island granted to Mr. Leinwand options to
purchase up to 240,000 shares of Digital Island common stock at a per share
exercise price of $0.40 per share.

146
<PAGE>

Tim Wilson. On March 16, 1998, Tim Wilson, Digital Island's vice president
of marketing and international sales, entered into an employment agreement with
Digital Island. This agreement provided for an annual salary of $150,000. Mr.
Wilson is also eligible for a discretionary quarterly bonus of up to $12,500.
On March 1, 1999, Mr. Wilson's annual salary was increased to $165,000 and his
discretionary quarterly bonus was increased to $15,000. In connection with his
employment agreement, Digital Island granted Mr. Wilson options to purchase up
to 140,000 shares of Digital Island common stock at a per share exercise price
of $0.90 per share.

Paul Evenson. On October 26, 1998, Paul Evenson, Digital Island's vice
president of operations, entered into an employment agreement with Digital
Island. This agreement provided for an annual salary of $165,000. Mr. Evenson
is also eligible for a discretionary quarterly bonus of up to $10,000. In
connection with his employment agreement, Digital Island granted Mr. Evenson
options to purchase up to 150,000 shares of Digital Island common stock at a
per share exercise price of $3.50 per share.

Limitation of Liability and Indemnification

Digital Island's certificate of incorporation eliminates, to the fullest
extent permitted by Delaware law, liability of a director to Digital Island or
its stockholders for monetary damages for conduct as a director. Although
liability for monetary damages has been eliminated, equitable remedies such as
injunctive relief or rescission remain available. In addition, a director is
not relieved of his or her responsibilities under any other law, including the
federal securities laws.

Digital Island's certificate of incorporation requires it to indemnify its
directors to the fullest extent permitted by Delaware law. Digital Island has
also entered into indemnification agreements with each of its directors.
Digital Island believes that the limitation of liability provisions in its
certificate of incorporation and indemnification agreements may enhance its
ability to attract and retain qualified individuals to serve as directors. See
Digital Island's "Description of Capital Stock."

147
<PAGE>

CERTAIN TRANSACTIONS RELATING TO DIGITAL ISLAND

Some of Digital Island's directors, executive officers and affiliates have
entered into transactions with it as follows:

Preferred Stock Financings
Since October 1, 1997 Digital Island has sold 4,283,181 shares of its Series
C preferred stock at a price of $3.45 per share, 2,022,476 shares of its Series
D preferred stock at a price of $5.25 per share and 11,764,706 shares of its
Series E preferred stock at a price of $4.25 per share in a series of private
financings. Digital Island sold these securities pursuant to preferred stock
purchase agreements and an investors' rights agreement on substantially similar
terms (except for terms relating to date and price), under which it made
standard representations, warranties, and covenants, and pursuant to which it
provided the purchasers thereunder with registration rights, information
rights, and rights of first refusal, among other provisions standard in venture
capital financings. Each share of preferred stock automatically converted into
one share of Digital Island common stock at its initial public offering, except
that each share of Series D preferred stock converted into 1.088084 shares of
Digital Island's common stock after giving effect to an antidilution adjustment
resulting from the sale of the Series E preferred stock. The purchasers of the
preferred stock included, among others, the following holders of 5% or more of
Digital Island common stock, directors, and entities associated with directors:

<TABLE>
<CAPTION>
Shares of Preferred Stock
Purchased
-----------------------------------
Name Series C Series D Series E
- ---- --------- --------- ---------
<S> <C> <C> <C>
Bass Trust U/D/T dated April 29,
1988(1)................................ 39,420 34,095 27,765

Chase Venture Capital Associates,
L.P.(2)................................ -- -- 2,823,529

The Cotsakos Revocable Trust dated
9/3/87(3).............................. -- 28,571 --

Crescendo II, L.P.(4)................... 289,855(5) 143,429(5) 463,294(5)

Crosspoint Venture Partners............. 289,855 -- 926,824

E*TRADE Group, Inc.(6).................. -- 1,333,334 562,588

FW Ventures III, L.P. .................. -- -- 1,822,353

Marcelo Gumucio......................... 29,000 -- --

Merrill Lynch KECALP.................... -- -- 1,482,824

Tudor Global Trading, Inc. ............. 1,015,000 190,476 744,470

Vanguard V, L.P.(7)..................... 260,870 142,857 --
</TABLE>
- --------
(1) Charlie Bass, a director of Digital Island, is the trustee of the Bass
Trust U/D/T dated April 29, 1998.

(2) Shahan Soghikian, a director of Digital Island, is a general partner of
Chase Venture Capital Associates, L.P.

(3) Christos Cotsakos, a director of Digital Island, is the trustee of The
Cotsakos Revocable Trust dated 9/3/87.

(4) David Spreng, a director of Digital Island, is the managing member of
Crescendo Ventures II, LLC, the general partner of Crescendo II, L.P.

(5) Includes shares held by Eagle Ventures II, LLC pursuant to a parallel
investment agreement with Crescendo.

(6) Mr. Cotsakos, a director of Digital Island, is chairman of the board of
E*TRADE.

(7) Cliff Higgerson, a director of Digital Island, is the general partner of
Vanguard V, L.P.

148
<PAGE>

Investors' Rights Agreement

Pursuant to the terms of the Amended and Restated Investors' Rights
Agreement dated February 19, 1999, as amended, by and among Digital Island and
the holders of its preferred stock, the investors acquired certain registration
rights with respect to their capital stock of Digital Island. At any time after
the earlier of (a) February 19, 2001, or (b) one year after Digital Island's
initial public offering, holders of more than two-thirds of the outstanding
stock under the agreement may require Digital Island to effect registration
under the Securities Act covering the lesser of 50% of the outstanding
Registrable Securities (as defined in the Investors' Rights Agreement) or a
number of shares of common stock yielding gross aggregate proceeds in excess of
$15.0 million, subject in either case to the board of directors' right if such
registration would harm Digital Island to defer such registration for a period
up to 60 days. In addition, if Digital Island proposes to issue equity
securities under the Securities Act for its own account in an underwritten
public offering, then any of the investors has a right (subject to quantity
limitations determined by the underwriters) to request that Digital Island
register such investor's Registrable Securities. All registration expenses
incurred in connection with the first two demand registrations described above
and all piggyback registrations will be borne by Digital Island. The
participating investors will pay for underwriting discounts and commissions
incurred in connection with any such registrations. Digital Island has agreed
to indemnify the investors against certain liabilities in connection with any
registration effected pursuant to the foregoing Investors' Rights Agreement,
including Securities Act liabilities.

Employment and Indemnification Agreements

Digital Island has entered into employment agreements with Ms. Ernst, Mr.
Leinwand, Mr. Wilson and Mr. Evenson who are named executive officers. Digital
Island has also entered into indemnification agreements with each of its other
directors and officers. See Digital Island's "Executive Compensation and Other
Information--Employment Contracts and Change of Control Arrangements," and "--
Limitation of Liability and Indemnification."

Director Arrangements and Stockholder Notes

In February 1998, Digital Island granted a nonstatutory option to purchase a
total of 183,000 shares of its common stock to Marcelo Gumucio, then the
chairman of the Digital Island board of directors and now a director. These
options were immediately exercisable and subject to repurchase by Digital
Island, with the right to repurchase expiring in 16 equal quarterly
installments. At the time of the option grant, Mr. Gumucio exercised the option
to purchase the entire 183,000 shares of common stock, in exchange for a
$109,800 note. Under the terms of the note, interest accrued on outstanding
amounts at 5.61% per annum. Interest was to be repaid in four equal annual
installments commencing February 24, 1999. The entire principal amount was due
and payable in one lump sum on February 24, 2002. In August 1999, Mr. Gumucio
repaid the entire principal amount as well as all accrued interest.

Officer Loans

On April 21, 1999, Ms. Ernst, Digital Island's president and chief executive
officer, and Mr. Higgins, Digital Island's then-chairman of the board, each
delivered a promissory note to it in payment of the exercise price of certain
outstanding stock options they hold under our 1998 stock option/stock issuance
plan. Ms. Ernst delivered a full-recourse promissory note in the principal
amount of $199,998 in payment of the exercise price for 133,332 shares of
Digital Island's common stock, and Mr. Higgins delivered a full-recourse
promissory note in the amount of $86,400 in payment of the exercise price for
216,000 shares of Digital Island's common stock. Each note bears interest at
the rate of 7.75% per annum, compounded semi-annually, and is secured by the
purchased shares. Accrued interest is due and payable at successive quarterly
intervals over the four-year term of the note, and the principal balance will
become due and payable in one lump sum at the end of such four-year term.
However, the entire unpaid balance of the note will become due and payable upon
termination of employment or failure to pay any installment of interest when
due. None of the shares serving as security for

149
<PAGE>

the note may be sold unless the principal portion of the note attributable to
those shares, together with the accrued interest on that principal portion, is
paid to Digital Island.

On June 14, 1999, Ms. Ernst borrowed an additional $128,000 from Digital
Island in order to finance the tax liability she incurred in connection with
the exercise of her stock options on April 21, 1999 for 133,332 shares of
Digital Island's common stock. The loan is evidenced by a full-recourse
promissory note with interest at the rate of 7.75% per annum, compounded semi-
annually, and secured by the same 133,332 shares which serve as collateral for
Ms. Ernst's April 21, 1999 promissory note. The terms of her note, including
the due dates for payment of principal and accrued interest and the
acceleration provisions, are substantially the same as the terms in effect for
her April 21, 1999 note.

On July 13, 1999 Chris Albinson, Digital Island's vice president of
corporate development, borrowed $100,000 from Digital Island. The borrowing is
interest-free, and $50,000 of the borrowings is being forgiven ratably over
five years. The remaining $50,000 is due in one lump sum on July 13, 2004.

E*TRADE Agreements

Digital Island has entered into a global data distribution agreement with
E*TRADE dated August 1, 1997 where we provide network connectivity for E*TRADE.
Mr. Costakos, a member of Digital Island's board of directors, is president,
chief executive officer and a director of E*TRADE.

Digital Island believes that all of the transactions set forth above were
made on terms no less favorable to Digital Island than could have been obtained
from unaffiliated third parties. Digital Island intends that all future
transactions, including loans, between Digital Island and its officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, and be on terms no less favorable to
Digital Island than could be obtained from unaffiliated third parties.

150
<PAGE>

PRINCIPAL STOCKHOLDERS OF DIGITAL ISLAND

Digital Island

The following table sets forth certain information as of September 30, 1999
(except as indicated in the footnotes below) with respect to the beneficial
ownership of Digital Island's common stock by:

. each person known by Digital Island to own beneficially more than 5%, in
the aggregate, of the outstanding shares of Digital Island's common
stock,

. the directors and named executive officers of Digital Island who hold
securities of Digital Island, and

. all executive officers and directors of Digital Island as a group.

Unless otherwise indicated, the address for each shareholder is c/o Digital
Island, Inc., 45 Fremont, Suite 1200, San Francisco, California 94105. Except
as indicated by footnote, Digital Island understands that the persons named in
the table below have sole voting and investment power with respect to all
shares shown as beneficially owned by them, subject to community property laws
where applicable. In the table below, "Beneficial Ownership of Shares After the
Merger" reflects the beneficial ownership after giving effect to the additional
shares of Digital Island common stock to be issued to Sandpiper stockholders,
which is 24,573,160 shares. Shares of Digital Island common stock subject to
options, which are currently exercisable or exercisable within 60 days of
September 30, 1999, are deemed outstanding for computing the percentages of the
person holding such options but are not deemed outstanding for computing the
percentages of any other person. Percentage ownership is based on 35,941,727
shares of Digital Island common stock outstanding as of September 30, 1999.

<TABLE>
<CAPTION>
Beneficial Beneficial
Ownership of Ownership of
Shares Shares
Before the Merger After the Merger
----------------- -----------------
Name of Beneficial Owner Number Percent Number Percent
- ------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Crosspoint Venture Partners(1)............ 3,246,679 9.0% 3,246,679 5.4%
Chase Venture Capital Associates,
L.P.(2).................................. 2,823,529 7.9% 2,823,529 4.7%
Vanguard V, L.P.(3)....................... 2,561,310 7.1% 2,561,310 4.2%
Crescendo Ventures II, L.P.(4)............ 2,109,212 5.9% 2,109,212 3.5%
E*TRADE Group, Inc.(5).................... 2,013,367 5.6% 2,013,367 3.3%
Tudor Global Trading, Inc.(6)............. 1,966,724 5.5% 1,966,724 3.3%
FW Ventures III, LP(7).................... 1,882,353 5.2% 1,882,353 3.1%
Merrill Lynch KECALP(8)................... 1,482,824 4.1% 1,482,824 2.5%
Ron Higgins(9)............................ 2,116,666 5.9% 2,116,666 3.5%
Ruann F. Ernst(10)........................ 641,032 1.8% 641,032 1.1%
T. L. Thompson............................ -- -- -- --
Paul Evenson(11).......................... 40,353 * 40,353 *
Allan Leinwand(12)........................ 186,899 * 186,899 *
Rick Schultz.............................. -- -- -- --
Michael T. Sullivan(13)................... 95,000 * 95,000 *
Tim Wilson(14)............................ 112,664 * 112,664 *
Chris Albinson............................ -- -- -- --
Charlie Bass(15).......................... 419,283 1.2% 419,283 *
Marcelo A. Gumucio(16).................... 212,000 * 212,000 *
Christos Cotsakos(17)..................... 45,532 * 45,532 *
Cliff Higgerson(18)....................... -- -- -- --
Shahan Soghikian(19)...................... -- -- -- --
David Spreng(20).......................... -- -- -- --
All directors and executive officers as a
group (14 people)(21).................... 3,869,429 10.6% 3,869,429 6.4%
</TABLE>
- --------
* Less than 1%.

151
<PAGE>

(1) Consists of 1,450,000 shares of Digital Island common stock held directly
by Crosspoint Venture Partners, 869,855 shares of common stock held
directly by Crosspoint Venture Partners 1996 and 926,824 shares of common
stock held directly by Crosspoint Venture Partners LS 1997 (collectively,
with Crosspoint Venture Partners 1996 and Crosspoint Venture Partners, the
"Crosspoint Entities"). The address for the Crosspoint Entities is 2925
Woodside Road, Woodside, California 94062.

(2) Consists of 2,823,529 shares of Digital Island common stock. Mr.
Soghikian, a director of Digital Island, is the general partner of Chase
Capital Partners, the general partner of Chase Venture Capital Associates,
L.P. The address for Chase Venture Capital Associates, L.P. is 50
California Street, Suite 2940, San Francisco, California 94111.

(3) Consists of 2,561,310 shares of Digital Island common stock. Mr.
Higgerson, a director of Digital Island, is the general partner of
Vanguard V, L.P. The address of Vanguard V, L.P. is 505 Hamilton Avenue,
Suite 305, Palo Alto, California 94301.

(4) Consists of 2,109,212 shares of Digital Island common stock held directly
by Eagle Ventures II, LLC and Crescendo II, L.P., (collectively, the
"Crescendo Entities"). Mr. Spreng, a director of Digital Island, is the
president of Eagle Ventures II, LLC and the managing member of Crescendo
Ventures II, LLC, the general partner of Crescendo II, LP. The address for
the Crescendo Entities is 505 Hamilton Avenue, Suite 315, Palo Alto,
California 94301.

(5) Consists of 2,013,367 shares of Digital Island common stock. Mr. Cotsakos,
a director of Digital Island, is chairman of the board and chief executive
officer of E*TRADE Group, Inc. The address of E*TRADE Group, Inc. is Four
Embarcadero Place, 2400 Geng Road, Palo Alto, California 94303.

(6) Consists of 1,966,724 shares of Digital Island common stock held directly
by Raptor Global Fund L.P., Raptor Global Fund Ltd. and Tudor Private
Equity Fund L.P., (collectively, the "Tudor Entities"). The address for
the Tudor Entities is Tudor Global Trading, Inc., 40 Rowes Wharf, Second
Floor, Boston, Massachusetts 02110.

(7) Consists of 1,882,353 shares of Digital Island common stock The address of
FW Ventures III, LP is 2775 Sand Hill Road, Menlo Park, California 94025.

(8) Consists of 1,482,824 shares of Digital Island common stock held directly
by KECALP, Inc., KECALP Inc., as Nominee for Merrill Lynch KECALP
International L.P. 1997 and Merrill Lynch KECALP L.P. 1997, (collectively,
the "Merrill Lynch KECALP Entities"). The address for the Merrill Lynch
KECALP Entities is World Financial Center, North Tower, New York, NY
10281.

(9) Consists of 1,666,000 shares of Digital Island common stock held directly
by Mr. Higgins, 50,666 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999, 150,000 shares
of Digital Island common stock held directly by the Ron and Sanne Higgins
1998 Irrevocable Trust Agreement f/b/o Dana Espinoza (the "Espinoza
Trust"), 150,000 shares of Digital Island common stock held directly by
the Ron and Sanne Higgins 1998 Irrevocable Trust Agreement f/b/o Nina
Higgins (the "Higgins Trust") and 100,000 shares of Digital Island common
stock held by the Ron and Sanne Higgins 1998 Irrevocable Grandchildren's
Trust Agreement (the "Grandchildren's Trust"). Mr. Higgins is a trustee of
the Espinoza Trust, the Higgins Trust and the Grandchildren's Trust.

(10) Consists of 233,332 shares of Digital Island common stock held directly by
Ms. Ernst and 407,700 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.

(11) Consists of 40,353 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.

(12) Consists of 163,733 shares of Digital Island common stock held directly by
Mr. Leinwand, and 23,166 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.

(13) Consists of 71,000 shares of Digital Island common stock held directly by
Mr. Sullivan and 24,000 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.

152
<PAGE>

(14) Consists of 53,249 shares of Digital Island common stock held directly by
Mr. Wilson, and 59,415 shares of Digital Island common stock subject to
options exercisable within 60 days of September 30, 1999.

(15) Consists of 419,283 shares of Digital Island common stock held directly by
the Bass Trust U/D/T dated April 29, 1988 (the "Bass Trust"). Mr. Bass, a
director of Digital Island, is the Trustee of the Bass Trust. Shares after
the merger excludes shares of Sandpiper.

(16) Consists of 212,000 shares of Digital Island common stock.

(17) Consists of 8,888 shares of Digital Island common stock subject to options
exercisable within 60 days of September 30, 1999 and 36,644 shares of
Digital Island common stock held directly by The Cotsakos Revocable Trust
dated September 3, 1987. Excludes 2,013,367 shares of Digital Island
common stock held by E*TRADE Group, Inc. Mr. Cotsakos, a director of
Digital Island, is the Trustee of the Cotsakos Trust and chairman of the
board and chief executive officer of E*TRADE Group, Inc. Mr. Cotsakos
disclaims beneficial ownership of the shares of Digital Island common
stock held by E*TRADE Group, Inc. except to the extent of his pecuniary
interest therein. See footnote 5 above.

(18) Excludes 2,561,310 shares of Digital Island common stock held by Vanguard
V, L.P. Mr. Higgerson, a director of Digital Island, is the general
partner of Vanguard V, L.P. Mr. Higgerson disclaims beneficial ownership
of the shares of Digital Island common stock held by Vanguard V, L.P.
except to the extent of his pecuniary interest therein. See footnote 3
above.

(19) Excludes 2,823,529 shares of Digital Island common stock held by Chase
Venture Capital Associates, L.P. Mr. Soghikian, a director of Digital
Island, is the general partner of Chase Capital Partners, the general
partner of Chase Venture Capital Associates, L.P. Mr. Soghikian disclaims
beneficial ownership of the shares of Digital Island common stock held by
Chase Venture Capital Associates, L.P. except to the extent of his
pecuniary interest therein. See footnote 2 above.

(20) Excludes 2,109,212 shares of Digital Island common stock held by the
Crescendo Entities. Mr. Spreng, a director of Digital Island, is the
president of Eagle Ventures II, LLC and the managing member of Crescendo
Ventures II, LLC, the general partner of Crescendo. Mr. Spreng disclaims
beneficial ownership of the shares of Digital Island common stock held by
the Crescendo Entities, except to the extent of his pecuniary interest
therein. See footnote 4 above.

(21) See footnotes 9 through 19 above. Includes options exercisable for 563,522
shares of Digital Island common stock within 60 days of September 30, 1999
under the 1999 stock incentive plan.

153
<PAGE>

PRINCIPAL SHAREHOLDERS OF SANDPIPER

The following table sets forth information regarding beneficial ownership of
Sandpiper's capital stock before the merger and as of December 3, 1999. The
table also sets forth pro forma information regarding beneficial ownership of
Digital Island common stock by the principal shareholders of Sandpiper
following the merger. The table includes:

. each person who owns beneficially more than 5% of the outstanding shares
of Sandpiper capital stock on an as-converted basis;

. each of Sandpiper's directors, the chief executive officer and other
executive officers whose annual salary and bonus during 1998 exceeded
$100,000; and

. all of Sandpiper's directors and executive officers as a group.

Unless otherwise indicated, the address of each person owning more than 5%
of the outstanding shares of capital stock is c/o Sandpiper Networks, Inc., 225
West Hillcrest Drive, Suite 250, Thousand Oaks, California 91360. Except as
indicated by footnote, to Sandpiper's knowledge, all persons named in the table
below have sole voting and investment power with respect to their shares of
capital stock, except to the extent authority is shared by spouses under
applicable law. Shares of Sandpiper capital stock that are subject to options
or warrants that are currently exercisable or exercisable within 60 days of
December 3, 1999, are deemed outstanding for computing the percentages of the
person holding such options or warrants but are not deemed outstanding for
computing the percentages of any other person. Percentage ownership before the
merger is based on 21,490,434 shares of capital stock outstanding as of
December 3, 1999. Percentage ownership after the merger is based on an
estimated 60,264,885 shares of Digital Island common stock outstanding.

<TABLE>
<CAPTION>
Beneficial
Beneficial Ownership of
Ownership of Digital Island
Sandpiper Shares Common Stock After
Before the Merger the Merger
------------------ ------------------
Name of Beneficial Owner Number Percent Number Percent
------------------------ ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Brentwood Venture Capital(1)
G. Bradford Jones..................... 3,645,469 17.0% 3,910,494 6.5%
Media Technology Ventures, L.P.(2)
Jonathan E. Funk...................... 3,240,417 15.1% 3,475,995 5.8%
Mission Ventures Management Company
LLC(3)
Robert Kibble......................... 2,592,333 12.1% 2,780,795 4.6%
Leo S. Spiegel(4)....................... 1,526,964 7.1% 1,637,974 2.7%
Andrew D. Swart......................... 1,752,575 8.2% 1,879,987 3.1%
David A. Farber(5)...................... 1,766,575 8.2% 1,895,005 3.1%
America Online, Inc.(6)................. 1,322,649 6.0% 1,418,805 2.3%
Attractor Ventures LLC(7)............... 1,227,142 5.7% 1,316,355 2.2%
Ronald Lachman(8)....................... 413,797 1.9% 443,880 *
Deborah Rieman.......................... 70,000 * 75,089 *
All directors and officers as a group
(14 persons)(9)........................ 15,789,213 69.8% 16,937,088 28.0%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding voting
power of all shares of Sandpiper common stock.

(1) Consists of 3,499,651 shares held by Brentwood Associates VIII, L.P., and
145,818 shares held by Brentwood Affiliates Fund, L.P. Mr. Jones is a
general partner or managing member of the general partners of each of these
shareholders, and as such may be deemed to be the beneficial owner of such
shares. Mr. Jones disclaims beneficial ownership of such shares except to
the extent of his pecuniary interest therein. The business address of
Brentwood Venture Capital is 11150 Santa Monica Boulevard, Suite 1200, Los
Angeles, California 90025.

154
<PAGE>

(2) Includes 370,704 shares held by Media Technology Entrepreneurs Fund, L.P.
Mr. Funk is a general partner of Media Technology Ventures, L.P., and Media
Technology Entrepreneurs Fund, L.P., and as such may be deemed to be the
beneficial owner of the shares held by each of these shareholders. Mr. Funk
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein. The business address of Media Technology
Ventures, L.P. is 1 First Street, Suite 12, Los Altos, California 94022.

(3) Consists of 1,967,859 shares held by Mission Ventures, L.P. and 624,474
shares held by Mission Ventures Affiliates, L.P. Mr. Kibble is a managing
member of the general partners of each of these shareholders, and as such
may be deemed to be the beneficial owner of such shares. Mr. Kibble
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein. The business address of Mission Ventures
Management Company LLC is 11512 El Camino Real, Suite 215, San Diego,
California 92130.

(4) Includes 80,000 shares held by Leo S. Spiegel and Jodi K. Spiegel as co-
trustees of the Hunter L. Spiegel Educational Trust, and 80,000 shares held
by Leo S. Spiegel and Jodi K. Spiegel as co-trustees of the Madison H.
Spiegel Educational Trust.

(5) Includes 150,000 shares held by the Farber Irrevocable Trust.

(6) Includes 650,000 shares currently issuable upon the exercise of warrants.
The business address of America Online, Inc. is 22000 AOL Way, Dulles,
Virginia 20166

(7) Includes 1,146,296 shares, 99,078 of which are currently issuable upon
exercise of warrants, held by Attractor LP, and 80,846 shares, 6,988 of
which are currently issuable upon exercise of warrants, held by Attractor
Institutional LP. Attractor Ventures LLC is the general partner of both
Attractor LP and Attractor Institutional LP, and as such has the sole power
to vote and dispose of the shares held by these entities. The business
address of Attractor LP and Attractor Institutional LP is 1 First Street,
Suite 12, Los Altos, California 94022.

(8) Includes 7,143 shares currently issuable upon the exercise of warrants.

(9) Includes 7,143 shares subject to currently exercisable warrants.

155
<PAGE>

DESCRIPTION OF DIGITAL ISLAND CAPITAL STOCK

The authorized capital stock of Digital Island consists of 100,000,000
shares of common stock, $0.001 par value per share, and 10,000,000 shares of
preferred stock, $0.001 par value per share.

Common Stock

As of September 30, 1999, 35,941,727 shares of Digital Island's common stock
were outstanding and held of record by 186 stockholders. After this merger,
approximately 60,500,000 shares will be outstanding, assuming no exercise of
options after September 30, 1999.

Holders of common stock are entitled to receive dividends as may from time
to time be declared by Digital Island's board of directors out of funds legally
available therefor. See "Dividend Policy." Holders of common stock are entitled
to one vote per share on all matters on which the holders of common stock are
entitled to vote and do not have any cumulative voting rights. Holders of
common stock have no preemptive, conversion, redemption or sinking fund rights.
In the event of a liquidation, dissolution or winding up of Digital Island,
holders of common stock are entitled to share equally and ratably in the assets
of the Digital Island, if any, remaining after the payment of all our
liabilities and the liquidation preference of any then outstanding class or
series of preferred stock. The rights, preferences and privileges of holders of
common stock are subject to any series of preferred stock that Digital Island
may issue in the future, as described below.

Preferred Stock

Digital Island's board of directors has the authority to issue preferred
stock in one or more series and to fix the number of shares constituting any
such series and the preferences, limitations and relative rights, including
dividend rights, dividend rate, voting rights, terms of redemption, redemption
price or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by Digital Island's
stockholders. The issuance of preferred stock by Digital Island's board of
directors could adversely affect the rights of holders of its common stock.

The potential issuance of preferred stock may have the effect of delaying or
preventing a change in control of Digital Island, may discourage bids for
Digital Island's common stock at a premium over the market price of the common
stock and may adversely affect the market price of, and the voting and other
rights of the holders of, its common stock. Immediately after this offering
there will be no shares of preferred stock outstanding, and Digital Island has
no current plans to issue shares of preferred stock.

Anti-Takeover, Limited Liability and Indemnification Provisions

Effect of Delaware Anti-takeover Statute. Digital Island is subject to
Section 203 of the Delaware General Corporation Law, as amended, or Section
203, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless:

. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;

. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or

156
<PAGE>

Section 203 defines business combinations to include:

. any merger or consolidation involving the corporation and any interested
stockholder;

. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;

. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;

. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

Certificate of Incorporation and Bylaw Provisions. Digital Island's
certificate of incorporation and bylaws include provisions that may have the
effect of discouraging, delaying or preventing a change in control of Digital
Island or an unsolicited acquisition proposal that a stockholder might consider
favorable, including a proposal that might result in the payment of a premium
over the market price for the shares held by stockholders. These provisions are
summarized in the following paragraphs.

Classified Board of Directors. Digital Island's certificate of
incorporation and bylaws provide for Digital Island's board to be divided
into three classes of directors serving staggered, three year terms. The
classification of the board has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of the members
of the board of directors.

Supermajority Voting. Digital Island's certificate of incorporation
requires the approval of the holders of at least 66 2/3% of Digital
Island's combined voting power to effect certain amendments to the
certificate of incorporation with respect to the bylaws, directors,
stockholder meetings and indemnification. Digital Island's bylaws may be
amended by either a majority of the board of directors, or the holders of a
majority of Digital Island's voting stock, provided that certain amendments
approved by stockholders require the approval of at least 66 2/3% of
Digital Island's combined voting power.

Authorized but Unissued or Undesignated Capital Stock. Digital Island's
authorized capital stock consists of 100,000,000 shares of common stock and
10,000,000 shares of preferred stock. No preferred stock will be designated
upon consummation of this offering. After the completion of the merger, we
will have outstanding approximately 60,300,000 shares of common stock. The
authorized but unissued (and in the case of preferred stock, undesignated)
stock may be issued by the board of directors in one or more transactions.
In this regard, Digital Island's certificate of incorporation grants the
board of directors broad power to establish the rights and preferences of
authorized and unissued preferred stock. The issuance of shares of
preferred stock pursuant to the board of director's authority described
above could decrease the amount of earnings and assets available for
distribution to holders of common stock and adversely affect the rights and
powers, including voting rights, of such holders and may have the effect of
delaying, deferring or preventing a change in control of Digital Island.
The board of directors does not currently intend to seek stockholder
approval prior to any issuance of preferred stock, unless otherwise
required by law or the rules of any exchange on which our securities are
then traded.

157
<PAGE>

No Stockholder Action by Written Consent. Digital Island's certificate
of incorporation and bylaws provide that an action required or permitted to
be taken at any annual or special meeting of the stockholders of Digital
Island may only be taken at a duly called annual or special meeting of
stockholders. This provision prevents stockholders from initiating or
effecting any action by written consent.

Notice Procedures. Digital Island's bylaws establish advance notice
procedures with regard to all stockholder proposals to be brought before
meetings of stockholders of Digital Island, including proposals relating to
the nomination of candidates for election as directors, the removal of
directors and amendments to Digital Island's certificate of incorporation
or bylaws. These procedures provide that notice of such stockholder
proposals must be timely given in writing to the secretary of Digital
Island prior to the meeting. Generally, to be timely, notice must be
received by Digital Island's secretary not less than 120 days prior to the
meeting. The notice must contain certain information specified in the
bylaws.

Other Anti-Takeover Provisions. See "Executive Compensation and Other
Information--Employee Benefit Plans" for a discussion of certain provisions of
the 1999 stock incentive plan which may have the effect of discouraging,
delaying or preventing a change in control of Digital Island or unsolicited
acquisition proposals.

Limitation of Director Liability. Digital Island's certificate of
incorporation limits the liability of its directors (in their capacity as
directors but not in their capacity as officers) to Digital Island or its
stockholders to the fullest extent permitted by Delaware law. Specifically,
directors of Digital Island will not be personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except for liability:

. for any breach of the director's duty of loyalty to Digital Island or its
stockholders;

. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

. under Section 174 of the Delaware General Corporation Law, which relates
to unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

. for any transaction from which the director derived an improper personal
benefit.

Indemnification Arrangements. Digital Island's bylaws provide that the
directors and officers of Digital Island shall be indemnified and provide for
the advancement to them of expenses in connection with actual or threatened
proceedings and claims arising out of their status as such to the fullest
extent permitted by the Delaware General Corporation Law. Digital Island has
entered into indemnification agreements with each of its directors and
executives officers that provide them with rights to indemnification and
expense advancement to the fullest extent permitted under the Delaware General
Corporation Law.

Transfer Agent and Registrar

The transfer agent and registrar for Digital Island common stock is
BankBoston, N.A.

158
<PAGE>

EXPERTS

The Financial Statements of Digital Island as of September 30, 1999 and 1998
and for each of the years in the three-year period ended September 30, 1999
included in this joint proxy statement/prospectus have been audited by
PricewaterhouseCoopers LLP, independent auditors, as stated in their report
appearing herein.

The Financial Statements of Sandpiper as of December 31, 1998 and 1997 and
for each of the years in the two-year period then ended included in this joint
proxy statement/prospectus have been audited by Ernst & Young LLP, independent
auditors, as stated in their report appearing herein.

LEGAL MATTERS

The validity of the shares of Digital Island common stock offered by this
joint proxy statement/prospectus and the federal income tax consequences in
connection with the merger will be passed upon for Digital Island by Brobeck,
Phleger & Harrison LLP, Palo Alto, California. Legal matters pertaining to
federal income tax consequences in connection with the merger will be passed
upon for Sandpiper by Riordan & McKinzie, Los Angeles, California.

WHERE YOU CAN FIND MORE INFORMATION

Digital Island files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information Digital Island files at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Digital Island's SEC filings are also available to the public
from commercial document retrieval services and at the Website maintained by
the SEC at www.sec.gov. Digital Island has filed a registration statement to
register with the SEC the Digital Island common stock to be issued to Sandpiper
shareholders in the merger. This joint proxy statement/prospectus is part of
that registration statement. As allowed by SEC rules, this joint proxy
statement/prospectus does not contain all of the information you can find in
the registration statement or the exhibits to the registration statement.

Digital Island has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus relating to Digital Island,
and Sandpiper has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus relating to Sandpiper.

If you are a shareholder of Sandpiper and have any questions or require
additional material from Sandpiper, please call Sandpiper's chief financial
officer, Thomas R. Govreau, at Sandpiper at (805) 370-2130 (collect). Copies of
the Sandpiper bylaws and articles of incorporation are available without
charge, upon written or oral request, from Sandpiper, at the following address:

SANDPIPER NETWORKS, INC
Attention: Chief Financial Officer
Suite 250
225 West Hillcrest Drive
Thousand Oaks, CA 91360
(805) 370-2100

If you would like to request documents from Sandpiper, please do so by
December 20, 1999 to ensure that you receive them before the special meeting.

159
<PAGE>

Digital Island stockholders should rely only on the information contained in
or incorporated by reference in this joint proxy statement/prospectus to vote
on the issuance of Digital Island common stock as contemplated by the merger
agreement. Sandpiper shareholders should rely only on the information contained
in or incorporated by reference in this joint proxy statement/prospectus to
vote on the merger agreement and the merger. Neither Digital Island nor
Sandpiper has authorized anyone to provide information that is different from
what is contained in this joint proxy statement/prospectus. This joint proxy
statement/prospectus is dated December 9, 1999. Shareholders should not assume
that the information contained in this joint proxy statement/prospectus is
accurate as of any other date, and neither the mailing of this joint proxy
statement/prospectus to Digital Island stockholders or Sandpiper shareholders
nor the issuance of Digital Island common stock in the merger shall create any
implication to the contrary.

This joint proxy statement/prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities, or the solicitation of a
proxy, in any jurisdiction in which, or to any person to whom, it is unlawful
to make any such offer or solicitation.

160
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO DIGITAL ISLAND, INC. FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Digital Island, Inc. Independent Accountants................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7

INDEX TO SANDPIPER NETWORKS, INC. FINANCIAL STATEMENTS

Report of Sandpiper Networks, Inc. Independent Auditors.................. F-21
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1998.................................................................... F-22
Consolidated Statements of Operations for the Years Ended December 31,
1997 and December 31, 1998.............................................. F-23
Consolidated Statements of Shareholders' Deficit......................... F-24
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and December 31, 1998.............................................. F-25
Notes to Consolidated Financial Statements............................... F-26
Consolidated Balance Sheet as of September 30, 1999 (unaudited).......... F-33
Consolidated Statement of Operations for the Nine Months Ended September
30, 1999 (unaudited).................................................... F-34
Consolidated Statements of Shareholders' Deficit (unaudited)............. F-35
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1999 (unaudited).................................................... F-36
Notes to Unaudited Consolidated Financial Statements..................... F-37
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Digital Island, Inc. and Subsidiaries:

In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Digital Island, Inc. and
Subsidiaries (the Company) at September 30, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
October 29, 1999

F-2
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

<TABLE>
<CAPTION>
September 30,
-----------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 5,711 $ 43,315
Investments............................................... 10,123 31,691
Accounts receivable, net of allowance of $55 and $380
respectively............................................. 662 3,557
Restricted cash........................................... 263 763
Loan receivable........................................... 532 --
Deferred offering costs................................... 132 --
Prepaid expenses and other................................ 152 1,825
------- --------
Total current assets................................... 17,575 81,151
Property and equipment, net................................. 4,938 25,273
Other assets................................................ 104 1,224
------- --------
Total assets........................................... $22,617 $107,648
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Bank borrowings........................................... $ 801 $ 801
Capital lease obligations................................. 756 3,916
Accounts payable.......................................... 2,408 8,621
Accrued liabilities....................................... 716 4,931
Cash overdraft............................................ -- 3,058
Deferred revenue.......................................... 11 318
------- --------
Total current liabilities.............................. 4,692 21,645
Bank borrowings, less current portion....................... 884 314
Capital lease obligations, less current portion............. 1,551 6,061
Deferred revenue............................................ -- 410
------- --------
Total liabilities...................................... 7,127 28,430
======= ========
Commitments (Note 8)
Stockholders' equity:
Series A through E convertible preferred stock, $0.001 par
value: Authorized: 14,000,000 shares in 1998 and no
shares in 1999; issued and outstanding: 13,305,657 shares
in 1998 and no shares in 1999............................ 13 --
Preferred stock, $0.001 par value:
Authorized: no shares in 1998 and 10,000,000 shares in
1999; no shares issued and outstanding.................. -- --
Common stock, $0.001 par value:
Authorized: 30,000,000 shares in 1998, and 100,000,000
shares in 1999; issued and outstanding: 2,519,835 shares
in 1998 and 35,941,727 shares in 1999................... 3 36
Additional paid-in capital............................... 39,182 156,791
Deferred compensation.................................... (1,503) (4,033)
Stockholder note receivable.............................. (110) (514)
Common stock warrants.................................... 29 --
Accumulated deficit...................................... (22,124) (73,062)
------- --------
Total stockholders' equity............................. 15,490 79,218
------- --------
Total liabilities and stockholders' equity............. $22,617 $107,648
======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

F-3
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Revenue.................................... $ 218 $ 2,343 $ 12,431
Costs and expenses:
Cost of revenue.......................... 2,508 9,039 29,496
Sales and marketing...................... 1,205 4,847 16,010
Product development...................... 378 1,694 6,357
General and administrative............... 1,502 3,392 9,848
Stock compensation expense............... -- 487 3,207
--------- ---------- ----------
Total costs and expenses................. 5,593 19,459 64,918
--------- ---------- ----------
Loss from operations..................... (5,375) (17,116) (52,487)
--------- ---------- ----------
Interest income, net....................... 87 354 1,551
--------- ---------- ----------
Loss before income taxes................. (5,288) (16,762) (50,936)
Provision for income taxes................. 1 2 2
--------- ---------- ----------
Net loss................................. $ (5,289) $ (16,764) $ (50,938)
========= ========== ==========
Basic and diluted net loss per share....... $ (3.53) $ (7.50) $ (4.58)
========= ========== ==========
Weighted average shares outstanding used in
per share calculation..................... 1,497,711 2,236,452 11,127,462
========= ========== ==========
Pro forma basic and diluted net loss per
share..................................... $ (1.39) $ (2.02)
========== ==========
Weighted average shares outstanding used in
pro forma per share calculation........... 12,042,539 25,233,080
========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

F-4
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
Convertible
Preferred
Stock Common Stock Additional Stockholder Common Total
--------------- -------------- Paid-in Deferred Note Stock Accumulated Stockholders
Shares Amount Shares Amount Capital Compensation Receivable Warrants Deficit Equity
------- ------ ------ ------ ---------- ------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30,
1996.............. 2,000 $ 2 275 $ -- $ 129 $ -- $ -- $ 23 $ (71) $ 83
Common stock
issued for
professional
services.......... -- -- 71 -- 28 -- -- -- -- 28
Conversion of
preferred stock
into common
stock............. (2,000) (2) 2,000 2 -- -- -- -- -- --
Repurchase of
common stock...... -- -- (130) -- (1) -- -- -- -- (1)
Series A preferred
stock issued for
cash, net of
issuance costs of
$17............... 3,342 3 -- -- 3,322 -- -- -- -- 3,325
Series B preferred
stock issued for
cash, net of
issuance costs of
$46............... 3,000 3 -- -- 7,451 -- -- -- -- 7,454
Warrants issued in
connection with
convertible note.. -- -- -- -- -- -- -- 6 -- 6
Conversion of
notes payable into
Series A preferred
Stock............. 658 1 -- -- 657 -- -- -- -- 658
Net loss.......... -- -- -- -- -- -- -- -- (5,289) (5,289)
------- ---- ------ ---- -------- ------- ----- ---- -------- --------
Balances,
September 30,
1997.............. 7,000 7 2,216 2 11,586 -- -- 29 (5,360) 6,264
Series C preferred
stock issued for
cash, net of
issuance costs of
$34............... 4,283 4 -- -- 14,739 -- -- -- -- 14,743
Series D preferred
stock issued for
cash, net of
issuance costs of
$33............... 2,023 2 -- -- 10,583 -- -- -- -- 10,585
Issuance of
stockholder note
in exchange for
common Stock...... -- -- 183 1 110 -- (110) -- -- 1
Common stock
issued for
professional
services.......... -- -- 6 -- 18 -- -- -- -- 18
Common stock
issued for cash
upon exercise of
options........... -- -- 115 -- 156 -- -- -- -- 156
Deferred
compensation in
connection with
issuance of stock
options........... -- -- -- -- 1,990 (1,990) -- -- -- --
Amortization of
deferred
compensation...... -- -- -- -- -- 487 -- -- -- 487
Net loss.......... -- -- -- -- -- -- -- -- (16,764) (16,764)
------- ---- ------ ---- -------- ------- ----- ---- -------- --------
Balances,
September 30,
1998.............. 13,306 13 2,520 3 39,182 (1,503) (110) 29 (22,124) 15,490
Series E preferred
stock issued for
cash, net of
issuance costs of
$2,539............ 11,765 12 -- -- 47,450 -- -- -- -- 47,462
Common stock
issued for cash
upon exercise of
options........... -- -- 829 1 964 -- -- -- -- 965
Deferred
compensation in
connection with
issuance of stock
options........... -- -- -- -- 5,737 (5,737) -- -- -- --
Amortization of
deferred
compensation...... -- -- -- -- -- 3,207 -- -- -- 3,207
Issuance of
stockholder note
in exchange for
common stock...... -- -- 349 -- 286 -- (286) -- -- --
Common stock
issued for cash
upon exercise of
warrants.......... -- -- 95 -- 38 -- -- (29) -- 9
Additional shares
of Series D
preferred stock
issued upon
Conversion........ 178 -- -- -- -- -- -- -- -- --
Conversion of
preferred stock... (25,249) (25) 25,249 25 -- -- -- -- -- --
Issuance of common
stock in public
offering, net of
issuance costs of
$5,858............ -- -- 6,900 7 63,134 -- -- -- -- 63,141
Notes issued to
officers in
exchange for
cash.............. -- -- -- -- -- -- (228) -- -- (228)
Repayment of
stockholder note.. -- -- -- -- -- -- 110 -- -- 110
Net loss.......... -- -- -- -- -- -- -- -- (50,938) (50,938)
------- ---- ------ ---- -------- ------- ----- ---- -------- --------
Balances,
September 30,
1999.............. -- $ -- 35,942 $ 36 $156,791 $(4,033) $(514) $ -- $(73,062) $ 79,218
======= ==== ====== ==== ======== ======= ===== ==== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(5,289) $(16,764) $(50,938)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 158 547 1,735
Amortization of capital lease obligations...... -- 263 1,507
Stock compensation expense..................... -- 487 3,207
Non-cash revenue in connection with barter
agreement..................................... (132) -- --
Debt discount in conjunction with convertible
notes......................................... 29 -- --
Amortization of discounts on investments....... (24) (227) (817)
Professional services in exchange for common
stock......................................... 28 18 --
Loss on disposal of property and equipment..... -- 2 5
Change in operating assets and liabilities:
Accounts receivable............................ (73) (589) (2,895)
Prepaid expenses and other..................... 27 (98) (1,673)
Deferred offering costs........................ -- (132) 132
Accounts payable............................... 1,901 486 6,213
Accrued liabilities............................ 322 394 4,215
Deferred revenue............................... 9 2 717
Other assets................................... (36) (68) (1,138)
------- -------- --------
Net cash used in operating activities........ (3,080) (15,679) (39,730)
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment.............. (2,128) (1,234) (14,337)
Proceeds from maturities of short-term
investments..................................... 1,000 5,600 31,478
Decrease (increase) in restricted cash........... (384) 121 (500)
Purchases of short-term investments.............. (2,959) (13,513) (52,229)
------- -------- --------
Net cash used in investing activities........ (4,471) (9,026) (35,588)
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net... 10,779 25,328 47,462
Proceeds from issuance of common stock, net...... -- 156 64,115
Proceeds from issuance of notes payable.......... 308 -- --
Proceeds from bank borrowings.................... 705 647 532
Repayments of bank borrowings.................... -- (199) (570)
Repayments of capital lease obligations.......... -- (100) (1,557)
Repayment of stockholder note receivable......... -- -- 110
Issuance of loans to officers.................... -- -- (228)
Cash overdraft................................... -- -- 3,058
Repurchase of common stock....................... (1) -- --
------- -------- --------
Net cash provided by financing activities.... 11,791 25,832 112,922
------- -------- --------
Net increase in cash and cash equivalents.... 4,240 1,127 37,604
Cash and cash equivalents, beginning of period.... 344 4,584 5,711
------- -------- --------
Cash and cash equivalents, end of period.......... $ 4,584 $ 5,711 $ 43,315
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest........................... $ 27 $ 129 $ 494
======= ======== ========
Cash paid for income taxes....................... $ 2 $ 2 $ 2
======= ======== ========
Supplemental schedule of noncash investing and
financing activities:
Common stock issued for professional services.... $ 28 $ 18 $ --
======= ======== ========
Receivable on bank borrowings.................... $ -- $ 532 $ --
======= ======== ========
Notes payable converted into preferred stock..... $ 658 $ -- $ --
======= ======== ========
Conversion of preferred stock into common
stock........................................... $ 21 $ -- $ 25
======= ======== ========
Note receivable issued in exchange for common
stock........................................... $ -- $ 110 $ 286
======= ======== ========
Capital lease obligations for equipment.......... $ -- $ 2,406 $ 9,227
======= ======== ========
Non-cash compensation expense.................... $ -- $ 487 $ 3,207
======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

F-6
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company:

Digital Island, Inc. and Subsidiaries (the "Company") offers a global
internet protocol applications network designed to deploy business-critical
applications worldwide. The Company also offers services such as network
management and application services to customers deployed on its network.
Together, these services provide a product offering that enables multinational
corporations to reach end users in worldwide local markets.

2. Summary of Significant Accounting Policies:

Principles of Consolidation:

The accompanying consolidated financial statements of the Company include
the accounts of Digital Island, Inc. and its wholly-owned subsidiaries, Digital
Island B.V., Digital Island Ltd., Digital Island (Europe) SA, Digital Island
(Hong Kong), Ltd., and Digital Island (Japan) KK, all of which were established
in fiscal 1999. All significant intercompany accounts and transactions are
eliminated in consolidation.

Use of Estimates:

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

Revenue Recognition:

Revenues are comprised primarily of bandwidth charges, equipment co-location
and storage fees, and one-time fees for installation if required to provide
services. Bandwidth charges are billed and recognized monthly based on customer
usage. All other revenues are based on flat-rate monthly charges. Installation
fees are typically recognized at the time that installation occurs. To date,
such revenues have not significantly exceeded the direct costs of installation.

Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share:

In accordance with SFAS 128, basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period, using either
the as if converted method for convertible preferred stock or the treasury
stock method for options and warrants.

Diluted net loss per share for the years ended September 30, 1997, 1998 and
1999 does not include the effect of 1,583,500, 2,993,765, and 3,847,569 stock
options, respectively, and 95,000, 95,000, and 0 common stock warrants,
respectively, or 7,000,000, 13,305,657, and 0 shares of convertible preferred
stock on an "as if converted" basis, respectively, as the effect of their
inclusion is antidilutive during each period.

F-7
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Pro forma basic and diluted net loss per share is presented to reflect per
share data assuming the conversion of all outstanding shares of convertible
preferred stock into common stock as if the conversion had taken place at the
beginning of the fiscal year or at the date of issuance, if later.

Cash and Cash Equivalents:

Cash and cash equivalents are stated at cost, which approximates fair value.
The Company includes in cash equivalents all highly liquid investments which
mature within three months of their purchase date.

Fair Value of Financial Instruments:

The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, notes payable,
capital leases, accounts payable and accrued liabilities approximate fair value
due to their short maturities.

Investments:

At September 30, 1998 and 1999 the Company's investments consisted of
commercial paper. Remaining maturities at the time of purchase are generally
less than one year.

Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 ("SFAS 115") "Accounting for Certain Investments
in Debt and Equity Securities." This statement requires that securities be
classified as "held to maturity," "available for sale" or "trading," and the
securities in each classification be accounted for at either amortized cost or
fair market value, depending upon their classification. The Company has the
intent and the ability to hold investments until maturity. Therefore, all such
investments are classified as held to maturity investments and carried at
amortized cost in the accompanying consolidated financial statements.

The Company's investments consist of the following (in thousands):

<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
----------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial paper....................... $10,123 $10,125 $31,691 $31,683
</TABLE>

Restricted Cash:

Restricted cash consists of irrevocable standby letters of credit issued by
the Company's banks. Funds are generally held in certificates of deposit at the
Company's bank, and have been established in favor of a third party
beneficiary. The funds are released to the beneficiary in the event that the
Company fails to comply with certain specified contractual obligations.
Provided the Company meets these contractual obligations, the letter of credit
is discharged and the Company is no longer restricted from use of the cash.

Property and Equipment:

Property and equipment are recorded at cost and depreciated using the
straight-line method over their useful lives. Equipment recorded under capital
leases is amortized using the straight-line method over the shorter of the
respective lease term or the estimated useful life of the asset. Network and
communications equipment is depreciated over five years, computer equipment and
software is depreciated over three years, and
furniture and fixtures are depreciated over seven years. Maintenance and
repairs are charged to expense as

F-8
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

incurred, and improvements and betterments are capitalized. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations in the period realized.

Long-lived Assets:

The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, ("SFAS
121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. No such impairments have
been identified to date. The Company assesses the impairment of long-lived
assets when events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable.

Income Taxes:

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, (SFAS 109) "Accounting for Income
Taxes." Under SFAS 109, deferred tax liabilities and assets 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 reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Income tax expense represents the tax payable for the current period and the
change during the period in the deferred tax assets and liabilities.

Software Development Costs:

Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, ("SFAS 86") "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Under
the standard, capitalization of software development costs begins upon the
establishment of technological feasibility. To date, all such amounts have been
insignificant, and accordingly, the Company has charged all such costs to
research and development expenses.

Deferred Revenues:

Deferred revenues primarily represent advanced billings to customers, or
prepayments by customers prior to completion of installation or prior to
provision of contractual bandwidth usage.

Concentration of Credit Risk:

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and accounts receivable. The Company places its temporary investments with one
major financial institution.

The Company performs ongoing credit evaluations, does not require
collateral, and maintains reserves for potential credit losses on customer
accounts when deemed necessary. For the year ended September 30, 1997, three
customers accounted for approximately 56%, 20%, and 10%, respectively, of all
revenue generated by the Company, and 0%, 57%, and 31% of accounts receivable
at September 30, 1997, respectively. For the year ended September 30, 1998, the
same customers accounted for approximately 13%, 20%, and 4%, respectively,
of all revenue generated by the Company, and 19%, 5%, and 0% of accounts
receivable at September 30, 1998,

F-9
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

respectively. In addition, a fourth customer accounted for 12% of all revenues
generated by the Company for the year ended September 30, 1998, and 14% of
accounts receivable at September 30, 1998. For the year ended September 30,
1999, the same four customers accounted for approximately 4%, 35%, 1%, and 4%,
respectively, of all revenues generated by the Company, and 6%, 41%, 0%, and
3%, respectively, of accounts receivable at September 30, 1999.

Risks and Uncertainties:

Factors that may materially and adversely affect the Company's future
operating results include: demand for and market acceptance of the Company's
products and services; introductions of products and services or enhancements
by the Company and its competitors; competitive factors that affect our
pricing; capacity utilization of the Digital Island Global IP applications
network; reliable continuity of service and network availability; the ability
and cost of bandwidth and our ability to increase bandwidth as necessary; the
timing of customer installations; the mix of products and services sold by the
Company; customer retention; the timing and success of marketing efforts and
product and service introductions by the Company; the timing and magnitude of
capital expenditures, including costs relating to the expansion of operations;
the timely expansion of its network infrastructure; fluctuations in bandwidth
used by customers; the retention of key personnel; conditions specific to the
Internet industry and other general economic factors; and new government
legislation and regulation.

Comprehensive Income:

The Company has adopted the accounting treatment prescribed by Financial
Accounting Statement No. 130, "Comprehensive Income." The adoption of this
statement had no impact on the Company's financial statements for the periods
presented, as net loss equals comprehensive loss.

Segment Information:

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not currently have any separately reportable operating
segments. Revenues from foreign operations have been insignificant.

Recently Issued Accounting Pronouncements:

On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires computer
software costs related to internal software that are incurred in the
preliminary project stage should be expensed as incurred. Once the
capitalization criteria of SOP 98-1 have been met, external direct costs of
materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project); and
interest costs incurred when developing computer software for internal use
should be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Accordingly, the Company will
adopt SOP 98-1 in its consolidated financial statements for the year ending
September 30, 2000. The adoption of SOP 98-1 is not expected to have a material
effect on the consolidated financial statements of the Company.

F-10
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities," which provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. As the Company has not capitalized such costs, the adoption of SOP
98-5 is not expected to have an impact on the consolidated financial statements
of the Company.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is effective for
fiscal years beginning after June 15, 2000. The Company does not believe the
adoption of SFAS 133 will have a material effect on the Company's consolidated
results of operations or financial condition.

3. Property and Equipment:

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

<TABLE>
<CAPTION>
September 30,
--------------
1998 1999
------ -------
<S> <C> <C>
Network equipment............................................ $2,299 $ 7,404
Communications equipment..................................... 194 217
Computer equipment and software.............................. 515 3,316
Furniture, fixtures, and leasehold improvements.............. 491 6,339
Equipment and fixtures under capital leases.................. 2,407 12,189
------ -------
5,906 29,465
Less accumulated depreciation and amortization............... 968 4,192
------ -------
Total property and equipment, net............................ $4,938 $25,273
====== =======
</TABLE>

4. Income Taxes:

For the years ended September 30, 1997, 1998, and 1999, the provision for
income taxes consists of state taxes.

The primary components of the net deferred tax asset are as follows (in
thousands):

<TABLE>
<CAPTION>
September 30,
-----------------
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards, federal and state....... $ 8,635 $ 26,999
Accrued employee benefits................................. 61 274
Sales tax................................................. 1 2
Accounts receivable allowance............................. 22 152
Deferred Revenue.......................................... -- 267
Property and equipment.................................... (358) (1,628)
------- --------
8,361 26,066
Less valuation allowance.................................. (8,361) (26,066)
------- --------
$ -- $ --
======= ========
</TABLE>

F-11
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. The valuation
allowance increased by $6.2 million and $17.7 million for the years ended
September 30, 1998 and 1999, respectively. The effective income tax rate
differs from the statutory federal income tax rate primarily due to the
inability to recognize the benefit of net operating losses.

At September 30, 1999, the Company had NOL carryforwards of approximately
$72.0 million for both federal and state income tax purposes. These
carryforwards expire beginning 2009 and 2002, respectively.

Pursuant to the provisions of Section 382 of the Internal Revenue Code,
utilization of the NOLs are subject to annual limitations through 2014 due to a
greater than 50% change in the ownership of the Company which occurred during
fiscal 1998.

5. Bank Borrowings:

Bank borrowings consist of (in thousands):

<TABLE>
<CAPTION>
September 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Line of credit............................................... $ 230 $ 230
Revolving credit facility.................................... 579 323
Equipment term facility...................................... 876 562
------ ------
1,685 1,115
Current maturities........................................... (801) (801)
------ ------
Long-term bank borrowings.................................... $ 884 $ 314
====== ======
</TABLE>

On November 21, 1996, the Company entered into a revolving credit agreement
(the "Revolving Agreement") with a commercial lender. The aggregate credit
under the Revolving Agreement was originally $250,000, and was increased to
$750,000 on April 18, 1997. Interest under the Revolving Agreement is 0.75%
over the "Prime Rate" as announced from time to time by the lender. At
September 30, 1998 and 1999, the effective interest rate was 9.25% and 9.00%,
respectively. The weighted average interest rates for the years ended September
30, 1998 and 1999, were 9.25%, and 8.61%, respectively. Under the terms of the
Revolving Agreement, advances could be made for the purchase of equipment until
October 18, 1997. At that date, the unpaid principal balance of equipment
advances plus interest became payable over 36 months in equal installments.
Outstanding borrowings under the Revolving Agreement at September 30, 1998 and
1999 were $579,000 and $323,000, respectively. All amounts outstanding related
to advances for equipment purchases.

On November 19, 1997, the Company entered into a loan agreement (the Loan
Agreement) with the same commercial lender associated with the Revolving
Agreement. Under the terms of the Loan Agreement, the Company was extended a
$5,000,000 line of credit, as well as an equipment loan term facility for
$2,500,000. Any borrowings under this line of credit are collateralized by
substantially all assets of the Company. Certain of the Loan Agreement's
provisions restrict the ability of the Company to declare or pay any dividends
while the credit agreement is in effect.

Advances under the line of credit are limited to a percentage of the
Company's recurring contract revenues, as defined in the Loan Agreement. The
Loan Agreement contains certain standard covenants. $230,0000 was outstanding
under the line of credit at both September 30, 1998 and 1999. Interest on
borrowings are charged at the lender's prime rate plus 0.25%, which was 8.75%
and 8.50% at September 30, 1998 and 1999, respectively. The weighted average
interest rates for the years ended September 30, 1998 and

F-12
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1999 were 8.75% and 8.13%, respectively. Advances under the line of credit can
be repaid and reborrowed at any time until the maturity date of May 31, 2000.

Under the terms of the equipment loan term facility, the Company had the
ability to borrow up to $1,250,000 for equipment purchases from November 19,
1997 to May 19, 1998 (Equipment Line A), as well as borrow an additional
$1,250,000 from February 1, 1998 to September 30, 1998 (Equipment Line B). At
September 30, 1998 and 1999, $224,000 and $140,000, respectively, was
outstanding related to advances made under Equipment Line A, and $652,000 and
$422,000, respectively, was outstanding related to advances made under
Equipment Line B. Interest on these borrowings are charged at the lender's
prime rate plus 0.75%, which was 9.25% and 9.00% at September 30, 1998 and
1999, respectively. The weighted average interest rates for the years ended
September 30, 1998 and 1999 were 9.25% and 8.61%, respectively. Repayments of
advances on Equipment Line A commenced on June 19, 1998, with the unpaid
principal balance as of May 19, 1998, plus interest, being repaid in 36 equal
monthly installments. Repayments of advances on Equipment Line B commenced on
October 19, 1998 in 34 monthly installments of principal and interest.

The Loan Agreement was due to mature on November 19, 1998. On November 18,
1998, the Loan Agreement was modified to extend the maturity date to February
15, 1999. On February 15, 1999 the Loan Agreement was modified again to extend
the maturity date to May 31, 1999. On May 31, 1999, the Loan Agreement was
modified yet again to extend the maturity date to May 31, 2000.

The Company did not comply with certain financial covenants at various
points during fiscal 1998, and accordingly, received an amendment and waiver
dated October 6, 1998 from its lender, which waived covenant violations for
periods prior to September 30, 1998 and eliminated one financial covenant with
respect to a minimum profitability threshold. Subsequent to September 30, 1998,
the Company did not comply with certain financial covenants. The Company
obtained waivers for all covenant violations from October 1, 1998 to January
31, 1999. Since the date of this most recent waiver the Company has been in
compliance with all covenants.

Interest expense for the years ended September 30, 1997, 1998 and 1999 was
$36,000, $94,000, and $123,000, respectively.

Principal maturities of bank borrowings are as follows (in thousands):

<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
2000............................................................... $ 801
2001............................................................... 314
------
$1,115
======
</TABLE>

6. Notes Payable:

Between September 27, 1996 and January 31, 1997, the Company issued three
convertible notes totalling $600,000 to a commercial lender. These notes had a
simple interest rate of 6%. In March 1997, all three notes plus accrued
interest of $8,454 were converted into 608,454 shares of Series A preferred
stock.

Prior to October 1, 1996, the Company had issued a $50,000 convertible note
to a related party. In March 1997, this note was converted into 50,000 shares
of Series A preferred stock.

F-13
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. Accrued Liabilities:

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
September
30,
-----------
1998 1999
---- ------
<S> <C> <C>
Employee compensation........................................... $596 $2,254
Other accrued liabilities....................................... 120 2,677
---- ------
Total......................................................... $716 $4,931
==== ======
</TABLE>

8. Commitments:

Leases:

The Company leases office space under noncancelable operating leases
expiring through April, 2014. Rent expense for the years ended September 30,
1997, 1998, and 1999, was $137,000, $715,000, and $3.2 million, respectively.

The Company's future minimum lease payments under noncancelable operating
leases having an initial or remaining term of more than one year, and capital
leases are as follows (in thousands):

<TABLE>
<CAPTION>
Year ending September 30, Operating Capital
------------------------- --------- -------
<S> <C> <C>
2000..................................................... $ 5,389 $4,531
2001..................................................... 6,506 4,113
2002..................................................... 6,477 2,297
2003..................................................... 6,268 10
2004..................................................... 5,337 --
Thereafter............................................... 20,838 --
------- ------
Total minimum lease payments........................... $50,815 10,951
=======
Less amounts representing interest....................... (974)
------
Present value of minimum lease payments.................. 9,977
Less current portion of capital lease obligations........ (3,916)
------
Long-term portion of capital lease obligations........... $6,061
======
</TABLE>

Carrier Line Agreements:

The Company has entered into various bandwidth capacity agreements with
domestic and foreign carriers. These agreements are generally cancelable and
provide for termination fees if cancelled by the Company prior to expiration.

F-14
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Earnings Per Share:

The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share ("EPS"):

<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Numerator--Basic and Diluted EPS
Net Loss (in thousands)................... $ (5,289) $ (16,764) $ (50,938)
========= ========== ==========
Denominator--Basic and Diluted EPS
Weighted average Common Stock
outstanding.............................. 1,497,711 2,361,010 11,280,534
Common Stock subject to repurchase........ -- (124,558) (153,072)
--------- ---------- ----------
Total weighted average Common Stock
outstanding.............................. 1,497,711 2,236,452 11,127,462
========= ========== ==========
Basic and diluted loss per share............ $ (3.53) $ (7.50) $ (4.58)
========= ========== ==========
Pro forma:
Denominator--Basic and Diluted EPS
Weighted Average Common Stock............. 2,361,010 4,752,354
Conversion of Preferred Stock............. 9,711,087 20,538,798
Conversion of Warrants.................... 95,000 95,000
Common Stock subject to repurchase........ (124,558) (153,072)
---------- ----------
Total weighted average Common Stock
outstanding pro Forma.................... 12,042,539 25,233,080
========== ==========
Basic and diluted pro forma loss per share.. $ (1.39) $ (2.02)
========== ==========
</TABLE>

10. Stockholders' Equity:

In June 1999, the Company completed its initial public offering ("IPO") of
6,000,000 shares of its common stock. Subsequent to the IPO, the underwriters
purchased an additional 900,000 shares to cover over-allotments. The net
proceeds to the Company after deducting underwriting discounts and commissions
and offering expenses, was approximately $63.1 million. In conjunction with the
IPO, all shares of Series A, B, C, D, and E convertible preferred stock were
converted to common stock. Immediately prior to this conversion, an additional
178,138 shares of Series D preferred stock were issued in accordance with
certain anti-dilution provisions. All of these additional shares were converted
into common stock. In addition, all outstanding warrants were exercised prior
to the IPO for 95,000 shares of common stock.

In June 1999, the Company was reincorporated in the state of Delaware.
Pursuant to the reincorporation, each share of common and preferred stock of
the Company's California predecessor entity was exchanged for one share of
common and preferred stock of the newly formed Delaware entity. Pursuant to the
reincorporation, the number of authorized shares of common stock increased to
100,000,000 with a par value of $0.001 per share. Additionally, 10,000,000
shares of undesignated preferred stock were authorized with a par value of
$0.001 per share.

F-15
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Convertible preferred stock issued and outstanding prior to the IPO was as
follows:

<TABLE>
<CAPTION>
Liquidation
Shares Issued and Value
Series Designated Outstanding (in thousands)
------ ---------- ----------- -------------
<S> <C> <C> <C>
A.................................... 4,000,000 4,000,000 $ 4,000
B.................................... 3,000,000 3,000,000 $ 7,500
C.................................... 4,300,000 4,283,181 $ 14,777
D.................................... 2,700,000 2,200,614 $ 10,618
E.................................... 11,764,706 11,764,706 $ 50,000
---------- ---------- --------
25,764,706 25,248,501 $ 86,895
========== ========== ========
</TABLE>

11. Stock Plans:

Stock Option Plans:

In January 1997, the Company established the 1997 Stock Option and Incentive
Plan (the "1997 Plan") and reserved up to 1,689,125 shares of common stock
issuable upon exercise of options granted to certain employees, directors, and
consultants. In May 1998, the Company adopted the 1998 Stock Option/Stock
Issuance Plan (the "1998 Plan"). The 1998 Plan was designed to serve as the
successor to the 1997 Plan. Upon adoption of the 1998 Plan the existing share
reserve under the 1997 Plan was transferred to the 1998 Plan, and all
outstanding options under the 1997 Plan were incorporated into the 1998 Plan.
The Company increased the maximum number of shares issuable to a total of
3,833,284. In November 1998, the Company increased the stock option pool by
another 600,000 shares, bringing the total to 4,433,284. This number of shares
was reserved for issuance under the 1998 Plan. In June 1998, concurrent with
the IPO, the Company adopted the 1999 Stock Incentive Plan (the "1999 Plan").
The 1999 Plan was designed to serve as the successor to the 1998 Plan. Upon the
initial public offering of the Company's common stock, all outstanding options
under the 1998 Plan, together with the remaining shares reserved under that
plan, were incorporated into the 1999 Plan, with no further grants of common
stock options to be made under the 1998 Plan. Upon implementation of the 1999
Plan, an additional 2,110,716 shares of common stock were reserved for
issuance. A total of 7,544,000 shares are now reserved for issuance.

Under the terms of the 1999 Plan, the Company has the ability to grant
incentive and nonstatutory stock options, as well as issue vested and unvested
shares of the Company's common stock. Exercise prices of stock options are
generally not less than 100% and 85% of the fair value of the common stock on
the date of grant of incentive stock options and nonstatutory stock options,
respectively, and have a term of up to ten years. Options generally vest
rateably over a period of up to fifty months after the grant date, subject to
accelerated vesting in connection with certain changes in control or ownership
of the Company. The plan provides that management can grant employees the right
to exercise options prior to vesting. Upon termination of an employee's
employment with the Company for any reason, the Company has the right to
repurchase all or any portion of the unvested shares acquired by the employee
upon exercise of options at a repurchase price that is equal to the exercise
price, within 90 days following the date of termination. At September 30, 1999,
1998, and 1997, 205,700, 254,125, and 0 shares of common stock were subject to
repurchase by the Company.

F-16
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A summary of the activity under the 1997 Plan, the 1998 Plan, and the 1999
Plan is as follows (dollars in thousands):

<TABLE>
<CAPTION>
Weighted
Exercise Aggregate Average
Price Per Exercise Exercise
Shares Share Price Price
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Outstanding at September
30, 1996.................. -- -- -- --
Granted.................. 1,688,500 $ 0.40 $ 675,400 $0.40
Terminated............... (105,000) $ 0.40 (42,000) 0.40
---------- ------------ ----------- -----
Outstanding at September
30, 1997.................. 1,583,500 $ 0.40 633,400 0.40
Granted.................. 1,903,009 $0.40-$ 3.35 3,283,649 1.73
Exercised................ (297,960) $0.40-$ 1.50 (265,784) 0.89
Terminated............... (194,784) $0.40-$ 3.25 (91,564) 0.47
---------- ------------ ----------- -----
Outstanding at September
30, 1998.................. 2,993,765 $0.40-$ 3.35 3,559,701 1.19
Granted.................. 2,412,350 $3.35-$26.00 19,109,274 7.92
Exercised................ (1,178,391) $0.40-$ 9.90 (1,142,950) 0.97
Terminated............... (380,155) $0.40-$10.00 (1,167,204) 3.07
---------- ------------ ----------- -----
Outstanding at September
30, 1999.................. 3,847,569 $0.40-$26.00 $20,358,821 $5.29
========== ============ =========== =====
</TABLE>

The Company accounts for the 1997 Plan, the 1998 Plan, and the 1999 Plan
using the intrinsic value based method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. For financial reporting purposes, the Company has
determined that the deemed fair value on the date of grant of employee stock
options granted between May 1, 1998 and April 21, 1999 was in excess of the
exercise price of the options. Consequently, the Company recorded deferred
compensation of $2.0 million for the year ended September 30, 1998, and an
additional $5.7 million for the year ended September 30, 1999. Of the total
deferred compensation, $487,000 was amortized during the year ended September
30, 1998 and $3.2 million was amortized during the year ended September 30,
1999.

At September 30, 1999 options to purchase 1,541,814 shares of common stock
were exercisable with a weighted average exercise price of $1.60 per share.

At September 30, 1998 and 1999, options to purchase 541,559 and 2,220,080
shares of common stock, respectively, remain available for issuance.

The following summarizes information with respect to stock options
outstanding at September 30, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Prices Exercisable Prices
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.40-$0.60......... 561,607 7.49 $ 0.41 166,921 $ 0.40
$0.90-$1.50......... 877,923 8.92 $ 1.43 454,862 $ 1.49
$2.75-$3.35......... 123,905 8.88 $ 3.10 123,905 $ 3.10
$3.50-$4.25......... 1,396,084 9.52 $ 4.02 397,052 $ 3.96
$7.50-$10.00........ 489,300 9.69 $ 9.46 398,683 $ 9.41
$18.875-$20.50...... 331,750 9.82 $20.10 391 $20.21
$23.750-$26.00...... 67,000 9.96 $24.46 -- --
</TABLE>

The following information concerning the Company's 1999 Plan is provided in
accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation."

F-17
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following weighted average assumptions
used for grants in the years ended September 30, 1998 and 1999:

<TABLE>
<CAPTION>
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Risk-free interest rates........ 5.85%-6.86% 4.23%-6.08% 5.80%
Expected life................... 5 years 5 years 4 years
Expected dividend yield......... -- -- --
Expected volatility............. -- -- 80%
</TABLE>

The weighted average fair value for options granted was $0.10, $0.36 and
$1.71 for the years ended September 30, 1997, 1998, and 1999, respectively.

The pro forma net loss for the Company for the years ended September 30,
1997, 1998 and 1999 following the provisions of SFAS 123, was $5.3 million,
$16.8 million and $51.6 million respectively. The pro forma basic and diluted
net loss per share for the years ended September 30, 1997, 1998 and 1999 was
$3.55, $7.53 and $4.63, respectively.

Employee Stock Purchase Plan:

In June 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("1999 ESPP"). Under the 1999 ESPP, eligible employees are allowed to have
salary withholdings of up to a certain specified percentage of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of defined
purchase periods. The initial purchase period commenced on July 1, 1999. A
total of 300,000 shares is reserved for issuance under the 1999 ESPP. At
September 30, 1999 a total of $581,000 had been withheld from employees for
future purchases under this plan.

12. Stockholder Notes Receivable:

On February 25, 1998, the Company granted a nonstatutory option to purchase
a total of 183,000 shares of the Company's common stock to a director of the
Company (the "Director"). These options were immediately exercisable and the
shares purchased thereunder are subject to repurchase by the Company, with the
right to repurchase expiring in 16 equal quarterly installments. At the time of
the option grant, the Director exercised the option to purchase the entire
183,000 shares of common stock, in exchange for a $109,800 note (the "Note").
The Note was collateralized by the 183,000 shares of common stock and by other
assets of the Director. Under the terms of the note, interest was accrued at
5.61% per annum. Interest was to be repaid in four equal annual installments
commencing February 24, 1999. The entire principal amount was due and payable
in one lump sum on February 24, 2002. In August 1999, the Director extinguished
the Note by paying the full amount of principal and accrued interest. At
September 30, 1999, a total of 114,375 shares of the Director's stock was
subject to repurchase.

On April 20, 1999, executive officers of the Company exercised stock options
to purchase 349,332 shares of common stock in exchange for full-recourse notes.
The total principal amount of these notes is $286,398. The notes bear interest
at the rate of 7.75% per annum, compounded semiannually. Accrued interest is
due and payable at successive quarterly intervals over the four-year term of
the note, and the principal balance will become due and payable in one lump sum
at the end of the four year term. None of the shares purchased with the notes
may be sold unless the principal portion of the note attributable to those
shares, together with the accrued interest on that principal portion, is paid
in full.

F-18
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On June 14, 1999, one of the executive officers who had exercised options on
April 20, 1999 in exchange for a full-recourse note, borrowed an additional
$128,000 in order to finance the tax liability she incurred in connection with
the exercise of her stock options on April 20, 1999 for 133,332 shares of
common stock. The loan is evidenced by a full-recourse promissory note with
interest at the rate of 7.75% per annum, compounded semi-annually, and secured
by the same 133,332 shares which serve as collateral for the April 20, 1999
promissory note, as well as other assets. The terms of her note, including the
due dates for payment of principal and accrued interest and the acceleration
provisions, are substantially the same as the terms in effect for her April 20,
1999 note.

In July 1999, the Company loaned an officer of the Company $100,000. The
loan is interest free, with $50,000 being forgiven ratably over a period of
five years. At the end of the five year term, the $50,000 portion of the loan
that has not been forgiven is to be repaid in one lump sum. In the event that
the officer's employment terminates during the five year period, the
outstanding unforgiven balance of the loan is to be repaid at the time of the
termination. The amount being forgiven, plus imputed interest are charged to
operations.

13. Warrants:

In connection with the issuance of certain convertible notes (see Note 6),
the Company issued warrants to purchase shares of the Company's common stock to
the note holders. Warrants to purchase 75,000 and 20,000 shares of the
Company's common stock were granted in September 1996 and January 1997,
respectively. The exercise price of the warrants was equal to $0.10 per share.
The warrants were due to expire upon the earlier of (i) five years from the
date of grant, (ii) the closing of a underwritten public offering of the
Company's common stock for not less than $2.50 per share and gross proceeds of
at least $10,000,000, or (iii) the closing of a consolidation or merger of the
Company. The fair value of the warrants was determined using the Black-Scholes
model and was accounted for as interest expense over the time period the notes
were outstanding. In June 1999, prior to the IPO, the warrants were exercised.

14. Related Party Transactions:

One shareholder also is a significant customer of the Company. For the years
ended September 30, 1997, 1998, and 1999, the Company earned $122,000,
$310,000, and $524,000, respectively, in revenue from sales to this customer,
and had $139,000, and $200,000 in total receivables at September 30, 1998 and
1999, respectively. The Company owed this customer $992,000 and $3.8 million at
September 30, 1998 and 1999, respectively, under terms of the master lease
agreement, and also owed another $94,000 and $68,000, respectively, in other
trade-related payables.

One other significant shareholder is also a customer of the Company. For the
years ended September 30, 1997, 1998, and 1999, the Company earned $43,000,
$458,000, and $4.4 million, respectively, in revenue from sales to this
customer, and had $39,000 and $1.4 million in total receivables at September
30, 1998 and 1999, respectively. In addition, $715,000 of the deferred revenue
balance at September 30, 1999 related to this customer.

15. Retirement Savings Plan:

On November 1, 1997, the Company established the Digital Island Retirement
Savings Plan ("Retirement Plan"), a defined contribution plan, covering all
eligible employees. Employees may elect to contribute from 1%-15% of their
annual compensation to the Retirement Plan. Matching contributions by the
Company are discretionary. The Company has made no contributions during the
years ended September 30, 1998 and 1999.

F-19
<PAGE>

DIGITAL ISLAND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16. Subsequent Events:

In October 1999, options to purchase 32,250 and 446,500 shares of common
stock were granted at exercise prices of $23.3125 and $38.6875 per share,
respectively.

On October 25, 1999, the Company agreed to merge with Sandpiper Networks,
Inc. ("Sandpiper") in a transaction to be accounted for as a purchase. The
merger is subject to approval by stockholders. The terms of the merger call for
1.07 shares of Digital Island, Inc. common stock to be exchanged for each share
of Sandpiper stock. Sandpiper stock options will be assumed by Digital Island,
Inc. at the same ratio. An estimated 24.5 million shares of Digital Island
common stock are to be exchanged.

F-20
<PAGE>

REPORT OF SANDPIPER NETWORKS, INC. INDEPENDENT AUDITORS

The Board of Directors
Sandpiper Networks, Inc.

We have audited the accompanying consolidated balance sheets of Sandpiper
Networks, Inc. as of December 31, 1997 and 1998, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sandpiper
Networks, Inc. at December 31, 1997 and 1998, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.

/s/ Ernst & Young LLP

February 3, 1999
Los Angeles, California

F-21
<PAGE>

SANDPIPER NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------

<S> <C> <C>
ASSETS
------

Current assets:
Cash and cash equivalents.......................... $ 5,728,826 $ 603,812
Accounts receivable................................ -- 2,176
Prepaid and other current assets................... 2,022 82,301
----------- -----------
Total current assets................................. 5,730,848 688,289
Property and equipment, net.......................... 38,730 1,072,791
Other assets......................................... 4,598 63,640
----------- -----------
Total assets......................................... $ 5,774,176 $ 1,824,720
=========== ===========

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' DEFICIT
-------------------------------

Current liabilities:
Current portion of debt............................ $ 125,000 $ 46,010
Current portion of capital lease obligations....... -- 310,327
Accounts payable................................... 175,023 8,462
Accrued expenses................................... 88,772 225,024
----------- -----------
Total current liabilities............................ 388,795 589,823
Debt, less current portion........................... -- 71,558
Capital lease obligations, less current portion...... -- 639,205
----------- -----------
Total liabilities.................................... 388,795 1,300,586
Series A redeemable convertible preferred stock,
$0.001 par value: 9,599,999 and 10,278,569 shares
authorized as of December 31, 1997 and 1998,
respectively; 9,428,570 and 9,607,141 issued and
outstanding as of December 31, 1997 and 1998,
respectively........................................ 6,552,920 6,674,442
Shareholders' deficit:
Common Stock, $0.001 par value: 30,000,000 shares
authorized as of December 31, 1997 and 1998;
5,095,658 and 6,685,405 issued and outstanding as
of December 31, 1997 and 1998, respectively....... 1,000 112,383
Accumulated deficit................................ (1,168,539) (6,262,691)
----------- -----------
Total shareholders' deficit.......................... (1,167,539) (6,150,308)
----------- -----------
$ 5,774,176 $ 1,824,720
=========== ===========
</TABLE>

See accompanying notes.

F-22
<PAGE>

SANDPIPER NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenues............................................. $ $ 5,700
Cost and expenses:
Cost of revenues................................... -- 1,695,057
Product development................................ 1,159,715 1,382,635
Marketing and sales................................ -- 1,272,441
General and administrative......................... 28,149 876,093
----------- -----------
Total operating expenses............................. 1,187,864 5,226,226
----------- -----------
Operating (loss)..................................... (1,187,864) (5,220,526)
Interest expense..................................... 23,649 29,119
Interest (income).................................... (42,974) (155,493)
----------- -----------
Net (loss)........................................... $(1,168,539) $(5,094,152)
=========== ===========
</TABLE>

See accompanying notes.

F-23
<PAGE>

SANDPIPER NETWORKS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
Common Stock Total
------------------- Accumulated Shareholders'
Shares Amount Deficit Equity (Deficit)
--------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance as of January 1,
1997....................... 5,095,658 $ 1,000 $ -- $ 1,000
Net loss.................. -- -- (1,168,539) (1,168,539)
--------- -------- ----------- -----------
Balance as of December 31,
1997....................... 5,095,658 1,000 (1,168,539) (1,167,539)
Repurchase of Common
Stock.................... (509,566) (35,670) -- (35,670)
Issuance of Common Stock
in connection with
exercise of stock
options.................. 2,099,313 147,053 -- 147,053
Net loss.................. -- -- (5,094,152) (5,094,152)
--------- -------- ----------- -----------
Balance as of December 31,
1998....................... 6,685,405 $112,383 $(6,262,691) $(6,150,308)
========= ======== =========== ===========
</TABLE>

See accompanying notes.

F-24
<PAGE>

SANDPIPER NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Operating activities
Net loss............................................. $(1,168,539) $(5,094,152)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization...................... 3,025 444,257
Changes in operating assets and liabilities:
Accounts receivable............................... -- (2,176)
Prepaid and other current assets.................. (2,022) (80,279)
Accounts payable.................................. 175,023 (166,561)
Accrued expenses.................................. 88,772 136,252
----------- -----------
Net cash used in operating activities................ (903,741) (4,762,659)
----------- -----------
Investing activities
Purchases of property and equipment.................. (41,755) (1,478,317)
Other assets......................................... (4,598) (59,042)
----------- -----------
Net cash used in investing activities................ (46,353) (1,537,359)
----------- -----------
Financing activities
Proceeds from issuance of Common Stock............... -- 147,053
Net proceeds from issuance of Series A redeemable
convertible preferred stock......................... 5,952,920 --
Proceeds from credit line............................ -- 800,000
Proceeds from debt................................... 846,924 117,568
Proceeds from capital lease obligations.............. -- 1,094,453
Repurchase of Common Stock........................... -- (35,670)
Repayment of credit line............................. -- (800,000)
Repayment of debt.................................... (121,924)
Repayment of capital lease obligations............... -- (144,921)
Other financing activities........................... -- (3,479)
----------- -----------
Net cash provided by financing activities............ 6,677,920 1,175,004
----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 5,727,826 (5,125,014)
Cash and cash equivalents at beginning of year....... 1,000 5,728,826
----------- -----------
Cash and cash equivalents at end of year............. $ 5,728,826 $ 603,812
=========== ===========
Supplemental schedule of non-cash transactions:
Conversion of notes payable to Series A redeemable
convertible preferred stock........................ $ 600,000 $ 125,000
=========== ===========
</TABLE>

See accompanying notes.

F-25
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization and Basis of Presentation

Sandpiper Networks, Inc. (the "Company") was incorporated in December 1996.
The Company and its wholly owned subsidiary, Sandpiper Leasing Corporation
("SLC") provide a subscription-based service that enables web publishers to
migrate their content onto a professionally managed content delivery network.
The Company's service provides publishers with unlimited scalability and
improved performance by avoiding Internet congestion and intelligently
delivering content closer to end-users. The Company has had limited sales of
products, and its customers are Internet publishing companies, located
principally in the United States.

As of December 31, 1998, the Company has an accumulated deficit of
$6,262,691. The Company anticipates that, in the event that profitability is
not attained, the required funding for expenditures will come from sources such
as additional equity (see Note 11) or debt financing, collaborative
arrangements or partnership agreements. While management believes that any
additional funding required will be available as necessary, there is no
assurance that additional financing will be available and on terms acceptable
to the Company, when required. If additional funding were not available when
needed, the Company would be required to reduce the rate of administrative
costs and research and development expenditures.

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingencies at the date of the financial statements, and
affect the reported amount of revenues and expenses during the reporting
period. Actual results could differ from the Company's estimates.

In October 1998, the Company commenced the planned principal operations by
introducing the first service offering through the launch of the Footprint
product. Accordingly, the Company is not presented as a development stage
company in the accompanying financial statements.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, SLC. All significant intercompany
accounts have been eliminated.

Stock Split

In 1997, the Company's Board of Directors approved a Common Stock split
whereby each outstanding share of Common Stock was converted into 8.1530496
shares of Common Stock. Such stock split has been retroactively reflected in
the accompanying consolidated financial statements.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash deposits at financial institutions.
The Company places its cash deposits with high credit quality financial
institutions. At times, balances in the Company's cash accounts may exceed the
Federal Deposit Limitation ("FDIC") limit.

F-26
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and Equipment

Property and equipment are stated at cost and depreciated or amortized over
the estimated useful lives of the assets on a straight-line basis. The
estimated useful lives of the assets are as follows:

<TABLE>
<S> <C>
Equipment....................................................... 3 years
Furniture and fixtures.......................................... 3-5 years
</TABLE>

Included in this caption are the following assets:

<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
------- ----------
<S> <C> <C>
Operations equipment.................................. $ -- $1,069,560
Other property and equipment.......................... 41,755 450,513
------- ----------
41,755 1,520,073
Accumulated depreciation.............................. (3,025) (447,282)
------- ----------
Net property and equipment............................ $38,730 $1,072,791
======= ==========
</TABLE>

Revenue recognition

The Company recognizes subscription revenues over the period the services
are provided.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expenses for the
year ended December 31, 1998 was $119,432. There were no advertising expenses
in 1997.

Research and Development Expenses

Research and development costs are expensed as incurred.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123"), requires that stock awards granted subsequent
to January 1, 1995, be recognized as compensation expense based on their fair
market value at the date of grant. Alternatively, a company may use APB Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"), and disclose the
pro forma results of operations which would have resulted from recognizing such
rewards at their fair market value. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, does not recognize compensation expense for stock
option grants. Stock Options are granted under the Company's Stock Incentive
Plan with an exercise price equal to the fair market value of the shares at the
date of grant.

2. Credit Arrangements and Long-Term Debt

On February 19, 1998, the Company entered into a $1,000,000 line of credit
with a bank, with a variable rate of interest, based on the bank's lending
rate. Under the terms of the line of credit, up to $750,000 of the credit
facility could be converted to a three-year term loan with similar interest
terms on August 19, 1999, to the extent that Company draws on credit were
supported by capital equipment invoices. At December 31, 1998 no amounts are
extended under this facility.

F-27
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On August 31, 1998, the Company executed a promissory note with a financial
institution in the amount of $117,568, at a stated interest rate of 7% per
annum, principal and interest due monthly for 36 months and collateralized by
equipment. Aggregate maturities for 1999, 2000 and 2001 are $46,010, $36,816
and $31,743, respectively.

3. Leases

The Company entered into a $1,500,000 equipment lease line of credit
through which non-cancelable capital lease obligations for computers and
equipment were executed during the year ended December 31, 1998. In addition,
the Company entered into a lease agreement for its facilities on January 6,
1999 under non-cancelable operating lease agreements expiring through 2005.
This operating lease provides for free rent and escalations.

Future minimum lease payments as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
Operating Capital
Lease Leases
---------- ----------
<S> <C> <C>
1999................................................ $ 174,549 $ 366,643
2000................................................ 299,227 394,729
2001................................................ 318,913 283,273
2002................................................ 322,850 --
2003................................................ 335,974 --
Thereafter.......................................... 395,032 --
---------- ----------
Total minimum lease payments........................ $1,846,545 $1,044,645
==========
Less amounts representing interest.................. 95,113
----------
Present value of lease payments..................... $ 949,532
==========
</TABLE>

At December 31, 1998, computers, software and equipment under capital
leases had an original cost basis and a net book value of $1,094,453 and
$670,263, respectively.

Rent expense was $13,716 and $123,412 for the years ended December 31, 1997
and 1998, respectively.

F-28
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Income Taxes

The deferred income tax assets and liabilities of the Company consist of the
differences between the financial statements and tax basis of assets and
liabilities, and are measured at the current enacted tax rates. The temporary
differences related to the following as of December 31, 1997 and 1998,
respectively, are as follows:

<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses and tax credits............. $ 517,236 $ 2,754,031
--------- -----------
Total deferred tax assets.......................... 517,236 2,754,031

Deferred tax liabilities:
Federal benefit for state income taxes........... 31,214 156,025
--------- -----------
Total deferred liabilities......................... 31,214 156,025
--------- -----------
Net deferred tax assets............................ 486,022 2,598,006
Less valuation reserve............................. (486,022) (2,598,006)
--------- -----------
$ -- $ --
========= ===========
</TABLE>

The Company has net operating loss carryforwards for federal and state
income tax purposes of $6,262,691, which begin to expire in 2004. Research tax
credit carryforwards of $248,956 are available for federal and state tax
purposes that expire beginning in 2013. Utilization of the above carryforwards
is subject to utilization limitations that may inhibit the Company's ability to
use carryforwards in the future.

5. Redeemable Convertible Preferred Stock

At December 31, 1998, the Company is authorized to issue up to 10,278,569
shares of redeemable convertible preferred stock which have been designated as
Series A. As of December 31, 1998, 9,607,141 of Series A have been issued.

In January 1999, the shareholders approved an increase to authorized
redeemable convertible preferred stock to 13,697,640, of which 9,885,981 have
been designated as Series A and 3,811,659 have been designated as Series B.

Series A

Series A shares were issued at $0.70 per share and are convertible to one
share of Common Stock. Series A shares are redeemable at $0.70 per share on the
seventh anniversary of the issuance of the first shares issued under this
series (November 17, 2004).

Series B

Series B shares are convertible to one share of Common Stock. Series B
shares are redeemable at $4.46 per share on November 17, 2004.

All Preferred Stock

The redeemable convertible preferred stock contains a liquidation preference
of an amount equal to the price for which such share of redeemable convertible
preferred stock was issued, adjusted for any stock dividends, combinations or
splits with respect to such shares, plus any declared and unpaid dividends on
the redeemable convertible preferred stock.

F-29
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The redeemable convertible preferred stock is generally convertible at any
time, at the holder's option, into Common Stock based on the conversion ratios
above, subject to future adjustment as defined. The redeemable convertible
preferred stock shall automatically convert into shares of Common Stock upon
the closing of an initial public offering of the Company's Common Stock, if the
per share price of the stock sold in the offering is not less than $5.00 per
share and the aggregate purchase price of the Common Stock sold in the offering
is not less than $10.0 million. The redeemable convertible preferred stock
contains voting rights identical to those of the Common Stock.

6. Convertible Notes Payable

In 1997, in contemplation of the Series A redeemable convertible preferred
stock financing (see Note 5), the Company issued convertible notes payable and
warrants (see Note 8) for $600,000 (the "bridge financing"). In connection with
the close of the Series A redeemable convertible preferred stock financing, the
$600,000 in convertible notes payable were converted into 857,143 shares of
Series A redeemable convertible preferred stock. In addition, during 1997, as
part of the bridge financing, the Company converted accounts payable of
$246,924 to a related party (see Note 11) to a promissory note convertible into
Series A redeemable convertible preferred stock. During 1997, in accordance
with the terms of the agreement, the Company repaid $121,924 of the promissory
note plus interest, and, in 1998, the holder converted the remaining $125,000
to Series A redeemable convertible preferred stock at $0.70 per share.

7. Stock Plan

The 1997 Stock Plan (the "Plan") provides for the grant of both incentive
stock options and non-statutory stock options to employees, directors and
consultants. The exercise price of the incentive stock options must equal or
exceed the fair market value of the Common Stock at the grant date and the non-
statutory stock options may be less than the fair market value of the Common
Stock at the grant date. The incentive stock options generally vest over four
years whereas the non-statutory stock options generally vest after one year.
The Company has allocated 3,599,629 shares for the Plan. All options under the
Plan must be exercised within ten years from the date of grant.

Following is a summary of all stock option activity:

<TABLE>
<CAPTION>
Exercise Number of Shares
Price --------------------------------------------
Per Share Employees Directors Consultants Total
--------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Granted................. $0.07 -- -- 58,499 58,499
Outstanding at
December 31, 1997.... -- -- 58,499 58,499
Granted............... $0.07 3,130,670 70,000 117,474 3,318,144
Exercised............. $0.07 (1,976,545) (70,000) (52,768) (2,099,313)
Canceled.............. (39,978) -- (5,706) (45,684)
----- ---------- ------- ------- ----------
Outstanding at
December 31, 1998.... 1,114,147 -- 117,499 1,231,646
===== ========== ======= ======= ==========
Vested at December 31,
1998................. 147,154 -- 81,445 228,599
===== ========== ======= ======= ==========
</TABLE>

The weighted average exercise price of options granted during the year ended
December 31, 1998 was $0.10 and the weighted average exercise price of options
outstanding at December 31, 1998 was $0.15. The weighted average exercise price
of options canceled during the year ended December 31, 1998 was $0.07 and the
weighted average contractual life for options outstanding at December 31, 1998
was 9.5 years.

F-30
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a "minimum value" option pricing model
with the following assumptions for 1997 and 1998: risk-free interest rate of
6.0% and 5.4%, respectively; no dividend yields for either year; and an
expected option life of 1 and 6, respectively. The weighted average fair value
of options granted during 1997 and 1998 was $0.01 per share and $0.02 per
share, respectively.

Based on the "minimum value" option pricing model, proforma net loss for the
years ended December 31, 1997 and 1998 would not be materially different from
the amounts of net loss reported in the Company's accompanying statements of
operations.

The "minimum value" option valuation model requires the input of highly
subjective assumptions. Because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.

The pro forma net loss for the years ended December 31, 1997 and 1998 is not
representative of the pro forma effect on net income in future years, as pro
forma information in future years will reflect the amortization of a larger
number of stock options granted in succeeding years.

8. Warrants

In 1997, in connection with a financing arrangement, the Company issued
warrants to purchase 171,428 shares of the Company's Series A redeemable
convertible preferred stock at $0.70 per share. These warrants expire on March
31, 2003.

In 1998, in connection with a financing arrangement, the Company issued
warrants to purchase 107,412 shares of the Company's Series A redeemable
convertible preferred stock at $0.70 per share. This warrant expires at the
shorter of ten years from the date of grant or five years from the date of an
initial public offering of the Company's Common Stock.

9. Defined Contribution Plan

In 1998, the Company established defined contribution plan for certain
qualified employees as defined in the plan. Participants may contribute up to
the lesser of 6% of pretax compensation subject to certain limitations, or
$6,000. The plan provides for required contributions of 1% to 3% by the Company
as defined in the plan. The Company accrued contribution for the year ended
December 31, 1998 was $10,228.

10. Related Party Transactions

Prior to financing, the Company's operating activities were performed and
funded by Sandpiper Consulting, a Limited Liability Company (the "LLC") owned
by several common stockholders and officers of the Company. These expenditures
were accumulated at cost and converted to a convertible note in the bridge
financing (see Note 6). Subsequent to the bridge financing, LLC continued to
provide services directly to the Company, which were billed at cost and
reimbursed from Company funds. As of December 31, 1998, the Company no longer
obtains services from LLC. Payments to LLC relating to the years ended December
31, 1997 and 1998 were $924,431 (including $168,810 included in accounts
payable) and $212,700, respectively.

F-31
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company. As a result, under the terms of the agreement, these shares were
purchased from the LLC for $35,670. Further, during 1998 these shares were
allocated to the 1997 Stock Option Plan (see Note 7).

11. Subsequent Event (Unaudited)

On January 29, 1999, the Company effected the first close on the issuance of
Series B redeemable convertible preferred shares (see Note 5). Under the first
closing, 2,242,152 Series B redeemable convertible preferred shares were issued
at $4.46 per share, with total gross proceeds amounting to $9,999,998. The
Company has available another 1,569,507 shares of Series B redeemable
convertible preferred stock available for sale at the same price per share, to
certain specific investors agreed to by the Company and the largest investor
participating in the first close. These additional shares are available for
sale for 90 days following the first closing.

12. Year 2000 Issue (Unaudited)

The Company has developed a plan to modify its information technology, as
necessary, to be ready for the Year 2000. The Company currently expects the
project to be substantially complete by September 1999 and to cost
approximately $50,000. This estimate includes internal costs, but excludes the
costs to upgrade and replace systems in the normal course of business. The
Company does not expect this project to have a significant impact on
operations.

F-32
<PAGE>

SANDPIPER NETWORKS, INC.

UNAUDITED CONSOLIDATED BALANCE SHEET
September 30, 1999

<TABLE>
<S> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................................ $ 10,853,468
Accounts receivable.............................................. 120,749
Prepaid and other current assets................................. 295,654
------------
Total current assets............................................... 11,269,871

Property and equipment, net........................................ 6,046,531
Other assets....................................................... 434,396
------------
Total assets....................................................... $ 17,750,798
============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
-----------------------------------------

Current liabilities:
Current portion of debt.......................................... $ 39,126
Current portion of capital lease obligations..................... 1,010,363
Accounts payable................................................. 2,015,180
Accrued expenses................................................. 394,502
------------
Total current liabilities.......................................... 3,459,171
Debt, less current portion......................................... 45,098
Capital lease obligations, less current portion.................... 1,621,075
------------
Total liabilities.................................................. 5,125,344

Series A redeemable convertible preferred stock, $0.001 par value:
9,885,981 shares authorized as of September 30, 1999; 9,607,141
issued and outstanding as of September 30, 1999................... 6,674,442
Series B redeemable convertible preferred stock, $0.001 par value:
6,026,694 shares authorized and 4,820,628 issued and outstanding
as of September 30, 1999.......................................... 21,426,766
Shareholders' deficit:
Common Stock, $0.001 par value: 40,000,000 shares authorized and
6,979,067 issued and outstanding as of September 30, 1999....... 4,413,247
Deferred Compensation............................................ (3,573,432)
Accumulated deficit.............................................. (16,315,569)
------------
Total shareholders' equity......................................... (15,475,754)
------------
$ 17,750,798
============
</TABLE>

See accompanying notes.

F-33
<PAGE>

SANDPIPER NETWORKS, INC.

UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 1999

<TABLE>
<S> <C>
Revenues......................................................... $ 242,954
Cost and expenses:
Cost of revenues............................................... 2,641,767
Product development............................................ 1,820,986
Marketing and sales............................................ 4,056,155
General and administrative..................................... 1,480,912
Amortization of deferred compensation.......................... 580,827
------------
Total operating expenses......................................... 10,580,647
------------
Operating (loss)................................................. (10,337,693)
Interest expense................................................. 74,660
Interest (income)................................................ (362,331)
Provision for income taxes....................................... 2,856
------------
Net (loss)....................................................... $(10,052,878)
============
</TABLE>

See accompanying notes.

F-34
<PAGE>

SANDPIPER NETWORKS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
Total
Common Stock Shareholders'
-------------------- Deferred Accumulated Equity
Shares Amount Compensation Deficit Deficit
--------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance as of December
31, 1998............... 6,685,405 $ 112,383 $ (6,262,691) $ (6,150,308)
Issuance of Common
Stock in connection
with exercise of
stock options........ 293,662 146,605 146,605
Deferred
Compensation......... 4,154,259 $(4,154,259)
Amortization of
deferred
compensation......... 580,827 580,827
Net loss.............. -- -- -- (10,052,878) (10,052,878)
--------- ---------- ----------- ------------ ------------
Balance as of September
30, 1999............... 6,979,067 $4,413,247 $(3,573,432) $(16,315,569) $(15,475,754)
========= ========== =========== ============ ============
</TABLE>

See accompanying notes.

F-35
<PAGE>

SANDPIPER NETWORKS, INC.

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1999

<TABLE>
<S> <C>
Operating activities
Net loss......................................................... $(10,052,878)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization................................ 1,043,071
Amortization of deferred compensation........................ 580,827
Changes in operating assets and liabilities:
Accounts receivable........................................ (118,573)
Prepaid and other current assets........................... (213,353)
Accounts payable........................................... 2,006,718
Accrued expenses........................................... 169,478
------------
Net cash used in operating activities............................ (6,584,710)
------------
Investing activities
Purchases of property and equipment.............................. (6,016,812)
Other assets..................................................... (370,756)
------------
Net cash used in investing activities............................ (6,387,568)
------------
Financing activities
Proceeds from issuance of Common Stock........................... 146,605
Net proceeds from issuance of Series B redeemable convertible
preferred stock............................................... 21,426,766
Proceeds from credit line........................................ 300,000
Proceeds from capital lease obligations.......................... 2,080,232
Repayment of credit line......................................... (300,000)
Repayment of debt................................................ (33,344)
Repayment of capital lease obligations........................... (398,326)
------------
Net cash provided by financing activities........................ 23,221,933
------------
Net increase (decrease) in cash and cash equivalents............. 10,249,656
Cash and cash equivalents at beginning of period................. 603,812
------------
Cash and cash equivalents at end of period....................... $ 10,853,468
============
</TABLE>

See accompanying notes.

F-36
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization and Basis of Presentation

As of September 30, 1999, the Company has an accumulated deficit of
$16,315,569. The Company anticipates that, in the event that profitability is
not attained, the required funding for expenditures will come from sources such
as additional equity or debt financing, collaborative arrangements or
partnership agreements. While management believes that any additional funding
required will be available as necessary, there is no assurance that additional
financing will be available and on terms acceptable to the Company, when
required. If additional funding were not available when needed, the Company
would be required to reduce the rate of administrative costs and research and
development expenditures.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, SLC. All significant intercompany
accounts have been eliminated.

Stock Split

In 1997, the Company's Board of Directors approved a Common Stock split
whereby each outstanding share of Common Stock was converted into 8.1530496
shares of Common Stock.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

Concentration of Credit Risk

F-37
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and Equipment

Property and equipment are stated at cost and depreciated or amortized over
the estimated useful lives of the assets on a straight-line basis. The
estimated useful lives of the assets are as follows:

<TABLE>
<S> <C>
Equipment....................................................... 3 years
Furniture and fixtures.......................................... 3-5 years
Software........................................................ 2 years
</TABLE>

Included in this caption are the following assets:
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Operations equipment......................................... $ 4,097,400
Operations software licenses................................. 1,963,200
Other property and equipment................................. 1,476,284
-----------
7,536,884
Accumulated depreciation..................................... (1,490,353)
-----------
Net property and equipment................................... $ 6,046,531
===========
</TABLE>

Revenue recognition

The Company recognizes subscription revenues over the period the services
are provided.

Advertising Expense

Advertising costs are expensed as incurred. Advertising expense for the nine
months ended September 30, 1999 was $734,894.

Research and Development Expenses

Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company accounts for stock option grants in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees, which requires the
recognition of expense when the option price is less than the fair value of the
stock at the date of grant.

The Company generally awards options for a fixed number of shares at an
option price equal to the fair value at the date of grant. The Company has
adopted the disclosure-only provisions of FASB's Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation ("SFAS
123").

2. Credit Arrangements and Long-Term Debt

On February 19, 1998, the Company entered into a $1,000,000 line of credit
with a bank, with a variable rate of interest, based on the bank's lending
rate. Under the terms of the line of credit, up to $750,000 of the credit
facility could be converted to a three-year term loan with similar interest
terms on August 19, 1999, to the extent that Company draws on credit were
supported by capital equipment invoices. At August 19, 1999 there were no
amounts extended on the facility and the facility expired.

F-38
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On August 6, 1999, the Company entered into an equipment lease line for $2.0
million that is available over the 12 months following the date of the lease.
The annual interest rate is 7.24% and the line is payable over 36 months. The
lessor received a warrant for 22,425 shares of the Company's common stock at an
exercise price of $1.00 per share.

3. Leases

The Company entered into a $1,500,000 equipment lease line of credit through
which non-cancelable capital lease obligations for computers and equipment were
executed during the year ended December 31, 1998. In addition, the Company
entered into a lease agreement for its facilities on January 6, 1999 under non-
cancelable operating lease agreements expiring through 2005. This operating
lease provides for free rent and escalations.

Annual future minimum lease payments as of September 30, 1999 are as
follows:

<TABLE>
<CAPTION>
Operating Capital
Lease Leases
---------- ----------
<S> <C> <C>
Fiscal (Calendar) year ended
1999................................................ $ 74,805 $ 291,324
2000................................................ 299,227 1,165,297
2001................................................ 313,007 1,053,841
2002................................................ 322,850 411,546
2003................................................ 332,037
2004................................................ 338,599
Thereafter.......................................... 141,083
---------- ----------
Total minimum lease payments........................ $1,821,608 2,922,008
==========
Less amounts representing interest.................. 256,198
----------
Present value of lease payments..................... $2,665,810
==========
</TABLE>

At September 30, 1999, computers, software and equipment under capital
leases had an original cost basis and a net book value of $3,157,316 and
$2,532,985, respectively.

Rent expense was $197,793 for the nine months ended September 30, 1999.

F-39
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Income Taxes

<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Deferred tax assets:
Net operating losses and tax credits........................ $ 4,327,004
-----------
Total deferred tax assets..................................... 4,327,004
Deferred tax liabilities:
Federal benefit for state income taxes........................ 277,694
-----------
Total deferred liabilities.................................... 277,694
-----------
Net deferred tax assets....................................... 4,049,310
Less valuation reserve........................................ (4,049,310)
-----------
$ --
===========
</TABLE>
The Company has net operating loss carryforwards for federal and state
income tax purposes of $17,946,276, which begin to expire in 2004. Research tax
credit carryforwards of $244,195 are available for federal and state tax
purposes that expire beginning in 2013. Utilization of the above carryforwards
is subject to utilization limitations that may inhibit the Company's ability to
use carryforwards in the future.

5. Redeemable Convertible Preferred Stock

In April 1999, the shareholders approved an increase to authorized
redeemable convertible preferred stock to 15,912,675, of which 9,885,981 have
been designated as Series A and 6,026,694 have been designated as Series B.

Series A

Series B

Series B shares were issued at $4.46 per share and are convertible to one
share of Common Stock. Series B shares are redeemable at $4.46 per share on
November 17, 2004.

F-40
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

All Preferred Stock

The redeemable convertible preferred stock is generally convertible at any
time, at the holder's option, into Common Stock based on the conversion ratios
above, subject to future adjustment as defined. The redeemable convertible
preferred stock shall automatically convert into shares of Common Stock upon
the closing of an initial public offering of the Company's Common Stock, or
change of control if the per share price of the stock sold in the offering is
not less than $5.00 per share and the aggregate purchase price of the Common
Stock sold in the offering is not less than $10.0 million. The redeemable
convertible preferred stock contains voting rights identical to those of the
Common Stock.

6. Convertible Notes Payable

In 1997, in contemplation of the Series A redeemable convertible preferred
stock financing (see Note 5), the Company issued convertible notes payable and
warrants (see Note 8) for $600,000 (the bridge financing). In connection with
the close of the Series A redeemable convertible preferred stock financing, the
$600,000 in convertible notes payable were converted into 857,143 shares of
Series A redeemable convertible preferred stock. In addition, during 1997, as
part of the bridge financing, the Company converted accounts payable of
$246,924 to a related party to a promissory note convertible into Series A
redeemable convertible preferred stock. During 1997, in accordance with the
terms of the agreement, the Company repaid $121,924 of the promissory note plus
interest, and, in 1998, the holder converted the remaining $125,000 to Series A
redeemable convertible preferred stock at $0.70 per share.

7. Deferred Compensation

The Company recorded deferred compensation of $4,154,259 for the period from
inception to September 30, 1999. The amount recorded represents the difference
between the grant price and the deemed fair value of the Company's Common Stock
for share subject to options granted. The amortization of the deferred
compensation will be charged to operations over the vesting period of the
options, which is typically four years. Total amortization recognized was
$580,827 for the nine months ended September 30, 1999.

8. Stock

The 1997 Stock Option Plan (the "Plan") provides for the grant of both
incentive stock options and non-statutory stock options to employees, directors
and consultants. The exercise price of the incentive stock options must equal
or exceed the fair market value of the Common Stock at the grant date and the
non-statutory stock options may be less than the fair market value of the
Common Stock at the grant date. The incentive stock options generally vest over
four years whereas the non-statutory stock options generally vest after one
year. The Company has allocated 7,524,629 shares for the Plan. All options
under the Plan must be exercised within ten years from the date of grant.

F-41
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Following is a summary of all stock option activity:

<TABLE>
<CAPTION>
Exercise Number of Shares
Price Per ------------------------------------------
Share Employees Directors Consultants Total
---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at December
31, 1998............... 1,114,147 -- 117,499 1,231,646
Granted................. $1.00-5.00 1,505,250 75,160 1,580,410
Exercised............... $0.07-1.25 (224,885) (68,777) (293,662)
Canceled................ (382,781) -- (31,905) (414,686)
---------- --------- ----- ------- ---------
Outstanding at September
30, 1999............... 2,011,731 -- 91,977 2,103,708
========== ========= ===== ======= =========
Vested at September 30,
1999.................... 1,213,336 -- 177,962 1,410,256
========== ========= ===== ======= =========
</TABLE>

The weighted average exercise price of options granted during the nine
months ended September 30, 1999 was $1.67 and the weighted average exercise
price of options outstanding at September 30, 1999 was $1.20. The weighted
average exercise price of options canceled during the nine months ended
September 30, 1999 was $0.48 and the weighted average contractual life for
options outstanding at September 30, 1999 was 9.07 years.

Pro forma information regarding net income is required by SFAS No. 123,
Accounting for Stock-Based Compensation, and has been determined as if the
Company has accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a "minimum value" option pricing model with the following
assumptions for 1999: risk-free interest rate of 6.0%; no dividend yield; and
an expected option life of 4 years. The weighted average fair value of options
granted during 1999 was $0.29 per share.

Based on the "minimum value" option pricing model, pro forma net loss for
the nine months ended September 30, 1999 would not be materially different from
the amounts of net loss reported in the Company's accompanying statements of
operations.

The pro forma net loss for the nine months ended September 30, 1999 is not
representative of the pro forma effect on net income in future years, as pro
forma information in future years will reflect the amortization of a larger
number of stock options granted in succeeding years.

9. Warrants

F-42
<PAGE>

SANDPIPER NETWORKS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In 1999, in connection with a financing arrangement, the Company issued
warrants to purchase 956,066 shares of the Company's Series B redeemable
convertible preferred stock at $4.46 per share, and 125,000 shares at $10.00
per share, and 125,000 at $5.00 per share. These warrant expires at five years
from the date of grant.

In 1999, in conjunction with a financing arrangement, the Company issued
warrants to purchase 22,425 shares of the Company's common stock (See note 2).
The warrants expire the earlier of July 2004 or one year after any applicable
lock up period applicable to the Holder after the Company's initial public
offering or a change in control.

10. Defined Contribution Plan

In 1998, the Company established defined contribution plan for certain
qualified employees as defined in the plan. Participants may contribute up to
the lesser of 6% of pretax compensation subject to certain limitations, or
$6,000. The plan provides for required contributions of 1% to 3% by the Company
as defined in the plan. The Company's accrued contribution for the nine months
ended September 30, 1999 was $19,660.

11. Related Party Transactions

Prior to financing, the Company's operating activities were performed and
funded by Sandpiper Consulting, a Limited Liability Company (the "LLC") owned
by several common stockholders and officers of the Company. These expenditures
were accumulated at cost and converted to a convertible note in the bridge
financing (see Note 6). Subsequent to the bridge financing, LLC continued to
provide services directly to the Company, which were billed at cost and
reimbursed from Company funds. As of September 30, 1999, the Company no longer
obtains services from LLC. There were no payments to LLC relating to the nine
months ended September 30, 1999.

The LLC was a holder of 509,566 shares of the Company's Common Stock. Under
an agreement with the investors in the Series A redeemable convertible
preferred stock financing, LLC agreed to hold these shares exclusively for the
benefit of the employees of LLC. During 1998, all LLC employees were
transferred to the Company. As a result, under the terms of the agreement,
these shares were purchased from the LLC for $35,670. Further, during 1998
these shares were allocated to the 1997 Stock Option Plan (see Note 8).

12. Year 2000 Issue

The Company developed a plan to modify its information technology, as
necessary, to be ready for the Year 2000. The Company completed this project at
a total cost of $44,427. This amount includes internal costs, but excludes the
costs to upgrade and replace systems in the normal course of business. This
project did not have a significant impact on operations.

F-43
<PAGE>

ANNEX A

AGREEMENT AND PLAN OF REORGANIZATION

by and among

DIGITAL ISLAND, INC.

BEACH ACQUISITION CORP.

and

SANDPIPER NETWORKS, INC.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER.................................................. A-2
1.1 The Merger...................................................... A-2
1.2 Closing; Effective Time......................................... A-2
1.3 Effect of the Merger............................................ A-2
1.4 Articles of Incorporation; Bylaws............................... A-2
1.5 Directors and Officers.......................................... A-2
1.6 Effect on Capital Stock......................................... A-3
1.7 Surrender of Certificates....................................... A-4
1.8 No Further Ownership Rights in Company Capital Stock............ A-6
1.9 Lost, Stolen or Destroyed Certificates.......................... A-6
1.10 Tax Consequences................................................ A-6
1.11 Withholding..................................................... A-6
1.12 Exemption from Registration; California Permit; Registration
Rights.......................................................... A-6
1.13 Taking of Necessary Action; Further Action...................... A-7

ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY.................. A-7
2.1 Organization, Standing and Power................................ A-7
2.2 Capital Structure............................................... A-8
2.3 Authority....................................................... A-9
2.4 Financial Statements............................................ A-9
2.5 Absence of Certain Changes...................................... A-10
2.6 Absence of Undisclosed Liabilities.............................. A-10
2.7 Litigation...................................................... A-10
2.8 Restrictions on Business Activities............................. A-10
2.9 Governmental Authorization...................................... A-10
2.10 Title to Property............................................... A-11
2.11 Intellectual Property........................................... A-11
2.12 Environmental Matters........................................... A-12
2.13 Taxes........................................................... A-13
2.14 Employee Benefit Plans.......................................... A-14
2.15 Certain Agreements Affected by the Merger....................... A-16
2.16 Employee Matters................................................ A-16
2.17 Interested Party Transactions................................... A-16
2.18 Insurance....................................................... A-16
2.19 Compliance With Laws............................................ A-16
2.20 Minute Books.................................................... A-17
2.21 Accounts Receivable............................................. A-17
2.22 Customers and Suppliers......................................... A-17
2.23 Material Contracts.............................................. A-17
2.24 No Breach of Material Contracts................................. A-18
2.25 Year 2000 Compliance............................................ A-18
2.26 Export Control Laws............................................. A-18
2.27 Product Releases................................................ A-18
2.28 Complete Copies of Materials.................................... A-19
2.29 Shareholder Agreement; Irrevocable Proxies...................... A-19
2.30 Vote Required................................................... A-19
2.31 Board Approval.................................................. A-19
2.32 Tax Treatment................................................... A-19
2.33 Information Statement and Proxy Statement....................... A-19
</TABLE>

A-i
<PAGE>

TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
2.34 Company Affiliates................................................ A-20
2.35 Brokers' and Finders' Fees........................................ A-20
2.36 Representations Complete.......................................... A-20

ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT.................... A-20
3.1 Organization, Standing and Power.................................. A-20
3.2 Capital Structure................................................. A-21
3.3 Authority......................................................... A-21
3.4 SEC Documents; Financial Statements............................... A-22
3.5 Absence of Certain Changes........................................ A-22
3.6 Absence of Undisclosed Liabilities................................ A-23
3.7 Litigation........................................................ A-23
3.8 Restrictions on Business Activities............................... A-23
3.9 Intellectual Property............................................. A-23
3.10 Certain Agreements Affected by the Merger......................... A-24
3.11 Principal Contracts............................................... A-24
3.12 Vote Required; Voting Agreements.................................. A-25
3.13 Board Approval.................................................... A-25
3.14 Information Statement and Proxy Statement......................... A-25
3.15 Tax Treatment..................................................... A-25
3.16 Broker's and Finders' Fees........................................ A-25
3.17 Complete Copies of Materials; Representations Complete............ A-25

ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... A-26
4.1 General Conduct of Business....................................... A-26
4.2 Conduct of Business of Company.................................... A-26
4.3 Conduct of Parent................................................. A-28
4.4 No Solicitation by Company........................................ A-29
4.5 No Solicitation by Parent......................................... A-30

ARTICLE V ADDITIONAL AGREEMENTS......................................... A-31
5.1 Information Statement and Proxy Statement......................... A-31
5.2 Meetings of Securityholders....................................... A-32
5.3 Access to Information............................................. A-33
5.4 Confidentiality................................................... A-33
5.5 Public Disclosure................................................. A-33
5.6 Consents; Cooperation............................................. A-33
5.7 Further Assurances................................................ A-34
5.8 Company Shareholder Agreements.................................... A-35
5.9 Parent Voting Agreements.......................................... A-35
5.10 Blue Sky Laws..................................................... A-35
5.11 Employee Benefit Plans............................................ A-35
5.12 Form S-8.......................................................... A-36
5.13 Listing of Additional Shares...................................... A-36
5.14 Escrow Agreement.................................................. A-36
5.15 Expenses.......................................................... A-36
5.16 Director and Officer Indemnification.............................. A-37
5.17 Preferred Stock; Warrants......................................... A-37
5.18 Board Composition................................................. A-37
</TABLE>

A-ii
<PAGE>

TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE VI CONDITIONS TO THE MERGER................................... A-37
6.1 Conditions to Obligations of Each Party to Effect the Merger.... A-37
6.2 Additional Conditions to Obligations of Company................. A-38
6.3 Additional Conditions to the Obligations of Parent and Merger
Sub............................................................. A-39

ARTICLE VII TERMINATION, AMENDMENT AND WAIVER......................... A-40
7.1 Termination..................................................... A-40
7.2 Effect of Termination........................................... A-40
7.3 Expenses and Termination Fees................................... A-41
7.4 Amendment....................................................... A-41
7.5 Extension; Waiver............................................... A-42

ARTICLE VIII ESCROW AND INDEMNIFICATION............................... A-42
8.1 Escrow Fund..................................................... A-42
8.2 Indemnification................................................. A-42
8.3 Escrow Period................................................... A-42
8.4 Claims upon Escrow Fund......................................... A-43
8.5 Objections to Claims............................................ A-43
8.6 Resolution of Conflicts; Arbitration............................ A-43
8.7 Shareholders' Agent............................................. A-44
8.8 Actions of the Shareholders' Agent.............................. A-44
8.9 Third-Party Claims.............................................. A-44

ARTICLE IX GENERAL PROVISIONS......................................... A-45
9.1 Non-Survival at Effective Time.................................. A-45
9.2 Notices......................................................... A-45
9.3 Interpretation.................................................. A-46
9.4 Counterparts.................................................... A-46
9.5 Entire Agreement; Nonassignability; Parties in Interest......... A-46
9.6 Severability.................................................... A-46
9.7 Remedies Cumulative............................................. A-46
9.8 Governing Law................................................... A-46
9.9 Rules of Construction........................................... A-47
9.10 Definitions..................................................... A-47
</TABLE>

Exhibits
<TABLE>
<C> <S> <C>
Exhibit A Form of Agreement of Merger
Exhibit B Declaration of Registration Rights
Exhibit C Form of Shareholder Agreement
Exhibit D Form of Shareholder Representation Agreement
Exhibit E Form of Escrow Agreement
Exhibit F Form of Voting Agreement
Exhibit G Form of Opinion of Counsel to Company
Exhibit H Form of Opinion of Counsel to Parent
</TABLE>

A-iii
<PAGE>

AGREEMENT AND PLAN OF REORGANIZATION

This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of October 24, 1999, by and among DIGITAL ISLAND, INC., a
Delaware corporation ("Parent"), BEACH ACQUISITION CORP., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and
SANDPIPER NETWORKS, INC., a California corporation ("Company").

RECITALS

A. The Board of Directors of Company has unanimously (i) determined that it
is advisable and fair to, and in the best interests of, Company and its
shareholders that, upon the terms and subject to the conditions of this
Agreement, Merger Sub merge with and into Company, with Company being the
surviving corporation (the "Merger"), (ii) approved this Agreement, the Merger
and the other transactions contemplated hereby and (iii) determined to
recommend the approval of this Agreement and the Merger by the shareholders of
Company.

B. The Board of Directors of Parent has (i) determined that the Merger is
advisable and fair to, and in the best interests of, Parent and its
stockholders, (ii) approved this Agreement, the Merger and the other
transactions contemplated hereby and (iii) determined to recommend the approval
by the stockholders of Parent of the issuance of shares of common stock, par
value $.001 per share, of Parent ("Parent Common Stock") pursuant to this
Agreement, as required under the rules and requirements of the Nasdaq National
Market.

C. Pursuant to the Merger, among other things, the outstanding shares of
Common Stock, par value $.001 per share ("Company Common Stock"), of Company
shall be converted into the right to receive shares of Parent Common Stock, at
the rate set forth herein.

D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
"reorganization" under the provisions of Section 368(a) of the Code.

E. Concurrently with the execution of this Agreement and as an inducement to
Parent and Merger Sub to enter into this Agreement, certain affiliates of
Company have on the date hereof entered into Shareholder Agreements in the form
attached hereto as Exhibit C (the "Shareholder Agreements") pursuant to which
they have agreed, among other things, to vote the shares of Company Common
Stock over which such persons have voting power to approve this Agreement and
the Merger.

F. Concurrently with the execution of this Agreement and as an inducement to
Company to enter into this Agreement, certain affiliates of Parent have on the
date hereof entered into Voting Agreements in the form attached hereto as
Exhibit F (the "Voting Agreements") pursuant to which they have agreed, among
other things, to vote the shares of Parent Common Stock over which such persons
have voting power to approve the issuance of shares of Parent Common Stock
pursuant to this Agreement.

NOW, THEREFORE, in consideration of the foregoing, the respective
representations, warranties, covenants and agreements set forth herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree
as follows:

A-1
<PAGE>

ARTICLE I

THE MERGER

1.1 The Merger. At the Effective Time (as defined in Section 1.2 below) and
upon the terms and subject to the conditions of this Agreement, the Agreement
of Merger attached hereto as Exhibit A (the "Agreement of Merger") and the
applicable provisions of the California Corporations Code (the "California
Corporations Code"), Merger Sub shall be merged with and into Company, the
separate corporate existence of Merger Sub shall cease and Company shall
continue as the surviving corporation of the Merger. Company, as the surviving
corporation after the Merger, is hereinafter sometimes referred to as the
"Surviving Corporation."

1.2 Closing; Effective Time. Unless this Agreement shall have been
terminated and the transactions contemplated herein shall have been abandoned
pursuant to Section 7.1, the closing of the Merger (the "Closing") shall take
place as soon as practicable after the satisfaction or, if permissible, waiver
of the conditions set forth in Article VI or at such other time as the parties
hereto may agree (the "Closing Date"). The Closing shall take place at the
offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng
Road, Palo Alto, California, or at such other location as the parties hereto
may agree. On the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing the Agreement of Merger, together with the required
officers' certificates, with the Secretary of State of the State of California,
in accordance with the relevant provisions of the California Corporations Code
(the time of such filing or such later time as may be agreed upon by the
parties as set forth in the Merger Agreement being the "Effective Time").

1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Agreement of Merger and the
applicable provisions of the California Corporations Code. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all
the property, rights, privileges, powers and franchises of Company and Merger
Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of Company and Merger Sub shall become the debts, liabilities and duties
of the Surviving Corporation.

1.4 Articles of Incorporation; Bylaws.

(a) At the Effective Time, the Articles of Incorporation of Company, as in
effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as provided
by the California Corporations Code and such Articles of Incorporation;
provided, however, that immediately after the Effective Time the Articles of
Incorporation of the Surviving Corporation shall be amended and restated so as
to read in its entirety like the Articles of Incorporation of Merger Sub with
Article I of the Articles of Incorporation amended to read as follows: "The
name of the corporation is Sandpiper Networks, Inc."

(b) At the Effective Time, the Bylaws of Company, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Corporation
until thereafter amended; provided, however, that immediately after the
Effective Time the Bylaws of the Surviving Corporation shall be amended and
restated in their entirety so as to read like the Bylaws of Merger Sub.

1.5 Directors and Officers. At the Effective Time, (a) the directors of
Merger Sub immediately prior to the Effective Time shall be the directors of
the Surviving Corporation, until their respective successors are duly elected
or appointed and qualified, and (b) the officers of Company immediately prior
to the Effective Time shall be the officers of the Surviving Corporation, until
their respective successors are duly elected or appointed and qualified.

A-2
<PAGE>

1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of any of the parties hereto or the holders
of any of the following securities:

(a) Conversion of Company Capital Stock. Subject to adjustment pursuant to
Section 1.6(f) below and subject to the other terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any
action on the part of the holder of any shares of capital stock of Company
("Company Capital Stock"), each share of Company Capital Stock outstanding
immediately prior to the Effective Time (other than shares, if any, held by
persons who shall have perfected, and not withdrawn or otherwise forfeited at
or prior to the Effective Time, dissenters' or appraisal rights in accordance
with the California Corporations Code ("Dissenting Shares")) shall be converted
into and exchanged for the right to receive 1.0727 shares of Parent Common
Stock (the "Exchange Ratio").

(b) Cancellation of Company Capital Stock Owned by Parent, Merger Sub or
Company. At the Effective Time, all shares of Company Capital Stock that are
owned by Company as treasury stock, and each share of Company Capital Stock (if
any) owned by Parent, Merger Sub or any other direct or indirect wholly owned
subsidiary of Parent or of Company immediately prior to the Effective Time,
shall be canceled and extinguished without any conversion thereof.

(i) At the Effective Time, the Company Stock Option Plan, as amended
(the "Company Stock Option Plan"), and all options outstanding under the
Company Stock Option Plan immediately prior to the Effective Time ("Company
Options"), whether vested or unvested, shall be assumed by Parent and
thereafter constitute the right to receive options to purchase such number
of shares of Parent Common Stock determined in accordance with this Section
1.6(c).

(ii) Each such option so assumed by Parent under this Agreement shall
continue to have, and be subject to, the same terms and conditions set
forth in the Company Stock Option Plan and the applicable stock option
agreement as in effect immediately prior to the Effective Time, except that
(i) such option will be exercisable for that number of whole shares of
Parent Common Stock equal to the product of the number of shares of Company
Common Stock that were issuable upon exercise of such option immediately
prior to the Effective Time multiplied by the Exchange Ratio and rounded
down to the next whole number of shares of Parent Common Stock, and (ii)
the per share exercise price for the shares of Parent Common Stock issuable
upon exercise of such assumed option will be equal to the quotient
determined by dividing the exercise price per share of Company Common Stock
at which such option was exercisable immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the next whole cent.

(iii) At the Effective Time, each warrant to acquire shares of Company
Capital Stock (each a "Company Warrant") outstanding immediately prior to
the Effective Time shall be converted and exchanged for warrants to
purchase such number of shares of Parent Common Stock as shall be equal to
the product of (a) the number of shares of Company Common Stock that were
issuable upon exercise of such Company Warrants immediately prior to the
Effective Time and (b) the Exchange Ratio, such product to be rounded down
to the next whole number of shares of Parent Common Stock. The per share
exercise price of each Company Warrant shall equal the quotient obtained by
dividing (a) the per share exercise price of the Company Warrant at which
such warrant was exercisable immediately prior to the Effective Time by (b)
the Exchange Ratio rounded up to the next whole cent.

(d) Unvested Company Common Stock. If any shares of Company Common Stock
outstanding immediately prior to the Effective Time are unvested or are subject
to a repurchase option, risk of forfeiture or other condition under the Company
Stock Option Plan, any applicable restricted stock purchase agreement, or other
agreement with Company or under which Company has any rights, then (unless such
condition terminates by virtue of the Merger pursuant to the express terms of
such agreement) the shares of Parent Common Stock issued in exchange for such
shares of Company Common Stock will also be unvested and subject to the same

A-3
<PAGE>

repurchase option, risk of forfeiture or other condition, and the certificates
representing such shares of Parent Common Stock may accordingly bear any
appropriate legends. Company shall take all action that may be necessary to
ensure that, from and after the Effective Time, Parent is entitled to exercise
any such repurchase option or other right set forth in any such restricted
stock purchase agreement or other agreement.

(e) Capital Stock of Merger Sub. At the Effective Time, each share of common
stock, no par value per share, of Merger Sub ("Merger Sub Common Stock") issued
and outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and exchanged for one validly issued, fully paid and nonassessable share
of common stock, par value $.001 per share, of the Surviving Corporation. Each
stock certificate of Merger Sub evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital stock of the Surviving
Corporation.

(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be appropriately
adjusted to reflect the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Capital Stock), reorganization, recapitalization
or other like change with respect to Parent Common Stock or Company Capital
Stock occurring after the date hereof and prior to the Effective Time and of
any increase in the number of shares of Company Common Stock or Parent Common
Stock outstanding resulting from any failure of Section 2.2 or Section 3.2 to
be correct on the date hereof or any failure by Company to comply with its
covenants under Section 4.2 of this Agreement or any failure by Parent to
comply with its covenants under Section 4.3 of this Agreement, so as to provide
Parent and shareholders of Company the same economic effect as contemplated by
this Agreement prior to such stock split, reverse split, stock dividend,
reorganization, recapitalization, like change or increase.

(g) Fractional Shares. No fraction of a share of Parent Common Stock will be
issued, but in lieu thereof each holder of shares of Company Capital Stock who
would otherwise be entitled to a fraction of a share of Parent Common Stock
(after aggregating all fractional shares of Parent Common Stock to be received
by such holder) shall receive from Parent an amount of cash (rounded to the
nearest whole cent) equal to the product of (i) such fraction, multiplied by
(ii) the average of the closing bid prices for a share of Parent Common Stock
as quoted on the Nasdaq National Market for the twenty (20) trading days
immediately preceding (but not including) the last full trading day prior to
date on which the Effective Time occurs (the "Closing Market Value").

(h) Dissenters' Rights. Any Dissenting Shares shall not be converted into
Parent Common Stock but shall instead be converted into the right to receive
such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to the California Corporations Code. Company agrees
that, except with the prior written consent of Parent, or as required under the
California Corporations Code, it will not voluntarily make any payment with
respect to, or settle or offer to settle, any such purchase demand. Each holder
of Dissenting Shares ("Dissenting Shareholder") who, pursuant to the provisions
of California law, becomes entitled to payment of the fair value for shares of
Company Capital Stock shall receive payment therefor (but only after the value
therefor shall have been agreed upon or finally determined pursuant to such
provisions). If, after the Effective Time, any Dissenting Shares shall lose
their status as Dissenting Shares, Parent shall issue and deliver, upon
surrender by such shareholder of certificate or certificates representing
shares of Company Capital Stock, the number of shares of Parent Common Stock to
which such shareholder would otherwise be entitled under this Section 1.6 less
the number of shares allocable to such shareholder that have been deposited in
the Escrow Fund (as defined below) in respect of such shares of Parent Common
Stock pursuant to Section 1.7 and Article VIII hereof.

1.7 Surrender of Certificates.

(a) Exchange Agent. Parent's transfer agent or another institution selected
by Parent and reasonably acceptable to Company shall act as exchange agent (the
"Exchange Agent") in the Merger.

A-4
<PAGE>

(b) Parent to Provide Common Stock and Cash. Promptly after the Effective
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I, through such reasonable procedures as Parent
may adopt, (i) the shares of Parent Common Stock issuable pursuant to Section
1.6(a) in exchange for shares of Company Capital Stock outstanding immediately
prior to the Effective Time less the number of shares of Parent Common Stock to
be deposited into an escrow fund (the "Escrow Fund") pursuant to the
requirements of Article VIII and (ii) cash in an amount sufficient to permit
payment of cash in lieu of fractional shares pursuant to Section 1.6(g).

(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause to be mailed to each holder of record of a certificate or certificates
(the "Certificates") which immediately prior to the Effective Time represented
outstanding shares of Company Capital Stock, whose shares were converted into
the right to receive shares of Parent Common Stock (and cash in lieu of
fractional shares) pursuant to Section 1.6, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Parent Common Stock (and cash in lieu of fractional shares). Upon surrender
of a Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Parent Common Stock less the number of shares of Parent Common Stock
to be deposited in the Escrow Fund on such holder's behalf pursuant to Article
VIII hereof and payment in lieu of fractional shares which such holder has the
right to receive pursuant to Section 1.6, and the Certificate so surrendered
shall forthwith be canceled. Until so surrendered, each outstanding Certificate
that, prior to the Effective Time, represented shares of Company Capital Stock
will be deemed from and after the Effective Time, for all corporate purposes,
other than the payment of dividends, to evidence the ownership of the number of
full shares of Parent Common Stock into which such shares of Company Capital
Stock shall have been so converted and the right to receive an amount of cash
in lieu of the issuance of any fractional shares in accordance with Section
1.6. As soon as practicable after the Effective Time, and subject to and in
accordance with the provisions of Article VIII hereof, Parent shall cause to be
distributed to the Escrow Agent (as defined in Article VIII hereof) a
certificate or certificates representing ten percent (10%) of the Merger Shares
which shall be registered in the name of the Escrow Agent as nominee for the
holders of Certificates cancelled pursuant to this Section 1.7. Such shares
shall be beneficially owned by such holders and shall be held in escrow and
shall be available to compensate Parent for certain damages as provided in
Article VIII hereof. To the extent not used for such purposes, such shares
shall be released, all as provided in Article VIII hereof.

(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions with respect to Parent Common Stock with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, at the time
of such surrender, the amount of any such dividends or other distributions with
a record date after the Effective Time theretofore payable (but for the
provisions of this Section 1.7(d)) with respect to such shares of Parent Common
Stock.

(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.

A-5
<PAGE>

(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.

(g) Dissenting Shares. The provisions of this Section 1.7 shall also apply
to Dissenting Shares that lose their status as such, except that the
obligations of Parent under this Section 1.7 shall commence on the date of loss
of such status and the holder of such shares shall be entitled to receive in
exchange for such shares the number of shares of Parent Common Stock to which
such holder is entitled pursuant to Section 1.6 hereof.

1.8 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid in
lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.

1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common
Stock (and cash in lieu of fractional shares) as may be required pursuant to
Section 1.6; provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Parent, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.

1.10 Tax Consequences. It is intended by the parties hereto that the Merger
shall constitute a "reorganization" within the meaning of Section 368 of the
Code.

1.11 Withholding. Each of the Surviving Corporation, Parent and the Exchange
Agent shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Capital
Stock such amounts, if any, as it is required to deduct and withhold with
respect to the making of such payment under the Code or any provision of state,
local or foreign tax law. To the extent that any amounts are so withheld by the
Surviving Corporation, Parent or the Exchange Agent, as the case may be, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Capital Stock in respect of
which such deduction and withholding was made by the Surviving Corporation,
Parent or the Exchange Agent, as the case may be.

1.12 Exemption from Registration; California Permit; Registration Rights.

(a) The shares of Parent Common Stock to be issued in the Merger will be
issued in a transaction exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"), by reason of Section 3(a)(10) thereof
or, pursuant to Section 1.12(b), pursuant to a registration statement on Form
S-4 or by reason of Section 4(2) of the Securities Act and SEC rules and
regulations promulgated thereunder. Subject to the provisions of Section
5.1(c), the shares of Parent Common Stock to be issued in the Merger will be
qualified under the California Corporations Code, pursuant to Section 25121
thereof, after a fairness hearing has been held pursuant to the authority
granted by Section 25142 of such law, and (if deemed necessary by Parent in its
good faith judgment) such fairness hearing shall also address the assumption by
Parent of all Company Options pursuant to this Agreement. Parent and Company
shall each use all requisite commercially reasonable efforts (i) to file, as
promptly as practicable following the execution and delivery of this Agreement
an application for issuance of a permit pursuant to Section 25121 of the
California Corporations Code to issue such securities (and, if deemed necessary
by Parent in its good faith judgment, to assume such Company Options) (the
"California Permit") and (ii) to obtain the California Permit as promptly as
practicable.

A-6
<PAGE>

(b) In the event that the California Permit cannot be obtained within a
reasonable time or without the imposition of burdensome conditions, then, at
Parent's election and with the consent of Company (which shall not be
unreasonably withheld), Parent and Company shall use commercially reasonable
efforts to effect the issuance of the shares of Parent Common Stock to be
issued in the Merger (x) pursuant to a registration statement on Form S-4 or
(y) subject to receipt of all required approvals pursuant to Section 1.12(c),
in a private placement pursuant to Section 4(2) of the Securities Act and SEC
rules and regulations promulgated thereunder, on terms and conditions
(including rights for the registration of such shares on Form S-3) that are
reasonably satisfactory to Parent and Company. The parties hereto acknowledge
and agree that in the event of such a private placement: (i) as a condition to
effecting such issuance as a private placement pursuant to Section 4(2) of the
Securities Act, Parent shall be entitled to obtain from each shareholder of
Company a Shareholder Representation Agreement in the form attached hereto as
Exhibit D (or such other form as shall be reasonably satisfactory to Parent and
Company) and that Parent will be relying upon the representations made by each
shareholder of Company in the applicable Shareholder Representation Agreement
in connection with the issuance of Parent Common Stock to such shareholder,
(ii) the shares of Parent Common Stock so issued pursuant to Section 1.6 will
not be registered under the Securities Act and will constitute "restricted
securities" within the meaning of the Securities Act; and (iii) the
certificates representing the shares of Parent Common Stock shall bear
appropriate legends to identify such privately placed shares as being
restricted under the Securities Act, to comply with applicable state securities
laws and, if applicable, to notice the restrictions on transfer of such shares.

(c) Subject to receipt of all required approvals pursuant to the Amended and
Restated Investors' Rights Agreement (the "Investors' Rights Agreement") dated
as of February 19, 1999 among Parent and the securityholders of Parent
identified therein, at the Closing, Parent shall execute and deliver a
Declaration of Registration Rights in the form attached hereto as Exhibit B.

1.13 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company, the officers and directors of Company immediately
prior to the Effective Time are fully authorized to take, and will take, all
such lawful and necessary action, so long as such action is not inconsistent
with this Agreement.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF COMPANY

Except as disclosed in that section of the document of even date herewith
delivered by Company to Parent prior to the execution and delivery of this
Agreement (the "Company Disclosure Schedule") corresponding to the Section of
this Agreement to which any of the representations and warranties specifically
relate or as disclosed in another section of the Company Disclosure Schedule if
it is reasonably apparent on the face of the disclosure that it is applicable
to another Section of this Agreement, Company hereby represents and warrants to
each of Parent and Merger Sub as follows:

2.1 Organization, Standing and Power. Each of Company and its subsidiaries
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization. Company has the corporate power
to own its properties and to carry on its business as now being conducted and
as currently proposed to be conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which it is required by law to be
so qualified and in good standing. Company has made available to Parent a true
and complete copy of the certificate or articles of incorporation or other
charter or organizational documents, each as amended, of Company and each of
its subsidiaries. Neither Company nor any of its subsidiaries is in violation
of any of the provisions of its certificate or articles of incorporation or
bylaws or other charter or organizational documents, each as amended. Neither
Company nor any of its subsidiaries

A-7
<PAGE>

directly or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity. All of the outstanding shares of capital stock and
voting securities of each of Company's subsidiaries owned, directly or
indirectly, by Company are duly authorized, validly issued, fully paid and
nonassessable, and those shares of capital stock and voting securities of each
of Company's subsidiaries owned by Company, directly or indirectly, are free
and clear of all liens, charges, claims or encumbrances or rights of others.
There are no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of
any character relating to the issued or unissued capital stock or other
securities of any such subsidiary, or otherwise obligating Company or any such
subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire any
such securities.

2.2 Capital Structure. The authorized capital stock of Company consists
solely of 40,000,000 shares of Company Common Stock, par value $0.001 per
share, of which 6,967,575 shares are issued and outstanding, and 15,912,675
shares of Preferred Stock, par value $0.001 per share, of which 9,885,981
shares have been designated Series A Preferred Stock, 9,607,141 shares of which
are issued and outstanding and of which 6,026,694 shares have been designated
Series B Preferred Stock, 4,820,628 shares of which are issued and outstanding.
There are no other outstanding shares of capital stock or voting securities and
no outstanding commitments to issue any shares of capital stock or voting
securities, other than pursuant to the exercise of warrants to acquire Company
Capital Stock and pursuant to the exercise of Company Options outstanding under
the Company Stock Option Plan. Section 2.2 of the Company Disclosure Schedule
sets forth a true and complete list (including numbers of shares and/or rights)
of holders of Company's capital stock and voting securities, and any persons
with rights to acquire Company's capital stock and voting securities, which
list will be promptly updated from time to time prior to Closing to reflect any
changes thereto (which changes are in any event subject to the restrictions
imposed under Section 4.2 below). All outstanding shares of Company Capital
Stock are duly authorized, validly issued, fully paid and non-assessable and
are free and clear of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and are not
subject to preemptive rights or rights of first refusal created by statute, the
Articles of Incorporation or Bylaws, each as amended, of Company or any
agreement to which Company is a party or by which it is bound. Company has
reserved 22,425 shares of Company Common Stock for issuance upon the exercise
of warrants to purchase Company Common Stock with an exercise price of $1.00
per share, Company Warrants to purchase 278,840 shares of Series A Preferred
Stock with an exercise price of $0.70 per share, and Company Warrants to
purchase 1,206,066 shares of Series B Preferred Stock with an exercise price
between $4.46 and $10.00. Company has reserved 7,524,629 shares of Company
Common Stock for issuance pursuant to the Company Stock Option Plan, of which
2,392,975 shares have been issued pursuant to option exercises and 2,677,833
shares are subject to outstanding, unexercised options (of which 728,080 such
shares are vested). Except for (i) the rights created pursuant to this
Agreement, (ii) the outstanding options under the Company Stock Option Plan,
(iii) Company Warrants described above in this Section 2.2, and (iv) Company's
right to repurchase any unvested shares under the Company Stock Option Plan,
there are no other options, warrants, calls, rights, commitments or agreements
of any character to which Company is a party or by which it is bound obligating
Company to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of capital stock or voting
securities of Company or obligating Company to grant, extend, accelerate the
vesting of, change the price of, or otherwise amend or enter into any such
option, warrant, call, right, commitment or agreement. Except for this
Agreement, there are no contracts, commitments or agreements relating to
voting, purchase or sale of Company's capital stock or voting securities (x)
between or among Company and any of its securityholders and (y) to Company's
knowledge, between or among any of Company's securityholders. None of the
outstanding options permit any accelerated vesting or exercisability of those
options or the shares of Company Common Stock subject to those options by
reason of the Merger or any other transactions contemplated by this Agreement,
and the terms of the Company Stock Option Plan and the outstanding option
agreements thereunder each permit the Parent's assumption of those options as
options to purchase Parent Common Stock as provided in this Agreement, without
the consent or approval of the holders of those options, Company's
shareholders, or otherwise, and without any acceleration of the options. True
and complete copies of all agreements and instruments relating to or issued
under the Company Stock Option Plan

A-8
<PAGE>

have been provided to Parent and such agreements and instruments have not been
amended, modified or supplemented, and there are no agreements to amend, modify
or supplement such agreements or instruments in any case from the form provided
to Parent. All outstanding shares of Company Capital Stock and all Company
Options and warrants to acquire Company Capital Stock from Company were issued
in compliance in all material respects with all applicable federal and state
securities laws. Section 2.2 of the Company Disclosure Schedule sets forth all
notes, bonds, debentures or other evidences of indebtedness of Company,
including the name of the holder, the date of issuance, and the principal
amount and interest rate of each such debt, as well as the aggregate amount
owed to the holder of each such instrument as of September 30, 1999 (including
accrued and unpaid interest, and any premiums).

2.3 Authority. Company has all requisite corporate power and authority to
enter into this Agreement and the other agreements set forth in the exhibits
hereto (the "Ancillary Agreements") to which Company is a party, to perform its
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Ancillary Agreements to which Company is a party and the consummation
of the transactions contemplated hereby and thereby have been duly authorized
by all necessary corporate action on the part of Company, subject only to the
approval of the Merger by Company's shareholders as contemplated by Section
6.1(a). Each of this Agreement and the Ancillary Agreements to which Company is
a party has been duly executed and delivered by Company and constitutes the
valid and binding obligation of Company enforceable against Company in
accordance with its terms, except as enforcement may be limited by (i) the
effect of bankruptcy, insolvency, reorganization, receivership,
conservatorship, arrangement, moratorium or other similar laws affecting the
rights of creditors generally, or (ii) the availability of specific
performance, injunctive relief or other equitable remedies and general
principles of equity, regardless of whether considered in a proceeding in
equity or at law. The execution and delivery of this Agreement or any Ancillary
Agreement by Company does not, and the performance of Company's obligations
hereunder or thereunder and the consummation of the transactions contemplated
hereby or thereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of any benefit, or result in any other consequence, under (i) any
provision of the certificate or articles of incorporation or bylaws or other
charter or organizational documents, each as amended, of Company or any of its
subsidiaries or (ii) any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Company or any of its subsidiaries or any of their respective properties or
assets, except in the case of clause (i) for any conflicts, violations,
defaults or other occurrences that would not prevent or materially impair or
delay the consummation of the Merger or any of the other transactions
contemplated by this Agreement. No consent, approval, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission, self-regulatory organization or other governmental
authority or instrumentality ("Governmental Entity") is required by or with
respect to Company in connection with the execution and delivery of this
Agreement, the performance of Company's obligations hereunder or thereunder or
the consummation of the transactions contemplated hereby or thereby, except for
(i) the filing of the Agreement of Merger, as provided in Section 1.2, (ii)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal or state securities
laws or the securities laws of any foreign country, and (iii) such filings as
may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), and (iv) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
prevent or materially alter or delay the Merger or any of the other
transactions contemplated by this Agreement.

2.4 Financial Statements. Company has delivered to Parent the audited
consolidated financial statements (including, without limitation, balance
sheets, statements of operations and statements of cash flows) of Company and
its subsidiaries for the fiscal years ended December 31, 1996, 1997 and 1998,
and the unaudited consolidated financial statements (including, without
limitation, balance sheet, statement of operations and statement of cash flows)
of Company and its subsidiaries as at, and for the nine-month period ended
September 30, 1999 (collectively, the "Company Financial Statements"). The
Company Financial

A-9
<PAGE>

Statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") (except that the financial statements which are not audited
do not have notes thereto) applied on a consistent basis throughout the periods
indicated and with each other. The Company Financial Statements fairly present
the financial condition and operating results of Company as of the dates, and
for the periods, indicated therein, subject to normal and recurring year-end
audit adjustments. Company maintains and will continue to maintain until the
Closing an adequate system of internal financial and accounting controls for
Company and its subsidiaries. There has been no change in Company's accounting
policies since January 1, 1996 except as described in the notes to the Company
Financial Statements.

2.5 Absence of Certain Changes. Since September 30, 1999 (the "Company
Balance Sheet Date"), Company has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
could reasonably be expected to result in, a Material Adverse Effect on
Company; (ii) any acquisition, sale or transfer of any material asset of
Company or any of its subsidiaries; (iii) any change in accounting methods or
practices (including any change in depreciation or amortization policies or
rates) by Company or any revaluation by Company of any of its or its
subsidiaries' assets; (iv) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the shares of Company, or any
direct or indirect redemption, purchase or other acquisition by Company or any
of its subsidiaries of any of its shares of capital stock or other securities;
(v) any amendment or change to the certificate or articles of incorporation or
bylaws or other charter or organizational documents of Company or any of its
subsidiaries; (vi) any material increase in or modification of the compensation
or benefits payable or to become payable by Company or any of its subsidiaries
to any of its directors or employees, (vii) any acts or omissions of the types
restricted by Section 4.2, or (viii) any negotiation or agreement by Company or
any of its subsidiaries to do any of the things described in the preceding
clauses (i) through (vii) (other than negotiations with Parent and its
representatives regarding the transactions contemplated by this Agreement).

2.6 Absence of Undisclosed Liabilities. None of Company or any of its
subsidiaries has any material obligations or liabilities of any nature (matured
or unmatured, fixed or contingent) other than (i) those set forth or adequately
provided for in the consolidated balance sheet included in the Company
Financial Statements as of the Company Balance Sheet Date (the "Company Balance
Sheet"), (ii) those incurred in the ordinary course of business and not
required to be set forth in the Company Balance Sheet under GAAP, (iii) those
incurred in the ordinary course of business consistent with past practice since
the Company Balance Sheet Date, and (iv) those incurred in connection with the
execution and performance of this Agreement.

2.7 Litigation. There is no private or governmental action, suit,
proceeding, arbitration or to the knowledge of Company, claim or investigation
pending or threatened by or before any agency, court or tribunal, foreign or
domestic, against Company or any of its subsidiaries or any of their respective
properties or officers or directors (in their capacities as such). There is no
judgment, decree or order binding upon or against Company or any of its
subsidiaries, or, to the knowledge of Company, any of their respective
directors or officers (in their capacities as such). As of the date of this
Agreement, there is no action, suit, proceeding, claim, arbitration or other
litigation that Company has pending or threatened against other parties.

2.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Company or any of its subsidiaries
which has or could reasonably be expected to have the effect of prohibiting or
impairing any current or future business practice of Company or any of its
subsidiaries, any acquisition of property by Company or any of its subsidiaries
or the conduct of business by Company or any of its subsidiaries as currently
conducted or as currently proposed to be conducted by Company or any of its
subsidiaries.

2.9 Governmental Authorization. Each of Company and its subsidiaries has
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Company or any of its subsidiaries currently operates or
holds any interest in any of its properties or (ii) that is required for the
operation of the business of Company or any of its subsidiaries or

A-10
<PAGE>

the holding of any such interest ((i) and (ii) herein collectively called
"Company Authorizations"), and all of such Company Authorizations are in full
force and effect.

2.10 Title to Property. Company and its subsidiaries have good and
marketable title to all of their respective properties, interests in properties
and assets, real and personal, reflected in the Company Balance Sheet or
acquired after the Company Balance Sheet Date (except properties, interests in
properties and assets sold or otherwise disposed of since the Company Balance
Sheet Date in the ordinary course of business), or with respect to leased
properties and assets, valid leasehold interests in, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any kind or character,
except (i) the lien of current taxes not yet due and payable, (ii) such
imperfections of title, liens and easements as do not and will not materially
detract from or interfere with the current use of the properties subject
thereto or affected thereby, or otherwise materially impair business operations
involving such properties and (iii) liens securing debt which is reflected on
the Company Balance Sheet. The plants, property and equipment of Company and
its subsidiaries that are used in the operations of their respective businesses
are in a state of repair sufficient for Company's and its subsidiaries' current
operations. All properties used in the operations of Company and its
subsidiaries are reflected in the Company Balance Sheet to the extent GAAP
requires the same to be reflected. Section 2.10 of the Company Disclosure
Schedule identifies each parcel of real property owned or leased by Company or
any of its subsidiaries.

2.11 Intellectual Property.

(a) Company and its subsidiaries own, or are licensed or otherwise possesses
legally enforceable rights to use all patents, trademarks, trade names, service
marks, copyrights, domain names and any applications therefor, maskworks, net
lists, schematics, technology, know-how, trade secrets, inventory, ideas,
algorithms, processes, computer software programs or applications (in source
code and/or object code form), and tangible or intangible proprietary
information or material ("Intellectual Property") that are used or proposed to
be used in the business of Company and its subsidiaries as currently conducted
or as proposed to be conducted by Company and its subsidiaries. Neither Company
nor any of its subsidiaries has (i) licensed any of its Intellectual Property
in source code form to any party or (ii) entered into any exclusive agreements
relating to its Intellectual Property with any party.

(b) Section 2.11 of the Company Disclosure Schedule lists (i) all patents
and patent applications and all registered and unregistered trademarks, trade
names and service marks, and all copyrights, domain names and maskworks which
are registered or as to which registration has been applied for, included in
the Intellectual Property, including the jurisdictions in which each such
Intellectual Property right has been issued or registered or in which any
application for such issuance and registration has been filed, (ii) all
material licenses, sublicenses and other agreements as to which Company or any
of its subsidiaries is a party and pursuant to which any person is authorized
to use any Intellectual Property except for Company's standard form non-
exclusive licenses and sublicenses contained in purchase orders, and (iii) all
material licenses, sublicenses and other agreements as to which Company or any
of its subsidiaries is a party and pursuant to which Company or any of its
subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software ("Third Party Intellectual Property Rights")
which are incorporated in, are, or form a part of any product of Company or any
of its subsidiaries as of the date of this Agreement.

(c) To Company's knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of Company
or any of its subsidiaries, or any Intellectual Property right of any third
party to the extent licensed by or through Company or any of its subsidiaries,
by any third party, including any employee or former employee of Company or any
of its subsidiaries. Neither Company nor any of its subsidiaries has entered
into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property, other than indemnification
provisions contained in purchase orders or license agreements arising in the
ordinary course of business.

(d) Neither Company nor any of its subsidiaries is, nor will any of them be
as a result of the execution and delivery of this Agreement or the Ancillary
Agreements or the performance of any of their obligations

A-11
<PAGE>

under this Agreement or the Ancillary Agreements, in breach of any license,
sublicense or other agreement relating to any Intellectual Property or Third
Party Intellectual Property Rights.

(e) All patents, registered trademarks, service marks and copyrights held by
Company or any of its subsidiaries are valid and subsisting. Neither Company
nor any of its subsidiaries (i) has been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right
of any third party, (ii) has any knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service
mark, copyright, trade secret or other proprietary right of any third party or
(iii) has brought any action, suit or proceeding for infringement of
Intellectual Property or breach of any license or agreement involving
Intellectual Property against any third party.

(f) Each of Company and its subsidiaries has secured written assignments
from all consultants and employees who contributed to the creation or
development of Intellectual Property of the rights to such contributions that
Company and its subsidiaries do not already own by operation of law, and
Company has no reason to believe that any such assignment is not valid or
binding.

(g) Each of Company and its subsidiaries has taken reasonable steps
consistent with prevailing industry practice to protect and preserve the
confidentiality of all Intellectual Property not otherwise protected by
patents, patent applications or copyright ("Confidential Information"). All
use, disclosure or appropriation of Confidential Information owned by Company
or any of its subsidiaries by or to a third party has, to the knowledge of
Company, been pursuant to the terms of a written agreement between Company and
such third party. All use, disclosure or appropriation of Confidential
Information not owned by Company or any of its subsidiaries has been pursuant
to the terms of a written agreement between Company and the owner of such
Confidential Information, or is otherwise lawful.

2.12 Environmental Matters.

(a) The following terms shall be defined as follows:

(i) "Environmental Laws" shall mean any federal, state or local laws,
ordinances, codes, regulations, rules, policies and orders that are
intended to assure the protection of the environment, or that classify,
regulate, call for the remediation of, require reporting with respect to,
or list or define air, water, groundwater, solid waste, hazardous or toxic
substances, materials, wastes, pollutants or contaminants.

(ii) "Hazardous Materials" shall mean any toxic or hazardous substance,
material or waste or any pollutant or contaminant, or infectious or
radioactive substance or material, including without limitation, those
substances, materials and wastes defined in or regulated under any
Environmental Laws.

(iii) "Property" shall mean all real property leased or owned by Company
or any of its subsidiaries either currently or in the past.

(iv) "Facilities" shall mean all buildings and improvements on the
Property of Company or any of its subsidiaries.

(b) (i) To the knowledge of Company, no methylene chloride or asbestos is
contained in or has been used at or released from the Facilities; (ii) to the
knowledge of Company, all Hazardous Materials and wastes have been disposed of
in accordance with all Environmental Laws; (iii) neither Company nor any of its
subsidiaries has received any notice (verbal or written) of any noncompliance
of the Facilities or its past or present operations with Environmental Laws;
(iv) no administrative actions or suits are pending or, to the knowledge of
Company, threatened against Company or any of its subsidiaries relating to a
violation of any Environmental Laws; (v) neither Company nor any of its
subsidiaries is a potentially responsible party under the federal Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), or state
analog statute, arising out of events occurring at or prior to the Effective
Time; (vi) neither Company nor any subsidiary has received any written or
verbal notice that there has been in the past, or is now, any Hazardous
Materials on,

A-12
<PAGE>

under or migrating to or from the Facilities or Property; (vii) to Company's
knowledge, there have not been in the past, and are not now, any underground
tanks or underground improvements at, on or under the Property including
without limitation, treatment or storage tanks, sumps, or water, gas or oil
wells; (viii) to Company's knowledge, there are no polychlorinated biphenyls
(PCBs) deposited, stored, disposed of or located on the Property or Facilities
or any equipment on the Property containing PCBs at levels in excess of 50
parts per million; (ix) to Company's knowledge, there is no formaldehyde on the
Property or in the Facilities, nor any insulating material containing urea
formaldehyde in the Facilities, the presence of which could reasonably be
expected to result in a liability to Company; (x) the Facilities and Company's
and its subsidiaries' uses and activities therein have at all times complied
with all Environmental and Safety Laws; and (xi) Company and its subsidiaries
have all the permits and licenses required to be issued under Federal, State or
local laws regarding Environmental and Safety Laws and are in full compliance
with the terms and conditions of those permits.

2.13 Taxes. Company and its subsidiaries, and any consolidated, combined,
unitary or aggregate group for Tax (as defined below) purposes of which Company
is or has been a member, have timely filed all Tax Returns required to be filed
by them and have paid all Taxes shown thereon to be due. The Company Financial
Statements, as of September 30, 1999, reflect any unpaid taxes of Company and
its subsidiaries in periods through such date, to the extent such are shown as
being due on any Tax Returns. Neither Company nor any of its subsidiaries has
accrued any material tax liabilities for periods after September 30, 1999.
There is (i) no claim for Taxes that is a lien against the property of Company
or any of its subsidiaries or is being asserted against Company or any of its
subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit
of any Tax Return of Company or any of its subsidiaries being conducted or
threatened by a Tax authority, (iii) no extension of the statute of limitations
on the assessment of any Taxes granted by Company and currently in effect, and
(iv) no agreement, contract or arrangement to which Company or any of its
subsidiaries is a party that may result in the payment of any amount that would
not be deductible by reason of Sections 280G (other than agreements or
arrangements for which shareholder approval meeting the requirements of
Section 280G(b)(5)(B) will be obtained prior to the Closing) or 404 of the
Code. Company and its subsidiaries have not been and will not be required to
include any material adjustment in Taxable income for any Taxable period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions, events
or accounting methods employed prior to the Merger. Neither Company nor any of
its subsidiaries has filed or will file any consent to have the provisions of
paragraph 341(f)(2) of the Code (or comparable provisions of any state Tax
laws) apply to Company or any of its subsidiaries. Neither Company nor any of
its subsidiaries is now or has ever been a party to any Tax sharing or Tax
allocation agreement. Neither Company nor any of its subsidiaries has filed any
disclosures under Section 6662 or comparable provisions of state, local or
foreign law to prevent the imposition of penalties with respect to any Tax
reporting position taken on any Tax Return. Neither Company nor any of its
subsidiaries has ever been a member of a consolidated, combined or unitary
group of which Company was not the ultimate parent corporation. For purposes of
this Agreement, the following terms have the following meanings: "Tax" (and,
with correlative meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with
any interest or any penalty, addition to tax or additional amount imposed by
any Governmental Entity (a "Tax authority") responsible for the imposition of
any such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person. As used herein, "Tax Return" shall mean any return, statement, report
or form (including, without limitation, estimated Tax Returns and reports,
withholding Tax Returns and reports and information reports and returns)
required to be filed with respect to Taxes. Each of Company and its
subsidiaries is in compliance in all material respects with all terms and
conditions of any Tax exemptions or other Tax-sparing agreement or order of a
foreign government, and the consummation of the Merger shall not materially
impair the continued validity and effectiveness of any such Tax exemptions or
other Tax-sparing agreement or order.

A-13
<PAGE>

Target and each of its subsidiaries have in their possession receipts for any
Taxes paid to foreign Tax authorities. Neither Target nor any of its
subsidiaries has been a "United States real property holding corporation"
within the meaning of Section 897 of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code.

2.14 Employee Benefit Plans.

(a) Section 2.14 of the Company Disclosure Schedule contains a true and
complete list, with respect to Company, its subsidiaries and any trade or
business (whether or not incorporated) which is treated as a single employer
with Company (an "ERISA Affiliate") within the meaning of Section 414(b), (c),
(m) or (o) of the Code, of (i) all material employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), (ii) each loan to a non-officer employee in excess of ten
thousand dollars ($10,000), and loans to officers and directors, (iii) any
stock option, stock purchase, phantom stock, stock appreciation right,
supplemental retirement, severance, sabbatical, medical, dental, vision care,
disability, employee relocation, cafeteria benefit (Code Section 125) or
dependent care (Code Section 129), life insurance or accident insurance plans,
programs or arrangements, (iv) all bonus, pension, profit sharing, savings,
deferred compensation or incentive plans, programs or arrangements, (v) other
material fringe or employee benefit plans, programs or arrangements that apply
to senior management of Company and that do not generally apply to all
employees, and (vi) any current or former employment or executive compensation
or severance agreements, written or otherwise, as to which unsatisfied
obligations of Company of greater than ten thousand dollars ($10,000) remain
for the benefit of, or relating to, any present or former employee, consultant
or director of Company or any of its subsidiaries (together, the "Company
Employee Plans").

(b) Company has furnished to Parent a copy of each of the Company Employee
Plans and related plan documents (including trust documents, insurance policies
or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any employee communications that are materially
inconsistent with the terms of the written Company Employee Plan relating
thereto) and has, with respect to each Company Employee Plan which is subject
to ERISA reporting requirements, provided copies of the Form 5500 reports filed
for the last three plan years. Any Company Employee Plan intended to be
qualified under Section 401(a) of the Code has (i) obtained from the Internal
Revenue Service a favorable determination letter as to its qualified status
under the Code, including all amendments to the Code effected by the Tax Reform
Act of 1986 and subsequent legislation, (ii) has applied to the Internal
Revenue Service for such a determination letter prior to the expiration of the
requisite period under applicable Treasury Regulations or Internal Revenue
Service pronouncements in which to apply for such determination letter and to
make any amendments necessary to obtain a favorable determination, or (iii) has
been established under a standardized prototype plan for which an Internal
Revenue Service opinion letter has been obtained by the plan sponsor and is
valid as to the adopting employer, or (iv) the deadline for filing an
application for a determination letter has not yet expired. Company has also
furnished Parent with the most recent Internal Revenue Service determination or
opinion letter issued with respect to each such Company Employee Plan, and
nothing has occurred since the issuance of each such letter which could
reasonably be expected to cause the loss of the tax-qualified status of any
Company Employee Plan subject to Code Section 401(a). Company has also
furnished Parent with all registration statements and prospectuses prepared in
connection with each Company Employee Plan.

(c) (i) None of the Company Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Company Employee Plan; (iii) each
Company Employee Plan has been administered in accordance with its terms and in
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code), and Company, its subsidiaries and
each ERISA Affiliate have performed all obligations required to be performed by
them under, are not in any material respect in default under or violation of,
and have no knowledge of any material default or violation by any other party
to, any of the Company Employee Plans; (iv) neither Company

A-14
<PAGE>

nor any of its subsidiaries or ERISA Affiliates is subject to any liability or
penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with
respect to any of the Company Employee Plans; (v) all material contributions
required to be made by Company or ERISA Affiliate to any Company Employee Plan
have been made on or before their due dates and a reasonable amount has been
accrued for contributions to each Company Employee Plan for the current plan
years; (vi) with respect to each Company Employee Plan, no "reportable event"
within the meaning of Section 4043 of ERISA (excluding any such event for which
the thirty (30) day notice requirement has been waived under the regulations to
Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 or
ERISA has occurred; (vii) no Company Employee Plan is covered by, and neither
Company nor any ERISA Affiliate has incurred or expects to incur any liability
under Title IV of ERISA or Section 412 of the Code; and (viii) each Company
Employee Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, and applicable law without
liability to Parent (other than the expense associated with full vesting of
employer contributions and the ordinary administrative expenses typically
incurred in a termination event). With respect to each Company Employee Plan
subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of
Section 3(1) of ERISA, Company has, in all material respects, prepared in good
faith and timely filed all requisite governmental reports (which were true and
correct as of the date filed) and has, in all material respects, properly and
timely filed and distributed or posted all notices and reports to employees
required to be filed, distributed or posted with respect to each such Company
Employee Plan. No suit, administrative proceeding, action or other litigation
has been brought or, to the knowledge of Company, is threatened, against or
with respect to any such Company Employee Plan, including any audit or inquiry
by the Internal Revenue Service or United States Department of Labor. No
payment or benefit which will or may be made by Company or any of its
subsidiaries to any Employee will be characterized as an "excess parachute
payment" within the meaning of Section 280G(b)(1) of the Code.

(d) With respect to each Company Employee Plan, Company has complied with
(i) the applicable health care continuation and notice provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
regulations (including proposed regulations) thereunder, (ii) the applicable
requirements of the Family and Medical Leave Act of 1993 and the regulations
thereunder, and (iii) the applicable requirements of the Health Insurance
Portability and Accountability Act of 1996 and the regulations (including
proposed regulations) thereunder.

(e) The consummation of the transactions contemplated by this Agreement or
any Ancillary Agreement in and of themselves will not (i) entitle any current
or former employee of or other service provider to Company, any of its
subsidiaries or any other ERISA Affiliate to severance benefits or any other
payment, except as expressly provided in this Agreement or the Ancillary
Agreements, or (ii) accelerate the time of payment or vesting, or increase the
amount of compensation due any such employee or service provider, except as
provided in Section 2.14 of the Company Disclosure Schedule.

(f) There has been no amendment to, written interpretation or announcement
(whether or not written) by Company, any of its subsidiaries or any other ERISA
Affiliate relating to, or change in participation or coverage under, any
Company Employee Plan which would materially increase the expense of
maintaining such Plan above the level of expense incurred with respect to that
Plan for the most recent fiscal year included in Company's financial
statements.

(g) Neither Company nor any of its subsidiaries currently maintain, sponsor,
participate in or contribute to, nor has any of them ever maintained,
established, sponsored, participated in, or contributed to, any pension plan
(within the meaning of Section 3(2) of ERISA) which is subject to Part 3 of
Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code.

(h) Neither Company, any of its subsidiaries nor any other ERISA Affiliate
is a party to, or has made any contribution to or otherwise incurred any
obligation under, any "multiemployer plan" as defined in Section 3(37) of
ERISA.

A-15
<PAGE>

2.15 Certain Agreements Affected by the Merger. Subject to Section 1.6,
neither the execution and delivery of this Agreement or any Ancillary
Agreements nor the performance of any of Company's obligations hereunder or
thereunder or the consummation of the transaction contemplated hereby or
thereby will (i) result in any payment (including, without limitation,
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any director or employee of Company, (ii) materially increase
any benefits otherwise payable by Company or (iii) result in the acceleration
of the time of payment or vesting of any such benefits.

2.16 Employee Matters. Each of Company and its subsidiaries is in compliance
in all material respects with all currently applicable laws and regulations
respecting employment, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices, and is not engaged in any unfair labor practice. Each of Company and
its subsidiaries has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries, and other payments to employees; and is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing. Neither Company nor any of its subsidiaries
is liable for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits (other than routine payments to be made in
the normal course of business and consistent with past practice). There are no
material pending claims against Company or any of its subsidiaries under any
workers compensation policy or for long term disability. There are no material
controversies pending or, to the knowledge of Company, threatened, between
Company or any of its subsidiaries, on one hand, and any of their employees, on
the other hand, which controversies have resulted in an action, suit,
arbitration or investigation before any agency, court or tribunal, foreign or
domestic. Neither Company nor any of its subsidiaries is a party to any
collective bargaining agreement or other labor union contract nor does Company
know of any activities of any labor union to organize any such employees. To
Company's knowledge, no employees of Company or any of its subsidiaries are in
violation of any term of any employment contract, patent disclosure agreement,
noncompetition agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by Company or any of
its subsidiaries because of the nature of the business conducted or presently
proposed to be conducted by Company or any of its subsidiaries or to the use of
trade secrets or proprietary information of others. Except as set forth in
Section 2.16 of the Company Disclosure Schedule, neither Company nor any of its
subsidiaries is a party to or bound by any employment contract with any of its
officers or other employees. No key employee of Company or any of its
subsidiaries, other than any employee whose duties are primarily secretarial or
clerical, has given notice to Company or any of its subsidiaries, nor is
Company otherwise aware, that any such employee intends to terminate his or her
employment with Company or any of its subsidiaries.

2.17 Interested Party Transactions. Neither Company nor any of its
subsidiaries is indebted to any director, officer, employee or agent of Company
or any such subsidiary (except for amounts due as normal salaries and bonuses
and in reimbursement of ordinary expenses), and no such person is indebted to
Company or any of its subsidiaries.

2.18 Insurance. Company and its subsidiaries have policies of insurance and
bonds of the type and in amounts customarily carried by persons conducting
business or owning assets similar to those of Company and its subsidiaries.
There is no material claim pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid and Company or the applicable subsidiary is otherwise
in compliance with the terms of such policies and bonds. Company has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.

2.19 Compliance With Laws. Each of Company and its subsidiaries has
complied, and is in compliance, in all material respects with all applicable
federal, state, local, foreign and self-regulatory laws, statutes, rules and
regulations. Each of Company and its subsidiaries has, and is in compliance in
all material respects with, all Company Authorizations necessary to conduct its
business or to own and operate its assets.

A-16
<PAGE>

2.20 Minute Books. The minute books of Company and its subsidiaries made
available to Parent contain a fair summary of all meetings or actions by
written consent of directors and shareholders since the time of incorporation
of Company and its subsidiaries, and reflect all transactions referred to in
such minutes accurately in all material respects.

2.21 Accounts Receivable. Subject to any reserves set forth in the Company
Financial Statements, the accounts receivable shown on the Company Financial
Statements represent and will represent bona fide claims against debtors for
sales and other charges, and are not subject to discount except for normal cash
and immaterial trade discounts. The amount carried for doubtful accounts and
allowances disclosed in the Company Financial Statements is sufficient to
provide for any losses which may be sustained on realization of the
receivables.

2.22 Customers and Suppliers. No customer which individually accounted for
more than five percent (5%) of Company's consolidated gross revenues during the
12-month period preceding the date hereof, and no supplier of Company or any of
its subsidiaries, has canceled or otherwise terminated, or made any written
threat to Company or any of its subsidiaries to cancel or otherwise terminates,
its relationship with Company or any of its subsidiaries, or has decreased
materially its services or supplies to Company or any of its subsidiaries in
the case of any such supplier, or its usage of the services or products of
Company or any of its subsidiaries in the case of such customer, and to
Company's knowledge, no such supplier or customer intends to cancel or
otherwise terminate its relationship with Company or any of its subsidiaries or
to decrease materially its services or supplies to Company or any of its
subsidiaries or its usage of the services or products of Company or any of its
subsidiaries, as the case may be.

2.23 Material Contracts. As of the date of this Agreement, except for the
material contracts described in Section 2.23 of the Company Disclosure
Schedule, neither Company nor any of its subsidiaries is a party to or bound by
any material contract or agreement (a "Material Contract"), including without
limitation:

(a) any distributor, sales, advertising, agency or similar contract
involving in the case of any such contract more than $100,000 in payments by or
to Company or any of its subsidiaries;

(b) any continuing contract for the purchase of materials, supplies,
equipment or services involving in the case of any such contract more than
$100,000 over the term of the contract;

(c) any contract that expires or may be renewed at the option of any person
other than Company so as to expire more than one year after the date of this
Agreement;

(d) any trust indenture, mortgage, promissory note, loan agreement or other
contract for the borrowing of money, any currency exchange, commodities or
other hedging arrangement or any leasing transaction of the type required to be
capitalized in accordance with GAAP;

(e) any contract for capital expenditures in excess of $100,000 in the
aggregate;

(f) any contract limiting the freedom of Company or any of its subsidiaries
to engage in any line of business or to compete with any other person as that
term is defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any confidentiality, secrecy or non-disclosure contract;

(g) any contract pursuant to which Company or any of its subsidiaries is a
lessor of any machinery, equipment, motor vehicles, office furniture, fixtures
or other personal property for more than $100,000 over the term of the
contract;

(h) any contract with any person with whom Company or any of its
subsidiaries does not deal at arm's length within the meaning of the Code; or

(i) any agreement of guarantee, support, indemnification, assumption or
endorsement of, or any similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or
indebtedness of any other person.

A-17
<PAGE>

2.24 No Breach of Material Contracts. Each of Company and its subsidiaries
has performed all of the material obligations required to be performed by it
and is entitled to all accrued benefits under, and, to Company's knowledge, is
not alleged to be in default in any material respect of any Material Contract.
Each of the Material Contracts is in full force and effect, and there exists no
default or event of default or event, occurrence, condition or act, with
respect to Company or any of its subsidiaries or to Company's knowledge with
respect to the other contracting party, which, with the giving of notice, the
lapse of the time or the happening of any other event or conditions, would
become a default or event of default under any Material Contract. Company has
provided true and complete copies of all Material Contracts to Parent.

2.25 Year 2000 Compliance. "Year 2000 Compliant" (or, as the context may
require, "Year 2000 Compliance") means that any particular hardware or software
will: (i) process date data from at least the years 1900 through 2101, or
involving date information from more than one century, without error,
interruption, malfunction, corruption, ceasing to function, generating
incorrect data or otherwise producing incorrect results or adversely impacting
current or future operations; (ii) maintain functionality with respect to the
introduction, processing and output of records containing dates falling on or
after January 1, 2000; and (iii) support numeric and date transitions from the
twentieth century to the twenty-first century, and back (including, without
limitation, all calculations, aging, reporting, printing, displays, reversals,
disaster and vital records recoveries) without error, interruption,
malfunction, corruption, ceasing to function, generating incorrect data or
otherwise producing incorrect results or adversely impacting current or future
operations.

(a) All of Company's and its subsidiaries' products and services (including
products sold to date, products currently being sold or future products), both
individually and when operating in conjunction with all other systems, products
or services with which they are designed to interface (assuming such other
systems, products or services are Year 2000 Compliant), and all material
computer software and hardware (including, without limitation, microcode,
firmware, system and application programs, files, databases, computer services
and microcontrollers, including those embedded in computer and noncomputer
equipment) contained in Company's and its subsidiaries' products or services
(including products and services sold to date, products and services currently
being sold or future products and services) are Year 2000 Compliant.

(b) All of Company's and its subsidiaries' internal computer systems are,
both individually and in conjunction with all other systems with which they
interface (assuming such other systems, products or services are Year 2000
Compliant), Year 2000 Compliant.

(c) Each of Company and its subsidiaries has made inquiries of its key
suppliers of services and products and, to knowledge of Company, neither
Company nor any of its subsidiaries is relying on the products or services of
any third party whose systems, products or services are not Year 2000
Compliant.

(d) Company does not have any material expenses or other material
liabilities associated with securing Year 2000 Compliance, or making
contingency arrangements to address Year 2000 Compliance issues, with respect
to Company's or its subsidiaries' products or services (including products and
services sold to date, products and services currently being sold or future
products and services), internal computer systems or the computer systems of
Company's or its subsidiaries' key suppliers or customers.

(e) Neither Company nor any of its subsidiaries has made any representations
or warranties specifically relating to the ability of any product or service
sold, licensed, rendered, or otherwise provided by Company or its subsidiaries
in the conduct of its business to be Year 2000 Compliant.

2.26 Export Control Laws. Each of Company and its subsidiaries has conducted
its export transactions in accordance with applicable provisions of United
States export control laws and regulations, including but not limited to the
Export Administration Act and implementing Export Administration Regulations.

2.27 Product Releases. Company has provided Acquiror a schedule of product
releases, which schedule is attached hereto as Section 2.27 of the Company
Disclosure Schedule. Company has a good faith reasonable

A-18
<PAGE>

belief that it can achieve the release of products on the schedule described in
Section 2.27 of the Company Disclosure Schedule and is not currently aware of
any change in its circumstances or other fact that has occurred that would
cause it to believe that it will be unable to meet such release schedule.
Notwithstanding the foregoing, Acquiror acknowledges that there may be events
beyond the control of Company that may cause it to be unable to meet such
release schedule and that Company makes no representations with respect
thereto.

2.28 Complete Copies of Materials. Company has delivered or made available
to Parent true and complete copies of each material document that has been
requested in writing by, Parent or its counsel in connection with their legal,
financial and accounting review of Company and its subsidiaries.

2.29 Shareholder Agreement; Irrevocable Proxies. Holders of more than 50% of
the issued and outstanding Company Common Stock, more than 50% of the issued
and outstanding Company Series A Preferred Stock, more than 50% of the issued
and outstanding Company Series B Preferred Stock and more than 50% of the
issued and outstanding Company Capital Stock, have signed and delivered to
Parent Shareholder Agreements in the form of Exhibit C hereto and irrevocable
proxies and market standoff letter agreements in the forms annexed thereto (the
"Irrevocable Proxies" and the "Market Standoff Agreements," respectively) and
have agreed in writing to vote for approval of the Merger and the transactions
contemplated thereby pursuant to such Shareholder Agreements and Irrevocable
Proxies. Schedule 2.29 to this Agreement sets forth the names and number of
shares held by each of the Holders who have signed and delivered such
Shareholder Agreement.

2.30 Vote Required. The affirmative vote of the holders of more than fifty
percent (50%) of the shares of Company Common Stock and each series of Company
Preferred Stock outstanding on the record date set for the Company Shareholders
Meeting is the only vote of the holders of any of Company's Capital Stock
necessary to approve this Agreement, the Merger and the other transactions
contemplated by this Agreement.

2.31 Board Approval. The Board of Directors of Company has unanimously (i)
approved and adopted this Agreement, the Merger and the other transactions
contemplated by this Agreement, (ii) determined that the Merger is advisable
and on terms fair to, and is in the best interests of, the shareholders of
Company and (iii) recommended that the shareholders of Company approve and
adopt this Agreement, the Merger and the other transactions contemplated by
this Agreement.

2.32 Tax Treatment. Neither Company nor, to Company's knowledge, any of its
directors or officers has taken any action that would prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code. Neither Company nor, to Company's knowledge, any of its affiliates or
agents is aware of any agreement, plan or other circumstance that would prevent
the Merger from qualifying as a "reorganization" within the meaning of Section
368(a) of the Code.

2.33 Information Statement and Proxy Statement. The information supplied by
Company for inclusion in the information statement (as amended or supplemented,
the "Information Statement") to be sent to the shareholders of Company in
connection with the meeting of Company's shareholders to consider and vote upon
this Agreement, the Merger and the other transactions contemplated hereby (the
"Company Shareholders Meeting") or in the proxy statement (as amended or
supplemented, the "Proxy Statement") to be sent to the stockholders of Parent
in connection with the meeting of Parent's stockholders to consider and vote
upon the issuance of Parent Common Stock pursuant to this Agreement (the
"Parent Stockholders Meeting") or in any registration statement on Form S-4 or
S-3 pursuant to Section 1.12 of this Agreement, shall not, on the date the
Information Statement (or prospectus in the event of a registration statement
on Form S-4) is first sent to Company's shareholders or on the date the Proxy
Statement is first sent to Parent's stockholders (as the case may be) , at the
time of the Company Shareholders Meeting or the Parent's Stockholders Meeting
(as the case may be), or at the Effective Time, contain any statement which, at
such time, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to matters to be voted on
at

A-19
<PAGE>

the Company Shareholders Meeting or the Parent Stockholders Meeting which has
become false or misleading. If at any time prior to the Effective Time any
event or information should be discovered by Company which should be set forth
in a supplement to the Information Statement or the Proxy Statement, Company
shall promptly inform Parent. Notwithstanding the foregoing, Company makes no
representation, warranty or covenant with respect to any information supplied
by Parent or Merger Sub which is contained in the Information Statement or the
Proxy Statement. The information supplied by Company for inclusion in the
application for issuance of a California Permit pursuant to which the shares of
Parent Common Stock to be issued in the Merger and the Company Options to be
assumed in the Merger will be qualified under the California Corporations Code
(the "Permit Application") shall not at the time the fairness hearing is held
pursuant to Section 25142 of the California Corporations Code and the time the
qualification of such securities is effective under Section 25122 of the
California Corporations Code contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.

2.34 Company Affiliates. Section 2.34 of the Company Disclosure Schedule
contains a true and complete list of all persons who, to Company's knowledge,
may be deemed to be an "affiliate" within the meaning of Rule 144 and Rule 145
of the Rules and Regulations of the SEC promulgated under the Securities Act
for purposes of Accounting Series Releases 130 and 135, as amended (each such
person, an "Affiliate" and collectively "Affiliates") of Company.

2.35 Brokers' and Finders' Fees. Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby, other
than as set forth in Section 2.35 of the Company Disclosure Schedule. Company
has previously furnished to Parent a complete and correct copy of all
agreements between Company and the financial advisors set forth in Section 2.35
of the Company Disclosure Schedule, pursuant to which such firms would be
entitled to any payment relating to the Merger.

2.36 Representations Complete. None of the representations or warranties
made by Company herein or in any Schedule hereto, including the Company
Disclosure Schedule, or certificate furnished by Company pursuant to this
Agreement, contains or will contain at the Effective Time any untrue statement
of a material fact, or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF PARENT

Except as disclosed in that section of the document of even date herewith
delivered by Parent to Company prior to the execution and delivery of this
Agreement (the "Parent Disclosure Schedule") corresponding to the Section of
this Agreement to which any of the following representations and warranties
specifically relate or as disclosed in another section of the Parent Disclosure
Schedule if it is reasonably apparent on the face of the disclosure that it is
applicable to another Section of this Agreement, or as disclosed in the
statements, reports, registration statements (with the prospectus in the form
filed pursuant to Rule 424(b) of the Securities Act), definitive proxy
statements, and other filings filed with the Securities and Exchange Commission
(the "SEC") by Parent on or prior to the date hereof (collectively, the "Parent
SEC Documents"), Parent hereby represents and warrants to Company as follows:

3.1 Organization, Standing and Power. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Each of Parent and Merger Sub has the
corporate power and authority to enter into this Agreement and the Ancillary
Agreements, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. Parent has no
material subsidiaries.

A-20
<PAGE>

3.2 Capital Structure.

(a) The authorized capital stock of Parent consists of 100,000,000 shares of
Common Stock, $0.001 par value per share, and 10,000,000 shares of Preferred
Stock, $0.001 par value per share, of which there were issued and outstanding
as of the close of business on June 30, 1999, 35,935,627 shares of Common Stock
and no shares of Preferred Stock. All outstanding shares of Parent have been
duly authorized, validly issued, fully paid and are nonassessable and free of
any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof. The shares of Parent Common Stock to be
issued pursuant to the Merger will be duly authorized, validly issued, fully
paid, and non-assessable. Parent has reserved 7,544,000 shares of Parent Common
Stock for issuance pursuant to the Parent Stock Option Plan, of which 1,476,351
shares have been issued pursuant to option exercises and 3,674,236 shares are
subject to outstanding, unexercised options. As of the date of this Agreement,
no warrants to purchase shares of Parent Common Stock are outstanding. Except
for (i) the rights created pursuant to this Agreement, (ii) the outstanding
options under the Parent's stock option plan, and (iii) Parent's right to
repurchase any unvested shares under its stock option plan, there are no other
options, warrants, calls, rights, commitments or agreements of any character to
which Parent is a party or by which it is bound obligating Parent to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of capital stock or voting securities of
Parent or obligating Parent to grant, extend, accelerate the vesting of, change
the price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. Except for this Agreement, there are no
contracts, commitments or agreement relating to voting, purchase or sale of
Parent's capital stock or voting securities (i) between or among Parent and any
of its securityholders, and (ii) to Parent's knowledge, between or among any of
Parent's securityholders. None of the outstanding options permit any
accelerated vesting or exercisability of those options or the shares of Parent
Common Stock subject to those options by reason of the Merger or any other
transactions contemplated by this Agreement. True and complete copies of all
agreements and instruments relating to or issued under Parent's stock option
plan have been provided to Company and such agreements and instruments have not
been amended, modified or supplemented, and there are no agreements to amend,
modify or supplement such agreements or instruments in any case from the form
provided to Company. All outstanding shares of Parent Common Stock and all
Parent options and warrants to acquire Parent Common Stock from Parent were
issued in compliance in all material respects with all applicable federal and
state securities laws.

(b) The authorized capital stock of Merger Sub consists of one thousand
(1,000) shares of common stock, no par value per share ("Merger Sub Common
Stock"), of which 1000 shares are issued and outstanding. Parent owns directly
all the outstanding shares of Merger Sub Common Stock. The outstanding shares
of Merger Sub Common Stock are duly authorized, validly issued, fully paid and
nonassessable and free of any preemptive rights.

3.3 Authority. The execution and delivery of this Agreement and the
Ancillary Agreements and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of each of Parent and Merger Sub, subject only to the approval by
Parent's stockholders of the issuance of the Merger Shares pursuant to this
Agreement (the "Parent Stockholder Approval"). This Agreement and each
Ancillary Agreement has been duly executed and delivered by each of Parent and
Merger Sub, as applicable, and constitutes the valid and binding obligation of
each of them, enforceable against each of them in accordance with its terms,
except as enforcement may be limited by (i) the effect of bankruptcy,
insolvency, reorganization, receivership, conservatorship, arrangement,
moratorium or other laws affecting the rights of creditors generally, or (ii)
the availability of specific performance, injunctive relief or other equitable
remedies and general principles of equity, regardless or whether considered in
a proceeding in equity or at law. The execution and delivery of this Agreement
or any Ancillary Agreement do not, and the performance of Parent's obligations
hereunder or thereunder and the consummation of the transactions contemplated
hereby or thereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of a benefit, or result in any other consequence, under (i) any provision
of

A-21
<PAGE>

the Certificate of Incorporation or Bylaws of Parent or Merger Sub, as amended,
or (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent, Merger Sub or
their respective properties or assets, except in the case of clause (i) for any
conflicts, violations, defaults or other occurrences that would not (A)
individually or in the aggregate have a Material Adverse Effect on Parent or
any of its subsidiaries or (B) prevent or materially impair or delay the
consummation of the Merger or the other transactions contemplated by this
Agreement. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or with
respect to Parent or Merger Sub in connection with the execution and delivery
of this Agreement or any Ancillary Agreement by Parent and Merger Sub, the
performance of Parent's obligations hereunder or thereunder or the consummation
by Parent and Merger Sub of the transactions contemplated hereby or thereby,
except for (i) the filing of the Agreement of Merger, as provided in Section
1.2, (ii) the filing with and clearance by the SEC of the Proxy Statement and
such other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal or state
securities laws or the securities laws of any foreign country, (iii) such
filings as may be required under the HSR Act, (iv) the filing with the Nasdaq
National Market of a Notification Form for Listing of Additional Shares with
respect to the shares of Parent Common Stock issuable upon conversion of the
Company Capital Stock in the Merger and upon exercise of the options under the
Company Stock Option Plan and warrants assumed by Parent, (v) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not have a Material Adverse Effect on Parent and would
not prevent or materially alter or delay any of the transactions contemplated
by this Agreement or the Ancillary Agreements, and (vi) the filing with the SEC
of a registration statement on Form S-8, or other applicable form, covering the
shares of Parent Common Stock issuable pursuant to outstanding options under
the Company Stock Option Plan assumed by Parent.

3.4 SEC Documents; Financial Statements. Parent has made available to
Company, in the form filed with the SEC (including via EDGAR and EDGAR II), the
Parent SEC Documents. As of their respective filing dates, the Parent SEC
Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and none of the Parent SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances in which they were made, not
misleading, except to the extent corrected by a subsequently filed Parent SEC
Document. The financial statements of Parent, including the notes thereto,
included in the Parent SEC Documents (the "Parent Financial Statements") were
complete and correct in all material respects as of their respective dates,
complied as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto as of their respective dates, and have been prepared in all
material respects in accordance with GAAP applied on a basis consistent
throughout the periods indicated and consistent with each other (except as may
be indicated in the notes thereto or, in the case of unaudited statements
included in Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, as
permitted by Form 10-Q or Form 8-K of the SEC). The Parent Financial Statements
fairly present the consolidated financial condition and operating results of
Parent and its subsidiaries at the dates and during the periods indicated
therein (subject, in the case of unaudited statements, to normal and recurring
year-end adjustments).

3.5 Absence of Certain Changes. Since June 30, 1999 (the "Parent Balance
Sheet Date"), Parent has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
could reasonably be expected to result in, a Material Adverse Effect on Parent;
(ii) any acquisition, sale or transfer of any material asset of Parent or any
of its subsidiaries; (iii) any change in accounting methods or practices
(including any change in depreciation or amortization policies or rates) by
Parent or any revaluation by Parent of any of its or its subsidiaries' assets;
(iv) any declaration, setting aside, or payment of a dividend or other
distribution with respect to the shares of Parent, or any direct or indirect
redemption, purchase or other acquisition by Parent or any of its subsidiaries
of any of its shares of capital stock or other securities, except from former
employees, directors and consultants in accordance with agreements providing
for the repurchase of shares in connection

A-22
<PAGE>

with any termination of service to it or its subsidiaries; (v) any amendment or
change to the certificate or articles of incorporation or bylaws or other
charter or organizational documents of Parent or any of its subsidiaries; (vi)
any acts or omissions of the types restricted by Section 4.3, or (vii) any
agreement by Parent or any of its subsidiaries to do any of the things
described in the preceding clauses (i) through (vi) (other than negotiations
with Company and its representatives regarding the transactions contemplated by
this Agreement).

3.6 Absence of Undisclosed Liabilities. Parent has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the balance sheet
included in Parent's Quarterly Report on Form 10-Q for the period ended June
30, 1999 (the "Parent Balance Sheet"), (ii) those incurred in the ordinary
course of business and not required to be set forth in the Parent Balance Sheet
under GAAP, and (iii) those incurred in the ordinary course of business
consistent with past practice since the Parent Balance Sheet Date which have
not had and could not reasonably be expected to have a Material Adverse Effect
on Parent and (iv) those incurred in connection with the execution and
performance of this Agreement.

3.7 Litigation. There is no private or governmental action, suit,
proceeding, arbitration or, to the knowledge of Parent, claim or investigation
pending or threatened by or before any agency, court or tribunal, foreign or
domestic, against Parent or any of its subsidiaries or any of their respective
properties or officers or directors (in their capacities as such). There is no
judgment, decree or order against Parent or Merger Sub or any of their
respective subsidiaries or, to the knowledge of Parent, any of their respective
directors or officers (in their capacities as such), that could prevent,
enjoin, or materially alter or delay the Merger or any of the other
transactions contemplated by this Agreement or any Ancillary Agreement. Section
3.7 of the Parent Disclosure Schedule contains a true and complete list of all
actions, suits, proceedings, claims, arbitrations or other litigation that
Parent has pending or threatened against other parties as of the date of this
Agreement.

3.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Parent or any of its subsidiaries
which has or could reasonably be expected to have the effect of prohibiting or
impairing any current or future business practice of Parent or any of its
subsidiaries, any acquisition of property by Parent or any of its subsidiaries
or the conduct of business by Parent or any of its subsidiaries as currently
conducted or as currently proposed to be conducted by Parent or any of its
subsidiaries.

3.9 Intellectual Property.

(a) Parent and its subsidiaries own, or are licensed or otherwise possesses
legally enforceable rights to use all Intellectual Property that are used or
proposed to be used in the business of Parent and its subsidiaries as currently
conducted or as proposed to be conducted by Parent and its subsidiaries.
Neither Parent nor any of its subsidiaries has (i) licensed any of its
Intellectual Property in source code form to any party or (ii) entered into any
exclusive agreements relating to its Intellectual Property with any party.

(b) Section 3.9 of the Parent Disclosure Schedule lists (i) all patents and
patent applications and all registered and unregistered trademarks, trade
names, service marks, and copyrights, domain names and maskworks which are
registered or to which registration has been applied for, included in the
Intellectual Property, including the jurisdictions in which each such
Intellectual Property right has been issued or registered or in which any
application for such issuance and registration has been filed, (ii) all
material licenses, sublicenses and other agreements as to which Parent or any
of its subsidiaries is a party and pursuant to which any person is authorized
to use any Intellectual Property except for Parent's standard form non-
exclusive licenses and sublicenses contained in purchase orders, and (iii) all
material licenses, sublicenses and other agreements as to which Parent or any
of its subsidiaries is a party and pursuant to which Parent or any of its
subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software ("Parent Third Party Intellectual Property
Rights") which are incorporated in, are, or form a part of any product of
Parent or any of its subsidiaries as of the date of this Agreement.

A-23
<PAGE>

(c) To Parent's knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of Parent
or any of its subsidiaries, or any Intellectual Property right of any third
party to the extent licensed by or through Parent or any of its subsidiaries,
by any third party, including any employee or former employee of Parent or any
of its subsidiaries. Neither Parent nor any of its subsidiaries has entered
into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property, other than indemnification
provisions contained in purchase orders or license agreements arising in the
ordinary course of business.

(d) Neither Parent nor any of its subsidiaries is, nor will any of them be
as a result of the execution and delivery of this Agreement or the Ancillary
Agreements or the performance of any of their obligations under this Agreement
or the Ancillary Agreements, in breach of any license, sublicense or other
agreement relating to any Intellectual Property or Parent Third Party
Intellectual Property Rights.

(e) All patents, registered trademarks, service marks and copyrights held by
Parent or any of its subsidiaries are valid and subsisting. Neither Parent nor
any of its subsidiaries (i) has been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right
of any third party, (ii) has any knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service
mark, copyright, trade secret or other proprietary right of any third party or
(iii) has brought any action, suit or proceeding for infringement of
Intellectual Property or breach of any license or agreement involving
Intellectual Property against any third party.

(f) Each of Parent and its subsidiaries has secured written assignments from
all consultants and employees who contributed to the creation or development of
Intellectual Property of the rights to such contributions that Parent and its
subsidiaries do not already own by operation of law, and Parent has no reason
to believe that any such assignment is not valid or binding.

(g) Each of Parent and its subsidiaries has taken reasonable steps
consistent with prevailing industry practice to protect and preserve the
confidentiality of all Intellectual Property not otherwise protected by
patents, patent applications or copyright ("Confidential Information"). All
use, disclosure or appropriation of Confidential Information owned by Parent or
any of its subsidiaries by or to a third party has, to the knowledge of Parent,
been pursuant to the terms of a written agreement between Parent and such third
party. All use, disclosure or appropriation of Confidential Information not
owned by Parent or any of its subsidiaries has been pursuant to the terms of a
written agreement between Parent and the owner of such Confidential
Information, or is otherwise lawful.

3.10 Certain Agreements Affected by the Merger. Subject to Section 1.6,
neither the execution and delivery of this Agreement or any Ancillary
Agreements nor the performance of any of Parent's obligations hereunder or
thereunder or the consummation of the transaction contemplated hereby or
thereby will (i) result in any payment (including, without limitation,
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any director or employee of Parent, (ii) materially increase
any benefits otherwise payable by Parent or (iii) result in the acceleration of
the time of payment or vesting of any such benefits.

3.11 Principal Contracts. Section 3.11 of the Parent Disclosure Schedule
sets forth as of the date of this Agreement principal contracts of Parent (each
a "Principal Contract") relating to: (i) any trust indenture, mortgage,
promissory note, loan agreement or other contract for the borrowing of money,
any currency exchange, commodities or other hedging arrangement or any leasing
transaction of the type required to be capitalized in accordance with GAAP;
(ii) any contract limiting the freedom of Parent or any of its subsidiaries to
engage in any line of business or to compete with any other person or entity,
or any confidentiality, secrecy or non-disclosure contract; (iii) any contract
with any person with whom Parent or any of its subsidiaries does not deal at
arm's length within the meaning of the Code. Each of Parent and its
subsidiaries has performed all of the material obligations required to be
performed by it and is entitled to all accrued benefits under, and, to

A-24
<PAGE>

Parent's knowledge, is not alleged to be in default in any material respect of
any Principal Contract. Each of the Principal Contracts is in full force and
effect, and there exists no default or event of default or event, occurrence,
condition or act, with respect to Parent or any of its subsidiaries or to
Parent's knowledge with respect to the other contracting party, which, with the
giving of notice, the lapse of the time or the happening of any other event or
conditions, would become a default or event of default under any Principal
Contract. Parent has made available true and complete copies of all Principal
Contracts to Company.

3.12 Vote Required; Voting Agreements. The affirmative vote of the holders
of more than fifty percent (50%) of the shares of Parent Common Stock
outstanding on the record date set for the Parent Stockholders Meeting is the
only vote of the holders of any of Parent's capital stock necessary to obtain
the Parent Stockholder Approval. Holders of more than forty five percent (45%)
in the aggregate of all of the issued and outstanding shares of Parent Common
Stock as of the date of this Agreement have agreed in writing to vote for the
Parent Stockholder Approval pursuant to the Voting Agreements.

3.13 Board Approval. The Board of Directors of Parent has (i) approved this
Agreement and the issuance of the Merger Shares pursuant to this Agreement,
(ii) determined that the Merger is advisable and on terms fair to, and is in
the best interest of, the stockholders of Parent and (iii) recommended that the
stockholders of Parent approve the issuance of the Merger Shares pursuant to
this Agreement.

3.14 Information Statement and Proxy Statement. The information supplied by
Parent for inclusion in the Information Statement, or in any registration
statement on Form S-4 or S-3 pursuant to Section 1.12 of this Agreement, shall
not, on the date the Information Statement (or prospectus in the event of a
registration statement on Form S-4) is first sent to Company's shareholders or
at the time of the Company Shareholders Meeting, contain any statement which at
such time is false or misleading with respect to any material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to matters to be voted on
at the Company Shareholders Meeting which has become false or misleading.
Notwithstanding the foregoing, Parent makes no representation, warranty or
covenant with respect to any information supplied by or on behalf of Company
which is contained in the Information Statement. The information supplied by
Parent and Merger Sub for inclusion in the Permit Application shall not, at the
time the fairness hearing is held pursuant to Section 25142 of the California
Corporations Code and the time the qualification of such securities is
effective under Section 25122 of the California Corporations Code, contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.

3.15 Tax Treatment. Neither Parent nor any of its directors or officers has
taken any action that would prevent the Merger from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code. Neither
Parent nor, to Parent's knowledge, any of its affiliates or agents is aware of
any agreement, plan or other circumstance that would prevent the Merger from
qualifying under Section 368(a) of the Code.

3.16 Broker's and Finders' Fees. Parent and Merger Sub have not incurred,
nor will they incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or investment bankers' fees or any similar
charges in connection with this Agreement or any transaction contemplated
hereby, other than as set forth in Section 3.16 of the Parent Disclosure
Schedule. Parent has previously furnished to Company a complete and correct
copy of all agreements between Parent and the financial advisors set forth in
Section 3.16 of the Parent Disclosure Schedule, pursuant to which such firms
would be entitled to any payment relating to the Merger.

3.17 Complete Copies of Materials; Representations Complete. Parent has
delivered or made available to Company true and complete copies of each
material document that has been requested in writing by, Company or its counsel
in connection with their legal, financial and accounting review of Parent and
its subsidiaries. None of the representations or warranties made by Parent
herein or in any Schedule hereto,

A-25
<PAGE>

including the Parent Disclosure Schedule, or certificate furnished by Parent
pursuant to this Agreement contains or will contain at the Effective Time any
untrue statement of a material fact, or omits or will omit (when read in
conjunction with the Parent SEC Documents) at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.

ARTICLE IV

CONDUCT PRIOR TO THE EFFECTIVE TIME

4.1 General Conduct of Business. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Company and Parent (except to the extent expressly
contemplated by this Agreement or as consented to in writing by the other party
or as approved by a majority of the Merger Integration Committee established
pursuant to Section 5.7(d) and except further, in the case of Parent, as
required by the fiduciary duties of the Board of Directors of Parent) shall,
and shall cause each of its subsidiaries to, carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted or as otherwise contemplated by the Company Budget as
defined in Section 4.2(i) below (in the case of Company) or Parent's FY2000
Plan (in the case of Parent). Company further agrees to, and to cause its
subsidiaries to, pay debts and Taxes when due (subject to (i) good faith
disputes over such debts or Taxes and (ii) Parent's consent to the filing of
material Tax Returns if applicable), pay or perform other obligations when due,
and use reasonable efforts consistent with past practice and policies to
preserve intact its present business organizations, keep available the services
of its present officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it so that its goodwill and ongoing businesses shall be
unimpaired at the Effective Time. Company and Parent shall promptly notify each
other of any event or occurrence not in the ordinary course of its or its
subsidiaries' business, and of any event which could have a Material Adverse
Effect on the other.

4.2 Conduct of Business of Company. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement or
any Ancillary Agreement, Company shall (and shall cause its subsidiaries to)
not do, cause or permit any of the following without the prior written consent
of Parent or the prior approval of a majority of the Merger Integration
Committee established pursuant to Section 5.7(d) (including the approval of at
least one member thereof designated by Parent):

(a) Charter Documents. Amend, modify, alter or rescind its certificate or
articles of incorporation or bylaws or other charter or organizational
documents;

(b) Dividends; Changes in Capital Stock. Declare or pay any dividends on or
make any other distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock, or repurchase or
otherwise acquire, directly or indirectly, any shares of its capital stock
except from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to it or its subsidiaries;

(c) Stock Option Plans. Grant any options or other rights to acquire
securities of Company (except grants of options to acquire Company Common Stock
in the ordinary course of business consistent with past practice, exercisable
for a total of not more than one million three hundred thirty three thousand
(1,333,000) shares of Company Common Stock), or accelerate, amend or change the
period of exercisability or vesting of options or other rights granted under
its stock plans or authorize cash payments in exchange for any options or other
rights granted under any of such plans;

A-26
<PAGE>

(d) Issuance of Securities. Issue, deliver or sell or authorize or propose
the issuance, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities, other than (i) the issuance of shares of Company Common Stock
pursuant to the exercise of Company Options outstanding under the Company Stock
Option Plan (or upon the exercise of warrants to acquire Company Common Stock
from Company outstanding) as of the date of this Agreement and (ii) grants of
options permitted by Section 4.2(c);

(e) Material Contracts. Enter into any material contract or commitment, or
violate, amend or otherwise modify or waive any of the terms of any of its
material contracts, other than in the ordinary course of business consistent
with past practice;

(f) Intellectual Property. Transfer to any person or entity any rights to
its Intellectual Property other than in the ordinary course of business
consistent with past practice;

(g) Exclusive Rights. Enter into or amend any agreements pursuant to which
any other party is granted exclusive marketing or other exclusive rights of any
type or scope with respect to any of its products or technology;

(h) Dispositions. Sell, lease, license or otherwise dispose of or encumber
any of its properties or assets which are material, individually or in the
aggregate, to its business, taken as a whole except for sales, leases or
licenses of products in the ordinary course of business;

(i) Indebtedness. Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or guarantee any debt
securities of others, except in accordance with Company's budget for October 1,
1999 through June 30, 2000 heretofore furnished to Parent (the "Company
Budget");

(j) Leases. Enter into any operating lease, except in accordance with the
Company Budget;

(k) Payment of Obligations. Pay, discharge or satisfy any claim, liability
or obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise) arising other than in the ordinary course of business other than the
payment, discharge or satisfaction of liabilities reflected or reserved against
in the Company Financial Statements or in accordance with the Company Budget;

(l) Capital Expenditures. Make any capital expenditures, capital additions
or capital improvements except in accordance with the Company Budget;

(m) Insurance. Materially reduce the amount of any material insurance
coverage provided by existing insurance policies;

(n) Termination or Waiver. Terminate or waive any right of substantial
value, other than in the ordinary course of business;

(o) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend any
employee benefit or stock purchase or option plan, elect or appoint any new
director, or hire any new officer level employee, pay any special bonus or
special remuneration to any employee or director or, other than in the ordinary
course of business consistent with past practice, increase the salaries or wage
rates of its employees;

(p) Severance Arrangements. Grant any severance or termination pay (i) to
any director or officer or (ii) to any other employee except payments made
pursuant to written agreements outstanding on the date hereof, identified
specifically on the Company Disclosure Schedule and furnished to Parent and its
counsel prior to the date hereof;

A-27
<PAGE>

(q) Lawsuits. Commence a lawsuit other than (i) for the collection of bills,
(ii) in such cases where it in good faith reasonably determines that failure to
commence suit would result in the material impairment of a valuable aspect of
its business, provided that it consults with Parent prior to the filing of such
a suit, or (iii) for a breach of this Agreement;

(r) Acquisitions. Acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to its
business, taken as a whole;

(s) Taxes. Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, file any material Tax
Return or any amendment to a material Tax Return, enter into any closing
agreement, settle any material claim or assessment in respect of Taxes, or
consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes;

(t) Notices. Fail to give all notices and other information required to be
given by Company or any of its subsidiaries to the employees of Company or any
of its subsidiaries, any collective bargaining unit representing any group of
employees of Company, and any applicable government authority under the WARN
Act, the National Labor Relations Act, the Internal Revenue Code, the
Consolidated Omnibus Budget Reconciliation Act, and other applicable law in
connection with the transactions provided for in this Agreement;

(u) Revaluation. Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;

(v) Domain Names. Change domain names or fail to renew existing domain name
registrations on a timely basis, or

(w) Other. Take or agree in writing or otherwise to take, any of the actions
described in Sections 4.2(a) through (v) above or (i) any action which would
make any of its representations or warranties contained in this Agreement
materially untrue or materially incorrect, or prevent it from performing or
cause it not to perform its covenants hereunder in any material respect, (ii)
any action that will result in any of the conditions to the Merger as set forth
in Article VI not being satisfied or in violation of any provision of this
Agreement, or any Ancillary Agreement, except, in every case, as may be
required by applicable law, or (iii) any other action that would materially
adversely delay or materially adversely impair the ability of Company to
consummate the Merger or the other transactions contemplated by this Agreement.

4.3 Conduct of Parent. During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, except as expressly contemplated by this Agreement or any
Ancillary Agreement, Parent shall (and shall cause its subsidiaries to) not do,
cause, cause or permit any of the following without the prior written consent
of Company or approval of a majority of the Merger Integration Committee
established pursuant to Section 5.7(d) (including the approval of at least one
member thereof designated by Company):

(a) Certain Actions. Take or agree in writing or otherwise to take, any of
the actions described in Sections 4.3(b) through (j) below, or (i) any action
which would make any of its representations or warranties contained in this
Agreement materially untrue or materially incorrect, or prevent it from
performing or cause it not to perform its covenants hereunder in any material
respect, (ii) any action that will result in any of the conditions to the
Merger as set forth in Article VI not being satisfied or in violation of any
provision of this Agreement or any Ancillary Agreement, except, in every case,
as may be required by applicable law, or (iii) any other action that would
materially adversely delay or materially adversely impair the ability of Parent
to consummate the Merger or the other transactions contemplated by this
Agreement.

(b) Charter Documents. Amend, modify, alter or rescind its certificate or
articles of incorporation or bylaws or other charter or organizational
documents;

A-28
<PAGE>

(c) Dividends; Changes in Capital Stock. Declare or pay any dividends on or
make any other distributions (whether in cash, stock or property) in respect of
any of its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock, or repurchase or
otherwise acquire, directly or indirectly, any shares of its capital stock
except from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to it or its subsidiaries;

(d) Intellectual Property. Transfer to any person or entity any rights to
its Intellectual Property other than in the ordinary course of business
consistent with past practice;

(e) Dispositions. Sell, lease, license or otherwise dispose of or encumber
any of its properties or assets which are material, individually or in the
aggregate, to its business, taken as a whole except for sales, leases or
licenses of products in the ordinary course of business;

(f) Taxes. Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, file any material Tax
Return or any amendment to a material Tax Return, enter into any closing
agreement, settle any material claim or assessment in respect of Taxes;

(g) Domain Names. Change domain names or fail to renew existing domain name
registrations on a timely basis;

(h) Stock Option Plans. Grant any options or other rights to acquire
securities of Parent (except grants of options to acquire Parent Common Stock
in the ordinary course of business consistent with past practice, exercisable
for a total of not more than two million (2,000,000) shares of Parent Common
Stock), or accelerate, amend or change the period of exercisability or vesting
of options or other rights granted under its stock plans or authorize cash
payments in exchange for any options or other rights granted under any of such
plans;

(i) Issuance of Securities. Issue, deliver or sell or authorize or propose
the issuance, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities, other than the issuance of shares of Parent Common Stock (i)
pursuant to the exercise of Parent Options outstanding under the Parent Stock
Option Plan (or upon the exercise of warrants to acquire Parent Common Stock
from Parent outstanding) as of the date of this Agreement or (ii) pursuant to a
transaction permitted by Section 4.3(j) below;

(j) Acquisitions. Acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof.

4.4 No Solicitation by Company.

(a) Company agrees that neither it nor any of its subsidiaries nor any of
their respective officers, directors, employees, agents and representatives,
(including without limitation any investment banker, attorney or accountant
retained by it or any of its subsidiaries) (collectively, "Representatives"),
will, directly or indirectly, initiate, solicit, encourage or otherwise
facilitate any inquiries or the making of any Company Takeover Proposal (as
defined below). Company further agrees that neither it nor any of its
subsidiaries nor any of their Representatives will, directly or indirectly,
engage in any negotiations concerning, or provide any confidential or non-
public information or data to, afford access to the properties, books or
records of Company or any of its subsidiaries to, or have any discussions with,
any person relating to a Company Takeover Proposal, enter into any agreement or
instrument relating to a Company Takeover Proposal or otherwise facilitate any
effort or attempt to make or implement a Company Takeover Proposal. Company
agrees that it will immediately cease and cause to be terminated all existing
activities, discussions or negotiations with any parties heretofore with

A-29
<PAGE>

respect to any of the foregoing (if any). Company agrees that it will take the
necessary steps to promptly inform each of its Representatives of the
obligations undertaken in this Section 4.4 and in the Confidentiality Agreement
(as defined in Section 5.4). Company agrees that it will notify Parent promptly
if any inquiries, proposals or offers relating to a Company Takeover Proposal
are received by, any such information is requested from, or any such
discussions or negotiations are sought to be initiated or continued with,
Company or any of its representatives indicating, in connection with such
notice, the name of the person making the inquiry, proposal or offer and the
material terms and conditions of any proposals or offers and thereafter shall
provide Parent with a true and complete copy of such Company Takeover Proposal
communication (if it is in writing) and otherwise keep Parent informed, on a
current basis, on the status and terms of any such proposals or offers and the
status of any such negotiations or discussions. Company also agrees that it
will promptly request each person that has heretofore executed a
confidentiality or non-disclosure agreement in connection with its
consideration of acquiring it or any of its subsidiaries to return to Company
all confidential information heretofore furnished to such person by or on
behalf of it or any of its subsidiaries. At the Closing, Company shall assign
to Parent the non-exclusive right to enforce the rights of Company and its
subsidiaries under any and all confidentiality or non-disclosure agreements
entered into between Company and prospective acquirors of Company or any of its
subsidiaries.

(b) The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Section 4.4 were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
by the parties hereto that Parent shall be entitled to seek an injunction or
injunctions to prevent breaches of this Section 4.4 and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which the
parties may be entitled at law or in equity.

(c) For purposes of this Agreement, "Company Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving Company or the acquisition of ten percent (10%)
or more of the outstanding shares of capital stock of Company, or a material
portion of the assets of, Company (other than the transactions contemplated by
this Agreement), or any other transaction inconsistent with consummation of the
transactions contemplated hereby.

4.5 No Solicitation by Parent.

(a) Parent agrees that neither it nor any of its subsidiaries nor any of
their respective Representatives, will, directly or indirectly, initiate,
solicit, encourage or otherwise facilitate any inquiries or the making of any
Parent Takeover Proposal (as hereinafter defined). Parent further agrees that
neither it nor any of its subsidiaries nor any of their Representatives will,
directly or indirectly, engage in any negotiations concerning, or provide any
confidential or non-public information or data to, afford access to the
properties, books or records of Parent or any of its subsidiaries to, or have
any discussions with, any person relating to a Parent Takeover Proposal, enter
into any agreement or instrument relating to a Parent Takeover Proposal or
otherwise facilitate any effort or attempt to make or implement a Parent
Takeover Proposal (other than a confidentiality agreement covering the
information contemplated by the following proviso); provided, however, that
nothing contained in this Section 4.5 shall prohibit the Board of Directors of
Parent (i) from complying with Rule 14d-9 or 14e-2(a) promulgated under the
Exchange Act with regard to a tender or exchange offer not made in violation of
this Section 4.5 or (ii) from providing information in connection with, and
negotiating concerning, an unsolicited, bona fide Parent Takeover Proposal if
Parent's Board of Directors (x) shall have concluded in good faith, after
considering applicable state law, on the basis of written advice of independent
outside counsel, that failure to take such action would not be a proper
exercise of the fiduciary duties of Parent's Board of Directors to Parent's
stockholders under applicable law, and (y) shall have in the exercise of such
fiduciary duties to Parent's stockholders determined (taking into account the
advice of Parent's independent financial advisor) that such Parent Takeover
Proposal provides materially greater value to Parent or its stockholders than
the Merger (any such Parent Takeover Proposal being referred to herein as a
"Parent Superior Proposal"). Parent agrees that it will immediately cease and
cause to be terminated all existing activities, discussions or negotiations
with any parties heretofore with respect to any of the foregoing (if any).
Parent agrees that it will take the necessary

A-30
<PAGE>

steps to promptly inform each of its Representatives of the obligations
undertaken in this Section 4.5 and in the Confidentiality Agreement (as defined
in Section 5.4). Parent agrees that it will notify Company promptly if any
inquiries, proposals or offers with respect to a Parent Takeover Proposal are
received by, any such information is requested from, or any such discussions or
negotiations are sought to be initiated or continued with, Parent or any of its
Representatives indicating, in connection with such notice, the name of such
person and the material terms and conditions of any proposals or offers and
thereafter shall provide Company with a true and complete copy of such Parent
Takeover Proposal communication (if it is in writing) and otherwise keep
Company informed, on a current basis, on the status and terms of any such
proposals or offers and the status of any such negotiations or discussions.
Parent also agrees that it will promptly request each person that has
heretofore executed a confidentiality or non-disclosure agreement in connection
with its consideration of acquiring it or any of its subsidiaries to return to
Parent all confidential information heretofore furnished to such person by or
on behalf of it or any of its subsidiaries.

(b) The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Section 4.5 were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
by the parties hereto that Company shall be entitled to seek an injunction or
injunctions to prevent breaches of this Section 4.5 and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which the
parties may be entitled at law or in equity.

(c) For purposes of this Agreement, "Parent Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving Parent or the acquisition of a majority of the
outstanding shares of capital stock of Parent, or all or substantially all of
the assets of Parent, or any other transaction inconsistent with consummation
of the transactions contemplated hereby, that is conditioned on the denial by
Parent stockholders of the Parent Stockholder Approval.

ARTICLE V

ADDITIONAL AGREEMENTS

5.1 Information Statement and Proxy Statement.

(a) As soon as practicable after the execution of this Agreement, Company
shall prepare, with the cooperation and reasonable assistance of Parent, and
furnish to its shareholders an Information Statement for the shareholders of
Company to approve and adopt this Agreement, the Merger and the other
transactions contemplated by this Agreement. The Information Statement shall
constitute a disclosure document for the offer and issuance of the shares of
Parent Common Stock to be received by the holders of Company Capital Stock in
the Merger and a proxy statement for solicitation of shareholder consent to or
approval of this Agreement, the Merger and the other transactions contemplated
hereby, and may be combined with the Proxy Statement as a joint
proxy/information statement. Parent and Company shall each use its reasonable
best efforts to cause the Information Statement to comply with applicable
federal and state securities laws requirements. Each of Parent and Company
agrees to provide promptly to the other such information concerning it and its
respective affiliates, directors, officers and securityholders as, in the
reasonable judgment of the other party or its counsel, may be required or
appropriate for inclusion in the Information Statement, or in any amendments or
supplements thereto, and to cause its counsel and auditors to cooperate with
the other's counsel and auditors in the preparation of the Information
Statement. Company will promptly advise Parent, and Parent will promptly advise
Company, in writing if at any time prior to the Effective Time either Company
or Parent shall obtain knowledge of any facts that might make it necessary or
appropriate to amend or supplement the Information Statement in order to make
the statements contained or incorporated by reference therein not misleading or
to comply with applicable law. The Information Statement shall contain the
recommendation of the Board of Directors of Company that Company shareholders
approve and adopt this Agreement, the Merger and the other transactions
contemplated by this Agreement, and the conclusion of the Board of Directors
that the terms and

A-31
<PAGE>

conditions of the Merger are fair and reasonable and in the best interests of
Company and its shareholders. Anything to the contrary contained herein
notwithstanding, Company shall not include in the Information Statement any
information with respect to Parent or its affiliates or associates, the form
and content of which information shall not have been approved by Parent prior
to such inclusion.

(b) As soon as practicable after the execution of this Agreement, Parent
shall prepare, with the cooperation of Company, and file with the SEC
preliminary proxy materials relating to the Parent Stockholders Meeting and the
vote of the stockholders of Parent on the issuance of the Merger Shares
pursuant to this Agreement. Parent and Company shall each use its reasonable
best efforts to cause the Proxy Statement to comply in all material respects
with the Exchange Act and all other applicable federal and state securities law
requirements. Each of Parent and Company shall, and shall cause its respective
representatives to, fully cooperate with the other such party and its
representatives in the preparation of the Proxy Statement, and shall promptly
provide to the other such information concerning it and its respective
affiliates, directors, officers and securityholders as the other may reasonably
request in connection with the preparation of the Proxy Statement. If at any
time prior to the Effective Time Company or Parent shall become aware of any
fact, event or circumstance that is required to be set forth in an amendment or
supplement to the Proxy Statement, such party shall promptly notify the other
of such fact, event or circumstance and the other parties shall cooperate with
each other in filing with the SEC or any other governmental official and
mailing to Parent stockholders such amendment or supplement. The Proxy
Statement shall contain the recommendation of the Board of Directors of Parent
in favor of the Parent Stockholder Approval; provided, that the Board of
Directors of Parent shall have the right to omit, withdraw or modify such
recommendation in the event that a Parent Superior Proposal has been made and
Parent's Board of Directors has concluded in good faith, after considering
applicable state law, on the basis of written advice of outside counsel, that
inclusion of such recommendation would not be a proper exercise of the Parent's
board of directors' fiduciary duties to Parent's stockholders under applicable
law. Notwithstanding any such omission, withdrawal or modification, Parent
shall convene and hold (and shall take all action otherwise required by this
Agreement to convene and hold) the Parent Stockholders Meeting. Without
limiting the generality of the foregoing, Parent shall use its reasonable best
efforts to respond promptly to any comments made by the SEC with respect to the
Proxy Statement (including each preliminary version thereof) and to clear the
Proxy Statement as promptly as practicable hereafter. As promptly as
practicable after SEC clearance of the Proxy Statement, Parent shall file with
the SEC the definitive Proxy Statement and mail or cause to be mailed the Proxy
Statement to its stockholders.

(c) As soon as practicable after the execution of this Agreement, Parent
shall prepare, with the cooperation of Company, the Permit Application. Parent
and Company shall each use commercially reasonable efforts to cause the Permit
Application to comply with the requirements of applicable federal and state
laws. Each of Parent and Company agrees to provide promptly to the other such
information concerning its business and financial statements and affairs as, in
the reasonable judgment of the providing party or its counsel, may be required
or appropriate for inclusion in the Permit Application, or in any amendments or
supplements thereto, and to cause its counsel and auditors to cooperate with
the other's counsel and auditors in the preparation of the Permit Application.
Company will promptly advise Parent, and Parent will promptly advise Company,
in writing if at any time prior to the Effective Time either Company or Parent
shall obtain knowledge of any facts that might make it necessary or appropriate
to amend or supplement the Permit Application in order to make the statements
contained or incorporated by reference therein not misleading or to comply with
applicable law.

5.2 Meetings of Securityholders.

(a) Company shall promptly after the date hereof take all action necessary
in accordance with California Corporations Code and its Articles of
Incorporation and Bylaws to convene the Company Shareholders Meeting or to
secure the written consent of its shareholders within sixty (60) days of the
date of this Agreement. Company shall consult with Parent regarding the date of
the Company Shareholders Meeting and shall not postpone or adjourn (other than
for the absence of a quorum) the Company Shareholders Meeting without the
consent of Parent. Company shall use its reasonable best efforts to solicit
from shareholders of Company proxies or consent in favor of approval and
adoption of this Agreement, the Merger and the other transactions

A-32
<PAGE>

contemplated hereby and shall take all other action necessary or advisable to
secure the vote or consent of securityholders required to effect the Merger and
the other transactions contemplated hereby.

(b) Parent shall promptly after the date hereof take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene the Parent Stockholders Meeting within sixty (60) days of mailing of
the Proxy Statement to stockholders of Parent and in no event later than May
31, 2000. Parent shall consult with Company regarding the date of the Parent
Stockholders Meeting and shall not postpone or adjourn (other than for the
absence of a quorum) the Parent Stockholders Meeting without the consent of
Company. Parent shall use its reasonable best efforts to solicit from
stockholders of Parent proxies in favor of the Parent Stockholder Approval and
shall take all other action necessary or advisable to secure the vote or
consent of Parent securityholders required to effect the Merger.

5.3 Access to Information.

(a) Each of Parent and Company shall afford the other and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (i) all of their
respective properties, books, contracts, commitments and records, and (ii) all
other information concerning their respective business, properties and
personnel as the other may reasonably request. Each of Parent and Company
agrees to provide to the other and its accountants, counsel and other
representatives copies of internal financial statements, budgets, operating
plans and projections promptly upon request.

(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of Parent and Company shall confer on a regular and
frequent basis with one or more representatives of the other party to report
material operational matters and the general status of ongoing operations.

(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.

5.4 Confidentiality. The parties acknowledge that Parent and Company have
previously executed a mutual Confidentiality Agreement dated September 21, 1999
(the "Confidentiality Agreement"), which Confidentiality Agreement shall
continue in full force and effect in accordance with its terms.

5.5 Public Disclosure. Unless otherwise permitted by this Agreement, Parent
and Company shall consult with each other before issuing any press release or
otherwise making any public statement or making any other public (or non-
confidential) disclosure (whether or not in response to an inquiry) regarding
the terms of this Agreement and the transactions contemplated hereby, and
neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law or by obligations
pursuant to any listing agreement with any national securities exchange or with
the NASD after consultation with Company.

5.6 Consents; Cooperation. Each of Parent, Merger Sub and Company will, and
will cause their respective subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed
on them with respect to the consummation of the transactions contemplated by
this Agreement and will promptly cooperate with and furnish information to any
party hereto necessary in connection with any such requirements imposed upon
such other party in connection with the consummation of the transactions
contemplated by this Agreement or any Ancillary Agreement and will take all
reasonable actions necessary to obtain (and will cooperate with the other
parties hereto in obtaining) any consent, approval, order or authorization of,
or any registration, declaration or filing with, any Governmental Entity or
other person, required to be obtained or made in connection with the taking of
any action contemplated by this Agreement or any Ancillary Agreement, including
without limitation under the HSR Act. Parent and Company shall have the right
to review in advance, and to the extent practicable each will consult with the
other as to, in each case subject to applicable laws relating to the exchange
of information, all of the information which will appear in any filing made
with, or written materials submitted to, any third party or Governmental Entity
in

A-33
<PAGE>

connection with the transactions contemplated by this Agreement. In the event
an injunction or other order shall have been issued which prevents, alters or
delays the Merger or any other transaction contemplated hereby, each party
agrees to use its reasonable best efforts to have such injunction or other
order lifted. Parent and Company and their respective subsidiaries shall
cooperate and use their respective reasonable best efforts to prepare all
documentation, to effect all filings and to obtain all permits, consents,
approvals and authorizations of all third parties and Governmental Entities
necessary to consummate the transactions contemplated by this Agreement or any
Ancillary Agreement, and to consult with the other party with respect to
obtaining such permits, consents, approvals and authorizations. Each of Parent
and Company agrees, upon request, to furnish the other party with all
information concerning itself, its subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its subsidiaries to any third party or Governmental
Entity.

5.7 Further Assurances. Each of the parties to this Agreement shall use its
reasonable best efforts to effect the transactions contemplated hereby and to
fulfill and cause to be fulfilled the conditions to closing under this
Agreement. Without limiting the generality of the foregoing:

(a) Each party hereto, at the reasonable request of another party hereto,
shall execute and deliver such other instruments and do and perform such other
acts and things as may be necessary or desirable for effecting completely the
consummation of this Agreement and the transactions contemplated hereby.

(b) FIRPTA Certificate. Company shall, prior to the Closing Date, provide
Parent with a properly executed FIRPTA Certificate, in form and substance
reasonably acceptable to Parent, which states that shares of capital stock of
Company do not constitute "United States real property interests" under Section
897(c) of the Code, for purposes of satisfying Parent's obligations under
Treasury Regulation Section 1.1445-2(c)(3), and simultaneously with delivery of
such FIRPTA Certificate, Company shall provide to Parent, as agent for Company,
a form of notice to the Internal Revenue Service in accordance with the
requirements of Treasury Regulation Section 1.897-2(h)(2) and in form and
substance reasonably acceptable to Parent along with written authorization for
Parent to deliver such notice form to the Internal Revenue Service on behalf of
Company upon the Closing of the Merger.

(c) Submission of Expenses. Not less than two (2) business days prior to the
Closing Date, Company shall deliver to Parent statements of all fees and
expenses paid or payable by Company in connection with the Merger (including,
without limitation, the fees and expenses of any financial advisors, legal
counsel, accountants or other service providers engaged by Company).

(d) Merger Integration Committee. Promptly after the date of this Agreement,
Parent and Company shall establish a committee (the "Merger Integration
Committee") to plan for the integration of the parties following the Effective
Time and to assist in carrying out certain provisions of this Agreement, as
provided herein. The Merger Integration Committee shall consist of seven
members, four of whom shall be members of the Board of Directors of Parent and
shall be designated by Parent and three of whom shall be members of the Board
of Directors of Company and shall be designated by Company. All determinations
by the Merger Integration Committee shall be made on the basis of what is in
the best interests of Parent and Company as a combined company following the
Effective Time.

(e) Resignation of Directors. The directors of Company in office immediately
prior to the Effective Time shall have resigned as directors of Company
effective as of the Effective Time.

(f) Termination of Certain Company Securityholder Agreements. Company shall,
effective from and after the Effective Time, cause the following agreements to
be terminated and of no further force or effect: (i) the Amended and Restated
Investors Rights Agreement dated as of January 29, 1999, by and among Company
and the investors listed on the signature page thereto, and (ii) the Amended
and Restated Co-Sale Agreement dated as of January 29, 1999 and the individuals
and entities listed on Exhibit A and Exhibit B thereto.

A-34
<PAGE>

5.8 Company Shareholder Agreements.

(a) Company shall provide Parent such information and documents as Parent
shall reasonably request for purposes of reviewing the list of Affiliates
contained in Section 2.34 of the Company Disclosure Schedule and promptly
advise Parent of any person who becomes an Affiliate of Company hereafter.

(b) Company shall use its reasonable best efforts to deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement (and in
any event prior to the time that the Information Statement is mailed to
shareholders of Company), from each Affiliate of Company, an executed
Shareholder Agreement substantially in the form attached hereto as Exhibit C
and an Irrevocable Proxy and Market Standoff Agreements substantially in the
forms attached as an annexes thereto.

(c) Company shall use its reasonable best efforts to deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement (and in
each case prior to the Effective Time), from each securityholder of Company
(whether or not an Affiliate thereof), an executed Shareholder Representation
Agreement substantially in the form attached hereto as Exhibit D (the
"Shareholder Representation Agreement") and a duly completed Investor
Suitability Questionnaire in the form attached as an annex thereto (an
"Investor Suitability Questionnaire").

(d) Company shall not permit the transfer of any shares of Company Capital
Stock beneficially owned or held of record by any Company shareholder who has
executed a Shareholder Agreement pursuant to Section 5.8(b) above, issue a new
certificate representing any such shares or record the vote with respect to any
such shares unless and until such Company shareholder shall have complied with
the terms of such Shareholder Agreement.

5.9 Parent Voting Agreements. Section 5.9 of the Parent Disclosure Schedule
sets forth those persons who may be deemed to be Affiliates of Parent. Parent
shall provide Company with such information and documents as Company shall
reasonably request for purposes of reviewing such list. Subject to applicable
law, Parent shall use its reasonable best efforts to deliver or cause to be
delivered to Company a duly executed Voting Agreement in the form of Exhibit F
attached hereto from each of the persons identified in Schedule 5.9 as soon as
practicable after the execution hereof (to the extent not executed heretofore).
Parent shall not permit the transfer of any shares of Parent Common Stock
beneficially owned or held of record by any Parent stockholder who has executed
a Voting Agreement pursuant to this Section 5.9, issue a new certificate
representing any such shares or record the vote with respect to any such shares
unless and until such Parent stockholder shall have complied with the terms of
such Voting Agreement.

5.10 Blue Sky Laws. Parent shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Merger Shares in connection with the Merger.
Company shall use its reasonable best efforts to assist Parent as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of the Merger Shares in
connection with the Merger.

5.11 Employee Benefit Plans.

(a) Assumption of Options. Company hereby represents and warrants to Parent
that Schedule 5.11 hereto sets forth a true and complete list as of the date
hereof of all holders of outstanding options under the Company Stock Option
Plan, including the number of shares of Company Capital Stock subject to each
such option, the exercise or vesting schedule, the exercise price per share and
the term of each such option. On the day immediately preceding the Closing
Date, Company shall deliver to Parent an updated Schedule 5.11, current as of
the Closing Date. Consistent with the terms of the Company Stock Option Plan
and the documents governing the outstanding options under such Plan, the Merger
will not terminate any of the outstanding options under the Company Stock
Option Plan or accelerate the exercisability or vesting of such options or the
shares of Parent Common Stock which will be subject to those options upon the
Parent's assumption of the options in the Merger. It is the intention of the
parties that the options assumed by Parent pursuant to

A-35
<PAGE>

Section 1.6(c) of this Agreement qualify, to the maximum extent permissible,
following the Effective Time as incentive stock options as defined in Section
422 of the Code to the extent such options qualified as incentive stock options
prior to the Effective Time. Within twenty (20) business days after the
Effective Time, Parent will issue to each person who, immediately prior to the
Effective Time was a holder of an outstanding option under the Company Stock
Option Plan, a document in form and substance reasonably satisfactory to the
Shareholders' Agent (as defined below) evidencing the foregoing assumption of
such option by Parent.

(b) Assignment of Repurchase Options. All outstanding rights of Company
which it may hold immediately prior to the Effective Time to repurchase
unvested shares of Company Common Stock (the "Repurchase Options") shall be
assigned to Parent in the Merger and shall thereafter be exercisable by Parent
upon the same terms and conditions in effect immediately prior to the Effective
Time, except that the shares purchasable pursuant to the Repurchase Options and
the purchase price per share shall be adjusted to reflect the Exchange Ratio.
Except as disclosed in Schedule 5.11, the consummation of the Merger will not
result in the termination of any Repurchase Options or accelerate the vesting
of any shares of Company Common Stock subject to those Repurchase Options.

(c) Employee Service Credit. Company employees who become employed by Parent
upon or immediately following the Closing shall be given full credit for their
Company service under Parent employee benefit plans for purposes of seniority,
eligibility and vesting to the extent allowable by law and not inconsistent
with the applicable plan documents. Parent agrees that for purposes of accrual
of vacation, PTO benefits or other such benefits, Parent will use the effective
date of Company's employees' respective employment with Company. Such Company
employees shall, to the extent then otherwise eligible, be allowed to
participate in Parent's employee stock purchase plan on the first entry date
under such plan following the Closing. Furthermore, to the extent practicable,
Parent shall also administer its medical plans so as to credit Company
employees with amounts that they have paid prior to the Closing toward
satisfying any applicable deductible and "out-of-pocket" maximum applicable
under Parent's medical plans.

(d) Termination of SIMPLE Plan. Unless Parent consents otherwise in writing,
Company shall, immediately prior to the Closing Date, terminate the Company
SIMPLE Plan described in Section 408(p) of the Code (the "Plan"). Company shall
provide to Parent executed resolutions by the Board of Directors of Company
authorizing the termination.

5.12 Form S-8. Parent shall use its reasonable best efforts to file, as soon
as practicable after the Effective Date, a registration statement on Form S-8
covering the shares of Parent Common Stock issuable pursuant to outstanding
options under the Company Stock Option Plan assumed by Parent. As soon as
practicable after the date hereof and prior to the Closing, Company will use
its reasonable best efforts to cause all holders of assumed Company Options to
agree in writing not to exercise their options pursuant to Section 1.6 until
Company has filed a registration statement on Form S-8 in accordance with this
Section. Company shall cooperate with and assist Parent in the preparation of
such registration statement.

5.13 Listing of Additional Shares. As soon as practicable after the Closing,
Parent shall file with the Nasdaq National Market a Notification Form for
Listing of Additional Shares with respect to the shares of Parent Capital Stock
issuable upon conversion of the Company Capital Stock in the Merger and upon
exercise of options and warrants to acquire Company's Capital Stock assumed by
Parent as a result of the Merger.

5.14 Escrow Agreement. At or before the Effective Time, the parties will
cause the Escrow Agent and the Shareholders' Agent to execute the Escrow
Agreement contemplated by Article VIII in substantially the form attached
hereto as Exhibit E, with such reasonable and customary modifications as the
escrow agent thereunder may require (the "Escrow Agreement").

5.15 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the Ancillary Agreements
and the transactions contemplated hereby and thereby shall be paid by the party
incurring such expense.

A-36
<PAGE>

5.16 Director and Officer Indemnification. Parent agrees not to cause or
allow the Surviving Corporation to modify, and to cause the Surviving
Corporation to honor, any rights to indemnification or exculpation from
liabilities for acts or omissions occurring at or prior to the Effective Time
now existing in favor of the officers and directors of Company and its
subsidiaries as provided in their respective certificates or articles of
incorporation or by-laws, as currently in effect.

5.17 Preferred Stock; Warrants. Company shall use its reasonable best
efforts to (i) ensure that either all of Company's outstanding Preferred Stock
shall have been converted into Company Common Stock in accordance with the
Articles of Incorporation of Company or that the Articles of Incorporation of
Company shall provide that the Merger shall cause a liquidation event with
respect to the Company Preferred Stock and (ii) ensure that all outstanding
warrants have been exercised at or prior to the Effective Time.

5.18 Board Composition. From and after the Effective Time, the Board of
Directors of Parent shall consist of not more than nine (9) members, and shall
initially consist of four (4) members designated by Parent, three (3) members
designated by Company and reasonably acceptable to Parent, and two independent
members mutually designated by Parent and Company, each of whom shall serve
(unless earlier removed in accordance with law) until their respective
successors have been elected or appointed and duly qualified. The persons so
designated who are not already members of the Board of Directors of Parent
shall be duly nominated and elected or appointed as directors of Parent,
effective upon the Effective Time, to serve until their successors are duly
elected or appointed and qualified. Six months after the Effective Time, one of
the four directors designated by Parent and one of the three directors
designated by Company shall resign.

ARTICLE VI

CONDITIONS TO THE MERGER

6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:

(a) Securityholder Approval. This Agreement and the Merger shall have been
duly approved and adopted by the requisite vote of the holders of Company
Capital Stock, and any agreements or arrangements that may result in the
payment of any amount that would not be deductible by reason of Section 280G of
the Code shall have been approved by such number of shareholders of Company as
is required by the terms of Section 280G(b)(5)(B) and shall be obtained in a
manner which satisfies all applicable requirements of such Code Section
280G(b)(5)(B) and the proposed Treasury Regulations thereunder, including
(without limitation) Q-7 of Section 1.280G-1 of such proposed regulations. The
Parent Stockholder Approval shall have been duly obtained.

(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to
the Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable efforts to have such injunction or other order lifted.

(c) Governmental Approval. Parent, Company and their respective subsidiaries
shall have timely obtained from each Governmental Entity all approvals, waivers
and consents, if any, necessary for consummation of or in connection with the
Merger and the other transactions contemplated hereby, including such
approvals, waivers and consents as may be required under the Exchange Act and
the HSR Act; provided,

A-37
<PAGE>

however, that none of the preceding shall be deemed obtained or made for
purposes of satisfying the foregoing condition to Parent's obligation to effect
the Merger if it shall impose a non-customary condition or restriction that
Parent reasonably determines in good faith could reasonably be expected to
result in a Material Adverse Effect on Parent or the Surviving Corporation.

(d) Escrow Agreement. Parent, Company, Escrow Agent and the Shareholders'
Agent shall have entered into the Escrow Agreement.

(e) Issuance of Shares. The fairness hearing shall have been held, and the
terms of the Merger shall have been determined to be fair, by the Commissioner
of Corporations of the State of California and the California Permit shall have
been issued by the State of California or a registration statement on Form S-4
with respect to the shares of Parent Common Stock issuable pursuant to Section
1.6(a) shall have been declared effective by the SEC and no stop order with
respect thereto shall be in effect. In the alternative, each of the
shareholders of Company who is an "accredited investor" shall have delivered an
executed copy of the Shareholder Representation Agreement, and the parties
shall be reasonably satisfied that the shares of Parent Common Stock to be
issued in connection with the Merger pursuant to Section 1.6(a) are issuable
without registration pursuant to Section 4(2) of the Securities Act and SEC
rules and regulations promulgated thereunder and shall be coupled with Form S-3
registration rights reasonably acceptable to Parent and Company. If the shares
of Parent Common Stock issuable pursuant to Section 1.6(a) have not been
registered on Form S-4, the Declaration of Registration Rights in substantially
the form of Exhibit B hereto shall have been approved pursuant to the
Investors' Rights Agreement and shall be in full force and effect.

6.2 Additional Conditions to Obligations of Company. The obligations of
Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Company:

(a) Representations, Warranties and Covenants. (i) The representations and
warranties of Parent and Merger Sub in this Agreement shall be true and correct
in all respects on and as of the Effective Time as though such representations
and warranties were made on and as of the Effective Time (other than
representations and warranties expressly made as of an earlier date, which
shall have been so true and correct as of such earlier date), except where the
failure to be true and correct could not reasonably be expected, either
individually or in the aggregate, to have a Material Adverse Effect on Parent,
and (ii) Parent in all material respects shall have performed and complied with
all covenants, obligations and conditions of this Agreement and Ancillary
Agreements required to be performed and complied with by it as of or prior to
the Effective Time (except, in the case of the covenants of Parent in Section
4.1 and Section 4.3, where the failure to perform or comply with such covenants
could not reasonably be expected to have a Material Adverse Effect on Parent).

(b) Certificate of Parent. Company shall have been provided with a
certificate executed on behalf of Parent by its President and its Chief
Financial Officer to the effect that the condition set forth in Section 6.2(a)
has been satisfied.

(c) Third Party Consents. Company shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent or
approval shall be required in connection with the Merger under any Principal
Contract of Parent or any of its subsidiaries or otherwise, the failure of
which to obtain could reasonably be expected to have a Material Adverse Effect
on Parent or the Surviving Corporation.

(d) Injunctions or Restraints on Merger and Conduct of Business. No
proceeding brought by any Governmental Entity, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Parent's conduct or operation of
the business of Company, following the Merger shall be in effect, nor shall any
proceeding brought by any Governmental Entity, domestic or foreign, seeking the
foregoing be pending.

A-38
<PAGE>

(e) Legal Opinion. Company shall have received a legal opinion from Parent's
legal counsel, Brobeck, Phleger & Harrison LLP, in substantially the form of
Exhibit H.

(f) Tax Opinion. Company shall have received a written opinion of company's
legal counsel, Riordan & McKinzie LLP, dated as of the Closing Date, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinion shall not have been withdrawn. In
rendering such opinion, counsel shall be entitled to rely upon, among other
things, reasonable assumptions as well as representations of Parent, Merger Sub
and Company.

6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by Parent:

(a) Representations, Warranties and Covenants. (i) The representations and
warranties of Company in this Agreement shall be true and correct in all
respects on and as of the Effective Time as though such representations and
warranties were made on and as of the Effective Time (other than
representations and warranties expressly made as of an earlier date, which
shall have been so true and correct as of such earlier date), except where the
failure to be true and correct could not reasonably be expected, either
individually or in the aggregate, to have a Material Adverse Effect on Company
or the Surviving Corporation and (ii) Company in all material respects shall
have performed and complied with all covenants, obligations and conditions of
this Agreement and the Ancillary Agreements to which it is a party required to
be performed and complied with by it as of or prior to the Effective Time
(except, in the case of the covenants of Company in Section 4.1 and Section
4.2, where the failure to perform or comply with such covenants could not
reasonably be expected to have a Material Adverse Effect on Company or the
Surviving Corporation).

(b) Certificate of Company. Parent shall have been provided with a
certificate executed on behalf of Company by its President and Chief Financial
Officer to the effect that the condition set forth in Section 6.3(a) has been
satisfied.

(c) Third Party Consents. Parent shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent or
approval shall be required in connection with the Merger under any Material
Contract of Company or any of its subsidiaries or otherwise, the failure of
which to obtain could reasonably be expected to have a Material Adverse Effect
on Parent, Company or the Surviving Corporation.

(e) Legal Opinion. Parent shall have received a legal opinion from Company's
legal counsel, Riordan & McKinzie LLP, in substantially the form of Exhibit G.

(f) Tax Opinion. Parent shall have received a written opinion of Parent's
legal counsel, Brobeck, Phleger & Harrison LLP, dated as of the Closing Date to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, and such opinion shall not have been withdrawn.
In rendering such opinion, counsel shall be entitled to rely upon, among other
things, reasonable assumptions as well as representations of Parent, Merger Sub
and Company.

(g) Employment and Non-Competition Agreements. Each of the Employment and
Non-Competition Agreements executed and delivered by employees of Company set
forth on Schedule 6.3(h) contemporaneously with the execution and delivery of
this Agreement shall be in full force and effect.

A-39
<PAGE>

(h) Certificates. Company shall, prior to the Closing Date, provide Parent a
certificate from the Secretary of State of California and the California
Franchise Tax Board as to Company's good standing and payment of all applicable
taxes, and such other certificates and closing documents as are reasonably
requested by Parent and customary for transactions of the type contemplated
hereby.

ARTICLE VII

TERMINATION, AMENDMENT AND WAIVER

7.1 Termination. At any time prior to the Effective Time, whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of Company, this Agreement may be terminated:

(a) by mutual consent duly authorized by the Boards of Directors of Parent
and Company;

(b) by either Parent or Company, if the Closing shall not have occurred on
or before May 31, 2000 (provided, that the right to terminate this Agreement
under this Section 7.1(b) shall not be available to any party whose action or
failure to act has been the cause or resulted in the failure of the Merger to
occur on or before such date and such action or failure to act constitutes a
material breach of this Agreement);

(c) by Parent, if (i) Company shall breach any representation, warranty,
obligation or agreement hereunder in a manner causing conditions precedent to
the Closing not to be satisfied and such breach shall not have been cured
within twenty (20) business days of receipt by Company of written notice of
such breach, provided that the right to terminate this Agreement by Parent
under this Section 7.1(c)(i) shall not be available to Parent where Parent is
at that time in material breach of this Agreement, or (ii) the Board of
Directors of Company shall have omitted, withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to Parent or
recommended, endorsed, accepted or agreed to a Company Takeover Proposal or
shall have resolved to do any of the foregoing (it being acknowledged that such
action would constitute a breach of this Agreement);

(d) by Company, if (i) Parent shall breach any representation, warranty,
obligation or agreement hereunder in a manner causing conditions precedent to
the Closing not to be satisfied and such breach shall not have been cured
within twenty (20) business days following receipt by Parent of written notice
of such breach, provided that the right to terminate this Agreement by Company
under this Section 7.1(d)(i) shall not be available to Company where Company is
at that time in material breach of this Agreement, or (ii) the Board of
Directors of Parent shall have omitted, withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to Company
or recommended or endorsed a Parent Takeover Proposal or shall have resolved to
do any of the foregoing;

(e) by Parent if (i) any permanent injunction or other order of a court or
other competent authority preventing the consummation of the Merger shall have
become final and nonappealable, (ii) if any required approval of the
shareholders of Company shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at a duly held meeting of
shareholders or at any adjournment thereof, or (iii) the Parent Stockholder
Approval is not obtained at the Parent Stockholders Meeting or at any
adjournment thereof; or

(f) by Company if (i) any permanent injunction or other order of a court or
other competent authority preventing the consummation of the Merger shall have
become final and nonappealable, (ii) if any required approval of the
shareholders of Company shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at a duly held meeting of
shareholders or at any adjournment thereof, or (iii) the Parent Stockholder
Approval is not obtained at the Parent Stockholders Meeting or at any
adjournment thereof.

7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent or

A-40
<PAGE>

Company or their respective officers, directors, securityholders or affiliates,
except as provided in Section 7.3 and/or except to the extent that such
termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth in this Agreement involving
fraud, intentional misrepresentation or willful misconduct; provided that the
provisions of Section 5.4 (Confidentiality), Section 7.3 (Expenses and
Termination Fees) and this Section 7.2 shall remain in full force and effect
and survive any termination of this Agreement.

7.3 Expenses and Termination Fees.

(a) Subject to Sections 7.3(b) and 7.3(c), whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement,
the Ancillary Agreements and the transactions contemplated hereby and thereby
(including, without limitation, the fees and expenses of its advisers,
accountants and legal counsel) shall be paid by the party incurring such
expense.

(b) In the event that (i) Parent shall terminate this Agreement pursuant to
Section 7.1(c)(ii) or (ii) this Agreement shall be terminated by Parent
pursuant to Section 7.1(e)(ii) or by Company pursuant to Section 7.1(f)(ii), in
either case following a failure of Company's shareholders to approve this
Agreement and, prior to the time of the Company Shareholders Meeting, a Company
Takeover Proposal shall have been made which at the time of the Company
Shareholders Meeting shall not have been definitively withdrawn by the third
party making such proposal, or (iii) Parent shall terminate this Agreement
pursuant to Section 7.1(c)(i) and prior to the breach giving rise to such
termination a Company Takeover Proposal shall have been made, then, in any such
event, in addition to any other remedies Parent may have, Company shall
promptly pay to Parent the sum of five million dollars ($5,000,000), and in the
event that a Company Takeover Proposal is consummated within twelve months
after such termination of this Agreement, Company shall pay to Parent the
additional sum of twenty-five million dollars ($25,000,000) upon the
consummation of such Company Takeover Proposal.

(c) In the event that (i) Company shall terminate this Agreement pursuant to
Section 7.1(d)(ii), or (ii) this Agreement shall be terminated by Parent
pursuant to Section 7.1(e)(iii), or by Company pursuant to Section 7.1(f)(iii),
following a failure of Parent stockholders to grant the Parent Stockholder
Approval and, prior to the time of the Parent Stockholders Meeting, a Parent
Takeover Proposal shall have been publicly announced which shall not have been
publicly and definitively withdrawn by the third party making such proposal, or
(iii) Company shall terminate this Agreement pursuant to Section 7.1(d)(i) and
prior to the breach giving rise to such termination a Parent Takeover Proposal
shall have been publicly announced, then, in any such event, in addition to any
other remedies Company may have, Parent shall promptly pay to Company the sum
of five million dollars ($5,000,000), and, in the event that a Parent Takeover
Proposal is consummated within twelve months after such termination of this
Agreement, Parent shall pay to Company the additional sum of twenty-five
million dollars ($25,000,000) upon the consummation of such Parent Takeover
Proposal. In the event that a Parent Takeover Proposal is publicly announced
and is thereafter withdrawn, the fact of such withdrawal shall be communicated
to Parent stockholders a reasonable time before the Parent Stockholders
Meeting, and the Parent Stockholders Meeting shall, if necessary, be adjourned
or postponed for a reasonable period to permit dissemination of such
information to Parent stockholders, withdrawal of proxies that may have been
affected by the announcement or pendency of such Parent Takeover Proposal and
resolicitation and submission of new proxies in favor of the Parent Stockholder
Approval.

7.4 Amendment. The boards of directors of the parties hereto may cause this
Agreement to be amended at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto; provided that an amendment made
subsequent to approval of the Merger by the shareholders of Company shall not
(i) alter or change the amount or kind of consideration to be received on
conversion of the Company Capital Stock, (ii) alter or change any term of the
Articles of Incorporation of the Surviving Corporation to be effected by the
Merger, or (iii) alter or change any of the terms and conditions of the
Agreement if such alteration or change would materially adversely affect the
holders of Company Capital Stock.

A-41
<PAGE>

7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto or
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.

ARTICLE VIII

ESCROW AND INDEMNIFICATION

8.1 Escrow Fund. As soon as practicable after the Effective Time, ten
percent (10%) of the Merger Shares issued at the Closing or to which holders of
Company Capital Stock are entitled to receive by virtue of the Merger (the
"Escrow Shares") shall be registered in the name of, and be deposited with,
State Street Bank and Trust Company (or another institution selected by Parent
with the reasonable consent of Company) as escrow agent (the "Escrow Agent"),
such deposit (together with interest and other income thereon) to constitute
the Escrow Fund and to be governed by the terms set forth herein and in the
Escrow Agreement attached hereto as Exhibit E. The Escrow Fund shall be
available to compensate Parent pursuant to the indemnification obligations of
the shareholders of Company.

8.2 Indemnification. Subject to the limitations set forth in this Article
VIII, the shareholders of Company will indemnify and hold harmless Parent and
its officers, directors, agents and employees, and each person, if any, who
controls or may control Parent within the meaning of the Securities Act
(hereinafter referred to individually as an "Indemnified Person" and
collectively as "Indemnified Persons") from and against any and all losses,
costs, damages, liabilities and expenses arising from claims, demands, actions,
causes of action, including, without limitation, reasonable legal fees, net of
any recoveries by Parent under existing insurance policies or indemnities from
third parties (collectively, "Damages") arising out of any misrepresentation or
breach of or default in any of the representations, warranties, covenants and
agreements given or made by Company in or pursuant to this Agreement, the
Company Disclosure Schedules or any exhibit or schedule to this Agreement,
including any agreement entered into by Parent and Company in connection with
this Agreement and any certificates delivered pursuant to Article VI hereof.
The Escrow Fund shall be security for this indemnity obligation subject to the
limitations in this Agreement. Parent and Company each acknowledge that such
Damages, if any, would relate to unresolved contingencies existing at the
Effective Time, which if resolved at the Effective Time would have led to a
reduction in the total number of shares Parent would have agreed to issue in
connection with the Merger. If the Merger is consummated, recovery from the
Escrow Fund shall be the sole and exclusive remedy under this Agreement for any
breach or default in connection with any of the representations, warranties,
covenants or agreements set forth in this Agreement or any exhibit hereto,
absent fraud, intentional misrepresentation or willful breach. Nothing in this
Agreement shall limit the liability (i) of Company for any breach of any
representation, warranty or covenant if the Merger is not consummated, or (ii)
of any Company shareholder in connection with any breach by such shareholder of
the Shareholder Representation Agreement, the Shareholder Agreement or the
Irrevocable Proxy. No claim for indemnification after the Effective Time shall
be made under this Article VIII unless and until aggregate Damages (including
Damages pursuant to all prior claims) exceed two million dollars ($2,000,000),
and then only to the extent that aggregate Damages exceed such amount.

8.3 Escrow Period. The Escrow Period shall terminate upon the following
dates: (a) for matters expected to be encountered and resolved in the audit of
Parent's financial statements for its fiscal year ending September 30, 2000,
the earlier of the first anniversary of the Closing Date or the date on which
Parent publishes the combined audited financial statements of Parent and
Company for the fiscal year which includes the Closing Date and (b) for all
other matters, the first anniversary of the Closing Date; provided, however,
that a portion of the Escrow Shares, which is necessary to satisfy any
unsatisfied claims specified in any Officer's

A-42
<PAGE>

Certificate theretofore delivered to the Escrow Agent prior to termination of
the Escrow Period with respect to facts and circumstances existing prior to
expiration of the Escrow Period, shall remain in the Escrow Fund until such
claims have been resolved. Parent shall deliver to the Escrow Agent a
certificate specifying the Effective Time.

8.4 Claims upon Escrow Fund. Upon receipt by the Escrow Agent on or before
the last day of the Escrow Period of a certificate signed by any officer of
Parent (an "Officer's Certificate"), setting forth the estimate of Damages and
specifying in reasonable detail the individual items of such Damages included
in the amount so stated, the date each such item was paid, or properly accrued
or arose, and the nature of the misrepresentation, breach of warranty or claim
to which such item is related, the Escrow Agent shall, subject to the
provisions of Section 8.5 and 8.6 below, deliver to Parent out of the Escrow
Fund, as promptly as practicable, Parent Common Stock or other assets held in
the Escrow Fund having a value equal to such Damages. For the purpose of
compensating Parent for its Damages pursuant to this Agreement, the Parent
Common Stock in the Escrow Fund shall be valued at the Closing Market Value
(the "Escrow Value").

8.5 Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate
shall be delivered to the Shareholders' Agent (defined in Section 8.7 below)
and for a period of twenty (20) days after such delivery to the Shareholders'
Agent of such Officer's Certificate, the Escrow Agent shall make no delivery of
Parent Common Stock or other property pursuant to Section 8.4 hereof unless the
Escrow Agent shall have received written authorization from the Shareholders'
Agent to make such delivery. After the expiration of such twenty (20) day
period, the Escrow Agent shall make delivery of the Parent Common Stock or
other property in the Escrow Fund in accordance with Section 8.4 hereof,
provided that no such payment or delivery may be made if the Shareholders'
Agent shall object in a written statement to the claim made in the Officer's
Certificate, and such statement shall have been delivered to the Escrow Agent
and to Parent prior to the expiration of such twenty (20) day period.

8.6 Resolution of Conflicts; Arbitration.

(a) In case the Shareholders' Agent shall so object in writing to any claim
or claims by Parent made in any Officer's Certificate, Parent shall have ten
(10) days after receipt by the Escrow Agent of an objection by the
Shareholders' Agent to respond in a written statement to the objection of the
Shareholders' Agent. If after such ten (10) day period there remains a dispute
as to any claims, the Shareholders' Agent and Parent shall attempt in good
faith for ten (10) days to agree upon the rights of the respective parties with
respect to each of such claims. If the Shareholders' Agent and Parent should so
agree, a memorandum setting forth such agreement shall be prepared and signed
by both parties and shall be furnished to the Escrow Agent. The Escrow Agent
shall be entitled to rely on any such memorandum and shall distribute the
Parent Common Stock or other property from the Escrow Fund in accordance with
the terms thereof.

(b) If no such agreement can be reached after good faith negotiation, either
Parent or the Shareholders' Agent may, by written notice to the other, demand
arbitration of the matter unless the amount of the damage or loss is at issue
in pending litigation with a third party, in which event arbitration shall not
be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by
arbitration conducted by one arbitrator. The decision of the arbitrator as to
the validity and amount of any claim in such Officer's Certificate shall be
binding and conclusive upon the parties to this Agreement, and notwithstanding
anything in Section 8.5 hereof, the Escrow Agent shall be entitled to act in
accordance with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith.

(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Santa
Clara, San Mateo or San Francisco County, California under the commercial rules
then in effect of the American Arbitration Association. For purposes of this
Section 8.6(c), in any arbitration hereunder in which any claim or the amount
thereof stated in the Officer's Certificate is at issue, Parent shall be deemed
to be the Non-Prevailing Party unless the arbitrators award Parent more than
one-half ( 1/2) of the amount in dispute, plus any amounts not in dispute;
otherwise, Company shareholders for whom

A-43
<PAGE>

shares of Company Common Stock otherwise issuable to them have been deposited
in the Escrow Fund shall be deemed to be the Non-Prevailing Party. The Non-
Prevailing Party to an arbitration shall pay its own expenses, the fees of each
arbitrator, the administrative fee of the American Arbitration Association, and
the expenses, including without limitation, attorneys' fees and costs,
reasonably incurred by the other party to the arbitration.

8.7 Shareholders' Agent.

(a) Thomas R. Govreau shall be constituted and appointed as agent
("Shareholders' Agent") for and on behalf of Company shareholders to give and
receive notices and communications, to authorize delivery to Parent of the
Parent Common Stock or other property from the Escrow Fund in satisfaction of
claims by Parent, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the Shareholders'
Agent for the accomplishment of the foregoing. Such agency may be changed by
the holders of a majority in interest of the Escrow Fund from time to time upon
not less than ten (10) days' prior written notice to Parent. No bond shall be
required of the Shareholders' Agent, and the Shareholders' Agent shall receive
no compensation for his services. Notices or communications to or from the
Shareholders' Agent shall constitute notice to or from each Company
shareholder.

(b) The Shareholders' Agent shall not be liable for any act done or omitted
hereunder as Shareholders' Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith. Each Company
shareholder shall jointly and severally indemnify the Shareholders' Agent and
hold him harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Shareholders' Agent and arising out
of or in connection with the acceptance or administration of his duties
hereunder.

(c) The Shareholders' Agent shall have reasonable access to information
about Company and the reasonable assistance of Company's officers and employees
for purposes of performing his duties and exercising his rights hereunder,
provided that the Shareholders' Agent shall treat confidentially and not
disclose any nonpublic information from or about Company to anyone (except on a
need to know basis to individuals who agree to treat such information
confidentially).

8.8 Actions of the Shareholders' Agent. A decision, act, consent or
instruction of the Shareholders' Agent shall constitute a decision of all
Company shareholders for whom shares of Parent Common Stock otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each such Company shareholder, and the Escrow Agent and Parent
may rely upon any decision, act, consent or instruction of the Shareholders'
Agent as being the decision, act, consent or instruction of each and every such
Company shareholder. The Escrow Agent and Parent are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Shareholders' Agent.

8.9 Third-Party Claims. In the event Parent becomes aware of a third-party
claim which Parent believes may result in a demand against the Escrow Fund,
Parent shall promptly notify the Shareholders' Agent of such claim, and the
Shareholders' Agent and the Company shareholders for whom shares of Parent
Common Stock otherwise issuable to them are deposited in the Escrow Fund shall
be entitled, at their expense, to participate in any defense of such claim.
Parent shall have the right in its sole discretion to settle any such claim;
provided, however, that Parent may not effect the settlement of any such claim
without the consent of the Shareholders' Agent, which consent shall not be
unreasonably withheld. In the event that the Shareholders' Agent has consented
to any such settlement, the Shareholders' Agent shall have no power or
authority to object under Section 8.6 or any other provision of this Article
VIII to the amount of any claim by Parent against the Escrow Fund for indemnity
with respect to such settlement.

A-44
<PAGE>

ARTICLE IX

GENERAL PROVISIONS

9.1 Non-Survival at Effective Time. The representations and warranties set
forth herein shall survive until the expiration of twelve (12) months after the
Effective Time. The agreements set forth in this Agreement shall terminate at
the Effective Time, except that the agreements set forth in Article I, Section
5.4 (Confidentiality), 5.7 (Further Assurances), 5.8 (Company Shareholder
Agreements), 5.10 (Blue Sky Laws), 5.11 (Employee Benefit Plans), 5.12 (Form S-
8), 5.13 (Listing of Additional Shares), 5.16 (Expenses), 5.18 (Director and
Officer Indemnification), 7.3 (Expenses and Termination Fees), 7.4 (Amendment),
Article VIII and this Article IX shall survive the Effective Date and the
Closing.

9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or by reputable overnight courier or sent via facsimile (with
confirmation of receipt and followed by delivery by one of the other methods
described in this Section) to the parties at the following address (or at such
other address for a party as shall be specified by like notice):

(a) if to Parent, to:

Digital Island, Inc.
45 Fremont Street
12th Floor
San Francisco, CA 94111
Attention: Ruann F. Ernst
Facsimile No.: (415) 738-4141
Telephone No.: (415) 738-4100

with a copy to:

Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.

with a copy to Rod J. Howard, Esq.
Facsimile No.: (650) 496-2715
Telephone No.: (650) 424-0160

(b) if to Company, to:

Sandpiper Networks, Inc.
225 W. Hillcrest Dr.
Suite 250
Thousand Oaks, CA 91360
Attention: Leo S. Spiegel
Facsimile No.: (805) 370-2121
Telephone No.: (805) 370-2100

A-45
<PAGE>

with a copy to:

Riordan & McKinzie
5743 Corsa Ave.
Suite 116
Westlake Village, CA 91362
Attention: Larry Weeks, Esq.
Facsimile No.: (818) 706-2956
Telephone No.: (818) 706-1800

9.3 Interpretation. When a reference is made in this Agreement to Exhibits,
such reference shall be to an Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
The phrase "made available" in this Agreement shall mean that the information
referred to has been made available if requested by the party to whom such
information is to be made available. The phrases "the date of this Agreement",
"the date hereof", and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to the date set forth in the first paragraph
of this Agreement. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

9.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.

9.5 Entire Agreement; Nonassignability; Parties in Interest. This Agreement
and the documents and instruments and other agreements specifically referred to
herein or delivered pursuant hereto, including the Exhibits, the Company
Disclosure Schedule, the Parent Disclosure Schedule and the other Schedules
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as set forth in Sections
1.6(a), (c), (d), (f) and (g), 1.7, 1.9, 1.12, 5.11, 5.12 and 5.18; and (c)
shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.

9.6 Severability. In the event that any provision of this Agreement, or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.

9.7 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not
preclude the exercise of any other remedy.

9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of California without reference to such state's
principles of conflicts of law. Each of the parties hereto irrevocably consents
to the exclusive jurisdiction of any court located within the State of
California, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of California

A-46
<PAGE>

for such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.

9.9 Rules of Construction. The parties hereto agree that they have been
represented by legal counsel during the negotiation, preparation and execution
of this Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement or
other document will be construed against the party drafting such agreement or
document.

9.10 Definitions. For purposes of this Agreement, the following terms shall
have the meanings set forth below:

(a) "Material Adverse Effect" means, with respect to any person or entity,
any event, change or effect that is materially adverse to the business,
operations, personnel, condition (financial or otherwise), properties, assets
(including intangible assets), liabilities, or results of operations of such
person or entity and its subsidiaries, taking such person or entity together
with its subsidiaries as a whole, provided, that none of the following, either
alone or in combination, shall constitute, in and of itself or in and of
themselves, a Material Adverse Effect: changes, events and effects that are
directly caused by (i) conditions affecting national, regional or world
economies as a whole (to the extent such person or entity is not
disproportionately affected), (ii) conditions affecting the industry or
industries, as a whole, in which such person or entity participates (to the
extent such person or entity is not disproportionately affected), (iii) the
announcement or pendency of this Agreement or the transactions contemplated by
this Agreement, (iv) failure of Parent to meet the revenue or earnings
predictions of equity analysts (as reflected in the First Call consensus
estimate), or any other published revenue or earnings predictions or
expectations, for any period ending on or after the date of this Agreement, or
(v) changes in the market price or trading volume of Parent capital stock.

(b) The term "knowledge" means, with respect to any party, the actual
knowledge after reasonable inquiry of the directors and officers of such party
and employees of such party charged with senior administrative or operational
responsibility for matters as to which knowledge is ascribed.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered by its respective officer thereunto duly authorized,
all as of the date first written above.

DIGITAL ISLAND, INC.

/s/ T.L. Thompson
By: _________________________________
Name: T.L. Thompson
Title: Chief Financial Officer &
Secretary

BEACH ACQUISITION CORP.

/s/ T.L. Thompson
By: _________________________________
Name: T.L. Thompson
Title: Chief Financial Officer &
Secretary

SANDPIPER NETWORKS, INC.

/s/ Leo S. Spiegel
By: _________________________________
Name: Leo S. Spiegel
Title: Chairman, President and
CEO

A-47
<PAGE>

EXHIBIT A

AGREEMENT OF MERGER OF
DIGITAL ISLAND, INC., BEACH ACQUISITION CORP.
AND SANDPIPER NETWORKS, INC.

This Agreement of Merger, dated as of the day of ("Merger
Agreement"), among Digital Island, Inc. a Delaware corporation ("Parent"),
Beach Acquisition Corp., a California corporation and a wholly owned subsidiary
of Parent ("Merger Sub"), and Sandpiper Networks, Inc., a California
corporation ("Company").

RECITALS

A. Company was incorporated in the State of California on December 23, 1996
and on the date hereof has outstanding shares of Common Stock ("Company
Common Stock") and shares of Preferred Stock ("Company Preferred Stock").
Company Common Stock and Company Preferred Stock are collectively referred to
herein as "Company Capital Stock."

B. Parent, Merger Sub and Company have entered into an Agreement and Plan of
Reorganization (the "Agreement and Plan of Reorganization") providing for the
merger ("Merger") of Merger Sub with and into Company.

C. The Boards of Directors of Parent, Company and Merger Sub and the
shareholders of Company have approved the Merger.

AGREEMENTS

The parties hereto hereby agree as follows:

1. Merger Sub shall be merged with and into Company, and Company shall be
the surviving corporation (the "Surviving Corporation").

2. The Merger shall become effective at such time (the "Effective Time") as
this Merger Agreement and the officers' certificate of Company is filed with
the Secretary of State of the State of California pursuant to Section 1103 of
the Corporations Code of the State of California.

3. At the Effective Time (i) all shares of Company Capital Stock that are
owned directly or indirectly by Company, Parent, Merger Sub or any other
subsidiary of Parent shall be cancelled, and no securities of Parent or other
consideration shall be delivered in exchange therefor, (ii) each of the issued
and outstanding shares of Company Capital Stock (other than shares, if any,
held by persons who have not voted such shares for approval of the Merger and
with respect to which such persons shall become entitled to exercise
dissenters' rights in accordance with Section 1300 et seq. of the California
Corporations Code, referred to hereinafter as "Dissenting Shares") shall be
converted automatically into and exchanged for 1.0727 shares of Parent Common
Stock. Those shares of Parent Common Stock to be issued as provided in this
Section 3 are referred to herein as the "Parent Shares."

4. Any Dissenting Shares shall not be converted into Parent Common Stock but
shall be converted into the right to receive such consideration as may be
determined to be due with respect to such Dissenting Shares pursuant to the law
of the State of California. If after the Effective Time any Dissenting Shares
shall lose their status as Dissenting Shares, then as of the occurrence of the
event which causes the loss of such status, such shares shall be converted into
Parent Common Stock in accordance with Section 3.

5. Notwithstanding any other term or provision hereof, no fractional shares
of Parent Common Stock shall be issued, but in lieu thereof each holder of
shares of Company Capital Stock who would otherwise, but

A-48
<PAGE>

for rounding as provided herein, be entitled to receive a fraction of a share
of Parent Common Stock shall receive from Parent an amount of cash equal to the
per share market value of Parent Common Stock (deemed to be $ ) multiplied
by the fraction of a share of Parent Common Stock to which such holder would
otherwise be entitled. The fractional share interests of each Company
shareholder shall be aggregated, so that no Company shareholder shall receive
cash in an amount greater than the value of one full share of Parent Common
Stock.

6. The conversion of Company Capital Stock into Parent Common Stock as
provided by this Merger Agreement shall occur automatically at the Effective
Time without action by the holders thereof. Each holder of Company Capital
Stock shall thereupon be entitled to receive shares of Parent Common Stock in
accordance with the Agreement and Plan of Reorganization.

7. Also, at the Effective Time, each share of Common Stock of Merger Sub
outstanding immediately prior to the Effective Time shall automatically be
converted into and exchanged for one share of Common Stock of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of any
such shares shall continue to evidence ownership of such shares of capital
stock of the Surviving Corporation.

8. At the Effective Time, the separate existence of Merger Sub shall cease,
and Company shall succeed, without other transfer, to all of the rights and
properties of Merger Sub and shall be subject to all the debts and liabilities
thereof in the same manner as if Company had itself incurred them. All rights
of creditors and all liens upon the property of each corporation shall be
preserved unimpaired.

9. At the Effective Time, Company's Stock Option Plan, as amended (the
"Company Stock Option Plan"), and all options to purchase Company Common Stock
then outstanding under the Company Stock Option Plan shall be assumed by
Parent.

10. At the Effective Time, each warrant to acquire shares of Company Capital
Stock then outstanding (each a "Company Warrant") shall be converted and
exchanged for warrants to purchase such number of shares of Parent Common Stock
in accordance with the Agreement and Plan of Reorganization.

11. This Merger Agreement is intended as a plan of reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.

12. (a) The Articles of Incorporation of Company in effect immediately prior
to the Effective Time shall be the Articles of Incorporation of the Surviving
Corporation unless and until thereafter amended, provided however, that
immediately after the Effective Time the Articles of Incorporation of the
Surviving Corporation shall be amended and restated so as to read in its
entirety like the Articles of Incorporation of Merger Sub with Article 1 of the
Articles of Incorporation amended to read as follows: "The name of the
corporation is Sandpiper Networks, Inc."

(b) The Bylaws of Company in effect immediately prior to the Effective Time
shall be the Bylaws of the Surviving Corporation unless and until amended or
repealed as provided by applicable law, the Articles of Incorporation of the
Surviving Corporation and such Bylaws.

(c) The directors of Merger Sub immediately prior to the Effective Time
shall be the directors of the Surviving Corporation. The officers of Company
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation.

13. (a) Notwithstanding the approval of this Merger Agreement by the
shareholders of Company, this Merger Agreement may be terminated at any time
prior to the Effective Time by mutual agreement of the Boards of Directors of
Parent and Company.

A-49
<PAGE>

(b) Notwithstanding the approval of this Merger Agreement by the
shareholders of Company, this Merger Agreement shall terminate in the event
that the Agreement and Plan of Reorganization shall be terminated as therein
provided.

(c) In the event of the termination of this Merger Agreement as provided
above, this Merger Agreement shall forthwith become void and there shall be no
liability on the part of Company or Parent or their respective officers,
directors or shareholders, except as otherwise provided in the Agreement and
Plan of Reorganization.

(d) This Merger Agreement may be signed in one or more counterparts, each of
which shall be deemed an original and all of which shall constitute one
agreement.

(e) This Merger Agreement may be amended by the parties hereto any time
before or after approval hereof by the shareholders of Company, but, after such
approval, no amendment shall be made which by law requires the further approval
of such shareholders without obtaining such approval. This Merger Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.

IN WITNESS WHEREOF, the parties have executed this Merger Agreement as of
the date first written above.

DIGITAL ISLAND, INC.

By: _________________________________
[Name]
President

By: _________________________________
[Name]
Secretary

BEACH ACQUISITION CORP.

By: _________________________________
[Name]
President

By: _________________________________
[Name]
Secretary

SANDPIPER NETWORKS, INC.

By: _________________________________
[Name]
President

By: _________________________________
[Name]
Secretary

A-50
<PAGE>

OFFICERS' CERTIFICATE OF SANDPIPER NETWORKS, INC.

, President, and , Secretary, of Sandpiper Networks,
Inc., a corporation duly organized and existing under the laws of the State of
California (the "Corporation"), do hereby certify:

1. That they are the duly elected, acting and qualified President and the
Secretary, respectively, of the Corporation.

2. There are two authorized class of shares, consisting of
shares of Common Stock, of which shares are outstanding and
entitled to vote on the Agreement of Merger in the form attached and
shares of Preferred Stock, of which shares are outstanding and
entitled to vote on such Agreement of Merger.

3. The Agreement of Merger in the form attached was duly approved by the
Board of Directors of the Corporation in accordance with the California
Corporations Code.

4. Approval of the Agreement of Merger by the holders of at least a majority
of the outstanding shares of Common Stock and Preferred Stock was required. The
percentage of the outstanding shares of each such class of the Corporation's
shares entitled to vote on the Agreement of Merger which voted to approve the
Agreement of Merger equaled or exceeded the vote required.

Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true of their own
knowledge. Executed in , California, on .

By: _________________________________
[Name]
President

By: _________________________________
[Name]
Secretary

A-51
<PAGE>

OFFICERS' CERTIFICATE OF DIGITAL ISLAND, INC.

, President, and , Secretary, of Digital Island, Inc. a
Delaware corporation ("Parent"), hereby certify that:

1. That they are duly elected, acting and qualified President and Secretary,
respectively, of Parent.

2. There are two authorized classes of shares, consisting of (i) 100,000,000
shares of Common Stock, of which shares were issued and outstanding on
, 1999, and (ii) 10,000,000 shares of Preferred Stock, none of which are
issued and outstanding.

3. The Agreement of Merger in the form attached was approved by the Board of
Directors of Parent in accordance with the Delaware General Corporation Law.

4. No vote of the shareholders of Parent was required pursuant to Section
1201(b) of the California Corporations Code and Section 252 of the Delaware
General Corporation Law with respect to the merger under the Agreement of
Merger. The issuance of Common Stock pursuant to the merger was required to be
approved by the holders of at least a majority of the outstanding shares of
Common Stock. A majority of the outstanding shares of Common Stock approved
such issuance of Common Stock.

Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true of their own
knowledge. Executed in , California on .

_____________________________________
[Name]
Secretary