PSINET INC, 424B1, 1999-04-16

PSINET INC
424B1, 1999-04-16
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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<PAGE>

Rule 424(b)(1)
Registration No. 333-75579

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus supplement. +
+This prospectus supplement and the accompanying prospectus are part of an +
+effective registration statement filed with the SEC. This prospectus +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- April 14, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospectus Supplement
, 1999
(To Prospectus--April 12, 1999)

PSINet
[LOGO]

6,000,000 Shares of Common Stock

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

PSINet: . We plan to use the net
proceeds of this
. We are the leading offering to finance
independent global capital expenditures,
provider of Internet including the
solutions to acquisition of
businesses. telecommunications
bandwidth and related
facilities and
equipment and the
construction of
Internet data centers,
and for general
corporate purposes. We
may also use a portion
for acquisitions or
investments.

. PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
(703) 904-4100

Nasdaq National Market
Symbol: PSIX.

The Offering:

. We are offering . Closing: , 1999.
6,000,000 shares of our
common stock and have
granted the
underwriters an option
to purchase an
additional 900,000
shares to cover over-
allotments. The table
below does not reflect
any exercise of this
option.

Concurrent Offering:

. We are concurrently
offering, by means of a
separate prospectus
supplement, 7,000,000
shares of our %
Series C cumulative
convertible preferred
stock, excluding
1,050,000 shares
available to cover
over-allotments. This
offering and the
convertible preferred
stock offering are not
dependent on each
other.

. Our common stock trades
on the Nasdaq National
Market. On April 13,
1999, the last reported
sales price for our
common stock was
$63.625 per share.

<TABLE>
- -----------------------------------------------------
<CAPTION>
Per Share Total
- -----------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to PSINet (after expenses):
- -----------------------------------------------------
</TABLE>

This investment involves risk. See "Risk Factors" beginning on page 4 of the
accompanying prospectus.

- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus supplement or the accompanying prospectus are truthful or complete.
Nor have they made, nor will they make, any determination as to whether anyone
should buy these securities. Any representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------

Donaldson, Lufkin & Jenrette
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
BancBoston Robertson Stephens
Legg Mason Wood Walker
Incorporated

The undersigned is facilitating Internet distribution.
DLJdirect Inc.
<PAGE>

[map depicting global network configuration]

<PAGE>

TABLE OF CONTENTS

Prospectus Supplement

<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................. S-1
Use of Proceeds.................... S-9
Price Range of Common Stock and
Dividend Policy................... S-10
Capitalization..................... S-11
Selected Consolidated Financial and
Operating Data.................... S-13
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... S-15
Business........................... S-31
Management......................... S-54
Stock Ownership of Certain
Beneficial Owners and Management.. S-61
Certain Relationships and
Transactions...................... S-63
Description of Common Stock........ S-64
Description of Convertible
Preferred Stock................... S-64
Important U.S. Tax Consequences to
Non-U.S. Holders ................. S-65
Underwriting....................... S-68
Legal Matters...................... S-70
Experts............................ S-70
Glossary........................... G-1
Index to Consolidated Financial
Statements........................ F-1
</TABLE>

Prospectus
<TABLE>
<CAPTION>
Page
<S> <C>
The Company......................... 3
Risk Factors........................ 4
Use of Proceeds..................... 18
Ratios of Earnings to Combined Fixed
Charges and Preferred Dividends.... 18
Description of Capital Stock........ 22
Description of Indebtedness......... 27
Plan of Distribution................ 30
Legal Matters....................... 31
Experts............................. 31
Documents Incorporated By
Reference.......................... 31
About This Prospectus............... 32
Where You Can Find More
Information........................ 32
</TABLE>

i
<PAGE>

PROSPECTUS SUMMARY

This summary highlights more detailed information contained elsewhere in
this prospectus supplement, in the accompanying prospectus and in the documents
incorporated in this prospectus supplement or the accompanying prospectus by
reference. You should read the entire prospectus supplement and accompanying
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors" on page 4 of the accompanying prospectus. Unless
otherwise stated, all of the information in this prospectus supplement assumes
that the underwriters' over-allotment option is not exercised. Certain
technical terms used in this prospectus supplement are defined in the glossary
beginning on page G-1 of this prospectus supplement.

PSINet Inc.

Our Business

PSINet is the leading independent global provider of Internet solutions to
businesses. We provide Internet connectivity and Web hosting services to
customers in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 12 of the 20 largest global telecommunications markets. In addition to
these services, we also offer a suite of value-added products and services that
are designed to enable our customers to maximize utilization of the Internet to
more efficiently communicate with their customers, suppliers, business partners
and remote office locations. We conduct our business through operations
organized into four geographic operating segments--the U.S., Canada, Europe and
Asia. Our services and products include the following:

. Access services that offer dedicated, dial-up, wireless and digital
subscriber line, or xDSL, connections that link our customers' networks
to the Internet;

. Web hosting services that provide cost-effective solutions for the
management and maintenance of our customers' Web sites and Web-based
applications;

. Intranets and virtual private networks, or VPNs, that allow our
customers to provide secure and seamless wide area networks, or WANs,
connecting their remote offices and employees, customers and suppliers;

. E-commerce services designed to enable our customers to securely
transact business over the Internet;

. Voice-over-Internet protocol services that enable companies with
multiple business locations to transmit voice conversations over our
network at a significant savings to traditional long-distance calling;

. E-mail services that allow our customers to outsource to us the day-to-
day management and maintenance of their internal message systems; and

. Managed security services designed to protect, monitor and maintain the
integrity of our customers' networks.

We also provide wholesale and private label network connectivity and related
services to other Internet service providers, known as ISPs, and
telecommunications carriers, to further utilize our network capacity. Based on
our quarter ended December 31, 1998, we had annualized revenues of $375.6
million, of which 70% consisted of access services, 7% of Web and enhanced
services, and 23% of wholesale services.

Our Global Network

S-1
<PAGE>

and systems resources through local calls in over 150 countries. Our network
architecture consists of high capacity frame relay switches and routers
designed to deliver superior Internet connections, reliable packet control and
intelligent data traffic routing and is compatible with all of the most widely
deployed transmission technologies. We further expand the reach of our network
by connecting with other large ISPs at 137 points through 67 contractual
arrangements, called peering agreements, that permit the exchange of
information between our network and the networks of our peering partners. We
have recently opened three global Internet hosting facilities in the U.S.,
Switzerland and Canada containing a total of approximately 25,000 square feet
and are currently constructing additional data center capacity in London and
New York containing a total of approximately 61,000 square feet. We have two
network operating centers that monitor and manage network traffic 24-hours per
day, seven-days per week.

Our Target Market and Customers

Internet access services is one of the fastest growing segments of the
global telecommunication services marketplace. According to Gartner Group,
worldwide Internet access revenues are forecasted to grow from $10.1 billion in
1997 to $34.6 billion in 2002. Trends contributing to this growth in demand
include:

. the increase in corporate Internet sites and connectivity as a means to
expand customer reach and improve communications efficiency;

. business demand for advanced, highly reliable information technology
solutions designed specifically to enhance productivity and improve
efficiency;

. the need of businesses to securely and efficiently connect multiple,
geographically-dispersed locations and provide global remote access
capabilities; and

. business use of the Internet as a lower-cost alternative to traditional
telecommunications services.

Our target market consists primarily of mid-sized and large businesses in
information intensive industries. As of December 31, 1998, we served
approximately 54,700 business accounts, including 168 ISPs. The following table
provides a summary of our operations across our four geographic operating
segments as of December 31, 1998:

<TABLE>
<CAPTION>
Revenue for
Year Ended 1997 to 1998 Wholesale and Commencement
12/31/98 Revenue Business Consumer Points of- of
($Millions) Growth (%) Accounts Accounts Presence Operations
----------- ------------ -------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
U.S..................... $157 50% 22,600 661,400 245 1989
Canada.................. 27 865% 6,750 89,200 42 1996
Europe.................. 40 267% 10,700 26,540 151 1995
Asia.................... 36 762% 14,650 85,990 62 1994
---- ------ ------- ---
All Segments............ $260 113% 54,700 863,130 500
==== ====== ======= ===
</TABLE>

Some of our corporate customers include American Airlines, American Express
Company, Boeing Company, C-SPAN, Compaq Computer, DaimlerChrysler, Electronic
Data Systems (EDS), E*TRADE, Lockheed Martin Corporation, Motorola, Oracle
Corporation and Xerox Corporation. Some of our ISP customers include EarthLink,
FlashNet, IDT, Microsoft's WebTV and MindSpring.

S-2
<PAGE>

Our Strategy

Our objective is to be one of the top three providers of Internet access
services and related communications services and products in each of the 20
largest global telecommunications markets. The principal elements of our
business strategy are summarized below:

. Leverage Multiple Sales Channels. We are pursuing growth opportunities
through multiple channels consisting of our direct sales force of
approximately 550 individuals, over 1,700 resellers and referral
sources, and strategic alliances with selected telecommunications
services and equipment suppliers, networking service companies, systems
integrators and computer retailers.

. Increase Sales of Value-Added Services and New Products. We intend to
capitalize on the trend of companies seeking to increasingly outsource
their critical business applications and integrate Web-based services
and products as part of their core data networking strategy. We are
aggressively marketing value-added services and products to our existing
account base and prospective business customers, and are significantly
increasing our data center capacity to accomodate the anticipated growth
in this business.

. Accelerate Growth Through Targeted Acquisitions. We intend to make
strategic investments in or acquire:

. local or regional ISPs in markets where we have an established POP
and can benefit from the increased network utilization and local
sales force;

. ISPs in the 20 largest global telecommunications markets where we
currently do not have a presence or in those global
telecommunications markets where our current presence would be
significantly enhanced;

. related or complementary businesses to broaden our market presence
and expand our strengths in key product areas; and

. telecommunication or information technology companies which have
strong relationships with major corporations.

. Enhance Brand Name Recognition. We intend to leverage our PSINet brand
by rebranding acquired ISP operations and services under the PSINet
name, selectively using television commercials, print ads and direct
mailings which target key decision makers in the U.S. and abroad, and
acquiring corporate sponsorship rights, such as our recent acquisition
of the naming rights to the NFL Stadium of the Baltimore Ravens.

Recent Developments

. Acquisitions. Over the eighteen month period ended March 31, 1999, we
acquired 20 ISPs primarily in nine of the 20 largest global
telecommunications markets (principally in those markets outside of the
U.S.) for an aggregate cash purchase price and related payments of
approximately $293.7 million, exclusive of assumed indebtedness. As a
result, we added approximately 21,990 business and Web services
accounts, 211,860 consumer dial-up customers and over 150 POPs.

. Termination of Contingent Payment Obligation to IXC. In January 1999,
our contingent payment obligation to IXC Internet Services, Inc.
("IXC"), a subsidiary of IXC Communications, Inc., under the agreement
relating to our purchase of OC-48 bandwidth from IXC was terminated
without the payment of any additional amounts or the issuance of any
additional shares of our common stock to IXC.

S-3
<PAGE>

. Strategic Commercial Partnership with Baltimore Ravens. In January 1999,
we entered into a 20-year strategic partnership with the Baltimore
Ravens of the National Football League. We acquired, among other things,
the rights to name the Ravens' NFL stadium "PSINet Stadium" as well as
rights for sponsorship and promotion of team events and related
advertising and marketing rights. We expect to pay the Ravens
approximately $93.5 million over a 20 year period for these rights.

. Conversion of Series B Convertible Preferred Stock. During the first
quarter of 1999, all 600,000 outstanding shares of our Series B 8%
convertible preferred stock were converted into an aggregate of
3,000,000 shares of our common stock. As a result of this conversion, we
are no longer required to pay the 8% annual dividends under the terms of
the Series B preferred stock.

. Arbitration Award to Chatterjee. In March 1999, an arbitrator awarded
The Chatterjee Management Company compensatory damages, including
interest and legal expenses, from us. In conjunction with this
arbitration decision, we have recorded a charge of $49.0 million, which
accrual is reflected in other accounts payable and accrued liabilities
in our consolidated balance sheet at December 31, 1998. This award
resulted from a claim by Chatterjee brought before the International
Chamber of Commerce that we had breached the terms of a joint venture
agreement executed by the parties in September 1996. We have submitted a
request to the International Chamber of Commerce requesting that it
reconsider the amount of the damages award. However, due to the nature
of arbitration proceedings, our ability to obtain relief in this matter
is likely to be constrained. See "Business--Legal Proceedings."

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

Our principal executive offices are located at 510 Huntmar Park Drive,
Herndon, Virginia 20170. Our telephone number is (703) 904-4100.

S-4
<PAGE>

The Offering

<TABLE>
<C> <S>
Common Stock offered......................... 6,000,000 shares of our common
stock.

Shares to be outstanding after the offering.. 62,347,303 shares, based on
56,347,303 shares of our common
stock outstanding as of April 9,
1999. This does not include up
to an additional 900,000 shares
issuable upon exercise of the
underwriters' over-allotment
option. Also does not include an
aggregate of 11,248,360 shares
issuable upon exercise of stock
options granted as of April 9,
1999 (of which 3,854,273 shares
are currently issuable upon
exercise of vested stock options).

Use of Proceeds.............................. We intend to use the net
proceeds from this offering:
. to finance capital
expenditures, including
acquisition of additional
telecommunications bandwidth
and related facilities and
equipment and construction of
Internet data centers;
. for possible future
acquisitions or strategic
investments in complementary
businesses or assets; and
. as additional working capital
for general corporate
purposes.

Nasdaq National Market Symbol................ PSIX

Concurrent offering.......................... We are concurrently offering, by
means of a separate prospectus
supplement, 7,000,000 shares of
our % Series C cumulative
convertible preferred stock,
excluding 1,050,000 shares
available to cover over-
allotments. Each share of the
convertible preferred stock will
be convertible into shares
of our common stock, subject to
anti-dilution adjustments. The
completion of the convertible
preferred stock offering and
this offering are not dependent
on each other.
</TABLE>

Risk Factors

You should carefully consider all of the information set forth in this
prospectus supplement and the accompanying prospectus. In particular, you
should evaluate the specific risk factors set forth under "Risk Factors,"
beginning on page 4 of the accompanying prospectus, to ensure that you
understand the risks associated with an investment in our common stock. Please
be aware when reading the accompanying prospectus that information contained in
that prospectus may have been updated or superseded by information in this
prospectus supplement or other reports that we have filed with the SEC.

S-5
<PAGE>

Summary Consolidated Financial and Operating Data
(In thousands of U.S. dollars, except per share, ratio and operating data)

The following summary consolidated financial and operating data as of and
for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been
derived from our audited consolidated financial statements.

The information contained in this table should be read in conjunction with
the sections entitled "Selected Consolidated Financial and Operating Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Use of Proceeds" and our consolidated financial statements and
notes thereto and other financial and operating data included elsewhere in this
prospectus supplement and the accompanying prospectus or incorporated in this
prospectus supplement and the accompanying prospectus by reference.

The December 31, 1998, as adjusted, balance sheet data gives effect to this
common stock offering and the application of the estimated net proceeds
therefrom as if this offering had occurred on December 31, 1998. The December
31, 1998, as further adjusted, balance sheet data gives effect to this offering
and the concurrent offering of our % Series C cumulative convertible preferred
stock and the application of the estimated net proceeds therefrom (excluding
amounts to be paid by the purchasers of the convertible preferred stock into
the deposit account therefor) as if they had occurred on December 31, 1998.

EBITDA is used in the Internet services industry as one measure of a
company's operating performance and historical ability to service debt. EBITDA
is not determined in accordance with generally accepted accounting principles,
is not indicative of cash used by operating activities and should not be
considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles. We define EBITDA as earnings (losses) before interest
expense and interest income, taxes, depreciation and amortization, other non-
operating income and expense, and charges for intangible asset write-down and
acquired in-process research and development. Our definition of EBITDA may not
be comparable to similarly titled measures used by other companies.

For the purposes of computing the ratio of earnings to combined fixed
charges and preferred dividends, earnings consist of losses before income
taxes, equity in loss of affiliate and fixed charges. Fixed charges consist of
interest on all indebtedness, amortization of debt financing costs and that
portion of rental expense which we believe to be representative of interest
(deemed to be one-third of rental expense).

S-6
<PAGE>

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
U.S......................... $15,159 $ 36,252 $ 77,571 $103,952 $156,048
International............... 55 2,470 6,780 17,950 103,588
------- -------- -------- -------- --------
15,214 38,722 84,351 121,902 259,636
Other income, net............ -- -- 5,417 -- --
Operating costs and expenses:
Data communications and
operations................. 9,489 32,124 70,102 94,363 199,372
Sales and marketing......... 3,599 23,930 27,064 25,831 57,026
General and administrative.. 3,605 10,569 20,648 22,947 45,288
Depreciation and
amortization............... 3,183 14,778 28,035 28,347 63,424
Charge for acquired in-
process research and
development................ -- -- -- -- 70,800
Intangible asset write-
down....................... -- 9,938 -- -- --
------- -------- -------- -------- --------
Total operating costs and
expenses................... 19,876 91,339 145,849 171,488 435,910
Loss from operations......... (4,662) (52,617) (56,081) (49,586) (176,274)
Interest expense............. (731) (1,964) (5,025) (5,362) (63,914)
Non-recurring arbitration
charge...................... -- -- -- -- (49,000)
Loss before income taxes..... (5,342) (53,160) (55,256) (46,078) (262,717)
Net loss..................... (5,342) (53,160) (55,097) (45,602) (261,869)
Return to preferred
shareholders................ -- -- -- (411) (3,079)
Net loss available to common
shareholders................ (5,342) (53,160) (55,097) (46,013) (264,948)
Basic and diluted loss per
share....................... (0.42) (2.01) (1.40) (1.14) (5.32)
Shares used in computing
basic and diluted
loss per share (in
thousands).................. 12,805 26,485 39,378 40,306 49,806
Other Financial Data:
Cash flows used in operating
activities.................. $(1,097) $(30,093) $(32,543) $(15,568) $(87,586)
Cash flows used in investing
activities.................. (1,937) (21,958) (7,897) (15,560) (783,877)
Cash flows provided by (used
in) financing activities.... 4,527 151,403 (10,529) 12,598 874,246
EBITDA:
U.S......................... (772) (26,930) (20,563) (13,071) (26,170)
International............... (707) (971) (7,483) (8,168) (15,880)
------- -------- -------- -------- --------
(1,479) (27,901) (28,046) (21,239) (42,050)
Capital expenditures......... 5,009 45,166 38,390 50,074 303,550
Ratio of earnings to combined
fixed charges and preferred
dividends (deficiency of
earnings to combined fixed
charges and preferred
dividends).................. (5,307) (52,956) (54,449) (46,489) (265,796)
Other Operating Data:
Number of POPs............... 82 241 350 350 500
Number of business customer
accounts.................... 4,220 8,200 17,800 26,400 54,700
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1998 As
1998 As Further
1994 1995 1996 1997 1998 Adjusted Adjusted
------ -------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents,
short-term investments
and marketable
securities............ $3,358 $102,710 $56,390 $33,322 $ 322,508 $ 685,375 $ 957,628
Restricted cash and
short-term
investments........... -- -- 954 20,690 162,469 162,469 162,469
Total assets........... 17,055 201,830 177,112 186,181 1,284,231 1,647,098 1,919,351
Current portion of
debt.................. 3,369 16,643 26,915 39,633 59,968 59,968 59,968
Long-term debt, less
current portion....... 4,397 24,130 26,938 33,820 1,064,633 1,064,633 1,064,633
Total liabilities...... 11,721 58,600 87,329 112,752 1,404,405 1,404,405 1,404,405
Mandatorily redeemable
preferred and common
stock................. 13,617 -- -- -- -- -- --
Shareholders' equity
(deficit)............. (8,283) 143,230 89,783 73,429 (120,174) 242,693 514,946
</TABLE>

S-7
<PAGE>

Acquisitions

As part of our growth strategy, over the 18 month period ended March 31,
1999, we acquired 20 ISPs primarily in nine of the 20 largest global
telecommunications markets. The aggregate amount of the purchase prices and
related payments for these acquisitions was approximately $293.7 million,
exclusive of indebtedness assumed in connection with such acquisitions. Of such
amount, we have paid $255.5 million as of March 31, 1999 and retained the
balance to secure performance by certain sellers of indemnification or other
contractual obligations. The following table summarizes certain information
concerning these acquisitions:

<TABLE>
<CAPTION>
Ranking Among
Name of 20 Largest
Acquired Date of Business Consumer Global Telecom
Company Acquisition Principal Market Accounts (1) Accounts (1) Markets (1)
- -------- ----------- ----------------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
CalvaCom 10/97 France 1,500 2,300 5
Iprolink 1/98 Switzerland 2,400 2,600 14
iSTAR 2/98 Canada 2,700 47,000 10
ITL 4/98 Jersey, Channel Islands -- -- N/A
INX 5/98 Germany 650 15,600 3
ioNet 6/98 U.S. 2,300 21,500 1
LinkAge 6/98 Hong Kong 1,100 -- 19
CalvaPro 6/98 Sub-Sahara Africa 425 30 N/A
Interlog 7/98 Canada 2,100 41,000 10
Rimnet 8/98 Japan 260 56,000 2
TWICS 9/98 Japan 70 1,700 2
HKIGS 9/98 Hong Kong 200 -- 19
Inet 9/98 Korea 1,100 13,000 12
Tokyo
Internet 10/98 Japan 6,500 10,000 2
IXE/USN 10/98 Netherlands 85 -- 13
AsiaNet 11/98 Hong Kong 180 250 19
Spider Net 12/98 Hong Kong 30 100 19
Huge Net 12/98 Hong Kong 90 -- 19
Planete.net 2/99 France 190 780 5
Satelnet 2/99 France 110 -- 5
------ -------
Total.................. 21,990 211,860
====== =======
</TABLE>
- ----------------
(1) As of the respective dates of acquisition.

S-8
<PAGE>

USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of our common
stock offered by this prospectus supplement and the accompanying prospectus of
approximately $ million, or approximately $ million if the underwriters'
over-allotment option is exercised in full. This estimate includes the
deduction of the estimated underwriting discounts and commissions and other
fees and expenses payable by us of approximately $ .

We intend to use the net proceeds from this offering to finance capital
expenditures, including the acquisition of additional telecommunications
bandwidth and related facilities and equipment and the construction of Internet
data centers, in furtherance of our goal of becoming one of the top three
providers of Internet access services and related communications services and
products in each of the 20 largest global telecommunications markets. We also
intend to use part of the net proceeds for general corporate purposes. In
addition, as described below, we expect to use a portion of the net proceeds to
make strategic investments in or acquisitions of complementary businesses or
assets. See "Management Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."

Concurrently with this offering and by means of a separate prospectus
supplement, we are offering 7,000,000 shares of our % Series C cumulative
convertible preferred stock, plus up to an additional 1,050,000 shares of our
convertible preferred stock to cover over-allotments by the underwriters for
that offering. Each share of the convertible preferred stock will be
convertible, at the option of the holder, into shares of our common stock,
subject to customary anti-dilution adjustments. The completion of the
convertible preferred stock offering and this offering are not dependent on
each other.

We expect to use a portion of the net proceeds from this offering for
possible future investments, acquisitions or strategic alliances in businesses
or assets that are related or complementary to our existing business. As a key
part of our growth strategy, we periodically evaluate investment, acquisition
and strategic alliance candidates. We are currently evaluating several
acquisition candidates. However, we cannot assure that we will successfully
complete any such acquisitions currently being contemplated. See "Summary-
Acquisitions."

We currently intend to allocate substantial proceeds to each of the
foregoing uses. However, the precise allocation of funds among these uses will
depend on future commercial, technological, regulatory and other developments
in or affecting our business, the competitive climate in which we operate and
the emergence of future opportunities. Because of the number and variability of
factors that determine our use of the net proceeds of this offering, we cannot
assure that our application of the net proceeds will not vary substantially
from our current intentions. Pending these uses, we intend to invest the net
proceeds of this offering in short-term U.S. investment grade and government
securities.

S-9
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Our common stock has traded on The Nasdaq Stock Market's National Market
under the symbol "PSIX" since our initial public offering in May 1995. The
following table sets forth the high and low bid prices for our common stock for
the periods indicated as reported by the Nasdaq National Market. On April 13,
1999, the last reported sales price of our common stock on the Nasdaq National
Market was $63.625 per share.

<TABLE>
<CAPTION>
Price Range of
Common Stock
--------------------
High Low
---------- ---------
<S> <C> <C>
Year Ended December 31, 1997:
First Quarter............................................ $ 13 3/8 $ 6 3/4
Second Quarter........................................... 9 1/4 5 1/2
Third Quarter............................................ 9 3/4 7 3/8
Fourth Quarter........................................... 9 1/2 4 1/4
Year Ended December 31, 1998:
First Quarter............................................ $ 17 5/16 $ 4 15/16
Second Quarter........................................... 15 3/16 10
Third Quarter............................................ 21 13/16 10 1/8
Fourth Quarter........................................... 24 15/16 8 3/8
Year Ending December 31, 1999:
First Quarter............................................ $ 45 15/16 $21
Second Quarter (through April 13, 1999).................. 63 3/4 41 3/8
</TABLE>

As of April 9, 1999, there were 800 shareholders of record of our common
stock.

We have never declared or paid any cash dividends on our common stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends on our common stock in the
foreseeable future. In addition, under the terms of our existing credit
facilities, the payment of cash dividends is prohibited without the lender's
consent, and under the terms of our debt securities, the payment of cash
dividends is subject to limitations.

S-10
<PAGE>

CAPITALIZATION

The following table sets forth the cash, cash equivalents, short-term
investments and marketable securities, restricted cash and short-term
investments and capitalization of PSINet as of December 31, 1998 on:

(1) an actual basis;

(2) an as adjusted basis, which adjusts the actual amounts to give effect
to (a) the conversion of our Series B 8% convertible preferred stock
into an aggregate of 3,000,000 shares of our common stock during the
first quarter of 1999, and (b) this common stock offering at an
assumed public offering price of $63.625 per share, which was the
closing price of our common stock as of April 13, 1999, and the
application of the estimated net proceeds therefrom, as if they had
occurred on December 31, 1998; and

(3) an as further adjusted basis, which further adjusts the as adjusted
amounts to give effect to the concurrent offering of 7,000,000 shares
of our % Series C cumulative convertible preferred stock at an
assumed public offering price of $50.00 per share and the application
of the estimated net proceeds therefrom (excluding amounts to be paid
by the purchasers of the convertible preferred stock into the deposit
account therefor), as if they had occurred on December 31, 1998.

This table should be read in conjunction with the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Structure" and "Use of Proceeds" and our consolidated
financial statements and notes thereto and other financial and operating data
included elsewhere in this prospectus supplement or incorporated in this
prospectus supplement and the accompanying prospectus by reference.

<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
As
As Further
Actual Adjusted Adjusted
--------- --------- ---------
(In thousands of U.S.
dollars)
<S> <C> <C> <C>
Cash, cash equivalents, short-term investments
and marketable securities...................... $ 322,508 $ 685,375 $ 957,628
========= ========= =========
Restricted cash and short-term investments...... $ 162,469 $ 162,469 $ 162,469
========= ========= =========
Current portion of long-term debt............... $ 59,968 $ 59,968 $ 59,968
--------- --------- ---------
Long-term debt:
10% Senior Notes............................... 600,000 600,000 600,000
11 1/2% Senior Notes (plus unamortized premium
of $2,950,000)................................ 352,950 352,950 352,950
Notes payable.................................. 40,518 40,518 40,518
Capital lease obligations...................... 71,165 71,165 71,165
--------- --------- ---------
Total long-term debt.......................... 1,064,633 1,064,633 1,064,633
--------- --------- ---------
</TABLE>

S-11
<PAGE>

<TABLE>
<CAPTION>
December 31, 1998
----------------------------------
As As Further
Actual Adjusted Adjusted
---------- ---------- ----------
(In thousands of U.S. dollars)
<S> <C> <C> <C>
Shareholders' equity (deficit):
Preferred stock, $.01 par value;
29,324,858 shares authorized,
actual; 30,000,000 shares authorized, as
adjusted; 23,000,000 shares authorized,
as further adjusted; no shares issued and
outstanding.............................. -- -- --
Convertible preferred stock, Series B,
$.01 par value; $50.00 stated value;
675,142 shares authorized, actual; no
shares authorized, as adjusted and as
further adjusted; 600,000 shares issued
and outstanding, actual; no shares issued
and outstanding, as adjusted and as
further adjusted......................... 28,802 -- --
Convertible preferred stock, Series C,
$.01 par value; $50.00 stated value; no
shares authorized or issued, actual and
as adjusted; 7,000,000 shares authorized
and issued, as further adjusted.......... -- -- 272,253
Common stock, $.01 par value; 250,000,000
shares authorized;
52,083,639 shares outstanding, actual;
61,083,639 shares outstanding, as
adjusted and as further adjusted......... 522 612 612
Capital in excess of par value............ 401,990 793,569 793,569
Accumulated deficit....................... (427,597) (427,597) (427,597)
Treasury stock, 99,556 shares, at cost.... (2,005) (2,005) (2,005)
Accumulated other comprehensive income.... 36,664 36,664 36,664
Bandwidth asset to be delivered under IXC
agreement................................ (158,550) (158,550) (158,550)
---------- ---------- ----------
Total shareholders' equity (deficit)..... (120,174) 242,693 514,946
---------- ---------- ----------
Total capitalization..................... $1,004,427 $1,367,294 $1,639,547
========== ========== ==========
</TABLE>

S-12
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

(In thousands of U.S. dollars, except per share, ratio and operating data)

The following table sets forth for the periods indicated selected
consolidated financial and operating data for PSINet. The consolidated balance
sheet data and consolidated statement of operations data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
our consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. In 1998, we acquired a
significant number of businesses, issued a significant amount of debt and
incurred a non-recurring arbitration charge. In 1996 and 1997, we sold our
individual subscriber accounts and certain related assets and also sold our
software subsidiary. These transactions affect the comparability of our
financial position, results of operations and cash flows for those years. The
following selected consolidated financial and operating data should be read in
conjunction with the sections entitled "Summary Consolidated Financial and
Operating Data," "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our more detailed
consolidated financial statements and notes thereto and other financial and
operating data included elsewhere in this prospectus supplement and the
accompanying prospectus or incorporated in this prospectus supplement and the
accompanying prospectus by reference.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue...................... $15,214 $ 38,722 $ 84,351 $121,902 $ 259,636
Other income, net............ -- -- 5,417 -- --
------- -------- -------- -------- ---------
15,214 38,722 89,768 121,902 259,636
Operating costs and expenses:
Data communications and
operations................. 9,489 32,124 70,102 94,363 199,372
Sales and marketing......... 3,599 23,930 27,064 25,831 57,026
General and administrative.. 3,605 10,569 20,648 22,947 45,288
Depreciation and
amortization............... 3,183 14,778 28,035 28,347 63,424
Charge for acquired in-
process research and
development................ -- -- -- -- 70,800
Intangible asset write-
down....................... -- 9,938 -- -- --
------- -------- -------- -------- ---------
Total operating costs and
expenses................... 19,876 91,339 145,849 171,488 435,910
------- -------- -------- -------- ---------
Loss from operations......... (4,662) (52,617) (56,081) (49,586) (176,274)
Interest expense............. (731) (1,964) (5,025) (5,362) (63,914)
Non-recurring arbitration
charge...................... -- -- -- -- (49,000)
Loss before income taxes..... (5,342) (53,160) (55,256) (46,078) (262,717)
Income tax benefit........... -- -- (159) (476) (848)
Net loss..................... (5,342) (53,160) (55,097) (45,602) (261,869)
Return to preferred
shareholders................ -- -- -- (411) (3,079)
Net loss available to common
shareholders................ $(5,342) $(53,160) $(55,097) $(46,013) $(264,948)
======= ======== ======== ======== =========
Basic and diluted loss per
share....................... $ (0.42) $ (2.01) $ (1.40) $ (1.14) $ (5.32)
======= ======== ======== ======== =========
Shares used in computing
basic and diluted loss per
share (in thousands)........ 12,805 26,485 39,378 40,306 49,806
======= ======== ======== ======== =========
</TABLE>

S-13
<PAGE>

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------ ---
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Cash flows used in
operating activities.... $(1,097) $(30,093) $(32,543) $(15,568) $ (87,586)
Cash flows used in
investing activities.... (1,937) (21,958) (7,897) (15,560) (783,877)
Cash flows provided by
(used in) financing
activities.............. 4,527 151,403 (10,529) 12,598 874,246
EBITDA (as defined)...... (1,479) (27,901) (28,046) (21,239) (42,050)
Capital expenditures..... 5,009 45,166 38,390 50,074 303,550
Ratio of earnings to
combined fixed charges
and preferred dividends
(deficiency of earnings
to combined fixed
charges and preferred
dividends).............. (5,307) (52,956) (54,449) (46,489) (265,796)
Other Operating Data:
Number of POPs........... 82 241 350 350 500
Number of business
customer accounts....... 4,220 8,200 17,800 26,400 54,700
<CAPTION>
December 31,
------------------------------------------------ ---
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents,
short-term investments
and
marketable securities... $ 3,358 $102,710 $ 56,390 $ 33,322 $ 322,508
Restricted cash and
short-term investments.. -- -- 954 20,690 162,469
Total assets............. 17,055 201,830 177,112 186,181 1,284,231
Current portion of debt.. 3,369 16,643 26,915 39,633 59,968
Long-term debt, less
current portion......... 4,397 24,130 26,938 33,820 1,064,633
Total liabilities........ 11,721 58,600 87,329 112,752 1,404,405
Mandatorily redeemable
preferred and common
stock................... 13,617 -- -- -- --
Shareholders' equity
(deficit)................ (8,283) 143,230 89,783 73,429 (120,174)
</TABLE>

S-14
<PAGE>

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

You should read the following discussion in conjunction with our
consolidated financial statements and notes thereto incorporated in this
prospectus supplement and the accompanying prospectus by reference. The results
shown herein are not necessarily indicative of the results to be expected in
any future periods. This discussion contains forward-looking statements based
on current expectations which involve risks and uncertainties. Actual results
and the timing of events could differ materially from the forward-looking
statements as a result of a number of factors. For a discussion of the risk
factors that could cause actual results to differ materially from the forward-
looking statements, you should read "Risk Factors" included in the accompanying
prospectus.

General

We were founded in 1989 and were the first commercial ISP to offer Internet
connectivity to businesses. In 1993, we commenced offering dial-up Internet
connectivity to individual consumers in the U.S. on a nationwide basis. We
funded the initial buildout of our U.S. network and expansion of our operations
through the private placement of equity securities and through capital lease
financings. Since 1993, we have pursued a strategy of both internal growth and
growth through acquisitions of complementary businesses to increase both
individual and business customer accounts, enter into new geographic markets
and increase our service and product offerings. During 1995, we raised net
proceeds of $47.3 million through an initial public offering of common stock
and an additional $86.6 million through a follow-on public offering of common
stock to continue the buildout of our domestic network and to increase our
sales, marketing and customer support infrastructure. Most recently, in April
and November 1998, we completed offerings of $600.0 million aggregate principal
amount of 10% senior notes and $350.0 million aggregate principal amount of 11
1/2% senior notes, respectively, from which we received aggregate net proceeds
of $785.1 million.

In mid-1996, in order to avoid increasing pricing competition and the high
marketing and customer care costs of providing consumer access and to better
utilize our network backbone, we altered our strategy to focus on providing
wholesale access services to consumer-oriented ISPs in the United States,
rather than providing consumer access services directly. As part of this
strategy, in 1996 we sold substantially all our individual subscriber accounts
and related assets, but from time to time thereafter have acquired individual
subscriber accounts in connection with our acquisitions. To further refine our
focus on providing business Internet services, in February 1997, we sold our
software subsidiary. Beginning in the third quarter of 1996, we hired several
new executive officers with extensive experience in the telecommunications
industry to assist us in executing our business strategy. In December 1997, we
realigned our core domestic operations into three customer-focused business
units--the Corporate Network Services group, the Applications and Web Services
group, and the Carrier and ISP Services group--to more effectively meet the
emerging needs of the Internet marketplace.

We derive a majority of our revenues from providing Internet access services
to business customers and other ISPs. Business customers are typically signed
to contracts for one year terms. Revenues generated from business customers are
typically comprised of recurring monthly fees, installation and start-up
charges and sales of related equipment and services. Revenues from other ISPs
are generated pursuant to network access agreements which typically require a
minimum number of subscribers and obligate the ISP customers to pay specified
monthly fees for each subscriber using the PSINet network. In addition, we
provide a variety of value-added services, including, among others, Web
hosting, corporate intranets, VPNs, security services, e-commerce solutions and
other advanced Internet protocol or IP-based applications, such as Internet
fax. Revenues from value-added services are typically in the form of monthly
charges and are often bundled with Internet access services.

S-15
<PAGE>

We currently have operations in 12 of the 20 largest international
telecommunications markets. In addition to the United States, we have
operations in Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, the
Netherlands, Republic of Korea, Switzerland and the United Kingdom. We
typically enter a new market through the acquisition of an existing company
within the particular market. Revenue from non-U.S. operations continues to
increase as a percentage of consolidated results, comprising 52% of revenue in
the fourth quarter of 1998 and 40% for all of 1998. By comparison, non-U.S.
operations comprised 18% of revenue in the fourth quarter of 1997 and 15% for
all of 1997.

Since the commencement of our operations, we have undertaken a program of
developing and expanding our data communications network. In connection with
this program, we have made significant investments in telecommunications
circuits and equipment to produce a geographically-dispersed, Asynchronous
Transfer Mode (ATM), Integrated Service Digital Network (ISDN) and Switched
Multimegabit Data Service (SMDS) compatible frame relay network specially
designed to optimize Internet traffic. ATM, ISDN and SMDS are among the most
widely used switching standards. These investments generally are made in
advance of obtaining customers and resulting revenue. As part of our ongoing
efforts to further expand and enhance our network, we have acquired or agreed
to acquire significant amounts of global fiber-based telecommunications
bandwidth, including long-term rights, typically for 20 or more years, called
indefeasible rights of use, or IRUs, or other rights in:

. 10,000 equivalent route miles of OC-48 capacity across the United
States;

. transatlantic capacity in two STM-1s connecting the United States, the
United Kingdom and continental Europe;

. ten dark fiber optic strands connecting the New York City and
Washington, D.C. metropolitan areas and major metropolitan areas in
between, and four strands each within New York and Washington, D.C.;

. six DS-3s of transpacific capacity connecting the United States and
Japan;

. four dark fiber optic strands connecting multiple locations in the San
Francisco Bay area;

. STM-1 network bandwidth having the capability of connecting Japan,
China, Southeast Asia, India, the Middle East, Europe and the United
Kingdom;

. STM-1 network bandwidth inter-connecting 30 European cities;

. 20 dark fiber optic strands connecting the Vancouver, British Columbia
and Seattle, Washington metropolitan areas; and

. an agreement with other leading global telecommunications companies to
build the Japan-U.S. Cable Network.

The acquisition of these telecommunications bandwidth assets is expected to
increase our network capacity by a substantial magnitude and to reduce
significantly our future data communications and operations costs per
equivalent mile. In addition, the increased network capacity is expected to
enable us to offer a wider variety of higher-speed Internet and Internet-
related services to a larger customer base. As a result, we anticipate that our
data communications and operations costs as a percentage of revenue will
decrease as we substitute the acquired bandwidth for existing leased circuit
arrangements with various telecommunications carriers.

Year Ended December 31, 1998 As Compared To The Year Ended December 31, 1997

Results of Operations

Revenue. We generate revenue primarily from the sale of Internet access and
related services to businesses. Revenue was $259.6 million in 1998, an increase
of $137.7 million, or 113%, from $121.9 million in 1997. The 113% revenue
growth is broken down into 58% from those operations that were in existence at

S-16
<PAGE>

the end of 1997 and 55% from the companies we acquired in 1998. Our organic
growth is attributable to a number of factors, including an increase in the
number of business customer and ISP accounts, an increase in the average annual
revenue realized per new business customer account, and an increase in the
business account retention rate.

Our business customer account base increased by 107% to 54,700 business
accounts at the end of 1998 from 26,400 business accounts at the end of 1997.
Of the total business account growth in 1998, 8,100 business accounts resulted
from organic growth and 20,200 business accounts were attributable to the
companies we acquired. The total number of our Carrier and ISP customers grew
to 168, serving 863,000 small office home office ("SOHO")/consumer customers at
the end of 1998, from 47 ISPs serving 264,000 SOHO/consumer customers at the
end of 1997. Average annual new contract value for business accounts increased
to $6,000 in 1998 from $5,500 in 1997, which we believe reflects an increasing
demand for value-added services and higher levels of bandwidth. Our business
account retention rate improved to 79% in 1998 from 76% in 1997.

Data Communications and Operations. Data communications and operations
expenses consist primarily of leased long distance and local circuit costs as
well as personnel and related operating expenses associated with network
operations, customer support and field service. Data communications and
operations expenses were $199.4 million (76.8% of revenue) for 1998, an
increase of $105.0 million from $94.4 million (77.4% of revenue) for 1997. The
increase in expenses related principally to increases in:

(1) the number of leased long distance, dedicated customer and dial-up
circuits,

(2) expenditures for additional primary rate interface, or PRI, circuits to
support the growth of our Carrier and ISP Services business,

(3) personnel costs resulting from the expansion of our network operations,
customer support and field service staff, including through
acquisitions, and

(4) operating and maintenance charges on telecommunications bandwidth.

Our dedicated customer account base grew to 14,000 at December 31, 1998 from
7,500 at December 31, 1997, an increase of 87%. Comparing 1998 to 1997,
backbone circuit costs increased $30.2 million (or 141%), dedicated customer
circuit costs increased $18.4 million (or 77%), PRI expense increased $16.7
million (or 112%), and personnel and related operating expenses associated with
network operations, customer support and field service increased $23.8 million
(or 109%). Circuit costs relating to our new and expanded POPs and PRIs
generally are incurred by us in advance of obtaining customers and resulting
revenue. Although we expect that data communications and operations expenses
will continue to increase as our customer base grows, we anticipate that such
expenses will decrease over time as a percentage of revenue due to decreases in
unit costs and continued increases in network utilization. In particular, we
anticipate that costs for data communications and operations as a percentage of
revenue will decrease as we substitute network bandwidth purchased or acquired
under capital lease agreements for existing bandwidth currently under operating
lease agreements. Network bandwidth purchased or acquired under capital lease
agreements is recorded as an asset and amortized over its useful life. This
will, in turn, result in increases in depreciation and amortization expense
over the useful life of the bandwidth, typically 10 to 25 years.

Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, advertising costs, distribution costs and related occupancy
costs. Sales and marketing expenses were $57.0 million (22.0% of revenue) for
1998, an increase of $31.2 million from $25.8 million (21.2% of revenue) for
1997. The increase is principally attributable to costs related to a branding
and advertising campaign resulting in additional advertising expense of $10.6
million and from costs associated with the growth of our sales force in
conjunction with our growth and acquisitions.

General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for executive, financial, legal and
administrative personnel and provision for uncollectible accounts receivable.
General and administrative expenses were $45.3 million (17.4% of revenue) for
1998, an increase of $22.4 million from $22.9 million (18.8% of revenue) for
1997. The increase resulted from the

S-17
<PAGE>

addition of management staff and related operating expenses across the
organization, including increases in conjunction with our growth and
acquisitions.

Depreciation and Amortization. Depreciation and amortization costs were
$63.4 million (24.4% of revenue) for 1998, an increase of $35.1 million from
$28.3 million (23.3% of revenue) for 1997. Depreciation and amortization costs
have increased as a result of capital expenditures associated with network
infrastructure enhancements, including telecommunications bandwidth
acquisitions, and depreciation and amortization of tangible and intangible
assets related to business acquisitions. We anticipate that our depreciation
and amortization expenses will continue to increase significantly as we
substitute network bandwidth purchased or acquired under capital lease
agreements for existing bandwidth under operating lease agreements, and as we
record depreciation and amortization on tangible and intangible assets related
to business combinations and expansion of our operations.

Acquired In-Process Research and Development. The results for 1998 include
$70.8 million (27.3% of revenue) in charges for acquired in-process research
and development. The charges were based on independent valuations and reflect
technologies acquired prior to technological feasibility and for which there
was no alternative future use. The technologies exist at eight of the companies
we acquired, specifically iSTAR, INX, ioNET, LinkAge, Interlog, Rimnet, iNet,
and Tokyo Internet, comprising approximately 18% of the total fair value of
assets acquired. We have included a detailed description of the specific
technologies acquired, their value, cost to complete, expected completion date
and remaining tasks in the notes to our consolidated financial statements
included in this prospectus supplement.

The value of the in-process projects was adjusted to reflect the relative
value and contribution of the acquired research and development. In doing so,
we gave consideration to the stage of completion, the complexity of the work
completed to date, the difficulty of completing the remaining development,
costs already incurred, and the projected cost to complete the projects. The
value assigned to purchased in-process technology was based on key assumptions
that included:

. Estimated revenue associated with the respective business enterprise
valuations assuming five-year compound annual revenue growth rates of
between 22% and 45%.

. Revenue growth rates for each technology considering, among other
things, current and expected industry trends, acceptance of the
technologies and historical growth rates for similar industry products.
Estimated revenues from the purchased in-process technology projects
were generally assumed to peak in the year 2003 and decline through 2014
or earlier as other new products are expected to be introduced. These
revenue projections were based on management's estimates of market size
and growth, expected trends in technology and the expected timing of new
product introductions.

. Estimated net cash flows discounted back to their present value using a
discount rate of between 17.0% and 27.5%, which represents a premium to
our cost of capital.

. Estimated percentage-of-completion of the various in-process research
and development projects ranged from 50% to 85% complete.

If none of these projects is successfully developed, our sales and
profitability may be adversely affected in future periods. However, the failure
of any particular individual project in-process would not have a material
impact on our financial condition or our results of operations. The failure of
any particular individual project in-process could impair the value of other
intangible assets acquired.

There were no comparable charges in 1997.

Interest Expense. Interest expense was $63.9 million for 1998, an increase
of $58.5 million from $5.4 million for 1997. The increase was due to interest
on our issuance of $600.0 million aggregate principal

S-18
<PAGE>

amount of 10% senior notes in April 1998 and our issuance of $350.0 million
aggregate principal amount of 11 1/2% senior notes in November 1998, as well as
to increased borrowings and capital lease obligations incurred to finance our
network expansion and to fund our working capital requirements.

Interest Income. Interest income was $19.6 million for 1998, an increase of
$16.5 million from $3.1 million for 1997. The increase was due to interest
received on the net proceeds of our offerings of the 10% senior notes and 11
1/2% senior notes, which we invest in short-term investment grade and
government securities until such time as we use them for other purposes.

Other Income, Net. Other income, net, was $6.8 million for 1998, which
primarily relates to a $5.6 million realized gain on equity securities that we
sold during the third quarter. The total of $5.8 million in 1997 primarily
related to the sale in the first quarter of 1997 of our software subsidiary.

Non-Recurring Arbitration Charge. The results for 1998 include a $49.0
million charge for an arbitration award and related costs associated with a
dispute between PSINet and The Chatterjee Management Company. The charge
relates to a joint venture agreement executed by the parties in 1996 and there
is no ongoing relationship between the companies. There were no similar charges
in 1997. See "Business--Legal Proceedings".

Net Loss Available to Common Shareholders and Loss per Share. Our net loss
available to common shareholders for 1998 was $264.9 million, or $5.32 basic
and diluted loss per share, a $218.9 million, or 476%, increase from a net loss
available to common shareholders for 1997 of $46.0 million, or $1.14 basic and
diluted loss per share. The primary reasons for the increase were:

(1) operating losses of acquired companies,

(2) the increase in data communications costs,

(3) the first portions of our acquired IRUs were installed, leading to an
increase in depreciation and personnel costs to manage the IRUs,

(4) the charge for acquired in-process research and development relating to
acquisitions in 1998,

(5) the increase in interest expense due to the issuance of the 10% senior
notes and 11 1/2% senior notes, and

(6) the non-recurring arbitration charge.

The return to preferred shareholders, which comprises the dividends with
respect to our Series B 8% convertible preferred stock and accretion of the
related conversion premium, is subtracted from net loss in determining the net
loss available to common shareholders. Because inclusion of common stock
equivalents is antidilutive, basic and diluted loss per share are the same for
each period presented.

Year Ended December 31, 1997 As Compared To The Year Ended December 31, 1996

Results of Operations

Revenue. Revenue was $121.9 million in 1997, an increase of $37.5 million,
or 45%, from $84.4 million in 1996. The increase was attributable to a number
of factors, including an increase in the number of business customer and ISP
accounts, an increase in the average annual revenue realized per new business
customer account and an increase in sales by our international subsidiaries.
The growth was driven by an expansion of our sales force and greater public
awareness and utilization of the Internet.

In comparison with 1996, revenue for 1997 was affected by the sale in 1996
of our individual consumer accounts and related assets and by the sale in 1997
of our software subsidiary, which together provided $15.6 million of revenue in
1996 but only $0.3 million in 1997. If such revenue was excluded from 1996
revenue, our growth in revenue from 1996 to 1997 would have been 77% instead of
45%. Revenue growth in

S-19
<PAGE>

1997 was also impacted by a drop in our annualized business customer retention
rate from 79% in 1996 to 76% in 1997, which was attributable in part to an
initiative by us to remove certain non-performing accounts.

Our business customer account base increased by 48% to 26,400 business
accounts at December 31, 1997, including 47 ISPs, from 17,800 business
accounts, including 22 ISPs, at December 31, 1996. Our revenue from
international operations increased by 165% to $18.0 million in 1997 from $6.8
million in 1996, principally as a result of significant growth in our
operations in the United Kingdom, Japan and Canada.

Other Income, Net. We did not have other income, net, in 1997, compared with
$5.4 million during 1996, consisting of the consideration received, net of
related asset costs and expenses, relating to the sale of our individual
consumer subscribers and certain related tangible and intangible assets during
the second and third quarters of 1996.

Data Communications and Operations. Data communications and operations
expenses were $94.4 million (77.4% of revenue) during 1997, an increase of
$24.3 million from $70.1 million (83.1% of revenue) during 1996. The increase
in expenses related principally to increases in:

(1) the number of leased long distance, dedicated customer and dial-up
circuits,

(2) expenditures for additional primary rate interfaces to support the
growth of our Carrier and ISP Services business, and

(3) personnel costs resulting from the expansion of our network operations,
customer support and field service staff.

Sales and Marketing. Sales and marketing expenses were $25.8 million (21.2%
of revenue) during 1997, a decrease of $1.3 million from $27.1 million (32.1%
of revenue) during 1996. The decrease resulted principally from reductions in
costs following the sale of our individual consumer subscribers and related
infrastructure in 1996 and the sale of our software operations in 1997, which
were offset in part by an increase in sales and marketing expenses relating to
the expansion of our operations.

General and Administrative. General and administrative expenses were $22.9
million (18.8% of revenue) during 1997, an increase of $2.3 million from $20.6
million (24.5% of revenue) during 1996. The increase resulted from the addition
of management staff and related operating expenses across the organization,
including in conjunction with our expansion outside of the United States, and
increases in the provision for doubtful accounts receivable. These expenses
were in part offset by decreased expenses following the sale of our individual
consumer subscribers and related assets in 1996 and the sale of our software
operations in 1997.

Depreciation and Amortization. Depreciation and amortization costs were
$28.3 million (23.3% of revenue) during 1997, an increase of $0.3 million from
$28.0 million (33.2% of revenue) during 1996. Depreciation costs increased due
to additional capital expenditures associated with network infrastructure
enhancements, which were partially offset by decreases in costs resulting from
the elimination of depreciation and amortization that had been associated with
the individual consumer subscriber assets sold in 1996 and the software assets
sold in 1997.

Interest Expense. Interest expense was $5.4 million during 1997, an increase
of $0.4 million from $5.0 million in 1996. The increase was principally due to
increased borrowings and capital lease obligations incurred by us to finance
network expansion and to fund working capital requirements.

Interest Income. Interest income was $3.1 million during 1997, a decrease of
$0.7 million from $3.8 million in 1996. The decrease was principally due to a
reduction in the amount of cash and short-term, interest-bearing investments
held by us.

Other Income, Net. Other income, net, was $5.8 million for 1997, which
primarily related to the sale in the first quarter of 1997 of our software
subsidiary.

S-20
<PAGE>

Net Loss Available to Common Shareholders and Loss Per Share. As a result of
the factors discussed above, our net loss available to common shareholders for
1997 was $46.0 million (37.7% of revenue), or $1.14 basic and diluted loss per
share, a $9.1 million improvement from a net loss available to common
shareholders in 1996 of $55.1 million (65.3% of revenue), or $1.40 basic and
diluted loss per share. The return to preferred shareholders, which comprises
the dividends with respect to our Series B 8% convertible preferred stock and
accretion of the related conversion premium, is subtracted from net loss in
determining the net loss available to common shareholders. Because inclusion of
common stock equivalents is antidilutive, basic and diluted loss per share are
the same for each year presented.

Income Taxes

In 1998, we generated a pretax U.S. book loss of approximately $134.6
million and pretax non-U.S. book loss of approximately $128.1 million. As of
December 31, 1998, we had net operating loss carryforwards of approximately
$216.7 million for U.S. income tax purposes. The use of the U.S. net operating
loss carryforwards may be subject to limitations under the rules regarding a
change in stock ownership as determined by the Internal Revenue Code. These net
operating loss carryforwards may be carried forward in varying amounts until
2018. Additionally, at December 31, 1998, we had net operating loss
carryforwards for tax purposes in various jurisdictions outside the United
States amounting to approximately $158.6 million. The majority of non-U.S. loss
carryforwards will expire in varying amounts in 2003 to 2005. Some of the non-
U.S. loss carryforwards will never expire under local country tax rules.

We have provided a valuation allowance against our deferred tax assets since
realization of these benefits cannot be reasonably assured. The change in
valuation allowance was an increase of $101.7 million and $18.8 million in 1998
and 1997, respectively.

We recognized deferred income tax benefits of $0.8 million in 1998, $0.5
million in 1997, and $0.2 million in 1996, resulting primarily from deferred
tax liabilities of companies we acquired outside of the U.S. We did not
recognize any current income tax expense or benefit for any of those three
years.

Segment Information

We offer a broad range of Internet access services and related products to
businesses in the U.S. and throughout the rest of the world. As of December 31,
1998, we served primary markets in 12 countries, with operations organized into
four geographic operating segments--the U.S., Canada, Europe and Asia. In
measuring performance and allocating assets, our chief operating officer
reviews each geographic operating segment as a whole and not by types of
services provided.

We evaluate the performance of our segments and allocate resources to them
based on revenue and EBITDA. We define EBITDA as earnings (losses) before
interest expense and interest income, taxes, depreciation and amortization,
other non-operating income and expense, and charges for intangible asset write-
down and acquired in-process research and development.

S-21
<PAGE>

All our reportable segments have experienced significant revenue increases
from 1996 to 1998. Between 1996 and 1997, our revenue growth by segment was
largely organic, with the United States growing by 33%, Canada by 823%, Europe
by 114% and Asia by 205%. Starting in late 1997 and through 1998, we acquired
18 ISPs in the U.S., Canada, Europe and Asia, and our revenue growth between
1997 and 1998 reflects a mixture of organic and acquired revenue. Revenue
growth by segment between 1997 and 1998 is as follows:

<TABLE>
<CAPTION>
Percentage of
Revenue Growth Total Revenue
---------------------- ---------------
Organic Acquired Total 1998 1997
------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C>
United States........................... 45% 5% 50% 60% 85%
Canada.................................. 140% 725% 865% 11% 2%
Europe.................................. 144% 123% 267% 15% 9%
Asia.................................... 105% 657% 762% 14% 4%
------ ------
All Segments............................ 58% 55% 113% 100% 100%
====== ======
</TABLE>

EBITDA losses as a percentage of revenue improved in all segments except the
U.S. from 1997 to 1998, reflecting the overall development cycle of our
businesses in these areas. In the U.S., our EBITDA loss as a percentage of
revenue increased from (13%) to (17%), which is reflective of increased costs
charged to the U.S. segment relating to shared network, marketing and general
and administrative costs not allocated to other reportable segments.
Improvements in EBITDA as percentage of revenue for the Canadian segment was
(144%) to (28%), for the European segment was (33%) to (16%), and for the Asian
segment was (12%) to (5%). These improvements have arisen as a result of two
primary factors. First, improvements have been generated based on organic
growth factors including high levels of revenue growth and concentration of
efforts on controlling operating costs, and second, almost every company we
acquired in 1998 operated at EBITDA breakeven or better, contributing to these
improvements.

EBITDA losses as a percentage of revenue improved in all segments from 1996
to 1997. In the U.S., it went from (26%) to (13%), in Canada from (1,032%) to
(144%), in Europe from (55%) to (33%), and in Asia from (108%) to (12%). The
improvement in the U.S. reflects revenue that increased at a faster rate than
did data communications and operations, sales and marketing and general and
administrative expenses. We achieved cost reductions between 1996 and 1997 in
the U.S. due to the disposition of our software operations. Our operating
improvements outside of the U.S. primarily are the result of the development of
these operations that were largely still in a start-up mode in 1996.

Our loss from operations in 1996, 1997 and 1998 differs from EBITDA only by
depreciation and amortization and the charge for acquired in-process research
and development; therefore, loss from operations in each segment reflects
underlying trends as those impacting EBITDA as a percentage of revenue.
However, as a result of our 1998 acquisitions of telecommunications bandwidth
and other fixed assets and acquisitions of ISPs, we incurred charges for
acquired in-process research and development and increased depreciation and
amortization expenses in each geographic segment, which increased our loss from
operations. In the U.S., our loss from operations as a percentage of revenue
went from (60%) in 1996 to (37%) in 1997 to (47%) in 1998. In Canada, it went
from (1,138%) to (176%) to (104%), in Europe from (74%) to (51%) to (41%), and
in Asia from (116%) to (17%) to (160%) for those same three years,
respectively.

S-22
<PAGE>

Quarterly Results

The following tables set forth certain unaudited quarterly financial data,
and such data expressed as a percentage of revenue, for the eight quarters
ended December 31, 1998. In the opinion of management, the unaudited financial
information set forth below has been prepared on the same basis as the audited
financial information included elsewhere herein and includes all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the information set forth. The operating results for any quarter are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
1997 1998
------------------------------ -------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------ ------ ------ ------ -------
(In millions of U.S. dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 25.6 $ 29.5 $ 32.0 $ 34.8 $ 44.5 $ 53.7 $ 67.6 $ 93.9
Operating costs and
expenses:
Data communications and
operations............. 21.0 22.1 23.8 27.5 36.7 41.9 51.9 68.9
Sales and marketing..... 6.0 5.9 6.2 7.8 10.7 12.5 14.7 19.1
General and
administrative......... 5.4 6.1 5.3 6.0 7.6 10.3 11.6 15.8
Depreciation and
amortization........... 8.0 6.1 6.6 7.7 9.5 12.9 14.7 26.4
Charge for acquired in-
process research and
development............ -- -- -- -- 7.0 20.0 13.4 30.4
------ ------ ------ ------ ------ ------ ------ -------
Total operating costs
and expenses........... 40.4 40.2 41.9 49.0 71.5 97.6 106.3 160.6
------ ------ ------ ------ ------ ------ ------ -------
Loss from operations.... (14.8) (10.7) (9.9) (14.2) (27.0) (43.9) (38.7) (66.7)
Interest expense........ (1.4) (1.3) (1.5) (1.2) (2.6) (16.9) (18.7) (25.7)
Interest income......... 0.8 0.7 0.5 1.1 0.5 6.0 4.8 8.2
Other income, net....... 5.7 -- 0.2 -- -- 1.2 5.3 0.5
Non-recurring
arbitration charge..... -- -- -- -- -- -- -- (49.0)
------ ------ ------ ------ ------ ------ ------ -------
Loss before income
taxes.................. (9.7) (11.3) (10.7) (14.3) (29.1) (53.6) (47.3) (132.7)
Income tax benefit...... (0.4) -- -- -- -- -- -- (0.9)
------ ------ ------ ------ ------ ------ ------ -------
Net loss................ (9.3) (11.3) (10.7) (14.3) (29.1) (53.6) (47.3) (131.8)
Return to preferred
shareholders........... -- -- -- (0.4) (0.8) (0.8) (0.8) (0.8)
------ ------ ------ ------ ------ ------ ------ -------
Net loss available to
common shareholders.... $ (9.3) $(11.3) $(10.7) $(14.7) $(29.9) $(54.4) $(48.1) $(132.6)
====== ====== ====== ====== ====== ====== ====== =======
Basic and diluted loss
per
share (1).............. $(0.23) $(0.28) $(0.26) $(0.36) $(0.67) $(1.06) $(0.93) $ (2.56)
====== ====== ====== ====== ====== ====== ====== =======
Shares used in computing
basic and diluted loss
per share
(in thousands)......... 40,158 40,225 40,407 40,436 44,596 51,111 51,659 51,871
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
- ----------------
(1) Since there are changes in the weighted average number of shares
outstanding each quarter, the sum of the loss per share by quarter does not
equal the loss per share for 1997 and 1998.

S-23
<PAGE>

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
1997 1998
--------------------------------- --------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs and
expenses:
Data communications and
operations............. 81.8 74.9 74.3 79.2 82.5 78.1 76.8 73.3
Sales and marketing..... 23.4 19.9 19.4 22.3 24.1 23.2 21.8 20.3
General and
administrative......... 21.4 20.8 16.7 17.2 17.1 19.2 17.1 16.9
Depreciation and
amortization........... 31.3 20.5 20.5 22.1 21.3 24.0 21.7 28.1
Charge for acquired in-
process research and
development............ -- -- -- -- 15.7 37.2 19.8 32.4
----- ----- ----- ----- ----- ----- ----- ------
Total operating costs
and expenses........... 157.9 136.1 130.9 140.8 160.7 181.7 157.3 171.0
----- ----- ----- ----- ----- ----- ----- ------
Loss from operations.... (57.9) (36.1) (30.9) (40.8) (60.7) (81.7) (57.3) (71.0)
Interest expense........ (5.2) (4.4) (4.7) (3.4) (5.8) (31.4) (27.7) (27.4)
Interest income......... 3.0 2.3 1.7 3.1 1.3 11.3 7.0 8.8
Other income, net....... 22.1 (0.1) 0.6 (0.1) (0.2) 2.0 7.9 0.5
Non-recurring
arbitration charge..... -- -- -- -- -- -- -- (52.2)
----- ----- ----- ----- ----- ----- ----- ------
Loss before income
taxes.................. (38.0) (38.3) (33.3) (41.2) (65.4) (99.8) (70.1) (141.3)
Income tax benefit...... (1.8) -- -- -- -- -- -- (0.9)
----- ----- ----- ----- ----- ----- ----- ------
Net loss................ (36.2)% (38.3)% (33.3)% (41.2)% (65.4)% (99.8)% (70.1)% (140.4)%
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>

Our quarterly operating results have fluctuated and will continue to
fluctuate from period to period for the foreseeable future depending upon such
factors as:

. the timing of acquisitions,

. the success of our efforts to expand our customer base, and to sell
enhanced and value added services to existing customers,

. changes in and the timing of expenditures relating to the continued
expansion of our network,

. the delivery of bandwidth from our global network providers,

. the development of new services, and

. changes in pricing policies by us or our competitors.

In view of the significant historical growth of our operations, we believe
that period-to-period comparisons of our financial results should not be relied
upon as an indication of future performance and that we may experience
significant period-to-period fluctuations in operating results in the future.
We expect to focus in the near term on building and increasing our customer
base and increasing our network utilization both through internal growth and
through acquisitions which may require us from time to time to increase our
expenditures for personnel, marketing, network infrastructure and the
development of new services.

Liquidity And Capital Resources

We have historically had losses from operations, which have been funded
primarily through borrowings and capital lease financings from vendors,
financial institutions and other third parties, and through the issuance of
debt and equity securities. In 1998, we received net proceeds of approximately
$1.06 billion from debt financings.

Cash Flows For The Years Ended December 31, 1998, 1997 and 1996

Cash flows used in operating activities were $87.6 million in 1998, $15.6
million in 1997 and $32.5 million in 1996. Cash flows from operating activities
can vary significantly from period to period depending upon the timing of
operating cash receipts and payments, especially accounts receivable, prepaid

S-24
<PAGE>

expenses and other assets, and accounts payable and accrued liabilities. In all
three years, our net losses were the primary component of cash used in
operating activities, offset by significant non-cash depreciation and
amortization expenses relating to our network and intangible assets and, in
1998, our charge for acquired in-process research and development.

Cash flows used in investing activities were $783.9 million for 1998, $15.6
million for 1997 and $7.9 million for 1996. Acquisition activities resulted in
the use of $268.0 million of cash for 1998, net of cash acquired. Investments
in our network and facilities during 1998 resulted in total additions to fixed
assets of $303.6 million. Of this amount, $113.3 million was financed under
vendor or other financing arrangements, $27.4 million of non-cash additions
related to the bandwidth acquired from IXC Internet Services, Inc.,
$44.9 million related to other network facilities that remained in accounts
payable at year end, and $118.0 million was expended in cash. For 1997, total
additions were $50.1 million, of which $37.5 million was financed under
equipment financing agreements and $12.6 million was expended in cash, and for
1996, additions were $38.4 million, with $25.6 million financed and $12.8
million expended in cash. Purchases of short-term investments with the proceeds
of our 10% senior notes and 11 1/2% senior notes offerings during 1998 were an
aggregate of $511.7 million, offset by proceeds from the sale and maturity of
short-term investments of $251.2 million. Investing cash flows in 1998 and 1997
were reduced by $141.0 million and $19.7 million, respectively, from increases
in restricted cash and short-term investments related to various financing
alternatives.

Cash flows provided by (used in) financing activities were $874.2 million
for 1998, $12.6 million for 1997, and ($10.5) million for 1996. In 1998, 1997
and 1996, we received net proceeds from the issuance of notes payable of
$1,060.6 million, $10.1 million and $8.3 million, respectively. In 1997, we
completed a private placement of 600,000 shares of our Series B convertible
preferred stock for gross proceeds of $30.0 million. In 1998, 1997 and 1996, we
made repayments aggregating $189.5 million, $27.7 million, and $20.8 million,
respectively, on our capital lease obligations and notes payable.

As of December 31, 1998, we had $485.0 million of cash, cash equivalents,
restricted cash, short-term investments and marketable securities.

Capital Structure

Our capital structure at December 31, 1998 consisted of a revolving credit
facility, other lines of credit, capital lease obligations, 10% senior notes,
11 1/2% senior notes, preferred stock and common stock.

Total borrowings at December 31, 1998 were $1.12 billion, which included
$60.0 million in current obligations and $1.06 billion in long-term capital
lease obligations and notes payable. We also had $1.2 million of letters of
credit outstanding as of December 31, 1998.

Our total U.S. borrowings at December 31, 1998 were $1.07 billion,
comprising $953.0 million of senior notes, $109.7 million of capital leases and
$7.8 million of other notes. The majority of our U.S. debt was added through
the issuance of our 10% senior notes and 11 1/2% senior notes in April and
November 1998, respectively. Total non-U.S. borrowings at December 31, 1998
were $54.1 million, comprising $11.0 million of capital leases and $43.1
million of other notes. The majority of our non-U.S. debt was added through our
acquisitions completed in 1998 and is secured by specific telecommunications
assets and letters of credit. In 1999, we expect to make interest payments on
our 10% and 11 1/2% senior notes and payments on our capital leases and other
notes payable of $169.2 million in the aggregate.

In September 1998, we entered into a new three year senior secured revolving
credit facility to replace our existing bank credit arrangements in the United
States. The revolving credit facility expires on September 29, 2001 and has an
aggregate principal amount of $110.0 million, of which no amounts were
outstanding and $108.8 million was available to draw at December 31, 1998. In
addition, as of December 31, 1998, $12.9 million was available for purchases of
equipment and other fixed assets under various other financing arrangements,
after designating $27.9 million of payables for various equipment purchases.

S-25
<PAGE>

Our bank financing arrangements in the U.S., which are secured by
substantially all of our assets, require us to satisfy many financial covenants
such as those relating to consolidated revenue, leverage, liquidity and EBITDA
(as defined therein), and prohibit us from paying cash dividends and
repurchasing our capital stock without the lender's consent. In particular, we
are prohibited from permitting:

. consolidated revenue for the period of four consecutive fiscal quarters
to be less than $215.0 million during the six month period beginning
December 31, 1998, $285.0 million during the six month period beginning
June 30, 1999, $350.0 million during the six month period beginning
December 31, 1999, $425.0 million during the six month period beginning
June 30, 2000, and $500.0 million on December 31, 2000 and thereafter;

. the ratio of consolidated debt minus cash, excluding cash escrowed with
respect to the payment of obligations, to annualized consolidated
revenue for the most recent fiscal quarter for which financial
statements have been delivered, as adjusted to give pro forma effect to
any acquisitions completed during or after such fiscal quarter, to
exceed 2.5 to 1 at any time;

. the sum of cash, excluding cash escrowed with respect to the payment of
obligations, and available borrowing capacity under our credit facility
at any time to be less than $100.0 million; and

. EBITDA (as defined therein), to be worse than negative $45.0 million,
negative $40.0 million, negative $29.0 million, negative $15.0 million,
$0, $15.0 million, $25.0 million, $40.0 million and $50.0 million for
the period of four consecutive fiscal quarters ending on each of
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999,
December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000 and
December 31, 2000, respectively.

At December 31, 1998, we were in compliance with all such covenants.

In April 1998, we completed an offering of $600.0 million aggregate
principal amount of 10% senior notes due 2005 and in November 1998 we completed
offerings of $350.0 million aggregate principal amount of 11 1/2% senior notes
due 2008. The aggregate net proceeds of these offerings, after giving effect to
discounts, commissions, premiums and expenses and the establishment of an
initial $138.7 million escrow arrangement to fund when due the first five
interest payments on our 10% senior notes, were $785.1 million.

The indentures governing the 10% senior notes and the 11 1/2% senior notes
contain many covenants with which we must comply relating to, among other
things, the following matters:

. a limitation on our payment of cash dividends, repurchase of capital
stock, payment of principal on subordinated indebtedness and making of
certain investments, unless after giving effect to each such payment,
repurchase or investment, certain operating cash flow coverage tests are
met, excluding permitted payments and investments;

. a limitation on our incurrence and our subsidiaries' incurrence of
additional indebtedness, unless at the time of such incurrence, our
ratio of debt to annualized operating cash flow would be less than or
equal to 6.0 to 1.0 prior to April 1, 2001 and less than or equal to 5.5
to 1.0 on or after April 1, 2001, excluding permitted incurrences of
debt;

. a limitation on our incurrence and our subsidiaries' incurrence of
liens, unless the 10% senior notes and the 11 1/2% senior notes are
secured equally and ratably with the obligation or liability secured by
such lien, excluding permitted liens;

. a limitation on the ability of any of our subsidiaries to create or
otherwise cause to exist any encumbrance or restriction on the payment
of dividends or other distributions on their capital stock, payment of
indebtedness owed to us or to any of our other subsidiaries, making of
investments in us or in any of our other subsidiaries, or transfer of
any of their properties or assets to us or any of our other
subsidiaries, excluding certain permitted encumbrances and restrictions;

. a limitation on certain mergers, consolidations and sales of assets by
us or our subsidiaries;

. a limitation on transactions with our affiliates;

S-26
<PAGE>

. a limitation on the ability of any of our subsidiaries to guarantee or
otherwise become liable with respect to any of our indebtedness unless
such subsidiary provides for a guarantee of the 10% senior notes and the
11 1/2% senior notes on the same terms as the guarantee of such
indebtedness;

. a limitation on sale and leaseback transactions by us or our
subsidiaries;

. a limitation on issuances and sales of capital stock of our
subsidiaries; and

. a limitation on the ability of us or our subsidiaries to engage in any
business not substantially related to a telecommunications business.

At December 31, 1998, we were in compliance with all such covenants.

In November 1997, we completed a private placement of 600,000 shares of our
Series B convertible preferred stock for gross proceeds of $30.0 million.
During the first quarter of 1999, all outstanding shares of the Series B
preferred stock, which accrued dividends at an annual rate of 8%, were
converted into an aggregate of 3,000,000 shares of our common stock. As a
result of this conversion, we are no longer required to pay the 8% annual
dividends under the terms of the Series B preferred stock, resulting in the
elimination of approximately $2.4 million in annual dividend expense.

Commitments, Capital Expenditures And Future Financing Requirements

As of December 31, 1998, we had commitments to certain telecommunications
vendors totaling $95.4 million payable in various years through 2011.
Additionally, we have various agreements to lease office space and facilities
and, as of December 31, 1998, were obligated to make future minimum lease
payments of $40.4 million on non-cancellable operating leases expiring in
various years through 2009.

For some of the acquisitions made in 1998, we have retained a portion of the
purchase price under hold-back provisions of the purchase agreements to secure
performance by certain sellers of indemnification or other contractual
obligations of the sellers. These acquisition hold-back liabilities are
generally payable up to 24 months after the date of closing of the respective
acquisitions. Acquisition hold-back liabilities total $38.2 million at December
31, 1998. In addition, the purchase price relating to one acquisition may be
increased by up to $8.0 million pursuant to an earnout provision in the event
the acquired company achieved certain levels of operating results in the period
following the acquisition. This amount will be recorded as additional cost of
the acquired company and reflected as additional purchased goodwill if it
becomes probable that the amount will be paid. At December 31, 1998, no amounts
have been accrued since the final outcome of the earnout provision was not
determinable.

In connection with our recently announced 20-year commercial relationship
with the Baltimore Ravens of the National Football League, we acquired, among
other things, rights to name the Ravens' NFL Stadium "PSINet Stadium" as well
as rights for sponsorship and promotion of team events and related advertising
and marketing rights. In addition, we have the right to develop a Baltimore
Ravens' web site and provide related Internet services to subscribing fan
members which, along with other commercial aspects of the transaction, are
expected to bring revenues to both organizations through service and membership
fees, e-commerce and promotional ventures. In exchange for all of these rights,
we will make payments to the Baltimore Ravens over a 20-year period. We paid
$11.8 million in January 1999, which includes a one-time prepayment of
$9.25 million under the stadium naming rights agreement. Annual payments for
2000 and for the 18 years thereafter start at $2.6 million, with successive
annual increases of approximately 5%. We expect that the total payments to be
made over the 20-year period will be approximately $93.5 million.

In connection with the non-recurring arbitration charge, we have recorded an
accrual of $49.0 million in 1998 for the award and related costs, which could
be paid in 1999 from available cash.

We acquire fiber-based telecommunications bandwidth through purchases and
capital leases. Some of the purchase agreements have obligations for future
cash payments that coincide with the delivery of bandwidth. At December 31,
1998, we were obligated to make future payments under these purchase agreements
that total $103.7 million, most of which will be paid in 1999.

S-27
<PAGE>

We expect to continue to seek opportunities to acquire fiber-based
telecommunications bandwidth to enhance our global network capabilities. In
addition to the U.S. and Canada, we anticipate that such bandwidth acquisitions
will be in Europe and Asia and would be accompanied by capital expenditures in
the deployment of high activity POPs designed and located with the objective of
optimizing the efficient use of the bandwidth. We currently anticipate that
these expenditures in 1999 will be consistent with those in 1998 and will be
financed through a combination of capital leases, existing working capital and
other sources of financing.

We presently believe, based on the flexibility we expect to have in the
timing of orders of bandwidth, in outfitting our POPs with appropriate
telecommunications and computer equipment, and in controlling the pace and
scope of our anticipated buildout of our international Internet network, that
we will have a reasonable degree of flexibility to adjust the amount and timing
of such capital expenditures in response to our then existing financing
capabilities, market conditions, competition and other factors. Accordingly, we
believe that working capital generated from the use of acquired bandwidth,
together with other existing working capital, working capital from existing
credit facilities, from capital lease financings, from the proceeds of this
offering and our concurrent convertible preferred stock offering and from
future equity or debt financings, which we presently expect to be able to
obtain when needed, will be sufficient to meet the currently anticipated
working capital and capital expenditure requirements of our operations. There
can be no assurance, however, that we will have access to sufficient additional
capital and/or financing on satisfactory terms to enable us to meet our capital
expenditure and working capital requirements.

Other Possible Strategic Relationships And Acquisitions

We anticipate that we will continue to seek to develop relationships with
strategic partners, both domestically and internationally, and to acquire
assets, including, without limitation, additional telecommunications bandwidth,
and businesses principally relating to or complementary to our existing
business. Certain of these strategic relationships may involve other
telecommunications companies that desire to enter into joint marketing and
services arrangements with us pursuant to which we would provide Internet and
Internet-related services to such companies. Such transactions, if deemed
appropriate by us, may also be effected in conjunction with an equity or debt
investment by such companies in us. Such relationships and acquisitions may
require additional financing and may be subject to the consent of our lenders
and other third parties.

We have not entered into any material financial instruments to serve as
hedges against certain financial and currency risks or for trading. However, as
a result of the recent increase in our foreign operations, we may begin to use
various financial instruments, including derivative financial instruments, in
the ordinary course of business, for purposes other than trading. These
instruments could include letters of credit, guarantees of debt, interest rate
swap agreements and foreign currency exchange contracts relating to
intercompany payables of foreign subsidiaries. We do not intend to use
derivative financial instruments for speculative purposes. Foreign currency
exchange contracts would be used to mitigate foreign currency exposure and with
the intent of protecting the U.S. dollar value of certain currency positions
and future foreign currency transactions. Interest rate swap agreements would
be used to reduce our exposure to risks associated with interest rate
fluctuations. By their nature, all such instruments would involve risk,
including the risk of nonperformance by counterparties. We would attempt to
control our exposure to counterparty credit risk through monitoring procedures
and by entering into multiple contracts.

Risks Associated With Year 2000

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computer applications that use a two-digit format could fail or create
erroneous results in any computer calculation or other processing involving the
Year 2000 or a later date. We have identified two main areas of Y2K risk:

. Internal computer systems or embedded chips could be disrupted or fail,
causing an interruption or decrease in productivity in our operations;
and

. Computer systems or embedded chips of third parties, including, without
limitation, financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others could be disrupted or fail, causing an interruption or decrease
in our ability to continue our operations.

We have developed plans for implementing, testing and completing any
necessary modifications to our key computer systems and equipment with embedded
chips to ensure that they are Y2K compliant. We have engaged a third party
consultant to perform an assessment of our U.S. internal systems (e.g.,
accounting, billing, customer support and network operations) to determine the
status of their Y2K compliance. The assessment of these systems has been
completed and, while some minor changes are necessary, we believe that no
material changes or modifications to our internal systems are required to
achieve Y2K compliance. Our U.S. chief information officer has developed a test
bed of our U.S. internal systems to implement and complete testing of the
requisite minor changes. We anticipate that our U.S. internal systems will be
Y2K ready by June 30, 1999. We are in the process of completing an inventory of
our internal systems that we use in Canada, United Kingdom, Europe and Asia to
determine the status of their Y2K compliance. Each international office has
plans in place to test, upgrade or, if necessary, replace components of its
internal systems to ensure they are Y2K compliant. We anticipate that our
international operations will be Y2K compliant by the end of the third quarter
of 1999. To help ensure that our network operations and services to our
customers are not interrupted due to the Y2K problem, we have established a
network operations team that meets weekly to examine our network on a worldwide
basis. This team of operational staff have conducted inventories of our network
equipment (software and hardware) and have found no material Y2K compliance
issues. We believe that all equipment currently being purchased for use in the
PSINet network is Y2K compliant. Any existing equipment that is not Y2K
compliant is planned to be made Y2K compliant through minor changes to the
software or hardware or, in limited instances, replacement of the equipment. We
anticipate that our network will be Y2K compliant by the end of the second
quarter of 1999. In addition to administering the implementation of necessary
upgrades for Y2K compliance, our network team is developing a contingency plan
to address any potential problems that may occur with our network as we enter
the year 2000. We believe that, as a result of our detailed assessment and
completed modifications, the Y2K issue will not pose significant operational
problems for us. However, if the requisite modifications and conversions are
not made, or not completed in a timely fashion, it is possible that the Y2K
problem could have a material impact on our operations.

Our cost of addressing Y2K issues has been minor to date, less than 5% of
our information technology and network operations budgets, but this amount may
increase if additional outside consultants or personnel resources are required
or if important operational equipment must be remediated or replaced. Our
estimated total costs related to Y2K issues for 1999 is not expected to exceed
$2.0 million. These costs include equipment, consulting fees, software and
hardware upgrades, testing, remediation and, in limited instances, replacement
of equipment. The risk that Y2K issues could present to us include, without
limitation, disruption, delay or cessation of operations, including operations
that are subject to regulatory compliance. In each case, the correction of the
problem could result in substantial expense and disruption or delay of our
operations. The total cost of Y2K assessments and remediation is funded through
cash on hand and available from other sources and we are expensing these costs,
as appropriate. The financial impact of making all required systems changes or
other remediation efforts cannot be known precisely, but it is not expected to
be material to our financial position, results of operations, or cash flows. We
have not canceled any principal information technology projects as a result of
our Y2K effort, although we have rescheduled some internal tasks to accommodate
this effort.

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In addition, we have identified, prioritized and are communicating with our
suppliers, vendors, customers, lenders and other material third parties to
determine their Y2K status and any probable impact on us. To date, our
inquiries have not revealed any significant Y2K noncompliance issue affecting
our material third parties. We will continue to monitor and evaluate our long-
term relationships with our material third parties based on their responses to
our inquiries and on information learned from other sources. If any of our
material third parties are not Y2K ready and their non-compliance causes a
material disruption to any of their respective businesses, our business could
be materially adversely affected. Disruptions could include, among other
things:

. the failure of a material third party's business;

. a financial institution's inability to take and transfer funds;

. an interruption in delivery of supplies from vendors;

. a loss of voice and data connections;

. a loss of power to our facilities; and

. other interruptions in the normal course of our operations, the nature
and extent of which we cannot foresee.

We will continue to evaluate the nature of these risks, but at this time we
are unable to determine the probability that any such risk will occur, or if it
does occur, what the nature, length or other effects, if any, it may have on
us. If a significant number of our material third parties experience failures
in their computer systems or operations due to Y2K non-compliance, it could
affect our ability to process transactions or otherwise engage in similar
normal business activities. For example, while we expect our internal systems,
U.S. and non-U.S., to be Y2K ready in stages during 1999, we and our customers
who communicate internationally will be dependent upon the Y2K-readiness of
many non-U.S. providers of telecommunication services and their vendors and
suppliers. If these providers and others are not Y2K ready, we and our
customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on our revenues and
business and that of our customers. While many of these risks are outside our
control, we have identified and contacted our critical third party vendors and
suppliers and are establishing contingency plans to remedy any potential
interruption to our operations.

While we believe that we are adequately addressing the Y2K issue, we can not
assure that our Y2K compliance effort will prevent every potential interruption
or that the cost and liabilities associated with the Y2K issue will not
materially adversely impact our business, prospects, revenues or financial
position. We are uncertain as to our most reasonably likely worst case Y2K
scenario and have not yet completed a contingency plan to handle a worst case
scenario. We expect to have such contingency plan in place by September 30,
1999.

Recent Accounting Pronouncement

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement establishes
accounting and reporting standards for derivative instruments, including some
derivative instruments embedded in other contracts, and for hedging securities.
To the extent we begin to enter into such transactions in the future, we will
adopt the Statement's disclosure requirements in the quarterly and annual
financial statements for the year ending December 31, 2000.

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BUSINESS

We are the leading independent global provider of Internet solutions to
businesses. We provide Internet connectivity and Web hosting services to
customers in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 12 of the 20 largest global telecommunications markets. In addition to
these services, we also offer a suite of value-added products and services that
are designed to enable our customers to maximize utilization of the Internet to
more efficiently communicate with their customers, suppliers, business partners
and remote office locations. We conduct our business through operations
organized into four geographic operating segments--the U.S., Canada, Europe and
Asia. Our services and products include access services that offer dedicated,
dial-up, wireless and xDSL connections, Web hosting services, intranets, VPNs,
e-commerce, voice-over-IP, e-mail and managed security services. We also
provide wholesale and private label network connectivity and related services
to other ISPs and telecommunications carriers to further utilize our network
capacity.

We operate one of the largest global commercial data communications
networks. Our Internet-optimized network has a footprint that extends around
the globe and is connected to approximately 500 POPs situated throughout the
U.S., Canada, Europe and Asia that enable our customers to connect to the
Internet. Our network reach allows our customers' employees to access their
corporate network and systems resources through local calls in over 150
countries. Our network architecture consists of high capacity frame relay
switches and routers designed to deliver superior Internet connections,
reliable packet control and intelligent data traffic routing and is compatible
with all of the most widely deployed transmission technologies. We further
expand the reach of our network by connecting with other large ISPs at
137 points through 67 contractual arrangements, called peering agreements, that
permit the exchange of information between our network and the networks of our
peering partners. We have recently opened three global Internet hosting
facilities in the U.S., Switzerland and Canada containing a total of
approximately 25,000 square feet and are currently constructing additional data
center capacity in London and New York containing a total of approximately
61,000 square feet. We have two network operating centers that monitor and
manage network traffic 24-hours per day, seven-days per week.

Our mission is to build a premier IP-based communications company. We have
grown by using multiple sales channels, including direct sales and resellers,
and by acquiring other ISPs and related businesses in key markets. We have
increased revenues by providing services and products that enhance our
customers' business processes by helping them to effectively use the Internet
and related tools. We served, as of December 31, 1998, approximately 54,700
business accounts, including 168 ISPs.

Some of our corporate customers include American Airlines, American Express
Company, BankAmerica Corporation, Boeing Company, C-SPAN, Compaq Computer,
DaimlerChrysler, Electronic Data Systems (EDS), E*TRADE, Lockheed Martin
Corporation, Motorola, Oracle Corporation and Xerox Corporation. Some of our
ISP customers include EarthLink, FlashNet, IDT, Microsoft's WebTV and
MindSpring.

Industry Overview

Overview. Internet access services is one of the fastest growing segments of
the global telecommunication services market place. According to Gartner Group,
worldwide Internet access revenues are forecasted to grow from $10.1 billion in
1997 to $34.6 billion in 2002. Internet access services represent the means by
which ISPs interconnect either businesses or individual consumers to the
Internet's resources or to corporate intranets and extranets. Access services
include dial-up access for individuals and small businesses, and high-speed
dedicated access used primarily by mid-sized and larger organizations. In
addition to Internet access services, business-focused ISPs are increasingly
providing a range of value-added services, including managed access (i.e.,
intranets), shared and dedicated Web hosting, security services, and advanced
applications such as IP-based voice, fax and video services. These services are
being used by business customers to enhance productivity, ensure reliability
and reduce costs.

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The ISP market is segmented into large national or multinational ISPs ("Tier
1 ISPs"), which are typically full-service providers that offer a broad range
of Internet access and value-added services to businesses, and regional and
local ISPs ("Tier 2" and "Tier 3 ISPs"), which typically offer a smaller range
of products and services to both individuals and business customers and may
specialize in the provision of one IP-based product or service. We are a Tier 1
TSP. Tier 1 ISPs also provide wholesale services by reselling capacity on their
networks to smaller regional and local ISPs, thereby enabling these smaller
ISPs to provide Internet services on a private label basis without building
their own facilities. Tier 1 ISPs exchange Internet traffic at multiple public
peering points known as network access points and through private peering
arrangements. As the number of ISPs have grown, Tier 1 ISPs have increased
their requirements for peering arrangements thereby increasing the barriers to
entry into the top-tier. Tier 2 and Tier 3 ISPs generally rely on Tier 1 ISPs
for Internet access and interconnection. The ISP market is highly fragmented
with, according to industry sources, over 6,700 providers estimated to be doing
business in the U.S. and Canada alone. Because of the low barriers to entry,
there are many local and regional ISPs entering the market, which has caused
the level of competition to intensify. In addition, there recently have been
several acquisitions of large ISPs by multinational telecommunications
companies seeking to offer a more complete package of telecommunications
products to their customers.

Market Size and Growth. The Internet services market is forecast to continue
its rapid growth for the foreseeable future. Gartner Group estimates that
worldwide revenues for Internet services will grow from $11.3 billion in 1997
to $39.8 billion in 2002, reflecting a compounded annual growth rate of 29%.
According to Gartner Group, in 1997, access services represented 89% or $10.1
billion of this total market.

Growth in demand for business connectivity is being driven by a number of
factors, including an increase in online market penetration, particularly in
the small and medium-sized business segments, and increased use of the Internet
by businesses. Specifically, Gartner Group estimates that business access
services represented 47% or $4.7 billion of the total access services market in
1997, but will increase their percentage to 62% of the $34.6 billion total
Internet access services market in 2002. In addition, as more businesses evolve
from establishing an Internet presence to utilizing secure connectivity between
geographically-dispersed locations, remote access to corporate networks and
business-to-business commerce solutions, the demand for high quality Internet
connectivity and value-added services should grow. Gartner Group forecasts that
worldwide web hosting services revenue will grow at a compound rate of 40% per
annum from $579 million in 1997 to $3.1 billion in 2002.

Reflecting the globalization of the Internet, Gartner Group estimates that
47% or $16.3 billion of the $34.6 billion access services opportunity in 2002
is expected to come from North America. It is estimated that Asia will
represent 26% or $8.9 billion, Europe will represent 20% or $6.8 billion, and
the rest of the world will comprise the remaining 7% or $2.5 billion. In North
America, Gartner Group forecasts that businesses will represent 57% of the
total Internet access services market of $16.3 billion. In Asia, Gartner Group
estimates that businesses will represent 65% of the total Internet access
services market of $8.9 billion. In Europe, Gartner Group forecasts that
businesses will represent 63% of the total Internet access services market of
$6.8 billion.

Growth in Business Use of the Internet. Since the commercialization of the
Internet in the early 1990s, businesses have rapidly established corporate
Internet sites and connectivity as a means to expand customer reach and improve
communications efficiency. Currently, many businesses are utilizing the
Internet as a lower-cost alternative to certain traditional telecommunications
services. For example, many corporations are connecting their remote locations
using intranets and VPNs to enable efficient communications with employees,
customers and suppliers worldwide, providing remote access for a mobile
workforce, reducing telecommunications costs by using value-added services such
as IP-based fax and videoconferencing, and migrating legacy database
applications to run over IP-based networks. Businesses of all sizes are
demanding advanced, highly reliable solutions designed specifically to enhance
productivity and improve efficiency. Moreover, businesses are seeking national
and global ISPs that can securely and efficiently connect multiple,

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geographically-dispersed locations, provide global remote access capabilities
and offer a full range of value-added services that meet their particular
networking needs.

The PSINet Solution

We provide high quality IP-based services and products that are tailored to
meet the needs of businesses. We believe that the business market is
particularly attractive due to its low customer churn characteristics, high
revenue per user, relatively low penetration and, in international markets,
early stage of development. In addition, we believe that within the business
access marketplace there is a significant opportunity to upsell to higher
service levels and provide additional value-added services as businesses grow
from establishing basic Internet connectivity and corporate Web sites to
utilizing the Internet, corporate intranets and VPNs for more advanced,
mission-critical applications. Further, we believe that small and medium-sized
businesses will continue to seek to outsource certain information technology
functions to large full-service ISPs to reduce costs and improve service
levels. Moreover, we believe that regional and local ISPs will continue to seek
business relationships with large, Tier 1 ISPs that enable them to sell
Internet connectivity services without making significant investments in
facilities.

The PSINet Strategy

. Leverage Multiple Sales Channels. We are pursuing growth opportunities
through multiple channels consisting of our direct sales force, a
reseller and referral program and strategic alliances with selected
telecommunications services and equipment suppliers, networking service
companies, systems integrators and computer retailers. We have built a
direct sales force, which, as of December 31, 1998, consisted of
approximately 550 individuals, more than half of whom are employed
outside of the U.S. As of December 31, 1998, our reseller and referral
program consisted of approximately 1,000 resellers and referral sources
in the U.S. and over 700 outside of the U.S. This program enables us to
leverage the sales and marketing resources of our resellers and referral
sources to offer PSINet Internet access services and products to a
broader and more diverse prospect base. We also seek to establish
strategic alliances with selected telecommunications carriers, such as
we have with American Communications Network, Inc., ATX
Telecommunications Services, e.Spire Communications, Inc. and NEXTLINK
Communications Inc., to offer our IP-based services and products to the
carriers' customer base on a private label or co-branded basis. In
addition, we are pursuing agreements with computer retailers, such as we
have with CompUSA, as a means for offering our services and products
through retail sales channels.

. Increase Sales of Value-Added Services and New Products. We intend to
capitalize on the trend of companies seeking to increasingly outsource
their critical business applications and integrate Web-based services
and products by aggressively marketing value-added services and products
to our existing account base and prospective business customers. We
currently offer a number of value-added services, such as Web hosting
and collocation, intranets, VPNs, multi-currency e-commerce, voice-over
IP services, e-mail outsourcing, streaming media, security and remote
user access. We are aggressively expanding our Web hosting and managed
services operations. We recently opened three new global Internet
hosting centers in Herndon, Virginia, Neuchatel, Switzerland and
Toronto, Ontario, containing a total of approximately 25,000 square
feet, and have two global Internet hosting centers under construction in
London, England and New York City containing a total of approximately
61,000 square feet. Additionally, we continue to evaluate and implement
new alternative broadband local loop services, including wireless, xDSL
and cable modem solutions.

. Accelerate Growth Through Targeted Acquisitions. We intend to continue
to accelerate our growth in the U.S. and expand our presence in key
markets internationally by acquiring primarily business-

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focused ISPs and related businesses and assets. We intend to make
strategic investments in or acquire:

. local or regional ISPs in markets where we have an established POP
and can benefit from the increased network utilization and local
sales force;

. related or complementary businesses to broaden our market presence
and expand our strengths in key product areas, such as Web hosting
or data center companies, or data-processing companies with legacy
networks which would benefit by migrating to IP-based technologies;
and

. telecommunication or information technology companies which have
strong relationships with chief technology officers and other
management information service executives at major corporations
worldwide.

. Continue to Invest in our Network. We remain focused on reducing costs
as a percentage of revenue by maintaining a scaleable network and
increasing utilization of and controlling strategic assets, such as
telecommunications bandwidth through IRUs and acquisition of dark fiber.
Our flexible network architecture utilizes advanced ATM, ISDN and SMDS
compatible frame relay equipment, which allows the PSINet network to
cost-effectively scale the number of POPs and the number of users
accessing a POP in response to customer demand. We have enhanced our
network significantly through several strategic acquisitions of fiber-
based telecommunications bandwidth, including acquisitions of IRUs and
other rights within and connecting the U.S., Canada, Europe and Asia.

. Enhance Brand Name Recognition. We were the first commercial ISP and
have established significant brand recognition among information
technology professionals in the U.S. In 1998, we launched a major
program to develop and enhance the PSINet brand name as a leading global
facilities-based ISP. Our branding program includes the rebranding of
acquired ISP operations and services under the PSINet name, the select
use of television commercials, print ads and direct mailings which
target key decision makers in the United States and abroad, and the
acquisition of corporate sponsorship rights, such as our recent
acquisition of the naming rights to the NFL Stadium of the Baltimore
Ravens and related marketing rights. By combining this branding program
with our multiple sales channel distribution strategy, superior customer
service and technical support available 24-hours per day, seven-days per
week, we seek to expand market share, increase customer loyalty and
develop brand recognition in the global Internet market.

PSINet Services

We offer a broad range of reliable, high-speed Internet access options and
related services in the U.S., Canada, Europe and Asia at a variety of prices
designed to meet the requirements of commercial, educational, governmental and
other organizations that link their computers, networks and information servers
to, or otherwise seek to benefit from the use of, the Internet. We provide
Internet solutions to help business and other organizations reduce costs,
increase productivity and access new markets. Access options range from dial-up
services to high-speed continuous access provided by dedicated circuits. We
believe that our broad range of competitively priced Internet services and
products allows us to compete effectively in the Internet access market for
corporate and other institutional customers. We have organized our core
operations into three customer-focused business units--Corporate Network
Services, which focuses on sales of Internet access services, Applications and
Web Services, which focuses on sales of Web and value-added services, and
Carrier and ISP Services, which focuses on sales of Internet access and related
services to telecommunications carriers and consumer-based ISPs--in order to
more closely align our operations with the needs of the emerging Internet
marketplace.

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Internet Access Services. We offer in the U.S., Canada, Europe and Asia
global connectivity services, including a variety of dial-up and dedicated
access solutions in bundled and unbundled packages, which provide high-speed
continuous access to the Internet for businesses' local area networks or LANs.
We provide turnkey configuration solutions encompassing such services as domain
name registration, line ordering and installation, IP address assignment,
router configuration, installation and management, security planning and
management and technical consultation services. All of our connectivity
customers receive 24-hours per day, seven-days per week technical support. We
also offer a full range of customer premise equipment required to connect to
the Internet, including routers, channel service units/data service units,
software and other products, as needed. Due to our business relationships with
a variety of vendors, we are able to offer competitive hardware pricing and
bundled services to our customers.

. Dedicated Access. We offer a broad line of high-speed dedicated
connectivity services which provide business customers with direct
access to a full range of Internet applications. Our flagship access
service, InterFrame, provides companies with robust, full-time,
dedicated Internet connectivity in a range of access speeds, from 56
Kbps to 45 Mbps. InterFrame is designed to offer comprehensive network
security and to help ensure bandwidth availability for priority business
applications. We believe that the traffic-management advantages of the
frame relay technology deployed in the PSINet network provide our
customers with fully integrated Internet access and improved
performance. For higher bandwidth needs, we provide our InterMAN(R)
access service in major U.S. cities in connection speeds ranging from
1.5 Mbps to 45 Mbps. InterMAN is a turnkey solution in which we provide,
install and maintain equipment at the customers' premises. InterMAN
affords cost advantages over competitive dedicated access services by
utilizing high-speed SMDS and ATM data transmission technologies.

. xDSL Access. We recently announced our offering of high-speed Internet
access services using digital subscriber line or DSL technology. DSL is
a new technology being deployed by telephone companies and competitive
local exchange carriers, or CLECs, that permits high speed digital
transmission over the existing copper wiring of regular telephone lines.
We have entered into an agreement with Covad Communications Group, Inc.,
a leading provider of DSL services to ISPs, to deliver DSL access
services to our customers. We expect to commence offering our DSL
services in California during the second quarter of 1999 with expansion
to other major metropolitan areas expected to occur later in 1999. Our
DSL services will be available in a wide range of dedicated access
speeds, from 144 Kbps to 1.5 Mbps. Our DSL services are designed to
appeal to the small-to-medium sized business market by providing high
quality Internet access at speeds faster than ISDN and at flat-rate
prices that are low relative to traditional dedicated access charges.

. Wireless Access. Our recently introduced InterSky(R) service offers
dedicated high-speed wireless Internet access utilizing digital
microwave technology. Speeds of up to 128Kbps are currently available
with faster capabilities anticipated to be made available during 1999
and 2000. Our InterSky service is currently operational in certain
cities in Alabama, Florida and Tennessee, with expansion to additional
areas in the southeastern U.S. expected to occur later in 1999. InterSky
provides an affordable, high-speed alternative to traditional land-based
Internet services, commonly referred to as "local loop connections,"
offered by telecommunications carriers.

. Dial-up Access. Our LAN-Dial(R) dial-up services offer a cost-effective,
entry-level Internet solution that provides access to PSINet's advanced
network backbone via ordinary telephone lines at speeds of up to 56
Kbps. Our LAN-ISDN service provides dial-up access through digital ISDN
lines at speeds of up to 128 Kbps.

Web and Value-Added Services. We believe that business customers on a
worldwide basis will continue to increase their use of the Internet as a
business tool and will increasingly rely upon an expanding range of value-added
services to enhance productivity, reduce costs and improve service reliability.
We offer in the U.S., Canada, Europe and Asia a variety of value-added
services, including Web hosting and collocation, intranets, VPNs, multi-
currency e-commerce, voice-over-IP, e-mail outsourcing, streaming media,
security and remote

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user access services designed to meet the diverse networking needs of
businesses. In addition, in order to capitalize on our technologically
advanced, high-capacity network, we intend to continue to develop new IP-based
services and products that increase customer use of the Internet, including
bandwidth-intensive multimedia services such as video conferencing over the
Internet.

. Web Hosting. We provide a line of Web hosting and multimedia streaming
services that permit companies to market themselves and their products
on the Internet without having to invest significantly in technology
infrastructure and operations staff. The PSIWeb(R) services are backed
by our 100% uptime guarantee, the industry's first, and by our advanced
network backbone, which provides highly reliable Internet connectivity.
PSIWeb offers options such as complete electronic commerce solutions as
well as "TV on the WEB LIVE," a joint service offering from PSINet and
Gardy McGrath International, which is an end-to-end solution for video
broadcasting of live events over the Internet.

. Collocation. Our PSIWeb Co-LocateSM service enables companies to house
business-critical servers in secure off-site facilities with improved
bandwidth management and reliable connections. Collocation facilities
are situated on the highest bandwidth portions of our infrastructure in
order to facilitate optimal performance and high-speed capabilities.

. VPNs/Intranets. Our IP-optimized network allows us to create private IP
networks, known as "intranets" or "virtual private networks," that are
designed to securely isolate internal network traffic from public
Internet traffic and provide each site on the intranet access to other
sites on the intranet as well as to the Internet. Our PSI IntraNet(R)
service integrates an organization's multiple sites in different
countries throughout the world by providing IP connectivity with access
speeds ranging from 56 Kbps to 2 Mbps. By combining the security and
control of a private network with cost-effective Internet-compatible
connectivity, PSI IntraNet provides a turnkey solution for equipment
management support and offers significant savings over traditional wide
area network or WAN solutions.

. Multi-Currency E-Commerce. Our PSIWeb eCommerceSM service provides a
turnkey solution to create and manage "Virtual Storefronts" and is
designed to give shoppers the ability to make secure purchases in their
local currency using the Web. PSIWeb eCommerce integrates payment
systems engineered for security with virtual store technology, through
alliances with CyberCash, Inc. and Mercantec, Inc., to facilitate a
seamless shopping experience. In addition, PSIWeb WorldpaySM provides a
cost-effective electronic commerce solution for selling goods and
services to an international audience. Developed in association with
Worldpay Ltd., an electronic commerce transaction clearing house, and
National Westminster Bank PLC, PSIWeb Worldpay enables customers around
the world to make real-time purchases using the Web in over 100
currencies.

. Voice-Over-Internet Protocol. PSIVoiceSM enables companies with multiple
business locations to communicate by voice among these sites and with
select third parties, such as business partners, customers and
suppliers, outside their corporate intranets or VPNs via low-cost IP
telephony links. PSIVoice is a turnkey service allowing for such
enhanced features as desktop faxing, conference calling and unified
messaging services and includes all the hardware and network management
services required for high quality, private-line voice connections among
geographically dispersed offices. By providing voice and Internet
traffic on the same circuit, customers are able to use existing
bandwidth more efficiently, resulting in savings of 20%-50% over
traditional long-distance telephone calling.

. E-Mail. PSIMailSM enables customers to outsource their e-mail service
and its management to our highly trained systems administrators and
support staff. For a monthly fee, we establish accounts, manage the
servers and provide full accessibility to e-mail for our customers while
saving them the investment in additional servers and staff.

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. Security Solutions. The proprietary nature of business Internet traffic
demands protection from unauthorized access. We deliver a range of
managed security services that were developed in conjunction with
certain strategic partners and are backed by the expertise of our
Security Planning and Response Team. Our RouteWaller(R) service provides
cost-effective perimeter defense with sophisticated remote user
authentication that helps to ensure that no strategic applications or
data can be accessed until the user has proven his or her access
clearance. SecureEnterprise(R) is our management service designed to
protect enterprises with a full-featured, application-layer firewall.

. Faxing. Since a significant portion of telecommunications traffic
consists of fax transmissions, companies are looking for ways to better
manage fax costs. Our InternetPaperSM service supports hard-copy
distribution of electronic documents from desktop PCs to any fax machine
in the world. This service offers centralized management of document
distribution, thereby significantly reducing transmission costs.

. Remote Access. Today's work force increasingly operates outside the
traditional office setting. Our InterRamp(R) Remote Access service
enables mobile personnel to access their corporate network and systems
resources using the Internet from over 2,400 POPs in over 150 countries
through our strategic relationship with iPass, an international data
communications network. In most locations where business is conducted,
InterRamp Remote Access offers full Internet access through a local
telephone call. As part of InterRamp Remote Access service, we provide
our customers with a special account management system that enables
customers' MIS administrators to control user access and monitor usage
statistics.

Carrier and ISP Services. In 1996, to maximize utilization of our network,
we formed our Carrier and ISP Services business unit to provide dial-up
Internet access to telecommunications carriers and consumer-based ISPs in the
U.S. and Canada, such as Earthlink Network, Inc. and Microsoft's WebTV, whose
customers typically access the network during evening hours when business use
tends to be minimal. We have recently expanded this business unit to offer
peering and transit services to telecommunications carriers and other ISPs and
to offer our connectivity and value-added services for resale, on a private
label basis, to larger telecommunications carriers and other ISPs that require
high quality business services and products to enhance their product portfolio.
Through such services, we have the opportunity to significantly increase our
distribution channel.

. ISP and Consumer Dial-up Access. We provide dial-up access to consumer-
oriented ISPs enabling them to expand their geographic reach and network
capacity by purchasing from us access to our IP-optimized network
through over 285 POPs in the United States and Canada as of December 31,
1998. We offer programs that provide smaller ISPs the opportunity to
increase their user base over time and provide larger ISPs the
opportunity to cost-effectively manage their rapid growth. In addition,
in certain domestic and international markets, we provide dial-up access
services directly to individual customers.

. Commercial Private Label/Virtual ISP Services. We provide our market-
tested services on a private label or "virtual ISP" basis to companies
with which we have strategic alliances and other companies that desire
to offer consumer Internet access services but do not have the resources
or network facilities to provide these services. This allows these
companies to market and resell PSINet services under their own brand
while leveraging our nationwide network and expertise in service
delivery. We assist in training the sales and support staffs of these
companies and provide technical support to facilitate their resale
efforts.

. Peering and Transit. In order to support the exchange of information
between ISPs, which is critical to the effective operation of the
Internet, we offer free private peering for all U.S.-based ISPs. Private
peering allows other ISPs' traffic to directly reach our customers,
which improves network performance and, we believe, thereby promotes
customer satisfaction. Furthermore, we offer, for a fee, transit
service, which allows an ISP to transfer traffic through the PSINet
network to another ISP.

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<PAGE>

Transit service enables ISPs to reduce their data communications expense
by leasing network utilization from us in lieu of leasing point-to-point
circuits from other telecommunications providers.

. Web Filtering. PSIChoiceSM enables our carrier and ISP customers to
offer their consumers the option to protect themselves from content they
find objectionable on the World Wide Web by restricting access to sites
that contain undesirable information. PSIChoice is hosted on the
technologically advanced PSINet network and utilizes content proxy
services to screen Web content accessed by end-users. PSIChoice requires
no software implementation on the consumer's computer and is presently
available in the United States.

Services and Product Development. As part of our ongoing efforts to develop
IP-based services and products that enable businesses to take maximum advantage
of their corporate networks and the Internet, we have continually invested in
service and product development programs. Since our inception, we have
introduced to the Internet marketplace several major new services, including
the first LAN-based dial-up TCP/IP access service, the first managed Internet
security service, the first ISP electronic commerce service and the first ISP
intranet service. Major services and products currently under development
include multimedia services, such as next-generation video conferencing over
the Internet, and higher speed connectivity services.

PSINet's Network

Overview. We operate a global high capacity, IP-optimized network which, as
of December 31, 1998, was comprised of approximately 500 POPs, of which 250
were within the United States with the remainder located throughout Canada,
Europe and Asia. Our network employs architecture designed to deliver superior
dedicated or dial-up Internet connections, reliable packet control and
intelligent data traffic routing. We have strengthened our position as a
leading facilities-based ISP through several recent acquisitions of high
capacity, fiber optic telecommunications bandwidth and other strategic network
assets that have significantly reduced our incremental data communications
costs. The combination of our technologically advanced network architecture and
global network infrastructure has positioned us to deliver the high level of
IP-based services, such as Web hosting and a broad array of multimedia Internet
services, increasingly demanded by businesses.

Network Architecture. We have engineered an IP-optimized network by
integrating advanced Internet routers with high-speed frame relay switching
equipment that is compatible with ATM, ISDN and SMDS transmission technologies.
We have planned for growth by ensuring that the network is scaleable, flexible,
fault tolerant, open standards-based and remotely manageable.

. Scaleable. Our flexible, multi-layer network architecture utilizes a
high-speed switching fabric which enables us to grow the number of POPs
and the number of users served in an incremental manner that matches
investment with demand. The network's scalability extends beyond the
currently installed base of over 500 POPs to allow for growth to 2,000
POPs without fundamental design changes.

. Flexible. Our network architecture consists of an Internet routing
infrastructure overlaid upon a fast packet switching fabric that enables
us to provide reliable, high-speed connections and provide our customers
the ability to manage bandwidth by type of application and to
accommodate applications that are delay-sensitive. We are able to use
our flexible network architecture in concert with our remote monitoring
capability to accommodate changing customer usage patterns and patterns
of traffic that, if left unmanaged, could otherwise degrade network
performance.

. Fault Tolerant. Redundancy and adaptive technology in our network
reduces the impact of isolated failures on the customer's experience.
Adaptive technology incorporated into our Internet router infrastructure
compensates automatically for circuit failures that might otherwise
interrupt the flow of customer traffic. Key switching and router
elements are redundantly configured to further reduce the impact of
individual component failures. In addition, we have an uninterruptible
power supply at each POP, limiting the impact of local power outages on
the PSINet network.

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<PAGE>

. Open. The PSINet network is based on the open internetworking protocol
standard TCP/IP and on relevant international standards relating to
transmission and modulation technologies. We are able to install a
variety of equipment types and capacities without impacting network
interoperability. As a result, our network can be upgraded incrementally
and benefit from multi-vendor supply strategies.

. Manageable. From our NOCs, we are able to monitor the network remotely,
perform network diagnostics and equipment surveillance, and initialize
customers. As a result of our network architecture and our experience in
Internet network management, these tasks can be performed remotely
regardless of POP location or network status. This capability allows us
to respond quickly to network problems and to control costs associated
with on-site network configuration and repair.

Global Network Infrastructure. As part of our ongoing efforts to control
strategic assets and further expand and enhance our network, we have recently
acquired or agreed to acquire IRUs and other rights in significant amounts of
fiber-based telecommunications bandwidth located throughout the world. The
following table summarizes our bandwidth facilities as of March 31, 1999.

<TABLE>
<CAPTION>
Location Capacity Connection Points Ownership
- -------- ---------------------------- --------------------------------------------------- -----------------
<S> <C> <C> <C>
North America 8,452 route miles of OC-12 New York--Chicago--Dallas--Los Angeles IRU
--Washington, DC--Atlanta--Houston IRU
--San Francisco
18 high capacity dark fibers New York (operational)--Washington, DC (Q2 1999) Capital lease
4 high capacity dark fibers San Francisco Bay Area (during 1999 and 2000) Capital lease
20 high capacity dark fibers Vancouver, B.C.--Seattle, WA (beginning in Q2 1999) IRU
T-3 Intercontinental Leased
Trans-Atlantic 14,000 km of STM-1 (OC-3) New York--U.K.--Amsterdam IRU
and Europe 12,600 km of STM-1 New York--U.K. (during Q2 1999) IRU
21,000 km of STM-1 30 European cities (during 1999 and 2000) IRU
E-1 Intercontinental Leased
Trans-Pacific 6,000 miles of 6 DS-3s US--Japan (3DS-3s operational; 3DS-3s in Q2 1999) IRU/Capital lease
and Asia 22 STM-1s (increasing to 30) Japan-Hawaii-US (during Q2 2000) IRU
27,300 km of STM-1 Japan-China-Southeast Asia-India-Middle East-Europe IRU
(beginning in Q2 1999)
</TABLE>

.Recently acquired bandwidth facilities in North America:

. In February 1998, we acquired from IXC IRUs in up to 10,000 equivalent
route miles of OC-48 network bandwidth across the United States,
including such major metropolitan areas as Atlanta, Chicago, Cleveland,
Dallas, Houston, Los Angeles, New York, Philadelphia, Phoenix and
Washington, D.C., in exchange for approximately 20% of our common stock.
As of March 31, 1999, approximately 8,452 route miles of OC-12
(equivalent to approximately 2,113 route miles of OC-48) bandwidth,
connecting New York, Washington, D.C., Atlanta, Chicago, Dallas,
Houston, San Francisco and Los Angeles and certain major cities in
between, have been placed into operation on the PSINet network. We
currently anticipate delivery of the remaining OC-48 bandwidth from IXC
over the next 18 to 24 months.

. In May 1998, we acquired from Metromedia Fiber Network Services, Inc.
("MFN") long-term rights in 18 dark fiber optic strands connecting the
New York City and Washington, D.C. metropolitan areas and major
metropolitan areas in between. Using currently available technology,
this fiber will be capable of carrying 96 Gbps of data in the New York
City to Washington, D.C. corridor, which currently handles approximately
35% of the telecommunications traffic in the United States and is a
vital route connecting Internet traffic between Europe and the United
States. The New York City-based fiber is currently operational and we
expect the remaining fiber to be placed into operation prior to the end
of the second quarter of 1999.

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<PAGE>

. In December 1998, we acquired from MFN long-term rights in four dark
fiber optic strands connecting multiple cities in the San Francisco Bay
area along a circular route extending south to the Silicon Valley,
including San Jose and Santa Clara, and east to Hayward. This market is
an important financial and technology corridor and is expected to
generate high demand for Internet services well into the future. We
expect to place into operation portions of this fiber prior to the end
of 1999, with full delivery anticipated in 2000.

. In January 1999, we entered into an agreement to acquire from Starcom
Service Corporation IRUs in 20 dark fiber optic strands connecting the
Vancouver, British Columbia and Seattle, Washington metropolitan areas,
a high-demand international telecommunications corridor. We expect to
place into operation portions of this fiber prior to the end of the
second quarter of 1999.

.Recently acquired Trans-Atlantic and European bandwidth facilities:

. In March 1998, we acquired from Global Crossing Ltd. IRUs in STM-1
(equivalent to OC-3) network bandwidth configured along an approximately
14,000 kilometer route on the Atlantic Crossing undersea fiber optic
system connecting the United States, the United Kingdom and continental
Europe. As of March 31, 1999, the portion of this bandwidth linking New
York City, the United Kingdom and Amsterdam, the Netherlands is
operational and integrated with the OC-12 bandwidth previously acquired
from IXC.

. In January 1999, we acquired from Hermes Europe Railtel (Ireland)
Limited IRUs in STM-1 network bandwidth configured as multiple rings
along an approximately 21,000 kilometer route linking 30 European
cities. By the end of 1999, we expect a portion of this bandwidth to be
connected to our existing operations in England, the Netherlands,
Belgium, France, Germany and Switzerland. In 2000, we anticipate that
the remainder of this bandwidth will be extended to additional cities in
Austria, Belgium, Denmark, France, Germany, Italy, Luxembourg, Monaco,
the Netherlands, Spain and Sweden. The acquisition of this bandwidth
will enable us to expand our presence into an additional two of the 20
largest global telecommunications markets--Spain and Sweden--and should
be sufficient to support our European operations for the next several
years.

. In March 1999, we acquired from Cable & Wireless, Inc. an IRU in STM-1
network bandwidth configured along an approximately 12,600 kilometer
route on the Gemini Submarine cable system connecting the United States
and the United Kingdom. We expect to place this bandwidth into operation
prior to the end of the second quarter of 1999.

.Recently acquired Trans-Pacific and Asian bandwidth facilities:

. In September 1998, we acquired from International Digital Communications
Inc. in the United States and from International Digital Communications,
Inc. and Cable & Wireless plc in Japan bandwidth capacity equivalent to
six DS-3s in the North Pacific Cable undersea fiber optic system
connecting the United States and Japan through a combination of IRUs and
long-term capital leases. As of March 31, 1999, three DS-3s connecting
Portland, Oregon and Tokyo, Japan are operational and we expect the
remainder of the capacity to become operational in stages during the
first half of 1999.

. In July 1998, we entered into an agreement with a group of leading
telecommunications companies to build the Japan-U.S. Cable Network, an
undersea cable system connecting the United States (through California
and Hawaii) and Japan, on which we will own IRUs in 22 STM-1s,
increasing to 30 STM-1s as the network is upgraded, of bandwidth. Upon
completion, the Japan-U.S. Cable Network will initially operate at 80
Gbps, increasing to 155 Gbps as the network is upgraded, and is
currently anticipated to become operational in the second quarter of
2000. Completion of the undersea cable system is subject to a number of
risks associated with construction projects.

. In December 1998, we acquired from FLAG Limited (Fiberoptic Link Around
the Globe) IRUs in STM-1 network bandwidth configured along an
approximately 27,300 kilometer route having the capability of connecting
Japan, China, Southeast Asia, India, the Middle East, Europe and the
United

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<PAGE>

Kingdom. With this acquisition, the PSINet network became the first
independent Internet network to fully circle the globe, serving
customers on three continents. Our agreement with FLAG also enables us
to purchase additional capacity and insert new connections along the
FLAG cable route to accommodate future demand. We expect to place into
operation portions of this bandwidth prior to the end of the second
quarter of 1999.

See "Risk Factors--We face risks associated with our acquisitions of bandwidth
from network suppliers, including our strategic alliance with IXC
Communications, Inc., relating to our dependence on their ability to satisfy
their obligations to us, the possibility that we may need to incur significant
expenses to utilize bandwidth and their ability to buildout their networks
under construction that could adversely affect our ability to utilize acquired
bandwidth" in the accompanying prospectus.

We expect to further expand our network in the U.S., Canada, Europe and
Asia, as well as in other select international markets, and to acquire fiber-
based IRUs and other rights in telecommunications bandwidth in these regions
to support demand growth and reduce costs. We are targeting cities with a high
concentration of businesses for global expansion with the objective, over the
long-term, of providing local access to our services and products to 80% of
the businesses in those cities. In furtherance of this plan, we have entered
into agreements in Germany and Switzerland that enable us to offer local
telephone call access to our services and products throughout each of these
countries. We already offer local call access to 80% of the business markets
in the United States, Canada, France, the Netherlands, Hong Kong and Japan.

Internet Data Centers. We have recently opened technologically advanced,
10,000 square foot, global Internet hosting facilities in each of Herndon,
Virginia and Neuchatel, Switzerland, a 5,000 square foot global Internet
hosting facility in Toronto, Ontario, are currently in the process of
constructing a 45,000 square foot global Internet hosting facility in London
and a 16,000 square foot global Internet hosting facility in New York City,
and have plans for construction of additional global Internet hosting
facilities throughout the world, including in the United States, the
Netherlands, Japan and Hong Kong. The additional facilities will range from
10,000-50,000 square feet, will be specifically designed for dedicated Web
hosting, application hosting, collocation services and high capacity access to
the PSINet network, and will be equipped with uninterruptible power supply and
backup generators, fire suppression, raised floors, HVAC, 24-hours per day,
seven-days per week operations and physical security. Our partnership with
Hewlett-Packard Company further supports our ability to provide high-end Web
services consisting of shared hosting, dedicated hosting and collocation
hosting.

PRI Circuits. In key geographically-dispersed cities located along the
configuration of the PSINet network (e.g., Atlanta, Chicago, Dallas, Los
Angeles and Washington, D.C.), we are also investing in PRI circuits, which
provide dial-up access to our POPs, in order to increase the capacity
available for our consumer-oriented ISP customers. Through agreements with
select CLECs we have lowered our average cost per PRI by approximately 15-20%
over the last twelve months. As of March 31, 1999, we have more than doubled
our dial-up capacity from March 31, 1998 as a result of our investment in
PRIs, which we believe will enhance revenue growth in our Carrier and ISP
Services business unit. As of March 31, 1999, nearly 100% of our dial-up
capacity is accessible at 56 Kbps modem speeds. We anticipate that all newly
deployed modems will support this technology.

Peering Arrangements. We maintain peering relationships with national,
regional and local ISPs by either private peering with the ISPs or by
participation in various public peering locations, known as network access
points. As of March 31, 1999, we maintained more than 2,000 Mbps (2.0 Gbps) of
peering connectivity with 50 private agreements and seventeen public
connections strategically placed throughout the United States, the United
Kingdom, Canada, Japan and Europe. Recently, some companies that have
previously offered peering have cut back or eliminated peering relations and
are establishing new, more restrictive criteria for peering. We expect that,
due to our offering of peering with any of the estimated 4,000 ISPs in the
United States without settlement charges, we will substantially increase the
number of ISPs with which we peer over

S-41
<PAGE>

the next two years. We believe that by entering into direct peering
relationships with a large number of ISPs, our business customers will receive
better service and the highest quality network performance.

Global Network Management. We believe that we offer superior network
management capabilities which enhance customer satisfaction. We have
established a 24-hours per day, seven-days per week NOC in the United States
that allows for continuous monitoring of our international network, managing of
traffic, and customer problem resolution. Back-up operating facilities manned
by trained personnel are available at our offices in Herndon, Virginia and
Cambridge, England in the event the U.S. NOC experiences service interruptions
or other difficulties. We have recently opened our European Technical Center in
Switzerland as a second NOC with global capabilities equivalent to those in the
U.S. NOC. Furthermore, we anticipate that as we expand our presence in Asia we
will construct a third NOC in that region during 1999.

Sales and Marketing

We have built a multi-channel sales and marketing infrastructure throughout
the U.S., Canada, Europe and Asia in an effort to respond effectively to the
growing opportunities in the business Internet market. We seek to attract and
retain customers by offering our services and products through our direct sales
force and our authorized reseller and referral program and by seeking to forge
strategic relationships with selected telecommunications carriers. We believe
that this multi-channel approach will enable us to utilize the technical skills
and experience of our direct sales force to penetrate our targeted customer
base while utilizing the potentially greater sales and marketing resources of
the resellers, referral sources and companies with which we have strategic
alliances to offer our services and products to a broader and more diverse
potential customer base.

Direct Sales. We have built a direct sales force, which, as of December 31,
1998, consisted of approximately 550 individuals (more than half of whom are
employed outside of the U.S.) who have a strong Internet technical background
and knowledge of potential applications of the Internet to meet the critical
needs of targeted business customers. Direct sales tactics include direct
contacts with targeted ISPs and potential significant corporate accounts by our
sales representatives and systems engineers, inbound and outbound
telemarketing, direct mail efforts, seminars and trade show participation. We
have developed programs to attract and train high quality, motivated sales
representatives who, in addition to having strong Internet technical skills and
knowledge of potential applications of the Internet, have consultative sales
experience. These programs include technical sales training, consultative
selling technique training, sales compensation plan development and sales
representative recruiting profile identification. Sales representatives from
our U.S. and international operations jointly attend training programs in order
to ensure an integrated sales approach domestically and internationally.

Reseller and Referral Program. We have forged an authorized reseller and
referral program with selected telecommunications service companies, equipment
suppliers, networking service companies, systems integrators and computer
retailers. This program, through which we have established as of December 31,
1998 approximately 1,000 formal and informal arrangements in the U.S. and over
700 outside of the U.S., affords us an indirect distribution mechanism in our
targeted markets and is designed to enable us to utilize the potentially
greater sales and marketing resources of the resellers and referral sources to
offer PSINet services and products to a broader and more diverse potential
customer base. Participants in our reseller and referral program include Ascend
Communications, Inc., a manufacturer and developer of telecommunications
equipment, CompUSA, a computer equipment and software retailer, and Hewlett-
Packard Company, a provider of computer hardware and networking products. We
provide training and ongoing support to the sales representatives of companies
with which we have reseller and referral relationships in order to strengthen
the sales representatives' knowledge of our services and products and brand
loyalty to PSINet. We believe that the reseller and referral program has
enabled us to achieve greater market reach with reduced overhead costs and to
use the reseller and referral sources to assist in the delivery of complete
solutions to meet customer needs. We have a team of 19 individuals who pursue
reseller and referral arrangements for us.

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<PAGE>

Strategic Alliances. In 1997, we launched our strategic alliance program,
pursuant to which we seek to establish strategic alliances with selected
telecommunications carriers which may afford us access to recurring revenue
from the carriers' customer base, while enabling the carriers to offer their
customers an integrated package of telecommunications and Internet services and
products. We also recently formed an alliance with the Baltimore Ravens of the
National Football League pursuant to which, among other things, we have the
right to develop a Web site and provide related Internet subscriber services
for the Baltimore Ravens. We believe that these strategic alliances may
facilitate the cost-effective acquisition of customers and increase utilization
of our network. It is anticipated that, in most cases, the companies with which
we have strategic alliances will offer our services and products on an
unbranded or co-branded basis or under only their own trademark. As with the
reseller and referral program, we provide training and ongoing support to the
sales representatives of companies with which we have strategic alliances in
order to strengthen the sales representatives' knowledge of our services and
products and brand loyalty to PSINet.

Marketing. Our marketing program is intended to build national and local
strength and awareness of the PSINet brand. We use radio and print advertising
in targeted markets and publications to enhance awareness and acquire leads for
our direct sales team and companies with which we have resale, referral or
strategic alliance relationships. Our print advertisements are placed in trade
journals and special-interest publications. We employ public relations
personnel in-house and work with an outside public relations agency to provide
broad coverage in the Internet and computer networking fields. We also attempt
to create brand awareness by securing corporate sponsorship rights, such as our
recent acquisition of the naming rights to the NFL stadium of the Baltimore
Ravens and related sponsorship, promotion, advertising and marketing rights,
and by participating in industry trade shows such as Networld, Interop,
InterNet World and ISPCon, based on the size and vertical makeup of the trade
show audience, and relationships with industry groups and the media. We also
use direct mailings, telemarketing programs, Web marketing, co-marketing
agreements and joint promotional efforts to reach new corporate customers. We
attempt to retain our customers through active and responsive customer support
as well as by continually offering new value-added services.

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<PAGE>

Customers

We had, as of March 1, 1999, over 57,000 business customers, including 189
ISP customers. Our customers include businesses in the aerospace, finance,
communications, computer data processing and related industries, governmental
agencies and educational and research institutions, as well as other ISPs. The
following is a list of certain business and governmental agency customers in
each of nine selected industry groups to which we provided Internet access and
related services as of March 1, 1999:

Computer and Data Services
Aerospace and Defense

Automatic Data Processing, Inc.
Boeing Company Computer Sciences Corporation
Lockheed Martin Corporation Dun & Bradstreet Corp.
Northrop Grumman Corporation Electronic Data Services
Raytheon Corporation Microsoft Corporation
NASA Oracle Corporation
Xerox Corporation

Airlines

Electronics
AMR/The Sabre Group
Continental Airlines, Inc.
Trans World Airlines, Inc. Applied Material, Inc.
United Airlines, Inc. Litton Applied Technology
Motorola, Inc.

Banks ISPs

Chase Manhattan Bank Earthlink Network Inc.
First Chicago NBD Corporation FlashNet
First Union Corporation IDT Corporation
Wells Fargo Bank NA MindSpring Enterprises, Inc.
WebTV Networks, Inc.

Financial Services

Telecommunications
American Express Company
Cigna Corporation
Donaldson, Lufkin & Jenrette AT&T Corporation
Lehman Brothers Inc. Bell Atlantic Corporation
Merrill Lynch & Co. Bell South Corporation
Morgan Stanley Dean Witter & Co. GTE Corporation
Travelers Group Inc. Lucent Technologies, Inc.
MCI WorldCom

Computers Retail and New Media

Apple Computer, Inc. C-SPAN
Compaq Computer Corporation DaimlerChrysler
Hewlett-Packard Company E*TRADE
International Business
Machines Corporation
Sun Microsystems, Inc.

Customer Support

High quality customer service and support is critical to our objective of
retaining and developing our customers. We have made significant investments in
customer service personnel and systems that enhance customer care and service
throughout the complete customer life cycle from order entry and billing to
selling of value-added services. As of December 31, 1998, our technical support
group consisted of over 570 individuals. To ensure consistency in the quality
and approach to customer care, both domestic and international associates
attend an intensive technical training and certification program at our U.S.
NOC. Our U.S. NOC monitors and responds to customer needs by providing 24-hours
per day, seven-days per week technical support and service.

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<PAGE>

Our customer support group utilizes a leading customer support trouble
ticketing and workflow management system from Remedy Corporation to track,
route and report on customer service issues. Network operations can remotely
service customer connections to the PSINet network. In addition, field service
personnel are dispatched in the event of an equipment failure that cannot be
serviced remotely. As part of our international expansion strategy, we have
recently opened a fully redundant NOC in Switzerland and anticipate adding a
third in Asia in 1999. In connection with our customer care initiatives, we
seek to continuously improve systems that increase productivity and enhance
customer satisfaction. We have recently reengineered our customer care program
to address the complex needs of our business customers and are scaling our
customer care resources to keep pace with projected increases in customer
requirements. By maintaining centralized support services, we seek to increase
operational efficiencies and enhance the quality, consistency and scalability
of customer care. We are currently in the process of implementing a new high
quality, cost-effective and scaleable billing system to replace our existing
system in order to provide customers on a global basis with uniform and easy-
to-understand invoicing.

Acquisitions

As a key component of our growth strategy, over the 18 month period ended
March 31, 1999, we acquired 20 ISPs primarily in nine of the 20 largest global
telecommunications markets. The aggregate amount of the purchase prices and
related payments for these acquisitions was approximately $293.7 million,
exclusive of indebtedness assumed in connection with such acquisitions. Of such
amount, we have paid $255.5 million as of March 31, 1999 and retained the
balance to secure performance by certain sellers of indemnification or other
contractual obligations. In connection with these acquisitions, we acquired,
among other things, valuable technologies including some under development
which we plan to complete. We are also currently evaluating additional
acquisitions as well. However, we cannot assure that we will successfully
complete any such acquisitions currently being contemplated.

In general, we seek acquisition targets that, once integrated into our
existing operations, generally will be accretive to EBITDA. After we have
acquired an ISP, we typically act to generate economies of scale and cost
savings by eliminating redundant operations and network architecture and
migrating the acquired ISP's customers on to the PSINet network. Connecting an
acquired ISP's customers to the PSINet network typically entails minimal
incremental data communication costs and enables us to significantly reduce our
transit costs. We seek to generate cost savings by centralizing back office
operations, such as network monitoring, customer billing, human resources and
accounting. We also endeavor to realize efficiencies by consolidating an
acquired ISP's purchasing, product development and marketing and sales
operations into our established programs. We believe this integration of
operations improves the quality, breadth, consistency and scaleability of the
services and products offered to customers of acquired ISPs. We believe that
our entrepreneurial environment is attractive to and helps us retain key
employees of acquired ISPs.

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<PAGE>

The following table summarizes basic information concerning our
acquisitions:

<TABLE>
<CAPTION>
Ranking
Among 20
Largest
Global
Date of Business Consumer Telecom
Name of Acquired Company Acquisition Principal Market Accounts(1) Accounts(1) Markets(1)
- ------------------------ ----------- ----------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
CalvaCom................ 10/97 France 1,500 2,300 5
Iprolink................ 1/98 Switzerland 2,400 2,600 14
iSTAR................... 2/98 Canada 2,700 47,000 10
ITL..................... 4/98 Jersey, Channel Islands -- -- N/A
INX..................... 5/98 Germany 650 15,600 3
ioNet................... 6/98 U.S. 2,300 21,500 1
LinkAge................. 6/98 Hong Kong 1,100 -- 19
CalvaPro................ 6/98 Sub-Sahara Africa 425 30 N/A
Interlog................ 7/98 Canada 2,100 41,000 10
Rimnet.................. 8/98 Japan 260 56,000 2
TWICS................... 9/98 Japan 70 1,700 2
HKIGS................... 9/98 Hong Kong 200 -- 19
Inet.................... 9/98 Korea 1,100 13,000 12
Tokyo Internet.......... 10/98 Japan 6,500 10,000 2
IXE/USN................. 10/98 Netherlands 85 -- 13
AsiaNet................. 11/98 Hong Kong 180 250 19
Spider Net.............. 12/98 Hong Kong 30 100 19
Huge Net................ 12/98 Hong Kong 90 -- 19
Planete.net............. 2/99 France 190 780 5
Satelnet................ 2/99 France 110 -- 5
------ -------
Total................... 21,990 211,860
====== =======
</TABLE>
- ----------------
(1) As of the respective dates of acquisition.

In October 1997, we acquired Serveur Telematique Internet S.A. (doing
business as "CalvaCom"), a leading ISP and Web hosting company in France. The
acquisition established our market presence in France with over 1,500 dedicated
and dial-up customer accounts through 24 POPs. CalvaCom also has a significant
commercial grade Web design and hosting business providing service to such
leading French companies as Total S.A. and La Chemise Lacoste S.A.

In January 1998, we acquired Internet Prolink S.A. ("Iprolink"), the leading
commercial ISP in Switzerland. This acquisition expanded our market presence in
Switzerland by adding approximately 2,400 dedicated and dial-up customer
accounts and 18 POPs in Switzerland and France. Iprolink also has relationships
with over 170 resellers located throughout Switzerland, France and Germany to
augment its direct sales force.

In February 1998, we acquired iSTAR internet inc. ("iSTAR"), one of the
leading Canadian providers of Internet services and solutions for business,
institutions and individuals. This acquisition established us as the largest
ISP in Canada with over 2,700 business and Web services customers as well as
over 47,000 dial-up customer accounts through over 35 POPs. By eliminating
redundant network architecture and administrative functions and migrating
iSTAR's customers on to our integrated network backbone, we have realized, and
believe we will continue to realize, significant cost savings in our Canadian
operations.

In April 1998, we acquired Interactive Telephony Limited ("ITL"), the
largest ISP based in Jersey in the Channel Islands, and a 12.5% equity interest
in WorldPay Limited, a leading provider of electronic commerce payment
solutions also based in Jersey, Channel Islands.

S-46
<PAGE>

In May 1998, we acquired Interactive Networx GmbH ("INX"), the largest ISP
in Berlin and nationally recognized across Germany. This acquisition expanded
our market presence in Germany by adding approximately 650 business customers,
15,600 consumer dial-up customers and ten POPs in Germany. The combination of
INX with our existing German operations has resulted in us becoming one of the
largest ISPs in Germany, which is the fastest growing Internet market in
Europe.

In June 1998, we acquired ioNet Internetworking Services ("ioNet"), a
provider of Internet and network systems integration services to businesses,
universities and residential customers in the south central region of the
United States. In addition, ioNet has developed a suite of vertical market
Internet services, including comprehensive banking, medical and
telecommunications Internet solutions, to enable customers to more efficiently
meet their internetworking needs. This acquisition resulted in our addition of
approximately 2,300 business and Web services accounts and 21,500 consumer
dial-up customers.

In June 1998, we acquired LinkAge Online Limited ("LinkAge"), a Hong Kong-
based supplier of Internet solutions, including Web hosting, managed co-
location, intranets and extranets, to businesses, professionals, government
agencies and other ISPs throughout Southeast Asia. This acquisition established
our market presence in Hong Kong, the fifth largest telecommunications market
in Asia, by adding approximately 1,100 business and Web services accounts.

In June 1998, we acquired SCII-CalvaPro ("CalvaPro"), a full service
business-to-business telecommunications company headquartered in Paris, France
that provides Internet applications and other communications services primarily
to banks and shipping and forwarding agencies in the sub-Saharan African
market. This acquisition gave us a market presence in sub-Saharan Africa by
adding approximately 425 business accounts and 30 consumer dial-up customers.

In July 1998, we acquired INTERLOG Internet Services Inc. ("Interlog"), one
of the first Internet-only service providers in Canada. This acquisition
further solidified our market-leading presence in Canada by adding
approximately 2,100 business and Web services accounts and 41,000 consumer
dial-up customers.

In August 1998, we acquired Rimnet Corporation ("Rimnet"), one of Japan's
leading providers of Internet services and solutions to businesses. This
acquisition further strengthened our market presence in Japan, the second of
the 20 largest global telecommunications markets, by adding approximately 260
business and Web services accounts and 56,000 consumer dial-up customers.

In September 1998, we acquired TWICS Co., Ltd., one of the original ISPs in
Japan, primarily serving the small-office/home-office market. This acquisition
added approximately 70 business and Web services accounts and 1,700 consumer
dial-up customers to our market presence in Japan.

In September 1998, we acquired Hong Kong Internet & Gateway Services
("HKIGS"), one of the original ISPs in Hong Kong, primarily serving the
business market. This acquisition enhanced our recently established market
presence in Hong Kong by adding approximately 200 business accounts.

In September 1998, we acquired Inet, Inc. ("Inet"), one of Korea's first
ISPs that provides a comprehensive range of Internet access options,
applications, consulting services and education programs, including Web hosting
and content development, intranet application development and training. This
acquisition established our market presence in Korea, one of the 20 largest
global telecommunications markets, by adding approximately 1,100 business and
Web services accounts and 13,000 consumer dial-up customers.

In October 1998, we acquired Tokyo Internet Corporation ("Tokyo Internet"),
one of the most widely used ISPs in Japan serving businesses, the small-
office/home-office market and individual Internet users. Tokyo Internet offers
a comprehensive range of Internet services, including individual and business
dial-up connection services, leased-line LAN connectivity services and high
quality collocation and Web services. In addition, Tokyo Internet has created
an IP network infrastructure that directly links 23 of Japan's largest
metropolitan areas. The combination of Tokyo Internet with our existing
Japanese operations has resulted in us becoming the second largest ISP in
Japan, based on customer domains serving business and commercial users, by
adding approximately 6,500 business and Web services accounts and 10,000
consumer dial-up customers.

S-47
<PAGE>

In October 1998, we acquired Internet Exchange Europe B.V. ("IXE"), the
first commercial top-level ISP in Holland to maintain its own Internet
backbone, and Unix Support Netherland B.V. ("USN"), a well-known provider of
Internet services, including Web hosting and maintenance, security and other
customized solutions, to businesses. These acquisitions provided us with
additional business Internet expertise to enhance our market presence in the
Netherlands and Europe by focusing on value-added products.

In November and December 1998, we acquired AsiaNet Limited, Huge Net Limited
and Spider Net Limited, three commercial ISPs in Hong Kong, to supplement our
acquisition of LinkAge and HKIGS. These acquisitions expanded our market
presence in Hong Kong by adding an aggregate of approximately 300 business and
Web services accounts and 350 consumer dial-up customers.

In February 1999, we acquired Planete.net and Satelnet, two commercial ISPs
based in France, to supplement our acquisition of CalvaCom. These acquisitions
expanded our market presence in France by adding an aggregate of approximately
300 business and Web services accounts and 780 consumer dial-up customers.

Competition

The market for Internet connectivity and related services is extremely
competitive. We anticipate that competition will continue to intensify as the
use of the Internet grows. The tremendous growth and potential market size of
the Internet access market has attracted many new start-ups as well as existing
businesses from different industries.

We believe that a reliable international network, knowledgeable salespeople
and the quality of technical support currently are the primary competitive
factors in our targeted market and that price is usually secondary to these
factors.

Our current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers and on-line service providers. While we
believe that our network, products and customer service distinguish us from
these competitors, some of these competitors have significantly greater market
presence, brand recognition, and financial, technical and personnel resources
than us.

ISPs. According to industry sources, there were over 6,700 ISPs in the
United States and Canada in 1998, consisting of national, regional and local
providers. Our current primary competitors include other ISPs with a
significant national presence which focus on business customers, such as UUNet
Technologies, Inc., GTE Internetworking (formerly BBN), Concentric Network and
DIGEX. While we believe that our level of customer service and support and
target market focus distinguish us from these competitors, many of these
competitors have greater market share, brand recognition, and financial,
technical and personnel resources than us. We also compete with unaffiliated
regional and local ISPs in our targeted geographic regions.

Telecommunications Carriers. The major long distance companies, also known
as interexchange carriers, including AT&T, MCI WorldCom, Cable & Wireless/IMCI
and Sprint, offer Internet access services and compete with us. Reforms in the
federal regulation of the telecommunications industry have created greater
opportunities for incumbent local exchange carriers, or ILECs, including the
Regional Bell Operating Companies, or RBOCs, and other CLECs, to enter the
Internet connectivity market. In order to address the Internet connectivity
requirements of the business customers of long distance and local carriers, we
believe that there is a move toward horizontal integration by ILECs and CLECs
through acquisitions or joint ventures with, and the wholesale purchase of,
connectivity from ISPs. The MCI/WorldCom merger (and the prior
WorldCom/MFS/UUNet consolidation), GTE's acquisition of BBN, the acquisition by
ICG Communications, Inc. of Netcom, Global Crossing's recently announced plans
to acquire Frontier Corp. (and Frontier's prior acquisition of Global Center)
and AT&T's recent purchase of IBM's global communications network are
indicative of this trend. Accordingly, we expect that we will experience
increased competition from the traditional telecommunications carriers. Many of
these telecommunications carriers, in addition to their greater network
coverage, market presence, and financial, technical and personnel resources,
also have large existing commercial customer bases.

S-48
<PAGE>

Cable Companies, Direct Broadcast Satellite and Wireless Communications
Companies. Many of the major cable companies have announced that they are
exploring the possibility of offering Internet connectivity, relying on the
viability of cable modems and economical upgrades to their networks.
Continental Cablevision, Inc., Tele-Communications, Inc. ("TCI") and At Home
Corporation (@Home) have announced trials to provide Internet cable service to
their residential customers in select areas. Cable companies, however, are
faced with large-scale upgrades of their existing plant equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. Additionally, their current subscriber base
and market focus is residential which requires that they partner with business-
focused providers or undergo massive sales and marketing and network
development efforts in order to target the business sector. Several
announcements also recently have been made by other alternative service
companies approaching the Internet connectivity market with various wireless
terrestrial and satellite-based service technologies. These include Hughes
Network Systems' DirecPC product that provides high-speed data through direct
broadcast satellite technology; CAI Wireless Systems Inc.'s announcement of an
MMDS wireless cable operator launching data services via 2.5 to 2.7 GHz and
high-speed wireless modem technology; Cellularvision's announcement that it is
offering Internet access via high-speed wireless LMDS technology; and WinStar
Communications, a 38 GHz radio company that wholesales its network capacity to
other carriers and now offers high-speed Internet access to business customers.
We believe that there is a trend toward horizontal integration involving cable
companies through acquisitions or joint ventures between cable companies and
telecommunications carriers. The acquisition of TCI by AT&T is indicative of
this trend.

On-line Service Providers. The dominant on-line service providers, including
Microsoft Network, America Online, Incorporated and Prodigy, Inc., have all
entered the Internet access business by engineering their current proprietary
networks to include Internet access capabilities. We compete to a lesser extent
with these service providers, which currently are primarily focused on the
consumer marketplace and offer their own content, including chat rooms, news
updates, searchable reference databases, special interest groups and shopping.
However, America Online's recent acquisition of Netscape Communications
Corporation and related strategic alliance with Sun Microsystems will enable it
to offer a broader array of IP-based services and products that could
significantly enhance its ability to appeal to the business marketplace and, as
a result, compete more directly with us. While CompuServe has announced it also
will target Internet connectivity for the small to medium-sized business
market, this will require a significant transition from a consumer market focus
to a business market focus.

We believe that our ability to attract business customers and to market
value-added services is a key to our future success. However, there can be no
assurance that our competitors will not introduce comparable services or
products at similar or more attractive prices in the future or that we will not
be required to reduce our prices to match competition. Recently, many
competitive ISPs have shifted their focus from individual customers to business
customers. Moreover, there can be no assurance that more of our competitors
will not shift their focus to attracting business customers, resulting in even
more competition for us. There can be no assurance that we will be able to
offset the effects of any such competition or resulting price reductions.
Increased competition could result in erosion of our market share and could
have a material adverse effect on our business, financial condition and results
of operations.

Proprietary Rights

Our success and ability to compete is dependent in part upon our technology
and proprietary rights, although we believe that our success is more dependent
upon our technical expertise than our proprietary rights. We rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect our technology. There can be no assurance
that the steps taken by us will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology. We are also
subject to the risk of adverse claims and litigation alleging infringement of
the intellectual property rights of others.

S-49
<PAGE>

Regulatory Matters

The following summary of regulatory developments and legislation is not
complete. It does not describe all present and proposed federal, state, and
local regulation and legislation affecting the ISP and telecommunications
industries. Existing federal and state regulations are currently subject to
judicial proceedings, legislative hearings, and administrative proposals that
could change, in varying degrees, the manner in which our industries operate.
We cannot predict the outcome of these proceedings or their impact upon the ISP
and telecommunications industries or upon us.

In recent years there have been a number of U.S. and foreign legislative and
other initiatives seeking to control or affect the content of information
provided over the Internet. Some of these initiatives would impose criminal
liability upon persons sending or displaying, in a manner available to minors,
obscene or indecent material or material harmful to minors. Liability would
also be imposed on an entity knowingly permitting facilities under its control
to be used for such activities. These initiatives may decrease demand for
Internet access, chill the development of Internet content, or have other
adverse effects on Internet access providers, including us.

Both the provision of Internet access service and the provision of
underlying telecommunications services are affected by federal, state, local
and foreign regulation. The Federal Communications Commission (the "FCC")
exercises jurisdiction over all facilities of, and services offered by,
telecommunications carriers to the extent that they involve the provision,
origination or termination of jurisdictionally interstate or international
communications. The state regulatory commissions retain jurisdiction over the
same facilities and services to the extent they involve origination or
termination of jurisdictionally intrastate communications. In addition, as a
result of the passage of the Telecommunications Act of 1996 (the "1996 Act"),
state and federal regulators share responsibility for implementing and
enforcing the domestic pro-competitive policies of the 1996 Act. In particular,
state regulatory commissions have substantial oversight over the provision of
interconnection and non-discriminatory network access by ILECs. Municipal
authorities generally have some jurisdiction over access to rights of way,
franchises, zoning and other matters of local concern.

Our Internet operations are not currently subject to direct regulation by
the FCC or any other U.S. governmental agency, other than regulations
applicable to businesses generally. However, the FCC continues to review its
regulatory position on the usage of the basic network and communications
facilities by ISPs. Although in an April 1998 Report, the FCC determined that
ISPs should not be treated as telecommunications carriers and therefore should
not be regulated, it is expected that future ISP regulatory status will
continue to be uncertain. Indeed, in that report, the FCC concluded that
certain services offered over the Internet, such as phone-to-phone IP
telephony, may be functionally indistinguishable from traditional
telecommunications service offerings, and their non-regulated status may have
to be re-examined. Our Internet operations outside the U.S. are subject to
direct regulation through licensing from governmental agencies.

Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from RBOCs
or other telecommunications companies, could have an adverse effect on our
business. Although the FCC has decided not to allow local telephone companies
to impose per-minute access charges on ISPs, and that decision has been upheld
by the reviewing court, further regulatory and legislative consideration of
this issue is likely. In addition, some telephone companies are seeking relief
through state regulatory agencies. Such rules, if adopted, are likely to have a
greater impact on consumer-oriented Internet access providers than on business-
oriented ISPs, such as us. Nonetheless, the imposition of access charges would
affect our costs of serving dial-up customers and could have a material adverse
effect on our business, financial condition and results of operations.

S-50
<PAGE>

resale telecommunications services, subjecting it to regulation as a non-
dominant international common carrier. In addition, our wholly-owned
subsidiary, PSINet Telecom UK Limited has received an international facilities
license from DTI and OFTEL, the responsible telecommunications regulatory
bodies in the United Kingdom. Generally, the FCC and OFTEL have chosen not to
closely regulate the charges or practices of non-dominant carriers, such as our
subsidiaries. Nevertheless, these regulatory agencies act upon complaints
against such carriers for failure to comply with statutory obligations or with
the rules, regulations and policies of such regulatory agencies. These
regulatory agencies also have the power to impose more stringent regulatory
requirements on us and to change our regulatory classification. We believe
that, in the current regulatory environment, such regulatory agencies are
unlikely to do so. As we enter new markets, we anticipate obtaining similar
licenses as required by applicable telecommunications rules and regulations in
order to acquire and maintain telecommunications assets and facilities in such
countries.

The laws relating to the provision of telecommunications services in
countries other than the U.S., and in multinational organizations such as the
International Telecommunications Union, are also undergoing a process of
development. As we continue our program of acquisition and expansion into
international markets, these laws will have an increasing impact on our
operations. There can be no assurance that new or existing laws or regulations
will not have a material adverse effect on us.

Our subsidiaries have also received CLEC certification in New York,
Virginia, Colorado, and Texas, have applied for CLEC certification in Maryland
and California and we are considering the financial, regulatory and operational
implications of becoming a CLEC in certain other states. The 1996 Act requires
CLECs not to prohibit or unduly restrict resale of their services; to provide
dialing parity, number portability, and nondiscriminatory access to telephone
numbers, operator services, directory assistance, and directory listings; to
afford access to poles, ducts, conduits, and rights-of-way; and to establish
reciprocal compensation arrangements for the transport and termination of
telecommunications traffic. In addition to federal regulation of CLECs, the
states also impose regulatory obligations upon CLECs. While these obligations
vary from state to state, most states require CLECs to file a tariff for their
services and charges; require CLECs to charge just and reasonable rates for
their services, and not to discriminate among similarly-situated customers; to
file periodic reports and pay certain fees; and to comply with certain services
standards and consumer protection laws. As a provider of domestic basic
telecommunications services, particularly competitive local exchange services,
we could become subject to further regulation by the FCC and/or another
regulatory agency, including state and local entities.

The 1996 Act has caused fundamental changes in the markets for local
exchange services. In particular, the 1996 Act and the FCC rules issued
pursuant to it mandate competition in local markets and require that ILECs
interconnect with CLECs. Under the provisions of the 1996 Act, the FCC and
state public utility commissions share jurisdiction over the implementation of
local competition: the FCC was required to promulgate general rules and the
state commissions were required to arbitrate and approve individual
interconnection agreements. The courts have generally upheld the FCC in its
promulgation of rules, including a January 25, 1999 U.S. Supreme Court ruling
which determined that the FCC has jurisdiction to promulgate national rules in
pricing for interconnection.

An important issue for CLECs is the right to receive reciprocal compensation
for the transport and termination of Internet traffic. We believe that, under
the 1996 Act, CLECs are entitled to receive reciprocal compensation from ILECs.
However, some ILECs have disputed payment of reciprocal compensation for
Internet traffic, arguing that ISP traffic is not local traffic. Most states
have required ILECs to pay CLECs reciprocal compensation. However, in October
1998, the FCC determined that dedicated Digital Subscriber Line service is an
interstate service and properly tariffed at the interstate level. In February
1999, the FCC concluded that at least a substantial portion of dial-up ISP
traffic is jurisdictionally interstate. The FCC also concluded that its
jurisdictional decision does not alter the exemption from access charges
currently enjoyed by ISPs. The FCC established a proceeding to consider an
appropriate compensation mechanism for interstate Internet traffic. Pending the
adoption of that mechanism, the FCC saw no reason to interfere with existing

S-51
<PAGE>

interconnection agreements and reciprocal compensation arrangements. The FCC
order has been appealed. In addition, there is a risk that state public utility
commissions that have previously considered this issue and ordered the payment
of reciprocal compensation by the ILECs to the CLECs may be asked by the ILECs
to revisit their determinations, or may revisit their determinations on their
own motion. To date, at least one ILEC has filed suit seeking a refund from a
carrier of reciprocal compensation that the ILEC had paid to that carrier.
There can be no assurance that any future court, state regulatory or FCC
decision on this matter will favor our position. An unfavorable result may have
an adverse impact on our potential future revenues as a CLEC, as well as
increasing our costs for PRIs generally.

As we become a competitor in local exchange markets, we will become subject
to state requirements regarding provision of intrastate services. This may
include the filing of tarriffs containing rates and conditions. As a new
entrant, without market power, we expect to face a relatively flexible
regulatory environment. Nevertheless, it is possible that some states could
require us to obtain the approval of the public utilities commission for the
issuance of debt or equity or other transactions which would result in a lien
on our property used to provide intrastate services.

Employees

As of December 31, 1998, we had approximately 1,817 full-time employees: 773
in the United States and 1,044 outside of the United States, including
approximately 688 in data communications and operational positions, 636 in
sales and marketing, and 493 in general and administrative positions. We
believe that our relations with our employees are good. None of our employees
are represented by a labor union or covered by a collective bargaining
agreement and we have never experienced a work stoppage.

Properties

Our principal administrative, operational and marketing and sales facilities
total approximately 66,000 square feet and are located in an office park in
Herndon, Virginia. We occupy this space under four leases which expire in
September 2003 and include five-year renewal options. We also lease:

. approximately 15,000 square feet of office space in a second office park
located in Herndon, Virginia,

. approximately 48,480 and 23,000 square feet of office space in two
office parks located in Reston, Virginia, and

. approximately 23,760 square feet of office space for our network
operations center in Troy, New York.

All of our regional offices and subsidiaries also lease their facilities,
except for our European Technical Center which includes our principal European
administrative, operational, marketing and sales facilities, which total
approximately 3,900 square feet and is owned by us in Switzerland. We also
lease or are otherwise provided with the right to utilize space in various
geographic locations to provide an operational facility for certain of our
POPs. We believe that these facilities are adequate for our current needs and
that suitable additional space, should it be needed, will be available to
accommodate expansion of our operations on commercially reasonable terms.

Legal Proceedings

From time to time, we have been involved in certain disputes and threatened
with or named as a defendant in lawsuits and administrative claims. Certain of
such disputes, lawsuits and threatened litigation include claims asserting
alleged breach of agreements and certain of them relate to relatively novel or
unresolved issues of law arising out of or relating to the developing nature of
the Internet and on-line services industries.

S-52
<PAGE>

On March 23, 1999, an arbitrator awarded The Chatterjee Management Company
("Chatterjee") compensatory damages, including interest and legal expenses,
from PSINet. In conjunction with this arbitration decision, we have recorded a
charge of $49.0 million, which accrual is reflected in other accounts payable
and accrued liabilities in our consolidated balance sheet at December 31, 1998.
This award resulted from a claim by Chatterjee that we had breached the terms
of a joint venture agreement executed by the parties in September 1996. As
previously disclosed by us in various filings with the Securities and Exchange
Commission, Chatterjee had initiated the arbitration proceeding against us in
November 1997 before the International Chamber of Commerce, Court of
Arbitration, in London, England.

On September 19, 1996, we signed an agreement with Chatterjee pursuant to
which we and an investment group led by Chatterjee would have established a
joint venture for the purpose of building an Internet network across Europe and
providing Internet-related services in Europe. Such investment group was to
invest up to $41 million in a joint venture. No monies were invested by
Chatterjee or the investment group pursuant to the joint venture agreement nor
were any other actions undertaken to implement it. Following the signing of the
agreement, the parties acknowledged structural difficulties associated with the
joint venture as originally contemplated, which prevented its implementation.
Instead, they sought for several months to negotiate a direct investment in
PSINet by Chatterjee in lieu of the initial agreement. Those negotiations were
not successful.

In the arbitration proceeding, Chatterjee alleged that we had breached the
joint venture agreement by repudiating our obligations under the agreement and
by breaching a covenant not to compete. Chatterjee requested an arbitration
award declaring that the agreement was still valid and binding upon the parties
and that we stood in breach of the agreement, directing us to specifically
perform our obligations under the agreement or, in the alternative, awarding
Chatterjee compensatory damages in an amount not less than $25 million,
awarding Chatterjee profits that we had earned or stood to earn in Europe, and
awarding Chatterjee the costs of arbitration, including attorney's fees and
interest on the award of damages. An award of specific performance by the
arbitrator could have given Chatterjee an ongoing ownership interest in our
European operations.

We have submitted a request to the International Chamber of Commerce
requesting that it reconsider the amount of the damages award. We are
continuing to evaluate our options and intend to pursue vigorously appropriate
legal steps to seek to modify the arbitrator's order. However, due to the
nature of arbitration proceedings, our ability to obtain relief in this matter
is likely to be constrained. Any amounts payable to Chatterjee will be made
from available cash, and we believe that any such payment will not have a
material adverse effect on our business.

In addition, from time to time we receive communications from third parties
asserting alleged infringement of patents, trademarks and service marks of
others. Although there is currently no material litigation arising out of any
alleged infringement of patents, trademarks or service marks, there can be no
assurance that litigation will not be commenced regarding these or other
matters.

We are not involved in any other legal proceedings which we believe would,
if adversely determined, have a material adverse effect upon our business,
financial condition or results of operations. There can be no assurance whether
these matters would be determined in a manner which is favorable to us or, if
adversely determined, whether such determination would have a material adverse
effect upon our business, financial condition or results of operations.

S-53
<PAGE>

MANAGEMENT

The following sets forth certain information as of March 31, 1999 concerning
the directors and executive officers of PSINet.

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers:
William L. 47 Chairman of the Board of Directors and
Schrader(1)(3)......... Chief Executive Officer (Founder)
Harold S. Wills......... 57 President, Chief Operating Officer and Director
David N. Kunkel......... 56 Executive Vice President, General Counsel and Director
Edward D. Postal........ 43 Senior Vice President and Chief Financial Officer
E. A. Davis............. 52 Senior Vice President and President, PSINetworks Company
Nadir Desai............. 34 Senior Vice President and President, PSINet Canada and Latin America
Harry G. Hobbs.......... 45 Senior Vice President and President, PSINet Europe
Chi H. Kwan............. 47 Senior Vice President and President, PSINet Asia/Pacific
Michael J. Malesardi.... 38 Vice President and Controller
Non-Executive Directors:
William H.
Baumer(1)(2)(3)........ 66 Director
Ian P. Sharp(2)(3)...... 67 Director
Ralph J. Swett(1)(2).... 64 Director
</TABLE>
- ----------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Financing Committee.

William L. Schrader is the founder of PSINet and has served as our Chairman
of the Board of Directors and Chief Executive Officer since our inception and
as our President from our inception to September 1998. Prior to forming PSINet,
Mr. Schrader served as President and Chief Executive Officer of NYSERNet Inc.,
a provider of data networking services in New York State ("NYSERNet"), from
January 1986 to December 1989. Mr. Schrader also was a co-founder, and, from
May 1984 until February 1987, served as Executive Director of the Cornell
Theory Center, a National Science Foundation supercomputer center. Mr.
Schrader's term of office as a director of PSINet expires in 1999.

Harold S. Wills has served as our President since September 1998 and as a
director of PSINet and our Chief Operating Officer since April 1996, and served
as our Executive Vice President from April 1996 to September 1998. Mr. Wills
served as Chief Operating Officer of Hospitality Information Networks, Inc., a
provider of information services for the hospitality industry, from July 1995
through January 1996. Mr. Wills also held various positions including, Managing
Director, International Computer Services, Technical Service Director and Sales
Director of Granada Group PLC, a computer services provider, from September
1991 through September 1995. Mr. Wills's term of office as a director of PSINet
expires in 2000.

David N. Kunkel has served as our Executive Vice President since 1998, as
our Senior Vice President since September 1996, as a director of PSINet and our
Secretary since September 1995, as our Vice President since July 1995 and as
our General Counsel since June 1995. Mr. Kunkel also served as our Vice
President of International Operations from April 1996 to September 1996 and as
Senior Counsel to Nixon, Hargrave, Devans & Doyle LLP, outside counsel to
PSINet, from July 1995 through December 1995. Prior to July 1995, Mr. Kunkel
was a partner with the law firm of Nixon, Hargrave, Devans & Doyle LLP for 16
years and served as outside counsel to NYSERNet from 1986 until 1989 and to
PSINet from our inception until July 1995. Mr. Kunkel's term of office as a
director of PSINet expires in 1999.

Edward D. Postal has served as our Senior Vice President and Chief Financial
Officer since August 1997 and served as our Vice President and Chief Financial
Officer since October 1996. Prior to joining us,

S-54
<PAGE>

Mr. Postal served as Senior Vice President, Chief Financial Officer and a
director of The Hunter Group, Inc., a systems integration consulting firm, from
March 1995 to October 1996, as Vice President and Chief Financial Officer of
The Wyatt Company, an international employee benefits and human resources
consulting firm (currently Watson Wyatt Worldwide), from December 1991 to
October 1994 and as controller/treasurer of The Wyatt Company from November
1985 to December 1991. From 1981 to November 1985, Mr. Postal served in various
financial management positions at Satellite Business Systems, a satellite
communications company acquired by MCI in 1985, and, prior thereto, held
various positions at Touche Ross & Co. (currently Deloitte & Touche LLP).

E. A. "Ted" Davis has served as our Senior Vice President and President,
PSINetworks Company since October 1998. Prior to joining us, Mr. Davis served
as Vice President of Customer Technical Support for Lucent Technologies
(formerly the network services division of AT&T), from January 1995 to April
1998. Prior thereto, Mr. Davis served in various technical and management
positions with AT&T since beginning his career there in June 1968.

Nadir Desai has served as our Senior Vice President and President, PSINet
Canada and Latin America since March 1999, and served as President and Chief
Executive Officer of PSINet Limited (Canada) from January 1996 to March 1999.
Prior to joining us in 1996, Mr. Desai served as President and Founder of
NICNAD Enterprises, a clothing organization engaged in wholesale,
manufacturing, import/export and retail activities from 1991 to December 1995.

Harry G. Hobbs has served as our Senior Vice President and President, PSINet
Europe since September 1998 and served as our Vice President, Customer
Administration from September 1997 to September 1998. Prior to joining us, Mr.
Hobbs served as Vice President, Customer Care for American Personal
Communications, LP, a provider of wireless communications services and an
affiliate of Sprint Spectrum, from February 1995 to August 1997. Prior thereto,
Mr. Hobbs served in various positions in the Customer Service, Operations and
Large Account Support groups at MCI, including Vice President, Global Customer
Service from September 1993 to February 1995, Director, Operations from March
1992 to February 1995 and Director, Large Account Group from November 1990 to
March 1992.

Chi H. Kwan has served as our Senior Vice President and President, PSINet
Asia/Pacific since October 1998. Prior to joining us, Mr. Kwan served as Vice
Chairman and Representative Director of Montblanc Japan K.K., a maker of luxury
branded products, from May 1997 to September 1998. Prior thereto, Mr. Kwan
served in several executive management positions with Pitney Bowes Corporation
and its affiliates, including Vice Chairman and Director and Vice President
Market Development, Asia Pacific, from October 1995 to April 1997, and
President and Representative Director of Dodwell Pitney Bowes Corporation from
April 1992 to September 1995. From 1975 to April 1992, Mr. Kwan held various
senior management positions with Nicolet Japan, K.K., Finnegan-Mat Instruments
Inc. and H.B. Fuller Japan Inc.

Michael J. Malesardi has served as our Vice President and Controller since
July 1997. Prior to joining us, Mr. Malesardi served as Director of Financial
Administration of Watson Wyatt Worldwide, an international employee benefits
and human resources consulting firm ("Watson Wyatt"), from April 1995 to May
1997 and as Controller of Watson Wyatt from February 1992 to April 1995. From
September 1982 to February 1992, Mr. Malesardi held various positions at Price
Waterhouse LLP (currently PricewaterhouseCoopers LLP), the latest as Senior
Audit Manager.

William H. Baumer has served as a director of PSINet since 1993. Mr. Baumer
has been a Professor of Philosophy at the University at Buffalo since 1971 and
was the Acting Chairman of the Department of Economics at the University at
Buffalo from June 1992 until June 1995. Mr. Baumer also served as Treasurer and
Vice President of NYSERNet from January 1986 to December 1990 and from December
1989 to December 1990, respectively. Mr. Baumer's term of office as a director
of PSINet expires in 2000.

Ian P. Sharp has served as a director of PSINet since September 1996. Mr.
Sharp is currently retired and was the President and founder of I.P. Sharp
Associates, a software development company, from December 1964 through July
1989. Mr. Sharp's term of office as a director of PSINet expires in 1999.

S-55
<PAGE>

Ralph J. Swett has served as a director of PSINet since February 1998. Mr.
Swett is currently retired, is a director of IXC Communications and was
Chairman of IXC Communications from its formation in July 1992 through April
1998, and served as Chief Executive Officer and President of IXC Communications
from July 1992 to October 1997. Prior thereto, Mr. Swett served as Chairman of
the Board and Chief Executive Officer of Communications Transmission, Inc.
("CTI") from 1986 to 1992. From 1969 to 1986, Mr. Swett served in increasingly
senior positions (Vice President, President and Chairman) of Times Mirror Cable
Television ("TMCT"), a subsidiary of Times Mirror and a previous owner of IXC
Carrier, and as a Vice President of Times Mirror from 1981 to 1986. Mr. Swett
served as Chairman of IXC Carrier from 1979 through April 1998, and served as
its Chief Executive Officer from 1986 to October 1997 and its President from
1991 to October 1997. Mr. Swett has managed communications businesses for the
past 26 years. Mr. Swett's term of office as a director of PSINet expires in
2000. See "Certain Relationships and Transactions--Strategic Alliance With
IXC."

Pursuant to the IRU Purchase Agreement between us and IXC, Ralph J. Swett,
the former Chairman of IXC Communications, was elected, effective as of the
closing of the transaction, to our Board of Directors. The IRU Purchase
Agreement provides that our Chairman will recommend that Mr. Swett continue to
be re-elected to our Board for so long as IXC continues to own at least 95% of
the shares of our common stock we issued to IXC in connection with the
transaction. IXC is an indirect wholly owned subsidiary of IXC Communications.
See "Certain Relationships and Transactions--Strategic Alliance With IXC."

Our Board of Directors is divided into two classes consisting of at least
three directors each and as nearly equal in number as possible, and directors
are elected for terms of two years on a staggered basis. Our Board of Directors
is currently composed of six directors, three whose terms expire in 1999 and
three whose terms expire in 2000 and until their respective successors have
been elected and qualified. Each of our executive officers serves at the
pleasure of the Board of Directors.

Committees of the PSINet Board

Our Board of Directors has three standing committees: the Audit Committee,
the Compensation Committee and the Financing Committee. The Audit Committee
recommends the firm to be appointed as independent accountants to audit our
financial statements, discusses the scope and results of the audit with our
independent accountants, reviews with management and our independent
accountants our interim and year-end operating results, considers the adequacy
of our internal accounting controls and audit procedures and reviews the non-
audit services to be performed by our independent accountants. The current
members of the Audit Committee are Messrs. Baumer, Sharp and Swett.

The Compensation Committee reviews and recommends the compensation
arrangements for our management and administers our Executive Stock Option
Plan, Executive Stock Incentive Plan and Strategic Stock Incentive Plan. The
current members of the Compensation Committee are Messrs. Baumer, Schrader and
Swett.

The Financing Committee may authorize and approve financings of our debt
securities, lease financings and equity financings, subject to limitations. The
current members of the Financing Committee are Messrs. Baumer, Schrader and
Sharp.

Compensation of Directors

Directors, other than those who also are our employees or consultants or are
serving on our Board of Directors as representatives of a shareholder, receive
annual fees of $15,000, with Committee Chairmen receiving an additional amount
of $3,000 each per year, and are eligible for awards under our Directors Stock
Incentive Plan (the "Directors' Plan"). The Directors' Plan provides for
initial option grants with respect to 10,000 shares of our common stock
("initial grants") to be made to each eligible director upon his or her first
election to our Board of Directors and, thereafter, for annual grants of
options to purchase 5,000 shares of

S-56
<PAGE>

common stock to be made to each eligible director who has served on our Board
of Directors for at least 12 months. Options are exercisable for 10 years after
the date of grant. The exercise price for any option under the plan shall be
equal to the fair market value of our common stock at the time such option is
granted. The plan provides that initial grants thereunder vest over a four-year
period in respect of the exercise of one-sixteenth of the shares subject
thereto on the last day of each calendar quarter following such grant, and that
annual option awards vest over a two-year period in respect of one-half of the
shares subject thereto on each of the first and second anniversaries of the
grant date. Each of Messrs. Sharp and Swett received initial grants upon their
election to our Board of Directors in accordance with the Directors' Plan. In
addition, directors who are not also officers of PSINet receive fees of $1,000
per day for Board and committee meetings, $200 per day for Board and committee
conference calls and $1,250 per day for on-site consultations not in
conjunction with a Board of Directors meeting. Committee Chairmen receive an
additional $250 for each committee meeting attended and $50 for each committee
conference call attended. Directors also are reimbursed for certain reasonable
expenses incurred in attending Board or committee meetings. We have issued to
Mr. Baumer warrants to purchase 25,000 shares of our common stock for $1.60 per
share in return for Mr. Baumer's services as a director of PSINet through 1996.
Mr. Baumer also holds warrants to purchase an additional 25,000 shares in
return for consulting services previously rendered to us by Mr. Baumer. Each of
these warrants became fully vested effective September 9, 1996. Other than
these fees and awards and the warrants issued to Mr. Baumer, no member of our
Board of Directors receives any fees or other compensation for serving in such
capacity.

Executive Compensation

Summary Compensation. The following table sets forth in summary form the
compensation paid by us to our chief executive officer and to each of our four
most highly compensated executive officers other than our chief executive
officer as of December 31, 1998 for services rendered to us in all capacities.

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Salary Bonus Other Annual Securities All Other
Name and Principal (1) (1) Compensation Underlying Compensation
Position Year ($) ($) ($) Options (#) ($)
- ------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader..... 1998 $314,519 $200,000 $ 5,905(2) -- $3,330(3)
Chairman and 1997 248,519 150,000 7,457(2) -- 3,135(3)
Chief Executive Officer 1996 194,471 2,438 2,015(2) -- 3,135(3)
Harold S. Wills(4)...... 1998 $360,500 $150,000 $ 9,354(5) 225,000(6) $3,250(7)
President and 1997 252,654 100,000 9,929(5) 250,000(6) 3,125(7)
Chief Operating Officer 1996 146,154 77,500 30,825(5) 250,000(6) --
David N. Kunkel.........
Executive Vice 1998 $334,192 $150,000 $ 4,288(8) 200,000(9) $3,250(7)
President and General 1997 299,327 100,000 6,550(8) 100,000(9) 3,125(7)
Counsel 1996 272,596 103,438 88,474(8) 251,193(9) --
Edward D. Postal(10)....
Senior Vice President 1998 $252,288 $115,000 $ 5,590(11) 200,000(12) $3,250(7)
and 1997 204,077 75,000 6,880(11) 75,000(12) 3,125(7)
Chief Financial Officer 1996 34,865 60,872 -- 100,000(12) --
Harry G. Hobbs(13)...... 1998 $197,847 $112,500 $23,143(14) 250,000(15) $3,250(7)
Senior Vice President 1997 55,385 25,000 -- 50,000(15) --
and President, PSINet
Europe
</TABLE>
- ----------------
(1) Amounts reported in respect of a particular fiscal year reflect amounts
earned for services rendered in that fiscal year regardless of when paid.

S-57
<PAGE>

(2) Consists of (a) $1,034 and $5,107 paid to Mr. Schrader with respect to
installation of a security system at Mr. Schrader's home in 1998 and 1997,
respectively, (b) a car allowance of $3,290, $2,350 and $2,015 in 1998,
1997 and 1996, respectively, and (c) a $1,581 taxable trip provided by us
to Mr. Schrader in 1998.
(3) Consists of: (a) insurance premiums in the amount of $2,135 paid by us in
each of 1998, 1997 and 1996 with respect to the proportionate beneficial
interest of Mr. Schrader's spouse in an insurance policy on Mr. Schrader's
life and (b) matching contributions made to Mr. Schrader's account under
our 401(k) Plan in the amount of $1,195 in 1998 and in the amount of $1,000
in each of 1997 and 1996.
(4) Mr. Wills joined us as Executive Vice President and Chief Operating Officer
in April 1996. Accordingly, no information is provided for periods prior
thereto with respect to Mr. Wills.
(5) Consists of (a) $473 and $6,051 paid to Mr. Wills for installation of a
security system at his home in 1998 and 1997, respectively, (b) car
allowances of $3,173, $3,878 and $256 paid to Mr. Wills in 1998, 1997 and
1996, respectively, (c) a $5,708 taxable trip provided by us to Mr. Wills
in 1998, and (d) payments made to Mr. Wills in 1996 in connection with his
relocation as follows: $15,271 for certain closing costs on his new home
and $15,298 for moving expenses.
(6) Consists of (a) 125,000 options issued under our Strategic Stock Incentive
Plan in 1998, (b) 100,000, 50,000 and 250,000 options issued under our
Executive Stock Incentive Plan in 1998, 1997 and 1996, respectively, and
(c) 200,000 options issued under our Executive Stock Option Plan in 1997.
Does not include options with respect to 100,000 shares of our common stock
granted in November 1996 which were canceled as of December 31, 1996 due to
a failure to satisfy vesting conditions.
(7) Consists of matching contributions made to the named officer's account
under our 401(k) Plan in the years indicated.
(8) Consists of (a) car allowances of $4,288 and $3,544 paid to Mr. Kunkel in
1998 and 1997, respectively, (b) payments made to Mr. Kunkel in connection
with his relocation as follows: $830 for certain closing costs on the sale
of his primary residence paid to Mr. Kunkel in 1997, $2,176 and $36,299 for
certain carrying costs for his residence pending such sale paid to Mr.
Kunkel in 1997 and 1996, respectively, and (c) $52,175 paid to Mr. Kunkel
in 1996 pursuant to an agreement to guarantee Mr. Kunkel a minimum price on
the sale of his primary residence.
(9) Consists of (a) 100,000 options issued under our Strategic Stock Incentive
Plan in 1998, (b) 100,000 options issued under our Executive Stock
Incentive Plan in 1998, (c) 100,000 options issued pursuant to our
Executive Stock Option Plan in 1997, and (d) options issued in connection
with a company-wide repricing of previously granted options in 1996. Does
not include options with respect to 18,494 shares granted in February 1996
(with respect to 1995) which were replaced in connection with such
repricing or options with respect to 75,000 shares of our common stock
granted in November 1996 which were canceled as of December 31, 1996 due to
a failure to satisfy vesting conditions. Does not include options with
respect to 251,193 shares issued under our Executive Stock Incentive Plan
pursuant to Mr. Kunkel's employment agreement with us which were replaced
in connection with a company-wide repricing as of April 5, 1996.
(10) Mr. Postal joined us as Vice President and Chief Financial Officer in
October 1996. Accordingly, no information is provided for periods prior
thereto with respect to Mr. Postal.
(11) Represents a car allowance to Mr. Postal.
(12) Consists of (a) 100,000 options issued under our Strategic Stock Incentive
Plan in 1998, (b) 100,000, 36,050 and 100,000 options issued under our
Executive Stock Incentive Plan in 1998, 1997 and 1996, respectively, and
(c) 38,950 options issued under our Executive Stock Option Plan in 1997.
(13) Mr. Hobbs joined us as Vice President, Customer Administration in August
1997. Accordingly, no information is provided for periods prior thereto
with respect to Mr. Hobbs. Mr. Hobbs was promoted to Senior Vice President
and President of PSINet Europe in October 1998.
(14) Consists of (a) a payment of $21,562 made to Mr. Hobbs pursuant to his
employment agreement in connection with his relocation to Switzerland,
which amount is equal to one-month of Mr. Hobbs' salary ($18,750) plus a
15% cost of living adjustment ($2,812), and (b) a $1,581 taxable trip
provided by us to Mr. Hobbs.

S-58
<PAGE>

(15) Consists of (a) 100,000 options issued in 1998 under our Strategic Stock
Incentive Plan and (b) 150,000 and 50,000 options issued in 1998 and 1997,
respectively, under our Executive Stock Incentive Plan.

Option Grants. The following table sets forth certain information, as of
December 31, 1998, concerning individual grants of stock options made during
the fiscal year ended December 31, 1998 to each of the persons named in the
Summary Compensation Table above.

Option Grants in 1998

<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential
Realizable
Value at Assumed
Annual Rates of
Number of % of Total Stock Price
Securities Options/SARs Exercise Appreciation
Name Underlying Granted to or Base for Option Term
- ---- Options/SARs Employees in Price Expiration -------------------
Granted(#) Fiscal Year(1) ($/sh) Date 5%($) 10%($)
------------ -------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader..... 0 0 $ 0 -- $ 0 $ 0
Harold S. Wills......... 100,000(2) 1.54% $ 7.6250 02/20/08 $479,532 $1,215,229
125,000(3) 1.93 10.6875 06/10/08 840,164 2,129,140
David N. Kunkel......... 100,000(2) 1.54% $ 7.6250 02/20/08 $479,532 $1,215,229
100,000(3) 1.54 10.6875 06/10/08 672,131 1,703,312
Edward D. Postal........ 100,000(2) 1.54% $ 7.6250 02/20/08 $479,532 $1,215,229
100,000(3) 1.54 10.6875 06/10/08 672,131 1,703,312
Harry G. Hobbs.......... 50,000(2) 0.77% $ 7.7188 02/27/08 $242,716 $ 615,089
100,000(3) 1.54 10.6875 06/10/08 672,131 1,703,312
100,000(2) 1.54 10.5000 08/31/08 660,339 1,673,430
</TABLE>
- ----------------
(1) Based upon total grants of options in respect of 6,483,804 shares of our
common stock made during 1998.
(2) Granted under our Executive Stock Incentive Plan. Vest monthly over 48
months from the anniversary of the grant, subject to continued employment
by PSINet on each of such dates.
(3) Granted under our Strategic Stock Incentive Plan. Vest monthly over 48
months from the anniversary of the grant, subject to the continued
employment by PSINet on each of such dates. Under each of our Executive
Stock Incentive Plan, Executive Stock Option Plan, Directors Stock
Incentive Plan and Strategic Stock Incentive Plan, upon the acquisition of
beneficial ownership of 30% or more of our outstanding common stock by any
person other than a wholly-owned subsidiary of PSINet or the occurrence of
other change in control events specified in such plans, including certain
mergers, consolidations and transfers of all or substantially all of our
assets, all options and stock appreciation rights will become fully
exercisable and all restricted stock awards will become immediately vested.

Aggregate Year-End Option Values. The following table provides information
concerning the number of unexercised options held by each of the individuals
named in the Summary Compensation Table as of December 31, 1998. Also reported
are the values of "in the money" options, which represent the positive spread
between the exercise price and the fair market value of our common stock as of
December 31, 1998.

S-59
<PAGE>

Aggregated Options Exercises in 1998 and Fiscal Year-End Option Values

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998(#) December 31, 1998($)(1)
-------------------------- --------------------------
Shares Value
Acquired Realized
Name on Exercise(#) ($) Exerciseable Unexercisable Exerciseable Unexercisable
- ---- -------------- -------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader..... -- -- 427,000 0 $8,090,425 --
Harold S. Wills......... -- -- 301,041 423,959 $3,744,327 $5,191,610
David N. Kunkel......... -- -- 296,414 254,779 $3,532,722 $3,087,248
Edward D. Postal........ -- -- 115,055 259,945 $1,361,632 $3,065,180
Harry G. Hobbs.......... -- -- 47,917 252,083 $ 560,222 $2,781,963
</TABLE>
- ----------------
(1) Based upon a closing price of $20.875 per share on December 31, 1998, as
reported on The Nasdaq Stock Market.

Employment Agreements

We have employment agreements with each of Messrs. Wills, Kunkel, Postal and
Hobbs. We also have employment agreements with most of our other officers other
than Mr. Schrader pursuant to which they serve in their respective capacities.

Mr. Wills's employment agreement provides for a four-year term ending
October 2002 and a current annual base salary of $425,000, and also provides
for a performance bonus of $150,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of specified performance objectives
established by our Chairman.

Mr. Kunkel's employment agreement provides for a four-year term ending in
October 2002 and a current annual base salary of $350,000, and also provides
for a performance bonus of $150,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of specified performance objectives
established by our Chairman.

Mr. Postal's employment agreement provides for a four-year term ending
October 2002 and a current annual base salary of $265,000, and also provides
for a performance bonus of $115,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of specified performance objectives
established by our Chairman.

Mr. Hobbs's employment agreement provides for a 27-month term ending
December 2000 and a current annual base salary of $225,000, and also provides
for a performance bonus of up to $112,500 in 1998 and for performance bonuses
in subsequent years, subject to achievement of specified performance objectives
established by our Chief Operating Officer. Mr. Hobbs's employment agreement
also provides for payments relating to Mr. Hobbs's relocation to our European
office in Switzerland, including housing and automobile expenses and a cost of
living adjustment to Mr. Hobbs's monthly salary not to exceed 15% of such
salary.

These employment agreements also provide for standard employee benefits,
including, without limitation, participation in our 401(k) plan and bonus plan
as well as life, health, accident and disability insurance. These agreements
also provide for a 24-month non-competition period. If we elect to enforce such
non-competition restrictions, these officers are entitled, for a period of 24
months after termination of their employment, to receive their then current
base salary and all benefits being provided to them at the time of termination.
Each of these employment agreements (other than that of Mr. Hobbs) provides
that options awarded pursuant thereto are subject to immediate vesting upon the
occurrence of specified change in control events.

S-60
<PAGE>

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of our common stock,
as of March 31, 1999, by (1) each person who is known by us to own beneficially
more than five percent of our common stock; (2) each director of PSINet who
owns shares of our common stock; (3) each executive officer named in the
Summary Compensation Table appearing under "Management--Executive
Compensation"; and (4) all directors and executive officers of PSINet as a
group.

<TABLE>
<CAPTION>
Amount Percent
Beneficially of
Name of Beneficial Owner Owned(1) Class
- ------------------------ ------------- -------
<S> <C> <C>
IXC Internet Services, Inc............................. 10,229,789(2) 18.2%
William L. Schrader.................................... 5,710,477(3) 10.2
T. Rowe Price Associates, Inc.......................... 5,168,600(4) 9.2
Harold S. Wills........................................ 378,485(5) *
David N. Kunkel........................................ 349,814(6) *
Edward D. Postal....................................... 166,834(7) *
William H. Baumer...................................... 91,988(8) *
Harry G. Hobbs......................................... 76,044(9) *
Ralph J. Swett......................................... 13,125(10) *
Ian P. Sharp........................................... 6,875(11) *
Executive officers and directors as a group (12
persons).............................................. 6,886,558(12) 12.2
</TABLE>
- ----------------
* Less than 1%
(1) The persons named in the table have sole voting and dispositive power with
respect to all shares of our common stock shown as beneficially owned by
them, subject to the information contained in the notes to the table and to
community property laws, where applicable.
(2) These shares could be deemed to be beneficially owned by the members of the
Board of Directors of IXC, consisting of James F. Guthrie, Jeffrey C. Smith
and Stuart K. Coppens, as well as by the members of the Board of Directors
of IXC Communications, the parent company of IXC, consisting of Wolfe
(Bill) H. Bragin, Joe C. Culp, Richard D. Irwin, Carl W. McKinzie, Benjamin
L. Scott, Ralph J. Swett and Phillip L. Williams. IXC's address is City
View Center, 1122 Capitol of Texas Highway South, Austin, Texas 78746. See
"Certain Relationships and Transactions--Strategic Alliance with IXC--IXC
Shares."
(3) Includes 5,556,477 shares which are pledged with BankAmerica Corp. in
respect of two lines of credit providing Mr. Schrader with up to $17.3
million on an aggregate basis, of which approximately $7.4 million
(including principal and interest) was outstanding as of March 19, 1999, at
an interest rate equal to the 30 day LIBOR rate plus 1.65% per annum.
Includes 1,000 shares held by Mr. Schrader and his wife as joint tenants
with rights of survivorship. Also includes 150,000 shares held by a limited
liability company of which Mr. Schrader and his wife have shared voting and
dispositive power. Does not include 1,062,612 shares beneficially owned by
Mr. Schrader's wife, nor 111,882 shares held by two trusts (of which Mr.
Schrader's wife is trustee) for the benefit of two minor children of Mr.
Schrader's. Mr. Schrader disclaims beneficial ownership of the shares
beneficially owned by his wife and held in trust for his minor children.
Mr. Schrader's address is c/o PSINet Inc., 510 Huntmar Park Drive, Herndon,
Virginia, 20170.
(4) In a Schedule 13G dated February 12, 1999, T. Rowe Price Associates, Inc.
claimed sole voting power over 385,000 shares, sole dispositive power over
5,168,600 shares and no shared voting or shared dispositive power over any
shares. T. Rowe Price and Associates, Inc.'s address is 100 East Pratt
Street, Baltimore, Maryland 21202.
(5) Includes 372,394 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
352,606 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.

S-61
<PAGE>

(6) Includes 347,285 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
203,908 shares issuable upon the exercise of options which are not deemed
to be presently exercisable or 29,571 shares beneficially owned by Mr.
Kunkel's wife. Mr. Kunkel disclaims beneficial ownership of the shares
beneficially owned by his wife.
(7) Includes 152,034 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
222,966 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(8) Includes 50,000 shares issuable upon the exercise of outstanding warrants
and 2,000 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable. Does not include 5,000 shares
issuable upon the exercise of options which are not deemed to be presently
exercisable.
(9) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 223,956 shares issuable upon the exercise of options which
are not deemed to be presently exercisable.
(10) Includes 3,125 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
6,875 shares issuable upon the exercise of options which are not deemed to
be presently exercisable, and does not include 10,229,789 shares
beneficially owned by IXC, of which Mr. Swett is a director and was the
chairman of the board. Mr. Swett disclaims beneficial ownership of the
shares beneficially owned by IXC. See "Certain Relationships and
Transactions--Strategic Alliance With IXC."
(11) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 8,125 shares issuable upon the exercise of options which are
not deemed to be presently exercisable.
(12) See notes (3) and (5) through (11) above. Includes also approximately
91,916 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable granted to four executive
officers. Does not include approximately 272,584 shares issuable upon the
exercise of outstanding options granted to four executive officers which
are not deemed to be presently exercisable.

S-62
<PAGE>

CERTAIN RELATIONSHIPS AND TRANSACTIONS

Strategic Alliance With IXC

General Terms. In February 1998, we acquired from IXC 20-year noncancellable
indefeasible rights of use for specified purposes in up to 10,000 equivalent
route miles of fiber-based OC-48 network bandwidth (the "PSINet IRUs") in
selected portions across the IXC fiber optic telecommunications system within
the United States (the "Available System"). The PSINet IRUs were acquired in
exchange for the issuance to IXC of 10,229,789 shares of our common stock,
representing approximately 20% of our issued and outstanding common stock after
giving effect to such issuance and having an aggregate market value of $78.6
million based on the closing market price per share of our common stock as
reported by The Nasdaq Stock Market on such date of $7.6875 (the "IXC Shares"),
pursuant to an IRU and Stock Purchase Agreement, dated as of July 22, 1997,
between us and IXC, as amended (the "IRU Purchase Agreement").

IXC Shares. IXC has been granted demand and "piggyback" registration rights
with respect to the IXC Shares pursuant to a registration rights agreement
between us and IXC. In the event IXC proposes to sell or otherwise dispose of
any of the IXC Shares, other than pursuant to a pledge to an unaffiliated third
party lender, we have a right of first offer to acquire the shares proposed to
be sold at the closing market price per share of our common stock as reported
by The Nasdaq Stock Market or the principal securities exchange on which our
common stock is then listed on the date notice of such proposed sale is given
to us. Other than as set forth above and except for transfer restrictions
existing from time to time under applicable federal and state securities laws,
the IXC Shares are not subject to any transfer restrictions or to any voting
restrictions or other agreements. The IXC Shares are currently eligible for
sale in the public market subject to compliance with the volume limitations,
manner of sale provisions, notice requirements and other requirements of Rule
144 under the Securities Act of 1933. IXC did not elect to include any of the
IXC Shares in this offering pursuant to its registration rights but may request
registration of all or any of the IXC Shares in the future. Future sales by IXC
of substantial numbers of shares of our common stock could adversely affect the
market price for our common stock and make it more difficult for us to raise
funds through equity offerings and to effect acquisitions of businesses or
assets in consideration for issuances of our common stock.

Termination of Contingent Payment Obligation. The IRU Purchase Agreement
provides that, if the fair market value of the IXC Shares (based on the volume-
weighted average closing market price per share of our common stock as reported
by The Nasdaq Stock Market over the 20 trading day period immediately preceding
the applicable date of determination) is less than $240.0 million at the
earlier of one year following delivery and acceptance of the total amount of
bandwidth corresponding to the PSINet IRUs or the fourth anniversary of the
closing of the transaction (i.e., February 25, 2002), we would be obligated to
provide IXC with additional shares of our common stock or, at our sole option,
cash or a combination thereof equal to the shortfall (the "Contingent Payment
Obligation"). The IRU Purchase Agreement also provides, however, that the right
of IXC to receive additional shares and/or cash pursuant to the Contingent
Payment Obligation would terminate on such date as the fair market value of the
IXC Shares (as determined above) is equal to or greater than $240.0 million.
After the close of trading on The Nasdaq Stock Market on January 13, 1999, the
fair market value of the IXC Shares (as determined above) exceeded $240.0
million and, as a result, the Contingent Payment Obligation terminated as of
such date without the payment of any additional amounts or the issuance of any
additional shares of our common stock to IXC.

PSINet IRUs. The total amount of bandwidth corresponding to the PSINet IRUs
is contemplated to be delivered to us, to the extent then available, in
specified increments every six months during the two year period following the
closing. As of March 31, 1999, approximately 8,452 route miles of OC-12
(equivalent to approximately 2,113 route miles of OC-48) bandwidth
corresponding to the PSINet IRUs, connecting New York, Washington, D.C.,
Atlanta, Chicago, Dallas, Houston, San Francisco and Los Angeles and certain
major cities in between, have been placed into operation on the PSINet network.
We currently anticipate delivery of the remaining bandwidth corresponding to
the PSINet IRUs over the next 18 to 24 months. IXC has granted us a security
interest in, among other collateral, a portion of the IRUs underlying the
PSINet IRUs granted to IXC

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by IXC Carrier, Inc., its direct parent company and in a portion of certain
other IRUs in IXC's fiber optic telecommunications system to secure the
performance of IXC's obligations under the IRU Purchase Agreement to deliver
the PSINet IRUs. IXC will provide customary operation and maintenance services
with respect to the bandwidth delivered to us at specified prices and terms,
the total cost of which to us on an annual basis is expected to be
approximately $1.2 million per each 1,000 equivalent route miles of OC-48
bandwidth accepted under the IRU Purchase Agreement. IXC also will furnish
multiplexing, reconfiguration and collocation services with respect to such
bandwidth as requested by us at agreed upon fees.

Joint Marketing and Services Agreement. In connection with this transaction,
we and IXC also entered into a Joint Marketing and Services Agreement (the
"Marketing Agreement") pursuant to which each party is entitled to market the
products and services of the other under its own brand. Pursuant to the
Marketing Agreement, we have agreed to provide IXC with managed connectivity
services, value-added services and opportunity consulting services for
specified fees which, in light of the strategic importance to us of the PSINet
IRUs and our other arrangements with IXC described herein, we have agreed will
be, or will be equal to, the lowest offered by us.

Other Transactions. In addition to the transactions described above, IXC
Communications or its affiliates and we are parties to transactions in the
ordinary course of business which we believe are on terms no more favorable
than could be obtained on an arms' length basis with independent third parties.

DESCRIPTION OF COMMON STOCK

For a general description of our common stock, see "Description of Capital
Stock" in the accompanying prospectus. The description of our common stock in
the accompanying prospectus and of certain provisions of New York law do not
purport to be complete and are subject to and qualified in their entirety by
reference to our Certificate of Incorporation, Amended and Restated By-laws and
Shareholder Rights Plan, and New York law. Copies of these documents have been
filed with the SEC. See "Where You Can Find More Information" in the
accompanying prospectus.

DESCRIPTION OF CONVERTIBLE PREFERRED STOCK

We are concurrently offering, by means of a separate prospectus supplement,
7,000,000 shares of our % Series C cumulative convertible preferred stock,
excluding 1,050,000 shares of the convertible preferred stock available to
cover over-allotments. This offering and the convertible preferred stock
offering are not dependent upon each other.

Simultaneously with the closing of the convertible preferred stock offering,
the purchasers of the convertible preferred stock will deposit funds into an
account, called the Deposit Account, from which quarterly cash payments will be
made or which may be used to purchase shares of common stock from us for
delivery to holders in lieu of cash payments. The funds placed in the Deposit
Account by the purchasers of the convertible preferred stock will, together
with the earnings on those funds, be sufficient to make payments, in cash or
stock, through , 2002. After such date, dividends will begin to accrue on
the convertible preferred stock, although they may begin to accrue at an
earlier time if the Deposit Account is terminated. On and after , 2002 (or
earlier, if the Deposit Account is terminated), holders of the convertible
preferred stock will be entitled to quarterly dividends when, as and if
declared by our Board of Directors, which will be payable in cash or, at our
option, shares of our common stock or a combination thereof (subject to
applicable law).

The convertible preferred stock will be convertible at any time at the
option of the holder into shares of our common stock at conversion prices to be
determined. The shares of convertible preferred stock will be entitled to a
liquidation preference equal to $50 per share.

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We may redeem the convertible preferred stock at a redemption premium of %
of the liquidation preference (plus accumulated and unpaid dividends, if any)
on or after , 2001, if the trading price of the convertible preferred stock
equals or exceeds $ per share for 20 trading days within any 30 trading day
period. Except in the foregoing circumstance, we may not redeem the convertible
preferred stock prior to , 2002. Beginning on , 2002, we may redeem
shares of convertible preferred stock at an initial redemption premium of %
of the liquidation preference and thereafter declining to 100.00%, plus in each
case all accumulated and unpaid dividends to the redemption date. We may effect
any redemption, in whole or in part, at our option, in cash, by delivery of
fully paid and nonassessable shares of our common stock or a combination
thereof (subject to applicable law), by delivering notice to the holders of the
convertible preferred stock.

Holders of convertible preferred stock will have no voting rights except (1)
as required by law, (2) if dividends payable on the convertible preferred stock
are in arrears for six quarterly periods, the holders of convertible preferred
stock voting separately as a class with shares of any other preferred stock or
preference securities having similar voting rights will be entitled to elect
two directors to our Board of Directors, and (3) the affirmative vote or
consent of the holders of at least 66 2/3% of the outstanding convertible
preferred stock will be required to permit us to issue any class or series of
stock, or security convertible into stock or evidencing a right to purchase any
shares of any class or series of stock ranking senior to the convertible
preferred stock as to dividends, liquidation rights or voting rights, and for
amendments to our charter that would adversely affect the rights of holders of
convertible preferred stock.

In the event of a change of control of PSINet (as defined in the charter
amendment designating the convertible preferred stock), holders of convertible
preferred stock will, if the market value of our common stock at such time is
less than the conversion price for the convertible preferred stock, have a one
time option to convert all of their outstanding shares of convertible preferred
stock into shares of common stock at an adjusted conversion price equal to the
greater of (1) the market value of common stock as of the date of the change in
control and (2) 66.67% of the market value of our common stock as of the date
of the prospectus supplement relating to the convertible preferred stock. In
lieu of issuing shares of common stock issuable upon conversion in the event of
a change of control, we may, at our option, make a cash payment equal to the
market value of the common stock otherwise issuable.

IMPORTANT U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS.

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by a Non-U.S. Holder (as defined). For purposes of this summary:

(1) the Internal Revenue Code of 1986, as amended, is referred to as "the
Code,"

(2) the Internal Revenue Service is referred to as "the IRS" and

(3) a "Non-U.S. Holder" is any beneficial owner of common stock other than
a person that is for United States federal income tax purposes:

. a citizen or resident of the United States,

. a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision
thereof, other than a partnership that is not treated as a United
States person under any applicable Treasury regulations,

. an estate whose income is subject to United States federal income tax
regardless of its source or

. a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.

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This discussion does not address all aspects of United States federal income
and estate taxes and does not deal with foreign, state and local consequences
that may be relevant to Non-U.S. Holders of common stock in light of their
particular personal circumstances. Furthermore, this discussion is based on
provisions of the Code, existing and proposed regulations promulgated under the
Code and administrative and judicial interpretations of the Code and those
regulations, as of the date hereof, all of which are subject to change,
possibly on a retroactive basis. Each prospective purchaser of our common stock
in the offering is advised to consult a tax advisor with respect to current and
possible future tax consequences of acquiring, holding and disposing of common
stock as well as any tax consequences that may arise under the laws of any U.S.
state, municipality or other taxing jurisdiction.

Dividends

We do not currently pay cash dividends on our common stock. See "Price Range
of Common Stock and Dividend Policy." Dividends paid to a Non-U.S. Holder of
common stock, generally will be subject to withholding of United States federal
income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty if the Non-U.S. Holder is treated as a resident of
such foreign country within the meaning of the applicable treaty. However,
dividends that are effectively connected with the conduct of a trade or
business by the Non-U.S. Holder within the United States and if a tax treaty
applies, are attributable to a United States permanent establishment maintained
by the Non-U.S. Holder, are not subject to the withholding tax, but instead are
subject to United States federal income tax on a net income basis at the
regular graduated individual or corporate rates. Any such effectively connected
dividends received by a foreign corporation may, under some circumstances, be
subject to an additional "branch profits tax" at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.

Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country, unless the payer has
knowledge to the contrary, for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations,
for purposes of determining the applicability of a tax treaty rate. Under final
United States Treasury regulations issued on October 7, 1997 (the "Final
Regulations"), effective for payments made after December 31, 1999, a Non-U.S.
Holder of common stock who wishes to claim the benefit of an applicable treaty
rate, and avoid back-up withholding as discussed below, would be required to
satisfy applicable certification and other requirements. Currently, a Non-U.S.
Holder must comply with certification and disclosure requirements to be exempt
from withholding under the effectively connected income exemption discussed
above.

A Non-U.S. Holder of common stock eligible for a reduced rate of United
States withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.

Non-U.S. Holders should be aware that distributions in excess of current and
accumulated earnings and profits have generally been treated as dividends for
purposes of the foregoing discussion. However, recent promulgated Treasury
regulations allow corporations, in certain circumstances, to treat payments
with respect to stock as distributions other than dividends subject to
withholding to the extent of insufficient earnings and profits. Holders should
consult their own tax advisors regarding such regulations.

Gain on Disposition of Common Stock

A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
our common stock unless:

. the gain is effectively connected with a trade or business of the Non-
U.S. Holder in the United States and, if a tax treaty applies, is
attributable to a permanent establishment maintained by the Non-U.S.
Holder if a tax treaty applies,

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. in the case of a Non-U.S. Holder who is an individual and holds the
common stock as a capital asset, the holder is present in the United
States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or

. we are or have been a "U.S. real property holding corporation" for
United States federal income tax purposes at any time within the shorter
of the five-year period preceding such disposition or the period the
Non-U.S. Holder held the common stock.

We have not determined whether we are or have been within the prescribed
period a "U.S. real property holding corporation," for federal income tax
purposes. In general, we will be treated as a U.S. real property holding
corporation if the fair market value of our U.S. real property interests equals
or exceeds 50% of the total fair market value of our U.S. and non-U.S. real
property interests and our other assets used or held in a trade or business. If
we are, have been or become a U.S. real property holding corporation, so long
as our common stock continues to be regularly traded on an established
securities market within the meaning of Section 897(c)(3), only a Non-U.S.
Holder who holds or held, at any time during the shorter of the five-year
period preceding the date of disposition or the holder's holding period, more
than 5% of our common stock will be subject to U.S. federal income tax on the
disposition of the common stock.

An individual Non-U.S. Holder described in clause (1) above will be taxed on
the net gain derived from the sale under regular graduated United States
federal income tax rates. An individual Non-U.S. Holder described in clause (2)
above will be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by United States capital losses, notwithstanding the fact
that the individual is not considered a resident of the United States. If a
Non-U.S. Holder that is a foreign corporation falls under clause (1) above, it
will be taxed on its gain under regular graduated United States federal income
tax rates and, in addition, may be subject to the branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for specified items, unless it qualifies
for a lower rate under an applicable income tax treaty.

Federal Estate Tax

Common stock owned or treated as owned by an individual Non-U.S. Holder at
the time of death will be includable in the individual's gross estate for
United States federal estate tax purposes unless an applicable estate tax
treaty provides otherwise and, therefore, may be subject to United States
federal estate tax.

Information Reporting and Backup Withholding Tax

We must report annually to the IRS and to each Non-U.S. Holder the amount of
dividends paid to such holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding also may be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.

Under current law, backup withholding, which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements,
generally will not apply to:

. dividends paid to Non-U.S. Holders that are subject to withholding at
the 30% rate, or lower treaty rate, discussed above or

. dividends paid to a Non-U.S. Holder at an address outside the United
States, unless the payer has knowledge that the payee is a U.S. person.

Under the Final Regulations, however, a Non-U.S. holder generally will be
subject to back-up withholding at a 31% rate unless it meets applicable
certification requirement.

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Payment of the proceeds of a sale of common stock by or through a United
States office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a Non-U.S. Holder, or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a broker.
If, however, such broker is, for United States federal income tax purposes a
U.S. person, a controlled foreign corporation, or a foreign person that derives
50% or more of its gross income for certain periods from the conduct of a trade
or business in the United States, such payments will be subject to information
reporting, but not backup withholding, unless:

. such broker has documentary evidence in its records that the beneficial
owner is a Non-U.S. Holder and certain other conditions are met or

. the beneficial owner otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's United States federal income tax
liability provided the required information is furnished to the IRS.

UNDERWRITING

Subject to the terms and conditions contained in an underwriting agreement,
the underwriters named below, who are represented by Donaldson, Lufkin &
Jenrette Securities Corporation, Merrill Lynch & Co., Bear, Stearns & Co. Inc.,
BancBoston Robertson Stephens Inc. and Legg Mason Wood Walker Incorporated have
severally agreed to purchase the number of shares of our common stock shown
opposite their names below:

<TABLE>
<CAPTION>
Number of
Underwriters: Shares
- ------------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Merrill Lynch & Co....................................................
Bear, Stearns & Co. Inc...............................................
BancBoston Robertson Stephens Inc.....................................
Legg Mason Wood Walker Incorporated...................................
DLJdirect Inc.........................................................
---------
Total................................................................. 6,000,000
=========
</TABLE>

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

The underwriters propose to initially offer some of our shares directly to
the public at the public offering price shown on the cover page of this
prospectus supplement and some of the shares to dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to other dealers. After the initial offering of the shares to
the public, the representatives of the underwriters may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.

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DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in this offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.

The following table shows the underwriting fees we will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of our common stock.

<TABLE>
<CAPTION>
Paid by PSINet
-------------------------
No Exercise Full Exercise
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>

We will pay the offering expenses, estimated to be $750,000.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to an additional 900,000
shares of our common stock at the public offering price less the underwriting
fees. The underwriters may exercise their option solely to cover over-
allotments, if any, made in connection with this offering. To the extent that
the underwriters exercise their option, each underwriter will become obligated,
subject to conditions, to purchase a number of additional shares of our common
stock approximately proportionate to that underwriter's initial purchase
commitment.

We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
of those liabilities.

PSINet, our executive officers and our directors have agreed, subject to
certain exceptions (including issuances in connection with anticipated
acquisitions), that, for a period of 120 days from the date of this prospectus
supplement, we and they will not, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, do either of the
following:

. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or

. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of our common
stock.

Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise.

Application has been made to list the shares of our common stock offered by
this prospectus supplement and the accompanying prospectus on the Nasdaq
National Market under the symbol "PSIX."

The shares included in this offering may not be offered or sold, directly or
indirectly, nor may this prospectus supplement, the accompanying prospectus or
any other offering material or advertisement in connection with the offer and
sale of any such shares be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the applicable rules
and regulations of such jurisdiction. Persons who receive this prospectus
supplement and the accompanying prospectus are advised to inform themselves
about and to observe any restrictions relating to this offering of our common
stock and the distribution of this prospectus supplement and the accompanying
prospectus. This prospectus supplement and the accompanying prospectus are not
an offer to sell or a solicitation of an offer to buy any shares of common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.

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Each of the underwriters has agreed that (1) it has not offered or sold and,
prior to the expiry of the period of six months from the date hereof, will not
offer or sell any shares of our common stock to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
of their businesses or otherwise in circumstances which have not resulted and
will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995; (2) it has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the issue of the shares of our
common stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom such document may otherwise lawfully be issued or passed
on; and (3) it has complied and will comply with all applicable provisions of
the Financial Services Act 1986 with respect to anything done by it in relation
to any shares of our common stock in, from or otherwise involving the United
Kingdom.

In connection with this offering, any of the underwriters may decide to
engage in transactions that stabilize, maintain or otherwise affect the price
of our common stock. Specifically, the underwriters may overallot this
offering, creating a syndicate short position. In addition, the underwriters
may bid for and purchase shares of our common stock in the open market to cover
syndicate short positions or to stabilize the price of our common stock. These
activities may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.

Donaldson Lufkin & Jenrette and Merrill Lynch have performed various
investment banking and other financial advisory services for us in the past for
which they have received customary compensation and each of them, as well as
other underwriters for this offering, may do so from time to time in the
future.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for
PSINet by Nixon, Hargrave, Devans & Doyle LLP, New York, New York, counsel for
PSINet. Certain attorneys with Nixon, Hargrave, Devans & Doyle LLP currently
own in the aggregate less than one percent of our common stock. Certain legal
matters will be passed upon for the underwriters by Paul, Hastings, Janofsky &
Walker, LLP, New York, New York.

EXPERTS

The consolidated financial statements of PSINet Inc. as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
included in this prospectus supplement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.

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GLOSSARY

Set forth below are definitions of some of the technical terms used in this
prospectus supplement.

ATM Asynchronous Transfer Mode. A communications standard
that provides for information transfer in the form of
fixed-length cells of 53 bytes each. The ATM format can
be used to deliver voice, video and data traffic at
varying rates.

Backbone A centralized high-speed network that interconnects
smaller, independent networks.

Bandwidth The number of bits of information which can move over a
communications medium in a given amount of time; the
capacity of a telecommunications circuit/network to carry
voice, data and video information. Typically measured in
Kbps and Mbps. Bandwidth from public networks is
typically available to business and residential end-users
in increments from 56 Kbps to T-3.

CLEC Competitive local exchange carrier. A category of
telephone service provider that offers services similar
to the former monopoly local telephone company. A CLEC
may also provide other types of telecommunications.

CSU/DSU Channel Service Unit/Data Service Unit. A device used in
digital transmission for connecting data terminal
equipment, such as a router, to a digital transmission
circuit or service.

Collocation The ability of an entity which is not the local phone
company (i.e., another local or long distance
telecommunications company or an end-user) to put their
equipment in the local phone company's offices and join
their equipment to the local phone company's equipment.

Dark fiber Fiber which does not have connected to it the electronics
required to transmit data on such fiber.

Dedicated Telecommunications lines dedicated or reserved for use by
circuits particular customers along predetermined routes.

Dial-up line Communications circuit that is established by a switched-
circuit connection using the telephone network.

DNS Domain Name System. Distributed name system used in the
Internet.

DSL Digital Subscriber Line. A generic name for a family of
evolving digital services to be provided by local
telephone companies to their local subscribers. The DSL
can carry both voice and data signals at the same time,
in both directions, as well as the signaling date used
for call information and customer data.

E-1 The European equivalent of the North American 1.544 Mbps
T-1, except that E-1 carries information at the rate of
2.048 megabits per second.

Electronic mail
or e-mail
An application that allows a user to send or receive text
messages to or from any other user with an Internet
address, commonly termed an e-mail address.

G-1
<PAGE>

56 Kbps Equivalent to a single high-speed telephone service line;
capable of transmitting one voice call or 56 Kbps of
data. Currently in widespread use by medium and large
businesses primarily for entry level high-speed data and
very low-speed video applications.

Frame relay A communications standard that is optimized for efficient
switching of variable-length data packets.

Gbps Gigabits per second. A measure of digital transmission
rates. One gigabit equals 1,000 megabits.

Host A computer with direct access to the Internet.

HTML Hypertext Markup Language used to produce Web pages. It
is a method of presenting information where selected
words can be "expanded" to provide other information
about the word.

ILEC Incumbent local exchange carrier. The local exchange
carrier that was the monopoly carrier, prior to the
opening of local exchange services to competition.

Internet An open global network of interconnected commercial,
educational and governmental computer networks which
utilize TCP/IP, a common communications protocol.

Internetworking The process of communicating between and among networks.

Intranet A TCP/IP based network and Web site which is securely
isolated from the Internet and serves the internal needs
of a company or institution.

IP Internet protocol.

IRUs Indefeasible rights of use in network bandwidth capacity.

ISDN Integrated services digital network. A network that
provides digital voice and data services through a single
medium.

ISP Internet service provider.

Kbps Kilobits per second. A measure of digital information
transmission rates. One kilobit equals 1,000 bits of
digital information. Normally, 10 bits are used for each
alpha-numeric character.

LAN Local area network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a localized
environment.

LEC Local exchange carrier. A telecommunications company that
provides telecommunications services in a geographic area
in which calls generally are transmitted without toll
charges.

Mbps Megabits per second. A measure of digital information
transmission rates. One megabit equals 1,000 kilobits.

Modem
A device for transmitting information over an analog
communications channel such as a POTS telephone circuit.

G-2
<PAGE>

Network A collection of distributed computers which share data
and information through inter-connected lines of
communication.

NOC Network operation center.

OC-3 OC-3 SONET high capacity optical telecommunications line
capable of transmitting data at 155.52 Mbps.

OC-12 OC-12 SONET high capacity optical telecommunications line
capable of transmitting data at 622.08 Mbps.

OC-48 OC-48 SONET high capacity optical telecommunications line
capable of transmitting data at 2488.32 Mbps.

OC-48 Equivalent One OC-48, four OC-12s, 16 OC-3s or 48 DS-3s.

OC-48 Equivalent One Route Mile of OC-48 capacity, four Route Miles of OC-
Mile 12 capacity, 16 Route Miles of OC-3 capacity or 48 Route
Miles of DS-3 capacity.

On-line services Commercial information services that offer a computer
user access through a modem to a specified slate of
information, entertainment and communications menus.
These services are generally closed systems, although
many are now offering full Internet access.

Open systems A networking system which is based upon non-proprietary
protocols (i.e., protocols which are in the public
domain).

Peering The commercial practice under which nationwide ISPs
exchange each other's traffic, in most cases, without the
payment of settlement charges.

POPs Points-of-presence. An interlinked group of modems,
routers and other computer equipment, located in a
particular city or metropolitan area, that allows a
nearby subscriber to access the Internet through a local
telephone call or using a short-distance permanent data
circuit.

POTS Plain old telephone service. Standard analog telephone
service used by many telephone companies throughout the
United States.

PRI Primary rate interface. ISDN interface to primary rate
access.

Protocol A formal description of message formats and the rules two
or more machines must follow in order to communicate.

RBOC Regional bell operating company. One of the LECs created
by the divestiture of the local exchange business by
AT&T. These include BellSouth, Bell Atlantic, Ameritech,
US West, SBC, and PacTel.

Router A device that receives and transmits data packets between
segments in a network or different networks.

Route Mile
One mile of the actual geographic length of the high
capacity telecommunications fiber route.

G-3
<PAGE>

Server Software that allows a computer to offer a service to
another computer. Other computers contact the server
program by means of matching client software. The term
also refers to the computer on which server software
runs.

SMDS Switched multimegabit data service. A public packet-
switching service offered by telephone companies in many
major metropolitan areas. Packet-switching is a method of
delivering voice and data traffic.

SONET Synchronous optical network.

STM-1 A digital transmission link with a capacity of 155 Mbps.

TCP/IP Transmission control protocol/Internet protocol. A
compilation of network and transport-level protocols that
allow computers with different architectures and
operating system software to communicate with other
computers on the Internet.

T-3 or DS-3 A data communications line capable of transmitting data
at 45 Mbps.

UNIX A computer operating system for workstations and personal
computers and noted for its portability and
communications functionality.

Virtual Private A public circuit-switched data service offered by IXCs
Network and making use of the public switched telephone network.
Circuit switching refers to the process of setting up and
keeping a circuit open between two or more users, such
that the users have exclusive and full use of the circuit
until the connection is released. The public switched
telephone network refers to the worldwide voice telephone
network accessible to all those with telephone and access
privileges.

VOIP Voice over internet protocol.

WAN Wide area network. A network spanning a wide geographic
area.

Web or World Wide A network of computer servers that uses a special
Web communications protocol to link different servers
throughout the Internet and permits communication of
graphics, video and sound.

Web server The computer system that runs Web software, used to
create custom Web sites, Web pages, and home pages.

Web sites or Web A site located on the Web, written in the HTML or SGML
pages language.

xDSL A term referring to a variety of new digital subscriber
line technologies. Some of these varieties are asymmetric
with different data rates in the downstream and upstream
directions. Others are symmetric. Downstream speeds range
from 384 kilobits (or "SDSL") to 1.5-8 Mbps (or "ADSL").

G-4
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
PSINet Inc.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996..................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended
December 31, 1998, 1997 and 1996........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of PSINet Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of PSINet Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Washington, D.C.
March 9, 1999, except as to Note 11, which is as of March 25, 1999

F-2
<PAGE>

PSINET INC.

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---------- --------
(In thousands of
U.S. dollars,
except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 56,842 $ 33,322
Restricted cash and short-term investments.............. 162,469 20,690
Short-term investments and marketable securities........ 265,666 --
Accounts receivable, net of allowances of $11,700 and
$2,101................................................. 50,211 11,022
Notes receivable........................................ 318 7,224
Prepaid expenses........................................ 10,998 1,478
Other current assets.................................... 18,759 5,162
---------- --------
Total current assets................................... 565,263 78,898
Property, plant and equipment, net....................... 389,476 95,619
Goodwill and other intangibles, net of accumulated
amortization of $14,491 and $2,057...................... 282,781 4,675
Other assets and deferred charges........................ 46,711 6,989
---------- --------
Total assets........................................... $1,284,231 $186,181
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of debt................................ $ 59,968 $ 39,633
Trade accounts payable................................. 89,973 25,031
Accrued payroll and related expenses................... 8,501 4,636
Other accounts payable and accrued liabilities......... 82,760 2,229
Accrued interest payable............................... 28,988 153
Deferred revenue....................................... 19,427 5,944
---------- --------
Total current liabilities.............................. 289,617 77,626
Long-term debt........................................... 1,064,633 33,820
Deferred income tax liabilities.......................... 6,123 --
Other liabilities........................................ 44,032 1,306
---------- --------
Total liabilities........................................ 1,404,405 112,752
---------- --------
Commitments and contingencies (Notes 2 and 10)
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 29,324,858 shares
authorized; no shares issued and outstanding........... -- --
Convertible preferred stock, $.01 par value; $50.00
stated value; 675,142 shares authorized; 600,000 shares
issued and outstanding................................. 28,802 28,135
Common stock, $.01 par value; 250,000,000 and
100,000,000 shares authorized; 52,183,195 and
40,577,342 shares issued 522 406
Capital in excess of par value.......................... 401,990 210,162
Accumulated deficit..................................... (427,597) (162,649)
Treasury stock, 99,556 shares, at cost.................. (2,005) (2,005)
Accumulated other comprehensive income (loss)........... 36,664 (620)
Bandwidth asset to be delivered under IXC agreement..... (158,550) --
---------- --------
Total shareholders' equity (deficit)................. (120,174) 73,429
---------- --------
Total liabilities and shareholders' equity (deficit)... $1,284,231 $186,181
========== ========
</TABLE>

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

F-3
<PAGE>

PSINET INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
(In thousands of U.S.
dollars,
except per share amounts)
<S> <C> <C> <C>
Revenue........................................ $ 259,636 $121,902 $ 84,351
Other income, net.............................. -- -- 5,417
--------- -------- --------
259,636 121,902 89,768
Operating costs and expenses:
Data communications and operations............ 199,372 94,363 70,102
Sales and marketing........................... 57,026 25,831 27,064
General and administrative.................... 45,288 22,947 20,648
Depreciation and amortization................. 63,424 28,347 28,035
Charge for acquired in-process research and
development.................................. 70,800 -- --
--------- -------- --------
Total operating costs and expenses........... 435,910 171,488 145,849
--------- -------- --------
Loss from operations........................... (176,274) (49,586) (56,081)
Interest expense............................... (63,914) (5,362) (5,025)
Interest income................................ 19,638 3,059 3,794
Other income, net.............................. 6,833 5,811 2,056
Non-recurring arbitration charge............... (49,000) -- --
--------- -------- --------
Loss before income taxes....................... (262,717) (46,078) (55,256)
Income tax benefit............................. 848 476 159
--------- -------- --------
Net loss....................................... (261,869) (45,602) (55,097)
Return to preferred shareholders............... (3,079) (411) --
--------- -------- --------
Net loss available to common shareholders...... $(264,948) $(46,013) $(55,097)
========= ======== ========
Basic and diluted loss per share............... $ (5.32) $ (1.14) $ (1.40)
========= ======== ========
Shares used in computing basic and diluted loss
per share (in thousands)...................... 49,806 40,306 39,378
========= ======== ========
</TABLE>

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

F-4
<PAGE>

PSINET INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

For the Three Years Ended December 31, 1998
(In thousands of U.S. dollars, except share data)

<TABLE>
<CAPTION>
Bandwidth
Preferred Stock Common Stock Accumulated Asset To Be
------------------- ------------------ Capital in Other Delivered
Outstanding Outstanding Par Excess of Accumulated Treasury Comprehensive Under IXC
Shares Amount Shares Value Par Value Deficit Stock Income (Loss) Agreement
----------- ------- ----------- ----- ---------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995........ -- $ -- 37,914,932 $379 $206,035 $ (61,539) $(2,054) $ 409 $ --
Comprehensive
income:
Net loss......... (55,097)
Unrealized
holding gains
(losses)........ (813)
Foreign currency
translation
adjustment...... 426
Total
comprehensive
income (loss)..
Retirement of
treasury stock.. (49) 49
Issuance of
common stock
pursuant to
exercise of
stock warrants.. 1,362,604 14 (14)
Issuance of
common stock
pursuant to
exercise of
stock options... 803,330 9 1,806
Issuance of
common stock in
escrow for
acquisition of
World Online.... 32,368
Repayments under
employee stock
option loan
program......... 232
Interest under
employee stock
option loan
program......... (10)
------- ------- ---------- ---- -------- --------- ------- ------- ---------
Balance, December
31, 1996........ -- -- 40,113,234 402 208,000 (116,636) (2,005) 22 --
Comprehensive
income:
Net loss......... (45,602)
Foreign currency
translation
adjustment...... (642)
Total
comprehensive
income (loss)...
Issuance of
common stock
pursuant to
exercise of
stock warrants.. 164,185 2 3
Issuance of
common stock
pursuant to
exercise of
stock options... 283,251 3 659
Issuance of
Series B
convertible
preferred stock,
net of
expenses........ 600,000 28,064 1,500
Return to
preferred
shareholders.... 71 (411)
Cancellation of
common stock for
acquisition of
World Online.... (82,884) (1)
------- ------- ---------- ---- -------- --------- ------- ------- ---------
Balance, December
31, 1997........ 600,000 28,135 40,477,786 406 210,162 (162,649) (2,005) (620) --
Comprehensive
income:
Net loss......... (261,869)
Unrealized
holding gains... 152
Foreign currency
translation
(losses)
adjustment...... 37,132
Total
comprehensive
income (loss)...
Issuance of
common stock
pursuant to
exercise of
stock warrants.. 174,274 2 277
Issuance of
common stock
pursuant to
exercise of
stock options... 1,201,790 12 5,679
Issuance of
common stock and
contingent
obligation to
IXC............. 10,229,789 102 185,872 (185,974)
Acceptance of IXC
bandwidth....... 27,424
Return to
preferred
shareholders.... 667 (3,079)
------- ------- ---------- ---- -------- --------- ------- ------- ---------
Balance, December
31, 1998........ 600,000 $28,802 52,083,639 $522 $401,990 $(427,597) $(2,005) $36,664 $(158,550)
======= ======= ========== ==== ======== ========= ======= ======= =========
<CAPTION>
Total
Shareholders
Equity
(Deficit)
------------
<S> <C>
Balance, December
31, 1995........ $ 143,230
Comprehensive
income:
Net loss.........
Unrealized
holding gains
(losses)........
Foreign currency
translation
adjustment......
Total
comprehensive
income (loss).. (55,484)
Retirement of
treasury stock.. --
Issuance of
common stock
pursuant to
exercise of
stock warrants.. --
Issuance of
common stock
pursuant to
exercise of
stock options... 1,815
Issuance of
common stock in
escrow for
acquisition of
World Online.... --
Repayments under
employee stock
option loan
program......... 232
Interest under
employee stock
option loan
program......... (10)
------------
Balance, December
31, 1996........ 89,783
Comprehensive
income:
Net loss.........
Foreign currency
translation
adjustment......
Total
comprehensive
income (loss)... (46,244)
Issuance of
common stock
pursuant to
exercise of
stock warrants.. 5
Issuance of
common stock
pursuant to
exercise of
stock options... 662
Issuance of
Series B
convertible
preferred stock,
net of
expenses........ 29,564
Return to
preferred
shareholders.... (340)
Cancellation of
common stock for
acquisition of
World Online.... (1)
------------
Balance, December
31, 1997........ 73,429
Comprehensive
income:
Net loss.........
Unrealized
holding gains...
Foreign currency
translation
(losses)
adjustment......
Total
comprehensive
income (loss)... (224,585)
Issuance of
common stock
pursuant to
exercise of
stock warrants.. 279
Issuance of
common stock
pursuant to
exercise of
stock options... 5,691
Issuance of
common stock and
contingent
obligation to
IXC............. --
Acceptance of IXC
bandwidth....... 27,424
Return to
preferred
shareholders.... (2,412)
------------
Balance, December
31, 1998........ $(120,174)
============
</TABLE>

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

F-5
<PAGE>

PSINET INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
(In thousands of U.S.
dollars)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(261,869) $(45,602) $(55,097)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 63,424 28,347 28,035
Gain on sale of investments and subsidiary.... (5,023) (5,721) (2,056)
Charge for acquired in-process research and
development.................................. 70,800 -- --
Amortization of debt offering costs and debt
premium...................................... 2,339 -- --
Gain on sale of other assets.................. (1,810) -- (5,417)
Provision for allowances...................... 5,505 5,426 3,130
(Increase) decrease in accounts receivable.... (27,583) 430 (14,320)
Decrease (increase) in notes receivable....... 4,835 (5,656) (56)
(Increase) decrease in prepaid expenses and
other assets................................. (16,880) 312 311
Increase in other assets and deferred
charges...................................... (3,017) (258) (509)
Increase in accounts payable and accrued
liabilities.................................. 78,766 6,449 11,545
Increase in deferred revenue.................. 9,419 635 2,367
Decrease in deferred income taxes............. (848) (476) (159)
(Decrease) increase in other liabilities...... (5,644) 546 (317)
--------- -------- --------
Net cash used in operating activities........ (87,586) (15,568) (32,543)
--------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment........... (118,006) (12,613) (12,814)
Purchases of investments...................... (511,738) (3,000) (17,167)
Proceeds from maturity or sale of
investments.................................. 251,207 7,649 15,769
Proceeds from sale of assets to MindSpring.... 2,077 691 8,451
Proceeds from sale of InterCon, net........... -- 20,353 --
Investments in certain businesses, net of cash
acquired..................................... (267,979) (8,551) (69)
Restricted cash and short-term investments.... (140,989) (19,736) (954)
Other......................................... 1,551 (353) (1,113)
--------- -------- --------
Net cash used in investing activities........ (783,877) (15,560) (7,897)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of debt................. 1,091,992 10,110 8,281
Costs of debt issuance......................... (31,417) -- --
Repayments of debt............................. (150,977) (5,670) (5,666)
Principal payments under capital lease
obligations................................... (38,571) (22,071) (15,117)
Proceeds from issuance of Series B preferred
stock......................................... -- 29,564 --
Payments of dividends on preferred stock....... (2,740) -- --
Proceeds from exercise of common stock
warrants...................................... 279 5 --
Proceeds from exercise of common stock
options....................................... 5,691 662 1,815
Other.......................................... (11) (2) 158
--------- -------- --------
Net cash provided by (used in) financing
activities.................................. 874,246 12,598 (10,529)
--------- -------- --------
Effect of exchange rate changes on cash......... 20,737 111 --
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 23,520 (18,419) (50,969)
Cash and cash equivalents, beginning of year.... 33,322 51,741 102,710
--------- -------- --------
Cash and cash equivalents, end of year.......... $ 56,842 $ 33,322 $ 51,741
========= ======== ========
</TABLE>

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

F-6
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--Nature of Operations and Summary of Significant Accounting Policies

Organization and Nature of Operations -- PSINet Inc. (the "Company") was
organized in October 1989 and is the leading independent global facilities-
based Internet data communications carrier focused on the business marketplace.
The Company provides a broad set of wireline and wireless high-speed corporate
LAN/WAN Internet connectivity services supporting managed security and
guaranteed service levels for intranet, electronic commerce, and Web and
application hosting services. The Company provides dedicated and dial-up
Internet connectivity in 90 of the 100 largest metropolitan statistical areas
in the U.S. and in 12 of the 20 largest international telecommunications
markets. Additionally, the Company provides network backbone and related
services to other telecommunications carriers and Internet Service Providers
("ISPs") to further exploit its network capacity.

The Company's operations are subject to certain risks and uncertainties,
including those associated with: significant indebtedness and the ability to
meet obligations; continuing losses, negative cash flow and fluctuations in
operating results; dependence on subsidiaries for repayment of debt; funding
expansion; acquisitions and strategic alliances, including their integration;
managing rapid growth and expansion; acquisition and utilization of bandwidth;
international expansion; dependence on key personnel; dependence on suppliers;
financing arrangement terms that may restrict operations; possible Year 2000
issues; regulatory issues; pending litigation; competition in the Internet
services industry; technology trends and evolving industry standards;
delivering reliable service; and volatility of stock price.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.

Principles of Consolidation -- The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Revenue Recognition -- Revenue and related direct costs from customer
contracts are recognized ratably over the terms of the contracts, which are
generally three months to three years. Cash received in advance of revenues
earned is recorded as deferred revenue. In 1996, when the Company's offerings
included connectivity software products, revenue from the sale of software was
recognized when software products were shipped, and revenue from separate post-
contract customer support agreements was recognized over the contract period.

Advertising and Customer Acquisition Costs -- The Company expenses all
advertising and customer acquisition costs in the period incurred. Advertising
expenses (which include customer acquisition costs) were $19.8 million in 1998,
$9.2 million in 1997 and $14.3 million in 1996.

Research and Development -- Research and development costs are expensed as
incurred.

Cash and Cash Equivalents -- All highly liquid investments with an original
maturity of three months or less at the date of acquisition are classified as
cash equivalents.

Restricted Cash and Short-Term Investments -- Restricted cash and short-term
investments represent amounts that are restricted as to their use in accordance
with financing arrangements and acquisition hold-back agreements.

Short-Term Investments and Marketable Securities -- Short-term investments
and marketable securities consist of U.S. government obligations, commercial
paper and certificates of deposit with original

F-7
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

maturities greater than three months but less than one year. Management
determines the appropriate classification of its investments in debt and equity
securities at the time of purchase. Debt securities are classified as held to
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are stated at amortized
cost. Debt securities for which the Company does not have the intent or ability
to hold to maturity, along with any equity securities, are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive income in shareholders' equity. Cost of
securities sold is determined on a specific identification basis.

Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
cash and cash equivalents, short-term investments and marketable securities and
accounts receivable. The Company's cash and investment policies limit
investments to short-term, investment grade instruments. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of geographic dispersion and customers comprising the Company's customer
base.

Property, Plant and Equipment -- Property, plant and equipment is recorded
at cost less accumulated depreciation, which is provided on the straight-line
method over the estimated useful lives of the assets. Cost includes major
expenditures for improvements and replacements which extend useful lives or
increase capacity of the asset and interest costs associated with significant
capital additions. Expenditures for maintenance and repairs are expensed as
incurred. Leasehold improvements include costs associated with
telecommunications equipment installations and building improvements. In 1998,
the Company capitalized interest of approximately $0.8 million. No interest was
capitalized in 1997 or 1996.

The Company finances most of its data communications equipment and other
fixed assets under capital lease agreements. The assets and liabilities under
capital leases are recorded at the lesser of the present value of aggregate
future minimum lease payments, including estimated bargain purchase options, or
the fair value of the assets under lease. Assets under these capital leases are
depreciated over their estimated useful lives of three to five years, which are
generally longer than the terms of the leases.

Costs for internal use software that are incurred in the preliminary project
stage and in the post-implementation/operation stage are expensed as incurred.
Costs incurred during the application development stage are capitalized and
amortized over the estimated useful life of the software.

Depreciation and amortization periods are as follows:

<TABLE>
<C> <S>
Type of Asset: Depreciation or Amortization Period:
Telecommunications bandwidth Shorter of useful life or indefeasible right
of use
("IRU")/lease agreement, generally 10-25
years,
beginning when bandwidth is available for use
Data communications equipment Three to five years
Leasehold improvements Shorter of lease or useful life, generally
five to seven years
Software Three to five years
Office and other equipment Three years
Building 50 years
</TABLE>

The carrying value of property, plant and equipment is assessed annually
and/or when factors indicating a possible impairment are present. If an
impairment is present, the assets are reported at the lower of carrying value
or fair value.

F-8
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Goodwill and Other Intangibles -- The Company continually reviews goodwill
and other intangibles and other long-lived assets to assess recoverability
based upon undiscounted cash flow analysis. Impairments, if any, are measured
based upon discounted cash flow analyses and are recognized in operating
results in the period in which an impairment in value is determined. Goodwill
is generally amortized over ten years and other intangibles are amortized over
their estimated useful lives of two to ten years.

Acquired In-process Research and Development -- The fair value of acquired
in-process research and development ("IPR&D") projects acquired in business
combinations is expensed immediately. The amount of purchase price allocated to
IPR&D is determined based on independent appraisals obtained by the Company
using appropriate valuation techniques, including percentage-of-completion
which utilizes the key milestones to estimate the stage of development of each
project at the date of acquisition, estimating cash flows resulting from the
expected revenues generated from such projects, and discounting the net cash
flows back to their present value. The discount rate includes a factor that
takes into account the uncertainty surrounding the successful development of
the purchased in-process technology. At the respective dates of acquisition,
the IPR&D projects had not yet reached technological feasibility and did not
have alternative future uses. As discussed in Note 5, material risks existed
with each IPR&D project, however, management expects that such projects will be
completed.

Other Assets and Deferred Charges -- Other assets and deferred charges
principally comprise debt issuance costs and investments in business in which
the Company owns less than a 20% voting equity interest. Debt issuance costs
are amortized using the effective interest method over the terms of the related
debt as additional interest expense. Investments in non-public businesses in
which the Company owns less than a 20% voting equity interest are accounted for
using the cost method. Such investments are periodically evaluated for
impairment and appropriate adjustments are recorded, if necessary.

Income Taxes -- The Company accounts for income taxes under the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and liabilities. The
Company provides a valuation allowance on net deferred tax assets when it is
more likely than not that such assets will not be realized. In conjunction with
business acquisitions, the Company records acquired deferred tax assets and
liabilities. Future reversals of valuation allowance on acquired deferred tax
assets will first be applied against goodwill and other intangibles before
recognition of a benefit in the consolidated statements of operations.

Stock Compensation -- The Company accounts for its stock option plans under
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Pro forma
information regarding net income and earnings per share, as calculated under
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," is
disclosed herein.

Foreign Currency -- Gains and losses on translation of the accounts of the
Company's non-U.S. operations are accumulated and reported as a component of
accumulated other comprehensive income in shareholders' equity. At December 31,
1998 and 1997, the cumulative foreign currency translation adjustment was $36.5
million and ($0.6 million), respectively. Transaction gains and losses are
recorded in the consolidated statement of operations.

Loss Per Share -- Basic loss per share is computed using the weighted
average number of shares of common stock outstanding during the year. Diluted
loss per share is computed using the weighted average number of shares of
common stock, adjusted for the dilutive effect of common stock equivalent
shares of common stock options and warrants and contingently issuable shares of
common stock. Common stock equivalent shares are calculated using the treasury
stock method. All stock options and warrants outstanding

F-9
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

have been excluded from the computation of diluted loss per share as their
effect would be antidilutive and, accordingly, there is no reconciliation
between basic and diluted loss per share for each of the years presented.

Fair Value of Financial Instruments -- For cash and cash equivalents, short-
term investments and marketable securities, the carrying amount represents or
approximates fair value. The Company estimates the fair value of borrowings by
reference to quoted market values or by discounting the future cash flows using
quoted market rates or interest rates at which similar types of borrowing
arrangements with the same maturities could be obtained by the Company.

Segment Reporting -- The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," during 1998. SFAS No. 131
replaces the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position. The
Company has provided comparable information for prior years.

Reclassifications in Financial Presentation -- Certain prior year
information has been reclassified to conform to the current year presentation.

Recent Pronouncements -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging securities. Currently, as the Company has no
derivative instruments, the adoption of SFAS No. 133 would have no impact on
the Company's financial condition or results of operations.

NOTE 2--Acquisitions and Dispositions of Certain Businesses

Acquisitions

During 1997 and 1998, the Company acquired the following businesses:

<TABLE>
<CAPTION>
Ownership
Business Name Location Acquisition Date Interest
- ------------- -------- ---------------- ---------
<S> <C> <C> <C>
Serveur Telematique
Internet S.A. France October 1997 100%
Internet Prolink S.A. Switzerland January 1998 100%
iSTAR internet inc. Canada February and May 1998 100%
Interactive Telephony
Limited Channel Islands, Jersey April 1998 100%
Interactive Networx GmbH Germany May 1998 100%
LinkAge Online Limited Hong Kong June 1998 100%
ioNET Internetworking
Services United States June 1998 100%
SCII-CalvaPro France June 1998 100%
INTERLOG Internet
Services, Inc. Canada July 1998 100%
Rimnet Corporation Japan August 1998 100%
TWICS Co., Ltd. Japan September 1998 100%
Hong Kong Internet &
Gateway Services Hong Kong September 1998 100%
iNet, Inc. Korea September 1998 100%
Tokyo Internet
Corporation Japan October 1998 100%
The Unix Group B.V. The Netherlands October 1998 100%
AsiaNet Limited Hong Kong November 1998 100%
Spider Net Limited Hong Kong December 1998 100%
Huge Net Limited Hong Kong December 1998 100%
</TABLE>

F-10
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Each of the acquisitions was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of the
acquired companies have been included in the Company's consolidated financial
statements since the acquisition dates. The purchase price of the acquisitions
was allocated to assets acquired, including intangible assets, and liabilities
assumed, based on their respective fair values at the acquisition dates.

All of the companies acquired are Internet service providers or data
transmission companies, offering a wide range of Internet-protocol based
solutions for businesses and small office/home office and consumer users.
Depending on the particular business activities of the company acquired,
revenue may also be derived from network integration, web hosting, managed co-
location, as well as vertical market Internet services, including comprehensive
banking, medical and telecommunications Internet solutions.

For certain acquisitions, the Company has retained a portion of the purchase
price under hold-back provisions of the purchase agreements to secure
performance by certain sellers of indemnification or other contractual
obligations. These acquisition hold-back liabilities are generally payable up
to 24 months after the date of closing of the respective acquisitions.
Acquisition hold-back liabilities totaling $37.0 million are included in other
noncurrent liabilities and $1.2 million are included in other accounts payable
and accrued liabilities at December 31, 1998.

The purchase price relating to one acquisition may be increased by up to
$8.0 million pursuant to an earnout provision in the event the acquired company
achieved certain levels of future operating results. Such amount will be
recorded as additional cost of the acquired company when the amount to be paid,
if any, becomes probable. At December 31, 1998, no amount has been accrued
since the final outcome of the earnout provision was not determinable.

In connection with these acquisitions, the Company recorded $14.2 million in
other accounts payable and accrued liabilities in accordance with planned
terminations of certain contracts of acquired companies. Such terminations are
expected to occur within one year of acquisition date. Through December 31,
1998, $1.4 million had been incurred and charged against the liability.

In connection with the acquisition of these companies, liabilities assumed
were as follows (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
Fair
Value of Cash Paid for
Assets the Liabilities
Business Name Acquired Capital Stock Assumed
- ------------- -------- ------------- -----------
<S> <C> <C> <C>
Tokyo Internet............................... $159,877 $(140,457) $ 19,420
ISTAR........................................ 49,047 (19,490) 29,557
Rimnet....................................... 41,318 (31,946) 9,372
IoNET........................................ 26,704 (22,215) 4,489
LinkAge...................................... 18,053 (11,800) 6,253
INX.......................................... 11,823 (9,469) 2,354
Other acquisitions........................... 83,338 (54,747) 28,591
-------- --------- --------
$390,160 $(290,124) $100,036
======== ========= ========
</TABLE>

F-11
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following represents the unaudited pro forma results of operations of
the Company for 1998 and 1997 as if the acquisitions were consummated on
January 1, 1997. The unaudited pro forma results of operations include certain
pro forma adjustments, including the amortization of intangible assets relating
to the acquisitions. The unaudited pro forma results of operations are prepared
for comparative purposes only and do not necessarily reflect the results that
would have occurred had the acquisitions occurred at January 1, 1997 or the
results which may occur in the future.

<TABLE>
<CAPTION>
Year Ended
-------------------------
December 31, December 31,
1998 1997
------------ ------------
(In thousands of U.S.
Dollars, except per share
amounts)
<S> <C> <C>
Revenue............................................... $ 325,252 $ 254,654
Net loss available to common shareholders............. $(296,140) $(121,216)
Basic and diluted loss per share...................... $ (5.95) $ (3.01)
</TABLE>

Dispositions

In 1997, the Company sold all of the issued and outstanding capital stock of
its software subsidiary in exchange for an aggregate of $20.5 million in cash
and recognized a gain of $5.7 million.

In 1996, the Company transferred substantially all of its individual
subscriber accounts and related assets and rights in connection with its
consumer dial-up internet access services in the U.S. to a third party in
exchange for $12.9 million in cash and a note receivable. In addition, the
Company signed an agreement to provide continued services to the third party's
customers. The Company recognized a gain from this transaction of $5.4 million,
which is included as other income, net, a component of operating loss, because
of the continued relationship with the customers. All amounts receivable under
the note were subsequently collected in accordance with the note's terms.

NOTE 3--Short-Term Investments and Marketable Securities

At December 31, 1998, short-term investments and marketable securities,
including restricted amounts, consist of $235.1 million of U.S. government
obligations, $112.3 million of commercial paper and $25.0 million of
certificates of deposit. The cost of all such investments approximates fair
value. The unrealized holding gain was $0.2 million and zero at December 31,
1998 and 1997, respectively.

F-12
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 4--Property, Plant and Equipment

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In thousands of
U.S. dollars)
<S> <C> <C>
Telecommunications bandwidth................................ $118,162 $ --
Data communications equipment............................... 103,467 32,108
Leasehold improvements...................................... 29,267 9,204
Software.................................................... 17,724 3,920
Office and other equipment.................................. 14,826 4,451
Land........................................................ 1,992 --
Building.................................................... 1,298 --
-------- --------
286,736 49,683
Less accumulated depreciation and amortization.............. (63,059) (28,217)
-------- --------
223,677 21,466
-------- --------
Leased data communications equipment........................ 171,935 96,059
Leased telecommunications bandwidth......................... 30,267 --
Leased office and other equipment........................... 3,973 3,521
-------- --------
206,175 99,580
Less accumulated amortization............................... (40,376) (25,427)
-------- --------
165,799 74,153
-------- --------
Property, plant and equipment, net.......................... $389,476 $ 95,619
======== ========

Total depreciation and leasehold amortization expense was $51.4 million in
1998, $25.1 million in 1997 and $16.6 million in 1996.

NOTE 5--Goodwill, Other Intangibles and Acquired In-Process Research and
Development

Goodwill and other intangibles consisted of the following:

<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In thousands of
U.S. dollars)
<S> <C> <C>
Goodwill.................................................... $230,362 $ 5,671
Tradename................................................... 24,081 --
Customer relationships...................................... 25,954 --
Existing technology......................................... 8,834 --
Workforce................................................... 3,887 --
Other....................................................... 4,154 1,061
-------- --------
297,272 6,732
Less accumulated amortization............................... (14,491) (2,057)
-------- --------
Goodwill and other intangibles, net......................... $282,781 $ 4,675
======== ========
</TABLE>

Total amortization expense was $11.4 million in 1998, $2.7 million in 1997
and $11.1 million in 1996.

F-13
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the acquisitions described in Note 2, the Company
recorded $70.8 million of charges in 1998 for acquired in-process research and
development. A summary of the allocated values by technology/ project for
companies acquired in 1998 is as follows (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
Cost to Expected Completion
Acquired Company R&D Technology/Project Value Complete At Date Of Acquisition Remaining Tasks
- ---------------- ---------------------- ------- -------- ---------------------- ---------------
<S> <C> <C> <C> <C> <C>
iSTAR Corporate--DSL/ATM/Fax
on Demand/Web Hosting $ 4,270 $1,930 Late 1998 or early 1999 System verification and testing
Dial-up--Widespan 2,660 2,200 Late 1998 or early 1999 System verification and testing
Icommerce 70 40 Early 1999 System verification and testing
INX Access technologies 3,600 1,460 Early 1999 System verification and testing
ioNET ATM and Internet services 8,500 2,210 Early 1999 System verification and testing
LinkAge VPN technology 2,900 200 Early 1999 Network architecture development
Website tools 2,600 1,325 Early 1999 Improve system stability
IP Telephony 2,400 200 Early 1999 Transmission quality improvement
Interlog DSL 2,700 320 Early 1999 Operations support system development,
resolution of provisioning issues
E-commerce 500 70 Early 1999 Software development
Website design 300 50 Early 1999 Systems verification and integration
Rimnet Wireless local loop 2,300 135 Mid 1999 Network interconnection and security issues
IP Telephony 1,500 320 Mid 1999 Database development, increasing system
scalability
Universal Messaging 300 70 Early 1999 Network integration and testing
iNet Frame Relay 5,000 125 Mid 1999 Network management system software
development, network reconfiguration
Website hosting 450 85 Late 1998 or early 1999 Software development and testing
E-commerce 350 70 Early 1999 Development of database management
system
Tokyo Internet ATM technologies 16,400 225 Early 1999 Development of safeguards
ensuring continued network reliability
under high traffic loads.
Domain Name Service 4,300 75 Mid 1999 Database testing and system
verification, resolution of scalability
issues.
Network technologies 3,400 60 Mid 1999 Resolution of issues related to shared
peering facilities, reliability of
content caching systems.
Access technologies 3,200 60 Mid 1999 Testing of wireless traffic
distribution functionality
Performance technologies 2,800 70 Mid 1999 Test service issues
Wholesale 300 100 Early 1999 Testing of software, verification, and
resolution of scalability issues.
-------
Total $70,800
=======
</TABLE>

A description of the key acquired in-process technologies for each of the
acquisitions is set forth below:

F-14
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

iSTAR

iSTAR is developing four concurrent technology projects relating to
corporate Internet access, including asymmetric digital subscriber line
technology to provide high-speed Internet access, a proprietary implementation
of an Asynchronous Transfer Mode ("ATM") network to provide high-bandwidth
backbone service to customers, a data conversion project to provide fax
services over the Internet and a proprietary website hosting service that will
be built on a Windows NT platform. Additionally, iSTAR is developing a
proprietary service management interface that would allow dial-up customers to
seamlessly select and manage a wide variety of services. iSTAR is also
developing several new electronic commerce applications that will enable
content providers to charge users a nominal fee to access information and
facilitate point of terminal sales.

INX

INX is developing proprietary implementations of wireless local loop and
digital subscriber line ("DSL") technologies to provide high-speed Internet
access in metropolitan Germany, which began in January 1997.

ioNet

ioNet is developing two concurrent technology projects, a proprietary
implementation of an ATM network for use by businesses in the Oklahoma region,
and a wholesale ISP system that will enable external service providers to use
ioNet's network, which began in January 1997.

LinkAge

LinkAge is developing a proprietary version of a virtual private network
("VPN") system based around a telecommunications link from Hong Kong to
mainland China. LinkAge began its VPN technology efforts in February 1997.
Additionally, LinkAge is developing a proprietary IP telephony system for use
in overseas communications. LinkAge is also developing proprietary technology
that will enable it to provide website mirroring in multiple countries. The
company began both its IP telephony and its website mirroring efforts in
February 1997.

Interlog

Interlog began developing a DSL network with proprietary operations support
systems in July 1996. Additionally, Interlog is designing a proprietary e-
commerce system that will enable small businesses to manage credit-card based
transactions over the Internet, which it began in December 1996. Interlog is
also developing a new web page design system that will enable it to design low-
cost corporate websites capable of supporting its e-commerce technology, which
was initiated in December 1996.

Rimnet

Rimnet is developing proprietary technology to allow corporate customers to
securely access wireless local loop services in the Tokyo region, which it
began in December 1997. Additionally, Rimnet is developing proprietary software
that will convert a new universal messaging system for Japanese-language use.
This system is being designed to integrate voicemail, e-mail, and facsimile
applications on one platform. Rimnet began this project in February 1997.
Rimnet is also developing a proprietary Internet Protocol ("IP") telephony
system for domestic and international service, which it began in August 1996.

F-15
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

iNet

iNet is developing and integrating a frame relay network with a proprietary
network management system optimized to lower service costs for transoceanic
data traffic, which it began in August 1996. Additionally, iNet is creating a
new electronic commerce micropayment system that will enable content providers
such as Korean newspapers to charge users a nominal fee to access information;
it initiated this in July 1998. iNet is also developing a proprietary website
hosting platform that will enable it to automate the daily operations of
websites on the system, which it began in March 1998.

Tokyo Internet

Tokyo Internet ("TI") is developing six technologies. In October 1996, TI
began related projects that will enable TI to support high-quality, value-added
services over its network, including IP telephony (a method of carrying voice
traffic over data networks) and IP multicasting (a method of broadcasting data
over the Internet). In July 1997, TI began related infrastructure projects that
involve the development of private peering and content caching capabilities
that will enable the company to improve its efficiency and service quality,
while serving more customers. In September 1997, TI began developing a
proprietary database and registry system to support the new generic Top Level
Domain ("gTLD") standard, which will add other domains beyond existing ones
such as ".com". This effort will enable TI to become an authorized registrar
for the new standard, so that it can offer domain registration services to
companies in Japan and internationally. In October 1997, TI began developing
technologies to integrate several new methods of accessing its network,
including wireless local loop, DSL technology, and third-party access to ATM
network resources. In March 1998, TI began a project that will enable the
company to use lower-cost ATM services in its backbone network while
maintaining its traditional emphasis on high network redundancy and reliability
and began a project that will enable the company to wholesale its network
capacity to external service providers.

Key Assumptions

The value of the in-process projects was adjusted to reflect the relative
value and contribution of the acquired research and development. In doing so,
consideration was given to the stage of completion, the complexity of the work
completed to date, the difficulty of completing the remaining development,
costs already incurred, and the projected cost to complete the projects. The
value assigned to purchased in-process technology was based on key assumptions
including:

. The estimated revenue associated with the respective business enterprise
valuations assumed five-year compound annual revenue growth rates of
between 22% and 45%.

. Revenue growth rates for each technology were developed considering,
among other things, the current and expected industry trends, acceptance
of the technologies and historical growth rates for similar industry
products.

. Estimated revenues from the purchased in-process technology projects
were generally assumed to peak in the year 2003 and decline through 2014
or earlier as other new products are expected to be introduced. These
revenue projections were based on management's estimates of market size
and growth, expected trends in technology and the expected timing of new
product introductions.

. The estimated net cash flows were discounted back to their present value
using a discount rate of between 17.0% and 27.5%, which represents a
premium to the Company's cost of capital. The estimated percentage-of-
completion of the various in-process research and development projects
ranged from 50% to 85% complete.

F-16
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The net cash flows from such projects were based on the Company's estimates
of revenues, cost of sales, research and development costs, selling, general
and administrative costs, and income taxes associated with such projects.

If none of these projects is successfully developed, the Company's sales and
profitability may be adversely affected in future periods. However, the failure
of any particular individual project in-process would not have a material
impact on the Company's financial condition or its results of operations. The
failure of any particular individual project in-process could impair the value
of other intangible assets acquired.

NOTE 6--Debt

Debt consisted of the following:

<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---------- --------
(In thousands of
U.S. dollars)
<S> <C> <C>
Senior notes at interest rate of 10%.................... $ 600,000 $ --
Senior notes at interest rate of 11.5%.................. 350,000 --
Capital lease obligations at interest rates ranging from
2.1% to 17.3%.......................................... 120,670 56,355
Notes payable at interest rates ranging from 1.8% to
12.7%.................................................. 50,981 11,450
Lines of credit......................................... -- 5,648
---------- --------
1,121,651 73,453
Plus unamortized premium................................ 2,950 --
---------- --------
1,124,601 73,453
Less current portion.................................... (59,968) (39,633)
---------- --------
Long-term portion....................................... $1,064,633 $ 33,820
========== ========
</TABLE>

In April 1998, the Company completed an offering of $600.0 million aggregate
principal amount of 10% Senior Notes due 2005, at par (the "10% Notes"). In
November 1998, the Company completed offerings of 11 1/2% Senior Notes due 2008
with $200.0 million principal amount at par and $150.0 million principal amount
at 102% of par (the "11 1/2% Notes" and, collectively with the 10% Notes, the
"Notes"). The Notes are senior unsecured obligations of the Company ranking
equivalent in right of payment to all existing and future unsecured and
unsubordinated indebtedness of the Company, and senior in right of payment to
all existing and future subordinated indebtedness of the Company. Interest is
payable on the Notes semi-annually. At December 31, 1998, the Company has
deposited in an escrow account restricted cash and short-term investments of
$122.2 million to fund, when due, the next four semi-annual interest payments
on the 10% Notes. The indentures governing the Notes contain certain financial
and other covenants which, among other things, will restrict the Company's
ability to incur further indebtedness and sell assets.

The Company has various financing arrangements accounted for as capital
leases for the acquisition of equipment, telecommunications bandwidth, and
other fixed assets. During 1998, 1997 and 1996, the Company incurred capital
lease obligations under these arrangements of $113.3 million, $37.5 million and
$25.6 million, respectively, upon the execution of leases for new data
communications equipment, telecommunications bandwidth and other fixed assets.
At December 31, 1998, the aggregate unused portion under these arrangements
totaled $12.9 million after designating $27.9 million of payables for various
equipment purchases which will be financed under capital lease facilities. The
capital lease obligations contain provisions which, among other things, require
the maintenance of certain financial ratios and restrict the payment of
dividends.

F-17
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In September 1998, the Company entered into a new senior secured credit
facility ("Credit Facility"), to replace its then existing bank credit
arrangement in the United States. The Credit Facility has a maximum principal
amount of $110.0 million and amounts drawn are payable in September 2001.
There were no amounts outstanding at December 31, 1998 and $108.8 million was
available to draw. Interest on the Credit Facility is based on a spread over
the London interbank offered rate or the higher of the bank's prime rate or
the Federal funds effective rate, at the Company's option (8.4% at December
31, 1998).

The Company's obligations under the Credit Facility are guaranteed by each
existing and subsequently acquired or organized significant domestic
subsidiary of the Company and are secured by a lien on substantially all of
the assets of the Company and each subsidiary guarantor and by a pledge by the
Company and each subsidiary guarantor of all capital stock and other equity
interests it owns. The Credit Facility requires, among other things, the
satisfaction of certain financial covenants, including a minimum annual
consolidated revenue test, a minimum EBITDA test and requires the reduction in
the maximum amount of availability and prepayments equal to the net proceeds
received from certain asset sales and certain casualty events. The Company is
required to pay a commitment fee ranging from 0.50% to 0.875% of the unused
amounts under the Credit Facility.

Future minimum lease payments under capital leases and annual maturities of
other debt are as follows:

<TABLE>
<CAPTION>
Capital
Year Ending December 31, Leases Other Debt
- ------------------------ -------- ----------
(In thousands of
U.S. dollars)
<S> <C> <C>
1999...................................................... $ 58,530 $ 10,463
2000...................................................... 47,394 7,253
2001...................................................... 27,782 7,078
2002...................................................... 1,830 5,033
2003...................................................... 57 3,401
Thereafter................................................ 1,644 967,753
-------- ----------
137,237 $1,000,981
==========
Less amount representing interest......................... (16,567)
--------
Present value of future minimum lease payments............ $120,670
========
</TABLE>

Cash paid for interest was $33.6 million in 1998, $5.6 million in 1997 and
$5.1 million in 1996.

At December 31, 1998 and 1997, the estimated fair value of the debt
excluding capital lease obligations was approximately $1,009.8 million and
$11.4 million, respectively.

NOTE 7--Capital Stock

Preferred Stock Rights Plan

In May 1996, the Company's Board of Directors adopted a Shareholder Rights
Plan, as thereafter amended ("Rights Plan"), pursuant to which preferred stock
purchase rights ("Rights") were granted as a dividend to shareholders of
record at the rate of one Right for each outstanding share of common stock
held of record as of the close of business on June 5, 1996. The Rights also
attach to most future issuances of common stock. Subject to exceptions, each
Right, when exercisable, will entitle the holder to buy one one-thousandth of
a share of a Series A Junior Participating Preferred Stock, par value $.01 per
share, of the Company (the "Series A Junior Preferred Stock") at an exercise
price of $75 per Right.

F-18
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Subject to exceptions, the Rights will become exercisable upon the
occurrence of specified events, including an announcement that a person or
group of affiliated or associated persons ("Acquiring Person") has acquired
beneficial ownership of 20.5% or more of the outstanding common stock of the
Company. In such event, each holder of a Right (other than Rights beneficially
owned by the Acquiring Person) will thereafter have the right, subject to
exceptions, to receive upon exercise thereof a number of shares of Series A
Junior Preferred Stock or, at the discretion of the Company's Board of
Directors, a number of additional shares of common stock of the Company, or in
some circumstances, shares of common stock of the Acquiring Person (or its
parent), as set forth in the Rights Plan.

The Company's Board of Directors has designated 1,000,000 shares of Series A
Junior Preferred Stock, which amount may be increased or decreased by the Board
of Directors. All Rights expire on June 5, 2006, unless the Rights are earlier
redeemed or exchanged by the Company in accordance with the Rights Plan or
expire earlier upon the consummation of specified transactions as set forth in
the Rights Plan.

Convertible Preferred Stock Private Placement

In November 1997, the Company completed a private placement of 600,000
shares of its Series B 8% Convertible Preferred Stock ("Series B Preferred
Stock") for net proceeds of $29.6 million. The Series B Preferred Stock accrues
dividends at an annual rate of 8%, payable quarterly in cash or, at the
Company's option, in Series B Preferred Stock and is non-voting. The Series B
Preferred Stock is convertible into the Company's common stock at $10 per share
and may be reset, under certain circumstances, to the stock's then current
market value. At the third anniversary date, the conversion price may be reset,
under certain circumstances, to 95% of the stock's then current market value.
To reflect the nature of the conversion rights, preferred stock was reduced at
issuance by $1.5 million with a corresponding increase to capital in excess of
par value. Such amount is being accreted as an additional return to preferred
shareholders over a period of three years. Subsequent to December 31, 1998, all
shares of the Series B Preferred Stock were converted into 3,000,000 shares of
the Company's common stock.

Common Stock Issued to IXC

In February 1998, the Company closed a transaction with IXC Internet
Services, Inc. ("IXC"), an indirect subsidiary of IXC Communications, Inc., to
acquire 20-year noncancellable IRUs in up to 10,000 equivalent route miles of
fiber-based OC-48 network bandwidth (the "PSINet IRUs") in selected portions
across the IXC fiber optic telecommunications network within the United States.
The PSINet IRUs were acquired in exchange for the issuance to IXC of 10,229,789
shares of common stock of the Company (the "IXC Initial Shares") and a
contingent payment obligation. The contingent payment obligation required the
Company to pay cash or issue additional shares, at its option, to IXC if the
fair market value of the IXC Initial Shares was less than $240 million at a
future date.

The Company accounted for the transaction in accordance with EITF 96-18,
"Accounting for Equity Instruments with Variable Terms That Are Issued for
Consideration Other Than Employee Services under FASB Statement No. 123" which
required the Company to measure the fair value of the common stock and
contingent payment obligation upon issuance. The bandwidth asset to be
delivered under the IXC agreement is recorded as a reduction to shareholders'
equity until such time as the Company accepts the bandwidth from IXC.

The fair value of the contingent payment obligation of $107.3 million was
measured utilizing a Black-Scholes valuation model using an assumed term of
four years, the closing market price per share of the common stock on the date
of the closing ($7.6875), an exercise price of $23.46 (which is the price per
share required in order for the calculation of the IXC Initial Shares to result
in a value equal to $240.0 million), expected volatility of 76% and an interest
rate of 11%.

F-19
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In January 1999, the Company's contingent payment obligation to IXC under
the agreement was terminated without the payment of any additional amounts or
issuance of additional shares to IXC when, after the close of trading on The
Nasdaq Stock Market, the fair market value of the shares issued to IXC exceeded
this threshold.

NOTE 8--Stock Compensation and Retirement Plans

Stock Option and Warrant Plans

The Company has four stock option plans that provide for granting of
incentive stock options, non-qualified stock options, stock appreciation rights
or restricted stock awards to employees, consultants and directors of the
Company and its subsidiaries, as appropriate. Under all of the plans, the
option exercise price is equal to fair market value at the date of grant.
Options granted under the various plans become exercisable based on a schedule
determined by the Compensation Committee at the date of grant, generally over
four years. The options have terms of seven to ten years from the date of
grant. The Company has also reserved shares for other plans.

The number of authorized and reserved shares were as follows at December 31,
1998:

<TABLE>
<CAPTION>
Shares
Reserved
Authorized for
Shares Issuance
---------- ----------
<S> <C> <C>
Executive Stock Incentive Plan............................ 10,000,000 9,306,427
Strategic Stock Incentive Plan............................ 3,500,000 3,422,789
Executive Stock Option Plan............................... 1,250,000 936,770
Directors Stock Incentive Plan............................ 100,000 100,000
Other plans............................................... 541,158 541,158
---------- ----------
Total..................................................... 15,391,158 14,307,144
========== ==========
</TABLE>

Stock Option Repricing

In 1996, the Company's Board of Directors approved a repricing of certain
employee stock options. Accordingly, options with respect to 2,520,555 shares
of the Company's common stock whose exercise price was greater than $9.375, the
closing market price of the Company's common stock on that date, were cancelled
and new options with respect to the same number of shares were granted with an
exercise price of $9.375. Other terms and conditions of the options remained
the same.

Fair Value of Stock Options

For disclosure purposes under SFAS No. 123, the fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (in years)...................................... 5.0 5.0 5.0
Risk-free interest rate....................................... 5.20% 6.36% 5.98%
Volatility.................................................... 90.0% 76.0% 80.0%
Dividend yield................................................ 0% 0% 0%
</TABLE>

Utilizing these assumptions, the weighted-average fair value of the stock
options granted in 1998, 1997 and 1996 was $7.10, $4.88 and $4.89,
respectively.

F-20
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under the above model, the total value of stock options granted was $46.0
million in 1998, $23.6 million in 1997, and $28.6 million in 1996, which would
be amortized on a pro forma basis over the option vesting period. Had the
Company determined compensation cost for these plans in accordance with SFAS
No. 123, the Company's pro forma results would have been as follows (in
thousands of U.S. dollars, except per share amounts):

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Pro forma net loss available to common
shareholders.................................. $(279,908) $(53,113) $(63,897)
Pro forma basic and diluted loss per share..... $ (5.62) $ (1.32) $ (1.62)
</TABLE>

Stock Option and Warrant Activity

The following table summarizes stock option and warrant activity under all
plans for the three years ended December 31, 1998:

<TABLE>
<CAPTION>
Number of Shares of Weighted-
Common Stock Average
---------------------- Exercise
Options Warrants Price per Share Price
---------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1995.. 3,843,668 2,084,507 $.01 to $ 25.25 $ 3.42
Granted.................... 5,853,949 167 4.15 to 16.75 10.81
Exercised.................. (819,256) (1,659,000) .01 to 9.38 2.36
Forfeited.................. (1,319,951) -- 1.60 to 25.25 8.72
Cancelled.................. (2,520,555) -- 9.56 to 25.25 13.61
---------- ----------
Balance, December 31, 1996.. 5,037,855 425,674 .05 to 13.50 6.24
Granted.................... 4,846,300 -- 5.38 to 11.25 7.36
Exercised.................. (288,529) (201,400) .05 to 8.13 1.83
Forfeited.................. (1,259,740) -- 2.00 to 13.13 8.33
---------- ----------
Balance, December 31, 1997.. 8,335,886 224,274 .05 to 13.50 6.81
Granted.................... 6,483,804 -- 6.00 to 19.13 9.82
Exercised.................. (1,202,069) (174,274) .05 to 13.13 4.34
Forfeited.................. (1,171,323) -- 2.00 to 14.94 8.27
---------- ----------
Balance, December 31, 1998.. 12,446,298 50,000 $1.60 to $19.13 $ 8.51
========== ==========
Exercisable, December 31,
1996....................... 1,584,068 425,674 $.05 to $ 10.01 $ 3.60
========== ==========
Exercisable, December 31,
1997....................... 2,824,881 224,274 $.05 to $ 13.50 $ 5.76
========== ==========
Exercisable, December 31,
1998....................... 4,161,506 50,000 $1.60 to $19.13 $ 7.27
========== ==========
</TABLE>

F-21
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about the outstanding and
exercisable options and warrants at December 31, 1998:

<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------- -------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life (Years) Price Number Price
- ------------------------ ---------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$1.60 to $6.19.......... 2,749,251 6.8 $4.81 1,184,631 $3.71
6.25 to 7.63............ 3,103,259 8.3 7.13 1,119,635 7.08
7.66 to 9.38............ 2,989,444 8.0 8.78 1,354,653 8.96
9.75 to 13.19........... 2,579,815 9.2 11.10 486,498 10.76
13.25 to 19.13.......... 1,074,529 9.7 14.95 66,089 14.03
---------- ---------
$1.60 to 19.13.......... 12,496,298 8.2 $8.51 4,211,506 $7.27
========== =========
</TABLE>

The Company sponsors a retirement savings plan, under which participants are
eligible to receive discretionary Company matching contributions each year of
the equivalent of 100% of the first $1,000 of employee salary deferral and 25%
of amounts thereafter up to the maximum allowable deferral under IRS
regulations. All contributions to a participant's plan account are vested after
two years of service with the Company. The total contributions made by the
Company under the Plan totaled $0.9 million, $0.5 million, and $0.6 million in
1998, 1997 and 1996, respectively.

NOTE 9--Income Taxes

The components of loss before income taxes are as follows (in thousands of
U.S. dollars):

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
U.S. operations................................. $ (134,639) $(34,427) $(46,047)
Non-U.S. operations............................. (128,078) (11,651) (9,209)
---------- -------- --------
$(262,717) $(46,078) $(55,256)
========== ======== ========
</TABLE>

The Company recognized deferred tax benefits of $0.8 million, $0.5 million
and $0.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively, resulting primarily from deferred tax liabilities of acquired
non-U.S. companies. The Company did not recognize any current income tax
expense or benefit for 1998, 1997 or 1996, and no cash was paid for income
taxes in 1998, 1997 or 1996.

F-22
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Significant components of the Company's deferred tax assets (liabilities)
consisted of the following (in thousands of U.S. dollars):

<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- -------------------------
Non-
U.S. U.S. Total U.S. Non-U.S. Total
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Gross deferred tax assets:
Net operating losses....... $ 82,053 $63,197 $145,250 $50,470 $7,834 $58,304
Arbitration accrual........ 20,090 -- 20,090 -- -- --
Other...................... 1,998 14,120 16,118 1,515 -- 1,515
-------- ------- -------- ------- ------ -------
104,141 77,317 181,458 51,985 7,834 59,819
Less: Valuation allowance.. (90,307) (62,485) (152,792) (43,245) (7,834) (51,079)
-------- ------- -------- ------- ------ -------
13,834 14,832 28,666 8,740 -- 8,740
-------- ------- -------- ------- ------ -------
Gross deferred tax
liabilities:
Depreciation/amortization.. (10,103) -- (10,103) (8,740) -- (8,740)
Acquired intangibles....... (2,493) (20,834) (23,327) -- -- --
Other...................... (1,238) (121) (1,359) -- -- --
-------- ------- -------- ------- ------ -------
(13,834) (20,955) (34,789) (8,740) -- (8,740)
-------- ------- -------- ------- ------ -------
Net deferred tax
liabilities................ $ -- $(6,123) $ (6,123) $ -- $ -- $ --
======== ======= ======== ======= ====== =======
</TABLE>

As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $216.7 million for U.S. income tax purposes. The use of the U.S.
net operating loss carryforwards may be subject to limitation under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code. These net operating loss carryforwards may be carried forward in varying
amounts until 2018. Additionally, at December 31, 1998, the Company had net
operating loss carryforwards for tax purposes in various jurisdictions outside
the U.S. amounting to approximately $158.6 million. The majority of non-U.S.
loss carryforwards will expire in varying amounts in 2003 to 2005. Some of the
non-U.S. loss carryforwards will never expire under local country tax rules.
The significant increase in net operating loss carryforwards for tax purposes
in jurisdictions outside the U.S. results mostly from the acquisition of non-
U.S. entities during 1998.

A capital tax loss of $0.8 million resulting from the sale of one of the
Company's investments was incurred in 1997. The loss may be carried forward
until 2003.

The Company has provided a valuation allowance against a portion of its
deferred tax assets since realization of these tax benefits cannot be
reasonably assured. The change in valuation allowance was an increase of $101.7
million and $18.8 million in 1998 and 1997, respectively. The changes primarily
relate to additional losses in those years. The portion of the valuation
allowance for which subsequently recognized tax benefits will be first applied
to reduce goodwill or other intangibles was $32.4 million at December 31, 1998.

F-23
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Taxes computed at the U.S. statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:

<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
U.S. federal taxes at statutory rate.................... 34.0% 34.0% 34.0%
State taxes (net of federal benefit).................... 7.0% 7.0% 7.0%
Foreign rate differential............................... (1.8)% (1.5)% --
Change in valuation allowance........................... (38.7)% (40.7)% (37.9)%
Acquired intangibles.................................... 11.5% -- --
Acquired research and development write-off............. (11.1)% -- --
Amortization of non-deductible goodwill................. (1.5)% (0.6)% (5.7)%
Other................................................... 0.9% 2.8% 2.9%
----- ----- -----
Effective tax rate...................................... 0.3% 1.0% 0.3%
===== ===== =====
</TABLE>

NOTE 10--Commitments and Contingencies

Commitments

The Company has guaranteed monthly usage levels of data and voice
communications with certain of its telecommunications vendors. In addition, the
Company leases certain of its facilities under non-cancelable operating leases
expiring in various years through 2009. Total rent expense for all operating
leases amounted to $12.5 million in 1998, $5.0 million in 1997, and $3.6
million in 1996.

At December 31, 1998, commitments to telecommunications vendors and future
minimum lease payments under non-cancelable operating leases are as follows:

<TABLE>
<CAPTION>
Year Ending December 31, Telecommunications Operating Leases
- ------------------------ ------------------ ----------------
(In thousands of U.S. dollars)
<S> <C> <C>
1999....................................... $26,151 $ 9,148
2000....................................... 18,398 7,669
2001....................................... 15,229 5,956
2002....................................... 8,556 5,285
2003....................................... 4,493 4,688
Thereafter................................. 22,528 7,671
------- -------
$95,355 $40,417
======= =======
</TABLE>

The Company also acquires fiber-based telecommunications bandwidth through
purchases of IRUs and capital leases. Some of the purchase agreements have
obligations for future cash payments that coincide with the delivery of
bandwidth. At December 31, 1998, the Company was obligated to make future
payments under these purchase agreements that total $103.7 million, most of
which will be paid in 1999. Under its telecommunications bandwidth agreements,
the Company is also obligated to pay operating and maintenance charges which
vary by agreement in amount.

In January 1999, the Company entered into a 20-year commercial relationship
with the Baltimore Ravens of the National Football League pursuant to which it
acquired, among other things, the rights to name the Ravens' NFL stadium
"PSINet Stadium" as well as rights for sponsorship and promotion of team events
and related advertising and marketing rights. In addition, the Company has the
right to develop a Baltimore Ravens' web site and provide related Internet
services to subscribing fan members. In exchange for all of these rights,

F-24
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the Company will make payments to the Baltimore Ravens over a 20-year period.
The Company paid $11.8 million in January 1999, which included a one-time
prepayment of $9.25 million under the stadium naming rights agreement. Annual
payments for 2000 and for the 18 years thereafter start at $2.6 million, with
successive annual increases of approximately 5%. Total payments over the 20-
year period will be approximately $93.5 million.

Contingencies

The Company is subject to certain other claims and legal proceedings that
arise in the ordinary course of its business activities. Each of these matters
is subject to various uncertainties, and it is possible that some of these
matters may be decided unfavorably to the Company. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition or results of
operations or cash flows of the Company.

NOTE 11--Non-Recurring Arbitration Charge

On March 23, 1999, an arbitrator awarded The Chatterjee Management Company
("Chatterjee") compensatory damages including interest and legal expenses from
the Company. In conjunction with this, the Company has recorded a charge of
$49.0 million relating to this arbitration decision and such accrual is
reflected in other accounts payable and accrued liabilities in the Company's
consolidated balance sheet at December 31, 1998. This award resulted from a
claim by Chatterjee that the Company had breached the terms of a joint venture
agreement executed by the parties in September 1996. Chatterjee had initiated
the arbitration proceedings against the Company in November 1997 before the
International Chamber of Commerce, Court of Arbitration, in London, England.

On September 19, 1996, the Company and Chatterjee signed an agreement
pursuant to which the Company and an investment group led by Chatterjee would
have established a joint venture for the purpose of building an Internet
network across Europe and providing Internet-related services in Europe. Such
investment group was to invest up to $41 million in a joint venture. No monies
were invested by Chatterjee or the investment group pursuant to the joint
venture agreement nor were any other actions undertaken to implement it.
Following the signing of the agreement, the parties acknowledged structural
difficulties associated with the joint venture as originally contemplated,
which prevented its implementation. Instead, they sought for several months to
negotiate a direct investment in the Company by Chatterjee in lieu of the
initial agreement. Those negotiations were not successful.

In the arbitration proceedings, Chatterjee alleged that the Company breached
the joint venture agreement by repudiating its obligations under the agreement
and by breaching a covenant not to compete. Chatterjee requested an arbitration
award declaring that the agreement was still valid and binding upon the parties
and that the Company stood in breach of the agreement, directing the Company to
specifically perform its obligations under the agreement or, in the
alternative, awarding Chatterjee compensatory damages in an amount not less
than $25 million, awarding Chatterjee profits that the Company had earned or
stood to earn in Europe, and awarding Chatterjee the costs of arbitration,
including attorney's fees and interest on the award of damages.

The Company is evaluating its options and intends to vigorously pursue
appropriate legal steps to seek to modify the arbitrator's order. However, due
to the nature of arbitration proceedings, the Company's ability to obtain
relief in this matter is likely to be constrained.

F-25
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 12--Industry Segment and Geographic Reporting

SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

The Company offers a broad range of Internet access services and related
products to businesses in the U.S. and throughout the world. As of December 31,
1998, the Company served primary markets in 12 countries, with operations
organized into four geographic operating segments--the U.S., Canada, Europe and
Asia. In measuring performance and allocating assets, the chief operating
decision maker reviews each geographic operating segment as a whole and not by
types of services provided.

Each of these geographic operating segments is considered a reportable
segment, and the accounting policies of the operating segments are the same as
those described in Note 1. The Company evaluates the performance of its
segments and allocates resources to them based on revenue and EBITDA. The
Company defines EBITDA as losses before interest expense and interest income,
taxes, depreciation and amortization, other non-operating income and expense,
and charge for acquired in-process research and development.

Operations of the U.S. segment include shared network costs and corporate
functions which the Company does not allocate to its other geographic segments
for management reporting purposes. Capital expenditures include both assets
acquired for cash and financed through capital lease and seller-financed
arrangements.

Revenue by reportable segment is provided on the basis of where services are
provided. The Company has no single customer representing greater than 10% of
its revenues.

Certain financial information is presented below; amounts are in thousands
of U.S. dollars:

<TABLE>
<CAPTION>
U.S. Canada Europe Asia Eliminations Total
---------- ------- ------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1998
Revenue................ $ 156,431 $27,440 $40,037 $ 36,111 $ (383) $ 259,636
EBITDA................. (26,170) (7,668) (6,364) (1,848) -- (42,050)
Assets................. 1,261,629 54,028 84,192 284,349 (399,967) 1,284,231
Capital expenditures... 248,295 14,899 17,687 22,790 (121) 303,550
1997
Revenue................ 104,254 2,844 10,917 4,189 (302) 121,902
EBITDA................. (13,091) (4,097) (3,556) (515) 20 (21,239)
Assets................. 196,053 10,617 14,608 2,938 (38,035) 186,181
Capital expenditures... 47,389 1,523 473 689 -- 50,074
1996
Revenue................ 78,132 308 5,097 1,375 (561) 84,351
EBITDA................. (20,378) (3,180) (2,819) (1,484) (185) (28,046)
Assets................. 199,959 2,109 4,640 991 (30,587) 177,112
Capital expenditures... 35,560 438 2,130 262 -- 38,390
</TABLE>

F-26
<PAGE>

PSINET INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

EBITDA for all reportable segments differs from consolidated loss before
income taxes reported in the consolidated statements of operations as follows
(in thousands of U.S. dollars):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
EBITDA.......................................... $ (42,050) $(21,239) $(28,046)
Reconciling items:
Depreciation and amortization.................. (63,424) (28,347) (28,035)
Charge for acquired IPR&D...................... (70,800) -- --
Interest expense............................... (63,914) (5,362) (5,025)
Interest income................................ 19,638 3,059 3,794
Other income, net.............................. 6,833 5,811 2,056
Non-recurring arbitration charge............... (49,000) -- --
--------- -------- --------
Loss before income taxes........................ $(262,717) $(46,078) $(55,256)
========= ======== ========
</TABLE>

F-27
<PAGE>

P R O S P E C T U S

PSINet
[LOGO]

Common Stock

Preferred Stock

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

PSINet: The Offer:

. We are a leading provider of . By this prospectus, we may
Internet access services and offer, from time to time, in
related products to businesses. one or more series or classes,
the following securities:

. PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
(703) 904-4100

. shares of our common stock

. shares of our preferred stock

The aggregate initial offering price of these "offered securities" that we
may issue under this prospectus will not exceed $1,000,000,000.

Our common stock is listed for trading on the Nasdaq Stock Market's National
Market under the symbol "PSIX." On April 9, 1999, the last reported sale price
of our common stock was $52.125.

We may offer the offered securities in amounts, at prices and on terms
determined at the time of the offering. We will provide you with specific terms
of the applicable offered securities in supplements to this prospectus.

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

You should read this prospectus and any prospectus supplement carefully
before you decide to invest. This prospectus may not be used to consummate
sales of the offered securities unless it is accompanied by a prospectus
supplement describing the method and terms of the offering of those offered
securities.

Investing in the offered securities involves risks. See "Risk Factors"
beginning on page 4.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these offered securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.

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

April 12, 1999
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Prospectus Page
- ---------- ----
<S> <C>
The Company............................................................... 3
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 18
Ratios of Earnings to Combined Fixed Charges and Preferred Dividends...... 18
Description of Preferred Stock to be Offered By Prospectus Supplement..... 19
Description of Capital Stock.............................................. 22
Description of Indebtedness............................................... 27
Plan of Distribution...................................................... 30
Legal Matters............................................................. 31
Experts................................................................... 31
Documents Incorporated By Reference....................................... 31
About This Prospectus..................................................... 32
Where You Can Find More Information....................................... 32
</TABLE>

2
<PAGE>

THE COMPANY

We are a leading global provider of Internet access services and related
products to businesses. We provide dedicated and dial-up Internet connections
to businesses in 90 of the 100 largest metropolitan statistical areas in the
U.S. and in 12 of the 20 largest global telecommunications markets, with
operations organized into four geographic operating segments--the U.S., Canada,
Europe and Asia. We also offer, in addition to Internet connectivity services,
services and products to businesses that enable them to maximize utilization of
the Internet in their day-to-day operations in and outside of their workplaces.
Some of these value-added services include corporate intranets, Web hosting
services that permit customers to market themselves on the Internet without
having to invest significantly in technology infrastructure and operations
staff, remote user access services that permit customers to allow their mobile
personnel to access their corporate network and systems resources in 150
countries using the Internet, multi-currency electronic commerce services,
security services and voice-over-Internet (as opposed to standard telephone)
services. We also own and operate a technologically advanced, high-speed
network that is one of the primary backbones that comprise the Internet. In
addition to being an Internet service provider and operating our network, we
also provide network connectivity and related services to other
telecommunications carriers and Internet service providers to further utilize
our network capacity.

Our mission is to build a premier Internet protocol-based communications
company. We have grown by using multiple sales channels, including direct sales
and resellers, and by acquiring other Internet service providers and related
businesses in key markets. We have increased revenues by providing services and
products that enhance our customers' business processes by helping them to
effectively use the Internet and related tools.

We serve, as of December 31, 1998, approximately 54,700 business accounts,
including 168 Internet service providers. Our technologically advanced network
is connected to over 500 sites that enable customers to connect to the
Internet, called points-of-presence, in 12 countries and is connected with
other large Internet service providers at 27 points through contractual
arrangements that permit the exchange of data communications, called peering
arrangements. We believe that our scaleable Internet Protocol-optimized
network, in combination with our highly trained, around-the-clock customer care
team, enables us to deliver superior performance and reliability.

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

We are a New York corporation and our principal executive offices are
located at 510 Huntmar Park Drive, Herndon, Virginia 20170. Our telephone
number is (703) 904-4100.

Additional information concerning us is incorporated by reference in this
prospectus. See "Documents Incorporated by Reference" and "Where You Can Find
More Information."

3
<PAGE>

RISK FACTORS

Before you invest in our securities, you should be aware that there are
various risks, including the ones listed below. You should carefully consider
these risk factors, as well as the other information contained in this
prospectus and in any prospectus supplement, in evaluating an investment in our
securities.

We have significant indebtedness and we may not be able to meet our obligations

We are highly leveraged and have significant debt service requirements. As
of December 31, 1998, our total indebtedness was $1.12 billion, representing
112% of total capitalization, and our interest expense for the twelve months
ended December 31, 1998 was $63.9 million.

Our high level of indebtedness could have several important effects on our
future operations, which, in turn, could have important consequences for the
holders of our securities, including the following:

. a substantial portion of our cash flow from operations must be used to
pay interest on our indebtedness and, therefore, will not be available
for other business purposes;

. covenants contained in the agreements evidencing our debt obligations
require us to meet many financial tests, and other restrictions limit
our ability to borrow additional funds or to dispose of assets and may
affect our flexibility in planning for, and reacting to, changes in our
business, including possible acquisition activities and capital
expenditures; and

. our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.

Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors. We
historically have been unable to generate sufficient cash flow from operations
to meet our operating needs and have relied on equity, debt and capital lease
financings to fund our operations. However, based on our current level of
operations, management believes that existing working capital, existing credit
facilities, capital lease financings and proceeds of future equity or debt
financings will be adequate to meet our presently anticipated future
requirements for working capital, capital expenditures and scheduled payments
of interest on our debt. We cannot assure, however, that our business will
generate sufficient cash flow from operations or that future working capital
borrowings will be available in an amount sufficient to enable us to service
our debt or to make necessary capital expenditures. In addition, we cannot
assure that we will be able to raise additional capital for any refinancing of
our debt in the future.

We have experienced continuing losses, negative cash flow and fluctuations in
operating results

Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, we must, among other things, respond to
competitive developments, continue to attract and retain qualified persons, and
continue to upgrade our technologies and commercialize our network services
incorporating such technologies. We cannot assure that we will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on our business, financial condition, results of operations and ability
to pay when due principal, interest and other amounts in respect of our debt.
Although we have experienced revenue growth on an annual basis with revenue
increasing from $84.4 million in 1996 to $121.9 million in 1997 to $259.6
million in 1998, we have incurred losses and experienced negative earnings
before interest expense and interest income, taxes, depreciation and
amortization, other income and expense, and charge for acquired in-process
research and development ("EBITDA") during each of such periods. We expect to
continue to operate at a net loss and experience negative EBITDA in the near
term as we continue our acquisition program and the expansion of our global
network operations. We have incurred net losses available to common
shareholders of $55.1 million,

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$46.0 million and $264.9 million and have incurred negative EBITDA of $28.0
million, $21.2 million and $42.1 million for each of the years ended December
31, 1996, 1997 and 1998, respectively. At December 31, 1998, we had an
accumulated deficit of $427.6 million. We cannot assure that we will be able to
achieve or sustain profitability or positive EBITDA.

Our operating results have fluctuated in the past and may fluctuate
significantly in the future as a result of a variety of factors, some of which
are outside our control. These factors, include, among others:

. general economic conditions and specific economic conditions in the
Internet access industry;

. user demand for Internet services;

. capital expenditures and other costs relating to the expansion of
operations of our network;

. the introduction of new services by us or our competitors;

. the mix of services sold and the mix of channels through which those
services are sold;

. pricing changes and new product introductions by us and our competitors;

. delays in obtaining sufficient supplies of sole or limited source
equipment and telecom facilities; and

. potential adverse regulatory developments.

As a strategic response to a changing competitive environment, we may elect
from time to time to make pricing, service or marketing decisions that could
have a material adverse effect on our business, results of operations and cash
flow.

We are partially dependent on our subsidiaries for repayment of debt

We are an operating entity which also conducts a significant portion of our
business through our subsidiaries. Our cash flow from operations and
consequently our ability to service our debt, including our 10% senior notes
and 11 1/2% senior notes, is therefore partially dependent upon our
subsidiaries' earnings and their distributions of those earnings to us. It may
also be dependent upon loans, advances or other payments of funds to us by
those subsidiaries. Our subsidiaries have no obligation, contingent or
otherwise, to make any funds available to us for payment of the principal of or
interest on many of our debt obligations, including our 10% senior notes and 11
1/2% senior notes. Our subsidiaries' ability to make payments may be subject to
the availability of sufficient surplus funds, the terms of such subsidiaries'
indebtedness, applicable laws and other factors.

Our subsidiaries' creditors will have priority to the assets of such
subsidiaries over the claims of PSINet and the holders of our indebtedness. One
exception is that if such subsidiaries have provided guarantees of our
indebtedness and if loans made by us to our subsidiaries are recognized as
indebtedness, they will not have such priorities. In any event, our 10% senior
notes and 11 1/2% senior notes are effectively subordinated in right of payment
to all existing and future indebtedness and other liabilities of our
subsidiaries, including trade payables. As of December 31, 1998, our
subsidiaries had approximately $133.5 million of total liabilities, including
trade payables and accrued liabilities, to which holders of our 10% senior
notes and 11 1/2% senior notes are structurally subordinated. Under the terms
of agreements evidencing our debt obligations, some of our subsidiaries are
restricted in their ability to incur debt in the future.

We may not be able to fund the expansion we will need to remain competitive

In order to maintain our competitive position and continue to meet the
increasing demands for service quality, availability and competitive pricing,
we expect to make significant capital expenditures. At December 31, 1998, we
were obligated to make future payments that total $103.7 million for
acquisitions of global fiber-based telecommunications bandwidth, including
indefeasible rights of use or other rights. We also expect that there will be
additional costs, such as connectivity and equipment charges, in connection
with

5
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taking full advantage of such acquired bandwidth and indefeasible rights of
use. Although we are currently unable to estimate the extent of such additional
costs, we currently anticipate that our capital expenditures in 1999 will be
consistent with those in 1998.

We historically have been unable to generate sufficient cash flow from
operations to meet our operating needs and have relied on equity, debt and
capital lease financings to fund our operations. However, we believe that we
will have a reasonable degree of flexibility to adjust the amount and timing of
these capital expenditures in response to market conditions, competition, our
then-existing financing capabilities and other factors. We also believe that
working capital generated from the use of acquired bandwidth, together with
other existing working capital, existing credit facilities, capital lease
financings and proceeds of future equity or debt financings will be sufficient
to meet the presently anticipated working capital and capital expenditure
requirements of our operations.

We may need to raise additional funds in order to take advantage of
unanticipated opportunities, more rapid international expansion or acquisitions
of complementary businesses. In addition, we may need to raise additional funds
to develop new products or otherwise respond to changing business conditions or
unanticipated competitive pressures. We cannot assure that we will be able to
raise such funds on favorable terms. In the event that we are unable to obtain
such additional funds on acceptable terms, we may determine not to enter into
various expansion opportunities.

We face risks associated with acquisitions and strategic alliances relating to
difficulties in integrating combined operations, incurrence of additional debt
to finance acquisitions and operations of acquired businesses, potential
disruption of operations and related negative impact on earnings, and
incurrence of substantial expenses that could adversely affect our financial
condition

Growth through acquisitions represents a principal component of our business
strategy. Over the 18 months ended March 31, 1999, we acquired 20 Internet
service providers in nine of the 20 largest global telecommunications markets.
We expect to continue to acquire assets and businesses principally relating to
or complementary to our current operations. We may also seek to develop
strategic alliances both domestically and internationally. Any such future
acquisitions or strategic alliances would be accompanied by the risks commonly
encountered in acquisitions or strategic alliances. Such risks include, among
other things:

. the difficulty of integrating the operations and personnel of the
companies;

. the potential disruption of our ongoing business;

. the inability of management to maximize our financial and strategic
position by the successful incorporation of licensed or acquired
technology and rights into our service offerings; and

. the inability to maintain uniform standards, controls, procedures and
policies and the impairment of relationships with employees and
customers as a result of changes in management.

We cannot assure that we will be successful in overcoming these risks or any
other problems encountered in connection with such acquisitions or strategic
alliances. We believe that after eliminating redundant network architecture and
administrative functions and taking other actions to integrate the operations
of acquired companies we will be able to realize cost savings. However, we
cannot assure that our integration of acquired companies' operations will be
successfully accomplished. Our inability to improve the operating performance
of acquired companies' businesses or to integrate successfully the operations
of acquired companies could have a material adverse effect on our business,
financial condition and results of operations. In addition, as we proceed with
acquisitions in which the consideration consists of cash, a substantial portion
of our available cash will be used to consummate such acquisitions.

As with each of our recent acquisitions, the purchase price of many of the
businesses that might become attractive acquisition candidates for us likely
will significantly exceed the fair values of the net assets of the acquired
businesses. As a result, material goodwill and other intangible assets would be
required to be recorded

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<PAGE>

which would result in significant amortization charges in future periods. In
addition, an intangible asset that frequently arises in connection with the
acquisition of a technology company is "acquired in-process research and
development," which under U.S. accounting standards, as presently in effect,
must be expensed immediately upon acquisition. Such expenses, in addition to
the financial impact of such acquisitions, could have a material adverse effect
on our business, financial condition and results of operations and could cause
substantial fluctuations in our quarterly and yearly operating results.
Furthermore, in connection with acquisitions or strategic alliances, we could
incur substantial expenses, including the expenses of integrating the business
of the acquired company or the strategic alliance with our existing business.

We expect that competition for appropriate acquisition candidates may be
significant. We may compete with other telecommunications companies with
similar acquisition strategies, many of which may be larger and have greater
financial and other resources than we have. Competition for Internet companies
is based on a number of factors including price, terms and conditions, size and
access to capital, ability to offer cash, stock or other forms of consideration
and other matters. We cannot assure that we will be able to successfully
identify and acquire suitable companies on acceptable terms and conditions.

Our growth and expansion may strain our ability to manage our operations and
our financial resources

Our rapid growth has placed a strain on our administrative, operational and
financial resources and has increased demands on our systems and controls. We
have approximately 500 points-of-presence and we plan to continue to expand the
capacity of existing points-of-presence as customer-driven demand dictates. In
addition, we have completed a number of acquisitions of companies and
telecommunications bandwidth during 1998 and plan to continue to do so. We
anticipate that our Carrier and Internet Service Provider Services business
unit, as well as other business growth, may require continued enhancements to
and expansion of our network. The process of consolidating the businesses and
implementing the strategic integration of these acquired businesses with our
existing business may take a significant amount of time. It may also place
additional strain on our resources and could subject us to additional expenses.
We cannot assure that we will be able to integrate these companies successfully
or in a timely manner. In addition, we cannot assure that our existing
operating and financial control systems and infrastructure will be adequate to
maintain and effectively monitor future growth.

Our continued growth may also increase our need for qualified personnel. We
cannot assure that we will be successful in attracting, integrating and
retaining such personnel. The following risks, associated with our growth,
could have a material adverse effect on our business, results of operations and
financial condition:

. our inability to continue to upgrade our networking systems or our
operating and financial control systems;

. our inability to recruit and hire necessary personnel or to successfully
integrate new personnel into our operations;

. our inability to successfully integrate the operations of acquired
companies or to manage our growth effectively; or

. our inability to adequately respond to the emergence of unexpected
expansion difficulties.

We face risks associated with our acquisitions of bandwidth from network
suppliers, including our strategic alliance with IXC Communications Inc.,
relating to our dependence on their ability to satisfy their obligations to us,
the possibility that we may need to incur significant expenses to utilize
bandwidth and their ability to buildout their networks under construction that
could adversely affect our ability to utilize acquired bandwidth

We are subject to a variety of risks relating to our recent acquisitions of
fiber-based telecommunications bandwidth from our various global network
suppliers, including our strategic alliance with

7
<PAGE>

IXC Communications Inc., and the delivery, operation and maintenance of such
bandwidth. Such risks include, among other things, the following:

. the risk that financial, legal, technical and/or other matters may
adversely affect such suppliers' ability to perform their respective
operation, maintenance and other services relating to such bandwidth,
which may adversely affect our use of such bandwidth;

. the risk that we will not have access to sufficient additional capital
and/or financing on satisfactory terms to enable us to make the
necessary capital expenditures to take full advantage of such bandwidth;

. the risk that such suppliers may not continue to have the necessary
financial resources to enable them to complete, or may otherwise elect
not to complete, their contemplated buildout of their respective fiber
optic telecommunications systems; and

. the risk that such buildout may be delayed or otherwise adversely
affected by presently unforeseeable legal, technical and/or other
factors.

We cannot assure that we will be successful in overcoming these risks or any
other problems encountered in connection with our acquisitions of bandwidth.

International expansion is a key component of our business strategy and, if we
are unable to complete this expansion, our financial condition may be adversely
affected

A key component of our business strategy is our continued expansion into
international markets. We may need to enter into joint ventures or other
strategic relationships with one or more third parties in order to conduct our
foreign operations successfully. However, we cannot assure that we will be able
to obtain the permits and operating licenses required for us to operate, to
hire and train employees or to market, sell and deliver high quality services
in these markets. In addition to the uncertainty as to our ability to continue
to expand our international presence, there are risks inherent in doing
business on an international level. Such risks include:

. unexpected changes in or delays resulting from regulatory requirements,
tariffs, customs, duties and other trade barriers;

. difficulties in staffing and managing foreign operations;

. longer payment cycles and problems in collecting accounts receivable;

. fluctuations in currency exchange rates and foreign exchange controls
which restrict or prohibit repatriation of funds;

. technology export and import restrictions or prohibitions;

. delays from customs brokers or government agencies;

. seasonal reductions in business activity during the summer months in
Europe and other parts of the world; and

. potentially adverse tax consequences, which could adversely impact the
success of our international operations.

We cannot assure that such factors will not have an adverse effect on our
future international operations and, consequently, on our business, financial
condition and results of operations. In addition, we cannot assure that laws or
administrative practice relating to taxation, foreign exchange or other matters
of countries within which we operate will not change. Any such change could
have a material adverse effect on our business, financial condition and results
of operations.

In particular, we have also recently made significant investments in Japan,
which is currently experiencing a severe economic recession. Other Asian-
Pacific countries in which we operate are also experiencing

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<PAGE>

economic difficulties and uncertainties. These economic difficulties and
uncertainties could have a material adverse effect on our business, financial
condition and results of operations.

We depend on key personnel and could be affected by the loss of their services

Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of persons with knowledge of
and experience in the Internet service industry. The process of locating such
personnel with the combination of skills and attributes required to carry out
our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, technical,
marketing and sales personnel and upon the continued contributions of such
management and personnel. In particular, our success is highly dependent upon
the personal abilities of our senior executive management, including William L.
Schrader, our Chairman of the Board and Chief Executive Officer and the founder
of PSINet, Harold S. Wills, our President and Chief Operating Officer, and
Edward D. Postal, our Senior Vice President and Chief Financial Officer. We
have employment agreements with Messrs. Wills and Postal. The loss of the
services of any one of them could have a material adverse effect on our
business, financial condition or results of operations.

We depend on suppliers and could be affected by changes in suppliers or delays
in delivery of their products and services

We have few long-term contracts with our suppliers. We are dependent on
third party suppliers for our leased-line connections or bandwidth. Some of
these suppliers are or may become competitors of ours, and such suppliers are
not subject to any contractual restrictions upon their ability to compete with
us. If these suppliers change their pricing structures, we may be adversely
affected. Moreover, any failure or delay on the part of our network providers
to deliver bandwidth to us or to provide operations, maintenance and other
services with respect to such bandwidth in a timely or adequate fashion could
adversely affect us.

We are also dependent on third party suppliers of hardware components.
Although we attempt to maintain a minimum of two vendors for each required
product, some components used by us in providing our networking services are
currently acquired or available from only one source. We have from time to time
experienced delays in the receipt of hardware components and telecommunications
facilities, including delays in delivery of PRI telecommunications facilities,
which connect dial-up customers to our network. A failure by a supplier to
deliver quality products on a timely basis, or the inability to develop
alternative sources if and as required, could result in delays which could have
a material adverse effect on us. Our remedies against suppliers who fail to
deliver products on a timely basis are limited by contractual liability
limitations contained in supply agreements and purchase orders and, in many
cases, by practical considerations relating to our desire to maintain good
relationships with the suppliers. As our suppliers revise and upgrade their
equipment technology, we may encounter difficulties in integrating the new
technology into our network.

Many of the vendors from whom we purchase telecommunications bandwidth,
including the regional bell operating companies, competitive local exchange
carriers and other local exchange carriers, currently are subject to tariff
controls and other price constraints which in the future may be changed. In
addition, recently enacted legislation will produce changes in the market for
telecommunications services. These changes may affect the prices which we are
charged by the regional bell operating companies and other carriers, which
could have a material adverse effect on our business, financial condition and
results of operations. Moreover, we are subject to the effects of other
potential regulatory actions which, if taken, could increase the cost of our
telecommunications bandwidth through, for example, the imposition of access
charges.

The terms of our financing arrangements may restrict our operations

Our financing arrangements are secured by substantially all of our assets
and stock of some of our subsidiaries. These financing arrangements require
that we satisfy many financial covenants. Our ability to satisfy these
financial covenants may be affected by events beyond our control and, as a
result, we cannot

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assure you that we will be able to continue to satisfy such covenants. These
financing arrangements also currently prohibit us from paying dividends and
repurchasing our capital stock without the lender's consent. Our failure to
comply with the covenants and restrictions in these financing arrangements
could lead to a default under the terms of these agreements. In the event of a
default under the financing arrangements, our lenders would be entitled to
accelerate the indebtedness outstanding thereunder and foreclose upon the
assets securing such indebtedness. They would also be entitled to be repaid
from the proceeds of the liquidation of those assets before the assets would be
available for distribution to the holders of our securities, including the
holders of the notes. In addition, the collateral security arrangements under
our existing financing arrangements may adversely affect our ability to obtain
additional borrowings.

Our financial condition may be adversely affected if our systems and those of
our suppliers fail because of Year 2000 problems

The commonly referred to Year 2000 ("Y2K") problem results from the fact
that many existing computer programs and systems use only two digits to
identify the year in the date field. These programs were designed and developed
without considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other processing
involving the Year 2000 or a later date. We have identified two main areas of
Y2K risk:

1. Internal computer systems or embedded chips could be disrupted or fail,
causing an interruption or decrease in productivity in our operations;
and

2. Computer systems or embedded chips of third parties including, without
limitation, financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others, could be disrupted or fail, causing an interruption or decrease
in our ability to continue our operations.

We have developed detailed plans for implementing, testing and completing
any necessary modifications to our key computer systems and equipment with
embedded chips to ensure that they are Y2K compliant. We have engaged a third
party consultant to perform an assessment of our U.S. internal systems (e.g.,
accounting, billing, customer support and network operations) to determine the
status of their Y2K compliance. The assessment of these systems has been
completed and, while some minor changes are necessary, we believe that no
material changes or modifications to our internal systems are required to
achieve Y2K compliance. Our U.S. chief information officer has developed a test
bed of our U.S. internal systems to implement and complete testing of the
requisite minor changes. We anticipate that our U.S. internal systems will be
Y2K ready by June 30, 1999. We are in the process of completing an inventory of
our internal systems that we use in Canada, United Kingdom, Europe and Asia to
determine the status of their Y2K compliance. Each international office has
plans in place to test, upgrade or, if necessary, replace components of its
internal systems to ensure they are Y2K compliant. We anticipate that our
international operations will be Y2K compliant by the end of the third quarter
of 1999. To help ensure that our network operations and services to our
customers are not interrupted due to the Y2K problem, we have established a
network operations team that meets weekly to examine our network on a worldwide
basis. This team of operational staff have conducted inventories of our network
equipment (software and hardware) and have found no material Y2K compliance
issues. We believe that all equipment currently being purchased for use in the
PSINet network is Y2K compliant. Any existing equipment that is not Y2K
compliant is planned to be made Y2K compliant through minor changes to the
software or hardware or, in limited instances, replacement of the equipment. We
anticipate that our network will be Y2K compliant by the end of the second
quarter of 1999. In addition to administering the implementation of necessary
upgrades for Y2K compliance, our network team is developing a contingency plan
to address any potential problems that may occur with our network as we enter
the year 2000. We believe that, as a result of our detailed assessment and
completed modifications, the Y2K issue will not pose significant operational
problems for us. However, if the requisite modifications and conversions are
not made, or not completed in a timely fashion, it is possible that the Y2K
problem could have a material impact on our operations.

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. the failure of a material third party's business;

. a financial institution's inability to take and transfer funds;

. an interruption in delivery of supplies from vendors;

. a loss of voice and data connections;

. a loss of power to our facilities; and

. other interruptions in the normal course of our operations, the nature
and extent of which we cannot foresee.

We will continue to evaluate the nature of these risks, but at this time we
are unable to determine the probability that any such risk will occur, or if it
does occur, what the nature, length or other effects, if any, it may have on
us. If any of our material third parties experience significant failures in
their computer systems or operations due to Y2K non-compliance, it could affect
our ability to process transactions or otherwise engage in similar normal
business activities. For example, while we expect our internal systems, U.S.
and non-U.S., to be Y2K ready in stages during 1999, we and our customers who
communicate internationally will be dependent upon the Y2K-readiness of many
non-U.S. providers of telecommunication services and their vendors and
suppliers. If these providers and others are not Y2K ready, we and our
customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on our revenues and
business and that of our customers. While many of these risks are outside our
control, we have identified and contacted our critical third party vendors and
suppliers and are establishing contingency plans to remedy any potential
interruption to our operations.

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We face a high level of competition in the Internet services industry

Our current and prospective competitors include other national, regional and
local Internet service providers, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers and on-line service providers. We believe
that our network, products and customer service distinguish us from these
competitors. However, some of these competitors have a significantly greater
market presence, brand recognition and financial, technical and personnel
resources than us.

We compete with all of the major long distance companies, also known as
interexchange carriers, including AT&T, MCIWorldCom, Sprint and Cable &
Wireless/IMCI, which also offer Internet access services. The recent sweeping
reforms in the federal regulation of the telecommunications industry have
created greater opportunities for local exchange carriers, including the
regional bell operating companies, to enter the Internet connectivity market.
We believe that there is a move toward horizontal integration through
acquisitions of, joint ventures with, and the wholesale purchase of
connectivity from Internet service providers to address the Internet
connectivity requirements of the current business customers of long distance
and local carriers. The WorldCom/MFS/UUNet consolidation, the WorldCom/MCI
merger, the ICG/NETCOM merger, Cable & Wireless' purchase of the internetMCI
assets, the Intermedia/DIGEX merger, GTE's acquisition of BBN, Global
Crossing's recently announced plans to acquire Frontier Corp. (and Frontier's
acquisition of Global Center) and AT&T's purchase of IBM's global
communications network are indicative of this trend. Accordingly, we expect to
experience increased competition from the traditional telecommunications
carriers. Many of these telecommunications carriers may have the ability to
bundle Internet access with basic local and long distance telecommunications
services. Such bundling of services may have an adverse effect on our ability
to compete effectively with the telecommunications providers and may result in
pricing pressure on us that could have a material adverse effect on our
business, financial condition and results of operations.

Many of the major cable companies have announced that they are exploring the
possibility of offering Internet connectivity, relying on the viability of
cable modems and economical upgrades to their networks. Several announcements
also have recently been made by other alternative service companies approaching
the Internet connectivity market with various wireless terrestrial and
satellite-based service technologies.

The predominant on-line service providers, including America Online,
CompuServe, Microsoft Network and Prodigy, have all entered the Internet access
business by engineering their current proprietary networks to include Internet
access capabilities. We compete to a lesser extent with these on-line service
providers. However, America Online's recent acquisition of Netscape
Communications Corporation and related strategic alliance with Sun Microsystems
will enable it to offer a broader array of Internet protocol-based services and
products that could significantly enhance its ability to appeal to the business
marketplace and, as a result, compete more directly with us.

Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies. These services would include new technologies such as
cable modems and xDSL. These providers have initially targeted the residential
consumer. However, it is likely that their target markets will expand to
encompass business customers, which is our target market. This expansion could
adversely affect the pricing of our service offerings.

As a result of the increase in the number of competitors and the vertical
and horizontal integration in the industry, we currently encounter and expect
to continue to encounter significant pricing pressure and other competition in
the future. Advances in technology as well as changes in the marketplace and
the regulatory

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<PAGE>

environment are constantly occurring, and we cannot predict the effect that
ongoing or future developments may have on us or on the pricing of our products
and services. Increased price or other competition could result in erosion of
our market share and could have a material adverse effect on our business,
financial condition and results of operations. We cannot assure that we will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.

As we continue to expand our operations outside the United States, we will
encounter new competitors and competitive environments. In some cases, we will
be forced to compete with and buy services from government-owned or subsidized
telecommunications providers. Some of these providers may enjoy a monopoly on
telecommunications services essential to our business. We cannot assure that we
will be able to purchase such services at a reasonable price or at all. In
addition to the risks associated with our previously described competitors,
foreign competitors may pose an even greater risk, as they may possess a better
understanding of their local markets and better working relationships with
local infrastructure providers and others. We cannot assure that we can obtain
similar levels of local knowledge. Failure to obtain that knowledge could place
us at a significant competitive disadvantage.

Technology trends and evolving industry standards could result in our
competitors developing or obtaining access to bandwidth and technologies that
carry more information faster than our bandwidth and technology and,
consequently, render our bandwidth or technology obsolete

Our products and services are targeted toward users of the Internet, which
has experienced rapid growth. The market for Internet access and related
services is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product and service
introductions. Our future success will depend, in part, on our ability to
effectively use and develop leading technologies.

We cannot assure that we will be successful in responding to changing
technology or market trends. In addition, services or technologies developed by
others may render our services or technologies uncompetitive or obsolete.
Furthermore, changes to our services in response to market demand may require
the adoption of new technologies that could likewise render many of our assets
technologically uncompetitive or obsolete. As we accept bandwidth from IXC and
our other existing global network suppliers or acquire bandwidth or equipment
from other suppliers that may better meet our needs than existing bandwidth or
equipment, many of our assets could be determined to be obsolete or excess. The
disposition of obsolete or excess assets could have a material adverse effect
on our business, financial condition and results of operations.

Even if we do successfully respond to technological advances and emerging
industry standards, the integration of new technology may require substantial
time and expense, and we cannot assure that we will succeed in adapting our
network infrastructure in a timely and cost-effective manner.

We may be liable for information disseminated through network

The law relating to liability of Internet service providers for information
carried on or disseminated through their networks is not completely settled. A
number of lawsuits have sought to impose such liability for defamatory speech
and infringement of copyrighted materials. The U.S. Supreme Court has let stand
a lower court ruling which held that an Internet service provider was protected
from liability for material posted on its system by a provision of the
Communications Decency Act. However, the findings in that case may not be
applicable in other circumstances. Other courts have held that online service
providers and Internet service providers may, under some circumstances, be
subject to damages for copying or distributing copyrighted materials.
Provisions of the Communications Decency Act which imposed criminal penalties
for using an interactive computer service for transmitting obscene or indecent
communications have been found unconstitutional by the U.S. Supreme Court.
However, on October 21, 1998, new federal legislation was enacted that requires
limitations on access to pornography and other material deemed "harmful to
minors." This legislation has been attacked in court as a violation of the
First Amendment. We are unable to predict the outcome of this case. The
imposition upon Internet service providers or web server hosts of potential
liability

13
<PAGE>

for materials carried on or disseminated through their systems could require us
to implement measures to reduce our exposure to such liability. Such measures
may require that we spend substantial resources or discontinue some product or
service offerings. Any of these actions could have a material adverse effect on
our business, operating results and financial condition.

We carry errors and omissions insurance with a policy limit of $5.0 million,
subject to deductibles and exclusions. Such coverage may not be adequate or
available to compensate us for all liability that may be imposed. The
imposition of liability in excess of, or the unavailability of, such coverage
could have a material adverse effect on our business, financial condition and
results of operations.

The law relating to the regulation and liability of Internet access
providers in relation to information carried or disseminated also is undergoing
a process of development in other countries. Decisions, laws, regulations and
other activities regarding regulation and content liability may significantly
affect the development and profitability of companies offering on-line and
Internet access services, including us.

FCC regulations may limit the services we can offer

Consistent with our growth and acquisition strategy, we are now engaged in,
or will soon be engaged in, activities that subject us to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, telecommunications carriers to the
extent that they involve the provision, origination or termination of
jurisdictionally interstate or international communications. The state
regulatory commissions retain jurisdiction over the same facilities and
services to the extent they involve origination or termination of
jurisdictionally intrastate communications.

Our Internet operations are not currently subject to direct regulation by
the FCC or any other governmental agency, other than regulations applicable to
businesses generally. However, the FCC has recently indicated that some
services offered over the Internet, such as phone-to-phone Internet protocol
telephony, may be functionally indistinguishable from traditional
telecommunications service offerings and their non-regulated status may have to
be re-examined. We are unable to predict what regulations may be adopted in the
future, or to what extent existing laws and regulations may be found
applicable, or the impact such new or existing laws may have on our business.
We can not assure that new laws or regulations relating to Internet services,
or existing laws found to apply to them, will not have a material adverse
effect on us. Although the FCC has recently decided not to allow local
telephone companies to impose per-minute access charges on Internet service
providers, and that decision has been upheld by the reviewing court, further
regulatory and legislative consideration of this issue is likely. In addition,
some telephone companies are seeking relief through state regulatory agencies.
Such rules, if adopted, would affect our costs of serving dial-up customers and
could have a material adverse effect on our business, financial condition and
results of operations.

In addition to our Internet activities, we have recently focused attention
on acquiring telecommunications assets and facilities, which is a regulated
activity. Our wholly-owned subsidiary, PSINetworks Company, has received an
international Section 214 authorization from the FCC to provide global
facilities-based and global resale telecommunications services. Our wholly-
owned subsidiary, PSINet Telecom UK Limited, has received an international
facilities license from DTI and OFTEL, the responsible telecommunications
regulatory bodies in the United Kingdom. Currently, the FCC and OFTEL do not
closely regulate the charges or practices of non-dominant carriers, such as our
subsidiaries. Nevertheless, these regulatory agencies have the power to impose
more stringent regulatory requirements on us and to change our regulatory
classification, which may adversely affect our business.

Our subsidiaries have also received competitive local exchange carrier
certification in New York, Virginia, Colorado and Texas, have applied for
competitive local exchange carrier certification in Maryland and California,
and we are considering the financial, regulatory and operational implications
of becoming a competitive local exchange carrier in other states. As a provider
of domestic basic telecommunications services,

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<PAGE>

particularly competitive local exchange services, we could become subject to
further regulation by the FCC and/or another regulatory agency, including state
and local entities.

An important issue for competitive local exchange carriers is the right to
receive reciprocal compensation for the transport and termination of Internet
traffic. Most states have required incumbent local exchange carriers to pay
competitive local exchange carriers reciprocal compensation. In October 1998,
the FCC determined that dedicated Digital Subscriber Line service is an
interstate service and properly tariffed at the interstate level. In February
1999, the FCC concluded that at least a substantial portion of dial-up Internet
service provider traffic is jurisdictionally interstate. The FCC also concluded
that its jurisdictional decision does not alter the exemption from access
charges currently enjoyed by Internet service providers. The FCC established a
proceeding to consider an appropriate compensation mechanism for interstate
Internet traffic. Pending the adoption of that mechanism, the FCC saw no reason
to interfere with existing interconnection agreements and reciprocal
compensation arrangements. The FCC order has been appealed. There can be no
assurance that any future court, state regulatory or FCC decision on this
matter will favor our position. An unfavorable result may have an adverse
impact on our potential future revenues as a competitive local exchange
carrier, as well as increasing our costs for PRIs generally.

If we experience system failure or shutdown, we may not be able to deliver
services

Our success depends upon our ability to deliver reliable, high-speed access
to the Internet and upon the ability and willingness of our telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. Our network, and other networks providing services to us, are
vulnerable to damage or cessation of operations from fire, earthquakes, severe
storms, power loss, telecommunications failures and similar events,
particularly if such events occur within a high traffic location of the
network. We have designed our network to minimize the risk of such system
failure, for instance, with redundant circuits among points-of-presence to
allow traffic rerouting. In addition, we perform lab and field testing before
integrating new and emerging technology into the network, and we engage in
capacity planning. Nonetheless, we cannot assure that we will not experience
failures or shutdowns relating to individual points-of-presence or even
catastrophic failure of the entire network.

We carry business personal property insurance at both scheduled locations
and unscheduled locations to protect us against losses due to property damage
and business interruption. Such coverage, however, may not be adequate or
available to compensate us for all losses that may occur. In addition, we
generally attempt to limit our liability to customers arising out of network
failures by contractually disclaiming all such liability. In respect of many
services, we have also contractually limited liability to a usage credit based
upon the amount of time that the system was not operational. We cannot assure,
however, that such limitations will be enforceable. In any event, significant
or prolonged system failures or shutdowns could damage our reputation and
result in the loss of customers.

Although we have implemented network security measures, our network may be
susceptible to viruses, break-ins or disruptions

We have implemented many network security measures, such as limiting
physical and network access to our routers. Nonetheless, our network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by our customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to our customers.
Furthermore, such inappropriate use of the Internet by third parties could also
potentially jeopardize the security of confidential information stored in the
computer systems of our customers. This could, in turn, deter potential
customers and adversely affect our existing customer relationships.

Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center
at Carnegie Mellon University, which facilitates responses of the Internet
community to

15
<PAGE>

computer security events. Addressing problems caused by computer viruses,
break-ins or other problems caused by third parties could have a material
adverse effect on us.

The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of such problems may result in
claims against us or liability on our part. Such claims, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on our business or reputation or on our ability to attract and
retain customers for our products. Moreover, until more consumer reliance is
placed on security technologies available, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet service
industry and our customer base and revenues.

Risk associated with dependence on technology and with proprietary rights

Our success and ability to compete is dependent in part upon our technology
and technical expertise and, to a lesser degree, on our proprietary rights as
well. In order to establish and protect our technology, we rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions. Nevertheless, we cannot assure that such measures are adequate to
protect our proprietary technology. It may be possible for a third party to
copy or otherwise obtain and use our products or technology without
authorization or to develop similar technology independently. In addition, our
products may be licensed or otherwise utilized in foreign countries where laws
may not protect our proprietary rights to the same extent as do laws in the
United States. It is our policy to require employees and consultants and, when
obtainable, suppliers to execute confidentiality agreements upon the
commencement of their relationships with us. Nonetheless, we cannot assure that
these precautions will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology.

In addition, we are also subject to the risk of adverse claims and
litigation alleging infringement by us of the intellectual property rights of
others. From time to time, we have received claims that we have infringed other
parties' proprietary rights. While we do not believe that we have infringed the
proprietary rights of other parties, we cannot assure that third parties will
not assert infringement claims in the future with respect to our current or
future products. Such claims may require that we enter into license
arrangements or may result in protracted and costly litigation, regardless of
the merits of such claims. We cannot assure that any necessary licenses will be
available or that, if available, such licenses can be obtained on commercially
reasonable terms.

We have recently introduced new enterprise service offerings, including
value-added, Internet protocol-based enterprise communication services and
xDSL-based Internet access services in limited areas. The failure of these
services to gain market acceptance in a timely manner or at all, or the failure
of xDSL-based services, in particular, to achieve significant market coverage
could have a material adverse effect on our business, financial condition and
results of operations. If we introduce new or enhanced services with
reliability, quality or compatibility problems, it could significantly delay or
hinder market acceptance of such services, which could adversely affect our
ability to attract new customers and subscribers. Our services may contain
undetected errors or defects when first introduced or as enhancements are
introduced. Despite testing by us or our customers, we cannot assure that
errors will not be found in new services after commencement of commercial
deployment. Such errors could result in additional development costs, loss of
or delays in market acceptance, diversion of technical and other resources from
our other development efforts and the loss of credibility with our customers
and subscribers. Any such event could have a material adverse effect on our
business, financial condition and results of operations.

Additionally, if we are unable to match our network capacity to customer
demand for our services, our network could become congested during periods of
peak customer demand. Such congestion could adversely affect the quality of
service we are able to provide. Conversely, due to the high fixed cost nature
of our infrastructure, if our network is under-utilized, it could adversely
affect our ability to provide cost-efficient

16
<PAGE>

services. Our failure to match network capacity to demand could have a material
adverse effect on our business, financial condition or results of operations.

We will retain a significant amount of discretionary authority over the use of
net proceeds of the offering

We will retain a significant amount of discretion over the application of
the net proceeds of the offering of the securities. Because of the number and
variability of factors that determine our use of the net proceeds of the
offering, there can be no assurance that such applications will not vary
substantially from our current intentions. Pending such utilization, we intend
to invest the net proceeds of the offering in short-term investment grade and
government securities. See "Use of Proceeds."

The market price and trading volume of our stock may be volatile

The market price and trading volume of our common stock has been and may
continue to be highly volatile. Factors such as variations in our revenue,
earnings and cash flow and announcements of new service offerings,
technological innovations, strategic alliances and/or acquisitions involving
our competitors or price reductions by us, our competitors or providers of
alternative services could cause the market price of our common stock to
fluctuate substantially. In addition, the stock markets recently have
experienced significant price and volume fluctuations that particularly have
affected technology-based companies and resulted in changes in the market
prices of the stocks of many companies that have not been directly related to
the operating performance of those companies. Such broad market fluctuations
have adversely affected and may continue to adversely affect the market price
of our common stock.

We do not anticipate that we will pay cash dividends on our common stock

We have never declared or paid any cash dividends on our common stock and do
not anticipate paying cash dividends on our common stock in the foreseeable
future. In addition, our debt securities and credit facility contain
limitations on our ability to declare and pay cash dividends.

Forward-looking statements

Some of the information contained in this prospectus and in any prospectus
supplement may contain forward-looking statements. Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or similar words, or by
discussions of strategy that involve risks and uncertainties. These statements
may discuss our future expectations or contain projections of our results of
operations or financial condition or expected benefits to us resulting from
acquisitions or transactions. We cannot assure that the future results
indicated, whether expressed or implied, will be achieved. The risk factors
noted in this section and other factors noted throughout this prospectus and in
any prospectus supplement, including risks and uncertainties, could cause our
actual results to differ materially from those contained in any forward-looking
statement.

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<PAGE>

USE OF PROCEEDS

Unless otherwise described in an applicable prospectus supplement, the
proceeds from the sale of securities offered by this prospectus and each
prospectus supplement will be used to repay certain indebtedness, for general
corporate purposes and for possible acquisitions of businesses,
telecommunications bandwidth and other assets.

RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED DIVIDENDS

For purposes of computing the ratio of earnings to combined fixed charges
and preferred dividends, earnings consist of losses before income taxes, equity
in loss of affiliate and fixed charges (interest charges and preferred dividend
requirements of subsidiaries, adjusted to a pretax basis). Fixed charges
consist of interest on all indebtedness, amortization of debt financing costs
and that portion of rental expense which we believe to be representative of
interest (deemed to be one-third of rental expense).

Due to operating losses, we have a deficiency of earnings to cover combined
fixed charges and preferred dividends for the periods indicated (in thousands
of U.S. dollars):

<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Deficiency of earnings to
cover combined fixed charges
and preferred dividends..... $(5,307) $(52,956) $(54,449) $(46,489) $(265,796)
------- -------- -------- -------- ---------
</TABLE>

18
<PAGE>

DESCRIPTION OF PREFERRED STOCK TO BE
OFFERED BY PROSPECTUS SUPPLEMENT

We may issue from time to time under the registration statement of which
this prospectus is a part shares of one or more series of our preferred stock.
The following description summarizes general terms and provisions of the
preferred stock to which any prospectus supplement may relate. The particular
terms of any series of preferred stock and the extent to which these general
provisions may apply to the series of preferred stock so offered will be
described in the prospectus supplement relating to such preferred stock. The
following summary of general provisions of the preferred stock does not purport
to be complete, and is qualified in its entirety by reference to the provisions
of our Certificate of Incorporation, including the amendment to our Certificate
of Incorporation relating to a specific series of the preferred stock, which
will be filed as an exhibit to, or incorporated by reference in, the
registration statement of which this prospectus is a part.

General

Under our Certificate of Incorporation, we have the authority to issue up to
30,000,000 shares of our preferred stock par value $.01 per share. As of the
date of this prospectus, 1,000,000 shares of our preferred stock were
designated as Series A Junior Participating Preferred Stock in connection with
our Shareholder Rights Plan, of which none have been issued. For a description
of the relative rights, preferences, privileges and restrictions of the
previously designated series of our preferred stock, see "Description of
Capital Stock-- Preferred Stock."

Our Board of Directors is authorized to issue shares of our preferred stock,
in one or more series, and to fix the rights, preferences, privileges and
restrictions of such series and such other qualifications, limitations or
restrictions as are permitted by the New York Business Corporation Law.

Our Board of Directors is authorized to determine for each series of
preferred stock, and the prospectus supplement with respect to each such series
shall set forth the following:

(1) the designation of such shares and the number of shares that constitute
such series;

(2) the dividend rate, or the method of calculation thereof, if any, on the
shares of such series and the priority as to payment of dividends with
respect to other classes or series of our capital stock;

(3) the dividend periods, or the method of calculation thereof;

(4) the voting rights of the shares;

(5) the liquidation preference and the priority as to payment upon
liquidation, dissolution or winding-up of PSINet;

(6) whether or not and on what terms the shares of such series will be
subject to redemption or repurchase at our option;

(7) whether and on what terms the shares of such series will be convertible
into or exchangeable for other debt or equity securities;

(8) whether the shares of such series of preferred stock will be listed on
a securities exchange;

(9) any special United States Federal income tax considerations applicable
to such series; and

(10) the other rights and privileges, if any, of such series.

Dividends

Holders of shares of our preferred stock shall be entitled to receive, when,
as and if declared by our Board of Directors out of our funds legally available
therefor, dividends payable in cash or such other property and at such dates
and such rates, if any, as may be set forth in the applicable prospectus
supplement.

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<PAGE>

Unless otherwise set forth in the applicable prospectus supplement, each
series of our preferred stock will rank junior as to dividends to any shares of
our preferred stock that may be issued in the future that is expressly senior
as to dividends to such preferred stock. Unless otherwise set forth in the
applicable prospectus supplement, no dividends, other than in shares of our
common stock or other capital stock ranking junior to the preferred stock of
any series as to dividends and upon liquidation, shall be declared or paid or
set aside for payment, nor shall any other distribution be declared or made
upon our common stock, or any other shares of our capital stock ranking junior
to or on a parity with the preferred stock of such series as to dividends, nor
shall any common stock or any other shares of our capital stock ranking junior
to or on a parity with the preferred stock of such series as to dividends be
redeemed, purchased or otherwise acquired for any consideration, or any moneys
be paid to or made available for a sinking fund for the redemption of any
shares of any such stock, by us, except by conversion into or exchange for
other shares of our capital stock ranking junior to the preferred stock of such
series as to dividends, unless:

(1) if such series of preferred stock has a cumulative dividend, full
cumulative dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum
sufficient for the payment of such dividends set apart for all past
dividend periods and the then current dividend period; and

(2) if such series of preferred stock does not have a cumulative dividend,
full dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for the then
current dividend period;

provided, however, that any monies previously deposited in any sinking fund
with respect to any preferred stock in compliance with the provisions of such
sinking fund may thereafter be applied to the purchase or redemption of such
preferred stock in accordance with the terms of such sinking fund, regardless
of whether at the time of such application full cumulative dividends upon
shares of the preferred stock outstanding on the last dividend payment date
shall have been paid or declared and set apart for payment;

and provided, further, that any such junior or parity preferred stock or common
stock may be converted into or exchanged for shares of our stock ranking junior
to the preferred stock as to dividends.

The amount of dividends payable for the initial dividend period or any
period shorter than a full dividend period shall be computed on the basis of a
360-day year of twelve 30-day months. Accrued but unpaid dividends will not
bear interest.

Deposit Account

No series of preferred stock will be entitled to payments from a deposit
account, nor will the initial purchasers of preferred stock deposit any amounts
in a deposit account, except as set forth in the applicable prospectus
supplement.

Convertibility

No series of preferred stock will be convertible into, or exchangeable for,
other securities or property, except as set forth in the applicable prospectus
supplement.

Redemption and Sinking Fund

No series of preferred stock will be redeemable or receive the benefit of a
sinking fund, except as set forth in the applicable prospectus supplement.

Liquidation Rights

Unless otherwise set forth in the applicable prospectus supplement, in the
event of any liquidation, dissolution or winding-up of PSINet, the holders of
shares of each series of preferred stock will be entitled to

20
<PAGE>

receive out of our assets available for distribution to stockholders, before
any distribution of assets is made to holders of (1) any other shares of our
preferred stock ranking junior to such series of preferred stock as to rights
upon liquidation, dissolution or winding-up and (2) shares of our common stock,
liquidating distributions per share in the amount of the liquidation preference
specified in the applicable prospectus supplement for such series of preferred
stock plus any dividends accrued and accumulated but unpaid to the date of
final distribution; but the holders of each series of preferred stock will not
be entitled to receive the liquidating distribution of, plus such dividends on,
such shares until the liquidation preference of any shares of our capital stock
ranking senior to such series of preferred stock as to the rights upon
liquidation, dissolution or winding-up shall have been paid, or a sum set aside
therefor sufficient to provide for payment, in full. If upon any liquidation,
dissolution or winding-up of PSINet, the amounts payable with respect to the
preferred stock, and any other shares of our preferred stock ranking as to any
such distribution on a parity with the preferred stock will share ratably in
any such distribution of assets in proportion to the full respective
preferential amount to which they are entitled. Unless otherwise specified in a
prospectus supplement for a series of preferred stock, after payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of shares of preferred stock will not be entitled to any further
participation in any distribution of our assets. Unless otherwise specified in
a prospectus supplement for a series of preferred stock, neither our
consolidation or merger with another corporation nor a sale of securities by us
shall be considered a liquidation, dissolution or winding-up of PSINet.

Voting Rights

Holders of preferred stock will not have any voting rights, except as set
forth below or in the applicable prospectus supplement to which such Preferred
Stock relates or as otherwise from time to time required by law. Unless
otherwise set forth in the applicable prospectus supplement, holders of shares
of preferred stock will have one vote for each share held.

So long as any shares of any series of preferred stock remain outstanding,
we shall not, without the affirmative vote of holders of at least two-thirds of
the shares of such series of preferred stock outstanding at the time, voting
separately as a class with all other series of our preferred stock upon which
like voting rights have been converted and are exercisable:

(1) issue or increase the authorized amount of any series of our capital
stock ranking prior to the outstanding preferred stock as to dividends
or upon liquidation; or

(2) amend, alter or repeal the provisions of our Certificate of
Incorporation relating to such series of preferred stock, whether by
merger, consolidation or otherwise, so as to materially adversely
affect any power, preferred or special right of such series of
preferred stock or the holders thereof;

provided, however, that any increase in the amount of our authorized common
stock or authorized preferred stock or the creation and issuance of other
series of common stock or preferred stock ranking on a parity with or junior to
the preferred stock as to dividends and upon liquidation, dissolution or
winding-up shall not be deemed to materially adversely affect such powers,
preferences or special rights.

Miscellaneous

The holders of preferred stock will have no preemptive rights. The preferred
stock, upon issuance against full payment of the purchase price therefor, will
be fully paid and nonassessable subject to Section 630 of the New York Business
Corporation Law. Shares of preferred stock redeemed or otherwise reacquired by
us shall resume the status of authorized and unissued shares of our preferred
stock undesignated as to series, and shall be available for subsequent
issuance. There are no restrictions on repurchase or redemption of the
preferred stock while there is any arrearage on sinking fund installments,
except as may be set forth in an applicable prospectus supplement. Payment of
dividends on any series of the preferred stock are currently restricted by, and
may continue to be restricted by, the terms of loan agreements, indentures and
other transactions to which

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<PAGE>

we are currently or may become a party. Any material contractual restrictions
on dividend payments will be described or incorporated by reference in the
applicable prospectus supplement.

No Other Rights

The shares of a series of preferred stock will not have any preferences,
voting powers or relative, participating, optional or other special rights
except as set forth above or in the applicable prospectus supplement, our
Certificate of Incorporation or as otherwise required by law.

Transfer Agent and Registrar

The transfer agent and registrar for each series of preferred stock will be
designated in the applicable prospectus supplement.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 250,000,000 shares of common stock,
par value $.01 per share, and 30,000,000 shares of preferred stock, par value
$.01 per share.

The following summary of our capital stock and provisions of our Certificate
of Incorporation, Amended and Restated By-laws, and Shareholders Rights Plan
does not purport to be complete and is qualified in its entirety by reference
to the provisions of or Certificate of Incorporation, Amended and Restated By-
laws, and Shareholders Rights Plan. Copies of our Certificate of Incorporation,
Amended and Restated By-laws, and Shareholders Rights Plan have been filed with
the Securities and Commission. See "Available Information."

Common Stock

At March 31, 1999, approximately 56,298,800 shares of common stock were
outstanding. In addition, a total of approximately 11,288,706 shares of common
stock were reserved for issuance in connection with outstanding stock options,
50,000 shares were reserved for issuance in connection with outstanding
warrants to purchase common stock and a total of 1,755,823 additional shares
were reserved for issuance under our Executive Stock Option Plan, Executive
Stock Incentive Plan, Director's Stock Incentive Plan and Strategic Stock
Incentive Plan.

Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Holders of our
common stock are not entitled to cumulative voting rights with respect to the
election of directors and, as a consequence, minority shareholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any shares of preferred stock issued in
the future, holders of common stock are entitled to receive ratably such
dividends as may be declared from time to time by our Board of Directors out of
funds legally available for payment. In the event of a liquidation, dissolution
or winding up of PSINet, holders of our common stock are entitled to share
ratably in all of our assets remaining after payment of liabilities and the
liquidation preference of any then outstanding preferred stock. Holders of
common stock have no preemptive rights and no right to convert their common
stock into any other securities. There are no redemption or sinking fund
provisions applicable to our common stock. All shares of our common stock to be
outstanding upon completion of this offering will by fully paid and non-
assessable, subject to Section 630 of the New York Business Corporation Law.

Under Section 630 of the New York Business Corporation Law, the ten largest
shareholders of PSINet may become personally liable for unpaid wages and debts
to our employees if our capital stock ceases to be listed on a national or an
affiliated securities association.

Our common stock is traded on The Nasdaq Stock Market under the symbol
"PSIX."

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<PAGE>

Preferred Stock

Our Board of Directors has the authority to issue up to 30,000,000 shares of
our preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of such series, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by shareholders.
As of the date of this prospectus, 1,000,000 shares of our preferred stock were
designated as Series A Junior Participating Preferred Stock, $.01 per value per
share, in connection with our Shareholder Rights Plan, no shares of which have
been issued. Our Board of Directors may designate and authorize the issuance of
new series of our preferred stock with voting and other rights that could
adversely affect the voting power of holders of our common stock and the
likelihood that such holders will receive dividend payments and payments upon
our liquidation and could have the effect of delaying, deferring or preventing
a change in control of PSINet.

In November 1997, we issued 600,000 shares of our Series B 8% Convertible
Preferred Stock in a private placement for approximately $30.0 million. During
the first quarter of 1999, all outstanding shares of the Series B preferred
stock, which accrued dividends at an annual rate of 8%, were converted into an
aggregate of 3,000,000 shares of our common stock. As a result of this
conversion, we are no longer required to pay the 8% annual dividends under the
terms of the Series B preferred stock. Effective upon this conversion, the
formerly outstanding shares of Series B preferred stock have resumed the status
of authorized and unissued shares of our preferred stock undesignated as to
series, and are available for future issuance as described in the immediately
preceding paragraph.

For a description of general terms and provisions of one or more new series
of preferred stock which may be offered by means of a separate prospectus
supplement, see "Description of Preferred Stock To Be Offered By Prospectus
Supplement."

Registration Rights

In connection with our acquisitions of InterCon Systems Corporation in June
1995 and Software Ventures Corporation in July 1995, we granted registration
rights with respect to an aggregate of approximately 1,683,819 shares of our
common stock and options to purchase 543,347 shares of our common stock issued
to former InterCon and Software Ventures shareholders. All such shares of
common stock and other securities are called the "registrable shares". Pursuant
to registration rights agreements between us and the former shareholders of
InterCon and Software Ventures, respectively, the original holders of
registrable shares or their permitted transferees are entitled to registration
rights with respect to their registrable shares. If, prior to May 8, 2000, we
propose to register any of our securities under the Securities Act of 1933, the
holders of registrable shares will be entitled to notice thereof and, subject
to restrictions, to include their registrable shares in such registration.
Furthermore, one or more holders of registrable shares may require us on up to
five occasions prior to September 30, 2006 to register their shares on Form S-
3, subject to specified conditions and limitations and provided that such
holders are not permitted to require such registration more frequently than
once every six months. The former InterCon shareholders are entitled to three
demand registrations and one Form S-3 registration; and some of the former
Software Ventures shareholders are entitled to a single demand registration and
a single Form S-3 registration, subject to specified conditions and limitations
and provided that any demand must be at an aggregate offering price to the
public of at least $1.0 million and no demand may be made within six months of
a prior demand. The right of holders of registrable shares to include their
shares in an underwritten registration is subject to the right of the
underwriters to limit the number of shares included in the offering. Subject to
limitations, we are required to bear all registration, legal (for no more than
one independent legal counsel for all selling holders of registrable shares)
and other expenses in connection with these registrations, other than
underwriting discounts and commissions, and must provide appropriate
indemnification. These registration rights rank ratably.

In connection with the private placement of our Series B preferred stock, we
granted registration rights to the holders of our Series B preferred stock with
respect to 600,000 shares of Series B preferred stock, which

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were recently converted into an aggregate of 3,000,000 shares of our common
stock. These registration rights rank ratably with and are substantially
similar to those described in the immediately preceding paragraph, except that
we were required to file a registration statement on Form S-3 with respect to
the shares of common stock issuable upon conversion of the Series B Preferred
Stock pursuant to demand registration rights exercised by the holders of the
Series B Preferred Stock, which registration statement was declared effective
by the Securities and Exchange Commission on April 24, 1998, and at any time
prior to November 17, 2000 when that registration statement is not effective,
the former holders of Series B Preferred Stock may be entitled to notice and
piggyback registration rights, which are not subject to an underwriter's
cutback.

In connection with the transactions contemplated by the IRU Purchase
Agreement between us and IXC, we granted registration rights to IXC with
respect to 10,165,779 shares of our common stock issued to IXC. These
registration rights rank ratably with and are substantially similar to those
described in the immediately preceding two paragraphs except that IXC is
entitled to notice and piggyback registration rights at any time, IXC may make
up to three separate demands to have us file a registration statement under the
Securities Act of 1933 with respect to an underwritten public offering, and IXC
is entitled to one demand registration on Form S-3 every six months.

No holder of registration rights exercised its rights in respect of the
registration of the securities offered pursuant to this prospectus.

New York Anti-Takeover Law, Certain Charter and By-law Provisions and Other
Anti-takeover Considerations

As a New York corporation, we are subject to the provisions of Section 912
of the New York Business Corporation Law and will continue to be so subject if
and for so long as we have a class of securities registered under Section 12 of
the Securities Exchange Act of 1934, at least 25% of our total employees are
employed primarily within New York or at least 250 employees are so employed
and at least 10% of our voting stock is owned beneficially by residents of the
State of New York. Section 912 provides, with certain exceptions, which
include, among others, transactions with shareholders who became interested
prior to the effective date of an amendment to the New York corporation's
certificate of incorporation providing that the corporation would be subject to
Section 912 if such corporation did not then have a class of stock registered
pursuant to Section 12 of the Exchange Act, that a New York corporation may not
engage in a "business combination" (e.g., merger, consolidation,
recapitalization or disposition of stock) with any "interested shareholder" for
a period of five years from the date that such person first became an
interested shareholder unless:

(1) the transaction resulting in a person becoming an interested
shareholder, or the business combination, was approved by the board of
directors of the corporation prior to that person becoming an
interested shareholder;

(2) the business combination is approved by the holders of a majority of
the outstanding voting stock not beneficially owned by such interested
shareholder; or

(3) the business combination meets certain valuation requirements for the
stock of the New York corporation.

An "interested shareholder" is defined as any person that:

(a) is the beneficial owner of 20% or more of the outstanding voting stock
a New York corporation; or

(b) is an affiliate or associate of the corporation that at any time during
the prior five years was the beneficial owner, directly or indirectly,
of 20% or more of the then outstanding voting stock.

These provisions are likely to impose greater restrictions on an unaffiliated
shareholder than on the existing shareholders who will continue to own a
majority of our outstanding common stock after this offering.

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Our Certificate of Incorporation and Amended and Restated By-laws contain
provisions intended to enhance the likelihood of continuity and stability in
the composition of our Board of Directors and of the policies formulated by
the Board which may discourage a future unsolicited takeover of PSINet. These
provisions could have the effect of discouraging some attempts to acquire
PSINet or remove incumbent management, including incumbent members our Board
of Directors, even if some or a majority of our shareholders deemed such an
attempt to be in their best interests.

Our Certificate of Incorporation or Amended and Restated By-laws, as
applicable, among other things:

(1) provide that the number of directors will be not fewer than three nor
more than nine, with the exact number of directors to be determined
from time to time by resolution adopted by a majority of our Board of
Directors;

(2) provide for a classified Board of Directors consisting of two classes
of directors having staggered terms of two years each, with each of the
classes required to consist of at least three directors;

(3) subject to any rights of holders of our preferred stock which may be
granted by our Board of Directors in the future and except as otherwise
provided by Section 706(d) of the New York Business Corporation Law,
provide that directors may be removed only for cause;

(4) subject to any rights of holders of our preferred stock which may be
granted by our Board of Directors in the future, permit vacancies on
the Board of Directors that may occur between annual meetings and any
newly created seats to be filled only by the Board of Directors and not
by the shareholders;

(5) limit the right of shareholders to call special meetings of
shareholders;

(6) prohibit shareholders from proposing amendments to our Certificate of
Incorporation;

(7) require any shareholder who wished to bring any proposal before a
meeting of our shareholders or to nominate a person to serve as a
director to give written notice thereof and certain related information
at least 60 days prior to the date one year from the date of our
immediately preceding annual meeting, if such proposal or nomination is
to be submitted at an annual meeting, and within ten days of the giving
of notice to our shareholders, if such proposal or nomination is to be
submitted at a special meeting;

(8) require the affirmative vote of at least two-thirds of our capital
stock entitled to vote to amend certain provisions of our Certificate
of Incorporation and to amend our Amended and Restated By-laws; and

(9) provide that our Board of Directors, without action by our
shareholders, may issue and fix the rights and preferences of shares of
our preferred stock.

These provisions may have the effect of delaying, deferring or preventing a
change of control of PSINet without further action by our shareholders, may
discourage bids for our common stock at a premium over the market price of our
common stock and may adversely affect the market price of, and the voting and
other rights of the holders of, common stock.

Shareholder Rights Plan

Each outstanding share of our common stock has attached to it a preferred
stock purchase right (a "right"). The rights also attach to most future
issuances of common stock. Subject to exceptions, each right will entitle the
registered holder to buy one one-thousandth of a share of our Series A
preferred stock at an exercise price of $75 per right.

Subject to exceptions, the right will become exercisable upon the
occurrence of the earlier of:

. an announcement that a person or group of affiliated or associated
persons (each, an "acquiring person") has acquired beneficial ownership
of 20.50% or more of our outstanding common stock

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(other than persons who acquire ownership pursuant to a tender offer or
exchange offer which is for all outstanding shares of our common stock,
or persons who acquire ownership directly from us, William L. Schrader,
our Chairman and Chief Executive Officer, or his or our affiliates so
long as such persons beneficially own less than 50% of our outstanding
common stock); or

. an announcement or commencement of an intention to make a tender offer
or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 20.50% or more of the
outstanding shares of our common stock (the earlier of such dates being
called the "distribution date").

In such event, each holder of a right, other than rights beneficially owned by
the acquiring person, will thereafter have the right, subject to exceptions,
to receive upon exercise thereof a number of shares (or portions of shares) of
Series A preferred stock or, at the discretion of our Board of Directors, a
number of additional shares of common stock as set forth in the Rights Plan.
The acquisition of shares of our common stock by IXC or its controlled
affiliates pursuant to the IRU purchase agreement between IXC and us, however,
will not render it an acquiring person. In addition, Ralph J. Swett, the
former Chairman of IXC, will not become an acquiring person solely by reason
of the issuance or exercise of options, if any, granted to him in his capacity
as a director of PSINet.

All rights expire on June 5, 2006, unless the rights are earlier redeemed
or exchanged by us or expire earlier upon the consummation of certain
transactions. Shares of our Series A preferred stock purchasable upon exercise
of the rights will not be redeemable. Each share of Series A preferred stock
will be entitled, when, as and if declared, to an aggregate dividend of 1,000
times the dividend declared per share of our common stock. No dividend may be
declared on the common stock without the concurrent declaration of a dividend
on the Series A preferred stock. In the event of liquidation, holders of the
Series A preferred stock will be entitled to a minimum preferential
liquidation payment of $1,000 per share, plus any accrued but unpaid
dividends, but will be entitled to an aggregate payment of 1,000 times the
payment made per share of common stock; thereafter, holders of the Series A
preferred stock and the holders of common stock will share pari passu per
share in any of our remaining assets. Each share of our Series A preferred
stock will have 1,000 votes, voting together with our common stock. Finally,
in the event of any merger, consolidation or other transaction in which shares
of common stock are converted or exchanged, each share of Series A preferred
stock will be entitled to receive 1,000 times the amount received per share of
common stock.

In the event that any person or group of affiliated or associated persons
becomes an acquiring person, each holder of a right, other than rights
beneficially owned by the acquiring person which will thereupon become void,
will thereafter have the right (the "flip-in right") to receive, upon exercise
of a right at the then current exercise price of the right, that number of one
one-thousandths of a share of Series A preferred stock or, in the discretion
of our Board of Directors, that number of shares of common stock or, in
certain circumstances, other of our securities, having a market value of two
times the exercise price of the right. The flip-in right provisions do not
apply to a merger or other business combination with a person who has acquired
shares of our common stock pursuant to certain transactions approved by our
Board of Directors (each, a "permitted offer").

In the event that, after a person or group has become an acquiring person,
we are acquired in a merger or other business combination transaction or 50%
or more of our consolidated assets or earning power are sold or transferred,
except pursuant to a permitted offer, proper provision will be made so that
each holder of a right, other than rights beneficially owned by an acquiring
person which will have become void, will thereafter have the right (the "flip-
over right") to receive, upon the exercise thereof at the then current
exercise price of the right, that number of shares of common stock of the
person with which we have engaged in the foregoing transaction (or its
parent), which number of shares at the time of such transaction will have a
market value of two times the exercise price of the right. The holder of a
right will continue to have the flip-over right whether or not such holder
exercises or surrenders the flip-in right.

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At any time prior to the earlier to occur of a person becoming an acquiring
person or the expiration of the rights, and under other specified
circumstances, we may redeem the rights at a redemption price of $.01 per
right. We may, at our option, pay the redemption price in shares of our common
stock. After the date that a person becomes an acquiring person, we may redeem
the then outstanding rights, at the redemption price, provided that such
redemption is in connection with a merger or other business combination
transaction or series of transactions involving us in which all holders of
shares of common stock are treated alike.

The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire us without conditioning
the offer on the rights being redeemed, a substantial number of rights being
acquired, or the offer being deemed a permitted offer under the Rights Plan.
However, the rights should not interfere with any merger or other business
combination in connection with a permitted offer or that is approved by us
because the rights are redeemable under specified circumstances.

Transfer Agent and Registrar

First Chicago Trust Company of New York is the transfer agent and registrar
for our common stock. Its telephone number for such purposes is (201) 222-4099.

DESCRIPTION OF INDEBTEDNESS

The following summaries of our existing indebtedness do not purport to be
complete and are qualified in their entirety by reference to the provisions of
the various agreements and indentures related thereto, copies of which have
been filed with the Securities and Exchange Commission and to which reference
is hereby made. See "Where You Can Find More Information."

Credit Facility

In September 1998, we entered into a new three-year senior secured revolving
credit facility, pursuant to which The Chase Manhattan Bank ("Chase") is acting
as administrative agent, to replace our existing bank credit arrangements in
the United States. The credit facility is a secured revolving credit facility
with borrowing availability thereunder in the maximum principal amount of $110
million.

Interest. Borrowings under the credit facility bear interest at our option,
at:

(a) the London interbank offered rate for deposits in U.S. Dollars for the
relevant period multiplied by the statutory reserve rate plus the
Applicable Margin ("Eurodollar Rate"), or

(b) the higher of Chase's prime rate or the Federal Funds effective rate
plus 1/2 of 1%, plus the Applicable Margin ("ABR Rate"). The Applicable
Margin varies based on the Leverage Ratio, as defined in the credit
facility, as of the most recent determination date. Currently, the
Applicable Margin is 1.75% for ABR Rate borrowings and 2.75% for
Eurodollar Rate borrowings.

Guarantees and Security. Our obligations under the credit facility are
guaranteed by each existing and subsequently acquired or organized domestic
subsidiary of ours which owns or maintains at least $1,000,000 in assets or
generates at least $1,000,000 in annual revenues, and are secured by a lien on
substantially all of our assets and the assets of each of our subsidiary
guarantors and by a pledge by us and each of our subsidiary guarantors of all
capital stock and other equity interests owned by us and such subsidiary
guarantors (65% in the case of equity interests in foreign subsidiaries).

Covenants. The credit facility contains covenants and provisions that
restrict, among other things, our and our subsidiaries' ability to:

(1) make dividends and distributions on, and redemptions and repurchases
of, capital stock and other similar payments;

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(2) make prepayments, redemptions and repurchases of indebtedness;

(3) incur liens and enter into sale-leaseback transactions;

(4) make certain loans and investments;

(5) incur additional indebtedness and certain contingent obligations;

(6) effect certain mergers, acquisitions and asset sales;

(7) engage in certain transactions with affiliates;

(8) effect certain changes in business conducted by us; and

(9) amend and waive certain debt and other agreements.

The credit facility also requires the satisfaction of certain financial
covenants, including a minimum annual consolidated revenue test, a minimum
debt-to-annualized adjusted revenue ratio, a minimum aggregate balance of
nonrestricted cash and available borrowings and a minimum EBITDA test. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Structure." In addition, the credit facility requires a
reduction in the maximum amount of availability and prepayments, if required as
a result of such reduction, equal to the net proceeds received from certain
asset sales aggregating more than $5 million and from certain casualty events.

Events of Default. Events of default under the credit facility include
various events of default customary for such type of agreement, such as failure
to pay scheduled payments when due, cross defaults with and cross acceleration
to other indebtedness, including the 10% senior notes and the 11 1/2% senior
notes, the occurrence of a change in control (as defined in the credit
facility) and certain events of bankruptcy, insolvency and reorganization.

10% Senior Notes

We have outstanding $600.0 million aggregate principal amount of our 10%
Senior Notes due 2005. The 10% senior notes are senior unsecured obligations
ranking equivalent in right of payment to all our existing and future unsecured
and unsubordinated indebtedness and senior in right of payment to all our
existing and future subordinated indebtedness. The 10% senior notes were issued
under an Indenture dated as of April 13, 1998 between us and Wilmington Trust
Company, as trustee.

The 10% senior notes will mature on February 15, 2005. Interest on the 10%
senior notes is payable semi-annually on August 15 and February 15 of each
year, commencing August 15, 1998. The 10% senior notes are redeemable at our
option, in whole or in part, at any time on or after February 15 of 2002, 2003
and 2004 at 105%, 102.5% and 100% of the principal amount thereof,
respectively, in each case, plus accrued and unpaid interest to the date of
redemption. In addition, on or prior to February 15, 2001, we may redeem up to
35% of the original aggregate principal amount of the 10% senior notes at a
redemption price of 110% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption, with the net cash proceeds of
certain public equity offerings or the sale of stock to one or more strategic
investors, provided that at least 65% of the original aggregate principal
amount of the 10% senior notes remains outstanding immediately after such
redemption. Upon the occurrence of a "change of control" (as defined in the 10%
senior notes indenture), we will be required to make an offer to purchase all
of the 10% senior notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
repurchase. We may not have sufficient funds or the financial resources
necessary to satisfy our obligations to repurchase the 10% senior notes upon a
change of control. Our credit facility prohibits us from repurchasing any 10%
senior notes upon a change of control unless we have paid all amounts
outstanding under the credit facility prior thereto.

The 10% senior notes indenture contains certain financial covenants with
which we must comply relating to, among other things, the following matters:

(1) limitation on our payment of cash dividends, repurchase of capital
stock, payment of principal on subordinated indebtedness and making of
certain investments, unless after giving effect to each such

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payment, repurchase or investment, certain operating cash flow coverage
tests are met, excluding certain permitted payments and investments;

(2) limitation on our and our subsidiaries' incurrence of additional
indebtedness, unless at the time of such incurrence, our ratio of debt
to annualized operating cash flow would be less than or equal to 6.0 to
1.0 prior to April 1, 2001 and less than or equal to 5.5 to 1.0 on or
after April 1, 2001, excluding certain permitted incurrences of debt;

(3) limitation on our and our subsidiaries' incurrence of liens, unless the
10% senior notes are secured equally and ratably with the obligation or
liability secured by such lien, excluding certain permitted liens;

(4) limitation on the ability of any of our subsidiaries to create or
otherwise cause to exist any encumbrance or restriction on the payment
of dividends or other distributions on its capital stock, payment of
indebtedness owed to us or any of our other subsidiaries, making of
investments in us or any other of our subsidiaries, or transfer of any
properties or assets to us or any of our other subsidiaries, excluding
permitted encumbrances and restrictions;

(5) limitation on certain mergers, consolidations and sales of assets by us
or our subsidiaries;

(6) limitation on certain transactions with our affiliates;

(7) limitation on the ability of any or our subsidiaries to guarantee or
otherwise become liable with respect to any of our indebtedness unless
such subsidiary provides for a guarantee of the 10% senior notes on the
same terms as the guarantee of such indebtedness;

(8) limitation on certain sale and leaseback transactions by us or our
subsidiaries;

(9) limitation on certain issuances and sales of capital stock of our
subsidiaries; and

(10) limitation on the ability of us or our subsidiaries to engage in any
business not substantially related to a telecommunications business.

The events of default under the 10% senior notes indenture include various
events of default customary for such type of agreement, including, among
others, the failure to pay principal and interest when due on the 10% senior
notes, cross-defaults on other indebtedness for borrowed monies in excess of
$10 million, which indebtedness would therefore include indebtedness
outstanding under the credit facility, certain judgments or orders for payment
of money in excess of $10 million, and certain events of bankruptcy, insolvency
and reorganization.

11 1/2% Senior Notes

We have outstanding $350.0 million aggregate principal amount of our 11 1/2%
senior notes due 2008. The 11 1/2% senior notes are our senior unsecured
obligations ranking equivalent in right of payment to all our existing and
future unsecured and unsubordinated indebtedness and senior in right of payment
to all our existing and future subordinated indebtedness. The 11 1/2% senior
notes were issued under an Indenture dated as of November 3, 1998, as amended,
between us and Wilmington Trust Company, as Trustee.

The 11 1/2% senior notes will mature on November 1, 2008. Interest on the 11
1/2% senior notes is payable semi-annually on May 1 and November 1 of each
year, commencing May 1, 1999. The 11 1/2% senior notes are redeemable at our
option, in whole or in part, at any time on or after November 1 of 2003, 2004,
2005 and 2006 at 105.70%, 103.833%, 101.917% and 100% of the principal amount
thereof, respectively, in each case, plus accrued and unpaid interest to the
date of redemption. In addition, on or prior to November 1, 2001, we may redeem
up to 35% of the original aggregate principal amount of the 11 1/2% senior
notes at a redemption price of 111.5% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption, with the net cash
proceeds of certain public equity offerings or the sale of stock to one or more
strategic investors, provided that at least 65% of the original aggregate
principal amount of the 11 1/2% senior notes

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<PAGE>

remains outstanding immediately after such redemption. Upon the occurrence of a
change of control (as defined in the 11 1/2% senior notes indenture), we will
be required to make an offer to purchase all of the 11 1/2% senior notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase. We may not have sufficient
funds or the financial resources necessary to satisfy our obligations to
repurchase the 11 1/2% senior notes upon a change of control. Our credit
facility prohibits us from repurchasing any 11 1/2% senior notes upon a change
of control unless we have paid all amounts outstanding under the credit
facility prior thereto.

The 11 1/2% senior notes indenture contains certain financial covenants with
which we must comply, which are substantially identical to those contained in
the indenture governing our 10% senior notes described above under "--10%
Senior Notes."

The events of default under the 11 1/2% senior notes indenture are
substantially identical to those contained in the indenture governing our 10%
senior notes described above under "--10% Senior Notes."

PLAN OF DISTRIBUTION

We may sell the securities to one or more underwriters pursuant to an
underwriting agreement for public offering and sale in the United States or
eligible foreign jurisdictions by them or may sell the securities to investors
directly or through agents. Any underwriter or agent involved in the offer and
sale of securities will be named in the applicable prospectus supplement. We
have reserved the right to sell securities directly to investors on our own
behalf in those jurisdictions where and in such manner as we are authorized to
do so.

Underwriters may offer and sell securities at a fixed price or prices, which
may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, or at negotiated prices. We also may,
from time to time, authorize dealers, acting as our agents, to offer and sell
securities upon the terms and conditions as are set forth in the applicable
prospectus supplement. In connection with the sale of securities, underwriters
may receive compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of the securities
for whom they may act as agent. Underwriters may sell securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent.

Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Dealers and agents participating in
the distribution of securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the securities may be deemed to be underwriting discounts and
commissions. Underwriters, dealers and agents may be entitled, under agreements
entered into with us, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act of
1933.

Underwriters and dealers may engage in passive market making transactions in
our common stock in accordance with Rule 103 of Regulation M of the Securities
and Exchange Commission. In general, a passive market maker may not bid for or
purchase shares of our common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% or its average daily trading volume
in shares of our common stock during a specified two month prior period, or 200
shares, whichever is greater. A passive market maker must identify passive
market making bids on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of our common
stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.

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LEGAL MATTERS

The validity of the securities offered hereby will be passed upon by Nixon,
Hargrave, Devans & Doyle LLP, New York, New York, counsel for PSINet. Certain
attorneys with Nixon, Hargrave, Devans & Doyle LLP currently own in the
aggregate less than one percent of our common stock.

EXPERTS

The consolidated financial statements of PSINet Inc. as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
incorporated by reference in this prospectus have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

DOCUMENTS INCORPORATED BY REFERENCE

The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We are
incorporating by reference in this prospectus the following documents:

1. Our annual report on Form 10-K for our fiscal year ended December 31,
1998. This report contains:

. audited consolidated balance sheets for us and our subsidiaries as
of December 31, 1998 and 1997

. related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended December
31, 1998, 1997 and 1996

2. Our current reports on Form 8-K dated

. July 31, 1997 (solely insofar as it relates to our Shareholder
Rights Agreement dated May 8, 1996, as amended)

. August 20, 1997

3. Our registration statement on Form 8-A dated April 7, 1995, as amended
(registration no. 0-25812)

4. Our registration statement on Form 8-A dated June 4, 1996, as amended
(registration no. 0-25812)

We are also incorporating by reference in this prospectus all reports and
other documents that we file after the date of this prospectus pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
prior to the termination of the offering of securities under this prospectus.
These reports and documents will be incorporated by reference in and considered
to be a part of this prospectus as of the date of filing of such reports and
documents.

Any statement contained in this prospectus or in a document which is
incorporated by reference herein will be modified or superseded for purposes of
this prospectus to the extent that a statement in any document that we file
after the date of this prospectus that also is incorporated by reference herein
modifies or supersedes such prior statement. Any such statement so modified or
superseded will not, except as so modified or superseded, constitute a part of
this prospectus.

This prospectus incorporates by reference documents which are not presented
in this prospectus or delivered to you with it. You may request, and we will
send to you, without charge, copies of these documents, other than exhibits to
these documents, which we will send to you for a reasonable fee. Requests
should be directed to the Office of the Secretary, PSINet Inc., 510 Huntmar
Park Drive, Herndon, Virginia 20170 (telephone (703) 904-4100).

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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement on Form S-3 that we
filed with the SEC using a "shelf" registration process under the Securities
Act of 1933. Under the shelf process, we may, from time to time, sell any
combination of the offered securities described in this prospectus in one or
more offerings up to a total dollar amount of $1,000,000,000.

This prospectus and the accompanying prospectus supplement do not contain
all of the information included in the registration statement. We have omitted
parts of the registration statement as permitted by the rules and regulations
of the SEC. For further information, we refer you to the registration statement
on Form S-3, including its exhibits. Statements contained in this prospectus
and any accompanying prospectus supplement about the provisions or contents of
any agreement or other document are not necessarily complete. If SEC rules and
regulations require that any agreement or document be filed as an exhibit to
the registration statement, you should refer to that agreement or document for
a complete description of these matters. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of each document.

This prospectus provides you with a general description of the offered
securities. Each time we sell offered securities, we will provide a prospectus
supplement that will contain specific information about the term of that
offering. The prospectus supplement may also add, update or change any
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with the additional information
described under the heading "Where You Can Find More Information."

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy materials that we have file
with the SEC, including the registration statement, at the following SEC public
reference rooms:

Judiciary Plaza 7 World Trade Center Northwest Atrium Center
450 Fifth Street, N.W. Suite 1300 500 West Madison Street
Room 1024 New York, New York 10048 Suite 1400
Washington, DC 20549 Chicago, Illinois 60661

You can also obtain copies of filed documents, at prescribed rates, by mail
from the Public Reference Section of the SEC at its Judiciary Plaza location,
listed above, or by telephone at 1-800-SEC-0330 or electronically through the
SEC's Web Site at http://www.sec.gov.

Our common stock is listed on the Nasdaq National Market under the symbol
"PSIX," and our SEC filings can also be read and obtained at the following
Nasdaq address:

The Nasdaq Stock Market
Reports Section
1735 K Street, N.W.
Washington, D.C. 20006

We furnish our stockholders with annual reports containing our audited
financial statements and with proxy material for our annual meetings complying
with the proxy requirements of the Securities Exchange Act of 1934.

32
<PAGE>

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, 1999

PSINet

[logo]

6,000,000 Shares of Common Stock

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PROSPECTUS SUPPLEMENT

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Donaldson, Lufkin & Jenrette

Merrill Lynch & Co.

Bear, Stearns & Co. Inc.

BancBoston Robertson Stephens

Legg Mason Wood Walker
Incorporated

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

DLJdirect Inc.

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We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus supplement and the accompanying
prospectus or to make representations as to matters not stated in this
prospectus supplement and the accompanying prospectus. You must not rely on
unauthorized information. This prospectus supplement and the accompanying
prospectus are not offers to sell these securities or our solicitation of your
offer to buy the securities in any jurisdiction where that would not be
permitted or legal. Neither the delivery of this prospectus supplement and the
accompanying prospectus nor any sales made hereunder after the date of this
prospectus supplement shall create an implication that the information
contained in this prospectus supplement and the accompanying prospectus or the
affairs of PSINet have not changed since the date hereof.

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