DIGEX INC/DE, S-1/A, 2000-01-25

DIGEX INC/DE
S-1/A, 2000-01-25
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

As filed with the Securities and Exchange Commission on January 25, 2000

Registration No. 333-94857
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

Amendment No. 1 to

FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933

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Digex, Incorporated
(Exact name of registrant as specified in its charter)

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Delaware 4813 59-3582217
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)

One Digex Plaza
Beltsville, MD 20705
(240) 264-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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

Mark K. Shull
President and Chief Executive Officer
Digex, Incorporated
One Digex Plaza
Beltsville, MD 20705
(240) 264-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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

Copies to:
Ralph J. Sutcliffe, Esq. Raymond Y. Lin, Esq.
Kronish Lieb Weiner & Hellman LLP Latham & Watkins
1114 Avenue of the Americas 885 Third Avenue
New York, New York 10036-7798 New York, New York 10022-4802
(212) 479-6000 (212) 906-1200

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

Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.

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

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

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

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

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

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CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Number of Maximum Maximum Amount of
Title of Securities Shares to be Offering Price Aggregate Registration
to be Registered Registered Per Share Offering Price(1) Fee
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
par value $.01 per
share................ 11,500,000 $63.97 $735,655,000 $194,212.92 (2)
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>

(1) Based on the average high and low prices of the Class A Common Stock on
January 10, 2000 in accordance with Rule 457(c) under the Securities Act.

(2) Previously paid.

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

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JANUARY 25, 2000

PRELIMINARY PROSPECTUS

10,000,000 Shares

[LOGO OF DIGEX]

Class A Common Stock

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

We are offering 2,000,000 shares of Class A Common Stock and one of our
stockholders, a subsidiary of Intermedia Communications Inc., is offering
8,000,000 shares of our Class A Common Stock. We will not receive any of the
proceeds from the sale of shares by the selling stockholder.

Our Class A Common Stock trades on the Nasdaq National Market under the symbol
"DIGX." On January 24, 2000, the last sale price of our Class A Common Stock as
reported on the Nasdaq National Market was $90.875 per share.

We have outstanding two classes of common stock. The holders of Class A Common
Stock are entitled to one vote for each share, whereas the holders of Class B
Common Stock are entitled to 10 votes for each share. The rights of holders of
our common stock are substantially the same in all other respects.

See "Risk Factors" beginning on page 7 about the risks you should consider
before buying shares of our Class A Common Stock.

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

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

<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discount............................................... $ $
Proceeds, before expenses, to us.................................... $ $
Proceeds, before expenses, to the selling stockholder............... $ $
</TABLE>

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

The underwriters may purchase up to an additional 1,500,000 shares of Class A
Common Stock from the selling stockholder at the public offering price less the
underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New
York on , 2000.

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

Joint Lead Managers

Bear, Stearns & Co. Inc. Salomon Smith Barney

Book Running Manager

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

Credit Suisse First Boston

Donaldson, Lufkin & Jenrette

Morgan Stanley Dean Witter

Legg Mason Wood Walker

Incorporated
PaineWebber Incorporated

The date of this prospectus is , 2000
<PAGE>

Managed Hosting & Application Services

High-Performance Internet Connectivity
[LOGO/SM/]
Responsive Customer Care Keeping E-Business in Business

Secure, Fault-Tolerant Data Centers

[Photographs]

<PAGE>

PROSPECTUS SUMMARY

This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all of the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including the section titled "Risk Factors" and the
financial statements and the notes relating to those statements.

Digex

Our Company

Digex is a leading provider of managed Web hosting services to businesses
operating mission-critical, multi-functional Web sites. In addition, Digex
offers Web hosting services to the rapidly growing number of application
service providers, enabling them to more efficiently deliver their application
services to their customers over the Internet. We also offer related value-
added services, such as firewall management, stress testing and consulting
services, including capacity and migration planning and database optimization.
From major corporations to Internet start-ups, our customers leverage our
services to rapidly and cost-effectively deploy secure and reliable business
solutions including on-line banking, on-line procurement and electronic
retailing. Our services include providing the computer hardware, software,
network technology, and systems management necessary to offer our customers
comprehensive outsourced Web site and application hosting solutions.

We believe our singular focus on delivering mission-critical Web site and
application hosting solutions has been the major contributor to our growth.
Digex currently serves over 550 customers, including American Century
Investments, Forbes, J. Crew, Kraft, Publishers Clearing House and Universal
Studios. We operate two state-of-the-art data centers strategically positioned
on the east and west coasts of the United States. We own and manage
approximately 2,000 Windows NT and UNIX-based servers in these data centers.
Our revenues grew at a compounded annual growth rate of 184% between 1996 and
1998 from $2.8 million in 1996 to $22.6 million in 1998. Our revenues for the
nine months ended September 30, 1999 grew to $38.1 million.

The following are among the key factors that we believe will continue to
drive our growth:

. the ability to facilitate the rapid, cost-efficient implementation and
expansion of customers' Web site initiatives;

. an operating platform designed to allow us to scale our operations to
achieve higher revenues, lower marginal unit costs and increased
operating margins;

. strong alliances with Microsoft Corporation and Compaq Computer
Corporation, each of whom have recently invested in Digex;

. strong working relationships with other technology leaders, including
Sun Microsystems, Akamai, Netscape and Cisco Systems;

. an experienced management team and technical experts, who in the
aggregate hold over 200 technical certifications from leading companies
such as Cisco Systems, Microsoft and Sun Microsystems;

. a highly skilled research and development organization dedicated to
identifying the best available tools, technologies and processes;

. a growing, geographically distributed sales force; and

. a network of over 120 business alliances which provide complementary
design, development and integration services for our customers and which
represent a significant source of new customer referrals for Digex.

Strategic Investment by Microsoft and Compaq

We recently entered into strategic development agreements and joint
marketing arrangements with Microsoft and Compaq. Digex and Microsoft will work
together to advance Digex's capabilities to more

1
<PAGE>

rapidly install, manage and upgrade large numbers of Microsoft Windows-based
servers for Web site and application hosting. Digex and Compaq will work
jointly to streamline the order, delivery and installation of Compaq's server
hardware and storage devices. In connection with these agreements, Microsoft
and a subsidiary of Compaq made a $100.0 million equity investment in our
company, of which $85.0 million was paid in cash and $15.0 million was paid in
the form of equipment credits from Compaq.

Our Market Opportunity

According to Forrester Research, Inc., the Web site hosting market is
projected to increase from $875 million in 1998 to approximately $14.6 billion
in 2003. In addition to the overall expansion and increasing pervasiveness of
the Internet, we believe one of the key drivers of growth in the Web site
hosting industry is the increasing number of businesses that have elected to
outsource the management of their Web sites and related operations. Web sites
are mission-critical for virtually all Web-centric companies and are becoming
increasingly strategic for many mainstream enterprises. At the same time, these
operations and applications are becoming more complex and challenging to
operate. We offer customers a comprehensive outsourcing solution designed to
reduce costs, speed implementation, reduce technology risks and provide
guaranteed operating performance.

Our Strategy

Our objective is to shape and lead the global market for Web site and
application hosting solutions. We intend to achieve this goal through a
strategy focused on:

. expanding our premier Web site and application hosting capabilities;

. developing next generation service offerings; and

. expanding our capabilities through selective strategic alliances and
acquisitions.

Our History

Our business started in 1996 as the Web site hosting unit of Business
Internet, Inc., previously known as DIGEX, Incorporated, a company that was
principally an Internet access and Web site hosting services provider. Business
Internet went public in October 1996 under the name DIGEX, Incorporated, and
was acquired by Intermedia Communications Inc. in July 1997. In contemplation
of our initial public offering, we were incorporated as Digex, Incorporated in
April 1999, and Business Internet contributed our assets to the newly formed
Digex, Incorporated in order to effect a recapitalization of our business. On
August 4, 1999, we sold 11,500,000 shares of Class A Common Stock in our
initial public offering. Subsequent to our initial public offering, Business
Internet contributed our Class B Common Stock to its wholly-owned subsidiary,
Intermedia Financial Company.

Our Address and Telephone Number

The address of our principal executive offices is One Digex Plaza,
Beltsville, Maryland 20705 and our telephone number is (240) 264-2000.

The information on any of our Web sites, such as www.digex.net or
www.digex.com, is not a part of this prospectus.

Digex and the Digex logo are two of our service marks. This prospectus also
contains trademarks and trade names of other companies.

2
<PAGE>

The Offering

<TABLE>
<C> <S>
Class A Common Stock offered by:
Digex........................................... 2,000,000 shares
The selling stockholder......................... 8,000,000 shares
21,500,000 shares of Class
Common Stock to be outstanding after the offering.. A Common Stock (1)
42,000,000 shares of Class
B Common Stock (1)(2)
Use of proceeds.................................... We intend to use the net
proceeds from this
offering to purchase or
construct
Telecommunications Related
Assets (3).
We will not receive any
proceeds from the shares
sold by the selling
stockholder.
Nasdaq National Market symbol...................... DIGX
</TABLE>
- --------
(1) Excludes:
. 1,500,000 shares to be sold by the selling stockholder if the
underwriters' over-allotment option is exercised in full, as described
in "Underwriting;"
. approximately 5,373,000 shares of our Class A Common Stock issuable upon
the exercise of stock options at a weighted average exercise price of
$15.91 per share;
. approximately 1,462,000 shares of our Class A Common Stock issuable upon
conversion of our outstanding Series A Preferred Stock at a conversion
price of $68.40 per share; and
. 1,065,000 shares of our Class A Common Stock issuable upon the exercise
of warrants with a weighted average exercise price of $57.00 per share.

(2) The Class B Common Stock to be sold by the selling stockholder
automatically converts to Class A Common Stock at the closing of the
offering. All purchasers in the offering will receive shares of Class A
Common Stock. The unsold Class B Common Stock is fully convertible into
Class A Common Stock, on a one-for-one basis, at any time at the option of
the holder or upon the transfer of the Class B Common Stock to any person
or entity not affiliated with Intermedia.

(3) Due to certain restrictions in the bond indentures of Intermedia, our
parent company, we will be required to use all of the net proceeds of this
offering to purchase or construct Telecommunications Related Assets. The
term "Telecommunications Related Assets" is defined under "Use of
Proceeds," and would include data centers and related capital expenditures.
In addition, we have made arrangements for Intermedia to purchase from us
some of the Telecommunications Related Assets purchased with the net
proceeds of this offering. We expect to be able to use the proceeds of such
sales to Intermedia to the extent necessary for working capital purposes
and to fund operating losses. This arrangement is explained under "Use of
Proceeds" and "Certain Relationships and Related Transactions--Sale of
Telecommunications Related Assets to Intermedia."

Except as otherwise indicated, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.

3
<PAGE>

Summary Financial Data

The following table sets forth summary financial data of Digex for the
period from July 7, 1997, the date of acquisition by Intermedia of the Web site
hosting unit (the "Predecessor"), which was then part of Business Internet, to
December 31, 1997, the year ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999, and of the Predecessor for the year ended December
31, 1996 and the period from January 1, 1997 to July 6, 1997. The summary
historical financial data has been derived from Digex's and the Predecessor's
financial statements which have been audited by Ernst & Young LLP, with the
exception of the unaudited financial statements as of and for the nine months
ended September 30, 1998 and 1999, and are included elsewhere in this
prospectus.

The following table also sets forth our pro forma financial information for
the year ended December 31, 1997. The pro forma financial information gives
effect to the purchase by Intermedia of the Predecessor as if such acquisition
had occurred on January 1, 1997. The presentation of pro forma financial
information is made to permit useful comparison of results of operations
between periods presented. This pro forma financial information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997. The relationship between
Business Internet and the Predecessor is more fully described in note 1 to the
financial statements.

In the following table, basic and diluted net loss per share have been
calculated assuming that the common shares issued in connection with our
recapitalization in April 1999 were outstanding for all periods of Digex
presented, and giving effect to the 50,000-for-one stock split of our Class B
Common Stock effected prior to the closing of our initial public offering in
July 1999.

You should read the summary financial data below in conjunction with our
audited and unaudited interim financial statements and the related notes
included elsewhere in this prospectus. You should also read the accompanying
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained later in this
prospectus.

4
<PAGE>

<TABLE>
<CAPTION>
Predecessor Digex
------------------------ --------------------------------------------------------------------
Historical Historical Pro Forma(1) Historical
------------------------ --------------- ------------ ------------------------------------
Nine months ended
September 30,
-----------------------
Period from
Period from July 7, 1997
January 1, (date of
Year ended 1997 to acquisition) to Year ended Year ended
December 31, July 6, December 31, December 31, December 31,
1996 1997 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................... $ 2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635 $ 14,863 $ 38,132
Costs and expenses:
Cost of operations........ 2,002 4,149 1,739 2,808 6,710 4,119 7,044
Cost of services.......... 684 1,817 1,611 3,428 7,044 4,412 13,761
Selling, general and
administrative........... 3,194 7,001 6,087 13,088 17,512 12,582 47,355
Depreciation and
amortization............. 591 519 2,753 4,850 8,109 6,081 18,112
Charge off of purchased
in-process research and
development.............. -- -- 15,000 (2) 15,000 (2) -- -- --
------- ------- -------- -------- -------- -------- ---------
Total costs and expenses... 6,471 13,486 27,190 39,174 39,375 27,194 86,272
------- ------- -------- -------- -------- -------- ---------
Loss from operations....... (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (48,140)
Other income (expense):
Interest expense.......... -- -- -- -- -- -- (612)
Interest and other
income................... -- -- -- -- -- -- 1,293
------- ------- -------- -------- -------- -------- ---------
Net loss before income tax
benefit................... (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (47,459)
Income tax benefit......... -- -- 1,440 4,710 159 -- 4,839
------- ------- -------- -------- -------- -------- ---------
Net loss................... $(3,668) $(9,066) $(18,558) $(22,852) $(16,581) $(12,331) $ (42,620)
======= ======= ======== ======== ======== ======== =========
Net loss per
common share:
Basic..................... -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Diluted................... -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Shares used in computing
basic and diluted net loss
per share................. -- -- 50,000 50,000 50,000 50,000 52,443
======== ======== ======== ======== =========
Other Data:
EBITDA before certain
charges (3)............... $(3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631) $ (6,250) $ (30,028)
Net cash used in operating
activities................ (2,565) (7,172) (6,079) (13,251) (10,930) (7,453) (28,125)
Net cash used in investing
activities................ (1,445) (1,004) (55,237) (56,241) (30,969) (18,352) (119,426)
Net cash provided by
financing activities (4).. 4,010 8,176 61,316 69,492 41,899 25,805 280,395
Capital expenditures....... 1,445 1,004 8,016 9,020 30,969 18,352 119,426
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
December 31,
1998 September 30, 1999
------------ ---------------------------
Actual Actual As Adjusted (5)
------------ ----------- ---------------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (6)..... $ -- $132,844 $391,670
Working capital................... 1,231 137,022 395,848
Property and equipment, net....... 39,059 165,055 165,055
Total assets...................... 77,739 342,142 615,968
Capital lease obligations,
including current maturities..... 2,089 16,719 16,719
Total stockholders'/owner's
equity........................... 70,845 312,536 586,362
</TABLE>
- --------

(1) The pro forma statement of operations data for the year ended December 31,
1997, represents the combining of the historical Predecessor statement of
operations data for the period from January 1, 1997 to July 6, 1997 and
the historical Digex statement of operations data for the period from July
7, 1997 to December 31, 1997, as adjusted for the following items:

. A decrease in cost of operations of $3,080 which represents reduced
network expenses.

. An increase in depreciation and amortization of $1,578 which represents
amortization of intangible assets arising from the acquisition.

. An increase in income tax benefit of $3,270 which represents the income
tax effect of purchase accounting adjustments.

(2) This amount represents a one-time charge to operations for the charge off
of purchased in-process research and development related to the
Predecessor in connection with Intermedia's purchase of Business Internet
on July 7, 1997.

(3) EBITDA before certain charges consists of earnings (loss) before tax
benefit, depreciation and amortization and the charge off of purchased in-
process research and development. EBITDA before certain charges does not
represent funds available for management's discretionary use and is not
intended to represent cash flow from operations. EBITDA before certain
charges should also not be construed as a substitute for operating income
or a better measure of liquidity than cash flow from operating activities,
which are determined in accordance with generally accepted accounting
principles. This caption excludes components that are significant in
understanding and assessing our results of operations and cash flows. In
addition, EBITDA before certain charges is not a term defined by generally
accepted accounting principles and as a result our measure of EBITDA
before certain charges might not be comparable to similarly titled
measures used by other companies. However, we believe that EBITDA before
certain charges is relevant and useful information which is often reported
and widely used by analysts, investors and other interested parties in the
Web site and application hosting industry. Accordingly, we are disclosing
this information to permit a more comprehensive analysis of our operating
performance, as an additional meaningful measure of performance and
liquidity, and to provide additional information with respect to our
ability to meet future debt service, capital expenditure and working
capital requirements. See the financial statements and notes thereto
contained elsewhere in this prospectus for more detailed information.

(4) Net cash provided by financing activities includes capital contributions
of $4,010, $7,626, $64,085, $41,899, $25,805 and $102,424 for the year
ended December 31, 1996, the period from January 1, 1997 to July 6, 1997,
the period from July 7, 1997 to December 31, 1997, the year ended December
31, 1998, and the nine months ended September 30, 1998 and 1999,
respectively.

(5) As Adjusted as of September 30, 1999 summary balance sheet data reflects
the sale of 100,000 shares of Series A Preferred Stock and warrants to
purchase 1,065,000 shares of Class A Common Stock to Microsoft and a
subsidiary of Compaq and the sale of the shares of Class A Common Stock
offered by this prospectus at an estimated offering price of $90.875 per
share, after deducting the underwriting discount and the offering expenses
payable by us. For more information, see "Use of Proceeds."

(6) Prior to our initial public offering in July 1999, we historically
participated in Intermedia's centralized cash management system and, as a
result, did not carry cash balances on our financial statements for any
period prior to the initial public offering. Since that date, we have
maintained and reported cash balances on our financial statements.

6
<PAGE>

RISK FACTORS

Investing in our Class A Common Stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below before
you purchase any of our Class A Common Stock. These risks and uncertainties are
not the only ones we face. Unknown additional risks and uncertainties, or ones
that we currently consider immaterial, may also impair our business operations.

If any of these risks or uncertainties actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this event, the trading price of our Class A Common Stock could
decline, and you could lose all or part of your investment.

We have a limited operating history and our business model is still evolving,
which makes it more difficult for you to evaluate our company and its
prospects.

We were established in January 1996 to provide Web site hosting services for
businesses deploying complex, mission-critical Web sites, which remains our
primary focus. Our range of service offerings has changed since 1996 and our
business model is still new and developing. Because some of our services are
new, we cannot be sure that businesses will buy them. As a result, the revenue
and income potential of our business is unproven. Our limited operating history
makes predicting future results difficult. Our prospects must be considered in
light of the risks, expenses and difficulties encountered by companies in the
new and rapidly evolving market for Web site and application hosting services.
To address these risks, among other things, we must:

. provide reliable, technologically current and cost-effective services;

. continue to upgrade and expand our infrastructure;

. market our brand name and services effectively;

. maintain and develop our business alliances; and

. retain and attract qualified personnel.

We have a history of significant losses and expect these losses to continue in
the foreseeable future.

We have experienced operating losses and negative cash flows from operations
in each annual period from inception. As of December 31, 1998 and September 30,
1999, our accumulated losses since January 1, 1996 have amounted to
approximately $47.9 million and $90.5 million, respectively. We had net losses
of $16.6 million for the year ended December 31, 1998 and $42.6 million for the
nine months ended September 30, 1999. While our revenues have grown in recent
periods, we cannot assure you this growth will continue. In connection with our
expansion plans, we anticipate making significant investments in sales,
marketing, technical and customer support personnel, as well as in our data
center infrastructure. As a result of our expansion plans, we expect our net
losses and negative cash flows from operations to continue for the foreseeable
future. We cannot assure you that we will ever become or remain profitable or
that we will generate positive cash flows from operations.

Our quarterly and annual results may fluctuate, resulting in fluctuations in
the price of our Class A Common Stock.

Our results of operations fluctuate on a quarterly and annual basis. We
expect to continue experiencing significant fluctuations in our future
quarterly and annual results of operations due to a variety of factors, many of
which are outside our control, including:

. demand for and market acceptance of our services;

. introductions of new services by us and our competitors;

. capacity utilization of our data centers;

7
<PAGE>

. timing of customer installations;

. the mix of services we sell;

. customer retention;

. the timing and magnitude of our capital expenditures;

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

. fluctuations in bandwidth used by customers;

. our retention of key personnel; and

. other general economic factors.

For these and other reasons, in some future quarters, our results of
operations may fall below the expectations of securities analysts or investors,
which could negatively affect the market price of our Class A Common Stock.

We cannot predict the outcome of our joint development effort with Microsoft
and Compaq.

Working closely with Microsoft and Compaq, we expect to invest significant
resources to advance our ability to more rapidly install, manage and upgrade
large numbers of Microsoft Windows-based servers for Web site and application
hosting. While Microsoft and a subsidiary of Compaq have each made a $50.0
million equity investment in our company, neither has an obligation to
contribute additional equity, whether or not the costs associated with this
development project exceed our expectations. Our alliance agreements also do
not prevent Microsoft and/or Compaq from working with other service providers
to develop similar capabilities. In addition, because this alliance is for a
research and development project, we cannot assure you that any commercially
successful products will be developed as a result of our agreements with
Microsoft and Compaq. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

We operate in a relatively new and evolving market with uncertain prospects for
growth.

The market for Web site and application hosting and related services has
only recently begun to develop and is evolving rapidly. Although certain
industry analysts project significant growth for this market, their projections
may not be realized. Our future growth, if any, will depend on the continued
trend of businesses outsourcing their Web site and application hosting and our
ability to market our services effectively. There can be no assurance that the
market for our services will grow, that our services will be adopted, or that
businesses will use these Internet-based services to the degree or in the
manner that we expect. It is possible that at some point businesses may find it
cheaper, more secure or otherwise preferable to host their Web sites and
applications internally and decide not to outsource the management of their Web
sites and applications. If we are unable to react quickly to changes in the
market, if the market fails to develop, or develops more slowly than expected,
or if our services do not achieve market acceptance, then we are unlikely to
become or remain profitable.

We may be unable to achieve our operating and financial objectives due to
significant competition in the Web site and application hosting industry.

The market for hosting Web sites and applications is highly competitive.
There are few substantial barriers to entry and many of our current competitors
have substantially greater financial, technical and marketing resources, larger
customer bases, more data centers, longer operating histories, greater name
recognition and more established relationships in the industry than we possess.
Our current and potential competitors in the market include Web hosting service
providers, Internet service providers, commonly known as ISPs,
telecommunications companies and large information technology outsourcing
firms. Our competitors may operate in one or more of these areas and include
companies such as AT&T, Cable & Wireless, Concentric Network, Data Return, EDS,
Exodus Communications, Frontier/GlobalCenter, Globix, GTE, IBM, Intel, Level 3
Communications, MCI WorldCom, Navisite, PSINet, Qwest Communications
International, and USinternetworking.

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Our competitors may be able to expand their network infrastructures and
service offerings more quickly. They may also bundle other services with their
Web site hosting or application hosting services, which could allow them to
reduce the relative prices of their Web site hosting and/or application hosting
services beyond levels that we could compete with, and generally adopt more
aggressive pricing policies. In addition, some competitors have entered and
will likely continue to enter into joint ventures or alliances to provide
additional services which may be competitive with those we provide. We also
believe the Web site hosting and application hosting markets are likely to
experience consolidation in the near future, which could result in increased
price and other competition that would make it more difficult for us to
compete. See "Business--Competition."

Our data centers and the networks we rely on are sensitive to harm from human
actions and natural disasters. Any resulting disruption could significantly
damage our business and reputation.

Our reputation for providing reliable service largely depends on the
performance and security of our data centers and equipment, and of the network
infrastructure of our connectivity providers. In addition, our customers often
maintain confidential information on our servers. However, our data centers and
equipment, the networks we use, and our customers' information are subject to
damage and unauthorized access from human error and tampering, breaches of
security, natural disasters, power loss, capacity limitations, software
defects, telecommunications failures, intentional acts of vandalism, including
computer viruses, and other factors that have caused, and will continue to
cause, interruptions in service or reduced capacity for our customers, and
could potentially jeopardize the security of our customers' confidential
information such as credit card and bank account numbers. Despite precautions
we have taken and plan to take, the occurrence of a security breach, a natural
disaster, interruption in service or other unanticipated problems could
seriously damage our business and reputation and cause us to lose customers.
Additionally, the time and expense required to eliminate computer viruses and
alleviate other security problems could be significant and could impair our
service quality. We also often provide our customers with service level
agreements. If we do not meet the required service levels, we may have to
provide credits to our customers, which could significantly reduce our
revenues. Additionally, in the event of any resulting harm to customers, we
could be held liable for damages. Awards for such damages might exceed our
liability insurance by an unknown but significant amount and could seriously
harm our business.

We could not provide adequate service to our customers if we were unable to
secure sufficient network capacity to meet our future needs on reasonable terms
or at all.

We must continue to expand and adapt our network arrangements to accommodate
an increasing amount of data traffic and changing customers' requirements. We
have entered into several two-year network services agreements with Intermedia
to provide us with certain network transit capacity which we believe to be
adequate for our capacity requirements. However, if our future network capacity
requirements exceed the capacity Intermedia has committed to provide to us, we
may have to pay higher prices for such additional network capacity or such
capacity might not be available at all. Our failure to achieve or maintain high
capacity data transmission could negatively impact service levels to our
existing customers and limit our ability to attract new customers, which would
harm our business.

Our business, in large part, depends on network services we receive from
Intermedia. Any disruption of these services or Intermedia's inability to
maintain its peering relationships could be costly and harmful to our business.

We currently rely primarily on Intermedia for network services. Intermedia
operates its own coast-to-coast Internet Protocol network, which qualifies it
as a tier-one service provider of Internet connectivity services. If our
network services agreements with Intermedia were to be terminated, we would
need to rapidly secure an alternative provider of these services. As a result,
we could incur transition costs and our monthly costs of operations could
increase. In addition, such a transition could have a detrimental effect on our
customer service levels.

The Internet is composed of many ISPs that operate their own networks and
interconnect with other ISPs at various peering points. Peering relationships
are arrangements that permit ISPs to exchange traffic with one

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another without having to pay for the cost of transit services. Peering
relationships are a competitive factor that allow some Web hosting companies to
provide faster data transmission than others. We believe Intermedia's tier-one
status and numerous peering relationships enable it to provide us faster data
transmission than many other ISPs provide. If Intermedia fails to adapt its
network infrastructure to meet industry requirements for peering or loses its
peering relationships for any other reason, then our transmission rates could
be reduced, resulting in a decrease in the service quality we provide to our
customers.

Providing services to customers with mission-critical Web sites and Web-based
applications could potentially expose us to lawsuits for customers' lost
profits or other damages.

Because our Web site and application hosting services are critical to many
of our customers' businesses, any significant interruption in our services
could result in lost profits or other indirect or consequential damages to our
customers. Our customers are required to sign server order forms which
incorporate our standard terms and conditions. Although these terms disclaim
our liability for any such damages, a customer could still bring a lawsuit
against us claiming lost profits or other consequential damages as the result
of a service interruption or other Web site or application problems that the
customer may ascribe to us. There can be no assurance a court would enforce any
limitations on our liability, and the outcome of any lawsuit would depend on
the specific facts of the case and legal and policy considerations. We also
believe we would have meritorious defenses to any such claims, but there can be
no assurance we would prevail. In such cases, we could be liable for
substantial damage awards. Such damage awards might exceed our liability
insurance by unknown but significant amounts, which would seriously harm our
business.

Digex is controlled by Intermedia, which could involve multiple risks for you
as a stockholder.

Intermedia controls a majority of our voting power, and Intermedia's
interests in us may conflict with your interests as a stockholder. Intermedia,
indirectly through its wholly-owned subsidiary, Intermedia Financial Company,
owns all of the issued and outstanding shares of our Class B Common Stock. When
this offering is completed, Intermedia will own 42,000,000 shares of Class B
Common Stock (40,500,000 shares if the underwriters' over-allotment option is
exercised). Each share of Class B Common Stock is entitled to 10 votes, as
compared to one vote for each share of Class A Common Stock to be sold in this
offering. Thus, after this offering is completed, Intermedia will control
approximately 95.1% of the voting power of Digex (94.6% if the underwriters'
over-allotment option is exercised), and will be able to control the management
and affairs of Digex, and all matters submitted to our stockholders for
approval, including the election and removal of directors, and any merger,
consolidation or sale of all or substantially all of our assets. As a result,
the price of our Class A Common Stock may be affected.

We depend on Intermedia to fund our working capital and operating losses,
but Intermedia's ability to fund these needs is limited by its own substantial
indebtedness. Because we are subject to the restrictions under Intermedia's
indentures, we will be required to use all of the net proceeds of this offering
to purchase Telecommunications Related Assets, as defined under "Use of
Proceeds," within 270 days of this offering. We will not be able to use the
proceeds of this offering directly to fund operating losses, working capital or
other uses that are not purchases of Telecommunications Related Assets. Because
we anticipate operating losses and a significant need for working capital for
the foreseeable future, we expect we will have to obtain funds for such
purposes from Intermedia or other sources which are significantly restricted.
See "Use of Proceeds" and "Certain Relationships and Related Transactions--Sale
of Telecommunications Related Assets to Intermedia" for a description of
certain arrangements we made with Intermedia relating to our use of a portion
of the proceeds of this offering.

Even though Intermedia has indicated that it intends to use most of the
proceeds from the shares it sells in this offering to reduce Intermedia's
indebtedness, Intermedia is and will continue to be highly leveraged and may
incur additional indebtedness in the future. Intermedia's level of debt will
require it to dedicate a substantial portion of its future cash flow from
operations for payment of principal and interest on its debt, as well as
dividends on and the redemption of its preferred stock. Historically,
Intermedia has not generated

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<PAGE>

sufficient cash flow to cover its operating and investing expenses. In
addition, because of the restrictions in the Intermedia indentures, Intermedia
has only a limited amount of cash that may be used for working capital purposes
and to fund operating losses. Consequently, Intermedia may not be able to
provide us with a source of funds for our working capital or operating losses.
Our dependence on Intermedia and the degree to which Intermedia is leveraged
could, among other things, increase our vulnerability to general adverse
economic and industry conditions, limit our ability to fund future working
capital, operating losses, capital expenditures, acquisitions and other
requirements, and limit our flexibility in reacting to changes in our business
and industry. We strongly urge you to read "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

We may require additional funds to finance our business but our ability to
raise funds is significantly limited by agreements that are binding on
Intermedia. Intermedia has issued debt securities to the public under seven
indentures and has recently borrowed $50.0 million under a $100.0 million
credit facility. As a subsidiary of Intermedia, we are subject to a number of
restrictions under the Intermedia indentures and the credit facility. These
restrictions will, among other things, limit our ability to make certain
restricted payments, incur indebtedness and issue preferred stock, pay
dividends or make other distributions, engage in sale and leaseback
transactions, create liens, sell our assets, issue or sell our equity
interests, or enter into certain mergers and consolidations. As a result, our
future financing sources will be significantly limited and our use of any
proceeds, including the net proceeds of this offering, will be significantly
restricted.

We have guaranteed Intermedia's obligations under its credit facility which
could make us more vulnerable to changes in Intermedia's financial condition
and make it more difficult for us to raise capital to expand our business. As
security for our guarantee, we have granted the banks a security interest in a
substantial portion of our assets. In addition, Intermedia recently announced
its intent to increase the size of its credit facility to $400.0 million. If
Intermedia were unable to meet its obligations under the credit facility we
could be obligated to repay the debt. In addition, the banks' liens on a
substantial portion of our assets could make it more difficult for us to obtain
additional financing.

Our ability to issue additional capital stock is constrained by Intermedia's
ownership of the Class B Common Stock, which could make it more difficult for
us to raise capital to expand our business. In the future, Intermedia may elect
to sell additional shares of our Class B Common Stock to the public or to
distribute these shares to its own stockholders. If as a result of a sale or
distribution, Intermedia would no longer hold more than 50% of the total voting
power of our capital stock, the consent of the majority in principal amount of
the noteholders under the Intermedia indentures would be required for the sale
or distribution. In addition, if we decide in the future to issue and sell
additional shares of our capital stock and, as a result, the voting power
represented by the Class B Common Stock held by Intermedia would no longer be
greater than 50% of the total voting power of our capital stock, the consent of
the majority in principal amount of the noteholders under the Intermedia
indentures would be required for the sale. We would be free of the restrictions
in the Intermedia indentures only if either Intermedia's voting power was
reduced to below 50% as described above or Intermedia designated us as an
"unrestricted subsidiary," which would also require a consent of a majority in
principal amount of the noteholders under the Intermedia indentures.

Digex and Intermedia have the same legal counsel, and therefore contractual
relationships between Digex and Intermedia might be less advantageous to Digex
than if Digex had separate legal representation. Kronish Lieb Weiner & Hellman
LLP, counsel to Digex, is also counsel to Intermedia. In addition, Ralph J.
Sutcliffe, a partner of Kronish Lieb Weiner & Hellman LLP, has recently been
appointed as a director of Intermedia. Consequently, Digex does not have legal
representation independent from Intermedia.

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If we do not respond effectively and on a timely basis to rapid technological
change and evolving industry standards, our business could suffer.

Internet and networking technology is changing rapidly. Our future success
will depend largely on our ability to:

. offer services that incorporate leading technologies;

. address the increasingly sophisticated and varied needs of our current
and prospective customers;

. respond to technological advances and emerging industry standards on a
timely and cost-effective basis; and

. continue offering services that are compatible with products and
services of other vendors.

Although we often work with various vendors in testing newly developed
products, there can be no assurance such products will be compatible with our
infrastructure or such products will adequately address changing customer
needs. Although we currently intend to support emerging standards, there can be
no assurance industry standards will be established or, if they become
established, that we will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. Our failure to
conform to the prevailing standards, or the failure of common standards to
emerge, could harm our business. In addition, products, services or
technologies developed by others may render our services no longer competitive
or obsolete.

Our business will not grow unless Internet usage grows and Internet performance
remains adequate.

The increased use of the Internet for retrieving, sharing and transferring
information among businesses and consumers has only recently begun to develop.
Our success will depend on the continued growth in Internet usage. In addition,
our business plan anticipates extensive growth in the Web site hosting and
application hosting markets. The growth of the Internet, including the Web site
hosting and application hosting markets, is subject to a high level of
uncertainty and depends on a number of factors, including the growth in
consumer and business use of new interactive technologies, the development of
technologies that facilitate interactive communications, security concerns and
increases in data transport capacity. If the Internet as a commercial medium
fails to grow or develops more slowly than expected, then our business is
unlikely to grow.

The recent growth in the use of the Internet in general has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by ISPs and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the benefits of our services. The performance of our Web
site and application hosting services is ultimately limited by and relies on
the speed and reliability of the networks operated by third parties.
Consequently, the growth of the market for our services depends on improvements
being made to the entire Internet infrastructure to alleviate overloading and
congestion.

We may be unable to achieve our operating and financial objectives if we cannot
manage our anticipated growth effectively.

Our business has grown rapidly, and our future success depends in large part
on our ability to manage the recent and anticipated growth in our business. For
us to manage this growth, we will need to:

. expand and enhance our operating and financial procedures and controls;

. replace or upgrade our operational and financial management information
systems; and

. attract, train, manage and retain key employees.

These activities are expected to place a significant strain on our financial
and management resources. If we are unable to manage growth effectively, our
business could suffer.

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We have had difficulty collecting a portion of our accounts receivable.

During the first three quarters of 1999, we encountered difficulties
establishing appropriate procedures to avoid billing errors and increasing our
financial staffing to accommodate our rapid growth. This resulted in disputes
and delayed payments on certain of our accounts receivable, as a consequence of
which our allowance for doubtful accounts was approximately 24% of our total
accounts receivable at September 30, 1999.

We believe we have remedied the deficiencies in our billing procedures and
staffing. Audit tests conducted by Intermedia's and Digex's internal audit
staff have confirmed the effectiveness of the remedial actions taken. We are in
the process of resolving with our customers existing disputes with respect to
outstanding accounts receivable. We expect our allowance for doubtful accounts
will be significantly reduced as a percentage of total accounts receivable over
time, commencing with the first quarter of 2000, as these disputes are
resolved, since customers typically withhold payment of the entire account
receivable even though the dispute ordinarily only relates to a modest portion
of that account receivable. There can be no assurance we will not encounter
billing problems in the future as our rapid growth continues or that we will be
able to collect all of our past due accounts receivable.

Our growth depends on our ability to expand data center capacity to meet
anticipated demand.

Continuing to expand capacity is critical to achieving our business
strategy. This expansion is likely to include the need to add new hardware and
software, and may include the opening of additional data centers both in the
United States and globally. We recently expanded the capacity of our east and
west coast data centers. We intend to add data center capacity over the next
five years as justified by customer demand. Our ability to do so successfully
depends on:

. anticipating and planning for future demand levels;

. having access to sufficient capital; and

. locating and securing satisfactory data center sites and implementing
the build-out of these sites, all of which may require significant lead
time.

If we cannot expand capacity effectively, our growth will suffer and we may
not be able to adequately meet the demands of existing customers.

Our business could be harmed if our management team, which has worked together
for only a brief time, is unable to work together effectively, or if we are
unable to retain and attract key personnel.

We have recently hired key employees and officers, including our President
and Chief Executive Officer and our President, Product Management, Engineering
and Marketing Group, who joined us in the beginning of July 1999, our
President, Sales and Service Delivery Group, who joined us in December 1998,
and our Chief Financial Officer, who joined us in January 2000. As a result,
our management team has worked together for only a brief time. Our success in
significant part depends on the continued services of our senior management
personnel, as well as of our key technical and sales personnel.

We believe our short and long-term success also depends largely on our
ability to attract and retain highly skilled technical, managerial and
marketing personnel, particularly additional management personnel in the areas
of application integration and technical support. Competition for such
personnel is intense. We may not be able to hire or retain the necessary
personnel to implement our business strategy, or we may need to pay higher
compensation for employees than we currently expect. Our inability to attract
and retain such personnel would limit our growth and harm our business.

We could face additional costs and operational disruptions in the future if
Intermedia discontinues providing general and administrative services to us.

Intermedia has provided and is expected to continue to provide many of our
financial, administrative and operational services and related support
functions, including customer billing, treasury, legal, human resources and
information management services. We have a General and Administrative Services
Agreement with

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Intermedia, as described under "Certain Relationships and Related
Transactions--Service Agreements--General and Administrative Services
Agreement," to provide such services for at least the next 18 months. Should
Intermedia's provision of these services no longer meet our needs or if
Intermedia unexpectedly stops providing these services for any reason, we could
face significant challenges and costs in transitioning to our own or
alternative general and administrative functions. Such a transition and any
resulting impairment of our operations could harm our financial results.

Regulatory and legal uncertainties could have significant costs or otherwise
harm our business.

The law in the United States relating to the liability of on-line and
Internet service providers for information disseminated through their systems
remains largely unsettled. It may also take years to determine whether and how
existing laws, such as those governing intellectual property, privacy, libel
and taxation, apply to the Internet. The growth and development of the market
for on-line commerce may also prompt calls for more stringent consumer
protection laws that may impose additional burdens on companies conducting
business on-line. The application of existing laws or promulgation of new laws
could require us to expend substantial resources to comply with such laws or
discontinue certain service offerings. Increased attention to liability issues
could also divert management attention, result in unanticipated expenses and
harm our business. Regulation of the Internet may also harm our customers'
businesses, which could lead to reduced demand for our services. We are not
currently subject to direct regulation by the Federal Communications Commission
("FCC") or any other government agency, other than as to regulations applicable
to business in general. However, in the future we may be subject to regulation
by the FCC or other federal or state agencies, which could increase our costs
and harm our business. See "Business--Government Regulation."

Our business plan contemplates future international operations but there are
numerous risks and uncertainties in offering services outside of the United
States.

We intend to expand into international markets and may build data centers
internationally. We cannot be sure that we will be able to successfully sell
our services or adequately maintain operations outside the United States. In
addition, there are certain risks inherent in conducting business
internationally. These include:

. unexpected changes in regulatory requirements;

. ability to secure and maintain the necessary physical and
telecommunications infrastructure;

. challenges in staffing and managing foreign operations; and

. employment laws and practices in foreign countries.

Any of these could adversely affect our international operations.
Furthermore, some foreign governments have enforced laws and regulations on
content distributed over the Internet that are more restrictive than those
currently in place in the United States. Any one or more of these factors could
adversely affect our contemplated future international operations and,
consequently, our business.

We may be unable to protect our intellectual property rights or to continue
using intellectual property that we license from others.

We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain of
our proprietary rights. We have no patented technology that would bar
competitors from our market. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
our data or technology.

We also rely on certain technologies licensed from third parties. We cannot
be sure these licenses will remain available to us on commercially reasonable
terms or at all. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could harm our business.

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We did not obtain third party consents in connection with our restructuring,
which may allow certain third parties, including some of our customers, to
assert a breach of a contract.

In connection with our initial public offering, Business Internet, our
indirect parent company, contributed the Web hosting business to us. This
contribution included an assignment of all of the contracts that were part of
our business on the date of assignment, including our customer contracts. We
elected not to seek consents in connection with this assignment. While the
failure to obtain required third party consents could give a third party the
ability to assert a breach of the acquired contract, we believe this would be
unlikely in the case of the restructuring because all of the assigned contracts
were transferred as part of the entire Web hosting business. Nevertheless, we
cannot be sure that one or more third parties will not assert a breach of our
contracts with them because of our failure to seek or obtain their consents to
assignment.

We could lose revenues and our reputation may be damaged if our systems or
those of our customers or our suppliers are not Year 2000 compliant.

Many installed computer systems and software products required upgrades in
order for 21st century dates to be distinguished from 20th century dates.
Systems that do not comply with these "Year 2000" requirements may cause
miscalculations which will interfere with business activities or simply fail to
work. Although we implemented a Year 2000 program intended to ensure our
computer systems and applications function properly beyond 1999 and requested
assurances from our suppliers that their products are Year 2000 compliant and
have not experienced any significant Year 2000 issues to date, we cannot be
sure that we will be able to promptly or correctly address all relevant Year
2000 issues, especially where third-party customers or suppliers are involved.
If we cannot achieve Year 2000 compliance, our systems could be disrupted for a
period of time. This would cause a loss of revenues, including requests from
customers for credits for downtime. More importantly, any significant
disruption would seriously damage our business reputation. We might also face
lawsuits for damages. As of the date of this prospectus we have not experienced
any material Year 2000 problems, either in our systems or in the systems of our
suppliers or customers.

The market price of the shares will fluctuate.

Since our initial public offering the closing market price for our common
stock has been as high as $98.25 per share and as low as $14.625 per share. The
stock markets, and in particular the Nasdaq National Market, have experienced
extreme price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies and that often
have been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect price to earnings ratios substantially above
historical levels which may not be sustained. These broad market factors may
adversely affect the market price of our Class A Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
companies. Such litigation, if instituted, could result in substantial costs
and a diversion of management's attention and resources, which could harm our
business.

Future sales of our common stock could adversely affect the price of our Class
A Common Stock.

After this offering is completed, 21,500,000 shares of Class A Common Stock
will be issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. All of the outstanding shares of Class A Common Stock will be
freely tradeable under the Securities Act unless held by our "affiliates," as
that term is defined in the Securities Act. In connection with this offering,
our executive officers and directors and the selling stockholder will be
required to refrain from selling any shares of Common Stock for a period of 90
days after the date of this prospectus without the written consent of Bear,
Stearns & Co. Inc. Additionally, shares of Class B Common Stock and Series A
Preferred Stock could be converted to, and the outstanding warrants could be
exercised for, shares of Class A Common Stock and sold in the future. The
market price of our Class A Common Stock could drop due to sales of a large
number of shares of our Class A Common Stock

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<PAGE>

in the market after this offering or the perception that such sales could
occur. Historically, market prices of start-up and Internet companies' stocks
have been particularly susceptible to such fluctuations. These factors could
also make it more difficult to raise funds through future offerings of common
stock.

You will suffer immediate and substantial dilution.

Purchasers of the Class A Common Stock being offered will experience
immediate and substantial dilution in the net tangible book value of their
Class A Common Stock. See "Dilution."

The greater voting power of our Class B Common Stock, as well as some
provisions of the Delaware Anti-Takeover Law and of our certificate of
incorporation and bylaws, could discourage a takeover of Digex and adversely
affect the price of the Class A Common Stock.

Upon completion of this offering, our board of directors will have the
authority to issue up to 4,900,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of any of our common stock may be adversely affected
by the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock. We have no current plans to issue additional
shares of preferred stock and any issuance of preferred stock is subject to
restrictions under the Intermedia indentures. We are also subject to certain
provisions of Delaware law which could have the effect of delaying, deterring
or preventing a change in control of Digex, including Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in any
business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder unless certain
conditions are met. In addition, our certificate of incorporation and bylaws
contain certain provisions that, together with Intermedia's voting power and
ownership of Class B Common Stock, could discourage potential takeover attempts
and make attempts by stockholders to change management more difficult.

This prospectus includes forward-looking statements which could differ from
actual future results.

Some of the statements in this prospectus that are not historical facts are
"forward-looking statements." Forward-looking statements can be identified by
the use of words such as "estimates," "plans," "anticipates," "expects,"
"intends," "believes" or the negative thereof or other variations thereon or by
discussions of strategy that involve risks and uncertainties. Examples of
forward-looking statements include discussions relating to:

. plans to expand our existing Web site hosting services and application
hosting services;

. introductions of new products and services;

. proposals to build new data centers in various geographic areas;

. estimates of market sizes and addressable markets for our services and
products;

. anticipated revenues from designated markets during 2000 and later
years; and

. statements regarding the future course of our relationship with
Intermedia.

We wish to caution you that all the forward-looking statements contained in
this prospectus are only estimates and predictions. Our actual results could
differ materially from those anticipated in the forward-looking statements due
to risks, uncertainties or actual events differing from the assumptions
underlying these statements. Such risks, uncertainties and assumptions include,
but are not limited to, those discussed in this prospectus.

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USE OF PROCEEDS

We estimate our net proceeds from the sale of the 2,000,000 shares of Class
A Common Stock we are offering, after deducting the estimated underwriting
discounts and our share of the estimated offering expenses, will be
approximately $173.8 million, based on an assumed public offering price of
$90.875 per share, the closing price of our Class A Common Stock on the Nasdaq
National Market on January 24, 2000. We have agreed with the selling
stockholder to allocate and pay the expenses of this offering in proportion to
the number of shares of Class A Common Stock to be sold by us and the selling
stockholder.

We will not receive any proceeds from the sale of Class A Common Stock by
the selling stockholder. We have been advised that Intermedia, the selling
stockholder, intends to use most of the proceeds to reduce its outstanding
debt.

Under the terms of Intermedia's indentures, described under "Risk Factors--
Digex is controlled by Intermedia," we will be required to use all of the net
proceeds of this offering to purchase Telecommunications Related Assets.
Telecommunications Related Assets mean assets used in connection with the
business of: (1) transmitting, or providing services relating to the
transmission of, voice, video or data through owned or leased transmission
facilities; (2) creating, developing and marketing communications related
network equipment, software and other devices for use relating to (1); or (3)
evaluating, participating in or pursuing any other activity or opportunity that
is related to those identified in (1) or (2); all as determined in good faith
by the board of directors of Intermedia. We intend to use approximately $50.0
million of our net proceeds to continue to expand and enhance our data center
infrastructure. We have entered into a letter agreement with Intermedia
pursuant to which Intermedia will purchase from us, at our cost, some of the
Telecommunications Related Assets purchased with our net proceeds of this
offering. Intermedia is expected to pay us for these Telecommunications Related
Assets to the extent necessary with funds not subject to restrictions under the
Intermedia indentures that we will use for working capital purposes and to fund
operating losses. The amounts actually expended for such capital expenditures
and working capital purposes may vary significantly, depending on a number of
factors, including our future revenues and Intermedia's availability of funds.

A portion of our net proceeds may also be used to acquire or invest in
complementary businesses, technologies, product lines or products. We have no
current plans, agreements or commitments with respect to any such acquisition.
Pending use of the net proceeds of this offering, we intend to invest the net
proceeds in short-term, interest-bearing, investment grade securities.

DIVIDEND POLICY

We do not anticipate paying any dividends on any of our common stock in the
foreseeable future. Moreover, because we are subject to restrictions under the
Intermedia indentures, we are effectively prohibited from paying dividends. We
may also incur indebtedness in the future which may prohibit or effectively
restrict the payment of dividends.

PRICE RANGE OF CLASS A COMMON STOCK

The following table sets forth the high and low closing prices for the Class
A Common Stock as reported on the Nasdaq National Market for the period from
July 29, 1999, through January 24, 2000.

<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
1999:
Third quarter (from July 29, 1999)...................... $33.6250 $14.6250
Fourth quarter.......................................... $90.0000 $21.1880
2000:
First quarter (through January 24, 2000)................ $98.2500 $56.0625
</TABLE>

17
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 1999
(1) on an actual basis, (2) as adjusted for the sale of 100,000 shares of
Series A Preferred Stock and warrants to purchase 1,065,000 shares of Class A
Common Stock to Microsoft and a subsidiary of Compaq and (3) as further
adjusted, to give effect to the conversion of the 8,000,000 shares of Class B
Common Stock to be sold by the selling stockholder into Class A Common Stock
and the sale of the 2,000,000 shares of Class A Common Stock we are offering,
at an assumed public offering price of $90.875 per share and after deducting
the estimated underwriting discounts and estimated offering expenses that we
will pay. The as adjusted and as further adjusted columns on the table do not
give effect to the 1,500,000 shares to be sold by the selling stockholder if
the underwriters' overallotment option is exercised in full, the approximately
5,373,000 shares of our Class A Common Stock issuable upon the exercise of
stock options at a weighted average price of $15.91 per share, the
approximately 1,462,000 shares of our Class A Common Stock issuable upon
conversion of the outstanding Series A Preferred Stock and the 1,065,000 shares
of our Class A common stock issuable upon the exercise of warrants with an
exercise price of $57.00 per share. This table should be read in conjunction
with the financial statements and the related notes included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------
(Unaudited)
As Further
Actual As Adjusted Adjusted
----------- ------------- ------------
(In thousands, except share data)
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 132,844 $ 217,844 $ 391,670
=========== =========== ===========
Note payable, including current
portion........................... $ 3,712 $ 3,712 $ 3,712
Capital lease obligations,
including current maturities...... 16,719 16,719 16,719
Stockholders' equity:
Preferred Stock, $.01 par value;
4,900,000 shares undesignated as
to series; no shares issued..... -- -- --
Series A Preferred Stock, $.01
par value; 100,000 shares
designated; no shares issued on
an actual basis and 100,000
shares issued on an as adjusted
and as further adjusted basis
authorized (liquidation value of
$100,000)....................... -- 83,900 83,900
Class A Common Stock, $.01 par
value; 100,000,000 authorized;
11,500,000 issued and
outstanding on an actual basis
and as adjusted basis, and
21,500,000 issued and
outstanding on an as further
adjusted basis.................. 115 115 215
Class B Common Stock, $.01 par
value; 50,000,000 authorized;
50,000,000 issued outstanding on
an actual basis and as adjusted
basis, and 42,000,000 issued and
outstanding on an as further
adjusted basis.................. 500 500 420
Additional paid-in capital....... 354,011 370,111 543,917
Accumulated deficit.............. (30,389) (30,389) (30,389)
Deferred compensation............ (11,701) (11,701) (11,701)
----------- ----------- -----------
Total stockholders' equity..... 312,536 412,536 586,362
----------- ----------- -----------
Total capitalization............... $ 332,967 $ 432,967 $ 606,793
=========== =========== ===========
</TABLE>

18
<PAGE>

DILUTION

Our net tangible book value per share on September 30, 1999, was $284.3
million, or $4.62 per share of the combined Class A and Class B Common Stock.
After giving effect to the sale of preferred stock and warrants to Microsoft
and a subsidiary of Compaq and to this offering, our net tangible book value
would have been $558.2 million, or $8.790 per share of the combined Class A and
Class B Common Stock. Purchasers of Class A Common Stock in this offering will
experience substantial and immediate dilution in net tangible book value per
share for financial accounting purposes, as illustrated in the following table
based on an assumed offering price of $90.875 per share:

<TABLE>
<S> <C>
Assumed public offering price per share of Class A Common Stock.... $90.875
Less net tangible book value per share after the offering(1)....... 8.790
-------
Immediate dilution in net tangible book value per share of Class A
Common Stock to new investors..................................... $82.085
=======
</TABLE>
- --------
(1) Determined by dividing the total number of Class A and Class B Common Stock
shares to be outstanding after the offering into our net tangible book
value, after giving effect to the sale of preferred stock and warrants to
Microsoft and a subsidiary of Compaq and to the application of the net
proceeds of this offering.

19
<PAGE>

SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data of Digex
for the period from July 7, 1997, the date of acquisition by Intermedia of the
Predecessor, to December 31, 1997, the year ended December 31, 1998 and the
nine months ended September 30, 1998 and 1999, and of the Predecessor for the
year ended December 31, 1996 and the period from January 1, 1997 to July 6,
1997. The selected historical financial data has been derived from Digex's and
the Predecessor's financial statements which have been audited by Ernst & Young
LLP, with the exception of the unaudited financial statements for the nine
months ended September 30, 1998 and 1999, and are included elsewhere in this
prospectus.

You should read the selected financial data below in conjunction with our
audited and unaudited interim financial statements and related notes included
elsewhere in this prospectus. You should also read the accompanying
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contained later in this prospectus.

20
<PAGE>

<TABLE>
<CAPTION>
Predecessor Digex
------------------------ --------------------------------------------------------------------
Historical Historical Pro Forma(1) Historical
------------------------ --------------- ------------ ------------------------------------
Nine months ended
September 30,
-----------------------
Period from
Period from July 7, 1997
January 1, (date of
Year ended 1997 to acquisition) to Year ended Year ended
December 31, July 6, December 31, December 31, December 31,
1996 1997 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................. $2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635 $ 14,863 $ 38,132
Costs and expenses:
Cost of operations....... 2,002 4,149 1,739 2,808 6,710 4,119 7,044
Cost of services......... 684 1,817 1,611 3,428 7,044 4,412 13,761
Selling, general and
administrative.......... 3,194 7,001 6,087 13,088 17,512 12,582 47,355
Depreciation and
amortization............ 591 519 2,753 4,850 8,109 6,081 18,112
Charge off of purchased
in-process research and
development............. -- -- 15,000 (2) 15,000 (2) -- -- --
-------- ------- -------- -------- -------- -------- ---------
Total costs and expenses.. 6,471 13,486 27,190 39,174 39,375 27,194 86,272
-------- ------- -------- -------- -------- -------- ---------
Loss from operations...... (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (48,140)
Other income (expense):
Interest expense......... -- -- -- -- -- -- (612)
Interest and other
income.................. -- -- -- -- -- -- 1,293
-------- ------- -------- -------- -------- -------- ---------
Net loss before income tax
benefit.................. (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (47,459)
Income tax benefit........ -- -- 1,440 4,710 159 -- 4,839
-------- ------- -------- -------- -------- -------- ---------
Net loss.................. $ (3,668) $(9,066) $(18,558) $(22,852) $(16,581) $(12,331) $ (42,620)
======== ======= ======== ======== ======== ======== =========
Net loss per common share:
Basic.................... -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Diluted.................. -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Shares used in computing
basic and diluted net
loss per share........... -- -- 50,000 50,000 50,000 50,000 52,443
======== ======== ======== ======== =========
Other Data:
EBITDA before certain
charges(3)............... $ (3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631) $ (6,250) $ (30,028)
Net cash used in operating
activities............... (2,565) (7,172) (6,079) (13,251) (10,930) (7,453) (28,125)
Net cash used in investing
activities............... (1,445) (1,004) (55,237) (56,241) (30,969) (18,352) (119,426)
Net cash provided by
financing activities(4).. 4,010 8,176 61,316 69,492 41,899 25,805 280,395
Capital expenditures...... 1,445 1,004 8,016 9,020 30,969 18,352 119,426
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
Predecessor Digex
------------ ---------------------------------------
December 31, December 31, December 31, September 30,
1996 1997 1998 1999
------------ ------------ ------------ -------------
(In thousands) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents
(5)..................... $ -- $ -- $ -- $132,844
Working capital
(deficiency)............ (1,237) (351) 1,231 137,022
Property and equipment,
net..................... 2,599 12,930 39,059 165,055
Total assets............. 3,173 49,693 77,739 342,142
Capital lease
obligations............. 1,745 1,980 2,089 16,719
Total
stockholders'/owner's
equity.................. 342 45,527 70,845 312,536
</TABLE>
- --------
(1) The pro forma statement of operations data for the year ended December 31,
1997, represents the combining of the historical Predecessor statement of
operations data for the period from January 1, 1997 to July 6, 1997 and the
historical Digex statement of operations data for the period from July 7,
1997 to December 31, 1997, as adjusted for the following items:

. A decrease in cost of operations of $3,080 which represents reduced
network expenses.

. An increase in depreciation and amortization of $1,578 which represents
amortization of intangible assets arising from the acquisition.

. An increase in income tax benefit of $3,270 which represents the income
tax effect of purchase accounting adjustments.

(2) This amount represents a one-time charge to operations for the charge off
of purchased in-process research and development related to the Predecessor
in connection with Intermedia's purchase of Business Internet on July 7,
1997.

(3) EBITDA before certain charges consists of earnings (loss) before tax
benefit, depreciation and amortization and the charge off of purchased in-
process research and development. EBITDA before certain charges does not
represent funds available for management's discretionary use and is not
intended to represent cash flow from operations. EBITDA before certain
charges should also not be construed as a substitute for operating income
or a better measure of liquidity than cash flow from operating activities,
which are determined in accordance with generally accepted accounting
principles. This caption excludes components that are significant in
understanding and assessing our results of operations and cash flows. In
addition, EBITDA before certain charges is not a term defined by generally
accepted accounting principles and as a result our measure of EBITDA before
certain charges might not be comparable to similarly titled measures used
by other companies. However, we believe that EBITDA before certain charges
is relevant and useful information which is often reported and widely used
by analysts, investors and other interested parties in the Web site and
application hosting industry. Accordingly, we are disclosing this
information to permit a more comprehensive analysis of our operating
performance, as an additional meaningful measure of performance and
liquidity, and to provide additional information with respect to our
ability to meet future debt service, capital expenditure and working
capital requirements. See the financial statements and notes thereto
contained elsewhere in this prospectus for more detailed information.

(4) Net cash provided by financing activities includes capital contributions of
$4,010, $7,626, $64,085, $41,899, $25,805 and $102,424 for the year ended
December 31, 1996, the period from January 1, 1997 to July 6, 1997, the
period from July 7, 1997 to December 31, 1997, the year ended December 31,
1998, and the nine months ended September 30, 1998 and 1999, respectively.

(5) Prior to our initial public offering in July 1999, we historically
participated in Intermedia's and the Predecessor's centralized cash
management systems and, as a result, did not carry cash balances on our
financial statements for any period prior to the initial public offering.
Since that date, we have maintained and reported cash balances on our
financial statements.

22
<PAGE>

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

The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.

Overview

Digex is a leading provider of managed Web hosting services to businesses
operating mission-critical, multi-functional Web sites. In addition, Digex
offers Web hosting services to the rapidly growing number of application
service providers, enabling them to more efficiently deliver their application
services to their customers over the Internet. We provide the computer
hardware, software, network technology, and systems management necessary to
provide our customers comprehensive, managed Web site hosting and application
hosting solutions. We also offer related value-added services such as firewall
management, stress testing and consulting services, including capacity and
migration planning and database optimization. We currently provide such
services to a diversified customer base consisting of over 550 customers. As of
September 30, 1999, we managed approximately 2,000 Windows NT and UNIX-based
servers in our state-of-the-art data centers which are strategically positioned
on the east and west coasts of the United States.

Our revenues grew at a compounded annual growth rate of 184% between 1996
and 1998, from $2.8 million in 1996 to $22.6 million in 1998. Our revenues for
the nine months ended September 30, 1999 grew to $38.1 million. We believe our
singular focus on delivering mission-critical Web site and application hosting
solutions has been the major contributor to our growth.

Revenue. Our revenues consist primarily of monthly fees from our managed Web
site and application hosting services. Contracts for these services are
typically between one and three years in length. In addition to Web site and
application hosting, we also offer enterprise services and consulting services
and believe that we will begin to derive increasing amounts of revenues from
the sale of these services in the future.

Cost and Expenses. Cost and expenses include:

. cost of operations;

. cost of services;

. selling, general and administrative expenses; and

. depreciation and amortization expense.

Cost of operations consist primarily of the costs for our network
connectivity and firewall services. We expect our network connectivity
requirements to grow in conjunction with the growth of our overall business and
accordingly expect these costs to increase in the future.

Cost of services consist primarily of facilities administration expenses
including rent, maintenance and utilities to support our data centers and
salaries and related benefits for our technical operations. We expect our cost
of services to increase in dollar amount but to decline as a percentage of
revenue due to economies of scale and expected improvements in technology and
productivity.

Selling, general and administrative expenses consist primarily of salaries
and benefits for our marketing, sales and support personnel, advertising costs,
consultants' fees, provision for doubtful accounts and other miscellaneous
expenses. We expect selling, general and administrative expenses in the future
to increase in dollar amount but to decline as a percentage of revenue.

Depreciation and amortization expense consists primarily of depreciation of
our data centers, servers and related equipment and amortization of our
intangible assets. We expect these expenses to increase due to our plans to
invest significant capital to expand our data center capacity.

23
<PAGE>

Results of Operations

The following table presents certain information derived from our audited
financial statements for the years ended December 31, 1996, 1997 and 1998 and
the unaudited financial statements for the nine months ended September 30, 1998
and 1999 expressed as a percentage of revenue. For the purposes of the
following discussion and analysis, the results of operations of the Predecessor
for the period from January 1, 1997 to July 6, 1997, have been adjusted to
reflect the acquisition of Business Internet by Intermedia as if the
acquisition had occurred at the beginning of 1997 and have been combined with
the results of our operations for the period from July 7, 1997 (date of
acquisition) to December 31, 1997. This computation was done to permit useful,
complete year comparisons between the results for 1996, 1997 and 1998. However,
this pro forma information is not necessarily indicative of the operating
results we would have achieved if the Predecessor had been acquired on January
1, 1997.

<TABLE>
<CAPTION>
Digex
Predecessor ---------------------------------------------
Historical Pro Forma Historical
Year Year
Ended ended Nine months ended
Year Ended December December September 30,
December 31, 31, 31, -----------------------
1996 1997 1998 1998 1999
------------ ----------- -------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of expenses:
Cost of operations.... 71.4 24.2 29.6 27.7 18.4
Cost of services...... 24.4 29.5 31.1 29.7 36.1
Selling, general and
administrative....... 114.0 112.7 77.5 84.7 124.2
Depreciation and
amortization......... 21.1 41.8 35.8 40.9 47.5
Charge off of
purchased in-process
research and
development.......... -- 129.2 -- -- --
Total costs and
expenses............... 230.9 337.4 174.0 183.0 226.2
------ ------ ----- ----- ------
Loss from operations.... (130.9) (237.4) (74.0) (83.0) (126.2)
Other income (expense):
Interest expense...... -- -- -- -- (1.6)
Interest and other
income............... -- -- -- -- 3.3
------ ------ ----- ----- ------
Net loss before income
tax benefit............ (130.9) (237.4) (74.0) (83.0) (124.5)
Income tax benefit...... -- 40.6 0.7 -- 12.7
------ ------ ----- ----- ------
Net loss.............. (130.9)% (196.8)% (73.3)% (83.0)% (111.8)%
====== ====== ===== ===== ======
</TABLE>

Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998

Revenue. Revenues were $38.1 million for the nine months ended September 30,
1999, compared to $14.9 million for the nine months ended September 30, 1998,
an increase of 156.6%. The $23.2 million increase in revenue was due primarily
to new customer growth and to a significant increase in the number of servers
per customer and revenue per server. Our installed base of servers increased
115.7% from 924 at September 30, 1998 to 1,993 at September 30, 1999.

Cost of Operations. Our cost of operations was $7.0 million for the nine
months ended September 30, 1999, compared to $4.1 million for the nine months
ended September 30, 1998. The $2.9 million increase was due primarily to
additional network costs resulting from our expanded customer base and increase
in service offerings since September 30, 1998. In addition, there were more
servers on line at September 30, 1999 than at September 30, 1998. As a
percentage of revenue, cost of operations decreased to 18.4% for the nine
months

24
<PAGE>

ended September 30, 1999 compared to 27.7% for the same period in 1998 as a
result of improved network utilization associated with the revenue improvement
discussed above.

Cost of Services. Our cost of services was $13.8 million for the nine months
ended September 30, 1999, compared to $4.4 million for the nine months ended
September 30, 1998. The $9.4 million increase was due primarily to increased
facilities and engineering costs to support our growth and the expansion of our
data centers. As a percentage of revenue, cost of services increased to 36.1%
for the nine months ended September 30, 1999 compared to 29.7% for the nine
months ended September 30, 1998.

Selling, General and Administrative. Our selling, general and administrative
expenses increased to $47.4 million for the nine months ended September 30,
1999, compared to $12.6 million for the nine months ended September 30, 1998.
The $34.8 million increase was due primarily to the significant administrative
requirements to support our growth strategy. During the nine months ended
September 30, 1998, the managed Web site and application hosting business
operated as part of a wholly owned subsidiary of Intermedia. During 1999, as
part of Digex's growth strategy, we continued building up our infrastructure to
operate as a separate public company. Increases in selling, general and
administrative expenses for 1999 include the costs associated with an increased
employee base, advertising campaigns, back office support (including the
General and Administrative Services Agreement with Intermedia), an increased
provision for doubtful accounts receivable, and the addition of key executive
management to support the growth of the business. In connection with the
completion of our initial public offering in August 1999, we also granted stock
options to certain employees at an exercise price below market value. As a
result, we recorded approximately $12.2 million of deferred compensation in the
third quarter of 1999 to be expensed over a four-year vesting period. During
the third quarter of 1999, approximately $0.5 million of stock compensation
expense was recognized. We expect that our growth strategy will continue to
require significant sales and marketing activities, including an expansion of
our sales force and further development of brand name recognition. In addition,
we will continue to build our personnel base to support our growth strategy in
the managed Web site and application hosting industry. As a result, we believe
that our selling, general and administrative expenses will continue to increase
in the future. As a percentage of revenue, total selling, general and
administrative expenses increased to 124.2% for the nine months ended September
30, 1999 from 84.7% for the nine months ended September 30, 1998.

Depreciation and Amortization. Depreciation and amortization increased to
$18.1 million for the nine months ended September 30, 1999, compared to $6.1
million for the nine months ended September 30, 1998. The $12.0 million
increase was principally due to additional servers and other facilities and
equipment placed in service since September 30, 1998. We expect increases in
depreciation charges for the remainder of the year due to the continued
expansion of our data centers and future server installations.

Interest Expense. Our interest expense of $0.6 million for the nine months
ended September 30, 1999 resulted from the capital leases assigned by
Intermedia to Digex during the second quarter of 1999 and a note payable issued
by Digex during the third quarter of 1999.

Interest and Other Income. Interest and other income of $1.3 million
resulted principally from interest earned by Digex on the cash proceeds from
the initial public offering completed in August 1999.

Net Loss Before Income Tax Benefit. Net loss before income tax increased to
$(47.5) million for the nine months ended September 30, 1999, compared to
$(12.3) million for the nine months ended September 30, 1998. As more fully
discussed above, the increased loss is attributable to growth strategy costs in
excess of current period revenues.

Income Tax Benefit. In connection with Intermedia's contribution of assets
on April 30, 1999, we recorded a deferred tax liability, net of deferred tax
assets, of $4.8 million. The deferred tax liability was related to certain
identifiable intangible assets. Since the date of the contribution, we
experienced taxable losses and non-deductible expenses that resulted in
recognition of deferred tax assets in excess of the deferred tax liability.
Accordingly, we recorded a $4.8 million deferred tax benefit during the second
quarter of 1999.

25
<PAGE>

EBITDA before certain charges. EBITDA before certain changes, as defined
below, decreased to $(30.0) million for the nine months ended September 30,
1999, compared to $(6.3) million for the nine months ended September 30, 1998.
The decrease is primarily attributable to costs associated with our growth
strategy. Costs associated with the administration and maintenance of our
expanded data centers and increased selling, general and administrative costs
will continue to represent a large portion of our expenses during our planned
expansion. In addition, we expect to continue to experience rapid growth in
marketing and selling expenses as new customers are acquired. EBITDA before
certain charges consists of earnings (loss) before tax benefit, depreciation
and amortization and the charge off of purchased in-process research and
development. EBITDA before certain charges does not represent funds available
for management's discretionary use and is not intended to represent cash flow
from operations. EBITDA before certain charges should also not be construed as
a substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles. This caption excludes components that
are significant in understanding and assessing our results of operations and
cash flows. In addition, EBITDA before certain charges is not a term defined by
generally accepted accounting principles and as a result our measure of EBITDA
before certain charges might not be comparable to similarly titled measures
used by other companies. However, we believe that EBITDA before certain charges
is relevant and useful information which is often reported and widely used by
analysts, investors and other interested parties in the Web site and
application hosting industry. Accordingly, we are disclosing this information
to permit a more comprehensive analysis of our operating performance, as an
additional meaningful measure of performance and liquidity, and to provide
additional information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. See the financial
statements and notes thereto contained elsewhere in this prospectus for more
detailed information.

Year Ended December 31, 1998 Compared to the Pro Forma Year Ended December 31,
1997

Revenue. Revenues were $22.6 million for the year ended December 31, 1998,
compared to $11.6 million for the year ended December 31, 1997, an increase of
94.9%. The $11.0 million increase in revenue was a result of our increased
marketing efforts, and market acceptance of our new products, resulting in
growth in our number of customers. We also experienced increases in revenue
from existing customers through upgrades and value added services. This
translated into higher average revenues per server. Additionally, during 1998
we increased the number of quota-bearing sales representatives.

Cost of Operations. Our cost of operations was $6.7 million for the year
ended December 31, 1998, compared to $2.8 million for the year ended December
31, 1997. The $3.9 million increase was due to increased network capacity
requirements necessary to support our growing business. In addition, we also
experienced an increase in the average network bandwidth per server. As a
percentage of revenue, the cost of operations increased to 29.6% in 1998 from
24.2% in 1997 primarily as a result of our purchasing added network capacity
per server in 1998 as compared to 1997 to improve customer Web site
performance.

Cost of Services. Our cost of services was $7.0 million for the year ended
December 31, 1998, compared to $3.4 million for the year ended December 31,
1997. The $3.6 million increase was due primarily to the hiring of additional
engineering and operations staff to support our expanded customer base. As a
percentage of revenue, the cost of services increased to 31.1% in 1998 from
29.5% in 1997.

Selling, General and Administrative. Our selling, general and administrative
expenses increased to $17.5 million for the year ended December 31, 1998,
compared to $13.1 million for the year ended December 31, 1997. The $4.4
million increase was due to higher commission expenses associated with our
increased sales levels as well as increases in our administrative headcount. As
a percentage of revenue, the expenses decreased to 77.5% in 1998 from 112.7% in
1997 due to economies of scale.

Depreciation and Amortization. Depreciation and amortization increased to
$8.1 million for the year ended December 31, 1998, compared to $4.9 million for
the year ended December 31, 1997. The $3.2 million increase was largely due to
increased capital expenditures for servers and other data center related
equipment.

26
<PAGE>

Income Tax Benefit. Our income tax benefit decreased to $159,000 for the
year ended December 31, 1998, compared to $4.7 million for the year ended
December 31, 1997. The 1998 income tax benefit represents the recognition of a
portion of the benefits associated with 1998 tax net operating loss. Benefits
were recognized in 1998 to the extent of unused deferred tax credits
originating in previous periods.

Net Loss. Net losses decreased to $(16.6) million for the year ended
December 31, 1998, compared to $(22.9) million for the year ended December 31,
1997.

Pro Forma Year Ended December 31, 1997 Compared to the Year Ended December 31,
1996

Revenue. Revenues were $11.6 million for the year ended December 31, 1997,
compared to $2.8 million for the year ended December 31, 1996, an increase of
314.3%. The $8.8 million increase in revenue was due primarily to our increased
marketing and sales efforts and the increased market acceptance of dedicated
Web site hosting as a viable outsourcing solution.

Cost of Operations. Our cost of operations was $2.8 million for the year
ended December 31, 1997, compared to $2.0 million for the year ended December
31, 1996. The $806,000 increase was due to increased network connectivity
expenses in connection with the growth in the number of managed servers. This
increase in our cost of operations was partially offset by the more favorable
network connectivity pricing we received subsequent to Intermedia's acquisition
of Business Internet in July 1997. As a percentage of revenue, the cost of
operations declined to 24.2% in 1997 from 71.4% in 1996, primarily as a result
of the favorable pricing from Intermedia.

Cost of Services. Our cost of services was $3.4 million for the year ended
December 31, 1997, compared to $684,000 for the year ended December 31, 1996.
The $2.7 million increase was due primarily to headcount increases in customer
service and operations during 1997. As a percentage of revenue, the cost of
services increased to 29.5% in 1997 from 24.4% in 1996, primarily due to the
additional customer service and operations employees who were hired in
conjunction with the expansion of our marketing efforts and to support the
anticipated growth in our business.

Selling, General and Administrative. Our selling, general and administrative
expenses increased to $13.1 million for the year ended December 31, 1997,
compared to $3.2 million for the year ended December 31, 1996. The $9.9 million
increase was due to significant increases in headcount in our sales, marketing,
management information, and administration departments, as well as one-time
expenditures for employee recruitment, relocation, and training. As a
percentage of revenue, the expenses decreased to 112.7% in 1997 from 114.0% in
1996.

Depreciation and Amortization. Depreciation and amortization increased to
$4.9 million for the year ended December 31, 1997, compared to $591,000 for the
year ended December 31, 1996. The $4.3 million increase was due to the
amortization of intangible assets in connection with the purchase of Business
Internet as allocated to us. This increase was also due to increased capital
expenditures for servers and other data center related equipment connected with
the continued expansion of our business.

Charge off of Purchased In-Process Research and Development. The charge for
purchased in-process research and development of $15.0 million in 1997
represents the amount of purchased in-process research and development
associated with the purchase of Business Internet by Intermedia. In connection
with this acquisition, Intermedia allocated $15.0 million of the purchase price
to in-process research and development projects that relate directly to us.
This allocation represents the estimated fair value based on risk-adjusted cash
flows of the incomplete projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and the in-
process research and development had no alternative future uses. Accordingly,
these costs were expensed as a one-time charge to earnings in 1997.

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<PAGE>

The acquired projects involved development, engineering, and testing
activities associated with the completion of next generation Web site
management services. The primary effort involved the development of an
additional Web site management facility on the west coast. The development of
technology related to this project was considered valuable as it was critical
to alleviating capacity constraints and adding significant new service
capabilities. Upon completion, the new Web site management facility was
expected to result in faster and easier installation of customers' servers as
well as efficient traffic management with significantly less overhead. Related
efforts involved the development and integration of next generation routers to
support greater transmission capacity, as well as a new software architecture
to assist in balancing traffic loads. Another valuable element involved the
development of site mirroring, the ability to create exact replicas of Web
sites at each of Digex's two data centers for greater service reliability. The
fair value assigned to these projects is $15.0 million.

These projects were completed during 1998. As such, there is no additional
future cost or risk expected with respect to these projects.

Income Tax Benefit. Our income tax benefit increased to $4.7 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. The income tax benefit in 1997 results from our ability to recognize the
benefits of our 1997 net tax operating loss carryforward to the extent of
available and unused tax credits that arose in connection with Intermedia's
purchase of Business Internet. Such tax credits relate to the purchase
accounting differences between bases in our identifiable intangible assets.

Net Loss. Net losses increased to $(22.9) million for the year ended
December 31, 1997, compared to $(3.7) million for the year ended December 31,
1996.

Liquidity and Capital Resources

We have used cash in our operating and investing activities during all
periods since inception. These cash usages have been funded by permanent
contributions to capital. Such contributions amounted to $4.0 million, $24.5
million, $41.9 million and $102.4 million in 1996, 1997 (pro forma), 1998, and
the nine months ended September 30, 1999, respectively.

Net cash used in operating activities in 1996, 1997 (pro forma), 1998 and
the nine months ended September 30, 1999 was $2.6 million, $13.3 million, $10.9
million and $28.1 million, respectively. Net cash used for operating activities
in each of these periods was primarily the result of operating losses and
changes in working capital.

Net cash used for investing activities in 1996, 1997 (pro forma), 1998 and
the nine months ended September 30, 1999 was $1.4 million, $56.2 million, $31.0
million and $119.4 million, respectively. Net cash used for investing
activities in each of these periods was primarily the result of capital
expenditures for data center infrastructure, as well as leasehold improvements,
furniture and fixtures and computers and other equipment. Additionally, in July
of 1997, goodwill and other intangible assets were allocated to us for separate
reporting purposes, and shown as a use of cash. Although we have plans to
invest significantly in property and equipment, we have no material commitments
for such items at this time.

We anticipate we will have significant cash requirements for several years
as we expand our data center capacity, increase our employee base to support
our expanding operations and invest in our marketing organization. In addition,
we expect to invest significantly in the purchase of property and equipment and
for research and development, including funding the expenses associated with
our research and development alliance with Microsoft and Compaq.

Prior to the date of our initial public offering, our capital expenditures
and operating expenses were principally funded by Intermedia. On August 4,
1999, we sold 11,500,000 shares of Class A Common Stock in our initial public
offering. The net proceeds from the offering were approximately $179.2 million.

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<PAGE>

On January 12, 2000, we sold 100,000 shares of our Series A Preferred Stock
and warrants to purchase 1,065,000 shares of Class A Common Stock to Microsoft
and a subsidiary of Compaq for aggregate gross proceeds of $100.0 million, of
which $85.0 million was paid in cash and $15.0 million was paid in the form of
equipment credits from Compaq. To the extent necessary to perform our
obligations under our agreement with Compaq, the proceeds from the investment
by a subsidiary of Compaq are committed to the development of a platform for
the delivery of high-performance application hosting services, which will
include capital expenditures and research and development expenditures.
Therefore, we do not expect the proceeds of the investment by a subsidiary of
Compaq to be available for general corporate purposes. We also intend to use
the proceeds of the investment by Microsoft to fund this development project.

The net proceeds of the initial public offering, the cash proceeds of the
investments by Microsoft and Compaq and the net proceeds of this offering must
be used to purchase Telecommunications Related Assets due to restrictions in
Intermedia's debt instruments. Therefore, to provide for the funding of our
operating expenses, we have made arrangements with Intermedia to sell to
Intermedia certain Telecommunications Related Assets that are purchased by
Digex with the net proceeds of these offerings. The assets are sold to
Intermedia for cash at our cost. As of September 30, 1999, we had received
approximately $19.5 million from Intermedia related to the sale of
Telecommunications Related Assets. These proceeds were unrestricted and were
used to fund our operating expenses. See "Use of Proceeds" and "Certain
Relationships and Related Transactions--Sale of Telecommunications Related
Assets to Intermedia."

Cash payments for capital assets for the nine months ended September 30,
1999 were approximately $119.4 million. As more fully discussed in the
footnotes to the financial statements, Digex was capitalized by Intermedia's
contribution of assets and certain liabilities amounting to approximately
$115.1 million on April 30, 1999. Additionally, beginning May 1, 1999 and
through the date of the initial public offering, Intermedia contributed
additional capital of $48.1 million to Digex, principally by way of
contributions of telecommunications assets. Finally, Intermedia assigned two
capital leases for data centers with a value of $17.1 million to Digex in the
second quarter of 1999.

We expect to continue experiencing negative cash flow from operating and
investing activities due to our plans for expansion and the growth of our
business. Subject to the limitations discussed under the caption "Use of
Proceeds," we believe that with the proceeds from this offering we will have
sufficient capital to sustain our current operations and capital expenditure
plans into the first half of 2001. We intend to continue to seek funding from
external sources to meet our cash needs subsequent to that date. There can be
no assurance that such funding will be available on terms satisfactory to us.
Alternatively, Intermedia may be able to advance funds to us to meet our
requirements, but it has no obligation to do so.

In addition, although Intermedia has advised us that it intends to use most
of the proceeds from its sale of shares in this offering to reduce its
outstanding debt, Intermedia is and will continue to be highly leveraged. At
September 30, 1999, Intermedia had outstanding approximately $3.1 billion of
debt and other liabilities including trade payables, and a total of
approximately $901.8 million of obligations with respect to four outstanding
series of preferred stock. In addition, Intermedia recently borrowed $50.0
million under its $100.0 million credit facility and announced its intent to
increase the size of its credit facility to $400.0 million. Intermedia's level
of debt will require it to dedicate a substantial portion of its future cash
flow from operations for payment of principal and interest on its debt, as well
as dividends on and the redemption of its preferred stock. Historically,
Intermedia has not generated sufficient cash flow to cover its operating and
investing expenses. For the year ended December 31, 1999, Intermedia's earnings
were insufficient to cover combined fixed charges and dividends on preferred
stock. Because of the restrictions in the Intermedia indentures, Intermedia has
only a limited amount of cash that may be used to fund working capital and
operating losses. Consequently, Intermedia may not be able to provide us with a
source of funds for our working capital or operating losses.

An affiliate of Kohlberg Kravis Roberts & Co. has recently agreed to make a
$200.0 million equity investment in Intermedia. However, the closing of this
transaction is subject to customary conditions including the expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
We can not assure you this transaction will be completed. If the equity
investment by the affiliate of Kohlberg Kravis

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<PAGE>

Roberts & Co. is consummated, the proceeds of that equity investment may be
used by Intermedia, at its discretion, to fund our working capital and
operating losses. This offering is not contingent on the closing of the
investment in Intermedia by the affiliate of Kohlberg Kravis Roberts & Co.

Impact of Year 2000

The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. To ensure that our computer systems and
applications function properly in 2000, through Intermedia, we have implemented
a Year 2000 program. To date, we have not experienced any significant Year 2000
problems.

Costs

We have tracked Year 2000 costs on a company-wide basis by segregating our
internal and external costs and hardware and software costs. The internal costs
are comprised of employee hours, and external costs are comprised of outside
consultant costs.

The costs presented below do not include system upgrades that would
otherwise result as part of our capital expenditure program. The estimated
costs for the fourth quarter of 1999 are based on management's best estimates.

A summary of historical and estimated costs for the Year 2000 project are
listed below (in millions):

<TABLE>
<CAPTION>
External Internal
-------- --------
<S> <C> <C>
Historical through September 30, 1999..................... $1.0 $0.5
Estimated additional expenditures for remainder of 1999... 1.8 0.8
---- ----
Total................................................... $2.8 $1.3
</TABLE>

<TABLE>
<CAPTION>
Software/Hardware
-----------------
<S> <C>
Historical through September 30, 1999..................... $0.1
Estimated additional expenditures for remainder of 1999... 0.5
----
Total................................................... $0.6
</TABLE>

We urge you to read "Risk Factors--We could lose revenues and our reputation
may be damaged if our systems or those of our customers or our suppliers are
not Year 2000 compliant."

Quantitative and Qualitative Disclosure About Market Risk

While our long-term debt bears fixed interest rates, the fair market value
of our fixed rate long-term debt is sensitive to changes in interest rates. We
run the risk that market rates will decline and the required payments will
exceed those based on current market rates. Under our current risk management
policies, we do not use interest rate derivative instruments to manage our
exposure to interest rate changes.

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<PAGE>

BUSINESS

Overview

We believe our singular focus on delivering mission-critical Web site and
application hosting solutions has been the major contributor to our growth.
Digex currently serves over 550 customers, including American Century
Investments, Forbes, J. Crew, Kraft, Publishers Clearing House and Universal
Studios. We operate two state-of-the-art data centers strategically positioned
on the east and west coasts of the United States. We own and manage
approximately 2,000 Windows NT and UNIX-based servers in these data centers.
Our revenues grew at a compounded annual growth rate of 184% between 1996 and
1998, from $2.8 million in 1996 to $22.6 million in 1998. Our revenues for the
nine months ended September 30, 1999 were $38.1 million.

The following are among the key factors that we believe will continue to
drive our growth:

. the ability to facilitate the rapid, cost-efficient implementation and
expansion of customers' Web site initiatives;

. an operating platform designed to allow us to scale our operations to
achieve higher revenues, lower marginal unit costs and increased
operating margins;

. strong alliances with Microsoft and Compaq, each of whom have recently
invested in Digex;

. strong working relationships with other technology leaders including Sun
Microsystems, Akamai, Netscape and Cisco Systems;

. an experienced management team and technical experts, who in the
aggregate hold over 200 technical certifications from leading companies
such as Cisco Systems, Microsoft and Sun Microsystems;

. a highly skilled research and development organization dedicated to
identifying the best available tools, technologies and processes;

. a growing, geographically distributed sales force; and

We believe we have established a reputation for reliable service, prompt
deployment and quality customer service. To meet our customers' evolving
requirements, we continuously seek to identify, test and utilize the best
available technologies and processes. Scalability is a central element of our
operating strategy. Our architecture was specifically designed to facilitate
the rapid, cost-efficient implementation and expansion of customers' Web
hosting initiatives.

In January 2000, Microsoft and a subsidiary of Compaq made a $100.0 million
equity investment in our company, of which $85.0 million was paid in cash and
$15.0 million was paid in the form of equipment credits from Compaq. We also
entered into strategic development agreements and joint marketing arrangements
with both companies.

Digex and Microsoft will work together to advance Digex's capabilities to
more rapidly install, manage and upgrade large numbers of Microsoft Windows-
based servers for Web site and application hosting.

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Digex and Compaq will work jointly to streamline the order, delivery and
installation of Compaq's server hardware and storage devices. Digex has agreed
to use Compaq's server hardware and attached storage exclusively for a period
of 18-months for all customer implementations using a Microsoft platform,
provided the equipment meets agreed performance, cost and service delivery
requirements.

In addition, we work closely with Sun Microsystems to provide our customers
with expertise on the UNIX platform. In January 2000, we were one of the first
service providers to complete SunTone certification for our services,
demonstrating our continued leadership in the UNIX marketplace.

Industry Background

Introduction

Use of the Internet, including intranets and extranets, has grown rapidly in
recent years. This growth has been driven by a number of factors, including the
large and growing installed base of personal computers, improvements in network
architectures, increasing numbers of network-enabled applications, the
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. As a result of this growing use, the
Internet has become an important new global communications and commerce medium.
The Internet represents an opportunity for enterprises to interact in new and
different ways with both existing and prospective customers, employees,
suppliers and partners. Enterprises are responding to this opportunity by
substantially increasing their investment in Internet sites and services.

Over the last few years, enterprises that focus solely on distributing
products and services over the Internet have emerged and, more recently,
mainstream businesses have begun to implement Web sites to complement
traditional business models and applications. Among the various factors which
continue to attract these businesses to the Internet is the transformation of
Web sites from being primarily text-based and informational to becoming
interactive, multimedia-enabled and transaction oriented. New technologies and
development tools have also led to the Web-enabling of traditional business
functions and applications such as customer service, procurement, human
resource management and sales force automation. Internet operations and
applications are mission-critical for virtually all Web-centric companies and
are becoming increasingly mission-critical for many mainstream enterprises. At
the same time, these operations and applications are becoming more complex and
challenging to operate. Ensuring the quality, reliability, and availability of
these Internet operations typically requires substantial investments in
developing Internet expertise and infrastructures. However, such a continuing
significant investment of resources is often an inefficient use of an
enterprise's limited resources. As a result, businesses are increasingly
seeking collaborative outsourcing arrangements that can increase performance,
provide continuous operation of their Internet solutions, and reduce Internet
operating expenses.

According to Forrester Research, 44% of the 50 Fortune 1000 firms they
surveyed have outsourced the management of their Web sites. Forrester reports
that companies outsource Web site management primarily for the following
reasons:

. scarcity of technical skills;

. performance;

. speed of implementation; and

. security.

We believe additional benefits of outsourcing the management of a complex
Web site include lower total costs, higher service level guarantees and reduced
risk of technology obsolescence.

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Emergence of Web Hosting Service Providers

In order to establish a high quality, reliable Web site or to run a Web-
based application on the Internet, businesses must, among other things, procure
and integrate sophisticated hardware and software, hire and retain an
operations support staff, develop application specific technical skills, and
have access to a secure, fault-tolerant physical location and redundant
Internet connectivity. While it is possible for a business to assemble all of
these elements in-house, many companies elect to outsource all or a portion of
their Web-site operations to companies offering Web hosting services. Web
hosting companies, in general, provide various infrastructure-related services,
including secure, monitored data centers, uninterrupted power supply and high-
speed network connectivity. We categorize the market for outsourced Web hosting
services into the following:

. Shared Hosting: customers share server hardware, software and bandwidth
with other customers. Shared hosting provides a price competitive entry
point for individuals and businesses desiring a simple Web site.

. Collocation Hosting: customers own their hardware, software and network
equipment, which is housed at the Web site hosting company's facilities.
The customers retain responsibility for the installation, management,
upgrading and security of their Web sites. While collocation requires
the customer to assume the majority of the responsibilities for the
operation of its Web site, collocation has been and remains an
attractive option for Web-centric companies with advanced in-house
Internet expertise.

. Dedicated Hosting: customers are provided a complete managed Web site
hosting solution. Unlike collocation, the service provider supplies the
hardware, software, network equipment and support necessary to run the
Web site. In addition, dedicated hosting often includes value-added
services such as firewall management, stress testing and consulting
services. As Web sites have become more complex, even large and
technically astute businesses have found Internet technologies and
solutions a challenge to manage. For such companies, including many
Fortune 2000 companies, dedicated Web site hosting has become a
preferred alternative.

. Application Hosting: Application service providers deliver Web-enabled
business applications to their end-users over the Internet, supporting
such common business processes as customer service, procurement, human
resource management and sales force automation. Often, an application
service provider partners with a dedicated hosting provider to bundle
the services of dedicated web hosting - known as "application hosting"
when targeted at this market - with their application services and
support. Through this partnership, the application service provider
typically experiences numerous benefits, including faster time-to-
market, access to advanced application skills and significantly lower
costs of operations.

A variety of companies, such as ISPs and large systems integrators, offer
products and services that attempt to address enterprises' Internet outsourcing
needs. However, we believe the solutions offered by these companies fail to
address certain elements required to ensure that customers' mission-critical
Internet operations are reliable, scalable and responsive. ISPs have
traditionally focused on providing Internet access and many have not developed
the technical expertise and physical resources to support mission-critical Web
sites and applications. In addition, many large systems integrators focus
primarily on large enterprises and traditional information technologies. These
firms often lack the network and Internet expertise required to provide
mission-critical solutions. As a result, we believe a significant opportunity
exists for a highly-focused company to provide a combination of complex Web
site hosting, outsourced applications management and professional consulting
services that enable businesses to implement reliable, high performance and
cost effective mission-critical Internet solutions.

The Digex Solution

We focus primarily on providing dedicated Web site and application hosting
services. Our core competency is developing and managing mission-critical Web
solutions for Fortune 2000 companies, Web-

33
<PAGE>

centric businesses and application service providers. We believe we are
uniquely positioned to assist such businesses in optimizing the potential of
the Internet and their Internet-related applications by providing our customers
with the following key advantages:

A Comprehensive Suite of Web Site and Application Hosting Services. We
provide a suite of services that enable companies to conduct business on the
Internet. Using a large, multi-specialized technical staff of certified
engineers, and through the security and reliability of our state-of-the-art
data centers, we provide the services and expertise necessary to ensure secure,
scalable, high-performance operation of mission-critical Web sites and
applications 24 hours a day. These services include:

. Management services such as operating and supporting Windows NT and
UNIX-based dedicated servers and intelligent networking services such as
load balancing and network caching;

. Enterprise services such as firewall management, stress testing,
customized Web site activity reporting, and enhanced security services;
and

. Consulting services including capacity planning, disaster recovery
planning, migration planning and database optimization.

As part of our services, we provide the installation and maintenance of
industry-leading hardware and software, core technical expertise, high-volume
backup and recovery systems and 24 hour a day monitoring by our Server
Operations Center ("SOC").

High-Performance Internet and Private Network Connectivity. We provide high
performance network connectivity services for our customers' Web sites as well
as direct private networking options for secure "back-end" network connections
to private corporate networks and information systems. Through our network
services agreement with Intermedia, we offer superior Internet connectivity
that provides the following direct benefits to customers:

. connectivity to a diversely redundant high-speed national network via
Intermedia, a tier-one ISP;

. use of all of Intermedia's public and private peering relationships,
permitting direct exchange of traffic with a significantly large number
of carriers and ISPs;

. use of all of Intermedia's regional direct connections to major ISPs,
dial-up carriers and content service providers; and

. service level agreements guaranteeing high availability and performance.

In addition to the Internet connectivity available through Intermedia's
backbone, we provide diversified connectivity from our data centers to other
major Internet backbones. We are also actively establishing and maintaining our
own public and private peering arrangements.

In addition, Digex offers a broad array of intelligent networking services
including products and services from Akamai and Cisco Systems.

Responsive Customer Care and Technical Support. We strive to provide
superior customer service. This includes providing customers with 24-hour a day
direct access to a staff of over 300 customer care and technical support
personnel and our use of a variety of proactive monitoring services from our
state-of-the-art SOC, which allows us to anticipate potential problems or
rapidly identify and remedy service interruptions. We believe this level of
customer support significantly differentiates Digex in the marketplace.

At our SOC, we monitor and report on the health of servers, software,
networks, and security devices managed by us. The SOC uses a variety of
technologies and tools to monitor specific network devices, such as routers,
switches and load balancing equipment. The SOC oversees a large number of
server resources, such as CPU, system processes, log files, TCP ports and disk
space, and security devices, such as firewalls.

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<PAGE>

Secure, Fault-Tolerant Data Centers. Our data centers have been engineered
to meet the highest expectations of our most demanding customers across our
target markets, including the particularly stringent requirements of the
financial industry.

Our data centers contain multiple, freestanding computer rooms to provide
containment and isolation. Separate mechanical rooms adjacent to each computer
room house cooling and mechanical equipment, eliminating the possible
introduction of liquid into the computer room from equipment leakage. We use
redundant uninterruptible power supply systems and redundant diesel generators
to ensure that the power system is capable of maintaining power to the data
center in the event of any component failure. State-of-the-art physical
security has been implemented through tightly controlled security zones
requiring both card and biometric identification. Over 100 surveillance cameras
record movement through the data centers and security guards provide real-time
visibility. Cooling and environmental controls for each data center are
designed to monitor and ensure proper temperature and humidity levels. Finally,
all telecommunications connections enter the data centers through multiple
points from diverse service arrangements to ensure continued operation of
service without degradation in the unlikely event of a cable cut or local
carrier network outage.

Predictable Monthly Fees. We provide our services for predictable monthly
fees, enabling our customers to accurately budget costs for Web site hosting
services. These fees are typically contracted as part of one, two or three-year
agreements. These agreements often provide service level guarantees and permit
technology upgrades at any time during the life of a contract.

Digex Strategy

Our objective is to maintain our leadership position in the industry and
continue to shape and lead the global market for hosting complex Web sites and
applications. We intend to accomplish this by delivering secure, scalable,
high-performance Web site and application hosting solutions. Our business
strategy focuses on the following:

Expand Our Premier Web Hosting Capabilities. We have recently expanded the
capacity of our east and west coast data centers. In addition, we are actively
seeking international expansion opportunities. We intend to continue to add
data center capacity over the next five years as justified by customer demand.
We believe our ability to readily grow and scale our operations while
simultaneously maintaining the highest service levels will allow us to continue
to attain higher revenues, lower marginal unit costs and higher operating
margins. The following are among the key initiatives we have instituted to
maintain the quality and scalability of our operations:

. We have formed alliances with leading technology companies. These
alliances help facilitate continuous innovation particularly in the
areas of Web solution scalability, serviceability and rapid deployment.
In January 2000, Microsoft and a subsidiary of Compaq invested $100
million in Digex, of which $85.0 million was paid in cash and $15.0
million was paid in the form of equipment credits from Compaq. We also
entered into strategic development agreements with both companies to
advance Digex's capabilities to more rapidly install, manage and upgrade
large numbers of Microsoft Windows-based servers and to streamline the
order, delivery and installation of Compaq hardware and storage devices.
In January 2000, we were one of the first service providers to receive
SunTone certification for our services, demonstrating our continued
leadership in the UNIX marketplace.

. We have designed an innovative architecture, called the Distributed
Internet Server Array ("DISA"), to facilitate Web site operating
scalability. DISA unifies interrelated layers of hardware and software
around industry standard solutions. Our customers are strongly
encouraged to adopt the DISA architecture in implementing their Web
initiatives. The consistency and reliability afforded by our DISA
architecture facilitates rapid and cost-efficient implementation of our
customers' Web hosting initiatives. Other Web hosting companies
typically have opted not to standardize their operating architectures.
The resulting multiple architectures significantly complicate and limit
the flexibility of their operations.

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. Our technical staff includes over 40 Microsoft certified engineers, as
well as technical experts certified by Cisco Systems and Sun
Microsystems. We believe this makes our technical staff among the most
highly skilled and trained in the Web hosting industry. Based on
comments by our customers, we believe our technical staff affords us a
competitive advantage and has been instrumental in attracting many of
our Fortune 2000 customers. In addition, we believe the depth and scope
of our staff's technical skill base is essential to our ability to
maintain our high quality service levels. To attract and retain these
individuals, we offer competitive financial incentives, including stock
options, in-house and external training programs, and the opportunity to
work with cutting-edge technology.

Develop Next Generation Service Offerings. As the underlying technology and
functionality of Web-based products evolve, we believe customers will
continuously demand new service offerings. We believe the depth of our Web site
management skills positions Digex to be a leading provider of next generation
Web site and application hosting services. The following are among the new
service initiatives we are currently pursuing:

. Support for Leading Applications and Databases. We have developed
expertise in several of the leading software applications and databases
used by many of today's business oriented Web sites. Over the past six
months, Digex has begun to support Lotus Domino and the Oracle 8i
database. We intend to continue to add new Web site applications and
databases to the list of software that we support.

. Value-added, Recurring Services. We have developed various value-added
services, which we believe significantly enhance the availability and
effectiveness of our customers' Web sites. Examples of these services
are testing, security, database, reporting and intranet service
offerings. In 1999, Digex added expanded reporting and monthly security
scanning and analysis services. We intend to continue developing
services that improve the effectiveness of Web sites and optimize their
performance.

. Enable the Emerging Application Service Provider Market. We believe that
we are well positioned to capitalize on the growth of the application
hosting segment of the Web hosting market by leveraging our experience
and technical expertise in efficiently deploying, managing, and scaling
Web hosting solutions. Digex intends to develop new services,
complementary to its suite of existing Web site hosting services, which
will enable application service providers to rapidly and cost
effectively deliver business applications to their customers' desktops
over the Internet. While the early phase of this emerging application
hosting market has been dominated by traditional software applications,
we believe a substantial number of new business process software
products designed for the Internet environment, and consequently a large
number of new application service providers, will begin to emerge in
2000. Forrester research, for example, predicts that the market for
hosted business applications will increase to $11.3 billion in 2003. We
intend to work with the various software developers, systems
integrators, and information technology firms that are evolving into
application service providers by providing their managed hosting
services.

Expand Capabilities Through Selective Strategic Alliances and Acquisitions.
We currently have business alliances with over 120 Web design and development
companies and interactive media agencies. These businesses typically partner
with Digex because our high quality services support and augment, rather than
compete with, their own product and service offerings. Together with our
business partners, we can provide our customers with end-to-end Web site
solutions. In 1998, we created the Digex e-Link Partner Program(TM), which
continues to attract leading interactive media and Web development companies
such as Agency.com, OrderTrust and US Interactive. In addition, in December
1999, we launched the Digex app-Link Partner Program(TM) in order to expand our
alliances to include systems integrators, value-added resellers and consultants
who offer application services to customers over the Internet. Our partnership
programs provide a valuable, cost-effective channel for marketing our services
as well as a highly productive customer referral source. In addition, we may
seek to opportunistically acquire companies which we believe will enable us to
cost-effectively augment our existing products and services, technology,
infrastructure, skill set, geographic presence or customer base.

36
<PAGE>

Digex Services

We offer a full range of complementary value-added services designed to
satisfy the rapidly evolving requirements of complex Web sites. Our services
include the following:

.Managed Hosting Services;

.Enterprise Services; and

.Consulting Services.

Managed Hosting Services

Dedicated Web Site and Application Hosting Services. We offer dedicated Web
site and application hosting services designed to enable reliable, scalable,
mission-critical Web solutions. We operate both Windows and UNIX-based servers
exclusively using hardware from Compaq and Sun Microsystems. By standardizing
around the hardware produced by these two vendors, we are able to quickly,
easily and cost-effectively upgrade, configure and implement the new hardware
necessary to accommodate our customers' growing needs for higher computing
speeds and capacity. We offer a number of services to dedicated Web site
management customers and application service providers to ensure ease of
implementation, security, performance and scalability. We offer a comprehensive
package featuring our core managed hosting services under the Digex
SmartServicesSM brand. Digex SmartServicesSM include:

. installation and maintenance of Web sites and applications on industry
leading server hardware and storage systems, from Compaq or Sun
Microsystems;

. installation and maintenance of Microsoft Windows NT or Microsoft Windows
2000 and/or the Sun Solaris UNIX operating system tested and configured
by Digex to ensure optimal Internet performance and security;

. unlimited help desk support available 24 hours a day with access to
certified technical professionals;

. continuous server and network monitoring services;

. substantial inventory of parts on-site for rapid upgrading and
maintenance of hardware and software;

. industry and vendor security alerts and maintenance;

. backup and recovery of system information, user information and customer
content to ensure protection against data loss from disaster, hardware
failure, or administrative errors; and

. secure remote administration capabilities for easy and ubiquitous remote
management.

Intelligent Networking. We offer a variety of intelligent networking
services to our customers. These services include load balancing and
geographical distribution of network traffic using Cisco Systems technology and
high-performance delivery of Internet content using the Akamai network and
technology. We expect demand for these products to increase as more customers
move to multiple server and higher bandwidth solutions.

Private Networking. Our private networking services are primarily used to
securely connect a customer's Web site at Digex to their private corporate
network or information system. Today, Digex offers a private IP connectivity
service and Intermedia's frame relay service.

Enterprise Services

Our enterprise services help companies deploy and maintain effective Web
sites. We believe these value-added, repeatable services will become
increasingly important to our customers as they look to ensure a higher level
of Web site availability, security and reporting. Our enterprise services
include the following:

Testing Services. Our testing services aim to identify problems that could
degrade the expected performance and availability of a customer's Web site. For
example, our stress testing services simulate users accessing a Web site to
provide information for isolating problems, optimizing performance and
accelerating the deployment of Web sites.

37
<PAGE>

Reporting Services. Our reporting services are designed to provide timely,
reliable information about user activity on a customer's Web site. Businesses
can use these reports to assess the effectiveness of their Web sites and to
increase their knowledge of the preferences, habits and demographic
characteristics of their Web site visitors. For example, we offer a custom Web
site usage reporting service to help improve Web server
performance for our customers by off-loading the usage reporting processing to
a powerful server designed specifically for reporting.

Security Services. Our security services are designed to ensure the security
of a customer's Web site or an application service provider's applications. In
December 1999 we introduced monthly security scanning and vulnerability
assessment services to provide our customers with a higher level of protection
and assurance. Other security services offered today include managed firewalls,
encryption software, and authentication devices.

Database Services. Our database services provide the installation,
configuration, maintenance and support of leading databases. Today, we provide
enhanced database services for Microsoft SQL Server and Oracle 8i database
technology.

Consulting Services

Our consulting services provide customized assistance to customers with
unique architecture, deployment or maintenance requirements. These services
include high-availability design, performance tuning, site architecture
assessment, migration planning, capacity planning, disaster recovery planning
and database optimization. Our consulting services typically assist customers
with limited resources or who lack Internet and technical expertise. Our
consulting engagements typically range from a few hours to a few weeks
depending on the complexity and volume of the services needed. We believe our
consulting services will play an increasingly important role in supporting the
implementation and maintenance of complex Web sites and Web-based applications.

Customers

We have a large and diverse customer base ranging from Fortune 50 companies
to small and medium size businesses that rely heavily on the Internet. Our
customers are primarily located within the United States. We serve over 550
customers, covering most major industries. Our customer contracts typically
range in duration from one to three years. Our customers include the following
well-known companies:

<TABLE>
<CAPTION>
Media and
Financial Services and Insurance Entertainment Manufacturing Retail and Distribution
- -------------------------------- ------------- ------------- -----------------------
<S> <C> <C> <C>
American Century BBC America Kraft Foods American Eagle Outfitters
Investments The Economist Liz Claiborne Authentic Fitness
Ernst & Young LLP Edmund's Nissan Campmor
LendingTree Forbes Sara Lee Corporation J. Crew
Northwestern Mutual Miller Freeman Philip Morris
Life Insurance Publishers Clearing House W.W. Grainger
Progressive Insurance Universal Studios
Companies
<CAPTION>
Technology and
Government Communications Healthcare Travel & Hospitality
- ---------- -------------- ---------- --------------------
<S> <C> <C> <C>
U.S. Department of Compaq Association of American Budget Rent-A-Car
Agriculture Microsoft Medical Colleges The Travel Company
Bally Total Fitness
Claimsnet
DuPont Pharmaceuticals
</TABLE>

In the past few years, our growth has come from new customers, as well as
existing customers whose Web sites have become increasingly more strategic to
their overall business goals and objectives.

38
<PAGE>

In addition, an increasing number of our customers are application service
providers, commonly referred to as ASPs, who use our hosting services to
deliver their applications to their customers. Our application service provider
clients include:

<TABLE>
<CAPTION>
ASP Client Hosted Application
---------- ------------------
<S> <C>
Encentris -- customer relationship management application
Continuity -- project management application
Celarix -- global logistics management application
Pandesic -- e-commerce application
Quick Arrow -- consulting and professional services office management application
</TABLE>

Sales and Marketing

Our sales objective is to achieve broad market penetration by focusing on
market segments that, we believe, have both a high propensity to outsource and
to deploy complex, mission-critical Web sites. We sell our services directly
through a highly skilled professional sales force and receive referrals through
an extensive network of business partners.

Direct Sales. As of September 30, 1999, our direct sales force consisted of
over 65 experienced, quota-bearing sales representatives. We have organized the
sales force into three units: major accounts, mid-market/Web-centric, and
alternate channel. The major accounts unit focuses on Fortune 2000 companies.
The mid-market/Web-centric unit addresses the large and growing number of mid-
size businesses requiring mission-critical hosting services. Our alternate
channel sales group works closely with our extensive network of business
alliance partners, which includes systems integrators, Web site developers and
application service providers. Supporting each of these units is a site
engineering team that provides pre-sales technical support, including
requirements gathering, configuration support, site architecture, and project
management.

Business Alliance Partners--The Digex e-Link Partner Program(TM) and Digex
app-Link Partner Program(TM). In 1998, we created the Digex e-Link Partner
Program(TM) which, we believe, has attracted some of the leading interactive
media and Web site development companies to partner with Digex. To date, our
business partners include companies such as Agency.com, OrderTrust and US
Interactive. We currently have over 120 business alliances that are a
significant source of sales leads and opportunities. These business partners
include Web site developers, Web site designers, interactive and new media
agencies, and systems integrators. We collaborate, instead of compete, with our
partners and complement each other's skills in an effort to bring the best
overall solution to our customers. Typically, in these collaborative
relationships, we focus on Web site hosting, while our strategic partners
concentrate on Web site design, development and systems integration.

In November 1999, we launched our second comprehensive partner program, the
Digex app-Link Partner Program(TM). The Digex app-Link Partner Program(TM)
targets application service providers, including consultants, systems
integrators and software developers. We currently host Web-based applications
for a variety of application service providers who specialize in providing a
broad range of Web-based business solutions.

Marketing. Our marketing organization is responsible for building Digex's
brand awareness, identifying key target markets and developing innovative
programs to communicate Digex's products and services to the marketplace.
Another objective of our marketing efforts is to stimulate the demand for Digex
services through a broad range of marketing communications and public relations
activities. Our primary communication vehicles include advertising, trade
shows, direct response programs, event sponsorship, the Digex Web sites and the
distribution channels of our technology vendors such as Microsoft, Compaq and
Sun Microsystems. Through our alliances with Microsoft and Compaq, we intend to
develop joint marketing activities promoting Windows-based solutions to Web
site and application service provider customers.

39
<PAGE>

Data Center Infrastructure

We presently operate highly secure, fault-tolerant data centers specifically
designed for the non-stop 24-hour a day hosting of Web sites and Web-based
applications. Our east coast data center is strategically located near major
network access points in the Washington, D.C. metropolitan area. Our west coast
data center is situated near the western network access points and the
headquarters of many of our strategic technology providers. We recently
expanded our total data center capacity and expect to add additional data
center capacity over the next five years as appropriate to meet anticipated
customer and market demand.

Our data centers combine the predictability and control of traditional
mainframe-based data centers with the network access and capacity required for
today's Internet-based computing. Our data centers are designed to provide
consistently high service levels while permitting customers to rapidly deploy
new and strategic applications without substantially increasing cost or
incurring risk.

The physical infrastructure and security controls of our data centers have
been designed to support rigorous requirements for secure data storage and
processing. Specifically, our data centers offer the following major physical
benefits to our customers:

. state-of-the-art physical security;

. multi-redundant mechanics, utilities and environmental controls;

. high-performance multi-network points of presence (WebPOPs); and

. fully-integrated customer work areas.

State-of-the-art physical security. Our data centers include multiple
separate computer rooms offering customers a high degree of containment and
isolation from accidents or disasters occurring within or outside of each data
center. Physical security has been implemented through tightly controlled
security zones requiring both access card and biometric identification. Each
data center has five security zones that require separate access levels to gain
entry. Our highest security zones include computer rooms physically constructed
as a building-within-a-building, with fire suppression and other controls
separate from the remainder of the data center. Fencing above the ceiling and
below the raised floor isolate each security zone. Over 100 surveillance
cameras record movement through the data centers and security guards provide
real-time visibility. Our cooling towers are surrounded by security fences and
monitored by cameras. Our dual 20,000 gallon diesel fuel tanks are safely
buried underground.

Multi-redundant mechanics, utilities and environmental controls. Within each
data center, separate mechanical rooms exist adjacent to each computer room.
These mechanical rooms house all cooling and mechanical equipment, eliminating
the possible introduction of liquid into the computer rooms from equipment
leakage. We use redundant uninterruptible power supply systems and redundant
diesel generators, to ensure the power system is capable of maintaining power
to the data center in the event of any component failure. Cooling and
environmental controls for each data center are designed to monitor and ensure
proper temperature and humidity.

High-performance WebPOPs. Our data centers include physically separated
WebPOPs, which are network points of presence within our data centers. These
WebPOPs provide high-performance, reliable networking connectivity to multiple
national Internet backbone carriers for our customers. Telecommunications
circuits enter the data centers through multiple points from diverse service
providers. Multiple points of presence ensure continued operation of service
without degradation in the unlikely event of a cable cut or local carrier
network outage.

Fully integrated customer work areas. Our data centers include separate,
private customer work areas. These work areas are isolated from the security
zones that house our servers, permitting customers to work on-site as
necessary. These work areas provide computing and personal resources, such as
customer breakrooms and wash areas.

40
<PAGE>

Competition

The market served by Digex is highly competitive. There are few substantial
barriers to entry, and we expect to face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include:

. quality of services and scalability of infrastructure;

. network capacity, reliability, security and adaptability to new
technologies;

. Internet system engineering expertise;

. quality of customer service and support;

. relationships with marketing partners and vendors;

. number and geographic presence of sales and technical support personnel;

. variety of services offered;

. price;

. product innovation;

. financial resources; and

. brand name.

Our current and potential competitors in the market include:

. Web hosting service providers;

. local, regional, national and international ISPs;

. local, regional, national and international telecommunications
companies; and

. large information technology outsourcing firms.

Our competitors may operate in one or more of these areas and include
companies such as AT&T, Cable & Wireless, Concentric Network, Data Return, EDS,
Exodus Communications, Frontier/GlobalCenter, Globix, GTE, IBM, Intel, Level 3
Communications, MCI WorldCom, Navisite, PSINet, Qwest Communications
International, and USinternetworking.

We believe our experience and reputation for delivering high quality,
complex Web site and application hosting services differentiates us from our
key competitors. We focus on our core competency of Web site and application
hosting as opposed to offering hosting as a complement to a wide range of
communication services. We believe we have defined and offer the industry's
most complete set of functions required to configure, engineer, implement and
maintain complex, transactional Web sites and applications. We believe our DISA
architecture, data centers, and technical team distinguish us from our
competition and enable us to provide among the highest quality end-to-end
complex Web site and application hosting solutions.

Intellectual Property Rights

We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our data, applications and services. We have no patented
technology that would bar competitors from our market. We also rely on certain
technologies we license from third parties, such as Microsoft, Netscape and
Micromuse. There can be no assurance these third-party technology licenses will
continue to be available to us on commercially reasonable terms. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could harm our
business. However, other than our trademarks and service marks, we do not
believe that the loss of any particular one of our intellectual property rights
would harm our business.

Government Regulation

We are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
currently only a small body of laws and regulations directly applicable to
access to or commerce on the Internet.

41
<PAGE>

In October 1998, Congress enacted the Digital Millennium Copyright Act,
which includes a limitation on liability of on-line service providers for
copyright infringement for transmitting, routing, or providing connections,
transient storage, caching or storage at the direction of a user. This
limitation on liability applies if the service provider had no actual knowledge
or awareness that the transmitted or stored material was infringing and if
certain other conditions are met. Since this law is relatively new, we are
unsure of how it will be applied to limit any liability we may face in the
future for any possible copyright infringement or copyright-related issues.
This law also requires ISPs to follow certain "notice and take-down" procedures
in order to be able to take advantage of the limitation on liability. We have
not yet implemented such procedures nor evaluated the cost of complying with
them. However, our customers are subject to an acceptable use policy which
prohibits them from posting, transmitting or storing material on or through any
of our services which, in our sole judgment is (1) in violation of any local,
state, federal or foreign law or regulation, (2) threatening, obscene, indecent
or defamatory or that otherwise could adversely affect any individual, group or
entity or (3) in violation of the intellectual property rights or other rights
of any person. Although this policy is designed to promote the security,
reliability and privacy of our systems and network, there is no assurance that
our policy will accomplish this goal or shield us from liability under the
Digital Millennium Copyright Act.

Despite enactment of the Digital Millennium Copyright Act, the law relating
to the liability of on-line services companies and Internet access providers
for information carried on or disseminated through their networks remains
largely unsettled. It is possible claims could be made against on-line services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
or other theories based on the nature and content of the materials disseminated
through their networks. Several private lawsuits seeking to impose such
liability upon on-line services companies and Internet access providers are
currently pending.

Although the sections of the Communications Decency Act of 1996 that
proposed to impose criminal penalties on anyone distributing indecent material
to minors over the Internet were held to be unconstitutional by the U.S.
Supreme Court, similar laws may be proposed, adopted and upheld. The nature of
future legislation and the manner in which it may be interpreted and enforced
cannot be fully determined and, therefore, legislation similar to the
Communications Decency Act could subject us and/or our customers to potential
liability, which in turn could harm our business. The adoption of any of these
types of laws or regulations might decrease the growth of the Internet, which
in turn could decrease the demand for our services or increase our cost of
doing business or in some other manner harm our business.

Due to the increasing popularity and use of the Internet, it is likely a
number of additional laws and regulations may be adopted at the federal, state
and local levels with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The adoption of any such laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase the cost of doing business or
in some other manner harm our business. In addition, applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies.

Employees

As of January 1, 2000, we employed approximately 595 full-time employees.
None of our employees are covered by a collective bargaining agreement. We
believe that our employee relations are good.

42
<PAGE>

Properties

We currently lease office space for our corporate headquarters in
Beltsville, Maryland. We lease additional space in Beltsville for our
administrative offices and regional sales office. We recently expanded our east
coast data center in Beltsville and our west coast data center in northern
California.We believe that our properties are adequate and suitable for their
intended purposes.

Legal Proceedings

We do not believe there are any pending or threatened legal proceedings
that, if adversely determined, would have a material adverse effect on us.

43
<PAGE>

MANAGEMENT

The following sets forth the name, age and position within Digex of our
current directors and executive officers:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David C. Ruberg......... 53 Chairman of the Board

Mark K. Shull........... 43 Director, President and Chief Executive Officer

Nancy G. Faigen......... 42 President, Sales and Service Delivery Group

Rebecca Ward............ 35 President, Product Management, Engineering and Marketing Group

Bryan T. Gernert........ 32 Senior Vice President, Sales, Distribution and Client Services

Timothy M. Adams........ 40 Chief Financial Officer

Marthe S. Lattinville-
Pace................... 46 Vice President, Human Resources

Robert B. Patrick....... 27 Vice President, Marketing

John C. Baker........... 50 Director

Philip A. Campbell...... 62 Director

Richard A. Jalkut....... 55 Director

George F. Knapp......... 67 Director

Robert M. Manning....... 40 Director

Jack E. Reich........... 48 Director
</TABLE>

Executive Officers and Directors

David C. Ruberg has served as Director and Chairman of the Board of Digex
since April 1999. Mr. Ruberg has served as President, Chief Executive Officer
and a Director of Intermedia since May 1993, and as Chairman of the Board of
Intermedia since March 1994. From September 1991 to May 1993, he was an
independent consultant to the computer and telecommunications industries. From
1989 to September 1991, Mr. Ruberg served as Vice President and General Manager
of the Telecommunications Division and then of the Personal Computer/Systems
Integration Division of Data General Corporation, a computer manufacturer. From
1984 to 1989, Mr. Ruberg served as a Vice President of TIE Communications,
Inc., a manufacturer of telecommunications equipment. Mr. Ruberg received his
B.A. in mathematics from Middlebury College and his M.S. in computer science
from the University of Michigan.

Mark K. Shull has served as President and Chief Executive Officer of Digex
since July 1999. From January 1997 to June 1999, he served as Vice President
and General Manager of the Web hosting and electronic commerce business unit of
GTE Internetworking. From March 1995 to January 1997, prior to GTE
Internetworking's acquisition of BBN Planet Corporation, he served as Vice
President and General Manager of BBN Planet Corporation's Internet Business
Solutions Group. From June 1994 to March 1995, he served as a Senior Consultant
at EDS Management Consulting. Mr. Shull received his B.A. in public and
international affairs from Princeton University, and holds a J.D. from Stanford
Law School.

Nancy G. Faigen has served as President of the Sales and Service Delivery
Group of Digex since July 1999, and she served as President and Chief Executive
Officer from December 1998 to June 1999. From January 1998 to November 1998,
she served as Vice President of IBM e-business solutions, a business unit of
IBM. From October 1996 to November 1998, she served as Vice President of Global
Web Solutions of IBM. From November 1991 to October 1996, Ms. Faigen served in
various managerial and executive positions at IBM, including Executive
Assistant to the CEO and Director of Strategy and Business Unit Director of the
Sales and Services Division. Ms. Faigen holds a B.A. in drama and fine arts
from Dartmouth College.

44
<PAGE>

Rebecca Ward has served as President of the Product Management, Engineering
and Marketing Group of Digex since July 1999. From March 1991 to June 1999, she
held various management positions at GTE Internetworking and BBN Planet
Corporation, prior to its acquisition by GTE Internetworking, including most
recently Vice President of Product Management and Engineering of the Web
hosting and electronic commerce business unit of GTE Internetworking. Ms. Ward
holds a B.S. in computer technology from Northeastern University and an M.S. in
computer science from Boston University.

Bryan T. Gernert has served as Senior Vice President of Sales, Distribution
and Client Services of Digex since July 1999. From April 1995 to June 1999, he
held various other management positions at Digex, including Vice President of
Sales, Consulting and Client Services, Vice President of Sales and
Distribution, Sales Account Manager and Director of Sales. From January 1993 to
April 1995, he served as National Sales Manager of Evergreen Information
Technologies, Inc. From June 1989 to January 1993, he was Director of
Acquisitions for RCI, Inc. Mr. Gernert holds a B.S. in business administration
with a concentration in finance from the University of Delaware.

Timothy M. Adams has served as Chief Financial Officer since January 2000.
From April 1997 to December 1999, he held various management positions at GTE
Internetworking and BBN Planet Corporation, prior to its acquisition by GTE
Internetworking, including Vice President of Operations, Circuits Management,
Vice President of Business Operations and Vice President of Finance. From May
1989 to April 1997, he held various financial positions with Trans National
Group Services, including Chief Financial Officer of Trans National
Communications from September 1995 to April 1997. Mr. Adams holds a B.S. in
accounting from Murray State University, Murray, Kentucky and an M.B.A. from
Boston University. Mr. Adams is also a certified public accountant. From June
1982 to May 1989 he held various positions in the audit and tax departments of
Price Waterhouse LLP, a predecessor of PricewaterhouseCoopers LLP.

Marthe S. Lattinville-Pace has served as Vice President of Human Resources
of Digex since April 1999. From January 1999 to March 1999 she served as Vice
President, Human Resources of ManorCare Realty. From April 1994 to March 1999,
she served as Director Human Resources, Europe, India & the Middle East for
Waters Corporation. She also served as Director Human Resources & Building
Administration of NYNEX Mobile Communications, from 1992 to 1994. Mrs.
Lattinville-Pace holds an M.B.A. from the Haute Etudes Commerciales of the
University of Montreal, a Bachelor in industrial relations from University of
Montreal and a psychology diploma from Old Montreal College.

Robert B. Patrick has served as Vice President of Marketing of Digex since
July 1999. From September 1998 to June 1999 he served as Vice President of
Marketing and Product Development of Digex. He served as Director of Business
Development for Digex from July 1997 through September 1998. He joined Digex in
September 1996, as Manager of Technical Operations. From June 1993 to June
1996, he served as a Senior Consultant for Andersen Consulting. From October
1988 to June 1993, he served as a Senior Computer Specialist for the Federal
Bureau of Investigation. Mr. Patrick holds a B.S. in management information
systems from George Mason University.

John C. Baker has served as Director of Digex since April 1999. He has
served as Director of Intermedia since February 1988. Mr. Baker has been the
President of Baker Capital Corp., a multi-national venture capital firm, since
October 1995. He served as Senior Vice President of Patricof & Co. Ventures,
Inc., a multi-national venture capital firm, from 1988 until September 1995.

Philip A. Campbell has served as Director of Digex since April 1999. He has
served as Director of Intermedia since September 1996. Mr. Campbell retired
from Bell Atlantic as Director, Vice Chairman and Chief Financial Officer in
1991. Previously, he served as President of New Jersey Bell, Indiana Bell and
Bell Atlantic Network Services.

Richard A. Jalkut has served as Director of Digex since July 1999. He has
served as President, Chief Executive Officer and Director of Pathnet, Inc.
since August 1997. From 1995 to August 1997, Mr. Jalkut served as President and
Group Executive of NYNEX Telecommunications Group. From 1991 to 1995, he served
as President and Chief Executive Officer of New York Telephone Co. Inc., the
predecessor company to

45
<PAGE>

NYNEX Telecommunications Group. Mr. Jalkut is currently a Director of HSBC Bank
USA, formerly Marine Midland Bank, a commercial bank, a Director and Chairman
of the Board of Ikon Office Solutions, Inc., a company engaged in wholesale and
retail office equipment sales, and a Director of Home Wireless Networks, a
company developing a wireless product for home and business premises.

George F. Knapp has served as Director of Digex since April 1999. He has
served as Director of Intermedia since February 1988. He has been a Principal
of Communications Investment Group, an investment banking firm, since June
1990. From January 1988 until June 1989, Mr. Knapp was an associate at MBW
Management, Inc., a venture capital firm. Prior to that time, he held various
executive positions at ITT Corporation and its subsidiaries, most recently as
Corporate Vice President of ITT Corporation. Mr. Knapp is currently a member of
the Manhattan College Board of Trustees and Chairman of its Finance Committee.

Robert M. Manning has served as Director of Digex since January 2000. Mr.
Manning has served as Senior Vice President, Chief Financial Officer of
Intermedia since September 1996. Mr. Manning joined Intermedia from DMX Inc., a
Los Angeles-based cable programmer, where he was Executive Vice President,
Senior Financial Executive and a director of DMX-Europe from October 1991 to
September 1996. Prior to his tenure at DMX, Mr. Manning spent ten years in the
investment banking field in corporate finance and mergers and acquisitions,
most recently with Oppenheimer and Co., Inc. as Vice President, Corporate
Finance, managing their Entertainment/Leisure Time Group from October 1988 to
October 1991. Mr. Manning is a graduate of Williams College.

Jack E. Reich has served as Director of Digex since July 1999. From November
1998 to the present, he has served as President of KJE Inc., a management and
investment consulting firm. From December 1996 to November 1998 he served as
President and Chief Executive Officer of e.spire Communications, Inc. Mr. Reich
was also appointed Director during his tenure with e.spire Communications, Inc.
From April 1994 to October 1996 he served as President, Customer Business
Solutions, of Ameritech. From April 1986 to April 1994, he served in a number
of management positions for MCI Communications Corporation, including
President, Multinational Accounts. Prior to MCI, Mr. Reich held various
management positions with Rolm Corporation and AT&T. Mr. Reich is currently a
Director of LISN, Inc.

No family relationship exists between any of the directors and executive
officers of Digex.

Committees of the Board of Directors

The board of directors has an audit committee and a compensation committee.
Among other functions, the audit committee:

. makes recommendations to the board of directors regarding the selection
of independent auditors;

. reviews the results and scope of the audit and other services provided
by our independent auditors;

. reviews our financial statements; and

. reviews and evaluates our internal control functions.

The audit committee is composed of Philip A. Campbell, George F. Knapp and
Richard A. Jalkut. The chairman of the audit committee is Mr. Campbell.

The compensation committee administers our Long-Term Incentive Plan and
makes recommendations to the board of directors regarding the executive
compensation and salaries and incentive compensation for our employees and
consultants. The compensation committee is composed of David C. Ruberg, and
Jack E. Reich. The chairman of the compensation committee is Mr. Ruberg.

Employment Agreements

Mark K. Shull. Mr. Shull's employment letter agreement provides for an
initial annual base salary of $250,000, which will be reviewed in 2000, and an
annual bonus opportunity of 60% of his initial annual base salary that will be
based on the achievement of certain corporate and individual objectives. The
agreement also

46
<PAGE>

provides Mr. Shull with stock options to purchase 100,000 shares of Intermedia
common stock at an exercise price of $30.94, subject to the terms and
conditions of the Intermedia 1996 Long-Term Incentive Plan, to vest in equal
installments over the 60-month period commencing on his date of employment. On
July 29, 1999, Mr. Shull was granted options to purchase 500,000 shares of our
Class A Common Stock. 250,000 of these options will be exercisable at $5.00 per
share and the balance will be exercisable at $17.00 per share. Options covering
25% of the 500,000 shares of our Class A Common Stock will vest one year
following the date of grant and the balance will vest in equal quarterly
installments over the next three years. Following a change of control of Digex
or Intermedia, one-half of Mr. Shull's then unvested Digex options will vest
immediately, and the remainder will vest on the first anniversary of the change
of control if Mr. Shull continues to be employed by Digex at that date, or upon
termination by Digex of Mr. Shull's employment (other than for cause), if
earlier. Following a change of control of Intermedia, one-half of Mr. Shull's
then unvested Intermedia options will vest immediately, and the remainder will
vest on the first anniversary of the change of control if Mr. Shull continues
to be employed by Digex or Intermedia or any of its subsidiaries at that date,
or upon termination by Digex and, if applicable, Intermedia of Mr. Shull's
employment (other than for cause), if earlier.

If Mr. Shull is terminated by Intermedia or us for any reason other than for
cause, we or Intermedia will pay his base salary as in effect at the time of
termination through the later of July 1, 2001, or the first anniversary of the
date of termination. Mr. Shull's entitlement to receive payments shall
terminate if he directly or indirectly knowingly hires, within six months
following his date of termination, any employee of director-level or above who
was employed by Intermedia or Digex on the date of his termination.

The letter agreement also provides Mr. Shull with a relocation allowance of
up to $100,000 in the form of a loan which will be forgiven in equal monthly
installments over a 12-month period commencing on the date of the last
relocation reimbursement.

Nancy G. Faigen. Ms. Faigen's employment letter agreement provides for an
initial annual base salary of $225,000, and an annual bonus opportunity of 50%
of her initial annual base salary that will be based on the achievement of
certain corporate and individual objectives. Ms. Faigen also received a
$275,000 signing bonus.

The agreement also provides Ms. Faigen with a stock option to purchase
100,000 shares of Intermedia common stock at an exercise price of $15.00,
subject to the terms and conditions of the Intermedia 1996 Long-Term Incentive
Plan, to vest in equal installments over the 60-month period commencing on her
date of employment. On July 29, 1999, Ms. Faigen was granted options to
purchase 300,000 shares of our Class A Common Stock. 150,000 of these options
will be exercisable at $5.00 per share and the balance will be exercisable at
$17.00 per share. Options covering 25% of the 300,000 shares of our Class A
Common Stock will vest one year following the date of grant and the balance
will vest in equal quarterly installments over the next three years. Following
a change of control of Digex or Intermedia, all of Ms. Faigen's unvested Digex
options will vest on the first anniversary of the change of control if Ms.
Faigen continues to be employed by Digex at that date, or upon termination by
Digex of Ms. Faigen's employment (other than for cause), if earlier. Following
a change of control of Intermedia, all of Ms. Faigen's Intermedia options will
vest on the first anniversary of the change of control if Ms. Faigen continues
to be employed by Digex or Intermedia or any of its subsidiaries at that date,
or upon termination of Ms. Faigen's employment (other than for cause), if
earlier.

The letter agreement also provides Ms. Faigen with a relocation allowance of
up to $125,000 in the form of a loan which will be forgiven in equal monthly
installments over a 12-month period commencing on the date of the last
relocation reimbursement.

Rebecca Ward. Ms. Ward's employment letter agreement provides for an initial
annual base salary of $200,000, and an annual bonus opportunity of 50% of her
initial annual base salary that will be based on the achievement of certain
corporate objectives. The agreement provides Ms. Ward with a bonus of $100,000,
payable in two equal installments: upon commencement of employment with us, and
after six months of

47
<PAGE>

employment. The agreement also provides Ms. Ward with a stock option to
purchase 50,000 shares of Intermedia common stock at an exercise price of
$30.00, subject to the terms and conditions of the Intermedia 1996 Long-Term
Incentive Plan, to vest in equal installments over the 60-month period
commencing with the day the option grant was approved. On July 29, 1999, Ms.
Ward was granted stock options to purchase 250,000 shares of our Class A Common
Stock. 125,000 of these options will be exercisable at $5.00 per share and the
balance will be exercisable at $17.00 per share. Options covering 25% of the
250,000 shares of our Class A Common Stock will vest one year following the
date of grant and the balance will vest in equal quarterly installments over
the next three years. Following a change of control of Digex or Intermedia, all
of Ms. Ward's unvested Digex options will vest on the first anniversary of the
change of control if Ms. Ward continues to be employed by Digex at that date,
or upon termination by Digex of Ms. Ward's employment (other than for cause),
if earlier. Following a change of control of Intermedia, all of Ms. Ward's
Intermedia options will vest on the first anniversary of the change of control
if Ms. Ward continues to be employed by Digex or Intermedia or any of its
subsidiaries at that date, or upon termination by Digex of Ms. Ward's
employment (other than for cause), if earlier.

If Ms. Ward is terminated by Digex for any reason other than for cause, we
will pay her base salary as in effect at the time of termination through the
later of January 1, 2002, or the first anniversary of the date of termination.

Bryan Gernert. Mr. Gernert's employment letter agreement provides for an
initial annual base salary of $200,000 and an annual bonus opportunity of 60%
of his annual base salary that will be based on the achievement of certain
corporate objectives.

On July 29, 1999, Mr. Gernert was granted options to purchase 400,000 shares
of our Class A Common Stock. 300,000 of these options will be exercisable at
$5.00 per share and the balance will be exercisable at $17.00 per share.
Options covering 25% of the 400,000 shares of our Class A Common Stock will
vest one year following the date of grant and the balance will vest in equal
quarterly installments over the next three years. In the event his employment
is terminated by Digex for any reason other than for cause prior to July 9,
2001, his options covering an aggregate of 200,000 shares (including any
installments previously vested) will vest immediately on the date of
termination, of which 150,000 will be those exercisable at $5.00 and 50,000
exercisable at $17.00 per share. Following a change of control of Digex or
Intermedia, all of Mr. Gernert's unvested options will vest on the first
anniversary of the change of control if Mr. Gernert continues to be employed by
Digex at that date, or upon termination by Digex of Mr. Gernert's employment
(other than for cause), if earlier.

Timothy M. Adams. Mr. Adams' employment letter agreement provides for an
initial annual base salary of $210,000, and an annual bonus opportunity of 50%
of his initial annual base salary that will be based on the achievement of
certain corporate objectives. Mr. Adams is also entitled to receive a $75,000
signing bonus.

The agreement also provides Mr. Adams with options to purchase 250,000
shares of our Class A Common Stock. 50,000 of these options will be exercisable
at $10.00 per share and the balance will be exercisable at $34.00 per share.
Options covering 25% of the 250,000 shares of our Class A Common Stock will
vest one year following the date of grant and the balance will vest in equal
quarterly installments over the next three years. Following a change of control
of Digex or Intermedia, all of Mr. Adams' unvested Digex options will vest on
the first anniversary of the change of control if Mr. Adams continues to be
employed by Digex at that date, or upon termination by Digex of Mr. Adams'
employment (other than for cause), if earlier.

Robert B. Patrick. Mr. Patrick's employment letter agreement provides for an
annual base salary of $150,000, and an annual bonus opportunity of 40% of his
annual base salary that will be based on the achievement of certain corporate
objectives.

48
<PAGE>

On July 29, 1999, Mr. Patrick was granted options to purchase 100,000 shares
of our Class A Common Stock. 50,000 of these options will be exercisable at
$5.00 per share and the balance will be exercisable at $17.00 per share.
Options covering 25% of the 100,000 shares of our Class A Common Stock will
vest one year following the date of grant and the balance will vest in equal
quarterly installments over the next three years. In the event his employment
is terminated by Digex for any reason other than for cause prior to July 9,
2000, his options covering an aggregate of 25,000 shares (including any
installments previously vested) will vest immediately on the date of
termination. Following a change of control of Digex or Intermedia, all of Mr.
Patrick's unvested options will vest on the first anniversary of the change of
control if Mr. Patrick continues to be employed by Digex at that date, or upon
termination by Digex of Mr. Patrick's employment (other than for cause), if
earlier.

49
<PAGE>

Summary Compensation Table

The following table sets forth the total compensation of our Chief Executive
Officer and each of our four most highly compensated executive officers whose
total salary and bonus for 1999 exceeded $100,000 (each a named executive
officer, and collectively, the named executive officers).

<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
------------------------------------ -----------------------------
Securities Securities
Name and Principal Fiscal Other Annual Underlying Underlying
Position(1) Year Salary($) Bonus($) Compensation($) Options(#)(10) Options(#)(11)
------------------ ------ --------- -------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... 1999 125,000(3) -- -- 500,000 100,000
President and Chief 1998 -- -- -- -- --
Executive Officer 1997 -- -- -- -- --

Nancy G. Faigen......... 1999 225,000(4) 225,000 -- 300,000 100,000
President, Sales and 1998 11,105 50,000 -- -- --
Service Delivery 1997 -- -- -- -- --
Group(2)

Rebecca Ward............ 1999 91,667(5) -- 15,810(8) 250,000 50,000
President, Product 1998 -- -- -- -- --
Management, 1997 -- -- -- -- --
Engineering and
Marketing Group

Bryan T. Gernert........ 1999 173,750(6) -- 140,587(9) 400,000 --
Senior Vice President, 1998 95,000 -- 166,108(9) -- --
Sales, Distribution 1997 75,000 -- 126,016(9) -- 33,552(12)
and Client Services

Robert B. Patrick....... 1999 137,500(7) 5,000 -- 100,000 --
Vice President, 1998 92,500 5,000 -- -- 5,000(12)
Marketing 1997 65,000 7,500 -- -- 9,586(12)
</TABLE>
- --------
(1) Effective January 14, 2000, Timothy M. Adams became our Chief Financial
Officer. Mr. Adams' current annual base salary is $210,000. For a
description of the terms of his employment, see "Management--Employment
Agreements."
(2) Ms. Faigen served as President and Chief Executive Officer from December
1998 to June 1999.
(3) Mr. Shull commenced employment with Digex in July 1999. Mr. Shull's
current annual base salary is $250,000. He has a target annual bonus
opportunity equal to 60% of his base salary.
(4) Ms. Faigen has a target annual bonus opportunity equal to 50% of her base
salary.
(5) Ms. Ward commenced employment with Digex in July 1999. Ms. Ward's current
annual base salary is $200,000. She has a target annual bonus opportunity
equal to 50% of her base salary.
(6) Mr. Gernert's current annual base salary is $200,000. He has a target
annual bonus opportunity equal to 60% of his base salary.
(7) Mr. Patrick's current annual base salary is $150,000. He has a target
annual bonus opportunity equal to 40% of his base salary.
(8) This amount represents relocation expense.
(9) These amounts represent commission payments.
(10) Represents the number of shares of Class A Common Stock of Digex
underlying options granted to the named executive officers.
(11) Represents the number of shares of common stock of Intermedia underlying
options granted to the named executive officers.
(12) Options issued when executive was an employee of Intermedia.

50
<PAGE>

Options Granted During Fiscal Year 1999

The following table sets forth certain information regarding grants of stock
options to purchase our Class A Common Stock to our named executive officers
during fiscal year 1999. All options set forth below will expire on July 28,
2009. The vesting provisions of the options set forth below are described under
the caption "Employment Agreements." The potential realizable value at assumed
annual rates of price appreciation for all options set forth below were
calculated using the initial public offering price of $17.00 as the market
price on the date of grant.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual Rates of
Stock Price
Annual Compensation Appreciation for Option Term
----------------------- ---------------------------------
Market
Number of % of Total Price
Securities Options on
Underlying Granted to Exercise or Date
Options Employees in Base Price of
Name Granted Fiscal Year Per Share Grant 0% 5% 10%
- ---- ---------- ------------ ----------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... 250,000 5.07 $ 5.00 $17.00 $3,000,000 $5,672,500 $ 9,772,500
250,000 5.07 17.00 17.00 0 2,672,500 6,772,500
Nancy G. Faigen......... 150,000 3.04 5.00 17.00 1,800,000 3,403,500 5,863,500
150,000 3.04 17.00 17.00 0 1,603,500 4,063,500
Rebecca Ward............ 125,000 2.54 5.00 17.00 1,500,000 2,836,250 4,886,250
125,000 2.54 17.00 17.00 0 1,336,250 3,386,250
Bryan T. Gernert........ 300,000 6.09 5.00 17.00 3,600,000 6,807,000 11,727,000
100,000 2.03 17.00 17.00 0 1,069,000 2,709,000
Robert B. Patrick....... 50,000 1.01 5.00 17.00 600,000 1,134,500 1,954,500
50,000 1.01 17.00 17.00 0 534,500 1,354,500
</TABLE>

The following table sets forth certain information regarding grants of stock
options to purchase shares of Intermedia's common stock to our named executive
officers during fiscal 1999. The vesting provisions of the options set forth
below are described under the caption "Employment Agreements."
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Annual Compensation Option Term
----------------------- -----------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year Per Share Date 5% 10%
- ---- ---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... 100,000 0.016 $30.94 7/20/2009 $ 2,183,050 $ 5,168,289
Nancy G. Faigen......... 100,000 0.016 15.00 1/15/2009 943,342 2,390,614
Rebecca Ward............ 50,000 0.008 30.00 7/20/2009 1,108,967 2,556,239
Bryan T. Gernert........ -- -- -- -- -- --
Robert B. Patrick....... -- -- -- -- -- --
</TABLE>

51
<PAGE>

Aggregate Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values

The following table shows the number of shares of our Class A Common Stock
covered by both exercisable and unexercisable options as of December 31, 1999
and the year-end value of exercisable and unexercisable options to purchase
shares of our Class A Common Stock as of December 31, 1999 for each named
executive officer. No options to purchase shares of our Class A Common Stock
were exercised in 1999.

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at the-Money Options at
December 31, 1999 December 31, 1999
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark K. Shull............... -- 500,000 -- $28,875,000
Nancy G. Faigen............. -- 300,000 -- 17,325,000
Rebecca Ward................ -- 250,000 -- 14,437,500
Bryan T. Gernert............ -- 400,000 -- 24,300,000
Robert B. Patrick........... -- 100,000 -- 5,775,000
</TABLE>

The following table shows the number of shares of Intermedia common stock
acquired upon exercise of stock options during the last fiscal year, the
aggregate value realized from those exercises, the number of shares of
Intermedia common stock covered by both exercisable and unexercisable options
as of December 31, 1999 and the year-end value of exercisable and unexercisable
options to purchase shares of Intermedia common stock as of December 31, 1999
for each named executive officer.

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at the-Money Options at
# Shares December 31, 1999 December 31, 1999
Acquired $ Value ------------------------- -------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... -- -- 8,333 91,667 $ 65,602 $ 721,649
Nancy G. Faigen......... -- -- 20,000 80,000 476,250 1,905,000
Rebecca Ward............ -- -- 4,166 45,834 36,713 403,912
Bryan T. Gernert........ 6,000 137,640 26,756 5,592 820,123 171,406
Robert B. Patrick....... 5,000 69,287 6,796 5,348 263,770 207,569
</TABLE>

Long-Term Incentive Plan

The Digex Long-Term Incentive Plan, adopted on July 23, 1999, permits awards
of stock, stock options, stock appreciation rights, restricted stock and other
stock-based awards as incentives to our current and prospective employees,
officers, directors and consultants, and those of our subsidiaries or of any
person that owns over 50% of the voting power of our authorized and outstanding
voting shares. However, only our employees are eligible for grants of incentive
stock options.

The Digex Long-Term Incentive Plan, also known as the "Plan," is
administered by the compensation committee of our board of directors, the
members of which consist solely of two or more members of the board who are
"Non-Employee" directors under Rule 16b-3 of the Exchange Act and "outside
directors" under Rule 162(m) of the Internal Revenue Code. The compensation
committee has the authority to select those employees, officers, directors and
consultants whose performance it determines significantly promote our success
to receive discretionary awards under the Plan, grant the awards, interpret and
determine all questions of policy pertaining to the Plan, adopt rules,
regulations, agreements and instruments deemed necessary for its proper
administration and take any and all other actions deemed necessary or desirable
for the proper administration of the Plan and to effectuate its purposes. In
regards to options, the board has the authority to

52
<PAGE>

determine who will receive options, the time at which options will be granted,
the number of shares subject to any option, the exercise price of an option,
the time or times at which the options will become vested and exercisable, and
the duration of the option.

The shares of Digex subject to the Plan are authorized but unissued shares
of our Class A Common Stock or treasury stock. No more than 9,000,000 shares of
our Class A Common Stock may be issued under the Plan.

Discretionary Awards:

Stock Options. Awards of stock options grant a right to buy a specified
number of shares of Class A Common Stock at a fixed exercise price during a
specified time, all as the compensation committee may determine.

Incentive Stock Options. Awards may be of incentive stock options, within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
any successor section. Subject to adjustment, the aggregate number of shares
which may be subject to incentive stock options awards under the Plan shall not
exceed 9,000,000 shares.

Stock Appreciation Rights. Awards of stock appreciation rights grant a
right, which may or may not be contained in the grant of a stock option or
incentive stock option, to receive in cash, or its equivalent value in Class A
Common Stock, the excess of the fair market value of a share of Class A Common
Stock on the date the right is surrendered over the option exercise price or
other price specified by agreement.

Restricted Shares. Restricted shares are shares of Class A Common Stock
granted to a participant of the Plan that are subject to forfeiture until
certain restrictions, terms and conditions as the compensation committee may
determine are fulfilled.

Dividend or Equivalent. An award of dividends grants a participant the right
to receive dividends or their equivalent in value in Class A Common Stock, cash
or a combination of both.

Stock Award. Class A Common Stock may be issued to a Plan participant. Such
awards can be granted on a contingent basis.

Other Stock-Based Awards. Other Class A Common Stock-based awards that serve
the same function as the foregoing awards may be granted.

Formula Awards:

Pursuant to the Plan, in addition to any discretionary awards granted to
non-employee directors, and subject to certain restrictions, additional grants
of non-incentive stock options shall be awarded to non-employee directors based
on the following formula: stock options to acquire 25,000 shares of Class A
Common Stock shall be granted on the date the director is elected to the board
of directors, exercisable, so long as the non-employee director continues to be
a member of the board of directors, as to 8,334 of the shares on the January 1
following the date the stock option is granted and as to an additional 8,333
shares on January 1 of each of the two years thereafter. Non-employee directors
serving on the board of directors on July 29, 1999 received this grant on July
29, 1999. If a non-employee director fails to attend 75% of the board meetings
in any calendar year, he or she will forfeit the right to exercise that portion
of the options which would have been exercisable on the next following January
1.

Non-employee directors shall also be granted a stock option to acquire 5,000
shares of Class A Common Stock on the date the director is elected to the board
of directors, and on each anniversary thereof which options shall be
immediately exercisable upon grant. Non-employee directors serving on the board
of directors on July 29, 1999 received the initial annual grant on July 29,
1999.

53
<PAGE>

Upon a change of control of Digex or Intermedia, options granted to all non-
employee directors shall become fully vested and immediately exercisable and
will continue to be exercisable through the expiration date of the grant. All
stock options granted pursuant to either of the foregoing formulas shall be
granted at the fair market value of the Class A Common Stock on the date the
options are granted and shall expire on the earlier of the fifth anniversary of
the date the options were granted or on the first anniversary of the date the
non-employee director ceases to be a member of the board of directors.

General:

If a Plan participant's employment or other relationship with us is
terminated for any reason other than death or "for cause"or voluntarily by the
participant without the consent of Digex, Intermedia or one of our
subsidiaries, and the participant is thereafter not employed by us or does not
then have a relationship with us, any options granted to the participant under
the Plan may be exercised by the participant at any time within three months of
such termination, to the extent the participant was entitled to exercise the
options at the time of the termination.

A change in the control of Digex or Intermedia will accelerate the date upon
which the options will become exercisable to the extent and under the terms set
forth in the Plan.

The maximum number of shares of Class A Common Stock that may be granted to
a single participant in the Plan in any single year is 1,000,000. Additionally,
no award shall be assignable.

The Plan may be terminated, modified or amended by the affirmative vote of
the holders of a majority of the votes of our outstanding shares of capital
stock present or represented and entitled to vote at a duly held stockholders'
meeting. The board of directors may terminate the Plan or make modifications or
amendments, provided that the board of directors cannot make any amendment to
the Plan increasing the number of shares of Class A Common Stock covered by the
Plan without prior approval by the holders of common stock having a majority of
the voting power thereof present and entitled to vote at a meeting of
stockholders. No termination, modification or amendment of the Plan may
adversely affect the rights previously conferred by an award under the Plan
without the consent of the recipient.

The Plan will terminate on July 29, 2009.

Indemnifications of Directors and Executive Officers and Limitation of
Liability

Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of
fiduciary duty as a director, except for liability:

. for any breach of the director's duty of loyalty to us or our
stockholders;

. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or

. for any transaction from which the director derived an improper personal
benefit.

These provisions are permitted under Delaware law.

Our bylaws provide that:

. we must indemnify our directors, officers, employees and agents to the
fullest extent permitted by Delaware law, subject to certain very
limited exceptions; and

. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law, subject to certain very limited exceptions.

54
<PAGE>

We have entered into indemnification agreements with each of our directors
and executive officers to give them additional contractual assurances regarding
the scope of the indemnification described above and to provide additional
procedural protections. Generally, pursuant to each indemnification agreement,
Digex will indemnify a director or officer who is or was a party to any legal
action by or in the right of Digex or against the indemnitee due to his or her
position as a Digex director or officer, known as the "indemnitee," against the
expenses, judgments, fines and amounts paid in settlement that were actually
and reasonably incurred by the indemnitee in connection with such legal action,
provided that such indemnitee acted in good faith and in a manner not opposed
to the best interests of Digex.

We also participate in Intermedia's directors' and officers' insurance
providing $50 million in indemnification coverage for our directors, officers
and certain employees for certain liabilities.

The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also have the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions.

There is no pending litigation or proceeding involving any of our directors,
officers or employees regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Digex pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.

55
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Service Agreements

We have entered into the General and Administrative Services Agreement and
several network services agreements with Intermedia. These agreements are
described below. The General and Administrative Services Agreement and certain
parts of the network services agreements are included as exhibits to the
registration statement of which this prospectus forms a part.

General and Administrative Services Agreement

Under the General and Administrative Services Agreement, Intermedia provides
us with a variety of general and administrative services, including:

. finance, accounting and administration services, collections and
accounts receivable services, financial planning and analysis, investor
relations and corporate development;

. human resources services;

. legal services;

. information management services; and

. insurance coverage and related services.

The General and Administrative Services Agreement has a two-year initial
term which expires in July 2001. We may terminate the agreement on 90-days
prior notice at any time after Intermedia no longer owns more than 50% of the
voting power of our outstanding common stock.

We paid Intermedia approximately $10.5 million for services provided under
the General and Administrative Services Agreement during the six months ended
September 30, 1999. Because the level of services provided by Intermedia have
not been reduced from the levels provided in the second quarter of 1999 as
originally anticipated, this agreement was recently amended to reset the fee to
be paid to Intermedia for services during each of the fourth quarter of 1999
and the first quarter of 2000 to the same level as provided for in the second
quarter of 1999 or $6.0 million. Intermedia also agreed to work with us to
develop a transition plan designed to reduce our reliance on general and
administrative services provided by Intermedia. The fee payable by us after the
first quarter of 2000 will be negotiated during the first quarter of 2000.

We have also agreed to reimburse Intermedia for 50% of the 1999 bonus awards
payable to Intermedia's officers who supported our general and administrative
services. This reimbursement is estimated at approximately $1.0 million.

Material amendments and modifications to the General and Administrative
Services Agreement and any extensions of its term are required to be approved
by a majority of our directors who are not officers or directors of Intermedia.

Intermedia has advised us that the fees payable by Digex to Intermedia under
the General and Administrative Services Agreement are intended to approximate
Intermedia's estimated costs of providing the covered services to Digex.
Because it is not practical to obtain quotes for all of these services from
third parties, we cannot determine whether, and there can be no assurance that,
the terms of the General and Administrative Services Agreement are as favorable
to us as would result from an arm's length negotiation with an unrelated third
party.

Network Services Agreements

In April 1999, we entered into two Internet transit services agreements and
a managed firewall reseller agreement with Intermedia.

The two Internet transit service agreements provide, among other things,
that:

. we will purchase and Intermedia will provide us with certain data
transit capacity;

. we will be treated as a most favored customer entitled to rates and fees
as low as those granted by Intermedia to any other customer purchasing
substantially similar services;

56
<PAGE>

. the agreements will have an initial term of two years which will be
automatically renewed for successive one year periods unless either we
or Intermedia elects not to renew by giving 30-days prior notice;

. Intermedia has made certain service level commitments to us covering
both network availability and performance; and

. if we do not renew the agreements for at least one renewal term, we will
be liable to Intermedia for any termination charges assessed against
Intermedia by local access providers for the early termination of local
access circuits purchased by Intermedia for the provision of services to
us.

We expect to pay Intermedia a total of approximately $7.4 million for
Internet transit services during the first year of these agreements.

The managed firewall reseller agreement provides, among other things, for:

. certain service level commitments covering both service availability and
performance; and

. continuous access by Intermedia to any equipment owned by Intermedia
deployed at any of our facilities.

Under this agreement, we will pay over to Intermedia all amounts we receive
from our customers for these services.

We believe the terms of the network services agreements are at least as
favorable to us as they would be under similar arrangements between Digex and
an unrelated third party.

Sale of Telecommunications Related Assets to Intermedia

We are subject to certain restrictions under the Intermedia indentures, as
described under "Risk Factors--Digex is controlled by Intermedia, which could
involve some risks for you as a stockholder--We depend on Intermedia to fund
our working capital and operating losses, but Intermedia's ability to fund
these needs is limited by its own substantial indebtedness." Due to these
restrictions, we are required to use all of the net proceeds of our initial
public offering and will be required to use all of the net proceeds of this
offering to purchase Telecommunications Related Assets, in each case within 270
days of the offering. We have entered into letter agreements with Intermedia
pursuant to which Intermedia will purchase from us, at our cost, some of the
Telecommunications Related Assets purchased with the net proceeds of the
offerings. Under the letter agreements, Intermedia is expected to pay us for
the Telecommunications Related Assets so purchased to the extent necessary out
of its funds that are not subject to restrictions under the indentures which we
will be able to use for working capital purposes and to fund operating losses.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

Restructuring Transactions

In conjunction with our initial public offering, Business Internet
contributed to us the Web hosting business described in this prospectus in
exchange for all the shares of our Class B Common Stock. Subsequent to our
initial public offering, Business Internet contributed our Class B Common Stock
to its wholly-owned subsidiary, Intermedia Financial Company.

Expense Sharing and Indemnity Arrangements

We have agreed with Intermedia to allocate and pay the expenses of this
offering, including any amounts arising from any indemnification or
contribution obligations, in proportion to the number of shares of Class A
Common Stock to be sold by us and by Intermedia.

Software, Equipment and Services Purchases from Microsoft and Compaq

We have in the past purchased and expect to continue to purchase computer
hardware, software and certain consulting services from both Microsoft and
Compaq pursuant to arrangements negotiated prior to or in connection with the
investment by Microsoft and Compaq in our company. During the nine months ended
September 30, 1999, we paid $13.1 million and $1.1 million for products and
services provided by Compaq and Microsoft.

57
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table provides information regarding:

. beneficial ownership of our common stock by each person or entity known
to us to be a beneficial owner of more than 5% of the outstanding shares
of our common stock, as of January 17, 2000;

. beneficial ownership of our common stock by each of our directors and
named executive officers, as of January 17, 2000; and

. beneficial ownership of our common stock by all of our directors and
executive officers as a group, as of January 17, 2000.
<TABLE>
<CAPTION>
Percentage of
Class Percentage
Beneficially of Voting Power
Number of Owned of Common Stock
Shares Shares ----------------- -----------------
Securities Beneficially Being Before After Before After
Beneficial Owner Owned Owned Offered Offering Offering Offering Offering
- ---------------- ------------ ------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Intermedia Communications Inc. .. Class B 50,000,000(1) 8,000,000 100.0% 100.0% 97.8% 95.1%
3625 Queen Palm Drive Common Stock
Tampa, Florida 33619
Microsoft Corporation............ Class A 1,263,494(2) -- 9.0% 5.3% 0.2% 0.3%
One Microsoft Way Common Stock
Redmond, Washington 98052
CPQ Holdings, Inc. (3) .......... Class A 1,263,494(2) -- 9.0% 5.3% 0.2% 0.3%
20555 SH 249 Common Stock
Houston, Texas 77070

Directors and Executive Officers:
David C. Ruberg.................. Class A 13,334(4)
Common Stock -- * * * *
Mark K. Shull.................... None -- -- -- -- -- --
Nancy G. Faigen.................. None -- -- -- -- -- --
Rebecca Ward..................... None -- -- -- -- -- --
Bryan T. Gernert................. None -- -- -- -- -- --
Timothy M. Adams................. None -- -- -- -- -- --
Robert B. Patrick................ None -- -- -- -- -- --
John C. Baker.................... Class A 13,334(4) -- -- -- -- --
Common Stock
Philip A. Campbell............... Class A 13,334(4) -- * * * *
Common Stock
Richard A. Jalkut................ Class A 13,334(4) -- * * * *
Common Stock
George F. Knapp.................. Class A 13,334(4) -- * * * *
Common Stock
Robert M. Manning................ Class A 5,000(4) -- * * * *
Common Stock
Jack E. Reich.................... Class A 18,334(5) -- * * * *
Common Stock
All directors and executive
officers as
a group (13 persons)............ Class A 90,004(4) -- -- -- -- --
Common Stock
</TABLE>

* less than 1%
- --------
(1) These shares are owned by Intermedia through its indirect wholly-owned
subsidiary, Intermedia Financial Company. Intermedia is selling 8,000,000
shares of Class B Common Stock that will convert to Class A Common Stock on
the closing of this offering (or 9,500,000 shares if the underwriters
exercise their over-allotment option in full).

(2) Consists of 730,994 shares of Class A Common Stock issuable upon conversion
of shares of Series A Preferred Stock and 532,500 shares of Class A Common
Stock issuable upon exercise of presently exercisable warrants.

(3) CPQ Holdings, Inc. is a wholly-owned subsidiary of Compaq Computer
Corporation.

(4) Consists of shares subject to options exercisable as of January 17, 2000 or
within 60 days thereafter.

(5) Consists of 5,000 shares of Class A Common Stock and 13,334 shares subject
to options exercisable as of January 17, 2000 or within 60 days thereafter.

58
<PAGE>

The following table provides information regarding:

. those persons or groups known to us to be the beneficial owners of more
than five percent of the common stock of our parent, Intermedia;

. beneficial ownership of common stock of our parent, Intermedia, by each
of our directors and named executive officers, as of January 14, 2000;
and

. beneficial ownership of common stock of our parent, Intermedia, by all
of our directors and executive officers as a group, as of January 14,
2000.

The percentage of Intermedia common stock beneficially owned was calculated
based on 52,260,000 shares outstanding on January 14, 2000.

<TABLE>
<CAPTION>
Percentage of
Common Stock
Number of Beneficially Owned
Shares -----------------------
Beneficially Before After
Beneficial Owner Securities Owned Owned Offering Offering
- ---------------- ----------------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Massachusetts Financial 5,038,416(1) 9.6% 9.6%
Services Corp. ........ Intermedia common stock
500 Boylston Street
Boston, MA 02116

Wellington Management 3,539,023(2) 6.8% 6.8%
Co. LLP ............... Intermedia common stock
75 State Street
Boston, MA 02109

Putnam Investments, Inc. 2,620,131(3) 5.0% 5.0%
....................... Intermedia common stock
One Post Office Square
Boston, MA 02109

American Express Co. ... Intermedia common stock 2,502,648(4) 4.8% 4.8%
200 Vesey Street
New York, NY 10285

T. Rowe Price and 2,457,379(5) 4.7% 4.7%
Associates, Inc. ...... Intermedia common stock
100 E. Pratt St.
Baltimore, MD 21202

Directors and Executive
Officers of Digex:
David C. Ruberg......... Intermedia common stock 1,075,504(6) 2.1% 2.1%
Mark K. Shull........... Intermedia common stock 13,333(7) * *
Nancy G. Faigen......... Intermedia common stock 25,000(8) * *
Rebecca Ward............ Intermedia common stock 6,666(9) * *
Bryan T. Gernert........ Intermedia common stock 29,552(10) * *
Timothy M. Adams........ None -- -- --
Robert B. Patrick....... Intermedia common stock 7,761(11) * *
John C. Baker........... Intermedia common stock 81,820(12) * *
Philip A. Campbell...... Intermedia common stock 28,000(13) * *
Richard A. Jalkut....... None -- -- --
George F. Knapp......... Intermedia common stock 57,100(14) * *
Robert M. Manning....... Intermedia common stock 265,231(15) * *
Jack E. Reich........... None -- -- --
All directors and
executive officers as a
group (13 persons)..... Intermedia common stock 1,589,967(16) 3.0% 3.0%
</TABLE>

59
<PAGE>

- --------
* Less than 1%

(1) Based upon information set forth in a Schedule 13G filed with the
Securities and Exchange Commission (the "Commission") on February 11, 1999.

(2) Based upon information set forth in a Schedule 13G filed with the
Commission on February 8, 1999.

(3) Based upon information set forth in a Schedule 13G filed with the
Commission on October 8, 1999.

(4) Based upon information set forth in a Schedule 13G filed with the
Commission on January 29, 1999. In such Schedule 13G, American Express
reported that it beneficially owned 5.2% of outstanding shares of
Intermedia common stock.
(5) Based upon information set forth in a Schedule 13G filed with the
Commission on February 12, 1999. In such Schedule 13G, T. Rowe Price
reported that it beneficially owned 5.0% of outstanding shares of
Intermedia common stock.
(6) Includes 110,183 shares of common stock, 198,817 shares subject to certain
vesting requirements and 766,504 shares subject to options exercisable as
of January 14, 2000 or within 60 days thereafter. Excludes 523,496 shares
subject to options that are not exercisable within 60 days of January 14,
2000.
(7) Includes 13,333 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 86,667 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(8) Includes 25,000 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 75,000 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(9) Includes 6,666 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 43,334 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(10) Includes 29,552 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 2,796 shares subject to
options that are not exercisable within 60 days of January 14, 2000.

(11) Includes 7,761 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 4,383 shares subject to
options that are not exercisable within 60 days of January 14, 2000.

(12) Includes 52,190 shares of common stock and 29,630 shares subject to
options exercisable as of January 14, 2000 or within 60 days thereafter.
Excludes 408 shares subject to options that are not exercisable within 60
days of January 14, 2000.

(13) Includes 28,000 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter.

(14) Includes 9,570 shares of common stock and 47,530 shares subject to options
exercisable as of January 14, 2000 or within 60 days thereafter. Excludes
408 shares subject to options that are not exercisable within 60 days of
January 14, 2000.

(15) Includes 4,808 shares of common stock, 90,592 shares subject to certain
vesting requirements and 169,831 shares subject to options exercisable as
of January 14, 2000 or within 60 days thereafter. Excludes 222,999 shares
subject to options that are not exercisable within 60 days of January 14,
2000.

(16) Includes 176,751 shares of common stock, 289,409 shares subject to certain
vesting requirements and 1,123,807 shares subject to options exercisable
as of January 14, 2000 or within 60 days thereafter. Excludes 959,491
shares subject to options that are not exercisable within 60 days of
January 14, 2000.

60
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our capital stock consists of 100,000,000 shares of Class A Common Stock,
$.01 par value per share, 50,000,000 shares of Class B Common Stock, $.01 par
value per share and 5,000,000 shares of preferred stock, $.01 par value per
share. As of January 14, 2000, 11,500,000 shares of Class A Common Stock were
outstanding and were held of record by approximately 40 holders. In addition,
on January 14, 2000, approximately 6,438,000 shares of Class A Common Stock
were subject to outstanding options and warrants and approximately 1,462,000
shares of Class A Common Stock were issuable upon conversion of the Series A
Preferred Stock. Of these, the approximately 1,462,000 shares of Class A Common
Stock issuable upon the conversion of the Series A Preferred Stock and the
1,065,000 shares of Class A Common Stock issuable upon the exercise of
outstanding warrants have been delivered to, and are being held in reserve by,
our transfer agent. As of January 14, 2000, 50,000,000 shares of Class B Common
Stock were outstanding and owned by Intermedia through Intermedia Financial
Company, its indirect wholly-owned subsidiary.

The following summary is qualified by our certificate of incorporation and
bylaws, which are included as exhibits to the registration statement of which
this prospectus forms a part.

Common Stock

Shares of Class A Common Stock and Class B Common Stock are substantially
identical in all respects except that: (1) the holders of Class B Common Stock
are entitled to 10 votes per share, and the holders of Class A Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders; and (2) each share of Class B Common Stock is convertible into
one share of Class A Common Stock at the option of the holder and automatically
upon the occurrence of a Conversion Event. A "Conversion Event" is defined as a
direct or indirect transfer of beneficial ownership of Class B Common Stock to
any person or entity that does not control, is not controlled by and is not
under common control with Intermedia.

Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of our outstanding shares of common stock
are entitled to receive dividends out of legally available assets at such times
and in such amounts as the board of directors from time to time may determine.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
votes can elect all of the directors then standing for election. The common
stock is not entitled to preemptive rights and, except as described in the
preceding paragraph with respect to Class B Common Stock, is not subject to
conversion or redemption. Upon liquidation, dissolution or winding-up, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the common stock after payment of liquidation
preferences, if any, on any outstanding preferred stock and payment of other
claims of creditors. Each outstanding share of common stock is duly and validly
issued, and fully paid and nonassessable.

Preferred Stock

The board of directors is authorized, subject to any limitations prescribed
by Delaware law, to issue 5,000,000 shares of preferred stock in one or more
series. The board of directors can fix the rights, preferences and privileges
of the shares of each series and any qualifications, limitations or
restrictions thereon. The board of directors has designated 100,000 shares of
preferred stock as Series A Preferred Stock with the preferences, privileges,
qualifications, limitations and restrictions described below.

The board of directors may authorize the issuance of additional series of
preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of common stock. The issuance
of preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, under
certain circumstances, have the effect of delaying, deferring or preventing a
change in control of Digex. We have no current plan to issue any additional
shares of preferred stock.

61
<PAGE>

Series A Preferred Stock

The Series A Convertible Preferred Stock has the following rights and
preferences:

The holders of the Series A Preferred Stock are not entitled to receive
dividends.

The holders of shares of the Series A Preferred Stock do not have any voting
rights other than those required by law or described below. The holders of at
least a majority of the shares of the Series A Preferred Stock then outstanding
(other than shares held by us or any of our affiliates) must approve any action
to:

. authorize, create or issue:

(a) additional shares of Series A Preferred Stock;

(b) any other class or series of stock which ranks equal or senior to
the Series A Preferred Stock;

(c) any obligation or security evidencing the right to purchase shares
of Series A Preferred Stock or any class or series of stock which
ranks equal or senior to the Series A Preferred Stock; or

(d) any series of preferred stock which provides for the regular
accrual or payment of dividends; or

. amend or otherwise alter the terms of the Series A Preferred Stock in
any manner that would adversely affect the rights of the holders of the
Series A Preferred Stock;

. dispose of assets or merge, consolidate or sell our company to any
person unless:

(a) the entity resulting from the transaction is a corporation
organized or existing under the laws of the United States, a state
or the District of Columbia; and

(b) if we are not the resulting entity, the Series A Preferred Stock
converts, exchanges or becomes shares of the resulting entity with
rights and preferences no less favorable than the rights and
preferences of the Series A Preferred Stock.

Without the consent of each holder of Series A Preferred Stock, we may not
alter the voting rights, reduce the number of shares, reduce the liquidation
preference, change the conversion terms or change the waiver rights of the
Series A Preferred Stock.

The Series A Preferred Stock ranks:

. senior to our Class A Common Stock and Class B Common Stock and all
other classes of capital stock or series of preferred stock issued in
the future unless their terms expressly provide they rank equal or
senior to the Series A Preferred Stock;

. equal to each class of capital stock or series of preferred stock issued
in the future whose terms expressly provide they rank equal to the
Series A Preferred Stock; and

. junior to each class of capital stock or series of preferred stock
issued in the future whose terms expressly provide they rank senior to
the Series A Preferred Stock.

Upon our liquidation, the holders of the Series A Preferred Stock are
entitled to receive their $1,000 per share liquidation preference before any
amount may be paid to the holders of our Class A Common Stock, Class B Common
Stock or other junior securities.

A holder of shares of Series A Preferred Stock may convert those shares into
shares of Class A Common Stock at any time. Initially, each share of Series A
Preferred Stock is convertible into the number of whole shares of our Class A
Common Stock equal to the liquidation preference of $1,000 divided by the
$68.40 per share conversion price. The conversion price and the number of
shares of Class A Common Stock into which each share of Series A Preferred
Stock can be converted may be adjusted as a result of stock splits, stock
dividends and other issuances of additional stock.

Unless earlier converted, on January 12, 2005, each share of Series A
Preferred Stock will automatically convert into the number of whole shares of
our Class A Common Stock equal to $1,000 divided by the average of the closing
prices of the Class A Common Stock for the twenty consecutive trading days
prior to January 12, 2005.

62
<PAGE>

Upon a "change of control" of our company (as defined in the certificate of
designation for the Series A Preferred Stock), we will offer to repurchase all
or any part of each holder's shares of Series A Preferred Stock at an offer
price equal to 100% of the aggregate liquidation preference, provided that the
repurchase is permitted under the terms of the agreements governing our
indebtedness and the indebtedness of Intermedia. If the repurchase is not
permitted, at the option of the holder, each share of Series A Preferred Stock
may be converted into the number of shares of our Class A Common Stock equal to
the liquidation preference of $1,000 divided by the average of the closing
prices of the Class A Common Stock for the twenty consecutive trading days
prior to the "change of control."

After January 12, 2004, the holders of Series A Preferred Stock have the
right to require us to redeem the Series A Preferred Stock at a price of $1,000
per share if the redemption is then permitted under the terms of the agreements
governing our indebtedness and the indebtedness of Intermedia, in each case as
those agreements existed on January 10, 2000. If the restrictions under these
agreements terminate at an earlier date, the holders may require us to redeem
the Series A Preferred Stock before entering into an agreement which would
restrict our ability to redeem the Series A Preferred Stock.

Outstanding Warrants

On January 12, 2000, we issued warrants to purchase a total of 1,065,000
shares of Class A Common Stock to Microsoft and a subsidiary of Compaq. The
warrants entitle the holders to purchase shares of Class A Common Stock at any
time on or before January 12, 2003 at an initial price of $57.00 per share,
which price is subject to adjustment as set forth in the warrant agreement.

Registration Rights of Security Holders

The holders of at least 25% of the shares of Class A Common Stock which may
be issued on conversion of our Series A Preferred Stock and exercise of our
warrants have the right, on at least two occasions, to demand that we register
with the SEC their Class A Common Stock. These demand registration rights may
not be exercised before January 12, 2001. In addition, after January 12, 2001,
the holders of the shares of Class A Common Stock which may be issued on
conversion of our Series A Preferred Stock and/or exercise of our warrants may
include their shares of Class A Common Stock in any registration statements
filed by us in connection with an underwritten offering of any class of common
stock. These demand and piggyback registration rights are subject to customary
blackout periods and cut back provisions.

Delaware Anti-Takeover Law

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law concerning corporate takeovers. This section prevents certain
Delaware corporations from engaging, under certain circumstances, in a
"business combination," which includes a merger or sale of more than 10% of the
corporation's assets, with any "interested stockholder," or a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such persons, for three years following the
date that such stockholder became an "interested stockholder" unless:

. the transaction in which such stockholder became an "interested
stockholder" is approved by the board of directors prior to the date the
"interested stockholder" attained such status;

. upon consummation of the transaction that resulted in the stockholder's
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 those shares owned by persons
who are directors and also officers; 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 by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested
stockholder."

63
<PAGE>

This statute could prohibit or delay mergers or other takeover or change-in-
control attempts with respect to Digex and, accordingly, may discourage
attempts to acquire us.

Transfer Agent and Registrar

The Transfer Agent and Registrar for our Class A Common Stock is Continental
Stock Transfer and Trust Company, located at Two Broadway, New York, New York
10004, with a telephone number of (212) 509-4000.

Listing

Our Class A Common Stock is listed on the Nasdaq National Market under the
trading symbol "DIGX."

64
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have outstanding an aggregate of
21,500,000 shares of Class A Common Stock and 42,000,000 shares of Class B
Common Stock, assuming no exercise of the underwriters' over-allotment option.
All shares of Class B Common Stock are convertible into shares of Class A
Common Stock, on a one-for-one basis, at any time at the option of the holder
or upon a direct or indirect transfer to any person or entity not affiliated
with Intermedia. All of the outstanding shares of Class A Common Stock and the
approximately 5,373,000 shares which may be issued on the exercise of
outstanding options will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are held by
"affiliates" as that term is defined in Rule 144 under the Securities Act.

The shares of Class B Common Stock and the shares of Class A Common Stock
which may be issued on conversion of the Class B Common Stock, Series A
Preferred Stock and Warrants are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 promulgated under the Securities Act, which
rule is summarized below. Some of our shares are also subject to contractual
restrictions described below.

The holders of some of our securities may require us to register their
securities under the Securities Act as described under the caption "Description
of Capital Stock -- Registration Rights of Security Holders." Sales of
restricted securities in the public market, or the availability of such shares
for sale, could adversely affect the price of our Class A Common Stock.

Lock-Up Agreements

All of our officers and directors and the selling stockholder have signed
lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, any shares of our Class A Common Stock or any
securities convertible into or exercisable or exchangeable for shares of our
Class A Common Stock, until 90 days after the date of this prospectus.
Transfers or dispositions can be made sooner with the prior written consent of
Bear, Stearns & Co. Inc.

Rule 144

In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our Class A Common Stock for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:

. 1% of the number of shares of Class A Common Stock then outstanding,
which will equal approximately 215,000 shares immediately after this
offering; or

. the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold at any time.

65
<PAGE>

Stock Options

The Digex Long-Term Incentive Plan was adopted on July 23, 1999. On July 29,
1999, we filed a registration statement under the Securities Act covering the
9,000,000 shares of Class A Common Stock that are reserved for issuance under
this Plan. Such registration statement became effective on that date.
Accordingly, shares registered under such registration statement will, subject
to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market.

66
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Bear,
Stearns & Co. Inc., Salomon Smith Barney Inc., Credit Suisse First Boston
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Morgan
Stanley & Co. Incorporated, Legg Mason Wood Walker, Incorporated and
PaineWebber Incorporated, the underwriters have severally agreed to purchase
from us and the selling stockholder the following respective numbers of shares
of Class A Common Stock at the public offering price less the underwriting
discount set forth on the cover page of this prospectus.

<TABLE>
<CAPTION>
Number of
Underwriter: Shares
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
Salomon Smith Barney Inc...........................................
Credit Suisse First Boston Corporation.............................
Donaldson, Lufkin & Jenrette Securities Corporation................
Morgan Stanley & Co. Incorporated..................................
Legg Mason Wood Walker, Incorporated...............................
PaineWebber Incorporated...........................................
---
Total..............................................................
===
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a "comfort letter" from our accountants, the listing of the Class A
Common Stock to be sold on the Nasdaq National Market and no occurrence of an
event that would have a material adverse effect on our business. The
underwriters are obligated to purchase and accept delivery of all the shares,
other than those covered by the over-allotment option described below, if they
purchase any of the shares.

The selling stockholder has granted to the underwriters an option,
exercisable for 30 days from the date of the underwriting agreement, to
purchase up to 1,500,000 additional shares at the public offering price less
the underwriting fees. The underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with this offering. To the
extent that the underwriters exercise such option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment
from the selling stockholder.

The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on sales
to other dealers. After the initial offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions.

The following table shows the underwriting fees to be paid to the
underwriters by us and the selling stockholder in connection with this
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares of the Class A Common
Stock.

<TABLE>
<CAPTION>
Paid Paid by the
by Us Selling Stockholder
----- -------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C> <C>
Per share....................................... $ $ $
Total........................................... $ $ $
</TABLE>

The offering expenses, estimated to be approximately $1,000,000, will be
paid by us and the selling stockholder in proportion to the number of shares
sold by each of us and the selling stockholder.

We have agreed that for a period of 90 days after the date of this
prospectus, we will not, directly or indirectly, without the prior written
consent of Bear, Stearns & Co. Inc., offer, sell, contract to sell, grant any

67
<PAGE>

option to purchase, pledge or otherwise dispose (or announce any of the
foregoing) of any shares of our Class A Common Stock or any securities
convertible into or exercisable or exchangeable for our Class A Common Stock,
except for the shares offered by this prospectus, shares and options to
purchase shares under our Long-Term Incentive Plan, shares issuable upon the
exercise or conversion of outstanding warrants or convertible preferred stock
and shares issued in connection with strategic relationships and acquisitions
of businesses, technologies and products complementary to ours, so long as
recipients, including transferees and assigns, of these shares agree to be
bound by lock-up agreements to remain in effect until the 90th day from the
date of this prospectus.

In order to facilitate the offering of the Class A Common Stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Class A Common Stock. Specifically, the
underwriters may over-allot shares of the Class A Common Stock in connection
with this offering, thereby creating a short position in the Class A Common
Stock for their own account. Additionally, to cover such over-allotments or to
stabilize the market price of the Class A Common Stock, the underwriters may
bid for, and purchase, shares of the Class A Common Stock in the open market.
Finally, the representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our Class A Common Stock at a
level above that which might otherwise prevail in the open market. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.

Our Class A Common Stock is listed on the NASDAQ National Market under the
symbol "DIGX".

Bear, Stearns & Co. Inc. or its affiliates have provided and may in the
future provide investment banking or other financial services to us and to
Intermedia, our indirect parent company, and its affiliates in the ordinary
course of business, for which it has received and is expected to receive
customary fees and expenses. To date, Bear, Stearns & Co. Inc. and Salomon
Smith Barney Inc. have been initial purchasers for numerous issuances of
securities by Intermedia. Bear, Stearns & Co. Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation served as the joint lead managers for our
initial public offering. Legg Mason Wood Walker, Incorporated served as a co-
manager in our initial public offering.

LEGAL MATTERS

The validity of the shares of Class A Common Stock offered hereby will be
passed upon for us by Kronish Lieb Weiner & Hellman LLP, New York, New York.
Partners of Kronish Lieb Weiner & Hellman LLP beneficially own 21,450 shares of
our Class A Common Stock. In addition, Ralph J. Sutcliffe, a partner of Kronish
Lieb Weiner & Hellman LLP, beneficially owns 11,490 shares of common stock of
Intermedia, a warrant to purchase 200,000 shares of common stock of Intermedia
at an exercise price of $20.75 per share and, subject to vesting, options to
purchase 22,000 shares of common stock of Intermedia at an exercise price of
$34.1875 per share. Intermedia is Digex's indirect parent entity and will own
approximately 95% of the voting power of our outstanding common stock when this
offering is completed. Certain legal matters in connection with this offering
will be passed upon for the underwriters by Latham & Watkins, New York, New
York.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements (and schedule) at December 31, 1997 and 1998, and for the year ended
December 31, 1996, the period from January 1, 1997 to July 6, 1997, the period
from July 7, 1997 (date of acquisition) to December 31, 1997 and the year ended
December 31, 1998, as set forth in their reports. We have included our
financial statements (and schedule) in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.

68
<PAGE>

WHERE YOU CAN FIND ADDITIONAL INFORMATION

This prospectus is part of a registration statement on Form S-1 under the
Securities Act that we filed with the Securities and Exchange Commission with
respect to the shares of Class A Common Stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedule filed therewith. For
further information about us and the Class A Common Stock offered by this
prospectus, reference is made to the registration statement and the exhibits
and schedule filed therewith. Statements contained in this prospectus regarding
the contents of any contract or any other document to which reference is made
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement and the exhibits and schedule
filed therewith may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. Please call the Commission at 1-800-SEC-0330 for further
information about its public reference room. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the Commission. The address of the site is http://www.sec.gov. Our registration
statement and the exhibits and schedules we filed electronically with the
Commission are available on this site.

69
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors--The Company............................... F-2

Report of Independent Auditors--Predecessor............................... F-3

Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999.... F-4

Statements of Operations for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997, and the Year Ended
December 31, 1998, and the Nine Months Ended September 30, 1998 and
1999..................................................................... F-5

Statements of Changes in Owner's Equity (Deficit) for the Year Ended
December 31, 1996, and the Period from January 1, 1997 to July 6, 1997,
and the Period from July 7, 1997 (Date of Acquisition) to December 31,
1997, and the Year Ended December 31, 1998, and the Nine Months Ended
September 30, 1999....................................................... F-6

Statements of Cash Flows for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997, and the Year Ended
December 31, 1998, and the Nine Months Ended September 30, 1998 and
1999..................................................................... F-7

Notes to Financial Statements............................................. F-8
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Digex, Incorporated

We have audited the accompanying balance sheets of Digex, Incorporated
(formerly the Web site hosting unit of Business Internet, Inc.) as of December
31, 1997 and 1998, and the related statements of operations, changes in owner's
equity and cash flows for the period from July 7, 1997 (date of acquisition) to
December 31, 1997, and the year ended December 31, 1998. Our audits included
the financial statement schedule listed in the index at Item 16(b). These
financial statements and this schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digex, Incorporated at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from July 7, 1997 (date of acquisition) to December 31,
1997 and the year ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

/s/ Ernst & Young LLP

Tampa, Florida
April 23, 1999

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Digex, Incorporated

We have audited the accompanying statements of operations, changes in
owner's equity, and cash flows of the Web site hosting unit of Business
Internet, Inc. for the year ended December 31, 1996 and the period from January
1, 1997 to July 6, 1997. Our audits included the financial statement schedule
listed in the index at Item 16(b). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of the Web
site hosting unit of Business Internet, Inc. for the year ended December 31,
1996 and the period from January 1, 1997 to July 6, 1997, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ Ernst & Young LLP

Tampa, Florida
April 23, 1999

F-3
<PAGE>

DIGEX, INCORPORATED

BALANCE SHEETS
(Amounts in thousands except share information)

<TABLE>
<CAPTION>
December 31,
---------------
September 30,
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ -- $ -- $132,844
Accounts receivable, net of allowances of $369
in 1997 and $719 in 1998 and $4,461 in 1999... 2,059 6,127 14,325
Prepaid expenses and other current assets...... 340 890 1,229
------- ------- --------
Total current assets............................. 2,399 7,017 148,398
Property and equipment, net...................... 12,930 39,059 165,055
Intangible assets, net........................... 34,364 31,204 28,211
Other assets..................................... -- 459 478
------- ------- --------
Total assets..................................... $49,693 $77,739 $342,142
======= ======= ========
Liabilities and stockholders'/owner's equity
Current liabilities:
Accounts payable............................... $ 486 $ 3,341 $ 4,827
Accrued compensation and other................. 920 843 3,401
Deferred revenue............................... 96 621 --
Due to parent.................................. -- -- 947
Current portion of note payable................ -- -- 1,235
Accrued line costs............................. 525 -- --
Current portion of capital lease obligations... 723 981 966
------- ------- --------
Total current liabilities........................ 2,750 5,786 11,376
Note payable..................................... -- -- 2,477
Capital lease obligations........................ 1,257 1,108 15,753
Deferred tax liability........................... 159 -- --
------- ------- --------
Total liabilities................................ 4,166 6,894 29,606
Stockholders'/Owner's equity (see Note 1):
Preferred stock, $.01 par value; 5,000,000
shares undesignated as to series; no shares
issued........................................ -- -- --
Class A common stock, $.01 par value;
100,000,000 shares authorized; 11,500,000
shares issued and outstanding................. -- -- 115
Class B common stock, $.01 par value;
50,000,000 shares authorized; issued and
outstanding................................... -- -- 500
Additional paid-in capital..................... -- -- 354,011
Accumulated deficit............................ -- -- (30,389)
Deferred compensation.......................... -- -- (11,701)
Owner's net investment......................... 45,527 70,845 --
------- ------- --------
Total stockholders'/owner's equity............... 45,527 70,845 312,536
------- ------- --------
Total liabilities and stockholders'/owner's
equity.......................................... $49,693 $77,739 $342,142
======= ======= ========
</TABLE>
See accompanying notes.

F-4
<PAGE>

DIGEX, INCORPORATED

STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share information)

See accompanying notes.

F-5
<PAGE>

DIGEX, INCORPORATED

STATEMENTS OF CHANGES IN OWNER'S EQUITY (DEFICIT)
(Amounts in thousands)

<TABLE>
<CAPTION>
Common Stock
--------------------------- Owner's
Class A Class B Additional Retained Net
------------- ------------- Paid-In Deferred Earnings Investment
Shares Amount Shares Amount Capital Comp (Deficit) (Deficit) Total
------ ------ ------ ------ ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at January 1,
1996................... -- $-- -- $-- $ -- $ -- $ -- $ -- $ --
Total allocated costs.. -- -- -- -- -- -- -- 3,177 3,177
Funding for working
capital............... -- -- -- -- -- -- -- (612) (612)
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 1,445 1,445
Net loss............... -- -- -- -- -- -- -- (3,668) (3,668)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at December 31,
1996................... -- -- -- -- -- -- -- 342 342
Stock options
exercised............. -- -- -- -- -- -- -- 550 550
Total allocated costs.. -- -- -- -- -- -- -- 6,105 6,105
Funding for working
capital............... -- -- -- -- -- -- -- 517 517
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 1,004 1,004
Net loss............... -- -- -- -- -- -- -- (9,066) (9,066)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at July 6,
1997................... -- $-- -- $-- $ -- $ -- $ -- $ (548) $ (548)
====== ==== ====== ==== ======== ======== ======== ======== ========
THE COMPANY
Balance at July 7,
1997.................. -- $-- -- $-- $ -- $ -- $ -- $ -- $ --
Contribution from
Parent for
Acquisition........... -- -- -- -- -- -- -- 47,221 47,221
Total allocated costs.. -- -- -- -- -- -- -- 2,698 2,698
Funding for working
capital............... -- -- -- -- -- -- -- 6,150 6,150
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 8,016 8,016
Net loss............... -- -- -- -- -- -- -- (18,558) (18,558)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at December 31,
1997................... -- -- -- -- -- -- -- 45,527 45,527
Total allocated costs.. -- -- -- -- -- -- -- 10,018 10,018
Funding for working
capital............... -- -- -- -- -- -- -- 912 912
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 30,969 30,969
Net loss............... -- -- -- -- -- -- -- (16,581) (16,581)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at December 31,
1998................... -- -- -- -- -- -- -- 70,845 70,845
Total allocated cost... -- -- -- -- -- -- -- 3,541 3,541
Funding for working
capital............... -- -- -- -- -- -- -- 11,443 11,443
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 89,574 89,574
Recapitalization by
Parent................ -- -- 50,000 500 114,566 -- -- (115,066) --
Contributions from
Parent following
recapitalization...... -- -- -- -- 48,106 -- -- (48,106) --
Initial public offering
of common stock, net
of issuance cost...... 11,500 115 -- -- 179,129 -- -- -- 179,244
Issuance of stock
options under long-
term compensation
plan.................. -- -- -- -- 12,210 (12,210) -- -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 509 -- -- 509
Net loss............... -- -- -- -- -- -- (30,389) (12,231) (42,620)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at September 30,
1999................... 11,500 $115 50,000 $500 $354,011 $(11,701) $(30,389) -- $312,536
====== ==== ====== ==== ======== ======== ======== ======== ========
</TABLE>

See accompanying notes.

F-6
<PAGE>

DIGEX, INCORPORATED

STATEMENTS OF CASH FLOWS
(Amounts in thousands)

<TABLE>
<CAPTION>
Predecessor The Company
------------------------ ----------------------------------------------------
Period from
Period from July 7, 1997
January 1, (date of Nine months ended
Year ended 1997 acquisition) to Year ended September 30,
December 31, to July 6, December 31, December 31, -----------------------
1996 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $ (3,668) $ (9,066) $ (18,558) $ (16,581) $ (12,331) $ (42,620)
Adjustments to reconcile
net loss to cash flows
used in operating
activities:
Deferred income taxes.. -- -- (1,440) (159) -- (4,839)
Depreciation and
amortization.......... 591 519 2,753 8,109 6,081 18,112
Provision for doubtful
accounts.............. 41 352 498 1,491 823 3,918
Amortization of
deferred
compensation.......... -- -- -- -- -- 509
Loss on sale of
telecommunications
equipment............. -- -- -- -- -- 94
Charge off of purchased
in-process research
and development....... -- -- 15,000 -- -- --
Changes in operating
assets and liabilities
net of the effects of
the acquisition:
Accounts receivable.... (594) (890) (1,466) (5,559) (2,650) (12,115)
Prepaid expenses and
other current assets.. (21) (54) (265) (550) (163) (340)
Other assets........... -- -- -- (459) -- (19)
Due to parent.......... -- -- -- -- -- 947
Accounts payable and
accrued liabilities... 1,086 1,967 (2,601) 2,778 787 8,228
-------- -------- --------- --------- --------- ---------
Net cash used in
operating activities... (2,565) (7,172) (6,079) (10,930) (7,453) (28,125)
Investing activities
Acquisition of
business............... -- -- (47,221) -- -- --
Purchases of property
and equipment.......... (1,445) (1,004) (8,016) (30,969) (18,352) (119,426)
-------- -------- --------- --------- --------- ---------
Net cash used in
investing activities... (1,445) (1,004) (55,237) (30,969) (18,352) (119,426)
Financing activities
Proceeds from issuance
of common stock, net of
issuance costs......... -- -- -- -- -- 179,244
Payments on capital
leases................. -- -- (2,769) -- -- (1,273)
Exercise of stock
options................ -- 550 -- -- -- --
Net contributions from
Parent................. 4,010 7,626 64,085 41,899 25,805 102,424
-------- -------- --------- --------- --------- ---------
Net cash provided by
financing activities... 4,010 8,176 61,316 41,899 25,805 280,395
Cash at beginning of the
year................... -- -- -- -- -- --
-------- -------- --------- --------- --------- ---------
Cash at end of year..... $ -- $ -- $ -- $ -- $ -- $ 132,844
======== ======== ========= ========= ========= =========
Supplemental disclosure
of cash flow
information
Noncash investing and
financing activities:
Equipment acquired
under capital leases.. $ 2,840 $ 829 $ 846 $ 958 $ 658 $ 17,111
======== ======== ========= ========= ========= =========
Asset purchased by
issuance of note
payable............... -- -- -- -- -- $ 4,672
=========
Interest paid.......... -- -- -- -- -- $ 528
=========
</TABLE>

See accompanying notes.

F-7
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

(In thousands, except share information)

1. Organization, Basis of Presentation and Significant Accounting Policies

Organization

Digex, Incorporated (the "Company") was incorporated on April 26, 1999,
under the laws of the State of Delaware. The Company's business was operated as
the Web site hosting unit of Intermedia Communications Inc. ("Intermedia" or
the "Parent Company") since its acquisition by Intermedia on July 7, 1997. On
that date, Intermedia acquired Business Internet, Inc. (previously known as
DIGEX, Incorporated), including the Web site hosting unit (the "Predecessor"),
in a business combination accounted for as a purchase. The Web site hosting
unit presented in the accompanying financial statements had no legal status or
existence prior to the incorporation of the Company on April 26, 1999. The
financial statements of the legal Registrant have been omitted because the
Registrant did not commence operations until May 1, 1999. Prior to April 30,
1999, the Registrant had no assets or liabilities. See also Note 10, which
discloses the contribution of assets on April 30, 1999 by Business Internet,
Inc. to the Registrant.

The Company's operations began in January 1996 to provide complex Web
hosting services, principally to Fortune 2000 companies. The Company's services
include implementing and maintaining secure, scaleable, high-performance Web
sites on the Internet 24 hours a day. In addition, the Company provides a
comprehensive suite of Web management services, including business process
solutions and value-added testing services directed toward improving its
customers' overall Internet performance.

Basis of Presentation

The accompanying financial statements of the Company reflect the carved-out
operations and financial position of the Web site hosting unit of Intermedia
for all periods since July 7, 1997. The accompanying financial statements of
the Predecessor reflect its operations and financial position from inception,
January 1, 1996, to July 6, 1997. As more fully discussed in Note 2, "Related
Party Transactions and Corporate Allocations," the financial statements for all
periods presented include allocations of network costs and corporate expenses.
In addition, for financial reporting purposes, the equity activity of the
Company, prior to its incorporation, and the Predecessor has been accumulated
into a single disclosure caption entitled "Owner's Net Investment."

Significant Accounting Policies

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Interim Financial Data

The financial statements for the nine months ended September 30, 1998 and
1999 and the related amounts in the Notes to Financial Statements are
unaudited, but in the opinion of management reflect all normal and recurring
adjustments necessary for a fair presentation of the results of those periods.
Operating results for the nine months ended September 30, 1999 are not
necessarily an indication of the results that may be expected for the year
ended December 31, 1999.

F-8
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

Revenue Recognition and Accounts Receivable

Revenues principally consist of installation fees and monthly service fees
charged to customers under contracts having terms that typically range from one
to three years. Installation fees are recognized upon the customer-approved
completion of the managed Web hosting solution. Monthly service fees are
recognized in the month the service is rendered over the contract period.
Certain customer payments for managed Web hosting services received in advance
of service delivery are deferred until the service is performed. Additional
services are recognized in the month the services are performed.

The Company's accounts receivable are financial instruments that expose the
Company to credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk. Accounts receivable are due from commercial entities to whom credit is
extended based on evaluation of the customer's financial condition, and
generally collateral is not required. Anticipated credit losses are provided
for in the financial statements and have been within management's expectations
for all periods presented.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of the property and equipment,
generally five years for equipment and up to fifteen years for leasehold
improvements. Equipment acquired under capital leases is amortized using the
straight-line method over the lesser of the lease term or the estimated useful
life of the asset, generally five years. The cost of license agreements with
software vendors is amortized over five years.

Intangible Assets

Intangible assets include assets that arose in connection with the purchase
of Business Internet by Intermedia. Identifiable intangible assets arising from
the purchase are stated at cost and consist of trade name, customer lists,
acquired workforce, developed technology and goodwill. Amortization of these
assets is computed using the straight-line method over the estimated periods of
benefit, generally five years for developed technologies and ten years for all
other intangible assets.

Impairment of Long-Lived Assets

In accordance with Statement on Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate the carrying value of such assets may not be
recoverable. This review consists of a comparison of the carrying value of the
asset with the asset's expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flow exceeds the carrying value of the asset, no
impairment indicator is considered present. If the carrying value exceeds the
future cash flow, an impairment indicator is considered present. Such
impairment would be measured and recognized using a discounted cash flow
method.

Financial Instruments

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate their fair values.

F-9
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)
Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense
amounted to $515, $2,016, $2,076, $2,544, $2,403 and $4,849 for the year ended
December 31, 1996, the period from January 1, 1997 to July 6, 1997, the period
from July 7, 1997 to December 31, 1997, the year ended December 31, 1998 and
the nine months ended September 30, 1998 and 1999, respectively.

Stock-Based Compensation

The Company's employees participated in the stock option plans of Intermedia
prior to August 4, 1999 and subsequently in the Digex plan. The Company
accounts for employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, because the alternative fair value accounting model
provided under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123), is not required. Accordingly, in cases
where exercise prices equal or exceed fair market value of the underlying
Intermedia or Digex common stock, the Company recognizes no compensation
expense. In cases where exercise prices are less than the fair value,
compensation is recognized over the period of performance or vesting period.

Income Taxes

The operations of the Company and of the Predecessor were included in the
consolidated income tax returns of Intermedia and Business Internet,
respectively. For reporting purposes, the Company has used the asset and
liability method in accounting for income taxes, prescribed in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, except
that the presentation reflects the parent companies as if they were the taxing
jurisdictions. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The income
tax provision is calculated on a separate return basis.

Comprehensive Income

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income. This standard requires that total
comprehensive income (loss) be disclosed with equal prominence as net income.
Comprehensive income is defined as changes in stockholder's equity exclusive of
transactions with owners, such as capital contributions and dividends. The
Company and the Predecessor adopted this Standard in 1998 and implemented the
Standard for all years presented herein. The Company's and Predecessor's
comprehensive losses were equal to net losses for all periods presented.

Segment Reporting

The Company and the Predecessor operated during all periods in a single
segment when applying the management approach defined in Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information.

Loss Per Share

The Company has applied the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128), which establishes standards
for computing and presenting earnings per share. Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The calculation of
diluted earnings per share includes the effect of dilutive common stock
equivalents. No dilutive common stock equivalents existed in any year
presented.

F-10
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

2. Related Party Transactions and Corporate Allocations

The Predecessor and the Company utilized the central cash management systems
of Business Internet and Intermedia, respectively. Cash requirements during
these periods were satisfied by cash transactions and transfers that were
accounted for through an intercompany account. In addition, the parent
companies charged the Company for identifiable corporate and operating
expenses, such as network cost and corporate overhead cost. Intercompany
account balances for all periods presented have been treated as permanent
contributions and have been reflected as a component of owner's net investment
in the accompanying financial statements.

The following table summarizes corporate charges and allocations included in
the accompanying financial statements:

<TABLE>
<CAPTION>
Predecessor The Company
----------------------- ----------------------------------------------------
July 7, 1997
January 1, (date of
Year ended 1997 to acquisition) to Year ended Nine months ended
December 31, July 6, December 31, December 31, September 30,
------------ ---------- --------------- ------------ -----------------------
1996 1997 1997 1998 1998 1999
------------ ---------- --------------- ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Caption
Cost of operations............................ $ 1,947 $ 4,001 $ 1,624 $ 6,494 $4,067 $ 4,570
Cost of services.............................. 189 344 103 1,320 779 2,066
Selling, general and administrative........... 1,041 1,760 971 2,204 1,579 12,123
------- ------- ------- -------- ------ -------
- -------------------------------------------------- $ 3,177 $ 6,105 $ 2,698 $ 10,018 $6,425 $18,759
======= ======= ======= ======== ====== =======
</TABLE>

Management believes that the allocation methodology applied is reasonable.
However, it was not practicable to determine whether the allocated amounts
represent amounts that would have been incurred on a standalone basis.
Explanations of the composition and the method of allocation for the above
captions are as follows:

Cost of Operations

Allocated costs within this caption were the costs of telecommunications
backbone circuits. These costs were allocated to the Company based upon
estimated circuit usage and rate information.

Cost of Services

Allocated costs within this caption were the costs associated with two data
centers (maintenance, utilities and support and employment costs for network
engineering and support, and certain other overhead). These costs were
allocated based upon the employee base.

Selling, General and Administrative

Allocated costs within this caption were the costs of human resources,
information systems services, accounting and back office support, executive
salaries and other general and administrative costs, including rent. All costs
except accounting and back office support were allocated based upon the
employee base. Accounting and back office support were allocated based upon the
relative percentage of monthly recurring revenues.

F-11
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

3. Property and Equipment

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Buildings.................................... $ -- $ -- $17,344
Electronics and computer equipment........... 12,163 36,245 90,107
Computer software............................ 1,594 8,153 24,210
Furniture and office equipment............... 121 297 2,269
Leasehold improvements....................... 227 488 52,547
------- ------- --------
14,105 45,183 186,477
Less accumulated depreciation................ (1,175) (6,124) (21,422)
------- ------- --------
$12,930 $39,059 $165,055
======= ======= ========
</TABLE>

Property and equipment included buildings, electronics and computer
equipment of $2,051, $3,009 and $20,353 at December 31, 1997 and 1998, and
September 30, 1999 respectively, that were capitalized pursuant to the terms of
capital lease agreements. Amortization of these assets is included in
depreciation expense for the years ended December 31, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999.

Depreciation expense amounted to $591 for the year ended December 31, 1996,
$519 for the period from January 1, 1997 to July 6, 1997, $1,175 for the period
from July 7, 1997 to December 31, 1997, $4,949 for the year ended December 31,
1998, $3,712 for the nine months ended September 30, 1998, and $15,120 for the
nine months ended September 30, 1999.

4. Intangible Assets

Intangible assets consisted of the following:

<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Goodwill..................................... $19,099 $19,099 $19,099
Trade name................................... 9,750 9,750 9,750
Customer list................................ 3,120 3,120 3,120
Developed technologies....................... 2,720 2,720 2,720
Acquired workforce........................... 1,253 1,253 1,253
------- ------- -------
35,942 35,942 35,942
Less accumulated amortization................ (1,578) (4,738) (7,731)
------- ------- -------
$34,364 $31,204 $28,211
======= ======= =======
</TABLE>

Amortization expense amounted to $1,578 for the period from July 7, 1997 to
December 31, 1997, $3,160 for the year ended December 31, 1998, $2,370 for the
nine months ended September 30, 1998, and $2,993 for the nine months ended
September 30, 1999. At the date of acquisition, the trade name was valued at
$11,000. The Company and another operating unit of Intermedia shared the value
of this trade name during the period from July 7, 1997 through December 31,
1998.

F-12
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)
5. Stockholders' Equity

On August 4, 1999, the Company sold 11,500,000 shares of its Class A Common
Stock in an initial public offering (also referred to as the "Offering"). The
shares sold represent approximately 18.7% of the aggregate number of shares of
Class A and Class B Common Stock outstanding. Intermedia retains a 97.8% voting
interest in the Company. The net proceeds from the Offering were approximately
$179,244 and can be used only to purchase telecommunications related assets due
to restrictions in Intermedia's debt instruments.

Under the provisions of the Intermedia 1996 Long-Term Incentive Plan (1996
Plan), certain employees and directors of the Company have been granted options
to buy shares of Intermedia common stock, generally at market value with terms
of five to ten years. Under the provisions of Business Internet's equity
participation plan, employees were awarded stock options, generally at market
value with terms of five years. Options in Business Internet that were held by
employees of the Predecessor were converted into 456,632 Intermedia options
upon the purchase of Business Internet, applying the same terms and conditions
as existed under the Business Internet Equity Participation Plan.

The Digex Long-Term Incentive Plan adopted on July 23, 1999 and administered
by the compensation committee of the Board of Directors, permits awards of
stock, stock options, stock appreciation rights, restricted stock and other
stock-based awards as incentives to current and prospective employees,
officers, directors and consultants, and those of our subsidiaries or of any
person that owns over 50% of the voting power of our authorized and outstanding
voting shares.

The following table summarizes the stock option activity related to
employees of the Predecessor, the Company and of Digex:

<TABLE>
<CAPTION>
Number Per Share
of Shares Option Price
--------- ------------
<S> <C> <C>
Outstanding Business Internet options at January 1,
1996............................................... -- $ --
Granted........................................... 483,535 0.13-5.19
Exercised......................................... -- --
Canceled.......................................... 1,102 0.13
--------- ------------
Outstanding Business Internet options at December
31, 1996........................................... 482,433 0.13-5.19
Granted........................................... 478,451 1.50-5.12
Exercised......................................... 4,778 0.13-5.00
Canceled.......................................... 3,326 0.13-5.00
--------- ------------
Outstanding Business Internet options at July 6,
1997............................................... 952,780 $ 0.13-5.19
========= ============
Outstanding Intermedia options at July 7, 1997...... 456,632 $ 0.26-10.82
Granted........................................... -- --
Exercised......................................... 95,364 0.26-10.82
Canceled.......................................... 1,280 8.99-10.82
--------- ------------
Outstanding Intermedia options at December 31,
1997............................................... 359,988 0.26-10.82
Granted........................................... 130,900 16.38-37.00
Exercised......................................... 87,521 0.26-10.82
Canceled.......................................... 183,187 0.26-37.00
--------- ------------
Outstanding Intermedia options at December 31,
1998............................................... 220,180 $ 0.26-37.00
========= ============
Digex options granted on July 29, 1999.............. 5,035,470 $ 5.00-17.00
Granted........................................... 497,780 17.00-29.00
Exercised......................................... -- --
Canceled.......................................... 410,400 17.00
--------- ------------
Outstanding Digex options at September 30, 1999..... 5,122,850 $ 5.00-29.00
========= ============
</TABLE>

F-13
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

As of September 30, 1999, unexercised options to purchase 1,092,400 shares
of Class A Common Stock (included in the total number above) were granted by
the Company to employees of the Parent. The Financial Accounting Standards
Board recently issued an Exposure Draft, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25, that
addresses the accounting for such option grants. The final interpretation of
APB Opinion No. 25 has not been issued, and therefore, the Company is unable
to discuss the potential impact relative to these stock option grants.

Pro forma net loss and net loss per share, assuming that the Predecessor
and Digex had applied the fair value model (Black-Scholes Pricing Model)
required by SFAS 123, is as follows:

<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss................... $ (4,395) $ (9,645) $ (18,558) $ (16,828)
Net loss per share......... -- -- $ (0.37) $ (0.34)
</TABLE>

The following table summarizes the significant assumptions used in
developing the pro forma information:

<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
January 1, July 7,
Year ended 1997 to 1997 to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Risk-free interest
rate................... 6.1% 6.1% 6.1% 5.4%
Volatility factor....... 58.0% 58.0% 58.0% 53.0%
Dividend yield.......... -- -- -- --
Weighted average life... 5 years 5 years 5 years 5 years
</TABLE>

The following table summarizes the weighted average exercise prices of
option activity:

<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
January 1, July 7,
Year ended 1997 to 1997 to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of
period................. $ 0.13 $ 6.28 $ 5.83 $ 5.83
Granted................. 3.07 5.36 -- 26.69
Exercised............... -- 7.45 5.28 6.94
Canceled................ 0.13 8.29 10.02 6.73
------ ------ ------ -------
Balance at end of
period................. $ 3.01 $ 5.83 $ 5.83 $ 20.60
====== ====== ====== =======
</TABLE>

As of December 31, 1998, the weighted average exercise price of exercisable
options was $10.20. Outstanding options as of December 31, 1998 were not
convertible into shares of the Company and had a weighted average remaining
contractual life of 7.4 years. The per share weighted average fair value of
options granted during the year ended December 31, 1996, the period from
January 1, 1997 to July 6, 1997, the period from July 7, 1997 to December 31,
1997 and the year ended December 31, 1998 were $1.72, $1.44, $0 and $14.84.

F-14
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

6. Income Tax Information

The Company's income tax benefit for the period from July 7, 1997 to
December 31, 1997 and the year ended December 31, 1998 are comprised of the
following:

<TABLE>
<CAPTION>
Period From
July 7,
1997 to Year ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Current............................................ $ -- $--
Deferred:
Federal.......................................... 1,306 144
State............................................ 134 15
------ ----
$1,440 $159
====== ====
</TABLE>

The following table reconciles the assumed statutory tax rate with the
effective rate of the Predecessor and the Company:

<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
Period
from Period from
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Tax benefit at statutory
rate.................... (34.0)% (34.0)% (34.0)% (34.0)%
Reconciling items:
State income taxes,
net................... (3.5)% (3.5)% (0.7)% (3.1)%
Charge off of purchased
in-process research
and development....... -- -- 25.5 % --
Change in valuation
allowance............. 37.0 % 37.1 % 0.0 % 32.0 %
Other items............ 0.5 % 0.4 % 2.0 % 4.1 %
----- ----- ----- -----
Effective tax rate....... -- % -- % (7.2)% (1.0)%
===== ===== ===== =====
</TABLE>

F-15
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

At December 31, 1997 and 1998, the Company had temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1997 and 1998
were as follows:

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization........................... $(5,949) $(5,216)
------- -------
Total deferred tax liabilities........................ (5,949) (5,216)
Deferred tax assets:
Net operating loss carryforwards........................ 5,541 10,268
Allowance for bad debts................................. 138 186
Stock-based compensation................................ 111 111
------- -------
Total deferred tax assets............................. 5,790 10,565
Less: valuation allowance............................. -- (5,349)
------- -------
Net deferred tax asset.............................. 5,790 5,216
------- -------
Net deferred tax asset (liability)........................ $ (159) $ --
======= =======
</TABLE>

At December 31, 1998, the Company's net operating loss carryforward for
federal income tax purposes is approximately $27,400, with expiration periods
beginning in 2011 through 2018. As a result of the recapitalization of the
Company, the net operating loss carryforwards will be limited such that no
benefit will enure to the newly formed corporation.

7. Lease Commitments

The Company leases electronic and computer equipment under capital lease
arrangements. The Company also leases office space and office equipment under
operating leases. Future noncancelable lease payments under the Company's lease
commitments at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Future minimum lease payments:
Year ended December 31:
1999.................................................... $1,121 $ 881
2000.................................................... 892 1,871
2001.................................................... 324 1,774
2002.................................................... -- 1,628
2003.................................................... -- 1,669
Thereafter.............................................. -- 8,748
------ -------
2,337 $16,571
=======
Less amount representing interest......................... (248)
------
Present value of lease payments........................... 2,089
Current portion of capital leases......................... (981)
------
Noncurrent portion of capital leases...................... $1,108
======
</TABLE>

F-16
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

Lease payments under operating leases include certain rent allocated to the
Company.

Rent expense amounted to $121 for the year ended December 31, 1996, $117 for
the period from January 1, 1997 to July 7, 1997, $170 for the period from July
7, 1997 to December 31, 1997, $829 for the year ended December 31, 1998, $417
for the nine months ended September 30, 1998, and $1,079 for the nine months
ended September 30, 1999.

8. Loss Per Share (Unaudited)

On April 30, 1999, the Company issued 1,000 shares of Class B Common Stock
to the Parent in connection with the contribution of assets to the Company.
Loss per share is presented on a pro forma basis assuming that the common
shares issued in connection with our recapitalization on April 30, 1999 were
outstanding for all periods of Digex presented. On July 23, 1999, the Board of
Directors authorized a 50,000-for-one split of the Class B Common Stock,
effective as of August 4, 1999 and paid in the form of a stock dividend, for
shares outstanding as of July 8, 1999. The basic and diluted net loss per
common share were calculated assuming that the stock split was effective for
all periods presented. All share information presented gives effect to the
stock split.

The following table sets forth the computation of basic and diluted loss per
share of common stock:

<TABLE>
<CAPTION>
Period from
July 1, 1997 Nine months ended
to Year ended September 30,
December 31, December 31, ------------------------
1997 1998 1998 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net loss, as reported... $ (18,558) $ (16,581) $ (12,331) $ (42,620)
=========== =========== =========== ===========
Weighted average common
shares................. 50,000,000 50,000,000 50,000,000 52,443,000
=========== =========== =========== ===========
Loss per share:
Basic................. $ (0.37) $ (0.33) $ (0.25) $ (0.81)
=========== =========== =========== ===========
Diluted............... $ (0.37) $ (0.33) $ (0.25) $ (0.81)
=========== =========== =========== ===========
</TABLE>

The above table reflects no adjustments for stock options, as the effect of
options was anti-dilutive.

9. Business Combination

On July 7, 1997, Intermedia purchased the outstanding common stock of
Business Internet, a nationwide Internet services provider and Web site
management company in a business combination accounted for as a purchase. The
purchase price was allocated to the fair values of assets acquired and
liabilities assumed, with the difference recorded as goodwill, which is being
amortized over ten years.

F-17
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

The following table summarizes the allocation of the purchase price to the
acquired assets and assumed net liabilities of the Company:

<TABLE>
<S> <C>
Estimated net fair values of operating assets and liabilities.... $ (3,721)
Purchased intangible assets:
Trade name..................................................... 9,750
Customer list.................................................. 3,120
Acquired workforce............................................. 1,253
Developed technologies......................................... 2,720
Goodwill....................................................... 19,099
In-process research and development.............................. 15,000
--------
$ 47,221
========
</TABLE>

The amount allocated to in-process research and development ("IPR&D") of
$15,000 was recorded as a one-time charge to operations in 1997 because the
technology was not fully developed and had no alternative future use.
Management is primarily responsible for estimating the fair value of the
purchased IPR&D.

The fair value of the IPR&D was estimated by management using an income
approach. The value allocated to IPR&D was determined by estimating the costs
to develop the purchased technology into commercially viable services,
estimating the resulting net cash flows, excluding the cash flows related to
the portion that was incomplete at the acquisition date, and discounting the
net cash flows to the present value. The forecast was based upon future
discounted cash flows, taking into account the stage of development of the
IPR&D, the costs to develop the IPR&D, the expected income stream, the life
cycle of the technology ultimately developed, and the associated risks. The
selection of the applicable discount rate was based on consideration of the
costs of capital of Digex and Intermedia, as well as other factors including
the useful life of the technology, profitability levels, the uncertainty of
technology advances that were known at the time, and the stage of completion
related to the technology.

The IPR&D involved development, engineering, and testing activities
associated with the completion of next generation Web site management services.
The primary effort involved the development of an additional Web site
management facility on the West Coast. The development of technology related to
this project was considered critical to alleviating capacity constraints and
adding significant new service capabilities. Upon completion, the new Web site
management facility was expected to result in faster and easier installation of
customers' servers as well as efficient traffic management with significantly
less overhead. Related efforts involved the development and integration of next
generation routers to support greater transmission capacity, as well as a new
software architecture to assist in balancing traffic loads. Another critical
element involved the development of site mirroring, the ability to create exact
replicas of Web sites at each of Digex's two sites for greater service
reliability.

At the valuation date, Digex had completed approximately 75% of the
development of its next generation Web site management services, and
substantial progress had been made in the areas of specification, design, and
implementation. In particular, engineers had made significant progress in the
areas of architecture development as well as the development of site mirroring
capabilities. The Company anticipated that the R&D would be completed in phases
by the end of 1998, after which the Company expected to begin generating
economic benefits from the value of the IPR&D. Total costs to complete were
expected to be $100 for the remainder of 1997 and $400 in 1998. Projected
future cash flows attributable to Digex's IPR&D, assuming successful
development of such technologies, were discounted to the present value using a
discount rate of 24%.

F-18
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

Intermedia management expected to continue development of the IPR&D efforts
at the valuation date, and believed there was a reasonable chance of
successfully completing such development. However, there was risk associated
with the completion of the IPR&D and there was no assurance that any of the
projects would meet with either technological or commercial success. Failure to
successfully develop and commercialize the IPR&D would result in the loss of
the expected economic return inherent in the fair value allocation.

As a result of the above, on an unaudited pro forma basis, assuming the
purchase had occurred at the beginning of the 1997 year, total revenues would
have been $11,612, net loss would have been $(22,852) and net loss per share
(basic and diluted) would have been $(0.46), assuming that the recapitalization
discussed in Note 10 had been in effect for that period. However, pro forma
results do not purport to be indicative of the results that would have occurred
if the acquisition had occurred at the beginning of year.

10. Recapitalization and Affiliate Agreements (Unaudited)

Recapitalization

In connection with the recapitalization, the Company filed a Certificate of
Incorporation and certain amendments in the state of Delaware. Pursuant to the
Certificate, as amended, the number of authorized shares of common stock is
150,000,000, including 100,000,000 Class A shares and 50,000,000 Class B shares
and the number of authorized shares of preferred stock is 5,000,000 shares. The
Class A and Class B common stock are identical in all respects except that the
Class A is entitled to one vote for each share and the Class B is entitled to
ten votes for each share. In addition, on April 30, 1999, Business Internet
contributed the Company's assets to the newly formed corporation.

Network Services Agreements

Pursuant to several network services agreements between Intermedia and the
Company, Intermedia will provide Internet network access, as well as network-
related services. These Agreements have an initial term of two years which
expires in July 2001. Rates charged to the Company will generally be consistent
with rates incurred during the periods presented in the accompanying financial
statements.

General and Administrative Services Agreement

Pursuant to a General and Administrative Services Agreement, entered into in
April 1999, between Intermedia and the Company, Intermedia will provide the
back office and administrative services listed below:

. Corporate Human Resources, including labor relations, payroll and
training

. Finance, accounting and administration

. Tax services, including tax return preparation

. Accounting and back office support services

. Investor relations

. Information management services

The General and Administrative Services Agreement has an initial term of two
years. Rates charged to the Company for these services are believed to be
consistent with the allocations in the accompanying financial

F-19
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)

(In thousands, except share information)

statements. Rates for services not previously provided to the Company (e.g.
investor relations) are based upon Intermedia and the Company's best estimate
of the fair value of those services.

11. Subsequent Events (Unaudited)

The Board of Directors of Intermedia has authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission for the secondary public offering of the Company's Class A Common
Stock. The Company contemplates using the proceeds from the proposed public
offering to finance its growth plans.

On January 12, 2000, the Company sold 100,000 shares of its preferred stock,
designated as Series A Convertible Preferred Stock (the "Preferred Stock"),
with detachable warrants to purchase 1,065,000 shares of its Class A Common
Stock (the "Warrants"), for an aggregate of $100,000, of which $15,000 was in
the form of equipment purchase credits. The Preferred Stock has an aggregate
liquidation preference of $100,000 and is convertible into approximately
1,462,000 shares of Class A Common Stock. The Warrants can be exercised at any
time over their three year term at a price of $57.00 per share (the fair value
of the Company's common stock on the transaction commitment date). The proceeds
from the offering will be allocated between the Preferred Stock and the
Warrants based upon their relative fair values, which have not yet been
determined by the Company. Following the allocation, the Preferred Stock will
be accreted up to its liquidation preference through charges to retained
earnings.

On December 22, 1999, Intermedia entered into a $100,000 credit facility
under which the Company is a guarantor.

F-20
<PAGE>

[Logo]
<PAGE>

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

Prospective investors may rely only on the information contained in this pro-
spectus. Neither Digex nor any underwriter has authorized anyone to provide
prospective investors with different or additional information. This prospec-
tus is not an offer to sell nor is it seeking an offer to buy these securities
in any jurisdiction where such offer or sale is not permitted. The information
contained in this prospectus is correct only as of the date of this prospec-
tus, regardless of the time of delivery of this prospectus or any sale of
these securities.

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Price Range of Class A Common Stock...................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 31
Management............................................................... 44
Certain Relationships and Related Transactions........................... 56
Principal and Selling Stockholders....................................... 58
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find Additional Information................................ 69
Index to Financial Statements............................................ F-1
</TABLE>

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

[LOGO OF DIGEX]
10,000,000 Shares

Class A Common Stock

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

PROSPECTUS

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

Bear, Stearns & Co. Inc.

Salomon Smith Barney

Credit Suisse First Boston

Donaldson, Lufkin & Jenrette

Morgan Stanley Dean Witter

Legg Mason Wood Walker

Incorporated

PaineWebber Incorporated

, 2000

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

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following statement sets forth the expenses payable in connection with
this Registration Statement (estimated except for the registration fee and the
NASD fee), all of which will be borne by Digex and Intermedia pro rata in
proportion to the number of shares to be sold by Digex and Intermedia:

<TABLE>
<S> <C>
Securities and Exchange Commission filing fee....................... $ 194,213
NASD filing fee..................................................... $ 30,500
Nasdaq National Market listing fee.................................. $ 17,500
Legal fees and expenses............................................. $ 150,000
Accountants' fees and expenses...................................... $ 150,000
Printing costs...................................................... $ 300,000
Miscellaneous....................................................... $ 157,787
----------
TOTAL............................................................. $1,000,000
==========
</TABLE>

Item 14. Indemnification of Directors and Officers.

Digex's Certificate of Incorporation provides that Digex shall, to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL"),
indemnify all persons whom it may indemnify pursuant thereto (i.e., directors
and officers) and shall advance expenses incurred in defending any proceeding
for which such right to indemnification is applicable, provided that, if the
DGCL so requires, the indemnitee provides Digex with an undertaking to repay
all amounts advanced if it is determined by a final judicial decision that such
person is not entitled to indemnification pursuant to this provision. Digex's
Certificate of Incorporation also contains a provision eliminating the personal
liability of Digex's directors for monetary damages for breach of any fiduciary
duty. By virtue of this provision, under the DGCL, a director of Digex will not
be personally liable for monetary damages for breach of his fiduciary duty as a
director, except for liability for (i) any breach of the director's duty of
loyalty to Digex or its stockholders, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
dividends or stock purchases or redemptions that are unlawful under the DGCL,
and (iv) any transaction from which a director derives an improper personal
benefit. However, this provision of Digex's Certificate of Incorporation
pertains only to breaches of duty by directors as directors and not in any
other corporate capacity such as officers, and limits liability only for
breaches of fiduciary duties under the DGCL and not for violations of other
laws, such as the federal securities laws. As a result of the inclusion of such
provision, stockholders may be unable to recover monetary damages against
directors for actions taken by them that constitute negligence or gross
negligence or that are in violation of their fiduciary duties, although it may
be possible to obtain injunctive or other equitable relief with respect to such
actions. The inclusion of this provision in Digex's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefited Digex and its stockholders.

Item 15. Recent Sales of Unregistered Securities.

On January 12, 2000, Digex issued 50,000 shares of Series A Preferred Stock
and warrants to purchase 532,500 shares of Class A Common Stock, with an
exercise price of $57.00 per share, to Microsoft Corporation for an aggregate
consideration of $50.0 million. On January 12, 2000, Digex also issued 50,000
shares of Series A Preferred Stock and warrants to purchase 532,500 shares of
Class A Common Stock, with an exercise price of $57.00 per share, to CPQ
Holdings, Inc., a subsidiary of Compaq Computer Corporation, for an aggregate
consideration of $50.0 million of which $35.0 million was paid in cash and
$15.0 million was paid in the form of equipment credits granted to Digex. The
100,000 shares of Series A Preferred Stock are convertible into an aggregate of
approximately 1,462,000 shares of Class A Common Stock. Based on
representations by the purchasers the issuances were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act, as
a transaction by an issuer not involving a public offering.

II-1
<PAGE>

Item 16. Exhibits and Financial Data Schedules.

(a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
1.1 Proposed Form of Underwriting Agreement.***
2.1 Contribution Agreement by and between Digex and Business Internet,
Inc., dated as of April 30, 1999.*
2.2 Assignment and Assumption Agreement by and between Digex and Business
Internet, Inc., dated as of April 30, 1999.*
2.3 Trademark Assignment by and between Digex and Business Internet, Inc.,
dated as of April 30, 1999.*
2.4 Bill of Sale to the Contribution Agreement, dated as of April 30,
1999.*
3.1 Certificate of Incorporation of Digex, as amended to date.**
3.2 Bylaws of Digex.*
3.3 Certificate of Designation for the Series A Preferred Stock.**
4.1 See the Certificate of Incorporation of Digex, as amended to date,
filed as Exhibit 3.1.
4.2 Warrant Agreement, dated as of January 12, 2000, among Digex,
Microsoft Corporation and CPQ Holdings, Inc.**
4.3 Registration Rights Agreement, dated as of January 12, 2000, among
Digex, Microsoft Corporation and CPQ Holdings, Inc.**
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP.***
10.1 Intentionally Omitted.
10.2 Lease by and between Intermedia and Intel Corporation, dated as of
November 10, 1998.*
10.3 Lease by and between Intermedia and Ammendale Commerce Center Limited
Partnership, dated as of April 15, 1998.*
10.4 Lease by and between Intermedia and 1111 19th Street Associates, dated
as of July 23, 1998.*
10.5 Contract for Construction by and between Intermedia and R.W. Murray
Company, d/b/a The Murray Company, dated as of February 19, 1999.*
10.6 Contract for Construction by and between Intermedia and R.W. Murray
Company, d/b/a The Murray Company, dated as of January 4, 1999.*
10.7 Software License and Services Agreement by and between Digex and
Oracle Corporation, dated as of May 27, 1999.*
10.8 License Agreement by and between Digex and Microsoft Corporation.*
10.9 Consulting Letter Agreement by and between Digex, Intermedia and
Andersen Consulting LLP, dated as of April 1, 1999.*
10.10 Internet Transit Services Agreement (East Coast) between Digex and
Business Internet, Inc., dated as of April 30, 1999.(1)*
10.11 Internet Transit Services Agreement (West Coast) between Digex and
Business Internet, Inc., dated as of April 30, 1999.(1)*
10.12 Managed Firewall Services Agreement between Digex and Business
Internet, Inc., dated as of April 30, 1999.(1)*
10.13 Employment Letter dated June 29, 1999 between Digex and Mark K. Shull,
and amendments thereto.**
10.14 Employment Letter dated December 14, 1998 between Digex and Nancy G.
Faigen, and amendments thereto.**
10.15 Employment Letter dated July 9, 1999 between Digex and Rebecca Ward,
and amendments thereto.**
10.16 Employment Letter dated July 9, 1999 between Digex and Bryan T.
Gernet, and amendments thereto.**
10.17 Employment Letter dated December 15, 1999 between Digex and Timothy M.
Adams, and amendments thereto.**
10.18 Employment Letter dated September 11, 1996 between Digex and Robert B.
Patrick, and amendments thereto.**
10.19 Digex Long-Term Incentive Plan.**
10.20 Intermedia 1996 Long-Term Incentive Plan.**
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
10.21 General and Administrative Services Agreement between Digex and
Intermedia, dated as of April 30, 1999.*
10.22 Amendment No. 1 dated as of January 17, 2000, to General and
Administrative Services Agreement between Digex and Intermedia.***
10.23 Use of Proceeds Agreement between Digex and Intermedia, dated as of
June 2, 1999.
10.24 Use of Proceeds Agreement between Digex and Intermedia, dated as of
January 11, 2000.
10.25 Use of Proceeds Agreement between Digex and Intermedia, dated as of
January 24, 2000.***
10.26 Expense Summary and Indemnity Arrangement Agreement between Digex and
Intermedia, dated as of January 24, 2000.***
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney.**
</TABLE>
- --------
(1) Confidential treatment of certain provisions of this exhibit was requested
and granted by the Commission in connection with the filing of Digex's
registration statement on Form S-1 (Commission File #333-77105).
* Filed as an exhibit to Digex's registration statement on Form S-1
(Commission File #333-77105) and incorporated herein by reference.

** Previously filed.

*** To be filed by Amendment to this Registration Statement.

(b) Financial Statement Schedules.

The financial statements and financial statement schedules filed as part of
this Registration Statement are as follows:

1. Financial Statements. See Index to Financial Statements on page F-1 of
the Prospectus included in this Registration Statement.

2. Financial Statement Schedules.

Schedule II-Valuation and Qualifying Accounts

Item 17. Undertakings.

The undersigned Registrant hereby undertakes:

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

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

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

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, Digex has duly caused
this Amendment No. 1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Beltsville, State of Maryland, on this 24th day
of January, 2000.

Digex, Incorporated

/s/ Mark K. Shull
By: _________________________________
Mark K. Shull
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act, this Amendment No. 1 has
been signed by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive Officer:

/s/ Mark K. Shull Director, President and January 24, 2000
___________________________________________ Chief Executive Officer
Mark K. Shull

Principal Financial and Accounting
Officers:

/s/ Timothy M. Adams Chief Financial Officer January 24, 2000
___________________________________________
Timothy M. Adams

/s/ T. Scott Zimmerman Controller January 24, 2000
___________________________________________
T. Scott Zimmerman

Directors:

* Chairman of the Board January 24, 2000
___________________________________________
David C. Ruberg

* Director January 24, 2000
___________________________________________
John C. Baker

* Director January 24, 2000
___________________________________________
Philip A. Campbell

Director January 24, 2000
___________________________________________
Richard A. Jalkut

* Director January 24, 2000
___________________________________________
George F. Knapp

Director January 24, 2000
___________________________________________
Robert M. Manning

* Director January 24, 2000
___________________________________________
Jack E. Reich

</TABLE>

/s/ Mark K. Shull

*By: ___________________________

Mark K. Shull

as Attorney-In-Fact

II-4
<PAGE>

DIGEX, INCORPORATED

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Additions
-------------------
Balance at Charged to Charged Deductions Balance at
Beginning Costs and to Other -- End of
Description of Period Expenses Accounts Describe Period
----------- ---------- ---------- -------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
The Predecessor
For the year ended De-
cember 31, 1996:
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $ -- $ 233 $-- $ -- $ 233
===== ====== ==== ===== ======
Allowance for
deferred tax
assets............. -- 1,358 -- -- 1,358
===== ====== ==== ===== ======
For the period from Jan-
uary 1, 1997 to
July 6, 1997:
Deducted from asset
accounts:
Allowance for
doubtful accounts.. 233 352 -- 278(1) 307
===== ====== ==== ===== ======
Allowance for
deferred tax
assets............. 1,358 3,359 -- -- 4,717
===== ====== ==== ===== ======
The Company
For the period from July
7, 1997 to December 31,
1997:
Deducted from asset
accounts:
Allowance for
doubtful accounts.. 307 498 -- 436(1) 369
===== ====== ==== ===== ======
Allowance for
deferred tax
assets............. -- -- -- -- --
===== ====== ==== ===== ======
For the year ended De-
cember 31, 1998:
Deducted from asset
accounts:
Allowance for
doubtful accounts.. 369 1,491 -- 1,141(1) 719
===== ====== ==== ===== ======
Allowance for
deferred tax
assets............. -- 5,349 -- -- 5,349
===== ====== ==== ===== ======
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
------- ------- ----
<C> <S> <C>
1.1 Proposed Form of Underwriting Agreement.***
2.1 Contribution Agreement by and between Digex and Business
Internet, Inc., dated as of
April 30, 1999.*
2.2 Assignment and Assumption Agreement by and between Digex and
Business Internet, Inc., dated as of April 30, 1999.*
2.3 Trademark Assignment by and between Digex and Business
Internet, Inc., dated as of April 30, 1999.*
2.4 Bill of Sale to the Contribution Agreement, dated as of April
30, 1999.*
3.1 Certificate of Incorporation of Digex, as amended to date.**
3.2 Bylaws of Digex.*
3.3 Certificate of Designation for the Series A Preferred Stock.**
4.1 See the Certificate of Incorporation of Digex, as amended to
date, filed as Exhibit 3.1.
4.2 Warrant Agreement, dated as of January 12, 2000, among Digex,
Microsoft Corporation and CPQ Holdings, Inc.**
4.3 Registration Rights Agreement, dated as of January 12, 2000,
among Digex, Microsoft Corporation and CPQ Holdings, Inc.**
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP.***
10.1 Intentionally Omitted.
10.2 Lease by and between Intermedia and Intel Corporation, dated as
of November 10, 1998.*
10.3 Lease by and between Intermedia and Ammendale Commerce Center
Limited Partnership, dated as of April 15, 1998.*
10.4 Lease by and between Intermedia and 1111 19th Street
Associates, dated as of July 23, 1998.*
10.5 Contract for Construction by and between Intermedia and R.W.
Murray Company, d/b/a
The Murray Company, dated as of February 19, 1999.*
10.6 Contract for Construction by and between Intermedia and R.W.
Murray Company, d/b/a
The Murray Company, dated as of January 4, 1999.*
10.7 Software License and Services Agreement by and between Digex
and Oracle Corporation, dated as of May 27, 1999.*
10.8 License Agreement by and between Digex and Microsoft
Corporation.*
10.9 Consulting Letter Agreement by and between Digex, Intermedia
and Andersen Consulting LLP, dated as of April 1, 1999.*
10.10 Internet Transit Services Agreement (East Coast) between Digex
and Business Internet, Inc., dated as of April 30, 1999.(1)*
10.11 Internet Transit Services Agreement (West Coast) between Digex
and Business Internet, Inc., dated as of April 30, 1999.(1)*
10.12 Managed Firewall Services Agreement between Digex and Business
Internet, Inc., dated as of April 30, 1999.(1)*
10.13 Employment Letter dated June 29, 1999 between Digex and Mark K.
Shull, and amendments thereto.**
10.14 Employment Letter dated December 14, 1998 between Digex and
Nancy G. Faigen, and amendments thereto.**
10.15 Employment Letter dated July 9, 1999 between Digex and Rebecca
Ward, and amendments thereto.**
10.16 Employment Letter dated July 9, 1999 between Digex and Bryan T.
Gernet, and amendments thereto.**
10.17 Employment Letter dated December 15, 1999 between Digex and
Timothy M. Adams, and amendments thereto.**
</TABLE>
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
------- ------- ----
<C> <S> <C>
10.18 Employment Letter dated September 11, 1996 between Digex and
Robert B. Patrick, and amendments thereto.**
10.19 Digex Long-Term Incentive Plan.**
10.20 Intermedia 1996 Long-Term Incentive Plan.**
10.21 General and Administrative Services Agreement between Digex and
Intermedia, dated as of April 30, 1999.*
10.22 Amendment No. 1, dated as of January 17, 2000, to General and
Administrative Services Agreement between Digex and
Intermedia.***
10.23 Use of Proceeds Agreement between Digex and Intermedia, dated
as of June 2, 1999.
10.24 Use of Proceeds Agreement between Digex and Intermedia, dated
as of January 11, 2000.
10.25 Use of Proceeds Agreement between Digex and Intermedia, dated
as of January 24, 2000.***
10.26 Expense Summary and Indemnity Arrangement Agreement between
Digex and Intermedia, dated as of January 24, 2000.***
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in
Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney.**
</TABLE>
- --------
(1) Confidential treatment of certain provisions of this exhibit was requested
and granted by the Commission in connection with the filing of Digex's
registration statement on Form S-1 (Commission File #333-77105).
* Filed as an exhibit to Digex's registration statement on Form S-1
(Commission File #333-77105) and incorporated herein by reference.

** Previously filed.

*** To be filed by Amendment to this Registration Statement.

<PAGE>

Exhibit 10.23

Intermedia Communications Inc.
3625 Queen Palm Drive
Tampa, Florida 33619

June 2, 1999

Digex, Incorporated
One Digex Plaza
Beltsville, Maryland 20705

Ladies and Gentlemen:

In connection with the proposed initial public offering ("IPO") of Digex,
---
Incorporated ("Digex"), Intermedia Communications Inc. ("Intermedia") and Digex
----- ----------
wish to confirm their understanding as set forth in this letter.

Intermedia and Digex acknowledge that Digex will be required to use all of
the net proceeds of the IPO, if one is consummated, to purchase or construct
Telecommunications Related Assets (as defined in the 12-1/2% Senior Discount
Notes Indenture, dated May 14, 1996 (the "Indenture"), between Intermedia and
---------
SunTrust Bank. Central Florida, National Association, as trustee) within 270
days after the closing of the IPO. Intermedia and Digex agree that during such
270-day period:

1. Intermedia, in consultation with the management of Digex, shall, from time
to time, determine the amount of funds required by Digex to meet its
working capital needs or to fund its operating losses ("Unrestricted Uses")
-----------------
during the next calendar month. Within five days of determination of the
amount required by Digex for Unrestricted Uses, Intermedia shall provide to
Digex a list of Telecommunications Related Assets having a purchase price
at least equal to such amount to be purchased by Digex (the "Designated
----------
Assets") and shall designate, and, if necessary, make arrangements with (on
------
Digex's behalf), a vendor or vendors from which Digex should purchase the
Designated Assets. Digex shall purchase the Designated Assets from the
vendor(s) designated by Intermedia from time to time as reasonably required
to fund Unrestricted Uses, and Intermedia shall purchase from Digex, the
Designated Assets at Digex's cost thereof promptly following each purchase.

2. If on the 260th day after the closing of the IPO there remains an amount
(the "Remaining Amount") of the net proceeds of the IPO that has not been
----------------
used by Digex to purchase or construct Telecommunications Related Assets,
then

<PAGE>

Digex, Incorporated
Page 2

Intermedia shall provide to Digex a list of Designated Assets, and, if
necessary, make arrangements with (on Digex's behalf), a vendor or vendors
from which Digex should purchase the Designated Assets. The purchase price
of such Designated Assets from such designated vendor(s) shall at least
equal the Remaining Amount. Within five days after its receipt of such
notice from Intermedia, Digex shall purchase the Designated Assets from the
vendor(s) designated by Intermedia. If and to the extent that the purchase
price of such Designated Assets exceeds the Remaining Amount, Intermedia
shall advance such difference to Digex prior to such purchase. Promptly
following any such purchase, Digex shall sell to Intermedia, and Intermedia
shall purchase from Digex, the Designated Assets at Digex's cost thereof.

3. Intermedia represents and warrants to Digex that Digex's use for
Unrestricted Uses of a portion of the amounts received by it from
Intermedia designated by Intermedia as unrestricted funds ("Unrestricted
------------
Portion") in any purchase and sale transaction pursuant to paragraphs 1 or
-------
2 will not violate, or result in a default by Intermedia under, the
provisions of the Indenture. The amount of the Unrestricted Portion shall
be determined based on a reasonable projection of Digex's need for funds
for Unrestricted Uses during the period commencing on the date of such
purchase and sale and ending on the first anniversary of the closing of the
IPO.

4. Digex represents, warrants and covenants to Intermedia that it shall use
the net proceeds of the IPO only to purchase or construct
Telecommunications Related Assets and as provided in this letter agreement.

5. Each of Digex and Intermedia agrees to cooperate with the other, and to do,
execute, acknowledge and deliver such further acts, instruments and
assurances as shall be necessary or desirable to carry out the provisions,
and the intents and purposes of this letter agreement. Notwithstanding any
of the procedures set forth in this letter agreement, with the consent of
both parties, Intermedia may advance to Digex on a daily basis Digex's cash
requirements for Unrestricted Uses and purchases of Telecommunications
Related Assets. In such circumstances, at the end of every calendar month,
Intermedia shall prepare and provide to Digex a statement of reconciliation
of all advances and expenditures made by Intermedia to Digex or on Digex
behalf during the month-ended, and Digex shall make a corresponding
transfer of funds to Intermedia.
<PAGE>

Digex, Incorporated
Page 3

Please confirm your understanding and acceptance of the foregoing by
signing in the space provided below.

Very truly yours,

INTERMEDIA COMMUNICATIONS INC.

By: /s/ RAYMOND L. LAWLESS
------------------------
Name: Raymond L. Lawless
Title: Vice President of Finance and Treasurer

Agreed and Accepted
This 2nd day of June, 1999

DIGEX, INCORPORATED

By: /s/ NANCY G. FAIGEN
--------------------
Name: Nancy G. Faigen
Title: Chief Executive Officer

<PAGE>

Exhibit 10.24

Intermedia Communications Inc.
3625 Queen Palm Drive
Tampa, Florida 33619

January 11, 2000

Digex, Incorporated
One Digex Plaza
Beltsville, Maryland 20705

Ladies and Gentlemen:

In connection with the proposed issuance and sale by Digex, Incorporated

("Digex") of Series A Preferred Stock and warrants to purchase Class A Common
-------
Stock (the "Transaction") to Microsoft Corporation ("Microsoft") and CPQ
----------- ---------
Holdings, Inc. ("Compaq"), Intermedia Communications Inc. ("Intermedia") and
------ ----------
Digex wish to confirm their understanding as set forth in this letter.

Intermedia and Digex acknowledge that Digex will be required to use all of
the cash proceeds of the Transaction (the "Proceeds") to purchase or construct
Telecommunications Related Assets (as defined in the 12-1/2% Senior Discount
Notes Indenture, dated May 14, 1996 (the "Indenture"), between Intermedia and
---------
SunTrust Bank. Central Florida, National Association, as trustee) within 270
days after the closing of the Transaction. Intermedia and Digex agree that
during such 270-day period:

1. Intermedia, in consultation with the management of Digex, shall, from time
to time, determine the amount of funds required by Digex other than to
purchase or construct Telecommunications Related Assets, including, without
limitation, in connection with the Alliance Agreements between Digex and
each of Microsoft and Compaq Computer Corporation ("Unrestricted Uses")
-----------------
during the next calendar month. Within five days of determination of the
amount required by Digex for Unrestricted Uses, Intermedia shall provide to
Digex a list of Telecommunications Related Assets having a purchase price
at least equal to such amount to be purchased by Digex (the "Designated
----------
Assets") and shall designate, and, if necessary, make arrangements with (on
------
Digex's behalf), a vendor or vendors from which Digex should purchase the
Designated Assets. Digex shall purchase the Designated Assets from the
vendor(s) designated by Intermedia from time to time as reasonably required
to fund Unrestricted Uses, and Intermedia shall purchase from Digex, the
Designated Assets at Digex's cost thereof promptly following each purchase.
<PAGE>

Digex, Incorporated
Page 2

2. If on the 260th day after the closing of the Transaction there remains an
amount (the "Remaining Amount") of the Proceeds that has not been used by
----------------
Digex to purchase or construct Telecommunications Related Assets, then
Intermedia shall provide to Digex a list of Designated Assets, and, if
necessary, make arrangements with (on Digex's behalf), a vendor or vendors
from which Digex should purchase the Designated Assets. The purchase price
of such Designated Assets from such designated vendor(s) shall at least
equal the Remaining Amount. Within five days after its receipt of such
notice from Intermedia, Digex shall purchase the Designated Assets from the
vendor(s) designated by Intermedia. If and to the extent that the purchase
price of such Designated Assets exceeds the Remaining Amount, Intermedia
shall advance such difference to Digex prior to such purchase. Promptly
following any such purchase, Digex shall sell to Intermedia, and Intermedia
shall purchase from Digex, the Designated Assets at Digex's cost thereof.

4. Digex represents, warrants and covenants to Intermedia that it shall use
the Proceeds only to purchase or construct Telecommunications Related
Assets and as provided in this letter agreement.

Digex, Incorporated
Page 3

Please confirm your understanding and acceptance of the foregoing by
signing in the space provided below.

Very truly yours,

INTERMEDIA COMMUNICATIONS INC.

By: /s/ DAVID C. RUBERG
-------------------
Name: David C. Ruberg
Title: President and Chief Executive Officer

Agreed and Accepted
This 11th day of January, 2000

DIGEX, INCORPORATED

By: /s/ MARK K. SHULL
------------------
Name: Mark K. Shull
Title: President and Chief Executive Officer

<PAGE>

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Summary
Financial Data", "Selected Financial Data", and "Experts" and to the use of our
reports dated April 23, 1999, in the Registration Statement (Form S-1) and
related Prospectus of Digex, Incorporated for the registration of 10,000,000
shares of its Class A common stock.

/s/ Ernst & Young LLP
----------------------------------

Tampa, Florida

January 24, 2000