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Sample Business Contracts

1998 Stock Option/Stock Issuance Plan - Digital Island Inc.

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                             DIGITAL ISLAND, INC.
                     1998 STOCK OPTION/STOCK ISSUANCE PLAN
                     -------------------------------------
               (As Amended and Restated through March 18, 1999)


                                  ARTICLE ONE

                              GENERAL PROVISIONS
                              ------------------

     I.   PURPOSE OF THE PLAN

          This 1998 Stock Option/Stock Issuance Plan is intended to promote the
interests of Digital Island, Inc., a California corporation, by providing
eligible persons in the Corporation's employ or service with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to continue in such employ
or service.

          Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.

     II.  STRUCTURE OF THE PLAN

          A.   The Plan shall be divided into two (2) separate equity programs:

                    (i)   the Option Grant Program under which eligible persons
     may, at the discretion of the Plan Administrator, be granted options to
     purchase shares of Common Stock, and

                    (ii)  the Stock Issuance Program under which eligible
     persons may, at the discretion of the Plan Administrator, be issued shares
     of Common Stock directly, either through the immediate purchase of such
     shares or as a bonus for services rendered the Corporation (or any Parent
     or Subsidiary).

          B.   The provisions of Articles One and Four shall apply to both
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

     III. ADMINISTRATION OF THE PLAN

          A.   The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
<PAGE>

          B.   The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option or stock issuance
thereunder.

     IV.  ELIGIBILITY

          A.   The persons eligible to participate in the Plan are as follows:

                    (i)   Employees,

                    (ii)  non-employee members of the Board or the non-employee
     members of the board of directors of any Parent or Subsidiary, and

                    (iii) consultants and other independent advisors who provide
     services to the Corporation (or any Parent or Subsidiary).

          B.   The Plan Administrator shall have full authority to determine,
(i) with respect to the grants made under the Option Grant Program, which
eligible persons are to receive the option grants, the time or times when those
grants are to be made, the number of shares to be covered by each such grant,
the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times when each option is to become exercisable,
the vesting schedule (if any) applicable to the option shares and the maximum
term for which the option is to remain outstanding, and (ii) with respect to
stock issuances made under the Stock Issuance Program, which eligible persons
are to receive such stock issuances, the time or times when those issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration to be
paid by the Participant for such shares.

          C.   The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.

     V.   STOCK SUBJECT TO THE PLAN

          A.   The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 5,433,284
shares.

                                      2.
<PAGE>

          B.   Such authorized share reserve is comprised of (i) the number of
shares which remained available for issuance under the Predecessor Plan as of
the Plan Effective Date, including the shares subject to the outstanding options
to be incorporated into this Plan pursuant to the provisions of Section II of
Article Four, plus (ii) an additional increase of 794,159 shares authorized as
of the Plan Effective Date and subsequently approved by the shareholders, plus
(iii) an additional increase of 750,000 shares authorized by the Board on July
17, 1998, subject to shareholder approval, plus (iv) an additional increase of
600,000 shares authorized by the Board on October 18, 1998, subject to
shareholder approval, and plus (v) an additional increase of 1,000,000 shares
authorized by the Board on March 18, 1999, subject to shareholder approval.

          C.   Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan.

          D.   Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive. In no event shall
any such adjustments be made in connection with the conversion of one or more
outstanding shares of the Corporation's preferred stock into shares of Common
Stock.

                                      3.
<PAGE>

                                  ARTICLE TWO

                             OPTION GRANT PROGRAM
                             --------------------

     I.   OPTION TERMS

          Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
                                    --------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

          A.   Exercise Price.
               --------------

               1.   The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:

                    (i)   The exercise price per share shall not be less than
     eighty-five percent (85%) of the Fair Market Value per share of Common
     Stock on the option grant date.

                    (ii)  If the person to whom the option is granted is a 10%
     Shareholder, then the exercise price per share shall not be less than one
     hundred ten percent (110%) of the Fair Market Value per share of Common
     Stock on the option grant date.

               2.   The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:

                    (i)   in shares of Common Stock held for the requisite
     period necessary to avoid a charge to the Corporation's earnings for
     financial reporting purposes and valued at Fair Market Value on the
     Exercise Date, or

                    (ii)  to the extent the option is exercised for vested
     shares, through a special sale and remittance procedure pursuant to which
     the Optionee shall concurrently provide irrevocable instructions (A) to a
     Corporation-designated brokerage firm to effect the immediate sale of the
     purchased shares and remit to the Corporation, out of the sale proceeds
     available on the settlement date, sufficient funds to cover the aggregate
     exercise price payable for the purchased shares plus all applicable
     Federal, state and local income and employment taxes required to be
     withheld by the Corporation by reason of such

                                      4.
<PAGE>

     exercise and (B) to the Corporation to deliver the certificates for the
     purchased shares directly to such brokerage firm in order to complete the
     sale.

          Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

          B.   Exercise and Term of Options. Each option shall be exercisable at
               ----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10)
years measured from the option grant date.

          C.   Effect of Termination of Service.
               --------------------------------

               1.   The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

                    (i)   Should the Optionee cease to remain in Service for any
     reason other than death, Disability or Misconduct, then the Optionee shall
     have a period of three (3) months following the date of such cessation of
     Service during which to exercise each outstanding option held by such
     Optionee.

                    (ii)  Should Optionee's Service terminate by reason of
     Disability, then the Optionee shall have a period of twelve (12) months
     following the date of such cessation of Service during which to exercise
     each outstanding option held by such Optionee.

                    (iii) If the Optionee dies while holding an outstanding
     option, then the personal representative of his or her estate or the person
     or persons to whom the option is transferred pursuant to the Optionee's
     will or the laws of inheritance shall have a twelve (12)-month period
     following the date of the Optionee's death to exercise such option.

                    (iv)  Under no circumstances, however, shall any such option
     be exercisable after the specified expiration of the option term.

                    (v)   During the applicable post-Service exercise period,
     the option may not be exercised in the aggregate for more than the number
     of vested shares for which the option is exercisable on the date of the
     Optionee's cessation of Service. Upon the expiration of the applicable
     exercise period or (if earlier) upon the expiration of the option term, the
     option shall terminate and cease to be outstanding for any vested shares
     for which the option has not been exercised. However, the option shall,
     immediately upon the Optionee's cessation of Service, terminate and cease
     to be outstanding with respect to any and all option shares for which the
     option is not otherwise at the time exercisable or in which the Optionee is
     not otherwise at that time vested.

                                      5.
<PAGE>

                    (vi)  Should Optionee's Service be terminated for
     Misconduct, then all outstanding options held by the Optionee shall
     terminate immediately and cease to remain outstanding.

               2.   The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                    (vii)  extend the period of time for which the option is to
     remain exercisable following Optionee's cessation of Service or death from
     the limited period otherwise in effect for that option to such greater
     period of time as the Plan Administrator shall deem appropriate, but in no
     event beyond the expiration of the option term, and/or

                    (viii) permit the option to be exercised, during the
     applicable post-Service exercise period, not only with respect to the
     number of vested shares of Common Stock for which such option is
     exercisable at the time of the Optionee's cessation of Service but also
     with respect to one or more additional installments in which the Optionee
     would have vested under the option had the Optionee continued in Service.

          D.   Shareholder Rights. The holder of an option shall have no
               ------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.

          E.   Unvested Shares. The Plan Administrator shall have the discretion
               ---------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
the option grant or any shares of Common Stock subject to that option which is
more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur not later than one (1) year after the option grant date.
However, such limitation shall not be applicable to any option grants made to
individuals who are officers of the Corporation, non-employee Board members or
independent consultants.

          F.   First Refusal Rights. Until such time as the Common Stock is
               --------------------
first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.

                                      6.
<PAGE>

          G.   Limited Transferability of Options. During the lifetime of the
               ----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.

          H.   Withholding. The Corporation's obligation to deliver shares of
               -----------
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.

     II.  INCENTIVE OPTIONS

          The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
terms of this Section II.

          A.   Eligibility.  Incentive Options may only be granted to Employees.
               -----------

          B.   Exercise Price. The exercise price per share shall not be less
               --------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.

          C.   Dollar Limitation. The aggregate Fair Market Value of the shares
               -----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

          D.   10% Shareholder. If any Employee to whom an Incentive Option is
               ---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.

     III. CORPORATE TRANSACTION

          A.   The shares subject to each option outstanding under the Plan at
the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to an
outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation's repurchase rights
with respect to the unvested option shares are concurrently

                                      7.
<PAGE>

assigned to such successor corporation (or parent thereof) or (ii) such option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to those unvested option shares or (iii)
the acceleration of such option is subject to other limitations imposed by the
Plan Administrator at the time of the option grant.

          B.   All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.

          C.   Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

          D.   Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
                         --------
securities shall remain the same.

          E.   The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation's repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.

          F.   The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee's Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the earlier of (i) the expiration of the option term or (ii) the
                 -------
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more

                                      8.
<PAGE>

of the Corporation's outstanding repurchase rights with respect to shares held
by the Optionee at the time of such Involuntary Termination shall immediately
terminate on an accelerated basis, and the shares subject to those terminated
rights shall accordingly vest at that time.

          G.   The portion of any Incentive Option accelerated in connection
with a Corporate Transaction shall remain exercisable as an Incentive Option
only to the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.

          H.   The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.

                                      9.
<PAGE>

     IV.  CANCELLATION AND REGRANT OF OPTIONS

          The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.

                                      10.
<PAGE>

                                 ARTICLE THREE

                            STOCK ISSUANCE PROGRAM
                            ----------------------


     I.   STOCK ISSUANCE TERMS

                  Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.

          A.   Purchase Price.
               --------------

               1.   The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issue date. However, the purchase
price per share of Common Stock issued to a 10% Shareholder shall not be less
than one hundred and ten percent (110%) of such Fair Market Value.

               2.   Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

                    (i)   cash or check made payable to the Corporation, or

                    (ii)  past services rendered to the Corporation (or any
     Parent or Subsidiary).

          B.   Vesting Provisions.
               ------------------

               1.   Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date. Such limitation shall
not apply to any Common Stock issuances made to the officers of the Corporation,
non-employee Board members or independent consultants.

               2.   Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's

                                      11.
<PAGE>

receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

               3.   The Participant shall have full shareholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

               4.   Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.

               5.   The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the non-
completion of the vesting schedule applicable to such shares. Such waiver shall
result in the immediate vesting of the Participant's interest in the shares of
Common Stock as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.

          C.   First Refusal Rights. Until such time as the Common Stock
               --------------------
is first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.

     II.  CORPORATE TRANSACTION

          A.   Upon the occurrence of a Corporate Transaction, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.

                                      12.
<PAGE>

          B.   The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).

     III. SHARE ESCROW/LEGENDS

          Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.

                                      13.
<PAGE>

                                 ARTICLE FOUR

                                MISCELLANEOUS
                                -------------

     I.   FINANCING

          The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price or the purchase price for shares issued to such
person under the Plan by delivering a full-recourse, interest-bearing promissory
note payable in one or more installments and secured by the purchased shares.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event
shall the maximum credit available to the Optionee or Participant exceed the sum
of (i) the aggregate option exercise price or purchase price payable for the
purchased shares plus (ii) any Federal, state and local income and employment
tax liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

     II.  EFFECTIVE DATE AND TERM OF PLAN

          A.   The Plan became effective on the Plan Effective Date and
was subsequently approved by the shareholders on June 12, 1998. On July 17,
1998, October 18, 1998 and March 18, 1999, the Board authorized an increase to
the number of shares of Common Stock reserved for issuance under the Plan by an
additional 750,000 shares, 600,000 shares and 1,000,000 shares, respectively,
with each such increase subject to shareholder approval on or before July 16,
1999. If such shareholder approval is not obtained, then all options granted on
the basis of such share increases will terminate and cease to be outstanding
without ever becoming exercisable for the option shares, and no further option
grants, and no issuances of Common Stock, shall be made on the basis of such
increase. Subject to such limitation, the Plan Administrator may grant options
and issue shares under the Plan at any time after the Plan Effective Date and
before the date fixed herein for termination of the Plan.

          B.   The Plan shall serve as the successor to the Predecessor
Plan, and no further option grants or direct stock issuances shall be made under
the Predecessor Plan after the Plan Effective Date. All options outstanding
under the Predecessor Plan on the Plan Effective Date shall be incorporated into
this Plan at that time and shall be treated as outstanding options under this
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of this Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.

                                      14.
<PAGE>

          C.   The Plan shall terminate upon the earliest of (i) the
                                                 --------
expiration of the ten (10)-year period measured from the Plan Effective Date,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. All options and unvested
stock issuances outstanding at that time under the Plan shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.

     III. AMENDMENT OF THE PLAN

          A.   The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
pursuant to applicable laws and regulations.

          B.   Options may be granted under the Option Grant Program and
shares may be issued under the Stock Issuance Program which are in each instance
in excess of the number of shares of Common Stock then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.

     IV.  USE OF PROCEEDS

          Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.

     V.   WITHHOLDING

          The Corporation's obligation to deliver shares of Common Stock
upon the exercise of any options or upon the issuance or vesting of any shares
issued under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.

                                      15.
<PAGE>

     VI.   REGULATORY APPROVALS

           The implementation of the Plan, the granting of any options
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any option or (ii) under the Stock Issuance Program shall be subject
to the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted
under it and the shares of Common Stock issued pursuant to it.

     VII.  NO EMPLOYMENT OR SERVICE RIGHTS

           Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

     VIII. FINANCIAL REPORTS

           The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.

                                      16.
<PAGE>

                                   APPENDIX

          The following definitions shall be in effect under the Plan:

          A.   Board shall mean the Corporation's Board of Directors.
               -----

          B.   Code shall mean the Internal Revenue Code of 1986, as
               ----
amended.

          C.   Committee shall mean a committee of two (2) or more Board
               ---------
members appointed by the Board to exercise one or more administrative functions
under the Plan.

          D.   Common Stock shall mean the Corporation's common stock.
               ------------

          E.   Corporate Transaction shall mean either of the following
               ---------------------
shareholder-approved transactions to which the Corporation is a party:

                    (i)   a merger or consolidation in which securities
     possessing more than fifty percent (50%) of the total combined voting power
     of the Corporation's outstanding securities are transferred to a person or
     persons different from the persons holding those securities immediately
     prior to such transaction, or

                    (ii)  the sale, transfer or other disposition of all or
     substantially all of the Corporation's assets in complete liquidation or
     dissolution of the Corporation.

          F.   Corporation shall mean Digital Island, Inc., a California
               -----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Digital Island, Inc. which shall by appropriate action
adopt the Plan.

          G.   Disability shall mean the inability of the Optionee or the
               ----------
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.

          H.   Employee shall mean an individual who is in the employ of
               --------
the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.

          I.   Exercise Date shall mean the date on which the Corporation
               -------------
shall have received written notice of the option exercise.

          J.   Fair Market Value per share of Common Stock on any relevant
               -----------------
date shall be determined in accordance with the following provisions:

                                     A-1.
<PAGE>

                    (i)     If the Common Stock is at the time traded on the
         Nasdaq National Market, then the Fair Market Value shall be the closing
         selling price per share of Common Stock on the date in question, as
         such price is reported by the National Association of Securities
         Dealers on the Nasdaq National Market. If there is no closing selling
         price for the Common Stock on the date in question, then the Fair
         Market Value shall be the closing selling price on the last preceding
         date for which such quotation exists.

                    (ii)    If the Common Stock is at the time listed on any
         Stock Exchange, then the Fair Market Value shall be the closing selling
         price per share of Common Stock on the date in question on the Stock
         Exchange determined by the Plan Administrator to be the primary market
         for the Common Stock, as such price is officially quoted in the
         composite tape of transactions on such exchange. If there is no closing
         selling price for the Common Stock on the date in question, then the
         Fair Market Value shall be the closing selling price on the last
         preceding date for which such quotation exists.

                    (iii)   If the Common Stock is at the time neither listed on
         any Stock Exchange nor traded on the Nasdaq National Market, then the
         Fair Market Value shall be determined by the Plan Administrator after
         taking into account such factors as the Plan Administrator shall deem
         appropriate.

             K.  Incentive Option shall mean an option which satisfies the
                 ----------------
requirements of Code Section 422.

             L.  Involuntary Termination shall mean the termination of the
                 -----------------------
Service of any individual which occurs by reason of:

                    (i)     such individual's involuntary dismissal or discharge
         by the Corporation for reasons other than Misconduct, or

                    (ii)    such individual's voluntary resignation following
         (A) a change in his or her position with the Corporation which
         materially reduces his or her duties and responsibilities or the level
         of management to which he or she reports, (B) a reduction in his or her
         level of compensation (including base salary, fringe benefits and
         target bonuses under any corporate-performance based bonus or incentive
         programs) by more than fifteen percent (15%) or (C) a relocation of
         such individual's place of employment by more than fifty (50) miles,
         provided and only if such change, reduction or relocation is effected
         without the individual's consent.

                                     A-2.
<PAGE>

          M.   Misconduct shall mean the commission of any act of fraud,
               ----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).

          N.   1934 Act shall mean the Securities Exchange Act of 1934, as
               --------
amended.

          O.   Non-Statutory Option shall mean an option not intended to
               --------------------
satisfy the requirements of Code Section 422.

          P.   Option Grant Program shall mean the option grant program in
               --------------------
effect under the Plan.

          Q.   Optionee shall mean any person to whom an option is granted
               --------
under the Plan.

          R.   Parent shall mean any corporation (other than the
               ------
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

          S.   Participant shall mean any person who is issued shares of
               -----------
Common Stock under the Stock Issuance Program.

          T.   Plan shall mean the Corporation's 1998 Stock Option/Stock
               ----
Issuance Plan, as set forth in this document.

          U.   Plan Administrator shall mean either the Board or the
               ------------------
Committee acting in its capacity as administrator of the Plan.

          V.   Plan Effective Date shall mean May 14, 1998, the date the Plan
               -------------------
was adopted by the Board.

          W.   Predecessor Plan shall mean the Corporation's Stock Option and
               ----------------
Incentive Plan. adopted by the Board.

          X.   Service shall mean the provision of services to the
               -------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant.

                                     A-3.
<PAGE>

          Y.   Stock Exchange shall mean either the American Stock Exchange or
               --------------
the New York Stock Exchange.

          Z.   Stock Issuance Agreement shall mean the agreement entered
               ------------------------
into by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.

          AA.  Stock Issuance Program shall mean the stock issuance program in
               ----------------------
effect under the Plan.

          BB.  Subsidiary shall mean any corporation (other than the
               ----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

          CC.  10% Shareholder shall mean the owner of stock (as determined
               ---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

                                     A-4.
<PAGE>


                                DIGITAL ISLAND

                    1998 STOCK OPTION /STOCK ISSUANCE PLAN

                                PLAN AMENDMENT
                                --------------

        The Digital Island 1998 Stock Option/Stock Issuance Plan (the "Plan") is
hereby amended, effective May 19, 1999, as follows:

                1.  Section IIIA of the Plan is hereby amended to read as
follows:

                    A.  The Plan shall be administered by the Board. However,
        any or all administrative functions otherwise exercisable by the Board
        may, with respect to officers and Board members, be delegated to the
        Primary Committee and, with respect to all other persons eligible to
        participate in the Plan, to the Secondary Committee. Members of the
        Primary Committee or any Secondary Committee shall serve for such period
        of time as the Board may determine and shall be subject to removal by
        the Board at any time. The Board may also at any time terminate the
        functions of the Primary Committee or any Secondary Committee and
        reassume all powers and authority previously delegated to such
        committee.

                2.  For purposes of this Plan Amendment, the following
definitions shall be in effect:

                Primary Committee shall mean a committee of two or more Board
                -----------------
        members appointed by the Board to exercise one or more administrative
        functions under the Plan with respect to officers and non-employee Board
        members.

                Secondary Committee shall mean a committee of one or more Board
                -------------------
        members appointed by the Board to administer the Plan with respect to
        eligible persons other than officers and non-employee Board members.

                3.  Except to the extent specifically modified by this Plan
Amendment, all of the terms and conditions of the Plan shall continue in
full force and effect.

                IN WITNESS WHEREOF, Digital Island has caused this Plan
Amendment to be executed on its behalf by its duly-authorized officer on this
19th day of May, 1999.
----

                                                DIGITAL ISLAND

                                                By: /s/ Ruann T. Ernst
                                                   ----------------------------
                                                Title: CEO and President
                                                      -------------------------

                                      6.