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Investors' Rights Agreement - Digital Island Inc.

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                             DIGITAL ISLAND, INC.

                              AMENDED AND RESTATED

                          INVESTORS' RIGHTS AGREEMENT

                                        


                               February 19, 1999
<PAGE>
 
                               TABLE OF CONTENTS

                                                                    Page
                                                                    ----
Section 1 Certain Definitions                                          1
       1.1  Certain Definitions...................................     1
       1.2  "SEC" ................................................     1
       1.3  "Exchange Act"........................................     2
       1.4  "Initial Public Offering" or "IPO"....................     2
       1.5  "register", "registered" and "registration"...........     2
       1.6  "Registrable Securities"..............................     2
       1.7  "Securities Act"......................................     2
       1.8  "Affiliate"...........................................     2
Section 2 Piggyback Rights .......................................     3
       2.1  Notice of Registration................................     3
       2.2  Underwriting..........................................     3
       2.3  Right to Terminate Registration.......................     4
       2.4  Definition of Holder..................................     4
Section 3 Demand Registration ....................................     4
       3.1  Demand Registration...................................     4
       3.2  Underwritten Public Offering..........................     4
       3.3  Limitations...........................................     5
Section 4 Form S-3 Registration                                        5
       4.1  Registrations on Form S-3.............................     5
       4.2  Limitations...........................................     6
Section 5 Obligations of Company                                       6
Section 6 Expenses of Registration                                     7
Section 7 Indemnification                                              8
       7.1  The Company...........................................     8
       7.2  Holders...............................................     8
       7.3  Defense of Claims.....................................     9
Section 8 Rule 144 Reporting                                           9
Section 9 Standoff Agreement                                          10
Section 10 Limitations on Subsequent Registration Rights              10
Section 11 Information Rights                                         11
      11.1  Financial Information.................................    11
      11.2  Inspection............................................    12
      11.3  Termination of Information and Inspection Covenants...    12
      11.4  Confidentiality.......................................    13
Section 12 Right of First Refusal ................................    13
Section 13 Termination of Rights .................................    15
Section 14 Miscellaneous .........................................    15
      14.1  Assignment............................................    15
      14.2  Aggregation of Shares.................................    15
      14.3  Governing Law.........................................    15
      14.4  Counterparts..........................................    16
      14.5  Titles and Subtitles..................................    16

                                       i
<PAGE>
 
      14.6  Notices...............................................    16
      14.7  Attorneys' Fees.......................................    16
      14.8  Amendments and Waivers................................    16
      14.9  Severability..........................................    16
      14.10 Delays or Omissions...................................    16
      14.11 Entire Agreement; Superseding Effect..................    17
 

                                      ii
<PAGE>
 
                             DIGITAL ISLAND, INC.

                             AMENDED AND RESTATED
                          INVESTORS' RIGHTS AGREEMENT


          THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the
"Agreement") is entered into as of February 19, 1999, by and among DIGITAL
ISLAND, INC., a California corporation (the "Company"), and the individuals or
entities listed on the signature pages hereof (each a "Holder" and collectively,
the "Holders").


                                   RECITALS

          A.  Certain of the Holders have purchased or will purchase shares of
the Company's Series E Preferred Stock (the "Series E Preferred") pursuant to
the terms of a Series E Preferred Stock Purchase Agreement dated as of even date
herewith among the Company and such Holders (the "Purchase Agreement").

          B.  The execution of this Agreement is a condition to the closing of
the transactions contemplated by the Purchase Agreement.

          C.  The Company desires to enter into this Agreement and grant the
Holders the rights contained herein in order to fulfill such condition.

          D.  The Company and those Holders who hold shares of the Company's
Series A Preferred Stock (the "Series A Preferred"), Series B Preferred Stock
(the "Series B Preferred"), Series C Preferred Stock (the "Series C Preferred")
and Series D Preferred Stock (the "Series D Preferred"), are parties to an
Amended and Restated Rights Agreement dated as of July 13, 1998 (the "Existing
Rights Agreement"), and wish to amend and restate the Existing Rights Agreement,
upon the terms and conditions set forth herein.

          NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:

                                   Section 1
                              Certain Definitions
                              -------------------

               Certain Definitions.  As used in this Agreement, the following
               -------------------                                           
terms shall have the following respective meanings:

        1.1  "SEC" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
<PAGE>
 
        1.2  "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder, as the
same shall be in effect from time to time.

        1.3  "Initial Public Offering" or "IPO" means the Company's sale of its
Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act yielding gross proceeds to the
Company of at least $25,000,000.00 and a per share offering price of at least
$7.00 (as adjusted for stock splits and the like).

        1.4  The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (as defined below), and the declaration or
ordering of the effectiveness of such registration statement.

        1.5  "Registrable Securities" means (i) the shares of Common Stock of
the Company issuable or issued upon conversion of the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred of the
Company (such shares of Common Stock, the "Stock"), and (ii) any other shares of
the Company's Common Stock issued as (or issuable upon conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to or in exchange for or replacement of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred of the Company or the Stock, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which a Holder's
rights under this Agreement are not assigned; provided, however, that
Registrable Securities shall only be treated as Registrable Securities if and so
long as, they have not been (A) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction or (B)
sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions and restrictive legends with respect thereto are removed
upon the consummation of such sale.

        1.6  "Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the SEC promulgated thereunder, as the same
shall be in effect from time to time.

        1.7  An "Affiliate" of an entity referenced herein shall mean (i) any
entity who controls, is controlled by, or is under common control with such
entity, (ii) any constituent partner or shareholder of such entity, (iii) all
mutual funds or other pooled investment vehicles or entities under the control
or management of such entity, or the general partner or investment advisor of
such entity, or any Affiliate of such mutual funds, pooled investment vehicles,
general partner or investment advisor, or (iv) with respect to an individual,
such individual's spouse, siblings, ancestors and descendants (whether natural
or adopted), any spouses of such siblings, ancestors and descendants, any
siblings of such ancestors and descendants, and any trust established solely for
the benefit of one or more of such individual's spouse, siblings, ancestors
and/or descendants.

                                       2
<PAGE>
 
                                   Section 2
                                PIGGYBACK RIGHTS
                                ----------------

        2.1  Notice of Registration.  If at any time or from time to time, the
             ----------------------      
Company shall determine to register any of its equity securities for its own
account in an underwritten public offering, the Company will:

             (i)  promptly give to the Holders written notice thereof; and

             (ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and underwriting, all the Registrable
Securities (subject to cutback as set forth in Section 2.2) specified in a
written request or requests made within thirty (30) days after receipt of such
written notice from the Company by any Holder.

        2.2  Underwriting.  The right of any Holder to registration pursuant 
             ------------       
to this Section 2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of Registrable Securities in the underwriting to
the extent provided herein.  If any Holder proposes to distribute its securities
through such underwriting, such Holder shall (together with the Company and any
other shareholders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by the Company.  Notwithstanding any
other provision of this Section 2, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration.  The Company shall so advise the Holder and
the other shareholders distributing their securities through such underwriting
pursuant to piggyback registration rights similar to this Section 2, and the
number of shares of Registrable Securities and other securities that may be
included in the registration and underwriting shall be allocated among the
Holder and any other participating shareholders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holder and other securities held by other shareholders and entitled to
registration rights at the time of filing the registration statement, provided
that the aggregate amount of Registrable Securities held by selling Holders
included in the offering shall not be reduced below twenty percent (20%) of the
total amount of securities included in that offering unless the offering is the
Initial Public Offering of the Company's securities, in which case all
Registrable Securities held by Holders may be excluded.  In the event the
managing underwriter does determine that marketing factors require a limitation
of the number of shares to be underwritten (the "Cutback"), such Cutback shall
be applied first to any participating shareholders other than Holders of
Registrable Securities before it shall be applied to Holders of Registrable
Securities, subject to the above mentioned twenty percent (20%) reduction limit,
if at all.  To facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares
allocated to each Holder or other shareholder to the nearest 100 shares.  If any
Holder or other shareholder disapproves of the terms of any such underwriting,
he or she may elect to withdraw therefrom by written notice to the Company and
the managing underwriter.  Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to one-hundred eighty (180) days
after the effective date of the registration statement relating thereto.

                                       3
<PAGE>
 
        2.3  Right to Terminate Registration.  The Company shall have the 
             -------------------------------   
right to terminate or withdraw any registration initiated by it under this
Section 2 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.

        2.4  Definition of Holder.  Solely for purposes of this Section 2 and 
             --------------------   
for so long as he remains employed by the Company, Ron Higgins shall be deemed
to be a "Holder" and all shares of the Company's capital stock held by him shall
be deemed to be "Registrable Securities."

                                   Section 3

                              Demand Registration
                              -------------------

        3.1 Demand Registration.  Beginning on the earlier of (i) February 19,
            -------------------                                               
2001, or (ii) one year after the Company's Initial Public Offering, if Holders
of more than 66-2/3% of the Registrable Securities request that the Company file
a registration statement for the lesser of 50% of the outstanding Registrable
Securities or a number of shares yielding gross aggregate proceeds in excess of
$15,000,000, then the Company will (x) promptly give written notice of the
proposed registration to all other Holders, and (y) use its reasonable best
efforts to cause such shares to be registered (together with any Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within twenty (20) days after receipt
of such written notice from the Company); provided, however, that (a) the
Company shall not be required to effect any such registration within one-hundred
eighty (180) days prior to its good faith estimate of the date of the filing of,
and one-hundred eighty (180) days following the effective date of, a
registration statement pertaining to an underwritten public offering of the
Company's securities, (b) such registration obligation shall be deferred for not
more than sixty days if the Company furnishes the requesting holders with a
certificate of the President of the Company stating that in the good faith
judgment of the Board of Directors it would be detrimental to the Company or its
shareholders for a registration statement to be filed in the near future, but
the Company shall not be entitled to such deferral more than twice in any 12-
month period and (c) the Company shall not be obligated to effect more than a
total of two such demand registrations.  Any such registration shall be firmly
underwritten by an underwriter of nationally recognized standing which shall be
mutually agreeable to the Company and a majority in interest of the Holders
requesting the registration.  If any Holder disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Holders making the request.  The
Registrable Securities so withdrawn shall also be withdrawn from registration,
and such Registrable Securities shall not be transferred in a public
distribution prior to ninety (90) days after the effective date of such
registration; provided, however, that, if by the withdrawal of such Registrable
Securities, a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities.  Holders shall be so entitled to include additional
Registrable Securities in the registration upon written notice within 10 days of
such offer being made.

        3.2  Underwritten Public Offering.  The Company shall enter into an 
             ----------------------------   
underwriting agreement with an investment banking firm or firms containing
representations, 

                                       4
<PAGE>
 
warranties, indemnities and agreements then customarily included by an issuer in
underwriting agreements with respect to secondary distributions. The Company
shall not cause the registration under the Securities Act of any other shares of
its Common Stock to become effective (other than registration of an employee
stock plan, or registration in connection with any Rule 145 or similar
transaction) during the effectiveness of a registration requested hereunder for
an underwritten public offering if, in the judgment of the underwriter or
underwriters, marketing factors would adversely affect the price of the
Registrable Securities subject to such underwritten registration.

        3.3  Limitations.  Notwithstanding the foregoing, if at the time of 
             -----------   
any request to register Registrable Securities pursuant to this Section 3, the
Company is engaged, or has fixed plans to engage within one-hundred eighty (180)
days of the request, in a registered public offering or any other activity that,
in the good faith determination of the Board of Directors of the Company, would
be adversely affected by the requested registration to the material detriment of
the Company, then the Company may, at its option, direct that such request be
delayed for a period not in excess of one-hundred eighty (180) days from the
effective date of such offering, or the date of commencement of such other
material activity, as the case may be. Such rights to delay a request to be
exercised by the Company may not be exercised more than once in any twelve month
period.

                                   Section 4
                             FORM S-3 REGISTRATION
                             ---------------------

        4.1  Registrations on Form S-3.  Holders shall be entitled to request 
             -------------------------   
(an "S-3 Registration Request") an unlimited number of registrations of
Registrable Securities then owned by such requesting Holders on a Form S-3
registration statement or any successor form under the Securities Act (an "S-3
Registration"). The S-3 Registration Request must be made in writing and the S-3
Registration Request shall: (i) specify the number of shares intended to be
offered and sold; (ii) express the present intention of the requesting Holders
to offer or cause the offering of such shares for distribution; and (iii)
contain the undertaking of the requesting Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the SEC and
to obtain any desired acceleration of the effective date of such registration
statement. The Company shall, as soon as practicable, (a) promptly give written
notice of the proposed registration to all other Holders, and (b) file an S-3
Registration and use its reasonable best efforts to obtain all such
qualifications and compliance as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of the requesting
Holders' Registrable Securities as are specified in the S-3 Registration Request
(together with any Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company),
within 45 days after receipt of such written notice by the Company; provided,
                                                                    -------- 
however, that the Company shall not be obligated to effect any such
-------                                                            
registration, qualification or compliance, pursuant to this Section 4 if:  (i)
Form S-3 is not available for such offering by the requesting Holders; (ii) the
requesting Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate gross price to the
public of less than $1,000,000; or (iii) the Company has, within the twelve (12)
month period preceding 

                                       5
<PAGE>
 
the date of such request, already effected two registrations on Form S-3 for any
Holder pursuant to this Section 4.

        4.2  Limitations.  Notwithstanding the foregoing, if at the time of 
             -----------                                     
any request to register Registrable Securities pursuant to this Section 4, the
Company is engaged, or has fixed plans to engage in any activity that, in the
good faith determination of the Board of Directors, would be adversely affected
by the requested registration to the material detriment of the Company, then the
Company may, at its option, direct that such request be delayed for a period not
in excess of forty-five (45) days from the effective date of such material
activity. Such rights to delay a request to be exercised by the Company may not
be exercised more than once in any twelve month period.

                                   Section 5
                             OBLIGATIONS OF COMPANY
                             ----------------------

          Whenever the Company is required by the provisions of this Agreement
to use its reasonable best efforts to effect the registration of the Registrable
Securities, the Company shall: (i) prepare and, as soon as possible, file with
the SEC a registration statement with respect to the Registrable Securities, and
use its reasonable best efforts to cause such registration statement to become
effective and to remain effective until the earlier of the sale of the
Registrable Securities so registered or one hundred twenty (120) days subsequent
to the effective date of such registration provided, however, that if the
                                           --------  -------             
Holders requesting a demand registration pursuant to an S-3 Registration
pursuant to Section 4 state in their request that they desire a shelf
registration pursuant to Rule 415 under the Securities Act (a "Shelf
Registration"), then the Company shall, solely in the first such instance, cause
such registration statement to be a Shelf Registration and shall cause such
registration statement to become effective and to remain effective until the
earlier of the date of the sale of the Registerable Securities so registered or
nine (9) months subsequent to the effective date of such registration statement;
(ii) prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to make and to keep such registration statement effective and to
comply with the provisions of the Securities Act with respect to the sale or
other disposition of all securities proposed to be registered in such
registration statement until the earlier of the sale of the Registrable
Securities so registered or one hundred twenty (120) days subsequent to the
effective date of such registration statement, or, in the case of a Shelf
Registration, until the earlier of the sale of the Registerable Securities so
registered or nine (9) months subsequent to the effective date of such
registration statement; (iii) furnish to any Holder such number of copies of any
prospectus (including any preliminary prospectus and any amended or supplemented
prospectus), in conformity with the requirements of the Securities Act, as such
Holder may reasonably request in order to effect the offering and sale of the
Registrable Securities to be offered and sold, but only while the Company shall
be required under the provisions hereof to cause the registration statement to
remain current; (iv) use its reasonable best efforts to register or qualify the
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such states as Holder shall reasonably request,
maintain any such registration or qualification current until the earlier of the
sale of the Registrable Securities so registered or one hundred twenty (120)
days subsequent to the effective date of the registration statement, or, in the
case of a Shelf Registration, until the earlier of the sale of the Registrable
Securities so registered or nine (9) months subsequent to the effective date

                                       6
<PAGE>
 
of such registration statement and, take any and all other actions either
necessary or reasonably advisable to enable Holders to consummate the public
sale or other disposition of the Registrable Securities in jurisdictions where
such Holders desire to effect such sales or other disposition; (v) cause all
Registrable Securities registered pursuant hereunder to be listed on each
securities exchange on which the same class of securities of the Company are
then listed; and (vi) take all such other actions either necessary or reasonably
desirable to permit the Registrable Securities held by a Holder to be registered
and disposed of in accordance with the method of disposition described herein,
including causing the Company's senior management to use their commercially
reasonable efforts in the marketing of any securities pursuant to any
underwritten public offering so registered. Notwithstanding the foregoing, the
Company shall not be required to register or to qualify an offering of the
Registrable Securities under the laws of a state if as a condition to so doing
the Company is required to qualify to do business or to file a general consent
to service of process in any such state or jurisdiction, unless the Company is
already subject to service in such jurisdiction.

                                   Section 6
                            EXPENSES OF REGISTRATION
                            ------------------------

          Except with respect to the Demand Registrations and the S-3
Registrations set forth in Sections 3 and 4 hereof for which the Company shall
pay for only the first two Demand Registrations and the first two S-3
Registrations initiated pursuant to this Agreement, the Company shall pay all of
the fees and expenses incurred in connection with any registration statement
that is initiated pursuant to this Agreement, including, without limitation, all
SEC and blue sky registration and filing fees, printing expenses, transfer agent
and registrar fees, the fees and disbursements of the Company's outside counsel,
the reasonable fees and disbursements of one counsel to the Holders and
independent accountants (the "Registration Expenses").  If a registration
proceeding is begun upon the request of Holders pursuant to Section 3 or 4 but
such request is subsequently withdrawn, then the Holders of Registrable
Securities to have been registered may either:  (i) bear all Registration
Expenses of such proceeding, pro rata on the basis of the number of shares to
have been registered, in which case the Company shall be deemed not to have
effected a registration pursuant to Section 3 or 4, as applicable, of this
Agreement; or (ii) require the Company to bear all Registration Expenses of such
proceeding, in which case the Company shall be deemed to have effected a
registration pursuant to Section 3 or 4, as applicable, of this Agreement.
Notwithstanding the foregoing, however, if at the time of the withdrawal, the
Holders have learned of a material adverse change in the condition, business or
prospects of the Company from that known to the Holders at the time of their
request, then the Holders shall be required to pay one-half (1/2) of any of said
Registration Expenses, unless the Company shall have failed to perform any of
its obligations with respect to such registration proceeding in which case the
holders shall bear none of the Registration Expenses.  In such case, the Company
shall be deemed not to have effected a registration pursuant to Section 3 or 4,
as applicable, of this Agreement.  The Holders shall pay all of the fees and
expenses incurred in connection with any Demand Registration or S-3 Registration
initiated pursuant to this Agreement after the filing of the first two Demand
Registrations and the first two S-3 Registrations.  In addition, any
underwriting discounts, fees and disbursements of any additional counsel to the
Holders, selling commissions and stock transfer or other taxes applicable to the
Registrable Securities registered on behalf of Holders shall be borne by the
Holders of the Registrable Securities included in such registration.

                                       7
<PAGE>
 
                                   Section 7
                                INDEMNIFICATION
                                ---------------

        7.1  The Company.  To the extent permitted by law, the Company will 
             -----------   
indemnify Holders and each person controlling Holders within the meaning of
Section 15 of the Securities Act, and each underwriter if any, of the Company's
securities, with respect to any registration, qualification or compliance which
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse Holders and each person controlling Holders, and
each underwriter, if any, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by such Holder or
controlling person or underwriter seeking indemnification expressly for use
therein; and provided further, that the indemnity provided in this Section 7.1
with respect to any losses, claims, damages, liabilities or actions, arising
from a sale of Registrable Securities pursuant to a registration hereunder,
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state a material fact in any preliminary or
final prospectus (or amendment or supplement thereto) of the Company shall not
inure to the benefit of or be available to the Holders or any other person if a
copy of the prospectus, as further amended or supplemented, in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected is sent or given to those persons asserting such losses, claims,
damages, liabilities or actions within the time required by the Act and the
Rules and Regulations thereto.

        7.2  Holders.  To the extent permitted by law, each Holder will, if 
             -------   
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected (the
"Indemnifying Holder"), indemnify the Company, each of its directors and
officers and each person who controls the Company within the meaning of Section
15 of the Securities Act, and each underwriter, if any, of the Company's
securities with respect to any registration, qualification or compliance which
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
such Indemnifying Holder of any rule or regulation 

                                       8
<PAGE>
 
promulgated under the Securities Act applicable to such Indemnifying Holder in
connection with any such registration, qualification or compliance, and the
Indemnifying Holder will reimburse the Company, such directors and officers and
each person controlling Company and each underwriter, if any, for any legal or
any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, in reliance upon and in conformity with written
information furnished to the Company by such Indemnifying Holder expressly for
use therein, provided that in no event shall any indemnity under this Section
7.2 exceed the gross proceeds of the offering received by such Indemnifying
Holder; and provided further, that the indemnity provided in this Section 7.2
with respect to any losses, claims, damages, liabilities or actions, arising
from a sale of Registrable Securities pursuant to a registration hereunder,
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state a material fact in any preliminary or
final prospectus (or amendment or supplement thereto) of the Company shall not
inure to the benefit of or be available to the Company or any other person if
the Holder corrected such untrue statement or alleged untrue statement or
omission or alleged omission and sent it to the Company for inclusion in the
prospectus within the time required by the Act and the Rules and Regulations
thereto.

        7.3  Defense of Claims.  Each party entitled to indemnification under 
             -----------------   
this Section 7 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
                                 --------  -------                             
shall pay such expense if representation of the Indemnified Party by counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding, and provided further that the
                                                    -------- -------         
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 7 unless
the failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action.  No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each Indemnified
Party which consent shall not be unreasonably withheld, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation and
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any Indemnified Party.  No Indemnifying Party shall be
required to indemnify any Indemnified Party with respect to any settlement
entered into without such Indemnifying Party's prior written consent.

                                   Section 8
                               RULE 144 REPORTING
                               ------------------

                                       9
<PAGE>
 
          With a view to making available the benefits of certain rules and
regulations of the SEC which may at any time permit the sale of the Registrable
Securities to the public without registration, the Company agrees to use its
reasonable best efforts to:

          (a)  Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after ninety (90) days following the effective date of the IPO;

          (b)  File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and

          (c)  So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time from
and after ninety (90) days following the effective date of the IPO), and of the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of the Company, and
such other reports and documents so filed as a Holder may reasonably request in
availing itself of any rule or regulation of the SEC allowing such Holder to
sell any such securities without registration.

                                   Section 9
                               STANDOFF AGREEMENT
                               ------------------

          In connection with the Company's Initial Public Offering, if requested
by the Company and the managing underwriter, each Holder agrees not to offer to
sell or sell, make any short sale of, loan, grant any option for the purchase
of, or otherwise dispose of any securities of the Company held by Holder at any
time during such period (other than those included in the Initial Public
Offering, if any), directly or indirectly, without the prior written consent of
the Company or the underwriters for such period of time (not to exceed one-
hundred eighty (180) days) as may be requested by the Company and the managing
underwriter, provided that all officers, directors and other shareholders of the
Company enter into similar agreements.  In order to enforce the foregoing, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of each Holder (and the share or securities of every other person
subject to the foregoing restrictions) until the end of such period.

                                  Section 10
                 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS
                 ---------------------------------------------

          From and after the date of this Agreement, the Company shall not,
without the prior written consent of Holder(s) of at least a majority of the
outstanding Registrable Securities (excluding Ron Higgins), enter into any
agreement with any holder or prospective holder of any securities of the Company
giving such holder or prospective holder any registration rights the terms of
which are pari passu or more favorable than the registration rights granted to
Holders hereunder or to require the Company to effect a registration earlier
than the date on which Holders can first require a registration under Section
3.1.

                                       10
<PAGE>
 
                                  Section 11
                              INFORMATION RIGHTS
                              ------------------

        11.1 Financial Information.  The Company shall deliver the following 
             ---------------------   
reports or information indicated below to each Holder or any transferee of a
Holder who holds, together with Affiliates, at least 500,000 shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Registrable Securities (the "Requisite Minimum Shares"):

        (a)  Monthly Financial Statements.  As soon as available, but in any 
             ----------------------------   
event not later than 30 days after the end of each month (other than the last
month of any fiscal year of the Company), the unaudited consolidated balance
sheet of the Company and its subsidiaries as at the end of each such month and
the related unaudited consolidated statements of income and cash flows of the
Company and its subsidiaries for such month and for the elapsed period in such
fiscal year, all in reasonable detail and stating in comparative form (i) the
figures as of the end of and for the comparable periods of the preceding fiscal
year and (ii) the figures reflected in the operating budget for such period as
specified in the financial plan of the Company delivered pursuant to
subparagraph (d) hereof. All such financial statements shall be certified by the
Company's Chief Financial Officer, shall be complete and correct in all material
respects, and shall be prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
reflected therein except as stated therein and subject to normal year-end
adjustments.

        (b)  Quarterly Financial Statements.  As soon as available, but in any
             ------------------------------           
event not later than 30 days after the end of each quarter (other than the last
quarter of any fiscal year of the Company), the unaudited consolidated balance
sheet of the Company and its subsidiaries as at the end of each such quarter and
the related unaudited consolidated statements of income and cash flows of the
Company and its subsidiaries for such quarter and for the elapsed period in such
fiscal year, all in reasonable detail and stating in comparative form (i) the
figures as of the end of and for the comparable periods of the preceding fiscal
year and (ii) the figures reflected in the operating budget for such period as
specified in the financial plan of the Company delivered pursuant to
subparagraph (c) hereof. All such financial statements shall be certified by the
Company's Chief Financial Officer, shall be complete and correct in all material
respects, and shall be prepared in accordance with GAAP applied on a consistent
basis throughout the periods reflected therein except as stated therein and
subject to normal year-end adjustments.

        (c)  Annual Financial Statements.  As soon as available, but in any 
             ---------------------------   
event within 90 days after the end of each fiscal year of the Company, a copy of
the audited consolidated and consolidating balance sheet of the Company and its
subsidiaries as at the end of such fiscal year and the related audited
consolidated statements of operations, shareholders' equity and cash flows of
the Company and its subsidiaries for such fiscal year, all in reasonable detail
and stating in comparative form the figures as at the end of and for the
previous fiscal year, accompanied by an opinion of an accounting firm of
recognized national standing selected by the Company, which opinion shall state
that such accounting firm's audit was conducted in accordance 

                                       11
<PAGE>
 
with generally accepted auditing standards. All such financial statements shall
be complete and correct in all material respects and prepared in reasonable
detail and in accordance with GAAP applied on a consistent basis throughout the
periods reflected therein except as stated therein.

        (d)  Budgets and Other Information.  As soon as available, but in any 
             -----------------------------                             
event not later than 30 days prior to the end of each fiscal year of the
Company, the draft financial plan of the Company for the next succeeding fiscal
year, and prior to the end of each fiscal year the final draft of such plan, in
each such case, including but not limited to a cash flow projection and
operating budget, calculated monthly, as contained in its operating plan
approved by the Company's Board of Directors as well as any updates or revisions
to such plan as soon as available. From time to time, such additional
information which is normally prepared by the Company regarding results of
operations, financial condition, business or prospects of the Company and its
subsidiaries, as a Holder holding the Requisite Minimum Shares may reasonably
request.

        (e)  Other Reports and Statements.  Promptly (but in any event within 
             ----------------------------   
ten days) after any distribution to the Company's shareholders generally, to its
directors or to the financial community of an annual report, proxy statement or
other report or communication, a copy of each such report, proxy statement or
other report or communication and promptly (but in any event within ten days)
after any filing by the Company with the SEC or with any national securities
exchange or automated quotation system, of any publicly available annual or
periodic or special report or proxy statement or registration statement, a copy
of such report or statement and copies of all press releases and other
statements made available generally by the Company to the public concerning
material developments in the Company's business.

        11.2  Inspection.  The Company shall permit each Holder, at such 
              ----------       
Holder's expense, to visit and inspect the Company's properties, to examine its
books of account and records and to discuss the Company's affairs, finances and
accounts with its officers, with reasonable written notice to the Company and
all at such reasonable times as may be requested by such Holder; provided,
                                                                 --------  
however, that the Company shall not be obligated pursuant to this Section 11.2
-------
to provide access to any information which it reasonably considers to be a trade
secret or similar confidential information. In addition, one representative from
each of JAFCO America Ventures, Inc., Partech International, E*Trade Group,
Inc., Arbor Investors, L.L.C., and KECALP Inc. (each an "Investor
Representative") shall be entitled to attend each meeting of the Company's Board
of Directors as an observer, shall be given timely notice of each meeting of the
Company's Board of Directors in the same manner and at the same time that
directors of the Company are given notice of such meeting and shall have their
reasonable out-of-pocket expenses incurred in attending such meetings reimbursed
to the same extent and in the same manner as such expenses are reimbursed for
the members of the Company's Board of Directors. Each Investor Representative
may be changed or replaced from time to time at the discretion of JAFCO America
Ventures, Inc., Partech International, E*Trade Group, Inc., Arbor Investors,
L.L.C., and KECALP Inc., with respect to each entity's appointed Investor
Representative by written notice to the Company.

        11.3   Termination of Information and Inspection Covenants.  The 
               ---------------------------------------------------       
covenants set forth in Sections 11.1 and 11.2 shall terminate as to each Holder
and be of no further force or effect immediately upon the earliest of (a) the
consummation of an IPO; (b) at such time as the 

                                       12
<PAGE>
 
Holder fails to own the Requisite Minimum Shares; or (c) when the Company first
becomes subject to the periodic reporting requirements of Section 12(g) and
15(d) of the Exchange Act.

        11.4  Confidentiality.  Each of the Holders agrees to keep 
              ---------------        
confidential and not to disclose to persons other than its employees,
professional consultants and advisors any information concerning the Company
which is confidential or proprietary ("Confidential Information"), except as
otherwise required by law or as deemed necessary by a Holder to be disclosed to
its own partners or Affiliates. No Confidential Information shall be used or
disclosed by a Holder for any purpose except in connection with the transactions
contemplated by the Purchase Agreement and the agreements executed and delivered
in connection with the Purchase Agreement and in the enforcement of its rights
thereunder. Each Holder shall use no less a level of care with the Confidential
Information than it uses with its own confidential information. Notwithstanding
the foregoing, the restrictions set forth in this Section 11.4 shall not be
applicable to any information that is publicly available through no fault of a
Holder, any information independently developed by a Holder or its professional
consultants, any information known to a Holder or its professional consultants
before the disclosure thereof by the Company, or any information disclosed to a
Holder by a person without any confidentiality duty to the Company. This
provision shall survive any termination of this Agreement.

                                  Section 12
                             RIGHT OF FIRST REFUSAL
                             ----------------------

          The Company hereby grants to each Holder the right of first refusal to
purchase, pro rata, a portion of "New Securities" (as defined in this Section
12) that the Company may, from time to time, propose to sell and issue.  Each
Holder's pro rata share, for purposes of this right of first refusal, is the
ratio of (X) the number of shares of Common Stock owned (or issuable upon the
conversion of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred held) by such Holder immediately after
the Closing (as defined in the Purchase Agreement) to (Y) the total number of
shares of Common Stock outstanding (or issuable upon the conversion of all
outstanding Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred) immediately after the Closing, provided,
however, that in the event that any Holder elects not to purchase its pro rata
share in accordance with the above (a "Non-Participating Holder"), then each
participating Holder purchasing New Securities may purchase, on a pro rata basis
among the participating Holders, such Non-Participating Holder's pro rata share.
This right of first refusal shall be subject to the following provisions:

          (a)  "New Securities" shall mean any Common Stock and Preferred 
                --------------  
Stock of the Company whether or not authorized on the date hereof, and rights,
options or warrants to purchase such Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible into said
Common Stock or Preferred Stock; provided, however, that "New Securities" does
not include the following:

                (i)   shares of Common Stock, or options to purchase shares of
Common Stock, issued or granted to directors, employees, vendors or consultants
of the Company pursuant to option plans or other employee benefit plans or
arrangements approved by 

                                       13
<PAGE>
 
a majority of the Board of Directors of the Company, including the Option Plan
(as that term is defined in Section 2.2(c) of the Purchase Agreement);

                (ii)  shares of Common Stock or other securities issuable upon
conversion of the Company's Preferred Stock;

                (iii) securities of the Company offered to the public pursuant
to a bona fide public offering;

                (iv)  securities of the Company issued pursuant to an
acquisition of or by the Company whether by merger, consolidation or purchase or
sale of all or substantially all of the assets of the Company or another entity,
or other reorganization;

                (v)   shares of Common Stock or Preferred Stock issued in
connection with any stock split, stock dividend, or recapitalization by the
Company; or

                (vi)  securities of the Company that are purchased pursuant to
the rights provided in this Section 12.

        (b)  In the event that the Company proposes to undertake an issuance of
New Securities, it shall give each Holder written notice of its intention,
describing the type of New Securities, the price, and the general terms upon
which the Company proposes to issue the same. Each Holder shall have ten (10)
business days from the date such notice is given to agree to purchase its pro
rata share of such New Securities or any portion thereof at the price and upon
the general terms specified in the notice by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased.

        (c)  In the event that the Holders' aggregate pro rata exercised portion
is less than the amount of New Securities proposed to be issued in the notice
referred to above, the Company shall have sixty (60) days thereafter to sell (or
enter into an agreement pursuant to which the sale of New Securities covered
thereby shall be closed, if at all, within thirty (30) days from the date of
such agreement) the New Securities respecting which the Holders' rights were not
exercised at a price and upon general terms no more favorable to the purchaser
thereof than specified in the Company's notice. In the event the Company has not
sold the New Securities within such sixty (60) day period (or sold and issued
New Securities in accordance with the foregoing within thirty (30) days from the
date of such agreement), the Company shall not thereafter issue or sell any New
Securities without first offering such New Securities to the Holders in the
manner provided above.

        (d)  The right of first refusal granted under this Agreement shall
terminate upon the first to occur of (i) the effective date of a merger of the
Company with or into another corporation in which fifty percent (50%) or more of
the voting power of the Company is disposed of, or the sale of all or
substantially all of the assets of the Company unless the Company's
shareholders, as of the date of this Agreement, control more than fifty percent
(50%) of the surviving entity; (ii) the closing date of an IPO; or (iii) the
liquidation or dissolution of the Company.

                                       14
<PAGE>
 
                                  Section 13
                             TERMINATION OF RIGHTS
                             ---------------------

          Unless otherwise specified herein, the rights and provisions of this
Agreement shall terminate as to all Holders on the seventh (7th) anniversary of
the date of the Company's seventh Initial Public Offering.  The rights of any
individual Holder to receive notice and to participate in a registration
pursuant to the terms of Section 2 or Section 3 hereof or to request a
registration pursuant to the terms of Section 4 hereof shall terminate at such
time as such Holder (i) owns less than one percent (1%) of the outstanding Stock
of the Company and (ii) could sell all of the Registrable Securities held by
such Holder in any one three-month period pursuant to Rule 144 (including Rule
144(k)) under the Securities Act, and in any event, upon the second anniversary
of the IPO.

                                  Section 14
                                 MISCELLANEOUS
                                 -------------

        14.1 Assignment.  Subject to compliance with the Purchase Agreement, 
             ----------                                  
the rights to cause the Company to register Registrable Securities, the
information rights provided in Section 11, and (upon the prior written consent
of the Company, not to be unreasonably withheld) the right of first refusal
provided in Section 12 granted to the Holders by the Company under this
Agreement may be transferred or assigned by the Holders to an Affiliate or may
be transferred or assigned by any Holder to a transferee which acquires at least
100,000 Shares of the Registrable Securities (including, for such purposes, the
Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred and the Series E Preferred) owned as of the date of this Agreement by
such Holder; provided that the Company is given written notice at the time of or
             --------
within a reasonable time after said transfer or assignment, stating the name and
address of the transferee or assignee and identifying the securities with
respect to which such rights are being transferred or assigned, and, provided
                                                                     --------
further, that the transferee or assignee of such rights assumes the obligations
-------
of such Holder under this Agreement and agrees to be bound hereby pursuant to a
written instrument in form and substance reasonably satisfactory to the Company.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Any transferee or assignee shall thereafter be treated as a Holder
in all respects, subject to the limitations herein. Until the Company receives
actual notice of any transfer or assignment, it shall be entitled to rely on the
then existing list of Holders and the failure to notify the Company of any
transfer or assignment shall not affect the validity of a notice properly given
by the Company to the Holders pursuant to lists maintained by the Company.

        14.2 Aggregation of Shares.  All shares of Registrable Securities held
             ---------------------   
or acquired by affiliated entities or persons, including without limitation,
Affiliates, shall be aggregated together for the purpose of determining the
availability of any rights under this Agreement.

        14.3 Governing Law.  This Agreement shall be governed by and construed
             -------------   
under the laws of the State of California as applied to agreements entered into
solely between residents of and to be performed entirely within, such state.

                                       15
<PAGE>
 
        14.4  Counterparts.  This Agreement may be executed in two or more 
              ------------        
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

        14.5  Titles and Subtitles.  The titles and subtitles used in this 
              --------------------   
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

        14.6  Notices.  All notices, requests, demands and other communications
              -------   
under this Agreement or in connection herewith shall be given to or made upon
the Holder at the addresses set forth in the Company's records and, if to the
Company, at the address previously furnished by the Company to the Holders,
addressed to the attention of the President.

        (a)  All notices, requests, demands and other communications given or
made in accordance with the provisions of this Agreement shall be in writing,
and shall be sent by airmail, return receipt requested, or by facsimile with
confirmation of receipt, and shall be deemed to be given or made when receipt is
so confirmed.

        (b)  Any party may, by written notice to the other, alter its address or
respondent, and such notice shall be considered to have been given three (3)
days after the airmailing or faxing thereof.

        14.7  Attorneys' Fees.  If any action at law or in equity (including
              ---------------                                               
arbitration) is necessary to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.

        14.8  Amendments and Waivers.  Any term of this Agreement may be amended
              ----------------------   
or any right hereunder waived with the written consent of the Company and the
Holders of 66-2/3% of the outstanding Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred and Registrable
Securities. Any amendment or waiver effected in accordance with this Section
14.8 shall be binding upon the Holders and each transferee of the Registrable
Securities, each future holder of all such Registrable Securities and the
Company.

        14.9  Severability.  If one or more provisions of this Agreement are 
              ------------      
held to be unenforceable under applicable law, portions of such provisions, or
such provisions in their entirety, to the extent necessary, shall be severed
from this Agreement, and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

        14.10  Delays or Omissions.  No delay or omission to exercise any 
               -------------------                                        
right, power or remedy accruing to any party to this Agreement, upon any breach
or default of the other party, shall impair any such right, power or remedy of
such non-breaching party nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions 

                                       16
<PAGE>
 
or conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any Holder, shall be
cumulative and not alternative.

        14.11  Entire Agreement; Superseding Effect.  This Agreement and the 
               ------------------------------------   
documents referred to herein constitute the entire agreement between the parties
hereto pertaining to the subject matter hereof and any other written or oral
agreements between the parties hereto pertaining thereto are expressly canceled.
This Agreement amends and restates the Existing Rights Agreement in its
entirety, and the Existing Rights Agreement shall be deemed terminated upon the
execution of this Agreement by the Company and the Holders of a majority of the
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred (and Common Stock issuable upon conversion thereof) party thereto.

                                       17
<PAGE>
 
          IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Investors' Rights Agreement to be executed as of the date first written above.



"Company"                                           "Holders"
 
DIGITAL ISLAND, INC.
                                                     ------------------------
 
 
By:                                                 By:
    ------------------------                            ---------------------
 
Name:                                               Name:
     -----------------------                             --------------------
 
Title:                                              Title:
      ----------------------                              ------------------- 




              **AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT**