<PAGE>

================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   Form 10-Q

           [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

              For The Quarterly Period Ended December 31, 2000

                                      OR

           [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                For the transition period from ______ to ______

                       Commission File Number: 000-26283

                             DIGITAL ISLAND, INC.
            (Exact name of Registrant as specified in its charter)

            Delaware                                      68-0322824
(State or other jurisdiction of                        (I.R.S. Employer
incorporation of organization)                        Identification No.)

    45 Fremont Street, 12th Floor                            94105
     San Francisco, California                             (Zip Code)
(Address of principal executive offices)

      Registrant's telephone number, including area code: (415) 738-4100

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.

Yes [ X ] No [  ]

As of December 31, 2000, there were 80,227,461 shares of the Registrant's Common
Stock outstanding, par value $0.001.

===============================================================================

<PAGE>

                             DIGITAL ISLAND, INC.

                          Form 10-Q Quarterly Report
                    For the Quarter Ended December 31, 2000

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                           Number
                                                                                                       ------------
PART I.     Financial Information
<S>         <C>                                                                                          <C>
Item 1      Financial Statements.......................................................................           3
            Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 2000
            (unaudited)................................................................................           3

            Condensed Consolidated Statements of Operations for the three months ended December 31,
            1999 and 2000 (unaudited)..................................................................           4

            Condensed Consolidated Statements of Cash Flows for the three months ended December 31,
            1999 and 2000 (unaudited)..................................................................           5

            Notes to Condensed Consolidated Financial Statements (unaudited)...........................           6

Item 2      Management's Discussion and Analysis of Financial Condition and Results of Operations......           9

Item 3      Quantitative and Qualitative Disclosures About Market Risk.................................          12

PART II.    Other Information

Item 1      Legal Proceedings..........................................................................          24

Item 2      Changes in Securities and Use of Proceeds..................................................          24

Item 3      Defaults Upon Senior Securities............................................................          24

Item 4      Submission of Matters to a Vote of Security Holders........................................          24

Item 5      Other Information..........................................................................          25

Item 6      Exhibits and Reports on Form 8-K...........................................................          25

Signatures.............................................................................................          25
</TABLE>

                                       2
<PAGE>

                         PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                     DIGITAL ISLAND, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                               September 30,      December 31,
                                                                                                   2000              2000
                                                                                             -----------------------------------
                                                                                                                  (Unaudited)
<S>                                                                                            <C>             <C>
                                    ASSETS
Current assets:
 Cash and cash equivalents...................................................................     $  176,929          $  177,862
 Investments.................................................................................        289,458             208,438
 Accounts receivable, net of allowances of $2,329 and $3,863, respectively.....................       21,298              31,395
 Inventory...................................................................................            554                 225
 Restricted cash.............................................................................         10,838              13,734
 Prepaid expenses and other..................................................................         22,785              30,404
                                                                                                  ----------          ----------
  Total current assets.......................................................................        521,862             462,058
Investments..................................................................................        124,213              57,651
Property and equipment, net..................................................................        166,766             209,862
Goodwill, net................................................................................      1,119,174           1,058,399
Intangible assets, net.......................................................................        170,080             161,553
Unamortized convertible note issuance costs..................................................          9,695               9,146
Other assets.................................................................................          4,336               5,043
                                                                                                  ----------          ----------
   Total assets..............................................................................     $2,116,126          $1,963,712
                                                                                                  ==========          ==========
                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable............................................................................     $   32,325          $   13,047
 Accrued liabilities.........................................................................         21,852              17,759
 Capital lease obligations...................................................................         10,159              13,780
 Cash overdraft..............................................................................          8,922               2,835
 Interest payable............................................................................          2,588               7,763
 Deferred revenue............................................................................          2,605               2,732
                                                                                                  ----------          ----------
  Total current liabilities..................................................................         78,451              57,916
Convertible notes............................................................................        345,000             345,000
Capital lease obligations, less current portion..............................................         10,077              13,852
Other liabilities............................................................................            613               2,112
                                                                                                  ----------          ----------
  Total liabilities..........................................................................        434,141             418,880
                                                                                                  ----------          ----------
Commitments and contingencies

Stockholders' equity:
 Preferred stock, $0.001 par value:
  Authorized: 10,000,000 shares; no shares issued and outstanding............................             --                  --
 Common stock, $0.001 par value:
  Authorized: 100,000,000 shares in 1999 and 2000; issued and outstanding:
   79,591,467 shares at September 30, 2000 and 80,227,461 shares                                          80                  80
   at December 31, 2000 (unaudited)..........................................................
 Additional paid-in capital..................................................................      2,094,566           2,096,816
 Treasury stock..............................................................................             --                (116)
 Deferred compensation.......................................................................        (13,310)            (10,701)
 Stockholder note receivable.................................................................         (2,264)             (1,659)
 Common stock warrants.......................................................................          5,850               5,850
 Accumulated deficit.........................................................................       (402,937)           (545,438)
                                                                                                  ----------          ----------
  Total stockholders' equity.................................................................      1,681,985           1,544,832
                                                                                                  ----------          ----------
   Total liabilities and stockholders' equity................................................     $2,116,126          $1,963,712
                                                                                                  ==========          ==========
</TABLE>


The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       3
<PAGE>

                     DIGITAL ISLAND, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                          Three Months Ended December 31,
                                                                                          -------------------------------
                                                                                             1999               2000
                                                                                          -----------        ------------
                                                                                          (Unaudited)        (Unaudited)
<S>                                                                                 <C>                 <C>
Revenue:
 Internet infrastructure services revenue.........................................        $     7,353        $    27,259
 Hosting equipment revenue........................................................                247              4,381
                                                                                          -----------        -----------
  Total revenue...................................................................              7,600             31,640
Cost of revenue:
 Cost of internet infrastructure services revenue (including non-cash
  compensation expense of $355 and $454, respectively)............................             15,992             43,344
 Cost of hosting equipment revenue................................................                231              3,493
                                                                                          -----------        -----------
  Total cost of revenue...........................................................             16,223             46,837
                                                                                          -----------        -----------
  Gross profit (loss).............................................................             (8,623)           (15,197)
Operating expenses:
 Sales and marketing (including non-cash compensation expense
  of $224 and $882, respectively).................................................              6,539             18,449
 Product development (including non-cash compensation expense
  of $86 and $435, respectively)..................................................              2,629              9,955
 General and administrative (including non-cash compensation
  expense of $90 and $869, respectively)..........................................              3,056             13,577
 Depreciation.....................................................................              2,241             14,832
 Amortization of intangible assets................................................              1,584             73,175
                                                                                          -----------        -----------
  Total operating expenses........................................................             16,049            129,988
                                                                                          -----------        -----------
  Loss from operations............................................................            (24,672)          (145,185)
                                                                                          -----------        -----------
Interest income...................................................................                917              8,381
Interest expense..................................................................               (220)            (5,836)
Other income, net.................................................................                 --                490
                                                                                          -----------        -----------
  Loss before income taxes........................................................            (23,975)          (142,150)
Provision for income taxes........................................................                  5                351
                                                                                          -----------        -----------
  Net loss........................................................................        $   (23,980)       $  (142,501)
                                                                                          ===========        ===========
Basic and diluted net loss per share..............................................             $(0.65)            $(1.82)
                                                                                          ===========        ===========
Weighted average shares outstanding
                                                                                           36,676,137         78,135,369
 Used in per share calculation....................................................        ===========        ===========

</TABLE>


The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       4
<PAGE>

                     DIGITAL ISLAND, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                            Three Months Ended December 31,
                                                                                            -------------------------------
                                                                                               1999                 2000
                                                                                            ----------           ----------
                                                                                            (Unaudited)          (Unaudited)
<S>                                                                                 <C>                  <C>
Cash flows from operating activities:
 Net loss.........................................................................            $(23,980)          $(142,501)
 Adjustments to reconcile net loss to net cash used in operating
  activities:
   Depreciation and amortization..................................................               3,817              88,586
   Stock compensation expense.....................................................                 755               2,640
   Amortization of discounts on investments.......................................                (338)             (2,398)
   Provision for bad debt.........................................................                  --               1,687
   Gain on disposal of property and equipment.....................................                  --                (443)
  Change in operating assets and liabilities, net of business acquisition.........              (3,067)            (37,115)
                                                                                            ----------          ----------
    Net cash used in operating activities.........................................             (22,813)            (89,544)
                                                                                            ----------          ----------
Cash flows from investing activities:
 Purchases of property and equipment..............................................             (16,262)            (44,894)
 Proceeds from sale of property and equipment.....................................                  --               3,394
 Purchases of investments.........................................................              (2,289)            (65,921)
 Proceeds from maturities of investments..........................................              15,395             213,555
 Increase in restricted cash......................................................                  --              (2,896)
 Business acquisitions, net of cash acquired......................................               4,312                  --
                                                                                            ----------          ----------
    Net cash provided by investing activities.....................................               1,156             103,238
                                                                                            ----------          ----------
Cash flows from financing activities:
 Repayment of stockholder notes...................................................                  90                 468
 Proceeds from issuance of common stock, net......................................                  63                 250
 Repurchase of common stock.......................................................                  --                (116)
 Repayments of bank borrowings....................................................                (143)                 --
 Repayments of capital lease obligations..........................................                (429)             (6,676)
 Issuance of notes to officers....................................................                  --                (600)
 Decrease in cash overdraft.......................................................              (3,058)             (6,087)
                                                                                            ----------          ----------
    Net cash used in financing activities.........................................              (3,477)            (12,761)
                                                                                            ----------          ----------
     Net increase (decrease)  in cash and cash equivalents........................             (25,134)                933
Cash and cash equivalents, beginning of period....................................              43,315             176,929
                                                                                            ----------          ----------
Cash and cash equivalents, end of period..........................................            $ 18,181           $ 177,862
                                                                                            ==========          ==========

Supplemental schedule of noncash investing and financing activities:
 Fixed asset acquired in exchange for stock.......................................            $  5,965           $   2,000
                                                                                            ==========          ==========
 Acquisition of subsidiaries in exchange for stock................................            $976,478   $              --
                                                                                            ==========          ==========
 Capital lease obligations for equipment..........................................            $  1,112           $  14,072
                                                                                            ==========          ==========
</TABLE>


The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       5
<PAGE>

                     DIGITAL ISLAND, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.   Basis of Presentation

     The accompanying consolidated financial statements of the Company include
the accounts of Digital Island, Inc. and its wholly-owned subsidiaries,
Sandpiper Networks, Inc., Live On Line, Inc., SoftAware, Inc., Digital Island
B.V., Digital Island Ltd., Digital Island (Europe) SA, Digital Island (Hong
Kong), Ltd., Digital Island (Japan) KK, Digital Island GmbH, Digital Island
France SAS, Digital Island (Sweden) AB and Digital Island (Belgium) SPRL
(collectively, Digital Island or the Company). All intercompany accounts and
transactions are eliminated in the accompanying condensed consolidated financial
statements.

     The interim financial data as of December 31, 2000 and for the three months
ended December 31, 2000 and 1999 is unaudited; however in the opinion of
management, the condensed consolidated financial statements reflect all
adjustments, which are normal and recurring, that are necessary for a fair
statement of the results for the periods shown. The results of operations for
such periods are not necessarily indicative of the results expected for the full
fiscal year or for any future period.

     Certain reclassifications have been made to the prior year balances in
order to conform to the current year presentation.

     Since inception, the Company has incurred net losses and experienced
negative cash flow from operations.  The Company's ability to achieve
profitability and positive cash flow from operations will be dependent upon its
ability to grow its revenues substantially and achieve other operating
efficiencies.  The execution of the Company's business plan will require
substantial additional capital to fund its operating losses, working capital
leases, sales and marketing expenses, lease payments and capital expenditures.
The Company intends to consider its future financing alternatives, which may
include the incurrence of indebtedness, additional public or private equity
offerings or an equity investment by a strategic partner.

2.   Purchase of Technology

     In November 1999, the Company agreed to purchase certain patented
technology from SRI International (SRI). Under the terms of the technology
purchase agreement, the Company acquired the technology in exchange for $6.0
million of common stock, which was issued in November 1999. In addition, the
Company agreed to issue $4.0 million of common stock in exchange for consulting
services to incorporate and integrate the purchased technology from SRI of which
$2.0 million was issued in August 2000. The value of stock issued under the
agreement is recorded as network equipment and technology. In November 2000, the
Company issued 338,627 shares of common stock with a value of $2.0 million to
SRI International pursuant to the terms of these agreements. The issuance of
such shares to SRI is an additional partial payment for consulting services
related to the acquired Internet technology and is recorded as network equipment
and technology.

3.   Related Party Transactions

     In November 2000, the Company loaned an executive officer of the Company
$600,000 through the execution of two promissory notes. The first promissory
note is for $150,000 and accrues interest at 8% per annum. The first principal
payment of $100,000 is due upon the sale of the officer's previous residence.
The final principal payment, together with accrued interest is due in November
2001. The second promissory note is for $450,000 and accrues interest at 8% per
annum. Principal payments commence in November 2002 on a monthly basis until the
final payment date in November 2004. The proceeds of the loan are collateralized
by the officer's principal residence.

     In December 2000, the Company forgave $109,333 of a loan made to an
executive officer on June 14, 1999. The proceeds of the original promissory note
were intended to finance the tax liability associated with the exercise of stock
options. The remaining balance of the June 14, 1999 promissory note from the
officer was $18,667 as of December 31, 2000.

4.   Indefeasible Right of Use Agreements

     The Company has recently begun a program of obtaining bandwidth under
indefeasible-right-of-use (IRU) agreements. Under the terms of the agreements,
the Company will have the authority to utilize certain capacity for a defined
number of years ranging from 15-25 years in duration. A one-time payment, which
will be amortized to expense over the respective terms of the Agreement, is made
at the beginning of the agreement in exchange for the right of usage.

5.  Acquisitions

     On December 28, 1999, the Company merged with Sandpiper Networks, Inc.
(Sandpiper). The acquisition price included approximately 24.6 million shares of
the Company's common stock with a fair market value of $857.0 million, 3.1
million vested and unvested stock options and warrants with a fair market value
of $96.6 million and direct transaction costs of $14.0 million. The transaction
was accounted for as a purchase and resulted in intangible assets of $2.0
million of assembled workforce. $121.1 million of core technology and $850.8
million of goodwill, which are being amortized on a straight-line basis over a
period of 5 years.

     On January 18, 2000, the Company acquired Live On Line, Inc. (Live On
Line).  The acquisition price included 799,989 shares of the Company's common
stock with a fair market value of $65.9 million and $5.2 million in cash. The
transaction was accounted for as a purchase and resulted in intangible assets of
$500,000 of assembled workforce, $3.1 million of core technology and $67.4
million of goodwill, which are being amortized on a straight-line basis over a
period of 5 years. Had the acquisition occurred at the beginning of the fiscal
year in which the acquisition was completed, or the beginning of the immediately
preceding year, combined pro forma revenue and net income would not have been
materially different from that currently being reported.

     On September 15, 2000, the Company acquired SoftAware, Inc. (SoftAware).
The acquisition price included 9,301,892 shares of the Company's common stock
with a fair market value of $390.5 million, 73,108 vested and unvested stock
options with a fair market value of $3.0 million, $20.0 million in cash and
estimated direct transaction costs of approximately $5.2 million. The fair value
of the common stock options was estimated using the value of the underlying
common stock of $41.98, risk-free interest rate of 5.8%, expected life of 4.5
years, expected dividend rate of 0% and volatility rate of 205%. The transaction
was accounted for as a purchase and resulted in intangible assets of $44.0
million of customer relationship, $10.3 million of software and technology, $2.1
million of assembled workforce, $3.4 million of trademarks and tradenames,
$343.2 million of goodwill and $11.9 million of deferred compensation. The
acquired intangible assets will be amortized over their estimated useful lives
of five years. Deferred compensation will be amortized over the remaining
vesting terms of the related unvested common shares and unvested options using
the amortization method under FIN 28.

     The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of operations of the Company,
Sandpiper, and SoftAware as if the Sandpiper and SoftAware acquisitions had
occurred as of the beginning of the quarter presented October 1, 1999. This pro
forma financial information is presented for informational purposes only and may
not be indicative of what the actual consolidated results of operations would
have been if the acquisitions had been effective as of the beginning of the
quarter presented October 1, 1999. Pro forma adjustments were applied to the
respective historical financial statements to account for the Sandpiper and
SoftAware acquisitions as purchases. Under purchase accounting, the purchase
price is allocated to acquired assets and liabilities based on their estimated
fair values at the date of acquisition, and any excess is allocated to goodwill.


Pro Forma December 31, 1999
(in thousands, except per share amounts)                            1999
------------------------------------------------------------------------------
Revenues                                                             $  10,199
Net loss from operations                                             $(151,301)
Net loss                                                             $(150,509)
Basic and diluted loss per share                                     $   (2.26)


6.         Property and Equipment:

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

<TABLE>
<CAPTION>
<S>                                                                                          <C>                 <C>
                                                                                       September 30, 2000     December 31, 2000
                                                                                       ------------------     -----------------
Network equipment and technology.................................................       $       66,180        $     82,954
Communications equipment.........................................................                2,826               2,898
Computer equipment and software..................................................               40,265              40,569
Furniture, fixtures, and leasehold improvements..................................               59,262              86,512
Equipment and fixtures under capital leases......................................               29,916              43,437
                                                                                       ------------------     -----------------
                                                                                               198,449             256,100
Less accumulated depreciation and amortization...................................               31,683              46,238
                                                                                       ------------------     -----------------
Total property and equipment, net................................................       $      166,766         $   209,862
                                                                                       ==================     =================
</TABLE>



                                       6
<PAGE>

                     DIGITAL ISLAND, INC. AND SUBSIDIARIES

  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

7.   Contingencies and Commitments-Litigation

     On September 13, 2000, Akamai Technologies, Inc. (Akamai) and the
Massachusetts Institute of Technology (MIT) filed a Complaint in the U.S.
District Court of Massachusetts (No. 00ev1181RWZ) alleging that the Company has
and continues to infringe U.S. Patent No. 6,108,703 (the "703 Patent"). Based on
a preliminary investigation, the Company believes that it has meritorious
defenses to Akamai and MIT's claim and intends to vigorously defend itself in
any litigation that arises from this claim. In addition, because the Company
believes that it was the first to invent the technologies claimed in the 703
Patent, it has instituted proceedings with the U.S. Patent and Trademark Office
to confirm its ownership of any such inventions.

     On September 20, 2000, Akamai filed a Motion in the U.S. District Court of
Massachusetts requesting Leave to File A Second Amended Complaint in which it
alleges that the Company infringes U.S. Patent No. 6,003,030 (the "030 Patent"),
which Motion was granted by the Court. Based on a preliminary investigation, the
Company believes that it has meritorious defenses to Akamai's claim and intends
to vigorously defend itself in any litigation that arises from this claim. On
October 18, 2000 Akamai and MIT filed a motion in the U.S. District Court of
Massachusetts requesting that the Company be enjoined from offering for sale its
Footprint 2.0 content delivery service. A hearing of the motion has been set for
February 14, 2001. The Company believes that it has meritorious defenses to
Akamai and MIT's request for preliminary injunctive relief and intends to
vigorously oppose Akamai and MIT's request.

8.   Calculation of Net Loss Per Share

     Shares used in computing basic and diluted net loss per share are based on
the weighted average shares outstanding in each period. The effect of
outstanding stock options and warrants is excluded from the calculation of
diluted net loss per share as their inclusion would be antidilutive.

     The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) calculation (in thousands, except for
share and per share amounts):

<TABLE>
<CAPTION>
                                                                                                   Three Months Ended
                                                                                                      December 31,
                                                                                               --------------------------
                                                                                                 1999             2000
                                                                                               -----------   ------------
                                                                                               (Unaudited)   (Unaudited)
<S>                                                                                            <C>           <C>
Numerator--Basic and Diluted EPS
 Net Loss..........................................................................            $   (23,980)  $   (142,501)
                                                                                               ===========   ============
Denominator--Basic and Diluted EPS
 Weighted average Common Stock outstanding.........................................             36,829,358     79,933,679
 Common Stock subject to repurchase................................................               (153,221)   (1,798,310 )
                                                                                               -----------   ------------
 Total weighted average Common Stock outstanding...................................             36,676,137     78,135,369
                                                                                               ===========   ============
Basic and diluted loss per share...................................................             $    (0.65)  $     (1.82)
                                                                                               ===========   ============
</TABLE>

     Diluted net loss per share for the three months ended December 31, 1999 and
2000 does not include the effect of 7,594,453 and 13,863,370 stock options,
respectively, or 0 and 120,393 common stock warrants, respectively, as the
effect of their inclusion is antidilutive during each period.

9.   Recently Issued Accounting Pronouncements

     In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 is effective no later than the quarter ended September 30, 2001.
The Company does not expect that the adoption of SAB 101 will have a material
effect on its consolidated results of operations or financial position.

     In September 2000, the FASB issued SFAS No. 140 (SFAS 140), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires entities that have
securitized financial assets to provide specific disclosures. SFAS 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The Company is evaluating the
impact, if any, SFAS 140 may have on its consolidated financial statements.

                                       7
<PAGE>

                     DIGITAL ISLAND, INC. AND SUBSIDIARIES

  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

10.  Subsequent Event

     In January 2001, the Company issued 103,081 shares of common stock with a
value of $490,000 to SRI International pursuant to the terms of the technology
acquisition agreement previously executed in November 1999 (see Note 2). This
issuance of such shares to SRI is an additional partial payment for consulting
services related to the acquired Internet technology.

                                       8
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements

     THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF DIGITAL ISLAND CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. DIGITAL ISLAND'S ACTUAL
RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS QUARTERLY REPORT AND IN OTHER DOCUMENTS FILED BY DIGITAL
ISLAND WITH THE SECURITIES AND EXCHANGE COMMISSION.

Overview

     We provide a global e-Business delivery network and suite of services for
enterprises that use the Internet to deploy critical business applications and
conduct e-commerce worldwide. We offer a managed Internet infrastructure that
integrates content delivery, hosting, intelligent networking and applications
services. We target global enterprises that increasingly rely on the Internet to
conduct business, but are constrained by the unreliability, slow performance and
limited range of functions of the public Internet. Our customers use our
services and proprietary technology to facilitate the deployment of a wide
variety of electronic commerce applications, including online marketing and
sales, customer service, fulfillment, software, document and multimedia
distribution and online training. As of December 31, 2000, we had contracts with
959 customers, of which 871 were deployed, including AOL, Autodesk, Canon,
Charles Schwab & Co., Cisco Systems, CNBC.com, E*TRADE, Blue Mountain, FT.com,
Intuit, Microsoft, National Semiconductor, UBS Warburg, Reuters, Hewlett-
Packard, Glaxo Wellcome, Universal Music Group, and BMG Entertainment.

     Since inception, we have incurred net losses and experienced negative cash
flow from operations. We expect to continue to operate at a net loss and to
experience negative cash flows at least through the year 2001. Our ability to
achieve profitability and positive cash flow from operations will be dependent
upon our ability to grow our revenues substantially and achieve other operating
efficiencies.

      We derive our revenues from a suite of services, which include content
delivery, hosting, intelligent networking and application services. We currently
sell our services under contracts with terms of one or more years. Revenues are
comprised primarily of bandwidth charges, equipment co-location and storage
fees, professional services, streaming events, equipment sales and one-time fees
for installation if required to provide services. Bandwidth charges are billed
and recognized monthly based on customer usage. Professional services and fees
for streaming events are billed and recognized as the related services are
performed. Equipment sales are recognized when the equipment is delivered. All
other revenues are based on flat-rate monthly charges and recognized as the
related services are performed. Installation fees are generally paid in advance,
and are recognized ratably over the term of the related contract, generally one
to three years.

     Cost of revenues consists primarily of the cost of contracting for lines
from telecommunication service providers worldwide and the cost of our network
and data center operations. We lease lines under contracts of one year or more.
The leasing of transoceanic lines comprises the largest component of our
telecommunications expense, with additional costs arising from leasing local
circuits between our data centers and points of presence in the United States
and international markets. In the future, we expect to increase the size and
number of circuits leased based on increases in network volume and geographic
expansion. The cost of our network and data center operations is comprised
primarily of data centers, equipment  maintenance, personnel and related costs
associated with the management and maintenance of the network.

     We have recently begun a program of obtaining bandwidth under indefeasible-
right-of-use (IRU) agreements, which convert some of our operating leases to
capital leases. We expect this to significantly increase the gross profit
margins in our Intelligent Networking business.

     The following discussion comparing our historical results of operations
does not reflect the results of operations of Live On Line or SoftAware for the
three months ended December 31, 1999 and only reflects the results of three days
of operations of Sandpiper, which we acquired on December 28, 1999. Live On Line
was acquired on January 18, 2000 and SoftAware was acquired on September 15,
2000.

Results of Operations

Three Months Ended December 31, 2000 and 1999

                                       9
<PAGE>

     Revenue. Revenue increased to $31.6 million for the three months ended
December 31, 2000 from $7.6 million for the three months ended December 31,
1999. The increase in revenue was primarily due to increased usage per customer
and an increase in the number of deployed customers to 871 from 132, of which a
significant portion was acquired in connection with the SoftAware acquisition,
which occurred on September 15, 2000.

     Cost of Revenue. Cost of revenue increased to $46.8 million for the three
months ended December 31, 2000 from $16.2 million for the three months ended
December 31, 1999. The increase in cost of revenue was due to $15.0 million of
spending for additional network capacity, $7.3 million in recruitment and
compensation costs relating to the addition of network and data center
operations personnel and $8.3 million in additional costs associated with
expansion of existing data center facilities, the deployment of the San Jose and
Japan data center facilities and equipment-related costs.

     Sales and Marketing. Sales and marketing expenses increased to $18.4
million for the three months ended December 31, 2000 from $6.5 million for the
three months ended December 31, 1999. This increase was due to $9.0 million of
growth in personnel and related costs and $2.9 million of program expenses.

     Product Development. Product development expenses increased to $10.0
million for the three months ended December 31, 2000 from $2.6 million for the
three months ended December 31, 1999. This increase was due to $6.5 million in
growth of personnel and related costs and $0.9 million of costs arising from new
product initiatives, developing intellectual property in content aware routing
such as Traceware and Vistaware and developing new technologies to support our
Content Delivery and Managed Hosting service offerings.

     General and Administrative. General and administrative expenses increased
to $13.6 million for the three months ended December 31, 2000 from $3.1 million
for the three months ended December 31, 1999. This increase was due to $5.7
million of growth in personnel and related expenses and $4.8 million office
facility expenses, legal and accounting fees and other administrative related
expenses.

     Depreciation. Depreciation expense increased to $14.8 million for the three
months ended December 31, 2000 from $2.2 million for the three months ended
December 31, 1999. This increase was entirely attributed to a significant
increase in property and equipment balances.

     Amortization of intangible assets. Amortization expense increased to $73.2
million for the three months ended December 31, 2000 from $1.6 million for the
three months ended December 31, 1999. This increase was primarily due to
amortization of the goodwill and intangibles related to the acquisitions of
Sandpiper, Live On Line and SoftAware which were completed during the year ended
September 30, 2000.

     Interest Income, Internet Expense and Other Income, Net. Interest income,
interest expense and other income, net, increased to $3.0 million for the three
months ended December 31, 2000 from $697,000 for the three months ended December
31, 1999. This increase was due to a higher average cash balance remaining
primarily from proceeds of the issuance of shares of our common stock in our
secondary stock offering and the issuance of convertible subordinated notes, and
was offset by accrued interest expense on the convertible notes.

Liquidity and Capital Resources

     From inception through our initial public offering on June 29, 1999, we
financed our operations primarily through private equity placements of $86.9
million dollars and borrowings under notes payable and capital leases from
financial institutions of $5.7 million. We raised $63.1 million in net proceeds
from our initial public offering. In February 2000, we raised $744.0 million in
net proceeds from our secondary offering of our common stock and issuance of
convertible subordinated notes. As of December 31, 2000, we had cash, cash
equivalents and marketable securities totaling $439.0 million.

     Net cash used in our operating activities for the three months ended
December 31, 2000 was $89.5 million. The net cash used by operations was
primarily due to working capital requirements and net losses, net of
depreciation and amortization. Net cash provided by investment activities was
$103.2 million for the three months ended December 31, 2000 and was comprised
primarily of proceeds from investments which matured of $213.5 million and
proceeds from the sale of equipment of $3.4 million, which were offset by
equipment purchases of $44.9 million, investment purchases of $65.9 million and
a $2.9 million increase in restricted cash. Net cash used in financing
activities was approximately $12.8 million and was related primarily to the
decrease in the cash overdraft balance of $6.1 million, repayments of capital
lease obligations of $6.7 million, loans made to an executive officer of
$600,000 and the repurchase of common stock of $116,000, offset by the repayment
of shareholder notes of $468,000 and proceeds from the issuance of common stock
of $250,000.

                                       10
<PAGE>

     Pursuant to the merger with Sandpiper, we assumed from Sandpiper a
promissory note with a financial institution in the amount of $84,000 at a
stated interest rate of 7% per annum, principal and interest due monthly for 36
months and collateralized by equipment. As of December 31, 2000, $32,000 remains
outstanding.

     In December 1999, Sun Microsystems agreed to provide $100 million of lease
financing, subject to certain milestones, for the acquisition of equipment. As
of December 31, 2000, $30 million of lease financing has been made available
under this agreement. Total borrowings under this lease line were $9.5 million
at December 31, 2000 and are collateralized by the equipment.

     In June 2000, Compaq Computer Corporation agreed to provide $50 million,
which may be increased to $80 million under certain circumstances, of lease
financing for the acquisition of equipment. We have not drawn any amounts under
the financing agreement.

     In addition, we have several other lease lines of credit. Total borrowings
under these other lease lines of credit were $18.1 million at December 31, 2000,
of which $379,000 and $179,000 were assumed pursuant to the mergers with
Sandpiper and SoftAware, respectively. All of these borrowings are
collateralized by the equipment.

     The execution of our business plan will require substantial additional
capital to fund our operating losses, working capital needs, sales and marketing
expenses, lease payments and capital expenditures. We intend to consider our
future financing alternatives, which may include the incurrence of indebtedness,
additional public or private equity offerings or an equity investment by a
strategic partner. Actual capital requirements may vary based upon the timing
and success of the expansion of our operations. Our capital requirements may
change based upon technological and competitive developments. In addition,
several factors may affect our capital requirements:

 .  demand for our services or our anticipated cash flow from operations being
   less than expected;

 .  our development plans or projections proving to be inaccurate;

 .  our engaging in acquisitions or other strategic transactions; or

 .  altering deployment of our network services or the schedule of our
   expansion plan.

     Other than the lease financing, we have no present commitments or
arrangements assuring us of any future equity or debt financing, and there can
be no assurance that any such equity or debt financing will be available to us
on favorable terms, or at all. If we do not obtain additional financing, we
believe that our existing cash resources will be adequate to continue expanding
operations on a reduced scale.

Recent Accounting Pronouncements

     In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 is effective no later than the quarter ended September 30, 2001.
We do not expect that the adoption of SAB 101 will have a material effect on our
consolidated results of operations or financial position.

     In September 2000, the FASB issued SFAS No. 140 (SFAS 140), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires entities that have
securitized financial assets to provide specific disclosures. SFAS 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. We are evaluating the impact, if
any, SFAS 140 may have on our consolidated financial statements.

                                       11
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We develop global network and related services and sell such services in
North America, Asia and Europe. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. As substantially all sales are currently
made in U.S. dollars, a strengthening of the dollar could make our services less
competitive in foreign markets. We do not use derivative instruments to hedge
our foreign exchange risks. Our interest income is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the nature of our investments,
we have concluded there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.

                  RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

     Set forth below and elsewhere in this Quarterly Report and in other
documents we file with the SEC are risks and uncertainties that could cause our
actual results to differ materially from the results contemplated by the forward
looking statement contained in this Quarterly Report.

                              Risks related to us

We have a short operating history.

     Our limited operating history makes it difficult for us to predict future
results of operations, and makes it difficult to evaluate us or our prospects.
We were incorporated in 1994, and began offering our e-Business delivery network
services in January 1997.

     We completed a merger with Sandpiper Networks, Inc. in December 1999, an
acquisition of Live on Line, Inc. in January 2000 and an acquisition of
SoftAware, Inc. in September 2000. Sandpiper commenced operations in December
1996 and introduced its service in September 1998. Live On Line commenced
operations and introduced its service in December 1995. SoftAware commenced
operations and introduced its service in January 1994. The limited operating
history of the combined company and the limited operating histories of Digital
Island, Sandpiper, Live On Line and SoftAware as individual entities may limit
your ability to evaluate our prospects and performance, due to:

 .  our unproven potential to generate profits;

 .  our limited historical financial data;

 .  our limited experience in operating as a combined entity; and

 .  our limited experience in addressing emerging trends that may affect our
   combined business.

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

 .  successfully market our content delivery solution;

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

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

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

We have incurred operating losses since our inception and expect continued
operating losses for the foreseeable future.

     The revenue and income potential of our business and market is unproven.
From inception, we have experienced operating losses, negative cash flows from
operations and net losses in each quarterly and annual period. For the three

                                       12
<PAGE>

months ended December 31, 2000, our operating loss, negative cash flow from
operations and net loss were $145.2 million, $89.5 million and $142.5 million,
respectively.

     Our operating expenses are largely based on anticipated revenue trends, and
a high percentage of our expenses are, and will continue to be, fixed in the
short term. In addition, we expect to continue to incur increasing expenses in
order to:

 .  expand sales and marketing activities through new programs and additional
   personnel;

 .  increase product development activities;

 .  continue to grow our network infrastructure to maintain and increase our
   ability to service new and existing customers;

 .  obtain access to additional bandwidth for the transport of increasing
   volumes of data over our network; and

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

     We will need to generate significantly higher revenues to achieve and
maintain profitability. Although we have experienced growth in revenues in
recent periods, this growth rate may not be indicative of future operating
results. We may never be able to achieve or sustain profitability.

Our quarterly results have varied significantly and we expect this to continue.

     We expect our revenues and operating results to vary significantly from
quarter to quarter due to a number of factors, many of which we cannot control.
These factors include the following:

 .  demand for and market acceptance of our products and services may decline
   or fail to increase enough to offset our costs;

 .  the introduction of new products and services or enhancements by us and our
   competitors may increase our costs or make our existing products or services
   obsolete;

 .  the prices we can charge our customers may decline due to price competition
   with our competitors;

 .  utilization of our global network may increase beyond our capacity and we
   may incur significant expenses to increase such capacity;

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

 .  the availability and cost of bandwidth may reduce our ability to increase
   bandwidth as necessary;

 .  the length of our sales cycle and timing of customer installations and
   expansion of our network infrastructure may vary from quarter to quarter;

 .  the mix of products and services we sell may change and the new mix may
   generate less revenue;

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

 .  bandwidth used by customers may fluctuate from quarter to quarter; and

 .  conditions specific to the Internet industry and other general economic
   factors may affect the prices we can charge or the expenses we incur.

     Because a relatively large portion of our expenses are fixed in the short-
term, particularly with respect to telecommunications capacity, depreciation,
real estate and interest expenses and personnel, our results of operations are
particularly sensitive to fluctuations in revenues. Due to the foregoing, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and that such comparisons cannot be relied upon as
indicators of future performance. It is possible that, in some future quarters,
our operating results may not meet the expectations of public market

                                       13
<PAGE>

analysts and investors. In that event, the price of our common stock may fall
and our ability to obtain additional financing may be impaired.

We must offer services priced above the overall cost of bandwidth, and any
failure to do so would jeopardize our operating results.

     If we do not obtain adequate bandwidth capacity on acceptable terms and
realize appropriate customer volume for such bandwidth, we will not achieve a
positive gross margin. We purchase our bandwidth capacity on a fixed-price basis
in advance of the sale of our services. We sell our services, by contract, on
the basis of actual usage. Our bandwidth costs currently exceed our revenues
from the sale of services, which results in negative gross profit.

     We have also recently begun a program of obtaining bandwidth under
indefeasible-right-of-use (IRU) agreements, with terms of 15 to 25 years.
Although we expect this to significantly increase the gross profit margin by
entering these agreements, we also commit to a specific purchased bandwidth
capacity for a period of at least 15 years.

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

     We expect that the cost of obtaining bandwidth for the transport of data
over our network will decline over time as a result of, among other things, the
large amount of capital currently being invested to build infrastructure. We
expect the prices we charge for data transported over our network will also
decline over time as a result of, among other things, the lower cost of
obtaining bandwidth and existing and new competition in the markets we address.
If we fail to accurately predict the decline in costs of bandwidth, are unable
to sell our services at acceptable prices, or fail to offer additional services
from which we can derive additional revenues, our revenues may decrease or fail
to increase as anticipated, and our business and financial results will suffer.

We must retain and expand our customer base or else we will continue to be
unprofitable.

     As of December 31, 2000, we had contracts with 959 customers of which 871
were deployed. We currently incur costs greater than our revenues and need to
increase customer revenue to become profitable. If we are unable to retain or
grow our customer base, we will not be able to achieve the economies of scale
necessary to offset our fixed and variable operating costs. Our ability to
attract new customers depends on a variety of factors, including:

 .  the willingness of businesses to outsource their Internet operations;

 .  the reliability and cost-effectiveness of our services; and

 .  our ability to effectively market such services.

     To attract new customers we intend to significantly increase our sales and
marketing expenditures. However, our efforts might not result in more sales as a
result of the following factors:

 .  we may be unsuccessful in implementing our marketing strategies;

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

 .  our marketing strategies may not result in increased sales.

Our network infrastructure may be subject to failure or disruptions, which would
seriously harm our business.

     Our business is dependent on providing our customers with fast, efficient
and reliable network services. To meet these customer requirements we must
protect our network infrastructure against damage from:

 .  human error;

                                       14
<PAGE>

 .  fire;

 .  natural disasters;

 .  power loss;

 .  sabotage or vandalism;

 .  telecommunications failures; and

 .  similar events.

     Despite precautions taken by us, the occurrence of a natural disaster or
other unanticipated problems at one or more of our data centers could result in
service interruptions or significant damage to equipment. We have experienced
temporary service interruptions in the past, and we could experience similar
interruptions in the future. We may be subject to legal claims and be liable for
losses suffered by our customers for disruptions resulting from failures on our
network. Our agreements with our customers generally attempt to eliminate our
liability for consequential or punitive damages not caused by our gross
negligence or willful acts. However, those provisions may not protect us from
being held liable for such damages. If our disruption rate is high, clients may
seek to terminate their contracts with us and our reputation could be harmed,
which would materially harm our business.

Our Internet content delivery service is complex and may have errors or defects
that could seriously harm our business.

     Our Internet content delivery service is highly complex and is designed to
be deployed in very large and complex networks. Because of the nature of this
service, we can only fully test it when it is fully deployed in very large
networks with high traffic. We and our customers have from time to time
discovered errors and defects during the deployment of our service. In the
future, there may be additional errors and defects that may adversely affect our
service. If we are unable efficiently to fix errors or other problems that may
be identified in the future, we could experience:

 .  loss of or delay in revenue;

 .  loss of customers;

 .  failure to attract new customers or achieve market acceptance;

 .  diversion of development resources;

 .  loss of reputation and credibility;

 .  increased service costs; and

 .  legal actions by our customers.

Future customer warranty claims based on service failures could exceed our
insurance coverage.

     Our customer contracts currently provide a limited service level warranty
related to the continuous availability of service 24 hours a day, seven days per
week, except for certain scheduled maintenance periods. This warranty is
generally limited to a credit consisting of free service for a specified period
of time for disruptions in Internet transmission services. To date, we have
incurred no material expense related to such service level warranty. Should we
incur significant obligations in connection with system downtime, our liability
insurance may not be adequate to cover such expenses. Although our customer
contracts typically provide for no recovery with respect to incidental,
punitive, indirect and consequential damages resulting from damages to equipment
or disruption of service, in the event of such damages, we may be found liable,
and such damages may exceed our liability insurance.

Our business will suffer if we do not anticipate and meet specific customer
requirements or respond to technological change.

                                       15
<PAGE>

     The market for Internet content delivery and network services is
characterized by rapid technological change, frequent new product introductions
and changes in customer requirements. We may be unable to respond quickly or
effectively to these developments. Our future success will depend to a
substantial degree on our ability to offer services that incorporate leading
technology, address the increasingly sophisticated and varied needs of our
current and prospective customers and respond to technological advances and
emerging industry standards and practices on a timely and cost-effective basis.
You should be aware that:

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

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

 .  the price of our services is likely to decline as rapidly as the cost of
   any competitive alternatives.

     The development of new or enhanced services through technology development
activities is a complex and uncertain process that requires the accurate
anticipation of technological and market trends. We may experience design,
manufacturing, marketing and other difficulties that could delay or prevent the
development, introduction or marketing of new services and enhancements. In
addition, our inability to effectively manage the transition from older services
to newer services could cause disruptions to customer orders and harm our
business and prospects.

If we do not successfully increase the capacity of our network and data centers,
demand for our services may decrease.

     Our network and data centers may not be able to serve expected customer
levels or meet performance expectations and we may be unable to obtain
additional network capacity from third-party suppliers or build or expand data
centers. In addition, as customers' usage of bandwidth increases, we will need
to make additional investments in our infrastructure to maintain adequate
downstream data transmission speeds, the cost of which may be significant.
Upgrading our infrastructure may cause delays or failures in our network. As a
result, our network may be unable to achieve or maintain a sufficiently high
capacity of data transmission, which could significantly reduce demand for our
services, reducing our revenues and adversely affecting our business.

If our market does not grow as we expect, our revenues will be below our
expectations and our business and financial results will suffer.

     The market for our services is new and unproven. If our customer base does
not expand or if there is not a widespread acceptance of our products and our
services, our business and prospects will be harmed. The market for our services
depends on several uncertain events and factors, including:

 .  the effectiveness of our marketing strategy and efforts;

 .  our product and service differentiation and quality;

 .  the extent of our network coverage;

 .  our ability to provide timely, effective customer support;

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

 .  our industry reputation; and

 .  general economic conditions such as downturns in the e-Business or software
   markets.

     If the market for our services fails to develop, or develops more slowly
than expected, our business will be adversely affected.

We will require significant additional capital, and if we cannot obtain this
financing on commercially reasonable terms, our business will suffer.

                                       16
<PAGE>

     Our ability to meet our planned growth will require substantial cash
resources. The timing and amount of future capital requirements may vary
significantly depending on numerous factors including regulatory, technological,
competitive and other developments in our industry. We do not expect to generate
sufficient cash flow from operations in the near term. Accordingly, our ability
to meet additional future capital needs will depend on future equity or debt
financing, which we may not be able to obtain on satisfactory terms or at all.
In addition, our credit agreements contain covenants restricting our ability to
incur further indebtedness, and future borrowing instruments such as credit
facilities and lease agreements are likely to contain similar or more
restrictive covenants and will likely require us to pledge assets as security
for borrowings thereunder.

     Additional equity financing may not be available and/or may be dilutive to
existing stockholders. Our inability to obtain additional capital on
satisfactory terms may delay or prevent the expansion of our business and cause
us to forego market opportunities, which could materially adversely affect our
growth and ability to compete.

Rapid growth in our business could cause a significant strain on our business.

     The planned expansion of our operations will place a significant strain on
our management, financial controls, operations systems, personnel and other
resources. We expect that our customers increasingly will demand additional
information and reports with respect to the services we provide. To handle these
demands and enable future traffic growth, we must develop and implement an
automated customer service system. In addition, if we are successful in
implementing our marketing strategy, we also expect the demands on our network
and data center infrastructure and technical support resources to grow rapidly.
We expect that these demands will require investments in our infrastructure, the
addition of new management  personnel, the development of additional expertise
by existing management personnel and the establishment of long-term
relationships with third-party service vendors. We may not be able to keep pace
with such growth, successfully implement and maintain our operational and
financial systems or successfully obtain, integrate and utilize the employees,
facilities, third-party vendors and equipment, or management, operational and
financial resources necessary to manage a developing and expanding business in
our evolving and increasingly competitive industry. If we are unable to manage
growth effectively, our business and financial results will suffer.

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

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

We must retain and attract key employees or else we may not grow or be
successful.

     We are highly dependent on key members of our management and engineering
staff. The loss of one or more of these individuals might impede the achievement
of our business objectives. Furthermore, recruiting and retaining qualified
technical personnel to perform research, development and technical support work
is critical to our success. If our business grows, we will also need to recruit
a significant number of additional management, technical and other personnel.
Competition for employees in our industry is intense. We may not be able to
continue to attract and retain skilled and experienced personnel on acceptable
terms. The loss of the services of any of our key employees, the inability to
integrate new employees or our failure to attract or retain qualified personnel
in the future in a timely manner could harm our business.

We depend on a limited number of third party suppliers for key components of our
network infrastructure, and the loss of one or more suppliers may slow our
growth or cause us to lose customers.

      We are dependent on third party providers to supply key components of our
infrastructure, including bandwidth capacity leased from telecommunications
network providers and networking equipment that, in the quantities and quality
demanded by us, are available only from sole or limited sources. While we have
entered into various agreements for carrier line capacity, any failure to obtain
additional capacity, if required, would impede the growth of our business and
cause our financial results to suffer. The routers and switches used in our
infrastructure are currently supplied primarily by Cisco Systems. We purchase
these components pursuant to purchase orders placed from time to time, we do not
carry significant

                                       17
<PAGE>

inventories of these components and we have no guaranteed supply arrangements
with this vendor. Any failure to obtain required products or services on a
timely basis and at an acceptable cost would impede the growth of our business
and cause our financial results to suffer. In addition, any failure of our
suppliers to provide products or components that comply with evolving Internet
and telecommunications standards could cause our business and financial results
to suffer.

Our failure to adequately protect our proprietary rights may harm our
competitive position.

     We rely on a combination of copyrights, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. However, we will not be able to protect our
intellectual property if we are unable to enforce our rights or if we do not
detect unauthorized use of our intellectual property.

     Although we have pending patent applications with the United States Patent
and Trademark Office with respect to our Footprint content delivery service, as
well as certain Internet technology acquired from SRI International, and were
recently issued a U.S. patent with respect to TraceWare, we currently may not
have sufficient patented technology to preclude or substantially inhibit
competitors from entering our market. Moreover, none of our technology is
patented abroad, although we do currently have international patent applications
pending. We cannot be certain that any pending or future patent applications
will be granted, that any future patent will not be challenged, invalidated or
circumvented, or that rights granted under any patent that may be issued will
provide competitive advantages to us.

     We have applied for (and in some instances, received) trademarks and
service marks on certain terms and symbols that we believe are important for our
business. In addition, we generally enter into confidentiality or license
agreements with our employees and consultants and with our customers and
corporations with whom we have strategic relationships, and we attempt to
maintain control over access to and distribution of our software documentation
and other proprietary information.

     The steps we have taken to protect our technology or intellectual property
may be inadequate. Our competitors may independently develop technologies that
are substantially equivalent or superior to ours. Moreover, in other countries
where we do business, there may not be effective legal protection of patents and
other proprietary rights that we believe are important to our business.
Unauthorized use of any of our proprietary information could seriously harm our
business.

If we do not effectively manage the integration of future acquisitions, it could
disrupt our business and cause increased losses.

Part of our expansion strategy includes acquiring businesses and technologies
that we believe will complement our existing business. In the event of any
future acquisitions, we may:

 .  issue stock that would dilute the ownership of our stockholders;

 .  incur debt;

 .  assume liabilities;

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

 .  incur large and immediate write-offs.

     Acquisition transactions require a significant commitment of resources and
are accompanied by a number of risks, including:

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

 .  the potential disruption of our ongoing business and distraction of
   management;

 .  the difficulty of incorporating acquired technology and rights into our
   products and services;

 .  unanticipated expenses related to technology integration;

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

                                       18
<PAGE>

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

 .  potential unknown liabilities associated with acquired businesses.

     We may need to complete these transactions to remain competitive. We cannot
be sure that we will succeed in addressing these risks or any other problems
encountered in connection with potential business combinations and acquisitions.

We have anti-takeover defenses that could delay or prevent a takeover that
stockholders may consider favorable.

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

We may be unable to license necessary technology, and we may be subject to
infringement claims by third parties.

     In addition to the risks inherent in the litigation with Akamai
Technologies described in Part II, Item 1 below, our commercial success will
also depend in part on our not infringing the proprietary rights of others and
not breaching technology licenses that cover technology used in our products. It
is uncertain whether any third party patents will require us to develop
alternative technology, alter our products or processes, obtain licenses or
cease activities that infringe on third party's intellectual property rights. If
any such licenses are required, we may not be able to obtain such licenses on
commercially favorable terms, if at all. Our failure to obtain a license to any
technology that we may require to commercialize our products and services could
cause our business and prospects to suffer.

     Companies in the Internet market are increasingly bringing suits alleging
infringement of their proprietary rights, particularly patent rights. Any
litigation or claims, whether or not valid, could result in substantial costs
and diversion of resources. Intellectual property litigation or claims could
force us to do one or more of the following:

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

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

 .  redesign products or services.

     If we are forced to take any of the foregoing actions, our business may be
seriously harmed. We expect that our insurance may not cover potential claims of
this type or may not be adequate to indemnify us in the event we are found
liable.

Our participation in joint ventures and strategic relationships may involve risk
associated with inconsistent goals, exposure to unknown liabilities and
unexpected obligations.

     As part of our international expansion, we pursue relationships and joint
ventures with local Internet service providers and telecommunications carriers
in other countries. We may not have a majority interest or control of the
governing body of any such local operating joint venture and there is a risk
that the other joint venture partner may at any time have economic, business or
legal interests or goals that are inconsistent with those of the joint venture
or us. The risk also will be present that a joint venture partner may be unable
to meet its economic or other obligations and that we may be required to fulfill
those obligations. In addition, in any joint venture in which we do not have a
majority interest, we may not have control over the operations or assets of such
joint venture. We may not be able to establish peering relationships or joint
ventures with local Internet service providers and telecommunications carriers
in other countries on favorable terms or at all. Our failure to establish these
relationships may cause us to lose customers or slow our growth and harm our
business.

     Sandpiper entered into strategic relationships with America Online, or AOL,
in April 1999 and with Microsoft in October 1999 for the joint development of
technology, services and/or products. We may not be successful in developing
such products. The AOL agreement expires in December 2001 and the agreement with
Microsoft expires in August 2002.

                                       19
<PAGE>

Each agreement may be terminated by either party if the other party materially
breaches the agreement. A termination of, or significant adverse change in our
relationship with AOL or Microsoft could have a material adverse effect on our
business.

     We entered into strategic relationships with Sun Microsystems, Inc. and
Inktomi Corporation in December 1999 to expand the global electronic business
content delivery network through deployment of up to 5,000 Sun servers equipped
with Inktomi's Traffic Server and Content Delivery Suite. We may not be
successful in such an expansion. A termination of, or significant adverse change
in our relationship with Sun or Inktomi could have a material adverse effect on
our business.

     We entered into strategic relationship with Compaq Computer Corporation,
Intel Corporation and Microsoft Corporation in June 2000 to extend our
infrastructure and to provide broadcast-scale streaming media over the Internet.
We may not be successful in such an extension of our infrastructure. A
termination of, or significant adverse change in our relationship with Compaq,
Intel or Microsoft could have a material adverse effect on our business.

Risks Related To The SoftAware Merger.

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

     We undertook the merger with the expectation that the merger will result in
significant benefits. Achieving the benefits of the merger depends on the
timely, efficient and successful execution of a number of post-merger events,
including the current efforts to integrate the operations and personnel of
SoftAware. We will need to overcome significant obstacles, however, in order to
realize any benefits or synergies from the merger. The successful execution of
these post-merger events will involve considerable risk and may not be
successful.

     Our business may be adversely affected as a result of the SoftAware merger
if:

 .  the integration of Digital Island and SoftAware is unsuccessful;

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

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

     Our failure to complete the integration successfully could also result in
the loss of key personnel and customers. In addition, the attention and effort
devoted to the integration of the two companies will significantly divert
management's attention from other important issues.

The carrying value of our goodwill arising from acquisitions could be subject to
impairment write-downs.

     The net book value of goodwill as of December 31, 2000 was $1.1 billion.
It is our policy to assess the impairment of long-lived assets, such as
goodwill, when events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. If our market capitalization is
consistently lower than the carrying value of our assets, this may trigger an
impairment analysis. Additionally, if the projected future undiscounted cash
flows of our enterprise-wide assets were determined to be less than the carrying
value of those assets, we would recognize an impairment loss.

                         Risks Related to Our Industry.

Competition in our industry is intense and growing and we may be unable to
compete effectively.

     Our market is highly competitive and fragmented. Our competitors include
companies such as AboveNet Communications, Adero, Akamai, AT&T, XO
Communications, Digex, Exodus Communications, Genuity, iBeam, InterNAP, MCI
WorldCom and Qwest. Many of our competitors have substantially greater
financial, technical and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established relationships
in the industry than we do. Some of our current and potential competitors have
the financial resources to withstand substantial price competition, and many may
be able to respond more quickly than we can to new or emerging technologies and
changes in customer requirements. Our competitors with more extensive customer
bases, broader customer relationships and broader industry alliances may be able
to use such resources to their advantage in competitive situations,

                                       20
<PAGE>

including relationships with many of our current and potential customers. In
particular, certain competitors have strategic alliances with entities that have
entered into similar alliances with us, including Microsoft.

     There are few substantial barriers to entry and we expect that we will face
additional competition from existing competitors and new market entrants in the
future. We compete against information technology and Internet outsourcing
firms, national and regional Internet service providers, and global, regional
and local telecommunications companies. Our larger competitors may be able to
provide customers with additional benefits in connection with their Internet
systems and network solutions, including reduced communications costs. As a
result, these companies may be able to price their products and services more
competitively than we can and respond more quickly than us to new or emerging
technologies and changes in customer requirements. If we are unable to compete
successfully against our current or future competitors, we may lose market share
and our business and prospects would suffer.

     We face competition, and in the future may face additional competition,
from providers of Internet content delivery services, including networking
hardware and software manufacturers, content distribution providers, traditional
hardware manufacturers, telecommunications providers, software database
companies, and large diversified software and technology companies. Some of
these competitors may bundle their services with other software or hardware in a
manner that may discourage website owners from purchasing our services or
Internet service providers from installing our servers. In addition, if those
third party telecommunications providers upon which we are currently dependent
for transmission capacity determine to compete with us in the Internet content
delivery market, their refusal to provide us with capacity, could result in a
degradation or termination of service to certain of our customers. As a result,
we could lose customers or generate reduced revenue from such customers, and our
business and financial results could suffer.

     In addition, no assurances can be given that the Internet content delivery
market will develop in a way that we currently anticipate. For example, while we
currently intend to offer our customers the most comprehensive solution
available in the marketplace today, there currently exists an array of
competitors that offer partial solutions to the problems that we address or
intend to address, and a number of these companies have been and are likely to
continue to be quite successful. To the extent Internet service providers
utilize other technology that reduces the need for content delivery solutions,
demand for our services could decrease.

     Increased competition could result in:

 .  price and revenue reductions and lower profit margins;

 .  increased cost of service from telecommunications providers;

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

 .  loss of market share.

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

     The law relating to the liability of online services companies and Internet
access providers for communications and commerce carried on or disseminated
through their networks is currently unsettled. The United States Congress has
already enacted Internet laws regarding children's privacy, copyrights, taxation
and the transmission of sexually explicit material. The European Union issued a
directive in December 1997 that required member states to initiate the process
for the adoption of privacy regulations by October 1998. The European Union is
also currently considering copyright legislation that may extend the right of
reproduction held by copyright holders to include the right to make temporary
copies for any reason. It is possible that claims could be made against online
services companies and Internet access providers under both United States and
foreign law for defamation, negligence, copyright or trademark infringement, or
other theories based on the nature of the data or the content of the materials
disseminated through their networks. Several private lawsuits seeking to impose
such liability upon online services companies and Internet access providers are
currently pending.

     In addition, the growth and development of the market for online commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, which may impose additional burdens on companies conducting
business online. Some countries may regulate or prohibit the transport of
telephony data in their territories. The imposition upon us and other Internet
network providers of potential liability for information carried on or
disseminated through our systems could require us to implement measures to
reduce our exposure to such liability, which may require the expenditure of
substantial resources, or to discontinue some of our service or product
offerings. Our ability to limit the types

                                       21
<PAGE>

of data or content distributed through our network is limited. Failure to comply
with such regulation in a particular jurisdiction could result in fines or
penalties or the termination of our service in such jurisdiction. The increased
attention focused upon liability issues as a result of these lawsuits and
legislative proposals could impact the growth of Internet use. Our professional
liability insurance may not be adequate to compensate or may not cover us in the
event we become liable for information carried on or disseminated through our
networks. Any costs not covered by insurance incurred as a result of such
liability or asserted liability could harm our business and prospects.

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

     We market and sell our network services and products in the United States
and internationally. While the United States currently represents the majority
of our revenues, we expect the percentage of our international sales to increase
over time and expect to commit significant resources to expand our international
sales and marketing activities throughout fiscal year 2001. However, we may not
be able to successfully market, sell, deliver and support our networking
services and products internationally. We presently conduct international sales
through local subsidiaries in the United Kingdom, Switzerland, Germany, the
Netherlands, Japan, Malaysia and China and through distributor relationships
with third parties in countries where we have no physical presence. Our failure
to manage our international operations effectively could limit the future growth
of our business, increase our costs, lengthen our sales cycle and require
significant management attention.

     There are certain risks inherent in conducting our business
internationally, such as:

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

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

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

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

 .  limited international collection experience in collecting accounts
   receivable in foreign jurisdictions;

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

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

 .  increased expenses associated with marketing services in foreign countries;

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

 .  the risks related to the global economic turbulence.

     Any of these risks could harm our international operations. For example,
some European countries already have laws and regulations related to content
distributed on the Internet and technologies used on the Internet that are more
strict than those currently in force in the United States. Furthermore, there is
an on-going debate in Europe as to the regulation of certain technologies we
use, including caching and mirroring. That debate could result in a directive
relating to the reform of copyright laws in the European Community which may, if
made into law, restrict caching and mirroring. Any or all of these factors could
cause our business and prospects to suffer.

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

                                       22
<PAGE>

     Although to date, substantially all of our customers have paid for our
services in U.S. dollars, we currently pay some of our suppliers in foreign
currencies, which subjects us to currency fluctuation risks. For fiscal 1998,
fiscal 1999 and fiscal 2000, costs denominated in foreign currencies were
nominal and we had insignificant foreign currency losses during those periods.
However, we believe that in the future an increasing portion of our revenues and
costs will be denominated in foreign currencies. In particular, as the Euro has
been introduced, we expect that an increasing portion of our international sales
may be Euro-denominated. We currently do not engage in foreign exchange hedging
activities and, although we have not yet experienced any material losses due to
foreign currency fluctuation, our international revenues are subject to the
risks of foreign currency fluctuations and such risks will increase as our
international revenues increase.

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

     Our services include the transmission of data over public telephone lines.
These transmissions are subject to the regulatory authority of the Federal
Communications Commission and the state public utility commissions although, to
date, neither has elected to exercise such authority. Our services could be
affected by changes in federal and state law or regulation in the
telecommunications arena, and the Internet in particular. Such changes could
directly or indirectly affect our costs, limit usage or subscriber-related
information, and increase the likelihood or scope of competition from
telecommunications companies.

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

     Implementation of any future changes in law or regulation, including those
discussed herein, could cause our business and prospects to suffer. Our business
and prospects may also be harmed by the imposition of certain tariffs, duties
and other import restrictions on facilities and resources that we obtain from
non-domestic suppliers. As a result, changes in law or regulation in the United
States or elsewhere could cause our business and prospects to suffer.

Substantial leverage and debt service obligations may adversely affect our cash
flow.

     We have substantial amounts of outstanding indebtedness, primarily
consisting of the convertible subordinated notes that were issued in February
2000. As a result of this indebtedness, our principal and interest payment
obligations have increased substantially. There is the possibility that we may
be unable to generate cash sufficient to pay the principal of, interest on and
other amounts due in respect of our indebtedness when due. We may also obtain
additional long term debt and working capital lines of credit to meet future
financing needs. There can be no assurance that any financing arrangements will
be available.

     Our substantial leverage could have significant negative consequences,
including:

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

 .  limiting our ability to obtain additional financing;

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

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

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

Our stock has been and will likely continue to be subject to substantial price
and volume fluctuations due to a number of factors, some of which are beyond our
control.

     Stock prices and trading volumes for many Internet companies fluctuate
widely for a number of reasons, including some reasons which may be unrelated to
their businesses or results of operations. This market volatility, as well as
general domestic or international economic, market and political conditions
could materially adversely affect the price of our

                                       23
<PAGE>

common stock without regard to our operating performance. In addition, our
operating results may fall below the expectations of public market analysts and
investors. If this were to occur, the market price of our common stock would
likely significantly decrease. Sales of substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options and warrants)
in the public, or the appearance that a large number of shares is available for
sale, could depress the market price for our common stock.

                           PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

     On September 13, 2000, Akamai Technologies, Inc. ("Akamai") and the
Massachusetts Institute of Technology ("MIT") filed a Complaint in the U.S.
District Court of Massachusetts (No. 00ev1181RWZ) alleging that Digital Island
infringes U.S. Patent No. 6,108,703 (the "703 Patent"). Based on our preliminary
investigation, we believe that we have meritorious defenses to Akamai and MIT's
claim and intend to vigorously defend ourselves in any litigation that arises
from this claim. In addition, because we believe that we were the first to
invent the technologies claimed in the 703 Patent, we have instituted
proceedings with the U.S. Patent and Trademark Office to confirm our ownership
of any such inventions.

     On September 20, 2000, Akamai filed a Motion in the U.S. District Court of
Massachusetts requesting Leave to File A Second Amended Complaint in which it
alleges that Digital Island infringes U.S. Patent No. 6,003,030 (the "030
Patent"), which Motion was granted by the Court. Based on our preliminary
investigation, we believe that we have meritorious defenses to Akamai's claim
and intend to vigorously defend ourselves in any litigation that arises from
this claim. On October 18, 2000 Akamai and MIT filed a motion in the U.S.
District Court of Massachusetts requesting that Digital Island be enjoined from
offering for sale its Footprint 2.0 content delivery service. A Hearing of the
motion has been set for February 14, 2001. We believe that we have meritorious
defenses to Akamai and MIT's request for preliminary injunctive relief and
intend to vigorously oppose Akamai and MIT's request.

     On September 21, 2000, Akamai filed a Compliant in the U.S. District Court,
Northern District of California, alleging that Digital Island's distribution of
certain marketing materials constituted False Advertising, Unfair Competition,
Intentional Interference With Contractual Relationships and Intentional
Interference With Prospective Business Advantage and requesting, among other
things, a Temporary Restraining Order prohibiting Digital Island from
disseminating the materials at issue and publicly commenting on certain related
issues. Based on our preliminary investigation, we believe that we have
meritorious defenses to Akamai's claims and intend to vigorously defend
ourselves in any litigation that arises from these claims. On October 13, 2000,
the Court denied Akamai's request for a Temporary Restraining Order. On October
26, 2000, we filed counterclaims in this case for equitable relief and damages,
alleging that Akamai's distribution of certain marketing material constituted
false advertising, unfair competition, interference with contract and
interference with prospective economic relationships.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c) Recent Sales of Unregistered Securities

SRI International

     In November 2000, the Company issued 338,627 shares of common stock to SRI
International as payment for consulting services related to Internet technology
acquired pursuant to a technology purchase agreement executed in November 1999.
In January 2001, the Company issued an additional 103,081 shares of common stock
as payment for consulting services related to the acquired Internet technology.
The shares were issued pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

                                       24
<PAGE>

     None.

ITEM 5. OTHER INFORMATION.

     None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

    4.1 Registration Rights Agreement dated as of July 1, 2000, by and between
    Digital Island, Inc. and SRI International.

(b) Reports on Form 8-K.

     On November 21, 2000, the Company filed an Amended Current Report on Form
8-K/A relating to Digital Island's acquisition of SoftAware, Inc. pursuant to
which SoftAware became a wholly owned subsidiary of Digital Island.  The
original Form 8-K announcing the completion of the acquisition was filed on
September 22, 2000.


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Date: February 14, 2001                   DIGITAL ISLAND, INC.
                                          (Registrant)

Date: February 14, 2001                   By: /s/ Ruann F. Ernst
                                              ---------------------------------
                                          Ruann F. Ernst,
                                          Chief Executive Officer and President
                                          (Principal Executive Officer)

Date: February 14, 2001                   By: /s/ T.L. Thompson
                                              ---------------------------------
                                          T.L. Thompson,
                                          Chief Financial Officer
                                          (Principal Financial Officer and
                                          Principal Accounting Officer)

                                       25