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+Proc-Type: 2001,MIC-CLEAR
+Originator-Name: webmaster@www.sec.gov
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+<SEC-DOCUMENT>0001012870-01-000277.txt : 20010130
+<SEC-HEADER>0001012870-01-000277.hdr.sgml : 20010130
+ACCESSION NUMBER:		0001012870-01-000277
+CONFORMED SUBMISSION TYPE:	10-K/A
+PUBLIC DOCUMENT COUNT:		2
+CONFORMED PERIOD OF REPORT:	20000930
+FILED AS OF DATE:		20010129
+
+FILER:
+
+	COMPANY DATA:	
+		COMPANY CONFORMED NAME:			DIGITAL ISLAND INC
+		CENTRAL INDEX KEY:			0001084329
+		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-BUSINESS SERVICES, NEC [7389]
+		IRS NUMBER:				680322824
+		STATE OF INCORPORATION:			DE
+		FISCAL YEAR END:			0930
+
+	FILING VALUES:
+		FORM TYPE:		10-K/A
+		SEC ACT:		
+		SEC FILE NUMBER:	000-26283
+		FILM NUMBER:		1516903
+
+	BUSINESS ADDRESS:	
+		STREET 1:		45 FREMONT STREET SUITE 1200
+		STREET 2:		12TH FLOOR
+		CITY:			SAN FRANCISCO
+		STATE:			CA
+		ZIP:			94105
+		BUSINESS PHONE:		4157384100
+
+	MAIL ADDRESS:	
+		STREET 1:		45 FREMONT STREET SUITE 1200
+		CITY:			SAN FRANCISCO
+		STATE:			CA
+		ZIP:			94105
+</SEC-HEADER>
+<DOCUMENT>
+<TYPE>10-K/A
+<SEQUENCE>1
+<FILENAME>0001.txt
+<DESCRIPTION>AMENDMENT #1 TO FORM 10-K
+<TEXT>
+
+<PAGE>
+- -------------------------------------------------------------------------------
+- -------------------------------------------------------------------------------
+                                 UNITED STATES
+                      SECURITIES AND EXCHANGE COMMISSION
+                            Washington, D.C. 20549
+
+                                --------------
+
+                                  Form 10-K/A
+
+[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
+    THE SECURITIES EXCHANGE ACT OF 1934
+
+For The Fiscal Year Ended September 30, 2000
+
+                                     OR
+
+[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
+    THE SECURITIES EXCHANGE ACT OF 1934
+
+                         Commission File No. 000-26283
+
+         For the transition period from ____________ to _____________
+
+                             DIGITAL ISLAND, INC.
+
+            (Exact name of Registrant as specified in its charter)
+
+<TABLE>
+<S>                                    <C>
+               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)
+</TABLE>
+
+      Registrant's telephone number, including area code: (415) 738-4100
+       Securities registered pursuant to Section 12(b) of the Act: None
+          Securities registered pursuant to Section 12(g) of the Act:
+                        Common Stock, $0.001 par value
+
+   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 past 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 [_]
+
+Indicate by check mark if disclosure of delinquent filers pursuant to Item
+405 of Regulation S-K is not contained herein, and will not be contained, to
+the best of the Registrant's knowledge, in definitive proxy or information
+statements incorporated by reference to Part III of this Form 10-K or any
+amendment to this Form 10-K. [_]
+
+The aggregate market value of voting stock held by non-affiliates of the
+Registrant was approximately $380 million as of November 28, 2000, based upon
+the closing price of the Registrant's Common Stock on the Nasdaq National Market
+reported for November 28, 2000. Shares of Common Stock held by each executive
+officer and director and by each person who beneficially owns more than 5% of
+the outstanding Common Stock have been excluded in that such persons may under
+certain circumstances be deemed to be affiliates. This determination of
+affiliate status is not necessarily a conclusive determination of affiliate
+status for any other purpose.
+
+79,781,332 shares of the Registrant's $0.001 par value Common Stock were
+outstanding at November 28, 2000.
+
+                     DOCUMENTS INCORPORATED BY REFERENCE
+
+The following documents (or portions thereof) are incorporated by reference
+into the Parts of this Form 10-K noted:
+
+None.
+
+PORTIONS AMENDED
+
+   The Registrant previously anticipated incorporating by reference from the
+definitive proxy statement for the Registrant's 2001 Annual Meeting of
+Stockholders to be filed with the Commission pursuant to Regulation 14A not
+later than 120 days after the end of the fiscal year covered by this Form.
+However, pursuant to Instruction G(3) to the Report on Form 10-K, the
+Registrant hereby amends Part III (Items 10, 11, 12 and 13) contained in the
+Registrant's Report on Form 10-K for the fiscal year ended September 30, 2000,
+to provide the additional information relating to the directors and executive
+officers of Registrant, executive compensation, security ownership and certain
+relationships and related transactions, as set forth below.
+
+   Except as set forth in Items 10, 11, 12 and 13 below, no other changes are
+made to the Registrant's Report on Form 10-K for the fiscal year ended
+September 30, 2000.
+
+- -------------------------------------------------------------------------------
+- -------------------------------------------------------------------------------
+<PAGE>
+
+                                    PART III
+
+ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
+
+Executive Officers and Directors
+
+   The following table sets forth certain information regarding our executive
+officers and directors as of January 16, 2001.
+
+<TABLE>
+<CAPTION>
+         Name                 Age                            Position
+         ----                 ---                            --------
+<S>                           <C>   <C>
+Ruann F. Ernst(3)(5).......   54    Chief Executive Officer and Chairman of the Board of Directors
+T.L. Thompson..............   54    Chief Financial Officer
+Charles Picasso............   59    Chief Operating Officer
+Chris Albinson.............   33    Chief Strategy Officer
+Howard Lasky...............   48    Vice President, General Counsel and Secretary
+Tim Wilson.................   41    Chief Marketing Officer
+Charlie Bass(2)............   58    Director
+Christos Cotsakos(2).......   52    Director
+Marcelo A.Gumucio(1)(4)....   63    Director
+G. Bradford Jones(1)(3)....   45    Director
+Shahan Soghikian(1)(3)(4)..   42    Director
+</TABLE>
+- --------
+(1) Member of Audit Committee
+(2) Member of Compensation Committee
+(3) Member of Finance Committee
+(4) Member of Nominating Committee
+(5) Member of Special Stock Option Committee
+
+   Ruann F. Ernst.  Ms. Ernst has served as Chairman of the Board since December
+1999 and as Chief Executive Officer and as a director since June 1998. Prior to
+joining Digital Island, Ms. Ernst served with Hewlett Packard, a computer
+equipment and services company, for approximately ten years, most recently as
+general manager of the Financial Services Business Unit. Ms. Ernst has also
+served as Director, Medical Computing Services Division and Assistant
+Professor, Medicine and Computer Science at The Ohio State University and as a
+Congressional Fellow in the Office of Technology Assessment. Ms. Ernst serves
+on the Board of Directors of The Institute for the Future, Phoenix
+International and Advanced Fibre Communications, Inc. Ms. Ernst holds a B.S. in
+Mathematics, a Masters Degree in Computer Science and a Ph.D. in Technology and
+Organizational Change from The Ohio State University.
+
+   T.L. Thompson.  Mr. Thompson has served as Chief Financial Officer since
+January 1999. Mr. Thompson served as Chief Financial Officer of Narrowline, an
+Internet marketing firm, from October 1996 to November 1998. From 1989 to 1996
+he served in various financial capacities at Ziff-Davis Publishing Company,
+most recently as Vice President of Business Development. Mr. Thompson holds a
+B.S. in Economics and an M.B.A. from Northwestern University.
+
+   Charles Picasso.  Mr. Picasso has served as Chief Operating Officer since
+September 2000. From 1999 to 2000, Mr. Picasso served as President at CDI
+Information Technology Services. From 1996 to 1998, he served as Senior Vice
+President, Worldwide Profession Services Unit at NCR Corporation/AT&T Global
+Solutions. From 1995 to 1996, he served as President and Chief Executive
+Officer of AT&T Istel, AT&T Solutions Europe. Prior to that position, he served
+as Vice President, European and Asian Operations with Control Data Corp. in
+London, and as President and CEO of the Concept Group in Paris. Prior to that,
+he worked at Prime Computer, Inc. and Xerox Corp., including senior management
+positions in sales and marketing. He served on the Advisory Board of the
+College of Engineering, Wright State University in Ohio. He graduated from the
+University of Sciences at Montpellier in France with a degree in computer
+science.
+
+                                      1
+<PAGE>
+
+   Chris Albinson.  Mr. Albinson has served as Chief Strategy Officer since
+January 2001 and previously served as Vice President of Corporate Development
+since September 1999. From 1993 to August 1999, Mr. Albinson served as
+Assistant Vice President at Newbridge Networks Corp., manufacturer of digital
+electronic network products. Mr. Albinson holds an M.B.A. from the University
+of WesternOntario
+
+   Howard Lasky.  Mr. Lasky has served as Vice President, General Counsel and
+Secretary since March 2000. From 1997 through March 2000, Mr. Lasky was a
+partner and from 1988 through 1997 an associate at the law firm of Howard,
+Rice, Nemerovski, Canady, Falk and Rabkin.
+
+   Tim Wilson.  Mr. Wilson has served as Chief Marketing Officer since January
+2001, and previously served as Vice President of Marketing since March 1998.
+From December 1996 to March 1998, Mr. Wilson served as General Manager within
+the Business Communications Systems Division of Lucent Technologies, a
+telecommunications equipment supplier. Mr. Wilson also served as Executive
+Director and General Manager of the Business Communications Systems Division of
+AT&T Australia from November 1994 to December 1996. Mr. Wilson holds a B.A. in
+Physics from Bowdoin College and an M.B.A. from the Fuqua School of Business at
+Duke University.
+
+   Charlie Bass.  Dr. Bass has served as a director since March 1997. Dr. Bass
+is Trustee of The Bass Trust. He also serves on the board of directors of Socket
+Communications, Inc. and on the board of directors of several private
+communications companies. Prior to co-founding Ungermann-Bass in 1979, Dr. Bass
+was at Zilog, Inc., and prior to the formation of Zilog, Inc. in 1975, he was on
+the Electrical Engineering and Computer Sciences faculty at the University of
+California at Berkeley from 1972 to 1975. Dr. Bass holds a Ph.D. in Electrical
+Engineering from the University of Hawaii where he participated in the Aloha
+System research in radio frequency-based computer networks.
+
+   Christos Cotsakos.  Mr. Cotsakos has served as a director of Digital Island
+since July 1998. Mr. Cotsakos joined E*TRADE, an online financial services
+company, in March 1996 as the President and Chief Executive Officer and as a
+director. Before joining E*TRADE, he served as President, Chief Operating
+Officer, Co-Chief Executive Officer and a director of AC Nielsen Inc., a
+marketing research company. Prior to joining AC Nielsen, Mr. Cotsakos spent 19
+years with Federal Express Corporation, where he held a number of senior
+executive positions. In addition to E*TRADE, Mr. Cotsakos serves on the boards
+of directors of Critical Path, Inc., Fox Entertainment Group, Inc., National
+Processing, Inc., Official Payments Corp., PlanetRx.com, Inc. and Tickets.com,
+Inc., as well as several private companies. A decorated Vietnam veteran, he
+received a B.A. from William Paterson College and an M.B.A. from Pepperdine
+University. Mr. Cotsakos is currently pursuing a Ph.D. degree in economics at
+the University of London.
+
+   Marcelo Gumucio.  Mr. Gumucio has served as a director since January 1998,
+and served as Chairman of the board of directors from January 1998 until May
+1998. He is the managing partner of Gumucio Burke & Associates, a private
+investment firm. In April 1996, Mr. Gumucio joined Micro Focus PLC, an
+enterprise software provider, as its Chief Executive Officer. He had served as
+a non-executive director of Micro Focus' board of directors since January 1996.
+Prior to joining Micro Focus, from 1992 to 1996, Mr. Gumucio was President,
+Chief Executive Officer and Chairman of the board of directors of Memorex Telex
+NV. Mr. Gumucio's professional experience in the computer and communications
+industry spans almost 30 years and includes senior management positions at Cray
+Research, Inc., Northern Telecom Limited, Memorex Corporation and Hewlett-
+Packard Company. Mr. Gumucio serves on the board of directors of BidCom Inc.,
+Burr Brown Corporation and E-Stamp Corporation. Mr. Gumucio graduated cum laude
+with a B.S. in mathematics from the University of San Francisco in 1960. He
+received an M.S. in applied mathematics and operations research in 1963 from
+the University of Idaho, where he was named a National Science Fellow and
+graduated with honors. In 1982, he graduated from the Harvard Business School
+Advanced Management Program.
+
+                                      2
+<PAGE>
+
+   G. Bradford Jones.  Mr. Jones has served as a director since December 1999.
+Mr. Jones is a founding General Partner at Redpoint Ventures, a venture capital
+fund which invests in Internet communications, media and commerce companies.
+Prior to founding Redpoint Ventures in 1999, Mr. Jones was a General Partner
+with Brentwood Venture Capital, which he joined in 1981. Mr. Jones also
+currently serves on the board of directors of Onyx Acceptance Corporation, a
+specialized consumer finance company, Interpore International, a medical device
+company, Trading Edge, an Internet-based fixed income securities broker,
+Stamps.com, an Internet postage company, and several privately-held companies.
+Mr. Jones received a B.S. in Chemistry from Harvard University, a M.S. degree
+in Physics from Harvard University and a J.D./M.B.A. from Stanford University.
+
+   Shahan Soghikian.  Mr. Soghikian has served as a director since February
+1999. He has over fourteen years of private equity and investment banking
+experience, and is a General Partner and head of the West Coast office of JP
+Morgan Partners (formerly Chase Capital Partners). Since joining Chase Capital
+in 1990, Mr. Soghikian has been involved with numerous venture investments and
+was responsible for developing and managing the firm's European activities from
+1994 to 1998. He currently serves as a director of Ninth House Network,
+Complient, Halo Data Devices, MetroOptix, Coactive Networks, Nextec
+Applications and DJ Orthopedics. He received his B.A. from Pitzer College and
+an M.B.A. from the Anderson School of Business at the University of California
+at Los Angeles.
+
+   Our executive officers are elected by the board of directors on an annual
+basis and serve until their successors have been duly elected and qualified.
+There are no family relationships among any of the directors or executive
+officers of the Company.
+
+                                       3
+<PAGE>
+
+ITEM 11. EXECUTIVE COMPENSATION
+
+Summary of Cash and Certain Other Compensation
+
+   The following table sets forth certain summary information concerning the
+compensation earned by our chief executive officer and each of the four most
+highly compensated executive officers (determined on the basis of their salary
+and bonus for the 2000 fiscal year) for services rendered in all capacities to
+the Company and its subsidiaries for the fiscal years ended September 30, 2000
+and September 30, 1999, respectively. The listed individuals are referred to as
+the named executive officers. There are no other executive officers who would
+have otherwise been includible in the table below on the basis of salary and
+bonus earned for the 2000 fiscal year that have been excluded by reason of their
+termination of employment or change in executive status during that fiscal year.
+
+   The option grants reflected in the table below were made either under our
+1997 Stock Option and Incentive Plan, our 1998 Stock Option/Stock Issuance Plan
+or our 1999 Stock Incentive Plan.
+
+<TABLE>
+<CAPTION>
+                                                     Long-Term
+                                       Annual       Compensation
+                                    Compensation     Securities
+    Name and Principal           ------------------  Underlying     All Other
+       Position(s)          Year Salary($) Bonus($)   Options    Compensation($)
+    ------------------      ---- --------- -------- ------------ ---------------
+<S>                         <C>  <C>       <C>      <C>          <C>
+Ruann F. Ernst............  2000 $218,174  $71,000     375,000       $38,379(1)
+ Chief Executive Officer    1999  185,961   64,250   1,044,159        24,620(1)
+ and Chairman of the Board
+ of Directors
+
+Rick Schultz..............  2000  164,119   87,600      35,000           --
+ Vice President, Sales and  1999   82,500   23,111     200,000           --
+ Implementation Services
+
+Tim Wilson................  2000  170,417   65,900      60,000           --
+ Chief Marketing Officer    1999  180,446   51,250     280,000           --
+
+Paul Evenson..............  2000  174,321   49,000      30,000           --
+ Vice President,            1999  146,635   27,222     200,000           --
+ Operations
+
+Chris Albinson............  2000  180,000   37,500      45,000        18,476(2)
+ Chief Strategy Officer     1999   37,500      --      200,000           --
+</TABLE>
+- --------
+(1) Consists of reimbursement of rent for Ms. Ernst's apartment in San
+    Francisco, California.
+(2) Consists of forgiveness of a portion of an outstanding loan we made to Mr.
+    Albinson.
+
+                                       4
+<PAGE>
+
+Stock Options and Stock Appreciation Rights
+
+   The following table sets forth information regarding option grants to each
+of the named executive officers during the fiscal year ended September 30,
+2000. No stock appreciation rights were granted to the named executive officers
+during the 2000 fiscal year.
+
+<TABLE>
+<CAPTION>
+                                                                    Potential Realizable
+                                                                      Value at Assumed
+                                    Percent of                        Annual Rates of
+                         Number or    Total                             Stock Price
+                         Securities  Options   Exercise               Appreciation for
+                         Underlying Granted to of Base                  Option Term
+                          Options   Employees    Price  Expiration ----------------------
+    Name                 Granted(#)  in 2000    ($/Sh)     Date        5%         10%
+    ----                 ---------- ---------- -------- ---------- ---------- -----------
+<S>                      <C>        <C>        <C>      <C>        <C>        <C>
+Ruann F. Ernst..........  250,000      3.6%     $49.44   11/15/09  $7,773,131 $19,698,653
+Ruann Ernst.............  125,000      1.8%      17.19    5/24/10   1,351,336   3,424,553
+Rick Shultz.............   35,000      0.5%      25.88    4/14/10     569,652   1,443,612
+Tim Wilson..............   60,000      0.8%      25.88    4/14/10     976,547   2,474,763
+Paul Evenson............   15,000      0.2%      38.69   10/25/09     364,979     924,928
+Paul Evenson............   15,000      0.2%      25.88    4/14/10     244,137     618,691
+Chris Albinson..........   25,000      0.4%      84.50    1/31/10   1,328,539   3,366,780
+Chris Albinson..........   20,000      0.3%      17.19    5/24/10     216,214     547,929
+</TABLE>
+
+   Each option has a maximum term of 10 years, subject to earlier termination
+upon the optionee's cessation of service with Digital Island. Ms. Ernst's
+option for 250,000 will vest and become exercisable in 48 successive equal
+monthly installments over the 48-month period measured from November 15, 1999.
+Her additional option for 125,000 shares will vest and become exercisable in 48
+successive equal monthly installments over the 48-month period measured from
+May 24, 2000. Mr Schultz's option for 35,000 shares will vest and become
+exercisable in 48 successive equal monthly installments over a 48-month period
+measured from April 10, 2000. Mr. Wilson's option for 60,000 shares will vest
+and become exercisable in 48 successive equal monthly installments over a 48-
+month period measured from April 10, 2000. Mr Everson's first option for 15,000
+shares will vest and become exercisable in 48 successive equal monthly
+installments over a 48-month period measured from October 25, 1999. Mr
+Everson's additional option for 15,000 shares will vest and become exercisable
+in 48 successive equal monthly installments over a 48-month period measured
+from April 10, 2000. Mr. Albinson's option for 25,000 shares will vest and
+become exercisable in 48 successive equal monthly installments over a 48-month
+period measured from January 31, 2000. Mr Albinson's additional option for
+20,000 shares will vest and become exercisable in 48 successive equal monthly
+installments over the 48-month period measured from May 24, 2000.
+
+   The actual stock price appreciation over the 10-year option term may not be
+at the above 5% and 10% assumed annual rates of compounded stock price
+appreciation or at any other defined level. Unless the market price of common
+stock appreciates over the option term, no value will be realized from the
+option grant made to the named executive officer.
+
+   In November 2000 , the board of directors granted Ms. Ernst an additional
+option for 300,000 shares with an exercise price of $8.25, equal to the fair
+market value of our common stock at the time of grant. This option will vest
+and become exercisable in 48 successive equal monthly installments.
+
+   In November 2000, the board of directors granted Mr. Schultz an option for
+15,000 shares with an exercise price of $8.25, equal to the fair market value
+of our common stock at the time of grant. This option will vest and become
+exercisable in 48 successive equal monthly installments.
+
+   In November 2000, the board of directors granted Mr. Wilson an option for
+80,000 shares with an exercise price of $8.25, equal to the fair market value
+of our common stock at the time of grant. This option will vest and become
+exercisable in 48 successive equal monthly installments.
+
+                                      5
+<PAGE>
+
+   In November 2000, the board of directors granted Mr. Evenson an option for
+50,000 shares with an exercise price of $8.25, equal to the fair market value
+of our common stock at the time of grant. This option will vest and become
+exercisable in 48 successive equal monthly installments.
+
+   In November 2000, the board of directors granted Mr. Albinson an option for
+175,000 shares with an exercise price of $8.25, equal to the fair market value
+of our common stock at the time of grant. This option will vest and become
+exercisable in 48 successive equal monthly installments.
+
+Aggregated Option/SAR Exercises and Fiscal Year-End Values
+
+   The following table sets forth information with respect to the named
+executive officers concerning their exercise of stock options during the fiscal
+year ended September 30, 2000 and the number of shares subject to unexercised
+stock options held by them as of the close of such fiscal year. No stock
+appreciation rights were exercised during the fiscal year ended September 30,
+2000, and no stock appreciation rights were outstanding at the close of such
+year.
+
+   In the following table, "Value Realized" is equal to the difference between
+the fair value of the shares at the time of exercise and the exercise price
+paid for the shares and the "Value of Unexercised In-The-Money Options at Year-
+End" is based upon the closing selling price per share at the close of the 2000
+fiscal year less the exercise price payable per share.
+
+            Aggregated Option Exercises in 2000 and Year-End Values
+
+<TABLE>
+<CAPTION>
+                                                   Number of Securities      Value of Unexercised
+                                                  Underlying Unexercised    In-the-Money Options at
+                           Shares                   Options at Year-End            Year-End
+                         Acquired on    Value    ------------------------- -------------------------
+    Name                 Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
+    ----                 ----------- ----------- ----------- ------------- ----------- -------------
+<S>                      <C>         <C>         <C>         <C>           <C>         <C>
+Ruann F. Ernst..........   146,600   $7,173,138    437,137      602,090    $6,220,996   $4,744,419
+Rick Schultz............    23,529      639,754     54,095      157,376       702,830    1,856,000
+Tim Wilson..............    70,444    5,296,800     45,301      171,006       584,275    1,905,937
+Paul Evenson............    21,233    1,060,748     64,222      144,545       895,671    1,794,124
+Chris Albinson..........    12,250      111,720     49,581      183,169         2,601       28,599
+</TABLE>
+
+            EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
+
+   We have entered into employment agreements with Ms. Ernst, and Messrs.
+Schultz, Evenson, Wilson and Albinson, each of whom are named executive
+officers of Digital Island. All outstanding options held by the foregoing
+officers will automatically vest in full upon an acquisition of Digital Island
+by merger, sale of substantially all the assets or sale of more than 50% of our
+outstanding voting securities, unless those options are assumed or otherwise
+continued in effect by a successor entity and our repurchase rights for any
+unvested shares subject to those options are to remain in force following such
+acquisition.
+
+   Ruann F. Ernst, our Chief Executive Officer, previously entered into an
+employment agreement with us on May 20, 1998 in connection with her
+commencement of employment. On December 15, 1999, the agreement was amended and
+restated to increase her salary and bonus levels and to provide her with
+enhanced severance benefits. Accordingly, should Ms. Ernst's employment be
+involuntarily terminated (other than for cause) in the absence of a change in
+control or ownership of Digital Island or more than 18 months following such a
+change in control or ownership, she will become entitled to the following
+severance benefits: (i) 12 months of salary continuation, (ii) 50% of her
+target bonus for the fiscal year in which her involuntary termination occurs,
+provided the designated performance milestones for that year are actually
+attained, (iii) continued health care coverage at our expense for up to 12
+months and (iv) 12 months of accelerated vesting of her outstanding stock
+
+                                       6
+<PAGE>
+
+options. Should her employment be involuntarily terminated (other than for
+cause) within 18 months following a change in control or ownership of Digital
+Island, she will become entitled to the following change in control severance
+benefits: (i) 12 months of salary continuation, (ii) 50% of her target bonus
+for the fiscal year in which her involuntary termination occurs, provided the
+designated performance milestones for that year are actually attained, (iii)
+continued health care coverage at our expense for up to 12 months and (iv)
+accelerated vesting of all her outstanding stock options, with the right to
+exercise those options for up to one year following the date of her involuntary
+termination. For purposes of such severance benefits, an involuntary
+termination will include any constructive termination resulting in her
+resignation within 90 days following a material reduction in her duties, a
+reduction in her base salary or a relocation of her principal place of
+employment by more than 50 miles. Should she resign for any other reason within
+6 months after a change in control or ownership of Digital Island, her
+severance benefits will be limited to 24 months of accelerated vesting under
+her outstanding options, with the right to exercise those options for up to one
+year following such resignation. Ms. Ernst will be subject to certain non-
+compete covenants and consulting obligations for up to a two-year period
+following her termination or resignation.
+
+   On February 18, 1999, Rick Schultz, Digital Island's Vice President of Sales
+and Implementation Services, entered into an employment agreement with Digital
+Island. Should Mr. Schultz's employment be involuntarily terminated (other than
+for cause) within 18 months following a change in control or ownership of
+Digital Island, he will become entitled to accelerated vesting of all his stock
+options.
+
+   On October 26, 1998, Paul Evenson, Digital Island's Vice President of
+Operations, entered into an employment agreement with Digital Island. Should
+Mr. Evenson's employment be involuntarily terminated (other than for cause) in
+the absence of a change in control or ownership of Digital Island or more than
+18 months following such a change in control or ownership, he will become
+entitled to the following severance benefits: (i) 6 months of salary
+continuation, and (ii) continued health care coverage at our expense for up to
+6 months. Should his employment be involuntarily terminated (other than for
+cause) within 18 months following a change in control or ownership of Digital
+Island, he will also become entitled to accelerated vesting of all his stock
+options.
+
+   On March 16, 1998, Tim Wilson, Digital Island's Chief Marketing Officer,
+entered into an employment agreement with Digital Island. Should Mr. Wilson's
+employment be involuntarily terminated (other than for cause) within 18 months
+following a change in control or ownership of Digital Island, he will be
+entitled to accelerated vesting of all his stock options.
+
+   On July 13, 1999, Chris Albinson, Digital Island's Chief Strategy Officer,
+entered into an employment agreement with Digital Island. Should Mr. Albinson's
+employment be involuntarily terminated (other than for cause) within 18 months
+following a change in control or ownership of Digital Island, he will be
+entitled to accelerated vesting of all his stock options.
+
+                                      7
+<PAGE>
+
+ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+
+   The following table sets forth certain information known to us with respect
+to the beneficial ownership of our common stock as of December 31, 2000, except
+as noted in the footnotes below by:
+
+  . all persons who are beneficial owners of 5% or more of our common stock;
+
+  . each director;
+
+  . our Chief Executive Officer and the four named executive officers for the
+    fiscal year ended September 30, 2000, whose salary and bonus exceeded
+    $100,000; and
+
+  . all named executive officers and directors a group.
+
+   Unless otherwise indicated, each of the stockholders has sole voting and
+investment power with respect to the shares beneficially owned, subject to
+community property laws, where applicable.
+
+<TABLE>
+<CAPTION>
+                                                       Beneficial Ownership
+                                                             of Shares
+                                                       ------------------------
+Name of Beneficial Owner                                 Number       Percent
+- ------------------------                               ------------- ----------
+<S>                                                    <C>           <C>
+Officers and Directors:
+  Ruann F. Ernst(1)...................................       829,573       1.0%
+  Rick Schultz(2).....................................        78,991         *
+  Tim Wilson(3).......................................       175,311         *
+  Paul Evenson(4).....................................        94,922         *
+  Chris Albinson(5)...................................        88,858         *
+  Charlie Bass(6).....................................       501,228         *
+  Marcelo A. Gumucio(7)...............................       203,825         *
+  Christos Cotsakos(8)................................        63,866         *
+  G. Bradford Jones(9)................................       177,798         *
+  Shahan Soghikian(10)................................        10,000         *
+  All directors and named executive officers as a
+   group (10 people)(11)..............................     2,224,372       2.7%
+</TABLE>
+- --------
+*   Less than 1% percent.
+1.  Stock consists of 302,332 shares of common stock held directly by Ms. Ernst
+    and 527,241 shares of common stock subject to options exercisable within 60
+    days of December 31, 2000.
+2.  Consists of 78,991 shares of common stock subject to options exercisable
+    within 60 days of December 31, 2000.
+3.  Consists of 92,677 shares of common stock held directly by Mr. Wilson and
+    82,634 shares of common stock subject to options exercisable within 60 days
+    of December 31, 2000.
+4.  Consists of 3,200 shares of common stock held directly by Mr. Evenson and
+    91,722 shares of common stock subject to options exercisable within 60 days
+    of December 31, 2000.
+5.  Consists of 88,858 shares of common stock subject to options exercisable
+    within 60 days of December 31, 2000.
+6.  Consists of 91,945 shares of common stock held by directly Mr. Bass, 25,000
+    shares held by his spouse, 374,228 shares of common stock held directly by
+    the Bass Trust U/D/T dated April 29, 1988 (the "Bass Trust") and 10,000
+    shares of common stock subject to options exercisable within 60 days of
+    December 31, 2000. Mr. Bass, a director of Digital Island, is the Trustee
+    of the Bass Trust.
+7.  Consists of 193,825 shares of common stock held directly by Mr. Gumucio and
+    10,000 shares of common stock subject to options exercisable within 60 days
+    of December 31, 2000.
+8.  Consists of 27,222 shares of common stock subject to options exercisable
+    within 60 days of December 31, 2000 and 36,644 shares of common stock held
+    directly by The Cotsakos Revocable Trust, dated September 3, 1987. Excludes
+    2,013,367 shares of common stock, held by E*TRADE Group, Inc.
+
+                                       8
+<PAGE>
+
+    Mr. Cotsakos, a director of Digital Island, is the Trustee of the Cotsakos
+    Trust and Chairman of the Board and Chief Executive Officer of E*TRADE
+    Group, Inc. Mr. Cotsakos disclaims beneficial ownership of the shares of
+    common stock held by E*TRADE Group, Inc. except to the extent of his
+    pecuniary interest therein.
+9.  Consists of 120,057 shares of common stock held directly by him, 28,645
+    shares of common stock held directly by the Jones Family Trust, 9,548
+    shares of common stock held by W.H. Walecka Trust, DTD 11/15/97, J.E.
+    Walecka Trust DTD 11/15/97, and 10,000 shares of common stock subject to
+    options exercisable within 60 days of December 31, 2000. Excludes any
+    additional shares of common stock held by the Brentwood Venture Capital
+    entities. Mr. Jones, a director of Digital Island and a General Partner of
+    Redpoint Ventures, was formerly a General Partner of Brentwood Venture
+    Capital . Mr. Jones disclaims beneficial ownership of the shares of common
+    stock held by the Brentwood Venture Capital entities except to the extent of
+    his pecuniary interest therein. Mr. Jones is the Trustee of the W.H. Walecka
+    Trust and J.E. Walecka Trust.
+10. Consists of 10,000 shares of common stock subject to options exercisable
+    within 60 days of December 31, 2000. Excludes 2,590,266 shares of common
+    stock held by Chase Venture Capital Associates, L.P. Mr. Soghikian, a
+    director of Digital Island, is a General Partner of JP Morgan Partners, the
+    General Partner of Chase Venture Capital Associates, L.P. Mr. Soghikian
+    disclaims beneficial ownership of the shares of common stock held by Chase
+    Venture Capital Associates, L.P. except to the extent of his pecuniary
+    interest therein.
+11. See footnotes 1 through 10 above. Includes options exercisable for 936,668
+    shares of common stock within 60 days of December 31, 2000.
+
+                                       9
+<PAGE>
+
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+
+Indemnification Agreements
+
+   We have entered into indemnification agreements with each of our directors
+and executive officers. These agreements require us, among other things, to
+indemnify such directors and officers for certain expenses, judgements, fines
+and settlement amounts incurred by such person in any threatened, pending or
+complete action, suit or proceeding by reason of any event or occurrence
+arising out of such person's services as a director or officer.
+
+Officer Loans
+
+   On April 21, 1999, Ms. Ernst, our current Chairman of the Board and Chief
+Executive Officer, delivered a promissory note to us in payment of the
+exercise price of certain outstanding stock options she held under our 1998
+stock option/stock issuance plan. Ms. Ernst delivered a full-recourse
+promissory note in the principal amount of $199,998 in payment of the exercise
+price for 133,332 shares of our common stock. The note bears interest at the
+rate of 7.75% per annum, compounded semi-annually, and is secured by the
+purchased shares. Accrued interest is due and payable at successive quarterly
+intervals over the four-year term of the note, and the principal balance will
+become due and payable in one lump sum at the end of such four-year term.
+However, the entire unpaid balance of the note will become due and payable
+upon termination of employment or failure to pay any installment of interest
+when due. None of the shares serving as security for the note may be sold
+unless the principal portion of the note attributable to those shares,
+together with the accrued interest on that principal portion, is paid to us.
+
+   On June 14, 1999, Ms. Ernst borrowed an additional $128,000 from us in
+order to finance the tax liability she incurred in connection with the April
+21, 1999 exercise of her stock options for 133,332 shares. The loan is
+evidenced by a full-recourse promissory note with interest at the rate of
+7.75% per annum, compounded semi-annually, and secured by the same 133,332
+shares which serve as collateral for Ms. Ernst's April 21, 1999 promissory
+note. The terms of her note, including the due dates for payment of principal
+and accrued interest and the acceleration provisions, are substantially the
+same as the terms in effect for her April 21, 1999 note. The April 21 and June
+14, 1999 promissory notes from Ms. Ernst aggregate to a principal total
+indebtedness to Digital Island of $327,998.
+
+   In December 2000, the Company forgave a total of $109,333 of Ms. Ernst's
+outstanding principal loans.
+
+   On July 13, 1999, Mr. Albinson, our current Chief Strategy Officer, borrowed
+$100,000 from us. The loan is interest free, with $50,000 being forgiven ratably
+over a period of five years. At the end of the five-year term, the $50,000
+portion of the loan that has not been forgiven is to be repaid in one lump sum.
+In the event that Mr. Albinson's employment terminates during the five-year
+period, the outstanding unforgiven balance of the loan is to be repaid at the
+time of the termination.
+
+   In December 2000, Mr. Albinson's loan terms were revised such that $45,000
+of his outstanding principal balance is to be forgiven on April 18, 2001, and
+the remaining $45,000 is to be forgiven on October 18, 2001, provided he
+continues in our employ.
+
+   On November 8, 2000, Mr. Charles Picasso, our current Chief Operating
+Officer, delivered two promissory notes to us totaling $600,000. The first
+promissory note of $150,000 accrues interest at 8% per annum. The first
+principal payment of $100,000 is due upon the sale of Mr. Picasso's previous
+residence. The final principal payment, together with accrued interest is due
+in November 2001. The second promissory note of $450,000 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 notes are secured by Mr.
+Picasso's principal residence.
+
+                                      10
+<PAGE>
+
+   The following table indicates the highest amount outstanding under each of
+the foregoing loans during the 2000 fiscal year and the amount outstanding
+under each loan as of December 31, 2000:
+
+<TABLE>
+<CAPTION>
+                                                            Highest    Current
+                                                            FY 2000  Outstanding
+                                                            Balance    Balance
+                                                            -------- -----------
+   <S>                                                      <C>      <C>
+   Ms. Ernst............................................... $327,998  $218,665
+   Mr. Albinson............................................ $100,000  $ 90,000
+   Mr. Picasso............................................. $    --   $600,000
+</TABLE>
+
+E*TRADE Agreements
+
+   We have previously entered into a global data distribution agreement with
+E*TRADE dated August 1, 1997 where we provide hosting and network services for
+E*TRADE. Mr. Costakos, a member of our board of directors, is President, Chief
+Executive Officer and a director of E*TRADE.
+
+
+                                      11
+<PAGE>
+
+                                  SIGNATURES
+
+   Pursuant to the requirements of Section 13 or 15(d) of the Securities
+Exchange Act of 1934, the registrant has duly caused this report to be signed
+on its behalf by the undersigned, thereunto duly authorized.
+
+                                          Digital Island, Inc.
+Date: January 26, 2001
+
+                                          By: /s/ Ruann F. Ernst
+                                              ---------------------------------
+                                              Ruann F. Ernst, Chief Executive
+                                              Officer and Chairman of the Board
+                                              of Directors
+                                              (Principal Executive Officer)
+
+
+<PAGE>
+
+                                EXHIBIT INDEX
+
+Exhibit
+Number       Description
+- -------      -----------
+ 23.1        Consent of Independent Auditors
+</TEXT>
+</DOCUMENT>
+<DOCUMENT>
+<TYPE>EX-23.1
+<SEQUENCE>2
+<FILENAME>0002.txt
+<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
+<TEXT>
+
+<PAGE>
+
+                                                                    EXHIBIT 23.1
+
+
+                      CONSENT OF INDEPENDENT ACCOUNTANTS
+
+We hereby consent to the incorporation by reference in the Registration
+Statements on Form S-8 (Reg. Nos. 333-81709, 333-95355, 333-38434, 333-47454)
+and Form S-3 (Reg. Nos. 333-41540, 333-48360) of Digital Island, Inc. of our
+report dated November 10, 2000 relating to the financial statements, which
+appears in this Form 10-K. We also consent to the incorporation by reference of
+our report dated November 10, 2000 relating to the financial statement
+schedules, which appears in this Form 10-K.
+
+/s/ PricewaterhouseCoopers LLP
+
+San Francisco, California
+January 26, 2001
+
+</TEXT>
+</DOCUMENT>
+</SEC-DOCUMENT>
+-----END PRIVACY-ENHANCED MESSAGE-----