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

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1999

                                      OR

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

                        Commission File Number 0-25812
                               ________________

                                  PSINET INC.
            (Exact name of Registrant as specified in its charter)
                               ________________


                New York                                     16-1353600
     (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                      Identification No.)

    510 Huntmar Park Drive, Herndon, VA                         20170
  (Address of principal executive office)                    (Zip Code)
                                ______________

                                (703) 904-4100

             (Registrant's telephone number, including area code)

                             ____________________

Securities registered pursuant to Section 12(g)
of the Act:                                      Common Stock, $.01 par value
                                                 Preferred Stock Purchase Rights

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [_]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 3, 2000, based upon the closing price of the Common
Stock on The Nasdaq Stock Market for such date, was approximately
$8,721,285,625.

     The number of outstanding shares of the registrant's Common Stock as of
March 3, 2000 was approximately 157,495,000.

     Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission on or prior to April 28, 2000 and to be used in connection
with the Annual Meeting of Shareholders expected to be held on May 15, 2000 are
incorporated by reference in Part III of this Form 10-K.


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                                  PSINET INC.

                               TABLE OF CONTENTS

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Part I

   Item 1.    Business...............................................................................   1

   Item 2.    Properties.............................................................................  31

   Item 3.    Legal Proceedings......................................................................  31

   Item 4.    Submission of Matters to a Vote of Security Holders....................................  31

Part II

   Item 5.    Market For Registrant's Common Equity and Related Stockholder Matters..................  32

   Item 6.    Selected Financial Data................................................................  34

   Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations..  35

   Item. 7A.  Quantitative and Qualitative Disclosures about Market Risk.............................  51

   Item 8.    Financial Statements and Supplementary Data............................................  52

   Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...  82

Part III

   Item 10.   Directors and Executive Officers of the Registrant.....................................  82

   Item 11.   Executive Compensation.................................................................  82

   Item 12.   Security Ownership of Certain Beneficial Owners and Management.........................  82

   Item 13.   Certain Relationships and Related Transactions.........................................  82

Part IV

   Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................  82
</TABLE>
Signatures

Exhibits
<PAGE>

                                    PART I

Item 1.  Business

     Some of the information contained in this Form 10-K, including under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth in Part II, Item 7 of this Form 10-K, contains forward-
looking statements. These forward-looking statements may involve risks,
uncertainties and other factors that may cause our actual results and
performance to be materially different from the future results or performance
expressed or implied by such statements. Cautionary statements regarding the
risks, uncertainties and other factors associated with these forward-looking
statements are discussed under "Risk Factors" beginning on page 22 of this Form
10-K. You are urged to carefully consider these factors, as well as other
information contained in this Form 10-K and in our other periodic reports and
documents filed with the Securities and Exchange Commission.

     Technical terms used in this Form 10-K that are important to an
understanding of our business are defined in the glossary beginning on page 27
of this Form 10-K.

                                   BUSINESS

General

We are a leading global provider of Internet and eCommerce solutions to
businesses. As an Internet Super Carrier (ISC), we offer a robust suite of
products globally that enable our customers to utilize the Internet for mission
critical applications carried over a worldwide fiber optic network that is
capable of transmission speeds in excess of three terabits per second. We define
the elements of an ISC to include:

 .  Worldwide fiber network and related optronic equipment - We operate one of
   the largest global data communications networks. It is Internet optimized and
   built with PSINet's fiber, satellite and wireless facilities which
   circumnavigates the globe, and is designed to enable our customers to connect
   to the Internet and access their corporate networks and systems resources
   from most of the world's major business and population centers.

 .  Multiple Internet and eCommerce hosting centers - We currently have open
   eight global Internet and eCommerce hosting centers located in Amsterdam,
   Herndon (Virginia/DC), La Chaux-de-Fonds (Switzerland), London, Los Angeles,
   New York City, Toronto and Tokyo. These data centers contain a total of
   approximately 250,000 square feet. In addition, we plan to open the
   following 12 global Internet and eCommerce hosting centers: eight in our
   U.S./Canada segment (Atlanta, Austin, Boston, Dallas, Loudoun (Virginia/DC),
   Miami, San Francisco and Toronto); two in our Europe segment (Berlin and
   Geneva); and two in our Asia/Pacific segment (Seoul and Sydney). These data
   centers are expected to range from 60,000 to 360,000 square feet each. Once
   all of these hosting facilities are completed, we will have more than 2
   million square feet of state-of-the-art infrastructure in key financial and
   business centers around the world.

 .  Full suite of products - We offer a full suite of Internet access and
   eCommerce products for corporate customers in 27 countries that not only
   allow them to access the Internet but also to host their mission critical
   business applications. We have a private label business unit, serving leading
   Internet Service Providers (ISPs) and telephone companies with Internet
   services supporting nearly 1 million consumers. In addition, through our
   Virtual ISP (VISP) programs, we provide a full private label solution to
   organizations who wish to offer Internet services to their customers,
   employees or members.

 .  Extensive global distribution - We have over 1,000 sales personnel and 2,500
   Value Added Resellers (VAR), systems integrators and Web design professionals
   throughout the world.

 .  Global brand name recognition - Our brand name is increasingly recognized
   throughout the world for Internet and eCommerce services and applications
   that meet the needs of business customers, supported by local language sales,
   provisioning and service.

                                      -1-
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We offer a suite of value-added products and services that are designed to
enable our customers, through their use of the Internet, to more efficiently
transact and conduct eCommerce with their customers, suppliers, business
partners and remote office locations. We provide Internet connectivity and Web
hosting services to more than 91,000 corporate customers, which together with
our ISP, carrier, small office/home office (SOHO) and consumer businesses around
the world served over 2.0 million end users. Our services and products include
dedicated, dial-up and digital subscriber line (DSL) Internet access services
connections, Web hosting and collocation services, transaction network services,
virtual private networks (VPNs), eCommerce solutions, voice-over-Internet
protocol (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 serve
approximately 90 of the 100 largest metropolitan statistical areas in the U.S.
have a presence in the 20 largest telecommunications markets globally and
operate in 27 countries. We conduct our business through operations organized
into five geographic operating segments - U.S./Canada, Latin America, Europe,
Asia/Pacific and India/Middle East/Africa

We operate one of the largest global commercial data communications networks.
Our Internet-optimized network extends around the globe and is connected to more
than 900 points of presence (POPs) that enable our customers to connect to the
Internet. Our network reach allows our customers to access their corporate
network and systems resources through local calls in over 150 countries. We
expand the reach of our network by connecting with other large ISPs through
contractual arrangements, called peering agreements, that permit the exchange of
information between our network and the networks of our peering partners. We
offer free peering to ISPs in more than 100 cities in the continental U.S.,
which provides each party with the opportunity to bypass the often congested and
unreliable public exchange points, thereby improving overall network performance
and customer satisfaction. We currently have eight global Internet and eCommerce
hosting centers operating and plans to open 12 more. We also had three network
operating centers that monitor and manage network traffic 24-hours per day,
seven-days per week.

Our mission is to build the premier global 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.
We have embarked on an initiative to aggressively grow our hosting center
business through the construction of more than $1.0 billion of new facilities.

For financial information relating to each of our geographic operating segments,
see "Management's Discussion and Analysis of Financial Condition - Results of
Operations-Segment Information" and Note 12 to our Consolidated Financial
Statements included in Part II, Items 7 and 8 of this Form 10-K.

As a result of acquisitions in 1998 and 1999, we have amassed a significant
number of consumer customers throughout our operating regions. Our primary
strategic focus is on providing services to business customer and wholesale
customers, and not to consumer customers. Accordingly, in February 2000 we
announced that we have begun consolidating our worldwide retail consumer
operations into a new retail business unit that will be run by an experienced
management team and will consist of nearly 400 staff specialists in consumer
sales, marketing and customer support, together with existing billing and
customer support systems. This retail unit will initially serve approximately
400,000 consumer accounts distributed throughout global markets (mostly outside
of the United States), with over 30 localized consumer portals in more than 20
countries. We are currently assessing options on how to structure this business
unit to maximize PSINet shareholder value.

In February 2000, we announced the launch of PSINet Ventures, a new corporate
venture program. With a combination of cash investments and the exchange of
services for equity, PSINet Ventures will partner with innovative Internet
entrepreneurs through direct minority equity investments, typically during
early-and mid-stage financing. We will focus globally on application service
providers (ASPs), content service providers (CSPs), eCommerce providers,
Internet infrastructure providers, incubators, and other emerging opportunities
that enhance PSINet's financial and competitive technology and service
positions. The services for equity structure permits the start-up company to
purchase any PSINet service, including managed web hosting and VISP services, in
exchange for equity rather than cash.

                                      -2-
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During the past two years we have made significant acquisitions of fiber-based
bandwidth and related equipment to enhance our network infrastructure and lower
our per unit operating costs. In addition, we have acquired more than 60
companies throughout our five geographic operating regions, with many in the
same countries where the result is an overlapping network infrastructure. Prior
to the end of the first quarter of 2000, we expect to have completed and
approved a plan that will be directed to eliminating redundancies, streamlining
operations, and taking advantage of synergies created by our mergers and
acquisitions process. We believe this will result in a restructuring charge in
the quarter ending March 31, 2000.

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

Industry Overview

Overview. Internet access services is one of the fastest growing segments of the
global telecommunication services market place. 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 and DSL access for individuals and small
businesses, and high-speed dedicated access used primarily by mid-sized and
larger organizations, including managed access (i.e., VPNs/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.

The ISP market is segmented into large national or multinational ISPs (Tier 1
ISPs), which are typically full-service providers that own or control large
networks and 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 do not own any network, and 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 ISP and are an
Internet Super Carrrier. 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 has 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. According to its 1999 survey, Gartner
Group forecasts that worldwide revenues for Internet services will grow from
$13.7 billion in 1998 to $42.5 billion in 2003. According to Gartner Group, in
1998, access services represented 87% or $14.8 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 41% or $6.9 billion of the total access services market in 1998, but
will increase their percentage to 46% of the $49.4 billion total Internet access
services market in 2003. 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 is expected to grow. Gartner Group
forecasts that worldwide web hosting services revenue will grow from $896
million in 1998 to $5.9 billion in 2003.

Reflecting the globalization of the Internet, Gartner Group estimates that 47%
or $20.1 billion of the $42.5 billion access services opportunity in 2003 is
expected to come from North America. It is estimated that Japan will represent
13% or $5.3 billion, the rest of Asia will represent 10% or $4.3 billion, Europe
will represent 27% or $11.3

                                      -3-
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billion and the remainder of the world representing 4% or $1.2 billion. Gartner
Group forecasts that, in North America, businesses will represent 36% of the
total Internet access services market of $20.1 billion; in Japan, businesses
will represent 54% of the total Internet access services market of $5.3 billion;
in the rest of Asia, businesses will represent 53% of the total Internet access
services market of $4.3 billion; in Europe, businesses will represent 80% of the
total Internet access services market of $11.3 billion; and in the rest of the
world, businesses will represent 80% of the total Internet access services
market of $1.5 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, 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 global 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 lower customer turnover characteristics, high
revenue per user 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.
We also believe that small- and medium-sized businesses will continue to seek to
outsource certain information technology functions to Tier 1 ISPs to reduce
costs and improve service levels. 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

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, 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, 1999, consisted of over 1,000 individuals
   worldwide, more than half of whom were employed outside of the U.S. As of
   December 31, 1999, our reseller and referral program consisted of over 2,500
   resellers and referral sources. This program enables us to leverage the sales
   and marketing resources of our resellers and referral sources to offer our
   Internet access services and products to a broader and more diverse prospect
   base. In addition, we are pursuing agreements with computer retailers as a
   means for offering our services and products through retail sales channels.
   We also provide transaction network services to the major processors and
   banks needing credit card, debit card and ATM services.

 .  Increase Sales of Web Hosting Services and Enhanced Data Services. We intend
   to capitalize on the trend of companies seeking to increasingly outsource
   their critical business applications to Web-based services and products. We
   also offer a number of value-added services, such as VPNs, multi-currency
   eCommerce, voice-over IP services, managed applications such as e-mail,
   streaming media, security and remote user access. We are aggressively
   expanding our Web hosting and collocation operations. As part of our ISC
   strategy, we have embarked on an initiative to aggressively grow our hosting
   center business through the construction of more

                                      -4-
<PAGE>

   than $1 billion of new facilities. We currently have opened eight global
   Internet and eCommerce hosting centers and have plans to open 12 more,
   which in total should provide more than 2.0 million square feet of state-of
   the art infrastructure. We anticipate opening additional Internet and
   eCommerce hosting facilities in other key financial and business centers
   around the world. Additionally, we continue to evaluate and implement new
   alternative broadband local loop services, including wireless, DSL 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-focused ISPs and related
   businesses and assets. Our strategy is 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 50 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, such as our acquisition of
      Transaction Network Services, Inc., which we refer to as TNI, 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 on-line transaction services; and
   .  through PSINet Ventures, investments in application service providers,
      content service providers, eCommerce providers, Internet infrastructure
      providers, and incubators.

 .  Continue to Invest in our Network. We remain focused on reducing costs as a
   percentage of revenue by maintaining a scalable network and increasing
   utilization of and controlling strategic assets, such as telecommunications
   bandwidth through indefeasible rights of use (IRUs) and the acquisition of
   dark fiber. Our flexible network architecture utilizes advanced asynchronous
   transer mode (ATM), integrated services digital network (ISDN) and switched
   multimegabit data service (SMDS) compatible frame relay equipment, which
   allows our 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 or
   agreements to acquire IRUs and other rights within and connecting the U.S.,
   Canada, Latin America, Europe, Asia/Pacific, India, the Middle East and
   Africa.

 .  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 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 high-speed Internet access options and related
services in the U.S., Canada, Latin America, Europe, Asia/Pacific, India, the
Middle East and Africa 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 customer-focused business
units which focus on sales of Internet access services, sales of Web and value-
added services, transaction network and other eCommerce Services, and sales of
Internet access and related services to

                                      -5-
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telecommunications carriers and consumer-based ISPs in order to more closely
align our operations with the needs of the emerging Internet marketplace.

Internet Access Services. We offer 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, PSINet Dedicated Access provides companies with robust, full-
        time, dedicated Internet connectivity in a range of access speeds, from
        56 Kbps to 150 Mbps. It 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 our network provide our customers
        with fully integrated Internet access and improved performance.

     .  Shared Access. For lower local loop costs, we provide PSINet Shared
        Access service in major U.S. cities in connection speeds ranging from
        1.5 Mbps to 45 Mbps. It is a turnkey solution in which we provide,
        install and maintain equipment at the customers' premises. It affords
        cost advantages over competitive dedicated access services by utilizing
        high-speed SMDS and ATM data transmission technologies.

     .  DSL Access. We offer 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
        agreements with two leading providers of DSL services to ISPs to deliver
        PSINet DSL Access services to our customers in major metropolitan areas
        throughout the U.S. We have also launched PSINet DSL Access services to
        customers in Canada. Our PSINet DSL Access services are available in a
        wide range of dedicated access speeds, from 144 Kbps to 1.5 Mbps. They
        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.

     .  Remote Access. Today's work force increasingly operates outside the
        traditional office setting. Our PSINet 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,
        PSINet Remote Access offers full Internet access through a local
        telephone call. As part of PSINet Remote Access service, we provide our
        customers with a special account management system that enables
        customers' management information systems (MIS) administrators to
        control user access and monitor usage statistics.

     .  Dial Access. Our PSINet Dial Access 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 ISDN service provides dial-up access through digital ISDN
        lines at speeds of up to 128 Kbps.

Web Hosting and Enhanced Data 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 products and
services to enhance productivity, reduce costs and improve service reliability.
We offer a variety of value-added services, including Web hosting and
collocation, VPNs, multi-currency eCommerce, voice-over-IP, e-mail outsourcing,
streaming media, security and remote 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.

                                      -6-
<PAGE>

     .  Web Hosting. We provide a line of dedicated and shared 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
        PSINet Web Hosting services are backed by our 100% uptime guarantee, the
        industry's first, and by our advanced network backbone, which provides
        highly reliable Internet connectivity.

     .  Multimedia. PSINet Multimedia services are designed to make multimedia
        on the Web both easy and effective. Our solutions provide live and on-
        demand Internet hosting and streaming services for video, audio, and
        animation. PSINet Media is a complete service for hosting and
        distributing multimedia content over the Internet with a 100% uptime
        service level guarantee. The service includes Web site hosting as well
        as video, audio, and animation hosting and streaming. The Web site
        hosting service supports the essential protocols of the Web, hypertext
        transfer protocol (HTTP) and common gateway interface (CGI) scripts. The
        video, audio, and animation streaming services support RealNetworks
        RealSystem 5.0, the industry standard for streamed multimedia files over
        the Internet. PSINet Stream is a complete audio, video, and animation
        Internet hosting and streaming service that supports RealNetworks
        RealSystem 5.0 but does not include Website hosting. Through a joint "TV
        on the Web" service between PSINet and Gardy McGrath International,
        PSINet can help provide the resources to professionally produce live
        events in a studio or on location, with features such as live studio
        audiences, professionally constructed sets, tape roll-ins, digital
        effects, viewer phone-in services, and computer graphics animation.
        PSINet provides the full Internet broadcast distribution resources to
        reliably stream the live production over the global Internet.

     .  Web Site Design. PSINet Web Site Design is a site content-creation
        service for electronic interactive media hosted by PSINet. The online
        content can include advertisements, product information, announcements,
        news, software, graphics, or electronic presentations. PSINet Web Site
        Design combines eCommerce capabilities including Intershop(R) technology
        to create a virtual storefront that allows the ultimate customer to shop
        24 hours a day. With our storefront, our customers can automatically
        track inventory, sales, sales tax, and shipping charges.

     .  Collocation. Our PSINet Collocation Hosting 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 VPNs, which 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 PSINet IntraNet 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, PSINet
        IntraNet provides a turnkey solution for equipment management support
        and offers significant savings over traditional wide area network or WAN
        solutions.

     .  eCommerce Business Solutions. In November 1999, we acquired TNI. TNI is
        a leading worldwide provider of eCommerce data communications and
        transports more than 19 million point-of-sale (POS) transactions daily.
        We anticipate that our acquisition of TNI will strengthen our position
        as a leading provider of global Internet and eCommerce solutions to
        businesses.

        Through TNI, we operate four divisions that provide PSINet eCommerce
        solutions to businesses:

        .  the POS Division which includes our TransXpress(R) network services
           for the POS transaction processing industry;

        .  the Telecom Services Division which includes our CARD*TEL(R)
           telephone call billing validation and fraud control services and
           other services targeting primarily the telecommunications industry;

                                      -7-
<PAGE>

        .  the Financial Services Division which provides integrated data and
           voice services including our FastLink(R) Data Service in support of
           the Financial Information eXchange messaging protocol and other
           transaction oriented trading applications primarily to the financial
           services industry; and

        .  the International Systems Division which markets our products and
           services internationally.

   The majority of TNI's revenues are derived from the transmission of POS
   transactions (predominantly credit and debit card transactions) which are
   processed electronically by a small number of third party transaction
   processors. TNI's TransXpress network services utilize proprietary technology
   that provides a fast communications link between the merchant site and the
   transaction processor at a cost generally lower than current alternatives.
   Through TNI we market our TransXpress network services directly to third
   party POS transaction processors, who in turn resell our network services as
   a part of the processors' own services. Several leading third party POS
   transaction processors in the nation, including First Data Corporation,
   Electronic Payment Services, Inc., Alliance Data Systems, First
   USA/Paymentech, Global Payments, National Data Corporation, American Express,
   NOVUS Services, Inc. and Vital Processing Services, purchase our network
   services.

   .  Multi-Currency eCommerce. Our PSINet eCommerce 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. PSINet 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, PSINet Worldpay provides a cost-effective eCommerce solution for
      selling goods and services to an international audience. Developed in
      association with Worldpay Ltd., an eCommerce transaction clearing house,
      and National Westminster Bank PLC, PSINet Worldpay enables customers
      around the world to make real-time purchases using the Web in over 100
      currencies.

   .  Voice-Over-IP. PSINet Voice 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. PSINet Voice
      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% to 50% over traditional long-distance telephone calling.

   .  e-Mail. PSINet e-Mail 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.

   .  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 PSINet Secure Office 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.
      PSINet Secure Enterprise service is 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 PSINet Fax 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.

                                      -8-
<PAGE>

Carrier and ISP Services. 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 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. 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. Through our PSINet VISP
        (SM) 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 for 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. 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. PSINet Secure Business 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. PSINet Secure
        Business is hosted on our technologically advanced network and utilizes
        content proxy services to screen Web content accessed by end-users. It
        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 transmission control protocol/Internet protocol (TCP/IP)
access service, the first managed Internet security service, the first Tier 1
ISP to offer eCommerce services 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, 1999, was comprised of more than 900 POPs, of which 340 were within
the United States with the remainder located throughout our other regions. 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

                                      -9-
<PAGE>

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 standard underlying transmission technologies. We have
planned for growth by ensuring that the network is scalable, flexible, fault
tolerant, open standards-based and remotely manageable.

     .  Scalable. 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 900 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, typically we have an
        uninterruptible power supply at each POP, limiting the impact of local
        power outages on our network.

     .  Open. The PSINet network is based on the open Internet working 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 network operating centers (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 material bandwidth facilities as of December 31,
1999:

<TABLE>
<CAPTION>
Location           Capacity                               Connection Points                         Ownership
--------           --------                               -----------------                         ---------
<S>                <C>                                    <C>                                       <C>
North America      16,248 route miles of OC-12            New York--Chicago--Dallas--               IRU
                                                          Phoenix--Las Vegas--Los
                                                          Angeles--Philadelphia--Washington,
                                                          DC--Atlanta--Houston (operational)
                                                          Seattle--San Francisco (partially
                                                          operational)
                   18 high capacity dark fibers           New York--Washington, DC (operational)    Capital lease
                   4 high capacity dark fibers            San Francisco Bay Area (beginning in      Capital lease
                                                          Q2 2000)
</TABLE>

                                     -10-
<PAGE>

<TABLE>
<S>                    <C>                                <C>                                       <C>
                       20 high capacity dark fibers       Vancouver, B.C.--Seattle, WA              IRU
                                                          (beginning in Q1 2000)
                       16 high capacity dark fibers       53 cities throughout continental U.S.    IRU
                                                          (beginning in Q1 2001)
                       T-3                                Intercontinental (operational)           Leased
                       2300 miles of OC-48                Vancouver--Calgary--Winnipeg--Chicago    IRU
                                                          (Q1 2000)
                       4 high capacity dark fibers        Atlanta, Georgia (Q12000)                IRU

Transatlantic and      14,000 km of 5 STM-1s (OC-3)       New York--U.K.-- Amsterdam (1 STM-1      IRU
Europe                                                    operational; 4 STM-1s in Q1 2000)
                       12,600 km of STM-1                 New York--U.K. (operational)             IRU
                       21,000 km of STM-1                 30 European cities (initial portions     IRU
                                                          operational)
                       6,000 km of STM-1                  New York--London (prior to 2000)         IRU
                                                          (operational)
                       2 high capacity dark fibers        New York--London--Paris (beginning in    IRU
                                                          Q2 2001)
                       E-1                                Intercontinental (operational)           Leased

Transpacific and Asia  6,000 miles of 6 DS-3s             US--Korea--Japan (5 DS-3s operational;   IRU/Capital lease
                                                          1 DS-3 prior to Q2 2000)
                       22 STM-1s (increasing to 30)       Japan--Hawaii--US (Q3 2000)              IRU
                       27,300 km of STM-1                 Japan--China--Southeast                  IRU
                                                          Asia--India--Middle East--Europe
                                                          (initial portions operational)
                       7,643 miles of DS-3                US--Korea (operational)                  IRU
                       21,000 km of 2 STM-1s              Los Angeles--Tokyo (Q1 2000)             IRU

Transpacific and       3,200 km of STM-1                  Los Angeles--Mexico City (Q1 2000)       IRU
Latin America
                       6,300 km of STM-1                  Los Angeles--Panama City(Q1 2000)        IRU
                       Two 54 MHz transponders of Ku      United States--Latin America (interim    Capital lease
                       band satellite capacity            connectivity operational; one
                                                          transponder in Q1 2000, the second
                                                          transponder in Q3 2000)
</TABLE>

We expect to further expand our network 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, Hong Kong, Japan and the Netherlands.

Internet and eCommerce Hosting Centers. We currently have open eight global
Internet and eCommerce hosting centers located in Amsterdam, Herndon
(Virginia/DC), La Chaux-de-Fonds (Switzerland), London, Los Angeles, New York
City, Toronto and Tokyo. These data centers contain a total of approximately
250,000 square feet. In addition, we have plans to open the following 12 global
Internet and eCommerce hosting centers: eight in our U.S./Canada segment
(Atlanta, Austin, Boston, Dallas, Loudoun (Virginia/DC), Miami, San Francisco
and Toronto); two in our Europe segment (Berlin, and Geneva); two in our
Asia/Pacific segment (Seoul and Sydney). These data centers are expected to
range from 60,000 to 360,000 square feet each. Once all of these hosting
facilities are completed, we will have more than 2 million square feet of state-
of-the-art infrastructure in key financial and business centers around the
world. Our data centers are specifically designed for dedicated Web hosting,
application hosting, collocation services and high capacity access

                                     -11-
<PAGE>

to our 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 our network, we are also investing in primary rate interface
(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 22% from 1998.  At the end of 1999 we had more than doubled our
dial-up capacity from the start of the year as a result of our investment in
PRIs.  As of December 31, 1999, substantially all of our dial-up capacity was
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 December
31, 1999, globally we maintained more than 5,412 Mbps (5.4 Gbps) of peering
connectivity with 234 active private peering sessions to 90 different peers and
17 public peering 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. 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 have commenced construction of a third NOC in Seoul, Republic of Korea.

Sales and Marketing

We have built a multi-channel sales and marketing infrastructure throughout our
geographic regions 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,
1999, consisted of approximately 1,000 individuals (more than half of whom were
employed outside of the U.S.) who typically 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.

                                     -12-
<PAGE>

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,
1999 approximately 2,500 arrangements, 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 our services and products to a broader and more diverse
potential customer base. Participants in our reseller and referral program
include 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 us. 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.

Strategic Alliances. We seek to establish strategic alliances with selected
consulting firms (including Perot Systems, Computer Associates, and Andersen
Consulting) and telecommunications carriers which may afford us access to
recurring revenue from their customer base, while enabling them to offer their
customers an integrated package of telecommunications and Internet services and
products. We also 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 us.

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
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.

Customers

We had, as of December 31, 1999, approximately 91,000 business customers, which
together with our ISP, carrier, SOHO and consumer businesses around the world
served over 2.0 million end users.  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.

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. 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. Our customer support group
utilizes a leading customer support trouble ticketing and workflow management
system

                                     -13-
<PAGE>

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 opened a fully redundant NOC in Switzerland and have
commenced construction of a third in Seoul, Korea. 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 scalable billing system to
replace our existing system in order to provide customers on a global basis with
uniform and easy-to-understand invoicing.

We have designed our network to minimize the risk of system failure (fires,
storms, earthquakes, etc.), for instance, with redundant circuits among POPs 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 you that we will not experience
failures or shutdowns relating to individual POPs or even catastrophic failure
of the entire network. Significant or prolonged system failures or shutdowns
could damage our reputation and result in the loss of customers.

Acquisitions and Strategic Investments

As a key component of our growth strategy, we acquired TNI and 60 ISPs and
related businesses from January 1, 1998 through December 31, 1999, which gives
us a presence in each of the 20 largest global telecommunications markets. The
aggregate amount of the purchase prices and related payments for these
acquisitions was approximately $1.4 billion, exclusive of indebtedness assumed
in connection with such acquisitions. Of such amount, we have retained $78.1
million as of December 31, 1999 to secure performance by certain sellers of
indemnification or other contractual obligations.

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 our 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 scalability 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.

In February 2000, we announced the launch of PSINet Ventures, a new corporate
venture program. With a combination of cash investments and the exchange of
services for equity, PSINet Ventures will partner with innovative Internet
entrepreneurs through direct minority equity investments, typically during
early-and mid-stage financing. Our investments are typically in businesses that
are accounted for as cost investments. We will focus globally on application
service providers (ASPs), content service providers (CSPs), eCommerce providers,
Internet infrastructure providers, incubators, and other emerging opportunities
that enhance PSINet's financial and competitive technology and service
positions. We expect to structure certain of these arrangements as new start-up
companies to allow them to purchase any PSINet service, including managed web
hosting and Virtual Internet Service Provider (VISP) services, in exchange for
equity rather than cash. This program will be funded with approximately $1.0
billion, which includes the value of current investments and the value of
Internet services for future investments as well as $100.0 million in cash.

Competition

The market for Internet connectivity and related hosting 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.

                                     -14-
<PAGE>

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 we do.

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 presence, brand recognition, and financial, technical and personnel
resources than us. We also compete with unaffiliated regional and local ISPs in
our targeted geographic regions.

Hosting Centers.  Large global companies offering data center services include
IBM, MCI WorldCom/UUNet, Frontier Global Center, AT&T, Qwest Communications and
Intel.  Leading webcom service providers offering data center services include
Abovenet Communications/Metromedia Fiber Network, Digex, Exodus Communications,
Globix and Verio.

Telecommunications Carriers. We compete with all of the major long distance
companies, also known as interexchange carriers, including AT&T, MCI WorldCom,
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 ISPs to address the Internet connectivity
requirements of the current business customers of long distance and local
carriers. 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. This 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.

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 a multichannel multipoint distribution
service, or 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 local multipoint
distribution service, or 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

                                     -15-
<PAGE>

carriers. The acquisition of TCI by AT&T and AT&T's proposed acquisition of
MediaOne are indicative of this trend.

On-line Service Providers. The dominant on-line service providers, including
Microsoft Network and America Online, Incorporated, have entered the Internet
access business by engineering their current proprietary networks to include
Internet access capabilities. America Online's plans to acquire Time Warner,
MCIWorldCom's plans to merge with Sprint, and Nextlink Communications's plans to
acquire Concentric Network Corporation are indicative of this trend.
Accordingly, we expect that we will experience increased competition from the
traditional telecommunications carriers. 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 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. Similarly CompuServe has announced it also will target Internet
connectivity for the small to medium-sized business market.

We believe that our ability to attract business customers and to market value-
added services is a key to our future success. However, we cannot assure you
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,
we cannot assure you that more of our competitors will not shift their focus to
attracting business customers, resulting in even more competition for us. We
cannot assure you 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.

Suppliers

Like other companies in our business, most of our contracts with suppliers are
short-term. Third parties provide 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. Changes in their pricing structures, or failure to or delay in delivering
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 are currently 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 Primary Rate
Interface, or 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 and have an adverse effect on us. 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. Advances in
technology as well as changes in the marketplace and the regulatory 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 you that we will have the
financial resources, technical expertise or marketing and support capabilities
to continue to compete successfully.

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. We cannot assure you 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

                                     -16-
<PAGE>

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.

Regulatory Matters

The following summary of regulatory developments and legislation is not
complete. It does not describe all present and proposed federal, state, local
and foreign regulation and legislation affecting the ISP and telecommunications
industries. Existing and proposed laws and 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 FCC exercises jurisdiction over all facilities of, and services
offered by, telecommunications carriers in the U.S. 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,
which we refer to as 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 foreign
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. We believe that 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.

In a recent development, the FCC adopted rules that direct ILECs to share their
telephone lines with providers of high speed Internet access and other data
services. This ruling will enable competitive carriers to provide DSL- based
services over the same telephone lines simultaneously used by ILECs to provide
basic telephone service. The new rules are expected to place competitive
carriers on a more equal footing with ILECs in the offering of advanced
telecommunications services, including DSL services.

                                     -17-
<PAGE>

In addition to our Internet activities, we have recently focused attention on
acquiring telecommunications assets and facilities, involving regulated
activities. 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, subjecting it to
regulations as a non-dominant international carrier including the filing of
reports with the FCC. PSINetworks Company also received a Type I facilities
license from the Japanese telecommunications regulatory authority. 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 foreign regulatory authorities 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, or acquire regulated companies, 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.  We cannot assure you that new or existing laws or regulations will
not have a material adverse effect on us.

Our subsidiaries have also received competitive local exchange carrier, or CLEC,
certification in New York, Virginia, Colorado, California, Texas and Maryland.
We are considering the financial, regulatory and operational implications of
also 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
interconnection agreements and reciprocal compensation arrangements. The FCC
order has been appealed, and oral arguments are expected to be heard in 2000. In
light of

                                     -18-
<PAGE>

the FCC's order, state commissions that previously addressed this issue and
required reciprocal compensation to be paid for ISP traffic are likely to
reconsider and may modify their prior rulings. Several incumbent LECs are
seeking to overturn prior orders that they claim are inconsistent with the FCCs'
February 1999 order. Relief sought could include repayment of reciprocal
compensation amounts previously paid by incumbent LECs. At least one incumbent
LEC has sought to escrow reciprocal compensation payments to carriers. In
response to these and other challenges, some state commissions have opened
inquiries as to the appropriate compensation mechanisms in the context of ISP
traffic. Of the state commissions that have considered the issue since the FCC's
February 1999 order, most, but not all, of these states have upheld the
requirement to pay reciprocal compensation of ISP traffic. We cannot assure you
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 tariffs containing rates and conditions, and regulation of rates
charged for our services. 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

We had approximately 4,150 full-time employees as of December 31, 1999.

Executive Officers

     The following is a list of our executive officers as of March 13, 2000.

<TABLE>
<CAPTION>
         Name                      Age                                   Title
         ----                      ---                                   -----
<S>                                <C>       <C>
William L. Schrader............    48        Chairman of the Board of Directors and Chief   Executive Officer (Founder)
Harold S. Wills................    57        President, Chief Operating Officer and Director
David N. Kunkel................    56        Vice Chairman, Executive Vice President and Director
Geoffrey E. Axton..............    42        Senior Vice President and President, U.S. Operations and Corporate Development
James F. Cragg.................    48        Senior Vice President and President, U.S. Sales and Marketing
Edward A. Davis................    53        Senior Vice President and President, PSINetworks Company
Harry G. Hobbs.................    46        Senior Vice President and President, PSINet Europe
Kathleen B. Horne..............    42        Senior Vice President, General Counsel and Corporate Secretary
Philippe J. Kuperman...........    56        Senior Vice President and President, PSINet Latin America
Chi H. Kwan....................    48        Senior Vice President and President, PSINet Asia/Pacific
Michael J. Malesardi...........    39        Senior Vice President and Controller
John B. Muleta.................    35        Senior Vice President and President, Global Facilities Development and IMEA
                                             (India, Middle East and Africa)
William A. Opet................    43        Senior Vice President and President, Transaction Networks Division
Lawrence S. Winkler............    34        Senior Vice President and Treasurer
</TABLE>

Additional information regarding our executive officers is incorporated by
reference to "Executive Officers" in our Proxy Statement to be used in
connection with our 2000 Annual Meeting of Shareholders and to be filed with the
Securities and Exchange Commission on or prior to April 28, 2000.

                                     -19-
<PAGE>

                                 RISK FACTORS

We had approximately $3.3 billion of indebtedness as of December 31, 1999, which
could restrict our operations and make us susceptible to economic downturns

At December 31, 1999 our total indebtedness was $3.3 billion. Our annual
interest expense increased from $63.9 million in 1998 to $193.1 million in 1999.
We estimate that our annual interest expense for the year 2000 will be
approximately $363.5 million, assuming that we do not incur any additional
indebtedness or refinance existing indebtedness.

If we are unable to generate sufficient cash from operations to service our
indebtedness, we will be adversely affected.  We historically have been unable
to generate sufficient cash flow from operations to meet our operating needs and
have relied upon financings to fund our operations. We cannot assure you that
our business will generate cash flow from operations, or that future financings
will be available, sufficient to fund our operations or satisfy our debt service
or working capital requirements. Our leverage could adversely affect our ability
to obtain additional financing for working capital, acquisitions or for other
purposes. It could make us more susceptible to economic downturns, contractions
in the general market availability of equity or debt financing and competitive
pressures.  Our leverage could also affect our liquidity as a substantial
portion of available cash from operations must be applied to debt service
requirements. In the event of a cash short-fall, we could be forced to reduce
expenditures or forego potential acquisitions and other elements of our business
plan to meet such requirements.

We may continue to incur substantial losses

Although revenue has increased each year from $84.4 million in 1996 to $554.7
million in 1999, we had net losses available to common shareholders of $55.1
million, $46.0 million, $264.9 million and $433.9 million, and had negative
EBITDA of $28.0 million, $21.2 million, $42.1 million and $24.2 million, for
each of the years ended December 31, 1996, 1997 and 1998 and 1999, respectively.
We may continue to have losses and negative EBITDA as we continue our
acquisition program and expansion of our global network operations.

Factors that cause our operating results to fluctuate include:

 .  general economic conditions and specific economic conditions in the Internet
   access industry;
 .  user demand for Internet services;
 .  timing and amount of capital expenditures, other costs and expenses of
   expanding our network;
 .  pricing changes, new product and new service introductions by us and our
   competitors;
 .  the mix of services sold and the mix of channels through which those services
   are sold;
 .  delays in obtaining sufficient supplies or inability to obtain sufficient
   equipment from limited sources and telecom facilities; and
 .  potential adverse legislative and 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.
As a result of these factors, we may continue to generate net losses and
negative EBITDA.

The terms of our financing arrangements may restrict our operations

Our financing arrangements with our equipment lessors are secured by some 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. As a result,
we cannot assure you that we will be able to continue to satisfy such covenants.
Some of our financing arrangements also currently prohibit us from paying
dividends and repurchasing our capital stock without consent. Our failure to
comply with covenants and restrictions could lead to a default under the terms
of these agreements. In the event of a default under these financing
arrangements, our lenders would be entitled to accelerate the outstanding
indebtedness and foreclose upon any assets securing that indebtedness. Lenders
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.

                                     -20-
<PAGE>

We partially depend on the cash flows of our subsidiaries in order to satisfy
our debt obligations

Our operating cash flow and consequently our ability to service our debt is
partially dependent upon the ability of our subsidiaries to distribute their
earnings to us in the form of dividends. We also depend on loans, advances or
other payments of funds to us by our subsidiaries. If for some reason, these
funds were restricted, we would be adversely affected. Our subsidiaries are
separate legal entities and have no obligation, contingent or otherwise, to pay
any amount due pursuant to our financing commitments or to make any funds
available for that purpose. Our subsidiaries' ability to make payments may be
subject to the availability of sufficient surplus funds, the terms of such
subsidiaries' financings, applicable law and other factors. Our subsidiaries'
creditors generally will have priority to the assets of those subsidiaries over
the claims, if any, that we may have against those assets and claims that
holders of our indebtedness may indirectly have.

The growth of our eCommerce and Web hosting business is subject to a number of
risks and uncertainties

To successfully implement our business plan, we must continue to grow our
Internet and eCommerce hosting business. In order to do so, we will need to
locate and build Internet and eCommerce hosting centers. We cannot assure you
that we can locate suitable sites to build these centers along a fiber path on a
cost-effective basis.  If we locate suitable sites, we will be subject to
construction risks, such as cost overruns and delays, and possible difficulty in
obtaining the hardware and telecommunications connectivity necessary to make the
Internet and eCommerce hosting centers operational. Also, once completed we
could experience difficulties in filling these centers to break even profit
capacity. Given the growing competition in our industry, speed to market is a
critical issue. To the extent we experience difficulties, delays and unexpected
costs, we may be adversely affected.

Acquisitions may strain our management, personnel, accounting, information
systems and other resources

During the two years ended December 31, 1999 we acquired TNI and 60 ISPs and
related businesses for aggregate purchase prices and related payments of
approximately $1.4 billion exclusive of assumed debt. In order to successfully
integrate these businesses into our own existing business, we need to expand and
refine our management, personnel, accounting, information systems and other
resources.

If we do not effectively expand our capabilities and deploy our resources to
meet these needs, our business may be disrupted and adversely affected.

Other risks include:

 .  Possible inability of management to incorporate licensed or acquired
   technology and rights into our service offering; and
 .  Possible impairment of relationships with employees, customers and suppliers
   as a result of changes in management.

We cannot assure you that we will be successful in overcoming these risks or
other problems encountered in connection with acquisitions, strategic alliances
or investments we make in other companies. 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, although we have assembled teams to help us
integrate the businesses that we acquire, we cannot assure you that our
integration process will be successfully accomplished. We may take charges or
make adjustments to the depreciable lives of our assets as we integrate acquired
companies and also seek to reduce our cost structure. Our inability to improve
the operating performance of businesses we acquire or to integrate successfully
the operations of those companies could have a material adverse effect on us. In
addition, as we proceed with acquisitions in which the consideration consists of
cash, a substantial portion of our available cash may be used for those
purposes.

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 which would result in
significant amortization charges in future periods.

                                     -21-
<PAGE>

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 present U.S. accounting standards must be expensed
immediately upon acquisition. Such expenses, in addition to the financial impact
of acquisitions, could have a material adverse effect on us and could cause
substantial fluctuations in our quarterly and yearly operating results.  During
1999, we recorded $88.7 million of charges for acquired in-process research and
development in connection with three acquisitions.  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.

Although we have been successful to date identifying acquisition candidates at
prices we consider to be reasonable, we cannot assure you that this will
continue. 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
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 you that we will be able to successfully identify and acquire
suitable companies on acceptable terms and conditions.

If we do not effectively expand our capabilities and deploy our resources to
meet these needs, our business may be disrupted and adversely affected.

Our success depends on providing increasing bandwidth to carry more information
faster than our competitors, which is expensive, requires us to make significant
future commitments and depends on technology that can become obsolete quickly

At December 31, 1999, we were obligated to make future cash payments totaling
$388.9 million for acquisitions of global fiber-based and satellite
telecommunications bandwidth, including IRUs or other rights. In addition, if
certain additional fiber-based bandwidth is delivered as expected in 2001, we
will have additional payment obligations ranging from $120.0 to $180.0 million,
depending on when the bandwidth is delivered. We also expect that there will be
additional costs, such as connectivity and equipment charges to take full
advantage of this acquired bandwidth and IRUs. Some of this fiber-based and
satellite telecommunications bandwidth may require acquisition and installation
of equipment necessary to access and light the bandwidth in order to make it
operational. We anticipate making significant investments to acquire and build-
out new Internet and eCommerce hosting centers in key financial and business
centers throughout the world and to purchase other facilities. We currently
anticipate that capital expenditures will be approximately $1.5 billion for the
year ending December 31, 2000. Additionally, in connection with our awards of
external and local wireless licenses in Hong Kong, we have committed to invest
approximately $385.8 million to build a next generation IP network in Hong Kong.
If we cannot continue to provide bandwidth, our business will suffer.

Our network is susceptible to failure, shutdown and disruption

We have implemented many network security measures, such as limiting physical
and network access to our routers. Nonetheless, our network infrastructure is
potentially vulnerable to computer viruses, break-ins, denials of service and
similar disruptive problems that could lead to interruptions in service, to our
customers. Third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of our customers. Any
one of these disruptions could deter potential customers, result in loss of
customer confidence and adversely affect our existing customer relationships. We
also cannot assure you that we will not experience failures or shutdowns
relating to individual POPs or even catastrophic failure of the entire network,
whether because of an "act of God" or otherwise.

These disruptions may also 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 an adverse effect on us or our reputation or on our
ability to attract and retain customers for our products.

We may be liable for information distributed on our network

                                     -22-
<PAGE>

The law relating to liability of ISPs for information disseminated through their
networks is not completely settled. A number of lawsuits have sought to impose
such liability for defamatory speech, infringement of copyrighted materials and
other claims. A U.S. Circuit Court of Appeals case held that an ISP was
protected by a provision of the Communications Decency Act from liability for
material posted on its system but this case may not be applicable in other
factual circumstances. Other courts have held that online service providers and
ISPs may, under some circumstances, be subject to damages for copying or
distributing copyrighted materials. However, in an effort to protect certain
qualified ISPs, the Digital Millennium Copyright Act provides qualified ISPs
with a "safe harbor" from liability for copyright infringement. We have taken
steps to qualify for the "safe harbor" but there is no assurance that we will
be found to have qualified, if challenged in court.  In 1998, the Child Online
Protection Act was enacted requiring 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 at this time. The imposition upon ISPs or Web server hosts
of potential liability 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
an adverse effect on our business, operating results and financial condition.

The regulation and liability of ISPs regarding information disseminated through
their networks is also undergoing a process of development in other countries.
For example, a recent court decision in England held an ISP liable for certain
allegedly indecent content carried through its network under factual
circumstances in which the ISP had failed to delete it when asked to do so by
the complainant. 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.

One particular area of uncertainty in this regard results from the entry into
effect of European Union Directive 95/46/EC on the protection of individuals
with regard to the processing of personal data and on the free movement of such
data. The EU Directive imposes obligations in connection with the protection of
personal data collected or processed by third parties. Under some circumstances,
we may be regarded as subject to the EU Directive's requirements. The United
States and the European Union currently are negotiating the application of the
EU Directive to U.S. companies.

Asserting and defending intellectual property rights may adversely impact
results of operations regardless of the outcome

Competitors increasingly assert intellectual property infringement claims
against each other. The success of our business depends on our ability to
successfully defend our intellectual property. These types of claims may have a
material adverse impact on us regardless of whether or not we are successful.
From time to time, we have received claims that we have infringed rights of
others. If a competitor were successful bringing a claim against us, our
business might suffer. We cannot assure you that we will be successful defending
or asserting our intellectual property rights.

In order to compete effectively we need to continually develop new products and
services that gain market acceptance and keep the confidence of our customers

We have introduced new enterprise service offerings, including value-added, IP-
based enterprise communication services and DSL-based Internet access services.
The failure of these services, particularly DSL-based services, to gain market
acceptance in a timely manner could have an adverse effect on us. To the extent
that new or enhanced services are introduced and are not reliable, or there are
quality or compatibility problems, it could negatively impact market acceptance
of such services and adversely affect our ability to attract or retain customers
and subscribers. Our services may contain undetected errors or defects that
could result in additional development or remediation costs and loss of
credibility with our customers and subscribers.

Additionally, if we are unable to meet customer demand for network capacity, our
network could become congested during peak periods. Congestion could adversely
affect the quality of service we are perceived to provide. Conversely, due to
the high fixed cost nature of our infrastructure, if our network is under-
utilized, it could

                                     -23-
<PAGE>

adversely affect our ability to provide cost-efficient services. Our failure to
match network capacity to demand could have an adverse effect on us.

If we do not continue to expand internationally, our business may suffer

A key component of our business strategy is our continued expansion into
international markets. Revenue from our non-U.S. operations continues to
increase as a percentage of consolidated results, comprising 51% of revenue for
1999. By comparison, our non-U.S. operations comprised 40% of revenue for all of
1998. As a result of our acquisition of TNI, our revenue mix will likely change
again in 2000 because TNI's revenues are derived primarily from U.S. operations.
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. To the extent that we cannot do so, our business may be adversely
affected. In addition, there are a number of risks involved with doing business
abroad including:

 .    unexpected changes in or delays resulting from foreign laws, 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;
 .    delays resulting 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.

Asia-Pacific and Latin American countries in which we operate have experienced
economic difficulties and uncertainties during the past few years. Economic
difficulties and uncertainties in varying regions of the world could also
adversely affect us.

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 more than 900 POPs and we plan to continue to expand the capacity of
existing POPs as customer-driven demand dictates.  In addition, we have
completed a number of acquisitions of companies and telecommunications bandwidth
during 1998 and 1999 and plan to continue to do so. The process of consolidating
the businesses and implementing the strategic integration of 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 you that we will be able to integrate companies
successfully or in a timely manner.  In addition, we cannot assure you that our
existing operating and financial control systems and infrastructure will be
adequate to maintain and effectively monitor our growth.  Our continued growth
may also increase our need for qualified personnel.  We cannot assure you that
we will be successful in attracting, integrating and retaining such personnel.

The loss of key management personnel could have a material adverse effect on us

Our success is highly dependent upon the personal abilities of our senior
executive management, which includes our Chairman of the Board and Chief
Executive Officer and founder and our President and Chief Operating Officer. We
have employment agreements with both of these senior executive officers. The
loss of the services of either of them could have a material adverse effect on
us.

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

From time to time, we are dependent on third party suppliers for our leased-line
connections, or bandwidth and some hardware components. Some of these suppliers
are or may become competitors. To the extent these suppliers increase prices, 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.

In the case of hardware suppliers, although we attempt to maintain a minimum of
two vendors for each required product, we are not always able to do so. Some
components that we use to provide networking services are currently supplied
only by one source. We have from time to time experienced delays in the receipt
of hardware components and telecommunications facilities, including delays in
delivery of Primary Rate Interface telecommunications facilities, which connect
our dial-up customers to our network. A failure by a supplier to deliver such
products and services on a timely basis, or the inability to develop alternative
sources for such products and services could adversely affect our business.

Recent legislative and regulatory actions may affect the prices that we are
charged by the regional bell operating companies and other bandwidth carriers,
which could adversely affect our business.

We are subject to foreign currency and exchange risks

                                       24
<PAGE>

During the year ended December 31, 1999, 51% of our revenue was derived from
operations outside the United States and 21% of our assets was located outside
the United States. We anticipate that a comparable percentage of our future
revenue and operating expenses will continue to be generated from operations
outside the United States, including investment in foreign companies.
Accordingly, we will be subject to significant foreign currency and exchange
risks. Our obligations and those of our customers in foreign currencies will be
subject to unpredictable and indeterminate fluctuations in the event that such
currencies change in value relative to U.S. dollars. Furthermore, we and our
customers may be subject to exchange control regulations which might restrict or
prohibit the conversion of such currencies into U.S. dollars. Although we have
not entered into hedging transactions to limit our foreign currency risks, as a
result of the increase in our foreign operations and our issuance of euro-
denominated indebtedness, we may implement such practices in the future. We
cannot assure you that we will be successful in these activities or that they
will not have an adverse effect on our financial condition.

We are subject to competitive pressures that may adversely impact us

The market for Internet connectivity and related services is extremely
competitive. Our current and prospective competitors include national, regional
and local ISPs, long distance and local exchange telecommunications companies,
cable television and direct broadcast satellite providers, wireless
communications providers and on-line service providers. While we believe that
our network, products and customer service distinguish us from our competitors,
some of these competitors have greater market presence, brand recognition, and
financial, technical and personnel resources.

New regulations may adversely affect us

Our activities 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 indicated that some 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. 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 that any new or existing
laws may have on our business. We cannot assure you that new laws or regulations
relating to Internet services will not have an adverse effect on us. Although
the FCC has 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 an adverse effect on us.

If we become subject to provisions of the Investment Company Act of 1940, our
business operations may be restricted

We have significant amounts of cash and pending our utilization of all the net
proceeds from our debt and equity offerings will have an even greater amount of
cash invested in short-term investment grade and government securities. The
Investment Company Act of 1940 places restrictions on the capital structure and
business activities of companies registered thereunder. We have active business
operations in the Internet industry and do not propose to engage in investment
activities in a manner or to an extent which would require us to register as an
investment company under the Investment Company Act of 1940. The Investment
Company Act of 1940 permits a company to avoid becoming subject to it for a
period of up to one year despite the holding of investment securities in excess
of such amount if, among other things, its board of directors has adopted a
resolution which states that it is not the company's intention to become an
investment company. Our board of directors has adopted such a resolution that
would become effective in the event we are deemed to fall within the definition
of an investment company. If we were to be determined to be an investment
company, our business would be adversely affected.

                                       25
<PAGE>

We do not anticipate paying 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 contain limitations on our ability to declare
and pay cash dividends.

Forward looking statements

Information contained in this Form 10-K contains forward-looking statements.
Forward-looking statements can be identified by the use of terminology such as
"believes," "expects," "may," "will," "should," "anticipates" or similar words.
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, investments or transactions. Actual results may
differ materially from those expected. Factors that effect or may contribute to
any differences include those discussed in sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" included or in this Form 10-K.

                                       26
<PAGE>

                                     GLOSSARY

     Set forth below are definitions of some of the technical terms used in this
Form 10-K.

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.

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.

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.

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

Dedicated circuits            Telecommunications lines dedicated or reserved for
                              use by 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. 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.

eCommerce                     Electronic commerce using electronic information
                              technologies to conduct business between trading
                              partners, using or not using the Internet.

                                       27
<PAGE>

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.

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 that 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 that 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 alphanumeric 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

                                       28
<PAGE>


                              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.

Network                       A collection of distributed computers that 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 Mile         One Route Mile of OC-48 capacity, four Route Miles
                              of OC-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 that is based upon non-
                              proprietary protocols (i.e., protocols that 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.

POS                           Point of sale or point of service. The location at
                              which retail sales are made or services are
                              provided.

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.

                                       29
<PAGE>

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.

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.

Terabit                                One terabit is equal to a million million
                                       bits.

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

Virtual Private Network                A public circuit-switched data service
                                       offered by IXCs 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 Web                  A network of computer servers that uses a
                                       special 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.

                                      -30-
<PAGE>

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


Item 2.  Properties

Our principal executive offices are in Herndon, Virginia in 46,000 square feet
of leased office space. We occupy this space under four leases, at market rates,
which expire in September 2003 and include five-year renewal options. We have
purchased 250,000 square feet of office space in Asburn, Virginia which will
comprise our new corporate headquarters and will replace most of our existing
leased facilities in Virginia starting in the second quarter of 2000. These
facilities are used mainly by our U.S./Canada geographical operating segment
which includes our corporate headquarters.

We currently have open eight global Internet and eCommerce hosting centers
located in Amsterdam, Herndon (Virginia/DC), La Chaux-de-Fonds (Switzerland),
London, Los Angeles, New York City, Toronto and Tokyo. These data centers
contain a total of approximately 250,000 square feet. We lease all of this
space, except for the Switzerland property, which we own. We also lease office
space in a number of other cities in which we operate. We believe that these
facilities are adequate for our current needs.

In addition, we plan to open the following 12 global Internet and eCommerce
hosting centers: eight in our U.S./Canada segment (Atlanta, Austin, Boston,
Dallas, Loudoun (Virginia/DC), Miami, San Francisco and Toronto); two in our
Europe segment (Berlin and Geneva); and two in our Asia/Pacific segment (Seoul
and Sydney). These data centers are expected to range from 60,000 to 360,000
square feet each. We own all of this space, except for Japan, which we lease.

Item 3.  Legal Proceedings

We are not a party to any legal proceedings which we believe would, if adversely
determined, have a material adverse effect on us.

From time to time, we receive claims that we have infringed other parties'
proprietary rights. While we do not believe that we have infringed rights of
others, we cannot assure you that third parties will not assert infringement
claims in the future. 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 you that any necessary licenses will
be available or that, if available, such licenses can be obtained on reasonable
terms.


Item 4.  Submission of Matters To a Vote of Security-Holders

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.

                                      -31-
<PAGE>

                                     PART II

Item 5.  Market For Registrant's Common Equity and Related Stockholder Matters

                                MARKET INFORMATION

Our common stock trades on The Nasdaq Stock Market under the symbol "PSIX". The
following table sets forth the high and low sales prices for our common stock as
reported during each quarterly period in 1998 and 1999 on The Nasdaq Stock
Market, as adjusted for our two-for-one common stock split effected on February
11, 2000.

<TABLE>
<CAPTION>
                                                                                                    1998
                                                                                        ----------------------------
                                                                                          High                Low
                                                                                        --------            --------
<S>                                                                                     <C>                 <C>
First Quarter....................................................................       $ 6.0625             $5.5625
Second Quarter...................................................................       $ 6.5000             $5.1250
Third Quarter....................................................................       $ 7.2500             $5.0625
Fourth Quarter...................................................................       $10.8750             $8.8750

<CAPTION>
                                                                                                    1999
                                                                                        ----------------------------
                                                                                          High                 Low
                                                                                        --------            --------
<S>                                                                                    <C>                  <C>
First Quarter....................................................................       $22.4688            $17.5625
Second Quarter...................................................................       $24.4688            $21.7125
Third Quarter....................................................................       $24.5000            $16.7500
Fourth Quarter...................................................................       $31.5625            $22.0625
</TABLE>

The last reported sale price of our common stock on The Nasdaq Stock Market on
March 14, 2000 was $53.6875 per share. There were approximately 765 holders of
record of our common stock as of March 14, 2000.

                           COMMON STOCK DIVIDEND POLICY

We have never declared or paid 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 equipment lease facilities,
the payment of cash dividends is prohibited without the lender's consent, and
under the terms of the indentures governing our senior notes, our ability to pay
cash dividends is limited. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Structure" in Part II,
Item 7 of this Form 10-K.

                     RECENT SALES OF UNREGISTERED SECURITIES

In February 2000, we issued 16,500,000 shares of our 7% Series D Cumulative
Convertible Preferred Stock. The aggregate net proceeds of this offering were
$738.8 million after expenses (excluding amounts paid by the purchasers of the
convertible preferred stock into the deposit account therefor). These securities
were issued and sold to Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.,
Incorporated, Bear, Stearns & Co. Inc., Chase Securities Inc. and BancBoston
Robertson Stephens Inc., as initial purchasers (the "Initial Purchasers"), in
reliance on the exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act"), provided by Section 4(2) of the Securities Act
as a transaction by an issuer not involving any public offering. In connection
with this transaction, each of the Initial Purchasers is an "accredited
investor" within the meaning of Securities and Exchange Commission Rule 501 and
had adequate access to information about PSINet, and appropriate legends
regarding the restricted nature of the securities were affixed to the
certificates representing the securities. The Initial Purchasers resold the
securities to "qualified institutional buyers" within the meaning of Securities
and Exchange Commission Rule 144A in reliance on the exemption from registration
under the Securities Act provided by Rule 144A. In connection with this

                                      -32-
<PAGE>

transaction, offers and sales of the securities were made to persons whom the
Initial Purchasers reasonably believed to be qualified institutional buyers, the
offering memorandum used in connection with the transaction met the requirements
of Rule 144A(d)(4), the securities were not of the same class as any of our
securities listed on a national securities exchange or quoted in a U.S.
automated inter-dealer quotation system, and appropriate legends regarding the
restricted nature of the securities were affixed to the certificates
representing the securities.

                                      -33-
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

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

The following table sets forth for the periods indicated our selected
consolidated financial and operating data. The balance sheet data, statement of
operations data and cash flow data as of and for the years ended December 31,
1995, 1996, 1997, 1998 and 1999 have been derived from our consolidated
financial statements. In 1998 and 1999, we acquired a significant number of
businesses, including TNI, and global fiber optic bandwith, issued a significant
amount of debt and equity and, in 1998, incurred a non-recurring arbitration
charge. In 1996 we sold our individual subscriber accounts and certain related
assets and in 1997 we 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 our more detailed consolidated
financial statements and notes thereto and the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Part II, Items 7 and 8 of this Form 10-K.

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 GAAP, 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
GAAP. We define EBITDA as losses before interest expense and interest income,
taxes, depreciation and amortization, other non-operating income and expense,
and charges for acquired in-process research and development (and for 1995 only,
intangible asset write-down). Our definition of EBITDA may not be comparable to
similarly titled measures used by other companies.

The following information gives effect to a two-for-one stock split of our
common stock, effected in the form of a stock dividend on February 11, 2000, to
holders of record as of the close of business on January 28, 2000.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                            Year Ended December 31,
                                                                            -----------------------
------------------------------------------------------------------------------------------------------------------
                                                              1995      1996      1997        1998          1999
                                                            --------  --------  --------  -------------  ----------
<S>                                                         <C>       <C>       <C>       <C>            <C>
Statement of Operations Data:
Revenue                                                     $  38.7   $  84.4   $ 121.9  $       259.6   $   554.7
Other income, net                                               ---       5.4       ---            ---         ---
                                                            -------   -------   -------  -------------   ---------
                                                               38.7      89.8     121.9          259.6       554.7
Operating costs and expenses:
  Data communications and operations                           32.1      70.1      94.4          199.4       396.4
  Sales and marketing                                          23.9      27.1      25.8           57.0       103.8
  General and administrative                                   10.6      20.7      23.0           45.3        78.7
  Depreciation and amortization                                14.8      28.0      28.3           63.4       166.5
  Charge for acquired in-process research and development       ---       ---       ---           70.8        88.7
  Intangible asset write-down                                   9.9       ---       ---            ---         ---
                                                            -------   -------   -------  -------------   ---------
  Total operating costs and expenses                           91.3     145.9     171.5          435.9       834.1
                                                            -------   -------   -------  -------------   ---------
Loss from operations                                          (52.6)    (56.1)    (49.6)        (176.3)     (279.4)
Interest expense                                               (2.0)     (5.0)     (5.4)         (63.9)     (193.1)
Non-recurring arbitration charge                                ---       ---       ---          (49.0)        ---
Loss before income taxes                                      (53.2)    (55.3)    (46.1)        (262.7)     (419.0)
Income tax benefit                                              ---      (0.2)     (0.5)          (0.9)       (2.8)
Net loss                                                      (53.2)    (55.1)    (45.6)        (261.8)     (416.2)
Return to preferred shareholders                                ---       ---      (0.4)          (3.1)      (17.7)
Net loss available to common shareholders                   $ (53.2)  $ (55.1)  $ (46.0) $      (264.9)  $  (433.9)
                                                            =======   =======   =======  =============   =========
Basic and diluted loss per share                            $ (1.01)  $ (0.70)  $ (0.57) $       (2.66)  $   (3.49)
                                                            =======   =======   =======  =============   =========
Shares used in computing basic and diluted loss per share
 (in thousands)                                              52,970    78,756    80,612         99,612     124,386
                                                            =======   =======   =======  =============   =========

Other Financial Data:
EBITDA (as defined)                                         $ (27.9)  $ (28.0)  $ (21.2) $       (42.1)  $   (24.2)
Capital expenditures                                           45.2      38.4      50.1          303.6       785.0
==================================================================================================================
</TABLE>

                                      -34-
<PAGE>

<TABLE>
------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>       <C>       <C>         <C>          <C>
Cash Flow Data:
Cash flows used in operating activities                     $ (30.1)  $ (32.5)  $ (15.6)    $    (87.6)  $  (214.2)
Cash flows used in investing activities                       (22.0)     (7.9)    (15.6)        (783.9)   (1,502.2)
Cash flows provided by (used in) financing activities         151.4     (10.5)     12.6          874.2     2,520.3

Operating Data:
Number of POPs                                                  241       350       350            500         900
Number of business customer accounts                          8,200    17,800    26,400         54,700      91,000
Number of consumer customer accounts                         75,000         0     5,300        225,000     562,000

Balance Sheet Data:
Cash, cash equivalents, short-term investments and
   marketable securities                                    $ 102.7   $  56.4   $  33.3     $    322.5   $ 1,601.2
Restricted cash and short-term investments                       --       0.9      20.7          162.5       154.1
Total Assets                                                  201.8     177.1     186.2        1,284.2     4,492.3
Current portion of debt                                        16.6      26.9      39.6           60.0       115.0
Long-term debt, less current portion                           24.1      26.9      33.8        1,064.6     3,185.2
Total liabilities                                              58.6      87.3     112.8        1,404.4     3,769.3
Shareholders' equity (deficit)                                143.2      89.8      73.4         (120.2)      723.0
------------------------------------------------------------------------------------------------------------------
</TABLE>

Item 7. 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 included in Part II, Item 8 of this Form
10-K. 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 that 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" in Item 1 of this
Form 10-K and our other periodic reports and documents filed with the Securities
and Exchange Commission.

General

We are a leading global provider of Internet and eCommerce solutions to
businesses. As an Internet Super Carrier (ISC), we offer a robust suite of
products globally that enable our customers to utilize the Internet for mission
critical applications carried over a worldwide fiber optic network that is
capable of transmission speeds in excess of three terabits per second.

                                      -35-
<PAGE>

We offer a suite of value-added products and services that are designed to
enable our customers, through their use of the Internet, to more efficiently
transact and conduct eCommerce with their customers, suppliers, business
partners and remote office locations. We provide Internet connectivity and Web
hosting services to more than 91,000 corporate customers, which together with
our ISP, carrier, small office/home office (SOHO) and consumer businesses around
the world served over 2.0 million end users. Our services and products include
dedicated, dial-up and DSL Internet access services connections, Web hosting and
collocation services, transaction network services, VPNs, eCommerce solutions,
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 serve
approximately 90 of the 100 largest metropolitan statistical areas in the U.S,.
have a presence in the 20 largest telecommunications markets globally and
operate in 27 countries. We conduct our business through operations organized
into five geographic operating segments - U.S./Canada, Latin America, Europe,
Asia/Pacific and India/Middle East/Africa.

We operate one of the largest global commercial data communications networks.
Our Internet-optimized network extends around the globe and is connected to more
than 900 points of presence (POPs) that enable our customers to connect to the
Internet. Our network reach allows our customers to access their corporate
network and systems resources through local calls in over 150 countries. We
expand the reach of our network by connecting with other large ISPs through
contractual arrangements, called peering agreements, that permit the exchange of
information between our network and the networks of our peering partners. We
offer free peering to ISPs in more than 100 cities in the continental U.S.,
which provides each party with the opportunity to bypass the often congested and
unreliable public exchange points, thereby improving overall network performance
and customer satisfaction. We have embarked on an initiative to aggressively
grow our hosting center business through the construction of more than
approximately $1.0 billion of new facilities. We currently have eight global
Internet and eCommerce hosting centers operating and plan to open 12 more. We
also have three network operating centers that monitor and manage network
traffic 24-hours per day, seven-days per week.

ACQUISITIONS

We typically enter a new market through the acquisition of an existing company
within the particular market, and then further expand through a combination of
organic growth supplemented by further acquisitions. A key component of our
business strategy is our continued expansion into international markets.

                                      -36-
<PAGE>


Additionally, on November 23, 1999 we acquired Transaction Network
Services, Inc., which we refer to as TNI. As our 1999 consolidated results
included only five weeks of TNI's operations, there should be a significant
impact on our results of operations for the year 2000. We expect to experience
increases to eCommerce revenue, data communications and operations expense and
EBITDA.

We continually evaluate our network operations and international organization
to ensure our operations are conducted in the most efficient manner possible. As
we identify redundant or inefficient operations we may restructure the
organization to increase efficiency. Such an evaluation may lead to a
restructuring which could include the closing or removal of non-essential
equipment or facilities or selective reduction in head count. We may incur
charges in connection with such an action.

Stock Split

                                      -37-
<PAGE>

On January 18, 2000, we announced a two-for-one split of our common stock that
was effected on February 11, 2000 by means of a stock dividend to holders of
record as of the close of business on January 28, 2000. Upon completion of the
stock split, we had approximately 146.6 million shares of common stock
outstanding. The financial statements and all references to common stock
contained in this Form 10-K give retroactive effect to the stock split.

Consumer Business

As a result of acquisitions in 1998 and 1999, we have amassed a significant
number of consumer customers throughout our operating regions. Our primary
strategic focus is providing services to business and wholesale customers.
Accordingly, in February 2000 we announced that in order to provide focus on our
Consumer business we have begun consolidating our worldwide retail consumer
operations into a new retail business unit that will be run by an experienced
management team and consist of nearly 400 staff specialists in consumer sales,
marketing and customer support, together with existing billing and customer
support systems. This retail unit will initially serve approximately 400,000
consumer accounts distributed throughout the top 20 global markets (mostly
outside of the United States), with over 30 localized consumer portals in more
than 20 countries. We are currently assessing options on how to structure this
business unit to maximize PSINet shareholder value.

Year Ended December 31, 1999 As Compared To The Year Ended December 31, 1998
and Year Ended December 31, 1998 As Compared To The Year Ended December 31, 1997

Results of Operations

                                      -38-
<PAGE>

(all charts below are in millions of U.S. dollars)

Revenue.

We generate revenue from providing Internet connectivity, Web hosting, eCommerce
services and related services to business, consumer and other ISP customers.
Revenue from business customers primarily arise from monthly charges for
Internet connectivity, eCommerce and web hosting services. Revenues from
consumer customers primarily relate to services provided under wholesale
arrangements which pay us a monthly charge for each customer served regardless
of what each customer pays their carrier for Internet access services. Other
consumer revenue is derived directly from our consumer accounts.


<TABLE>
<CAPTION>
Revenue by Geographic Segment                 U.S./       Latin                     Asia/        India/ Middle
                                             Canada      America       Europe       Pacific       East/ Africa        Total
                                             ------      -------       ------      --------       ------------        -----
<S>                                          <C>         <C>           <C>         <C>           <C>                 <C>
Year Ended December 31, 1999                  $309.2      $22.0           $90.0       $133.5         $    *            $554.7
Year Ended December 31, 1998                   183.5          *            40.0         36.1              *             259.6
Year Ended December 31, 1997                   106.8          *            10.9          4.2              *             121.9

1999 Increase                                 $125.7      $22.0           $50.0       $ 97.4              *            $295.1
1999 Percentage Increase                          69%         *             125%         270%             *               114%

1998 Increase                                 $ 76.7      $   *           $29.1       $ 31.9              *            $137.7
1998 Percentage Increase                          72%         *             267%         760%             *               113%
</TABLE>

*  Latin America and India/Middle East/Africa ( IMEA ) were new segments in
1999.

<TABLE>
<CAPTION>
Revenue by Business Unit                   Access      Hosting    eCommerce      Carrier and ISP
                                          Services    Services     Services          Services         Total
                                          --------    --------     --------          --------         -----
<S>                                       <C>         <C>         <C>            <C>                  <C>
Year Ended December 31, 1999               $362.9       $41.9        $20.6             $129.3         $554.7
Year Ended December 31, 1998                185.4        17.2           **               57.0          259.6
Year Ended December 31, 1997                 98.6         5.1           **               18.2          121.9

1999 Increase                              $177.5       $24.7        $20.6             $ 72.3         $295.1
1999 Percentage Increase                       96%        144%          **                127%           114%

1998 Increase                              $ 86.8       $12.1           **             $ 38.8         $137.7
1998 Percentage Increase                       88%        237%          **                213%           113%
</TABLE>

** eCommerce was a new business unit in 1999.

Revenue growth in 1999 of 114% consisted of 85% organic growth (i.e., from
businesses that were owned at the beginning of the year) and 29% from
acquisitions (i.e., from the businesses acquired during 1999). Revenue growth in
1998 of 113% consisted of 58% organic growth and 55% acquisition growth. Our
organic revenue growth is attributable to a number of factors, including the
timing of acquisitions in prior years, an increase in the number of business
customer and ISP accounts, and an increase in the average annual revenue
realized per new business customer account. While most revenue is recurring in
nature, from time to time we generate non-recurring revenue from consulting and
other arrangements that may or may not continue in the future. To date, such
amounts have not been material to total revenue.

Our business customer account base increased in 1999 by 66% to 91,000 business
accounts from the 54,700 business accounts in 1998, which was a 107% increase
from the 26,400 business accounts in 1997. Of the total business account growth
in 1999, 16,100 accounts were attributable to the existing customer base of the
companies we acquired, compared to 20,200 accounts in 1998. The remaining
increase was generated from organic growth. Our accounts outside the U.S. in
1999 represented 64% of our customer account base compared with 59% in 1998. At
the end of 1999, our Carrier and ISP customers together with our small
office/home office (SOHO) and consumer customers, provided service to 2.0
million end users.

                                     -39-
<PAGE>

This compares with 863,000 Carrier, ISP, SOHO and consumer customers at the end
of 1998. Average annual new contract value for business accounts increased from
$5,500 for 1997 to $6,000 for 1998 to $6,800 for 1999, which we believe reflects
an increasing demand for value-added services and higher levels of bandwidth.
Our business account retention rate for both 1999 and 1998 was 79%, which was an
increase from 76% in 1997.

The reasons for the growth in access services between 1997, 1998 and 1999 are
consistent with the overall organic and acquisitive revenue growth for the
Company as a whole.

Hosting service revenue growth between years is primarily organic and related to
the increased investments made in the infrastructure behind this business unit.

eCommerce service revenue growth between 1998 and 1999 is from revenue
attributable to TNI, which was acquired late in 1999.

Carrier and ISP Services revenue growth between 1997, 1998 and 1999 is almost
entirely organic and relates to increases in the number of customers.

Data Communications and Operations.

<TABLE>
<CAPTION>
           Annual    Percentage    Change from Prior Year
                                   ----------------------
 Year      Amount    of Revenue    Amount         Percentage
 ----      ------    ----------    ------         -----------
<S>        <C>       <C>           <C>            <C>
 1999      $396.4       71.5%      $197.0            99%
 1998      $199.4       76.8%      $105.0           111%
 1997      $ 94.4       77.4%
</TABLE>

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.
The increases in expenses over the periods presented related principally to
increases in:

 .  our dedicated access customer account base grew to 23,400 at December 31,
   1999 from 14,000 at December 31, 1998 and 7,500 at December 31, 1997;
 .  dedicated customer circuit costs increased $26.7 million, or 63% from 1998 to
   1999, and $18.4 million, or 77%, from 1997 to 1998;
 .  backbone circuit costs increased $53.1 million, or 103% from 1998 to 1999,
   and $30.2 million, or 141%, from 1997 to 1998;
 .  PRI expenses increased $32.7 million, or 103% from 1998 to 1999, and $16.7
   million, or 112%, from 1997 to 1998;
 .  personnel and related operating expenses associated with network operations,
   customer support and field service increased $47.5 million, or 104% from 1998
   to 1999, and $23.8 million, or 109%, from 1997 to 1998; and
 .  operations and maintenance charges on our bandwidth increased $8.1 million,
   or 634%, from 1998 to 1999 and there were no operations or maintenance
   charges on our bandwidth in 1997.

Circuit costs relating to our new and expanded POPs and PRIs generally are
incurred by us in advance of obtaining customers and resulting revenue.
Historically, the organic growth of our Carrier and ISP customer business is
highest beginning late in the fourth quarter and into the first quarter of the
following year due to seasonal impacts from holiday sales of computers. In order
to prepare for this demand, in addition to improving service to existing
customers, we expended a considerable amount of effort during the second half of
1999 in building an inventory of PRIs. As a result, our monthly direct costs in
the U.S. for PRIs increased from approximately $3.0 million in the month of
March 1999 to approximately $6.0 million in the month of December 1999. Based on
current capacity and customer usage rates, we believe that we are able to
service approximately twice as many dial-up customers in the U.S. than we
currently service with these PRIs.

Although we expect that data communications and operations expenses will
continue to increase as our customer base grows, we anticipate that such
expenses will continue to decrease over time as a percentage of revenue as we
acquire network bandwidth under IRU or capital lease agreements due to decreases
in unit costs as a result of continued increases in network utilization. Network
bandwidth acquired under IRU or capital lease agreements is recorded as an asset
and amortized over its useful life as a component of depreciation and
amortization. This will, in turn, result in an increase in the operations and
maintenance expense component of data communications costs, increases in costs
for other leased circuits connected to the bandwidth, as well as increases in
depreciation and amortization expense over the useful life of the bandwidth,
typically 10 to 20 years.

Sales and Marketing.

           Annual   Percentage    Change from Prior Year
                                  ----------------------
 Year      Amount   Of Revenue    Amount         Percentage
 ----      ------   ----------    ------         ----------
 1999      $103.8      18.7%      $46.8              82%

                                      -40-
<PAGE>

 1998      $ 57.0      22.0%      $31.2      121%
 1997      $ 25.8      21.2%

Sales and marketing expenses consist primarily of personnel costs, advertising
costs, distribution costs and related occupancy costs. The amount increased
between years due to costs associated with the expansion of our sales force
internationally in conjunction with our growth and acquisitions, implementation
of our newly regionalized sales and marketing organization in the U.S. and
advertising costs designed to increase awareness of the PSINet brand, including
costs associated with our naming rights and sponsorship agreements for PSINet
Stadium with the Baltimore Ravens of the National Football League and the launch
of a television advertising campaign during National Football League television
broadcasts. However, as a percentage of revenue, sales and marketing expense
should continue to decrease.

General and Administrative.

<TABLE>
<CAPTION>
           Annual         Percentage        Change from Prior Year
                                            ----------------------
 Year      Amount         of Revenue        Amount         Percentage
 ----      ------         ----------        ------         ----------
<S>        <C>            <C>               <C>            <C>
 1999      $78.7          14.2%             $33.4             74%
 1998      $45.3          17.4%             $22.3             97%
 1997      $23.0          18.9%
</TABLE>

General and administrative expenses consist primarily of salaries and occupancy
costs for executive, financial, legal and administrative personnel and provision
for uncollectible accounts receivable. The increase in 1999 over 1998 resulted
from general and administrative expenses of companies acquired and from the
growth of our business, in particular, our organic growth and the addition of
management staff and other related operating expenses across our organization.
We are finalizing plans to consolidate most of our Virginia locations into one
facility. As a result, various costs associated with the termination of various
facility leases and the relocation of employees are likely to be incurred in the
first half of 2000. The increase in 1998 over 1997 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
increase in the provision for doubtful accounts receivable. These expenses were
in part offset by decreased expenses following the sale of certain business
units in 1997. While general and administrative expenses should continue to
increase in amount as we continue to develop our infrastructure and our
organizations to manage a global business, such costs should decrease as a
percentage of revenue due to achieving greater economies of scale.

Depreciation and Amortization.

<TABLE>
<CAPTION>
           Annual         Percentage        Change from Prior Year
                                            ----------------------
 Year      Amount         Of Revenue        Amount         Percentage
 ----      ------         ----------        ------         ----------
<S>        <C>            <C>               <C>            <C>
 1999      $166.5           30.0%           $103.1           163%
 1998      $ 63.4           24.4%           $ 35.1           124%
 1997      $ 28.3           23.2%
</TABLE>

Depreciation and amortization costs have increased both in amount and as a
percentage of revenue 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.  For 1999, $113.6 million related to
depreciation of fixed assets, and approximately $52.9 million related to
amortization of intangibles.  For 1998, approximately $51.4 million related to
depreciation of fixed assets, and approximately $11.4 million related to
amortization of intangibles.  For 1997, expenses were primarily related to
depreciation of equipment.

Our depreciation and amortization expenses will increase significantly as a
result of our acquisition of network bandwidth under IRU or capital lease
agreements, and from tangible and intangible assets related to business
combinations and expansion of our operations. In connection with finalizing our
plans to consolidate most of our Virginia locations into one facility, the
useful lives of certain of our assets will be reassessed and may be shortened
over the next two quarters.

Acquired In-Process Research and Development.

                                     -41-
<PAGE>

<TABLE>
<CAPTION>
           Annual         Percentage         Change from Prior Year
                                            -------------------------
 Year      Amount         Of Revenue        Amount         Percentage
 ----      ------         ----------        ------         ----------
<S>        <C>            <C>               <C>            <C>
 1999      $ 88.7            16.0%          $ 17.9             25%
 1998      $ 70.8            27.3%          $ 70.8
 1997      $  ---             ---%
</TABLE>

A portion of the value of various acquisitions in 1998 and 1999 was attributed
to in-process research and development, which must be expensed immediately.  The
charges were quantified by means of independent valuations and reflect
technologies acquired prior to technological feasibility and for which there was
no alternative future use. We have included a detailed description as of the
respective acquisition dates of the specific technologies acquired, their value,
cost to complete, expected completion date and remaining tasks, in the notes to
our consolidated financial statements contained in Part II, Item 8 of this
Form 10-K.

Interest Expense.

<TABLE>
<CAPTION>
            Annual         Percentage         Change from Prior Year
                                              -------------------------
 Year       Amount         of Revenue         Amount         Percentage
 ----       ------         ----------         ------         ----------
<S>         <C>            <C>                <C>            <C>
 1999        $193.1         34.8%             $129.2             202%
 1998        $ 63.9         24.6%             $ 58.5           1,083%
 1997        $  5.4          4.4%
</TABLE>

Interest expense has increased due to the issuance of our 10% senior notes in
April 1998, our 11 1/2% senior notes in November 1998, our 11% senior notes in
July 1999 and our 10 1/2% senior notes in December 1999, as well as to increased
borrowings and capital lease obligations incurred to finance our network
expansion and to fund our working capital requirements. Interest expense is
directly related to our borrowings. Interest expense will increase in absolute
dollar terms in 2000 based on a full year of interest expense on our 1999
borrowings. Future increases in interest expense will depend on our capital
needs and its financing decisions.

Interest Income.

<TABLE>
<CAPTION>
           Annual         Percentage         Change from Prior Year
                                          ---------------------------
 Year      Amount         of Revenue        Amount         Percentage
 ----      ------         ----------       -------         ----------
<S>        <C>            <C>              <C>             <C>
 1999       $54.4          9.8%            $34.8              178%
 1998       $19.6          7.6%            $16.5              532%
 1997       $ 3.1          2.5%
</TABLE>

Interest income has increased due to interest received on the net proceeds of
our various financing activities during 1998 and 1999, which we invest in short-
term investment grade and government securities until such time as we use them
for other purposes.

Non-Recurring Arbitration Charge.

The results for 1998 include a $49.0 million charge for an arbitration award and
related costs.  There were no similar charges in 1999 or 1997.

Net Loss Available to Common Shareholders and Loss per Share.

<TABLE>
<CAPTION>
              Net Loss
            Available to     Percentage    Percentage       Basic and
               Common           of        change from     Diluted Loss
  Year      Shareholders     Revenue       prior year       per Share
  ----      ------------     -------       ----------       ---------
<S>         <C>              <C>          <C>             <C>
  1999      $(433.9)         (78.2)%        64%            $(3.49)
  1998      $(264.9)        (102.0)%       476%            $(2.66)
  1997      $ (46.0)         (37.7)%                       $(0.57)
</TABLE>

The primary reasons for the change in net loss available to common shareholders
were:

                                     -42-
<PAGE>

 .    an increase of return to preferred shareholders;
 .    operating losses of acquired companies;
 .    the increase in data communications costs, including expenditures for dial-
     up circuits (e.g., PRIs);
 .    acquisitions of fiber-based and satellite telecommunications bandwidth,
     leading to an increase in depreciation, personnel and other operating costs
     to manage the bandwidth;
 .    an increase in depreciation and amortization related to acquisitions;
 .    an increase in charges for acquired in-process research and development;
 .    an increase of return to preferred shareholders;
 .    an increase in net interest expense due to the issuance of our senior
     notes; and
 .    the non-recurring arbitration charge in 1998.

The return to preferred shareholders 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
in each period presented.

Segment Information

We offer a broad range of Internet access services and related products to
businesses in the U.S. and throughout the world.  As of December 31, 1999, we
served primary markets in 27 countries, with operations organized into five
geographic operating segments - U.S./Canada, Latin America, Europe, Asia/Pacific
and India/Middle East/Africa.  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.

We evaluate the performance of our operating segments and allocate resources to
them based on revenue and EBITDA, which we define 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./Canada segment include shared network costs and corporate
functions that we do not allocate to our 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 operating segment is provided on the basis of where services are
provided.  We had no single customer representing greater than 10% of our
revenues.

Key changes in the metrics we report in our segment disclosure footnote are as
follows:

<TABLE>
<CAPTION>
                                                      U.S. /      Latin                      Asia /       India/
                                                      Canada     America       Europe       Pacific       Middle        Total
                                                      ------     -------       ------       -------     East/Africa     -----
                                                                                                        -----------
<S>                                                 <C>          <C>          <C>         <C>           <C>           <C>
Revenue growth - YTD98 to YTD99                        68.5%         *         125.0%        269.8%          *         113.7%
Revenue growth - YTD97 to YTD98                        71.8%         *         267.0%        759.5%          *         113.0%
Revenue growth - YTD96 to YTD97                        37.1%         *         113.7%        200.0%          *          44.4%

EBITDA growth - YTD98 to YTD99                         (8.3)%        *          57.8%        844.4%          *          42.5%
EBITDA growth - YTD97 to YTD98                        (97.1)%        *         (82.9)%      (260.0)%         *         (98.6)%
EBITDA growth - YTD96 to YTD97                         27.4%         *         (25.0)%        66.7%          *          24.3%
EBITDA as % of Revenue - YTD99                        (11.9)%       8.2%        (3.0)%        10.0%          *          (4.4)%
EBITDA as % of Revenue - YTD98                        (18.4)%        *         (16.0)%        (5.0)%         *         (16.2)%
EBITDA as % of Revenue - YTD97                        (16.1)%        *         (32.1)%       (11.9)%         *         (17.4)%

Asset growth - YTD98 to YTD99                         303.6%         *         353.6%         32.3%          *         249.8%
Asset growth - YTD97 to YTD98                         435.3%         *         458.7%     10,227.6%          *         589.7%
Asset growth - YTD 96 to YTD97                        (1.9)%         *         226.1%        190.0%          *           5.1%

Capital expenditures growth - YTD98 to YTD99          150.1%         *         500.0%        169.3%          *         174.3%
</TABLE>

                                     -43-
<PAGE>

<TABLE>
<CAPTION>

                                                      U.S. /      Latin                      Asia /      India/
                                                                                             -----       Middle
                                                      Canada     America      Europe        Pacific    East/Africa      Total
                                                      ------     -------      ------        -------    -----------      -----
<S>                                                   <C>        <C>         <C>           <C>         <C>             <C>
Capital expenditures growth - YTD97 to YTD98          438.0%        *        3,440.0%      3,157.1%         *           506.0%
Capital expenditures growth - YTD96 to YTD97           35.8%        *          (76.2)%       133.3%         *            30.5%
Capital expenditures as % of Revenue - YTD99          212.8%        *          118.0%         46.0%         *           150.2%
Capital expenditures as % of Revenue - YTD98          143.4%        *           44.3%         63.2%         *           116.9%
Capital expenditures as % of Revenue - YTD97           45.8%        *            4.6%         16.7%         *            41.1%
</TABLE>

*  Latin America and India/Middle East/Africa are new segments in 1999.

All of our operating segments have experienced significant changes in revenue,
EBITDA, assets and capital expenditures during 1998 and 1999 due to our organic
growth, to increases in the number of our acquisitions primarily outside of the
U.S. and to expansion of investments in our network as described elsewhere in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.

Our loss from operations differs from EBITDA only by depreciation and
amortization and charges for acquired in-process research and development;
therefore, loss from operations in each segment reflects the same underlying
trends as those impacting EBITDA as a percentage of revenue.

Liquidity And Capital Resources

We historically have 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 issuances of
debt and equity securities. In 1999, we received net proceeds of approximately
$2.7 billion from debt and equity financings. At December 31, 1999, we had $1.8
billion of cash, cash equivalents, short-term investments and marketable
securities, including restricted amounts.

Cash Flows For The Year Ended December 31, 1999, 1998 and 1997

Cash flows used in operating activities were $157.8 million, $87.6 million and
$15.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Cash flows from operating activities can vary significantly from
period to period depending upon the timing of operating cash receipts and
payments and other working capital changes, especially accounts receivable,
prepaid 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 charges
for acquired in-process research and development. Operating cash flows in 1999
also include the $48.0 million arbitration award payment.

Cash flows used in investing activities were $1.6 billion, $783.9 million and
$15.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Investments in certain businesses resulted in the use of $599.8
million of cash for the year ended December 31, 1999, net of cash acquired.
Investments in our network and facilities during 1999 resulted in total
additions to fixed assets of $832.8 million. Of this amount, $298.5 million was
financed under vendor or other financing arrangements, $48.2 million of non-cash
additions related to the OC-48 bandwidth acquired from IXC Internet Services,
Inc. (IXC), $1.8 million related to other network facilities that remained in
accounts payable at year end, and $529.2 million was expended in cash including
payment of $44.9 million for other network facilities that remained in accounts
payable at December 31, 1998. For the year ended December 31, 1998, total
additions were $303.6 million, of which $113.3 million was financed under
equipment financing agreements, $27.4 million of non-cash additions related to
the OC-48 bandwidth acquired from IXC, $44.9 million related to other network
facilities that remained in accounts payable at December 31, 1998, and $118.0
million was expended in cash. For the year ended 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. Purchases of short-term
investments during 1999 were an aggregate of $1.6 billion, offset by proceeds
from the sale and maturity of short-term investments of $1.2 billion. Purchases
of short-term investments during 1998 were an aggregate of $511.7 million offset
by the sale and maturity of short-term investments of $251.2 million. Investing
cash flows in 1999 and 1998 were increased by $8.4 million and decreased by
$141.0 million, respectively, from changes in restricted cash and short-term
investments related to various financing and acquisition activities.


                                     -44-
<PAGE>

Cash flows provided by financing activities were $2.5 billion, $874.2 million
and $12.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively. In 1999, we received $2.0 billion of net proceeds from the
issuance of notes payable and $742.0 million from equity offerings. In 1998 and
1997, we received net proceeds from the issuance of notes payable of $1.1
billion and $10.1 million, respectively. We made repayments aggregating $246.1
million, $189.6 million and $27.7 million for the years ended December 31, 1999,
1998 and 1997, respectively, on our lines of credit, capital lease obligations
and notes payable. During the year ended December 31, 1999, 1998, and 1997, we
received proceeds from the exercise of stock options of $20.3 million, $6.0
million and $0.7 million, respectively.

Capital Structure

Our capital structure at December 31, 1999 consisted of senior notes, capital
lease obligations, convertible preferred stock and common stock.

Total borrowings at December 31, 1999 were $3.3 billion, which included $115.0
million in current obligations and $3.2 billion in long-term debt, capital
lease obligations and notes payable.

As of December 31, 1999, $209.7 million was available for purchases of equipment
and other fixed assets under various lease financing arrangements, after
designating $47.8 million of payables for various equipment purchases that we
intend to finance under these agreements.

At December 31, 1999, we had outstanding $600.0 million aggregate principal
amount of 10% senior notes due 2005, $350.0 million aggregate principal amount
of 11 1/2% senior notes due 2008, $1.05 billion aggregate principal amount and
Euro 150 million aggregate principal amount of 11% senior notes due 2009, and
$600 million aggregate principal amount and Euro 150 million aggregate principal
amount of 10 1/2% senior notes due 2006. At December 31, 1999 we had on deposit
in an escrow account restricted cash and short-term investments of $67.5 million
to fund, when due, the next two semi-annual interest payments on the 10% senior
notes.

The indentures governing each of the 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
   certain permitted payments and investments;

 .  a 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;

 .  a 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;

 .  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 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;

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

 .  a limitation on certain transactions with our affiliates;

                                      -45-
<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 senior notes on the same terms
   as the guarantee of such indebtedness;

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

 .  a limitation on certain 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, 1999, we were in compliance with all such covenants.

In May 1999, we completed an offering of 16,000,000 shares of our common stock
at $25.25 per share for net proceeds of approximately $383.8 million, after
expenses.

In May 1999, we completed a public offering of 9,200,000 shares of our 6 3/4%
Series C Cumulative Convertible Preferred Stock ("Series C preferred stock") for
net proceeds of approximately $358.1 million after expenses (excluding amounts
paid by the purchasers of the Series C preferred stock into the Series C deposit
account described below). The Series C preferred stock has a liquidation
preference of $50 per share.

At closing, the purchasers of the Series C preferred stock deposited
approximately $85.8 million into an account established with a deposit agent
("Series C deposit account"). The Series C deposit account is not an asset of
ours. Funds in the Series C deposit account will be paid to the holders of the
Series C preferred stock each quarter in the amount of $0.84375 per share in
cash or may be used, at our option, to purchase shares of common stock at 95% of
the market price of the common stock on that date for delivery to holders of
Series C preferred stock in lieu of cash payments. Holders of Series C preferred
stock received quarterly interest payments from the Series C deposit account of
approximately $7.8 million on each of August 15, 1999, November 15, 1999 and
February 15, 2000. The funds placed in the Series C deposit account by the
purchasers of the Series C preferred stock will, together with the earnings on
those funds, be sufficient to make payments, in cash or stock, through May 15,
2002. See Note 7 to our consolidated financial statements for further
information on the deposit account and other features of this stock.

                                      -46-
<PAGE>


In February and March 2000, we exchanged 8,155,192 newly issued shares of our
common stock for an aggregate of 4,629,335 shares of our Series C preferred
stock through individually negotiated transactions with a limited number of
holders of the Series C preferred stock. The implied premium of approximately
$1.7 million incurred in connection with the exchanges, net of cash received
from the deposit account relating to the exchanged shares, will be recognized as
a return to preferred shareholders in the first quarter of 2000. Subsequent to
the exchange, we converted the exchanged Series C preferred stock into 7,422,675
shares of our common stock, which we hold as treasury shares.

In February 2000, we completed an offering of 16,500,000 shares of 7% Series D
cumulative convertible preferred stock ("Series D preferred stock") for
aggregate net proceeds of approximately $738.8 million after expenses (excluding
amounts paid by the purchasers of the Series D preferred stock into the deposit
account described below). The Series D preferred stock has a liquidation
preference of $50 per share.

At closing, the purchasers of the Series D preferred stock deposited
approximately $57.9 million into an account established with a deposit agent
("the Series D deposit account"). The Series D deposit account is not an asset
of ours. Funds in the Series D deposit account will be paid to the holders of
the Series D preferred stock each quarter in the amount of $0.875 per share in
cash or may be used, at our option, to purchase shares of common stock at either
93% or 97% of the market price of the common stock on that date (depending on
whether the registration statement covering the shares is effective) for
delivery to holders of Series D preferred stock in lieu of cash payments.
Holders of Series D preferred stock will receive quarterly payments from the
Series D deposit account commencing May 15, 2000 and continuing until February
15, 2001. The funds placed in the Series D deposit account by the purchasers of
the Series D preferred stock will, together with the earnings on those funds, be
sufficient to make payments, in cash or stock, from the issue date through
February 15, 2001. See Note 7 to our consolidated financial statements for
information on the deposit account and other features of this stock.

                                      -47-
<PAGE>


Commitments, Capital Expenditures And Future Financing Requirements

In order to maintain our competitive position, enhance our capabilities as an
Internet Super Carrier and continue to meet the increasing demands for service
quality, availability and competitive pricing, we expect to make significant
capital expenditures including for developing hosting centers. At December 31,
1999, we were obligated to make future cash payments that total $388.9 million
for acquisitions of global fiber-based and satellite telecommunications
bandwidth, including IRUs or other rights. We also expect that there will be
additional costs, such as connectivity and equipment charges, in connection with
taking full advantage of such acquired bandwidth and IRUs. Certain of this
fiber-based and satellite telecommunications bandwidth may require the
acquisition and installation of equipment necessary to access and light the
bandwith in order to make it operational. We currently believe that our capital
expenditures in 2000 will be substantially greater than those in 1999 and that,
as a result of the completion of our recent debt and equity offerings, our
capital expenditure program will be accelerated. For the year ended December 31,
1999, our total capital expenditures were $832.8 million, of which $529.2
million was in cash. For the year ending December 31, 2000, we expect our
capital expenditures will be approximately $1.5 billion, which we expect to come
from a combination of cash on hand and through vendor and other lease financing.

In February 2000, we announced the launch of PSINet Ventures, a new corporate
venture program. With a combination of cash investments and the exchange of
services for equity, PSINet Ventures will partner with innovative Internet
entrepreneurs through direct minority equity investments, typically during
early-and mid-stage financing. Our investments are typically in businesses that
are accounted for as cost investments. We will focus globally on application
service providers (ASPs), content service providers (CSPs), eCommerce providers,
Internet infrastructure providers, incubators, and other emerging opportunities
that enhance PSINet's financial and competitive technology and service
positions. We expect to structure certain of these arrangements as new start-up
companies to allow them to purchase any PSINet service, including managed web
hosting and Virtual Internet Service Provider (VISP) services, in exchange for
equity rather than cash. This program will be funded with approximately $1.0
billion, which includes the value of current investments and the value of
Internet services for future investments as well as $100.0 million in cash.

As of December 31, 1999, we had commitments to certain telecommunications
vendors under operating lease agreements totaling $164.0 million payable in
various years through 2011. Additionally, we have various agreements to lease
office space, facilities and equipment and, as of December 31, 1999, we were
obligated to make future minimum lease payments of $74.1 million under those
non-cancelable operating leases expiring in various years through 2022.

For certain acquisitions, we have retained a portion of the purchase price under
holdback provisions of the purchase agreements to secure performance by certain
sellers of indemnification or other contractual obligations of the sellers.
These holdback amounts are generally payable up to 24 months after the date of
closing of the related acquisitions. Acquisition holdback amounts totaled $78.1
million at December 31, 1999, the majority of which is reported in other
liabilities.

In connection with our previously announced naming rights and sponsorship
agreements with the Baltimore Ravens of the National Football League, we will
make payments over the next 19 years totaling approximately $81.7 million.

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 data communications network and
eCommerce hosting centers, 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 working capital, from capital lease
financings, from the proceeds of our recent debt and equity offerings 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. We cannot assure
you, 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. We regularly review our capital commitments and
needs and the availability of financing through institutional sources and the
capital markets. We expect to pursue opportunities to raise additional capital
from time to time as we determine to be advisable based upon our capital needs,
financing capabilities and market conditions.

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

                                      -48-
<PAGE>

businesses and make investments (including venture capital investments)
principally relating to or complementary to our existing businesses. 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 or vice versa. Such relationships and acquisitions may require additional
financing and may be subject to the consent of our lenders and other third
parties.

Derivatives and Foreign Currency Exposure

We have not entered into any 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 and the issuance of our Euro-
denominated senior notes, 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.

Year 2000

Prior to entering the year 2000, or Y2K, we 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 were Y2K
compliant. We also developed a test bed of our U.S. internal systems to
implement and complete testing of the requisite minor changes and completed an
inventory of our internal systems that we use outside of the United States to
determine the status of their Y2K compliance. Now that we have entered the year
2000, we have tested our key computer systems and to date, we have not
encountered any material Y2K related disruptions or failures of our systems or
services, nor have we been notified of any disruptions or failures in the
systems of any of our third parties with whom we deal. There is an ongoing risk
that Y2K related problems could still occur and we will continue to evaluate
these risks. However, we believe that the Y2K issue will not pose any
significant operational problems for us.

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, 1999. 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
                                      ------------------------------------------------------------------------------------
                                                         1998                                        1999
                                      ------------------------------------------------------------------------------------
                                       Mar 31     Jun 30     Sep 30     Dec 31     Mar 31     Jun 30     Sep 30     Dec 31
                                      ------------------------------------------------------------------------------------
                                               (In millions of U.S. dollars, except share and per share amounts)
<S>                                   <C>       <C>        <C>        <C>        <C>        <C>        <C>        <C>
Revenue                               $  44.5   $   53.7   $   67.6   $   93.9   $  104.9   $  123.8   $  140.6   $  185.4

Operating costs and expenses:

Data communications and operations       36.7       41.9       51.9       68.9       76.0       86.7       98.5      135.1

Sales and marketing                      10.7       12.5       14.7       19.1       18.6       21.9       27.5       35.8

General and administrative                7.6       10.3       11.6       15.8       17.1       15.4       14.9       31.4
</TABLE>

                                      -49-
<PAGE>

<TABLE>
<CAPTION>
                                                                              Quarter Ended
                                          ------------------------------------------------------------------------------------
                                                             1998                                        1999
                                          ------------------------------------------------------------------------------------
                                           Mar 31     Jun 30     Sep 30     Dec 31     Mar 31     Jun 30     Sep 30     Dec 31
                                          ------------------------------------------------------------------------------------
                                                   (In millions of U.S. dollars, except share and per share amounts)
<S>                                       <C>       <C>        <C>        <C>        <C>        <C>        <C>        <C>
Depreciation and amortization                 9.5       12.9       14.7       26.4       26.8       34.4       41.6       63.7
Charge for acquired in-process                7.0       20.0       13.4       30.4         --         --         --       88.7
   research and development               -------   --------   --------   --------   --------   --------   --------   --------
Total operating costs and expenses           71.5       97.6      106.3      160.6      138.5      158.4      182.5      354.7
                                          -------   --------   --------   --------   --------   --------   --------   --------
Loss from operations                        (27.0)     (43.9)     (38.7)     (66.7)     (33.6)     (34.6)     (41.9)    (169.3)
Interest expense                             (2.6)     (16.9)     (18.7)     (25.7)     (29.6)     (31.9)     (59.4)     (72.2)
Interest income                               0.5        6.0        4.8        8.2        4.7        8.1       19.8       21.9
Other income, net                              --        1.2        5.3        0.5       (0.2)      (0.2)      (1.1)       0.6
Non-recurring arbitration charge               --         --         --      (49.0)        --         --         --         --
                                          -------   --------   --------   --------   --------   --------   --------   --------
Loss before income taxes                    (29.1)     (53.6)     (47.3)    (132.7)     (58.7)     (58.6)     (82.6)    (219.0)
Income tax benefit                             --         --         --        0.9         --        0.4        0.3        2.0
                                          -------   --------   --------   --------   --------   --------   --------   --------
Net loss                                    (29.1)     (53.6)     (47.3)    (131.8)     (58.7)     (58.2)     (82.3)    (217.0)
Return to preferred shareholders             (0.8)      (0.8)      (0.8)      (0.8)      (0.6)      (4.2)      (6.4)      (6.5)
                                          -------   --------   --------   --------   --------   --------   --------   --------
Net loss available to common
   shareholders                           $ (29.9)  $  (54.4)  $  (48.1)  $ (132.6)  $  (59.3)  $  (62.4)  $  (88.7)  $ (223.5)
                                          =======   ========   ========   ========   ========   ========   ========   ========
Basic and diluted loss per share (1)      $ (0.33)  $  (0.53)  $  (0.47)  $  (1.28)  $  (0.56)  $  (0.50)  $  (0.68)  $  (1.63)
                                          =======   ========   ========   ========   ========   ========   ========   ========
Shares used in computing basic and
   diluted loss per share (in
   thousands)                              89,192    102,222    103,318    103,743    106,716    123,912    129,688    136,778
                                          =======   ========   ========   ========   ========   ========   ========   ========
</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 1998 and 1999.

<TABLE>
<CAPTION>
                                                                    Quarter Ended
                                                     1998                                 1999
                                          ------------------------------------------------------------------------
                                          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          82.5     78.1     76.9      73.3     72.5     70.1     70.1      72.9
Sales and marketing                         24.1     23.2     21.8      20.3     17.7     17.7     19.5      19.3
General and administrative                  17.1     19.2     17.1      16.9     16.3     12.4     10.6      16.9
Depreciation and amortization               21.3     24.0     21.7      28.1     25.6     27.8     29.6      34.4
Charge for acquired in-process
   research and development                 15.7     37.2     19.8      32.4       --       --       --      47.8
                                          ------   ------   ------   -------   ------   ------   ------   -------
Total operating costs and expenses         160.7    181.7    157.3     171.0    132.1    128.0    129.8     191.3
                                          ------   ------   ------   -------   ------   ------   ------   -------
Loss from operations                       (60.7)   (81.7)   (57.3)    (71.0)   (32.1)   (28.0)   (29.8)    (91.3)
Interest expense                            (5.8)   (31.4)   (27.7)    (27.4)   (28.2)   (25.8)   (42.2)    (38.9)
Interest income                              1.3     11.3      7.0       8.8      4.5      6.5     14.1      11.8
Other income, net                           (0.2)     2.0      7.9       0.5     (0.2)    (0.1)    (0.8)      0.3
Non-recurring arbitration charge              --       --       --     (52.2)      --       --       --        --
                                          ------   ------   ------   -------   ------   ------   ------   -------
Loss before income taxes                   (65.4)   (99.8)   (70.1)   (141.3)   (56.0)   (47.4)   (58.7)   (118.1)
Income tax benefit                           --       --       --        0.9       --      0.4      0.2       1.1
                                          ------   ------   ------   -------   ------   ------   ------   -------
Net loss                                  (65.4)%  (99.8)%  (70.1)%  (140.4)%  (56.0)%  (47.0)%  (58.5)%  (117.0)%
                                          ======   ======   ======   =======   ======   ======   ======   =======
</TABLE>

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

                                      -50-
<PAGE>

     .  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;

     .  in-process research and development charges;

     .  interest expense and return to preferred shareholders due to timing of
        our debt and equity issuances;

     .  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, data center
build-out 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.

  Recent Accounting 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, 2000. 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, 2001.

In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101) which clarifies the SEC's views on revenue recognition. We believe that our
existing revenue recognition policies and procedures are in compliance with SAB
101 and therefore, SAB 101's adoption will have no material impact on our
financial condition, results of operations or cash flows.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

At December 31, 1999, we had financial instruments consisting of cash,
fixed and variable rate debt and short-term investments, which are held for
purposes other than trading. The majority of our debt obligations have fixed
interest rates and are denominated in U.S. dollars, which is our reporting
currency. However, as described elsewhere in this report, in 1999 we issued
fixed rate Euro 300.0 million aggregate principal amount of 11% senior notes and
10 1/2% senior notes, which are subject to foreign currency exchange risk. The
proceeds from the Euro senior notes are currently invested in Euro denominated
cash and cash equivalents. A 10% change in the exchange rate for the Euro would
impact annual interest expense by approximately $3.4 million and the carrying
value of the Euro denominated notes by approximately $30.2 million. Annual
maturities of our debt obligations at December 31, 1999, excluding capital lease
obligations were as follows: $8.1 million in 2000, $8.8 million in 2001, $8.1
million in 2002, $8.0 million in 2003, $0.9 million in 2004 and $2.9 billion
thereafter. At December 31, 1999, the carrying value of our debt obligations,
excluding capital lease obligations, was $2.9 billion and the fair value was
$3.0 billion. The weighted-average interest rate of our debt obligations,
excluding capital lease obligations, at December 31, 1999 was 10.7%. Our
investments are generally fixed rate short-term investment grade and government
securities and equity securities denominated in U.S. dollars. At December 31,
1999, all of our investments in debt securities are due to mature within twelve
months and the carrying value of all of our investments approximates fair value.
At December 31, 1999, $154.1 million of our cash and short-term investments were
restricted in accordance with the terms of our financing arrangements and
certain acquisition holdback agreements. We actively monitor the capital and
investing markets in analyzing our capital raising and investing decisions.

                                      -51-
<PAGE>

Item 8.  Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
                                                                                                    Page
                                                                                                    ----
<S>                                                                                                 <C>
Index to Financial Statements:

  Financial Statements:

     Report of Independent Accountants............................................................   53

     Consolidated Balance Sheets as of December 31, 1999 and 1998.................................   54

     Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and
      1997........................................................................................   55

     Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the years
      ended December 31, 1999, 1998 and 1997......................................................   56

     Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and
      1997........................................................................................   57

     Notes to Consolidated Financial Statements...................................................   59

  Financial Statement Schedules:

     II--Valuation and Qualifying Accounts for each of the three years in the period ended
       December 31, 1999..........................................................................   81
</TABLE>

     All other schedules are omitted because they are not applicable or the
      required information is shown in the financial statements or notes
      thereto.

                                      -52-
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of PSINet Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of PSINet
Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States 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.

/s/PricewaterhouseCoopers LLP

Washington, D.C.
March 20, 2000

                                      -53-
<PAGE>

                                  PSINET INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                  --------------------------------
                                                                                    1999                    1998
                                                                                    ----                    ----
                                                                                  (In millions of U.S. dollars,
                                                                                        except share data)
<S>                                                                               <C>
ASSETS                                                                                                    <C>
------
Current assets:
 Cash and cash equivalents                                                          $  853.6              $   56.8
 Restricted cash and short-term investments                                            154.1                 162.5
 Short-term investments and marketable securities                                      747.6                 265.7
 Accounts receivable, net of allowances of $18.0 and $11.7                             103.6                  50.2
 Prepaid expenses                                                                       20.6                  11.0
 Other current assets                                                                   62.9                  19.1
                                                                                    --------              --------
     Total current assets                                                            1,942.4                 565.3

Property, plant and equipment, net                                                   1,162.6                 389.4
Goodwill and other intangibles, net                                                  1,212.0                 282.8
Other assets and deferred charges                                                      175.3                  46.7
                                                                                    --------              --------
     Total assets                                                                   $4,492.3              $1,284.2
                                                                                    ========              ========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
 Current portion of debt                                                            $  115.0              $   60.0
 Trade accounts payable                                                                141.5                  90.0
 Accrued payroll and related expenses                                                   16.1                   8.5
 Other accounts payable and accrued liabilities                                         85.3                  82.7
 Accrued interest payable                                                               94.7                  29.0
 Deferred revenue                                                                       29.5                  19.4
                                                                                    --------              --------
     Total current liabilities                                                         482.1                 289.6

Long-term debt                                                                       3,185.2               1,064.6
Deferred income tax liabilities                                                         17.9                   6.2
Other liabilities                                                                       84.1                  44.0
                                                                                    --------              --------
     Total liabilities                                                               3,769.3               1,404.4
                                                                                    --------              --------

Commitments and contingencies (Notes 2 and 10)

Shareholders' equity (deficit):
 Preferred stock, $.01 par value; 30,000,000 shares authorized, 10,200,000
  and 1,675,142 shares designated                                                         --                    --
  Preferred stock, Series A; 1,000,000 shares designated; no shares issued
   and outstanding
  Convertible preferred stock, Series B, $50.00 stated value; 675,142
   shares designated; 600,000 shares issued and outstanding                               --                  28.8
  Convertible preferred stock, Series C, $50.00 stated value; 9,200,000
   shares designated, issued and outstanding                                           375.2                    --
 Common stock, $.01 par value; 500,000,000 shares authorized; 146,795,972
  and 104,366,390 shares issued                                                          1.5                   1.0
 Capital in excess of par value                                                      1,194.8                 401.5
 Accumulated deficit                                                                  (861.5)               (427.6)
 Treasury stock, 199,112 shares, at cost                                                (2.0)                 (2.0)
 Accumulated other comprehensive income                                                125.4                  36.7
 Bandwidth asset to be delivered under IXC agreement                                  (110.4)               (158.6)
                                                                                    --------              --------
     Total shareholders' equity (deficit)                                              723.0                (120.2)
                                                                                    --------              --------
     Total liabilities and shareholders' equity (deficit)                           $4,492.3              $1,284.2
                                                                                    ========              ========
</TABLE>

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

                                      -54-
<PAGE>

                                  PSINET INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                ----------------------------------------
                                                                  1999           1998              1997
                                                                  ----           ----              ----
                                                                      (In millions of U.S. dollars,
                                                                   except share and per share amounts)
<S>                                                             <C>              <C>              <C>
Revenue                                                           $ 554.7        $ 259.6          $121.9

Operating costs and expenses:
 Data communications and operations                                 396.4          199.4            94.4
 Sales and marketing                                                103.8           57.0            25.8
 General and administrative                                          78.7           45.3            23.0
 Depreciation and amortization                                      166.5           63.4            28.3
 Charge for acquired in-process research and development             88.7           70.8              --
                                                                 --------        -------          ------
  Total operating costs and expenses                                834.1          435.9           171.5
                                                                 --------        -------          ------

Loss from operations                                               (279.4)        (176.3)          (49.6)

Interest expense                                                   (193.1)         (63.9)           (5.4)
Interest income                                                      54.4           19.6             3.1
Other (expense) income, net                                          (0.9)           6.9             5.8
Non-recurring arbitration charge                                       --          (49.0)             --
                                                                 --------        -------          ------

Loss before income taxes                                           (419.0)        (262.7)          (46.1)
Income tax benefit                                                    2.8            0.9             0.5
                                                                 --------        -------          ------

Net loss                                                           (416.2)        (261.8)          (45.6)

Return to preferred shareholders                                    (17.7)          (3.1)           (0.4)
                                                                 --------        -------          ------

Net loss available to common shareholders                        $ (433.9)       $(264.9)         $(46.0)
                                                                 ========        =======          ======

Basic and diluted loss per share                                 $  (3.49)       $ (2.66)         $(0.57)
                                                                 ========        =======          ======

Shares used in computing basic and diluted loss per share
(in thousands)                                                    124,386         99,612          80,612
                                                                 ========        =======         =======
</TABLE>

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

                                     -55-
<PAGE>

                                  PSINET INC.
     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                  For the Three Years Ended December 31, 1999
               (In millions of U.S. dollars, except share data)


<TABLE>
<CAPTION>

                                                   Series B Preferred      Series C Preferred                            Capital in
                                                          Stock                  Stock               Common Stock        Excess of
                                                    Shares      Amount      Shares     Amount     Shares        Amount   Par Value
                                                 ----------   ---------   ----------  --------  -----------   --------   ---------
<S>                                              <C>          <C>         <C>         <C>       <C>           <C>        <C>
Balance, December 31, 1996                               --   $      --           --  $     --   80,226,468     $  0.8   $  207.6
                                                 ----------   ---------   ----------  --------  -----------     ------   --------
Comprehensive income:
   Net loss
   Foreign currency translation adjustment
     Total comprehensive income (loss)
Issuance of common stock pursuant
  to exercise of stock warrants and options                                                         894,872         --        0.7
Issuance of Series B convertible
  preferred stock, net of expenses                  600,000        28.1                                                       1.5
Return to preferred shareholders                                    0.1
Cancellation of common stock for
  acquisition of World Online                                                                      (165,768)        --
Other (rounding)                                                   (0.1)                                                     (0.1)
                                                 ----------   ---------   ----------  --------  -----------     ------   --------
Balance, December 31, 1997                          600,000        28.1           --        --   80,955,572        0.8      209.7

Comprehensive income:
   Net loss
   Unrealized holding gains
   Foreign currency translation adjustment
      Total comprehensive income (loss)
Issuance of common stock pursuant
  to exercise of stock warrants and options                                                       2,752,128         --        6.0
Issuance of common stock and
  contingent obligation to IXC                                                                   20,459,578        0.2      185.8
Acceptance of IXC bandwidth
Return to preferred shareholders                                    0.7
                                                 ----------   ---------   ----------  --------  -----------     ------   --------
Balance, December 31, 1998                          600,000        28.8           --        --  104,167,278        1.0      401.5

Comprehensive income:
   Net loss
   Unrealized holding gains
   Foreign currency translation adjustment
     Total comprehensive income (loss)
Issuance of common stock pursuant
  to exercise of stock warrants and options                                                       5,219,512        0.1       20.2
Conversion of Series B convertible                                                                                           28.9
 preferred stock                                   (600,000)      (29.0)                          6,000,000        0.1
Public offering of common stock, net of expenses                                                 16,000,000        0.1      383.7
Public offering of Series C convertible
  preferred stock, net of expenses                                         9,200,000     358.1
Issuance of common stock and assumed options
  pursuant to TNI acquisition                                                                    15,210,070        0.2      360.5
Acceptance of IXC bandwidth
Return to preferred shareholders                                   0.2                    17.1
                                                 ----------   ---------   ----------  --------  -----------     ------   --------
Balance, December 31, 1999                               --   $      --    9,200,000    $375.2  146,596,860     $  1.5   $1,194.8
                                                 ==========   =========   ==========  ========  ===========     ======   ========

<CAPTION>

                                                                                   Accumulated     Bandwidth Asset      Total
                                                                                      Other        To Be Delivered   Shareholders'
                                                        Accumulated    Treasury   Comprehensive       Under IXC         Equity
                                                          Deficit       Stock     Income (Loss)       Agreement        (Deficit)
                                                          -------       -----     -------------       ---------         --------
                                                        <C>            <C>        <C>              <C>               <C>
Balance, December 31, 1996                                 $(116.6)      $(2.0)          $   --        $   --           $  89.8
                                                           -------     -------           ------        ------           -------
Comprehensive income:
   Net loss                                                  (45.6)                                                       (45.6)
   Foreign currency translation adjustment                                                 (0.6)                           (0.6)
                                                                                                                        --------
     Total comprehensive income (loss)                                                                                   [(46.2)]
Issuance of common stock pursuant
  to exercise of stock warrants and options                                                                                 0.7
Issuance of Series B convertible
  preferred stock, net of expenses                                                                                         29.6
Return to preferred shareholders                              (0.4)                                                        (0.3)
Cancellation of common stock for
  acquisition of World Online                                                                                                --
Other (rounding)                                                                                                           (0.2)
                                                           -------      ------           ------       -------           -------
Balance, December 31, 1997                                  (162.6)       (2.0)            (0.6)           --              73.4

Comprehensive income:
   Net loss                                                 (261.9)                                                      (261.9)
   Unrealized holding gains                                                                 0.2                             0.2
   Foreign currency translation adjustment                                                 37.1                            37.1
                                                                                                                        --------
      Total comprehensive income (loss)                                                                                 [(224.6)]
Issuance of common stock pursuant
  to exercise of stock warrants and options                                                                                 6.0
Issuance of common stock and
  contingent obligation to IXC                                                                         (186.0)               --
Acceptance of IXC bandwidth                                                                              27.4              27.4
Return to preferred shareholders                              (3.1)                                                        (2.4)
                                                           -------       -----           ------       -------           -------
Balance, December 31, 1998                                  (427.6)       (2.0)            36.7        (158.6)           (120.2)

Comprehensive income:
   Net loss                                                 (416.2)                                                      (416.2)
   Unrealized holding gains                                                                77.6                            77.6
   Foreign currency translation adjustment                                                 11.1                            11.1
                                                                                                                        -------
     Total comprehensive income (loss)                                                                                  [(327.5)]
Issuance of common stock pursuant
  to exercise of stock warrants and options                                                                                20.3
Conversion of Series B convertible preferred
  stock                                                                                                                      --
Public offering of common stock, net of expenses                                                                          383.8
Public offering of Series C convertible
  preferred stock, net of expenses                                                                                        358.1
Issuance of common stock and assumed options
  pursuant to TNI acquisition                                                                                             360.7
Acceptance of IXC bandwidth                                                                              48.2              48.2
Return to preferred shareholders                             (17.7)                                                        (0.4)
                                                           -------     -------          -------       -------           -------
Balance, December 31, 1999                                 $(861.5)      $(2.0)          $125.4       $(110.4)          $ 723.0
                                                           =======     =======          =======       =======           =======

</TABLE>

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

                                     -56-
<PAGE>

                                  PSINET INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                             -----------------------
                                                                                   1999               1998                 1997
                                                                                   ----               ----                 ----
                                                                                           (In millions of U.S. dollars)
<S>                                                                            <C>                   <C>                   <C>
Cash flows from operating activities:
  Net loss                                                                     $  (416.2)            $ (261.9)              $(45.6)
  Adjustments to reconcile net loss to net cash used in operating
   activities:
  Depreciation and amortization                                                    166.5                 63.4                 28.3
  Loss (gain) on sale of investments                                                 0.3                 (5.0)                (5.7)
  Charges for acquired in-process research and development                          88.7                 70.8                   --
  Amortization of debt offering costs and debt premium                               5.8                  2.3                   --
  Loss (gain) on sale of other assets                                                1.3                 (1.8)                  --
  Provision for allowances                                                           7.6                  5.5                  5.4
  (Increase) decrease in accounts receivable                                       (23.9)               (27.6)                 0.4
  Increase (decrease) in notes receivable                                           (2.7)                 4.8                 (5.7)
  (Increase) decrease in prepaid expenses and other assets                         (24.9)               (16.9)                 0.3
  Increase in other assets and deferred charges                                    (33.2)                (3.0)                (0.2)
  (Decrease) increase in accounts payable and accrued liabilities                   (6.8)                50.2                  6.5
  Increase in accrued interest payable                                              65.3                 28.6                  0.1
  Increase in deferred revenue                                                       5.0                  9.4                  0.6
  Decrease in deferred income taxes                                                 (1.9)                (0.8)                (0.5)
  Increase (decrease) in other liabilities                                          11.3                 (5.6)                 0.5
                                                                               ---------             --------               ------
            Net cash used in operating activities                                 (157.8)               (87.6)               (15.6)
                                                                               ---------             --------               ------

Cash flows from investing activities:
  Purchases of property, plant and equipment                                      (529.2)              (118.0)               (12.6)
  Purchases of short-term investments                                           (1,618.4)              (511.7)                (3.0)
  Proceeds from maturity or sale of short-term investments                       1,211.7                251.2                  7.6
  Proceeds from sale of InterCon, net                                                 --                   --                 20.4
  Investments in certain businesses, net of cash acquired                         (599.8)              (259.7)                (8.6)
  Purchases of minority investments                                                (28.4)                (8.3)                  --
  Restricted cash and short-term investments                                         8.4               (141.0)               (19.7)
  Other                                                                             (2.9)                 3.6                  0.3
                                                                               ---------             --------               ------
            Net cash used in investing activities                               (1,558.6)              (783.9)               (15.6)
                                                                               ---------             --------               ------

Cash flows from financing activities:
  Proceeds from issuance of debt and credit facilities                           2,060.2              1,092.0                 10.1
  Costs of debt issuance                                                           (55.6)               (31.4)                  --
  Repayments of debt and credit facilities                                        (166.2)              (151.0)                (5.7)
  Principal payments under capital lease obligations                               (79.9)               (38.6)               (22.1)
  Proceeds from issuance of common and preferred stock                             778.3                   --                 29.6
  Costs of common and preferred stock                                              (36.3)                  --                   --
  Payments of dividends on preferred stock                                          (0.5)                (2.8)                  --
  Proceeds from exercise of common stock options and warrants                       20.3                  6.0                  0.7
                                                                               ---------             --------               ------
            Net cash provided by financing activities                            2,520.3                874.2                 12.6
                                                                               ---------             --------               ------

Effect of exchange rate changes on cash                                             (7.1)                20.8                  0.2
                                                                               ---------             --------               ------

Net increase (decrease) in cash and cash equivalents                               796.8                 23.5                (18.4)

Cash and cash equivalents, beginning of year                                        56.8                 33.3                 51.7
                                                                               ---------             --------               ------

Cash and cash equivalents, end of year                                         $   853.6             $   56.8               $ 33.3
                                                                               =========             ========               ======

</TABLE>

                                     -57-
<PAGE>

<TABLE>
<S>                                                                   <C>          <C>          <C>
Supplemental disclosures of cash flow information:

    Cash paid during the year for:
        Interest                                                      $   124.4    $   33.6     $  5.1
        Income taxes                                                        0.1           -          -

    Noncash investing and financing activities:
        Capital lease obligations incurred                                298.5       113.3       37.5
        Acceptance of IXC bandwidth                                        48.2        27.4          -
</TABLE>

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

                                     -58-
<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 a leading global provider of Internet and
eCommerce solutions to businesses.  As an Internet Super Carrier (ISC), the
Company offers a suite of products globally that enable customers to
utilize the Internet for mission critical applications carried over a worldwide
fiber optic network.  PSINet provides Internet connectivity and hosting services
to more than 91,000 corporate customers. Services and products include
dedicated, dial- up, and DSL Internet access services connections, Web hosting
and collocation services, transaction network services, VPNs, eCommerce
solutions, voice-over-IP, e-mail and managed security services. The Company also
provides wholesale and private label network connectivity and related services
to other ISPs and telecommunications carriers to further utilize its network
capacity.  It serves approximately 90 of the 100 largest metropolitan
statistical areas in the U.S,. has a presence in the 20 largest
telecommunications markets globally and operates in 27 countries.  PSINet
conducts business through operations organized into five geographic operating
segments-- U.S./Canada, Latin America, Europe, Asia/Pacific and India/Middle
East/Africa.

Summary of Significant Accounting Policies

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 - The Company recognizes revenue when persuasive evidence of
an agreement exists, the terms are fixed or determinable, services are
performed, and collection is probable. Revenue and related direct costs from
customer contracts for Internet access and related services are recognized
ratably over the terms of the contracts, which are generally one year. Cash
received in advance of revenue earned is recorded as deferred revenue. Revenue
earned under "services for equity" arrangements is recognized when the services
are provided if the receivable will be converted into equity to satisfy the
earnings process within the normal collection timeline. To date, revenue earned
under "service for equity" arrangements has been insignificant.

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 $31.8 million in 1999,
$19.8 million in 1998 and $9.2 million in 1997

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

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

Restricted Cash - Restricted cash and short-term investments represent amounts
that are restricted as to their use in accordance with financing arrangements
and acquisition holdback agreements. At December 31, 1999, $8.8 million of cash
was designated as collateral for outstanding letters of credit.

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 maturities at acquisition greater than three
months but less than one year and publicly traded equity securities.  Management
determines the appropriate classification of its investments in debt and equity
securities at the time of purchase.  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.

                                     -59-
<PAGE>

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 short-term investments and marketable securities are
primarily investment grade instruments.  The Company continually monitors these
investments and other equity investments in third parties.  Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number and geographic dispersion of customers comprising the Company's customer
base.

The Company has a subsidiary which makes direct minority equity
investments in businesses during their early- and mid-stage financing.  These
investments, which are recorded in the accompanying balance sheet within "other
assets and deferred charges", are in the form of direct cash investments in
equity and convertible debt instruments, and in equity instruments through
"services for equity" arrangements.  The nature of these investments involves a
high degree of risk. To date, revenue earned under such arrangements has been
insignificant.

Concentrations of Other Risks - The Company is a facilities-based provider of
Internet-related services that require significant investments in network
bandwidth, technology to operate the network, hosting centers (including real
estate and equipment), and related infrastructure.  The Company's operations can
be affected by the availability of and its ability to acquire suitable assets,
the ability to place those assets in service, and the ability to generate
profitable customer revenue utilizing those assets.  As well, the Company's
success depends on employing technologies that require it to own as well as make
significant future commitments in technologies that are both expensive and which
can quickly become obsolete as new technologies emerge.  The carrying value of
the Company's fixed and intangible assets could be affected by these risks.

The Company had significant indebtedness at December 31, 1999, and the amount
and terms of the Company's financing arrangements could restrict its operations
as well as make it susceptible to economic downturns. The Company expects to
continue to acquire or build network facilities and to make acquisitions of
other companies, which will continue to require significant amounts of capital
and which could strain management, personnel, accounting, information systems
and other resources. The Company will continue to incur substantial losses,
which could restrict its ability to raise capital in the future. The Company
also has significant foreign operations, which makes it subject to foreign
currency exchange risks.

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 that extend useful lives or
increase capacity of the asset and interest costs associated with significant
capital additions. Costs incurred prior to an asset being ready for service are
reflected as construction in progress within property, plant and equipment.
Construction in progress includes direct expenditures for construction of the
asset and is stated at cost. Capitalized costs include costs incurred under the
construction contract; advisory, consulting and legal fees; interest; property
taxes and incremental staff costs directly related to managing the project
during the construction phase. Expenditures for maintenance and repairs are
expensed as incurred. Leasehold improvements include costs associated with
telecommunications equipment installations and building improvements. In 1999
and 1998, the Company capitalized interest of approximately $6.2 million and
$0.8 million, respectively. No interest was capitalized in 1997.

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. Telecommunications bandwidth under
long-term IRU contracts requiring payment at or near acceptance is classified
as owned assets.

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, including appropriate
website development costs, are capitalized and amortized over the estimated
useful life of the software.

Depreciation and amortization periods are as follows:



     Type of Asset:                   Depreciation or Amortization Period:

                                      -60-
<PAGE>

     Telecommunications bandwidth     Shorter of useful life or indefeasible
                                      right of use (IRU)/lease agreement,
                                      generally 10-20 years, beginning when
                                      bandwidth is ready 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 to five years

     Building                         30 years

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.

Goodwill and Other Intangibles - Goodwill and other intangibles primarily arise
from purchases of companies. The Company reviews goodwill and other intangibles
and other long-lived assets to assess recoverability based upon undiscounted
cash flow analysis when factors indicating an impairment are present.
Impairments, if any, are measured based upon the difference between the carrying
value and fair value, which may be determined using discounted cash flow
analyses or other methods, and are recognized in operating results in the period
in which an impairment in value is determined.

Amortization periods are as follows:

     Type of Asset:                        Amortization Period:

     Goodwill                              Ten to 20 years

     Customer relationships                Two to 20 years

     Existing technology                   Two to five years

     Tradename                             Seven to ten years

     Workforce and other                   Two to ten years


Acquired In-Process Research and Development -- The fair value of acquired in-
process research and development (IPR&D) technologies 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, as appropriate, percentage-
of-completion which utilizes the key milestones to estimate the stage of
development of each project at the date of acquisition, an estimation of cash
flows resulting from the expected revenues generated from such projects, and the
discounting of the net cash flows to their present value. The discount rate
includes a factor that takes into account the stage of completion and
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 exist 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, deposits and investments in certain
businesses.  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.

                                      -61-
<PAGE>

Investments in businesses that the Company owns less than a 50% voting equity
interest and can exert significant influence are accounted for using the equity
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 that 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 statement of operations.
Recognition of deferred tax assets related to non-qualified stock option
exercises will be recorded as an adjustment to capital in excess of par value.

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

Foreign Currency - Gains and losses on translation of the accounts of the
Company's non-U.S. operations, including permanently invested intercompany
balances, are accumulated and reported as a component of accumulated other
comprehensive income in shareholders' equity. At December 31, 1999 and 1998, the
cumulative foreign currency translation adjustment was $47.6 million and $36.5
million, respectively. Transaction gains and losses on the Company's non-
functional currency denominated assets and liabilities are recorded in the
consolidated statement of operations. For the Euro denominated notes, a 10%
change in the exchange rate for the Euro would impact annual interest expense by
approximately $3.4 million and the carrying value would change by approximately
$30.2 million.

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, common stock issuable upon conversion of convertible
preferred stock and contingently issuable shares of common stock. Common stock
equivalent shares are calculated using the treasury stock method. The effect of
common stock equivalents which totaled 32.4 million, 15.3 million and 2.9
million shares at December 31, 1999, 1998 and 1997, has been excluded from the
computation of diluted loss per share as the effect would be antidilutive.
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. The fair
value of the Company's equity investments in non-public businesses is not
practicable to estimate as quoted market prices are not available. In addition,
as most non-public investees are in the start-up phase, other valuation
techniques are not appropriate as other information which might be pertinent to
estimating fair value is either not reliable or not available.

Segment Reporting - The Company provides segment information in accordance with
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information".  SFAS No. 131 designates the internal information used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments and requires disclosure about products and
services, geographical areas and major customers.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make reasonable
estimates and assumptions, based upon all known facts and circumstances, that
affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.

Stock Split - On February 11, 2000 the Company effected a two-for-one split of
its common stock, in the form of a stock dividend, to holders of record as of
the close of business on January 28, 2000.  Share and per share information for
all periods presented in the accompanying financial statements have been
adjusted to reflect the two-for-one stock split.

                                      -62-
<PAGE>
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, 2000. 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. To the extent the Company begins to enter
into such transactions in the future, the Company will adopt the Statement's
disclosure requirements in the quarterly and annual financial statements for the
year ending December 31, 2001.

In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101) which clarifies the SEC's views on revenue recognition. The Company
believes its existing revenue recognition policies and procedures are in
compliance with SAB 101 and therefore, SAB 101's adoption will have no material
impact on the Company's financial condition, results of operations or cash
flows.

NOTE 2 - Acquisitions and Dispositions of Certain Businesses

In 1998 and 1999, the Company completed the acquisition of 100% of 61
businesses. 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.
Outstanding stock options of acquired businesses were included in the
determination of the purchase prices based on the fair value of the options
assumed. Summary information regarding the business combinations is as follows:

<TABLE>
<CAPTION>
     Business Name                                   Location                     Acquisition Date
     -------------                                   --------                     ----------------
<S>                                                  <C>                          <C>
Internet Prolink S.A.                                Switzerland                  January 1998
ISTAR Internet inc. ("iSTAR")                        Canada                       February and May 1998
Interactive Telephony Limited                        Channel Islands, Jersey      April 1998
Interactive Networx GmbH ("INX")                     Germany                      May 1998
LinkAge Online Limited ("LinkAge")                   Hong Kong                    June 1998
IoNET Internetworking Services ("ioNet")             United States                June 1998
SCII-CalvaPro                                        France                       June 1998
INTERLOG Internet Services, Inc. ("INTERLOG")        Canada                       July 1998
Rimnet Corporation  ("Rimnet")                       Japan                        August 1998
TWICS Co., Ltd.                                      Japan                        September 1998
Hong Kong Internet & Gateway Services                Hong Kong                    September 1998
iNet, Inc. ("iNet")                                  Korea                        September 1998
Tokyo Internet Corporation ("Tokyo Internet")        Japan                        October 1998
The Unix Group B.V.                                  The Netherlands              October 1998
AsiaNet Limited                                      Hong Kong                    November 1998
Spider Net Limited                                   Hong Kong                    December 1998
Huge Net Limited                                     Hong Kong                    December 1998
Planete.net S.A.R.L                                  France                       February 1999
Satelnet S.A.                                        France                       February 1999
Telelinx Ltd.("Telelinx")                            U.K.                         February 1999
Horizontes Internet Ltda                             Brazil                       April 1999
Wavis Equipamentos de Informatica Ltda               Brazil                       April 1999
Sao Paulo On-Line Ltda                               Brazil                       May 1999
Internet de Mexico S.A. de C.V.                      Mexico                       May 1999
Datanet S.A. de C.V.                                 Mexico                       May 1999
The Internet Company                                 Switzerland                  May 1999
Caribbean Internet Service Corp.                     U.S. (Puerto Rico)           June 1999
The Internet Access Company ("TIAC")                 U.S.                         June 1999
Argentina On-Line S.A.                               Argentina                    June 1999
CSO.net Telecom Services GmbH                        Austria                      June 1999
Intercomputer, S.A. and Intercomputer
Soft, S.A ("Intercomputer")                          Spain                        July 1999
ABAFoRUM S.A.                                        Spain                        July 1999
Netwing EDV-Dienstleistungs GmbH                     Austria                      July 1999
</TABLE>

                                      -63-
<PAGE>

<TABLE>
<S>                                                 <C>                          <C>
Global Link                                          Hong Kong                    July 1999
Netsystem S.A.                                       Argentina                    August 1999
Domain Acesso e Servicos Internet Ltda               Brazil                       August 1999
Netline Communicaciones S.A.                         Chile                        August 1999
Sinfonet S.A.                                        Panama                       August 1999
Vision Network Limited                               Hong Kong                    September 1999
Servnet Servicos de Informatica e Communicacao
Ltda                                                 Brazil                       September 1999
Elender Informatikai ("Elender")                     Hungary                      September 1999
Infase Comunicaciones, S.L.                          Spain                        September 1999
Internet Network Technologies                        U.S.                         September 1999
Site Internet Ltda                                   Brazil                       September 1999
TotalNet Inc.("TotalNet")                            Canada                       September 1999
Terzomillennio S.L.                                  Italy                        September 1999
Orbinet Telecommunications, Inc.                     Panama                       September 1999
ZebraNet, Inc.                                       U.S.                         October 1999
SPIN GmbH                                            Switzerland                  October 1999
Zircon                                               Australia                    October 1999
Mlink Internet, Inc.                                 Canada                       October 1999
Netup                                                Chile                        November 1999
Lyceum                                               U.S.                         November 1999
Telalink Corporation                                 U.S.                         November 1999
Transaction Network Services, Inc. ("TNI")           U.S.                         November 1999
Alpha dot net                                        U.S.                         December 1999
Netgate                                              Uruguay                      December 1999
JoinNet                                              Taiwan                       December 1999
Correionet                                           Brazil                       December 1999
Lynx                                                 Lebanon                      December 1999
Pacwan                                               France                       December 1999
</TABLE>

Additionally, in December 1999, the Company acquired a 49% voting interest in
iNet Telecom, a telecommunications company in Seoul, Korea.  The investment in
iNet Telecom is accounted for under the equity method.

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,
eCommerce, as well as vertical market Internet services, including comprehensive
banking, medical and telecommunications Internet solutions.

The Company paid TNI shareholders approximately $339.3 million in cash and
approximately 15.2 million shares of the Company's common stock, which
represented an aggregate value of approximately $347.7 million based upon a
price per share of the Company's common stock of $22.859. The Company also
assumed options to acquire approximately 463,000 shares of TNI common stock,
representing an aggregate value of approximately $13.0 million, which were
exercisable into 926,000 shares of the Company's common stock. The Company also
repaid outstanding principal and interest under TNI's revolving credit facility
in the amount of $52.1 million from cash on hand. All other acquisitions were
cash transactions.

For certain acquisitions, the Company has retained a portion of the purchase
price under holdback 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 holdback
liabilities totaled $78.1 million and $38.2 million at December 31, 1999 and at
December 31, 1998. The Company had $6.9 million in payments on acquisition
holdbacks at in 1999 and no such payments in 1998.

In connection with these acquisitions, the Company recorded $15.1 million and
$14.2 million in 1999 and 1998, respectively, in other accounts payable and
accrued liabilities in accordance with planned terminations of certain



                                      -64-
<PAGE>

contracts of acquired companies. Such terminations are expected to occur within
one year of acquisition date. In 1999 and 1998, $2.3 million and $1.4 million,
respectively, had been incurred and charged against the liability and $12.4
million had been reversed against goodwill as a result of renegotiated
termination penalties or changes in anticipated use of assets.

The purchase price relating to one acquisition was increased in 1999 by $6.0
million pursuant to an earnout provision as a result of the acquired company
achieving certain levels of operating results post-acquisition. Acquisition
holdback liabilities and transaction costs accrued totalled $109.9 million and
$41.5 million at December 31, 1999 and 1998, respectively. Cash acquired in
conjunction with our acquisitions was $28.8 million and $7.0 million for the
year ended Decemeber 31, 1999 and December 31, 1998, respectively.

In connection with the 1999 acquisitions of these companies, liabilities assumed
were as follows (in millions of U.S. dollars):

<TABLE>
<CAPTION>
                                           Fair Value of Cash Paid and
                        Fair Value of        Stock Issued in Exchange        Liabilities
 Business Name         Assets Acquired          for Capital Stock                Assumed
 -------------         ---------------          -----------------                -------
<S>                    <C>                 <C>                               <C>
TNI                           $  810.6                  $(700.6)                  $110.0
Telelinx                         104.3                    (32.5)                    71.8
Elender                           35.7                    (26.8)                     8.9
Intercomputer                     35.4                    (25.4)                    10.0
TotalNet                          28.5                    (20.6)                     7.9
TIAC                              29.5                    (15.8)                    13.7
Other acquisitions               199.6                   (125.9)                    73.7
                              --------                ---------                   ------
                              $1,243.6                  $(947.6)                  $296.0
                              ========                =========                   ======
</TABLE>

The following represents the unaudited pro forma results of operations of the
Company for 1999 and 1998 as if the acquisitions were consummated on January 1,
1998. 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, 1998 or the results
that may occur in the future.

<TABLE>
<CAPTION>
                                                                              Year Ended
                                                                              ----------
                                                            December 31, 1999            December 31, 1998
                                                            -----------------            -----------------
                                                        (In millions of U.S. dollars, except per share amounts)
<S>                                                    <C>                               <C>
Revenue                                                               $ 758.8                      $ 506.5
Net loss available to common shareholders                             $(489.4)                     $(362.7)
Basic and diluted loss per share                                      $ (3.93)                     $ (3.64)
</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.

NOTE 3 - Short-Term Investments and Marketable Securities

At December 31, 1999 and 1998, short-term investments and marketable securities,
including restricted amounts, consists of $342.9 million and $235.1 million,
respectively, of U.S. government obligations, $346.1 million and $112.3 million,
respectively, of commercial paper, $42.8 million and $25.0 million,
respectively, of certificates of deposit and $82.7 million and $0 respectively,
in equity securities. All short-term investments are classified as
available-for-sale. The unrealized holding gain was $77.8 million and $0.2
million at December 31, 1999 and 1998, respectively. The 1999 unrealized holding
gain was comprised of $0.9 million in government obligations, $1.1 million in
commercial paper and $75.8 million in equity securities.

                                      -65-
<PAGE>

NOTE 4 - Property, Plant and Equipment

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                     ------------
                                                               1999               1998
                                                               ----               ----
                                                            (In millions of U.S. dollars)
<S>                                                         <C>                   <C>
Owned Assets:
  Telecommunications bandwidth                               $  441.9             $118.1
  Data communications equipment                                 181.4              103.5
  Leasehold improvements                                        114.4               29.3
  Software                                                       32.5               17.7
  Office and other equipment                                     57.5               14.8
  Land and building                                              55.8                3.3
                                                             --------             ------
                                                                883.5              286.7
  Less accumulated depreciation and amortization               (147.0)             (63.1)
                                                             --------             ------
                                                                736.5              223.6
                                                             --------             ------
Assets Under Capital Leases:
  Leased data communications equipment                          364.9              171.9
  Leased telecommunications bandwidth                            58.3               30.3
  Leased building, office and other equipment                    68.8                4.0
                                                             --------             ------
                                                                492.0              206.2
  Less accumulated amortization                                 (65.9)             (40.4)
                                                             --------             ------
                                                                426.1              165.8
                                                             --------             ------

  Property, plant and equipment, net                         $1,162.6             $389.4
                                                             ========             ======
</TABLE>

Total depreciation and leasehold amortization expense was $113.6 million in
1999, $51.4 million in 1998 and $25.1 million in 1997. At December 31, 1999 and
1998, telecommunications bandwith includes $223.2 million and $70.7 million,
respectively, and land and buildings includes $53.3 million and $1.3 million,
respectively, of assets classified as construction in progress for which no
depreciation will be recognized until construction is completed. Anticipated
completion dates are through 2001.

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

Goodwill and other intangibles consisted of the following:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                      ------------
                                                               1999                1998
                                                             --------             ------
                                                            (In millions of U.S. dollars)
  <S>                                                       <C>                   <C>
  Goodwill                                                   $  879.2             $230.4
  Customer relationships                                        173.2               26.0
  Existing technology                                           112.6                8.8
  Tradename                                                      93.5               24.1
  Workforce and other                                            18.7                8.0
                                                             --------             ------
                                                              1,277.2              297.3
  Less accumulated amortization                                 (65.2)             (14.5)
                                                             --------             ------

  Goodwill and other intangibles, net                        $1,212.0             $282.8
                                                             ========             ======
</TABLE>

Total amortization of goodwill and other intangibles was $52.9 million in 1999,
$11.4 million in 1998 and $2.7 million in 1997.

1999 Acquisitions

                                      -66-
<PAGE>

In connection with the 1999 acquisitions described in Note 2, the Company
recorded $88.7 million of charges for acquired in-process research and
development in 1999. A summary of the allocated values by technology/project for
companies acquired in 1999 is as follows (in millions of U.S. dollars):

<TABLE>
<CAPTION>

                                                                              At Acquisition Date
                                                       -------------------------------------------------------------------------
                                                                   Estimated
  Acquired                                                          Cost to      Expected
  Company         R&D Technology/Project                Value      Complete     Completion           Remaining Tasks
  ------          ----------------------                -----      --------     ---------            ---------------
<S>              <C>                                    <C>        <C>         <C>              <C>
TNI              Fraud Engine Update                    $73.2        $0.1      Early 2000       Redesigning user interface
                                                                                                Improve data management
                                                                                                System verification and testing
                 Outdial/Next Generation Excel            1.1         0.1      Mid 2000         System verification and testing
                 Local Number Portability                 1.7         1.4      Early 2000       Resolving database formatting
                                                                                                    and replication
                                                                                                Achieving compatibility with
                                                                                                    established voice services
                                                                                                System verification and testing
                 ATM Processing                           3.6         0.1      Late 2000        Conceptual design, initiatives
                                                                                                and project plan
                                                                                                Development of switch
                                                                                                System verification and testing
                 ATM Connectivity                         4.4          --      Early 2000       System verification and testing

Intercomputer    Various eBanking applications            1.2         0.3      Early 2000       System verification and testing

Elender          Virtual Private Network(VPN)             1.1          --      Late 2000        Resolutions relating to ability
                                                                                                Dedicate bandwith, manage
                                                                                                    routers and security features
                                                                                                System verification and testing
                 Internet cable                           1.9          --      Early 2000       Resolutions relating to
                                                                                                Compatibility between hard-
                                                                                                    ware and cable operators
                                                                                                System configuration
                                                                                                Software configuration
                                                                                                System verification and testing
                                                                                                System configuration
                 eCommerce and Portal                     0.5          --      Early 2000       System verification and testing
                                                        -----

        Total                                           $88.7
                                                        =====

</TABLE>

Transaction Network Services, Inc. Through TNI the Company is in the process of
working on five key research and development projects which have not yet been
determined to be technologically feasible and which have no alternative future
use. The Fraud Engine project under development is designed to update the
systems by which a telephone company verifies the billability of a long distance
call originating from a pay phone and significantly increases throughput volume.
The Company expects the Fraud Engine project to substantially expand TNI's
ability to offer authentication and verification services across a wide range of
industries and geographies. The Outdial/Next Generation Excel Switch project
under development for the United Kingdom is designed to allow TNI's network
access controllers the ability to originate calls, whereas they currently can
only receive calls. This project will allow the host (credit card processor) to
call the merchant's terminal for daily batch verifications, thus eliminating the
need for a merchant to remember to call the host. The Local Number Portability
project is designed to allow telephone companies to verify the billability of a
long distance call originating from a pay phone in Australia, and enabling users
of telecommunications services to retain their telephone number when changing
their service carrier or changing locations. The ATM Processing project,
intended for the European marketplace, would both enable the carrying of credit
card transactions between


                                      -67-
<PAGE>

the merchant and processor, and provide TNI the ability to assume the role of
the processor. The ATM Connectivity project is being developed to give customers
the capability to download information to the ATM's utilizing one modem card
that provides four separately types of connectivity. Currently, customers need
individual modem cards for each connectivity type and integration architecture
to enable the technology to work properly.

Intercomputer. Through Intercomputer the Company is developing five concurrent
electronic banking technologies. A proprietary application is being developed
that allows automatic, bi-directional transmission of various financial quotes
to the General Treasury of Spain. Additionally, Intercomputer is developing a
proprietary GSM Gateway Integrator designed to allow messages formatted to the
internal application to be sent and received by cellular phones. Intercomputer
is also developing two proprietary operating systems and system tools to allow
clients to maintain and transmit financial information between themselves and
financial entities and to maintain and manage electronic transfers of both
receipts and payroll between themselves and financial entities.

Elender. Through Elender the Company is developing a proprietary version of VPN
network system and a proprietary Internet cable access technology to provide
high-speed Internet access. Also, Elender is developing a proprietary integrated
eCommerce application designed for credit card payment over the Internet in
Hungary and a Hungarian portal that could be personalized and able to connect
with other eCommerce solutions.

1998 Acquisitions

In connection with the 1998 acquisitions described in Note 2, the Company
recorded $70.8 million of charges for acquired in-process research and
development in 1998. Most of these technologies were completed by the end of
1999, with the remaining few expected to be completed in early 2000. A summary
of the allocated values by technology/project for companies acquired in 1998 is
as follows (in millions of U.S. dollars):

<TABLE>
<CAPTION>

                                                                   At Acquisition Date
                                               -----------------------------------------------------------
                                                            Estimated
 Acquired              R&D                                   Cost to
 Company         Technology/Project            Value        Complete              Remaining Tasks
 -------         ------------------            -----        --------              ---------------
<S>            <C>                             <C>          <C>            <C>
iSTAR          Corporate DSL/ATM/Fax           $ 4.3          $1.9         System verification and testing
               On Demand/Web Hosting
               Dial-up - Widespan                2.7           2.2         System verification and testing
               Icommerce                         0.1            --         System verification and testing

INX            Access technologies               3.6           1.5         System verification and testing

ioNet          ATM and Internet services         8.5           2.2         System verification and testing

LinkAge        VPN technology                    2.9           0.2         Network architecture development
               Website tools                     2.6           1.3         Improve system stability
               IP Telephony                      2.4           0.2         Transmission quality improvement

INTERLOG       DSL                               2.7           0.3         Operations support system development, resolution of
                                                                           provisioning issues
               eCommerce                         0.5           0.1         Software development
               Website design                    0.3           0.1         Systems verification and integration

Rimnet         Wireless local loop               2.3           0.1         Network interconnection and security issues
               IP Telephony                      1.5           0.3         Database development, increasing system scalability
               Universal Messaging               0.3           0.1         Network integration and testing

iNet           Frame Relay                       5.0           0.1         Network management system software development,
                                                                           network reconfiguration
               Website hosting                   0.4           0.1         Software development and testing
</TABLE>

                                      -68-
<PAGE>

<TABLE>
<S>            <C>                           <C>         <C>        <C>
               eCommerce                       0.3       0.1        Development of database management system

Tokyo          ATM technologies               16.4       0.2        Development of safeguards ensuring continued network
Internet                                                            reliability under high traffic loads
               Domain Name Service             4.3       0.1        Database testing and system verification, resolution
                                                                    of scalability issues
               Network technologies            3.4       0.1        Resolution of issues related to shared peering
                                                                    facilities, reliability of content caching systems
               Access technologies             3.2       0.1        Testing of wireless traffic distribution
                                                                    functionality
               Performance  technologies       2.8       0.1        Test service issues
               Wholesale                       0.3       0.1        Testing of software verification, and resolution of
                                             -----                  scalability issues
Total                                        $70.8
                                             =====
</TABLE>

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 technological initiatives remaining to complete
development, costs already incurred, and the projected cost to complete the
projects. The value assigned to purchased in-process technology in 1999 and 1998
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 51% in 1999 and between 22% and 45% in 1998.

 .  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
   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 to their present value using a
discount rate of between 25% and 60% in 1999 and between 17% and 28% in 1998,
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 20% to 90% in 1999 and from 50% to 85% in 1998.

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 are 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.

                                      -69-
<PAGE>

NOTE 6 - Debt

Debt consisted of the following:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                 ----------------------
                                                                                 1999              1998
                                                                                 ----              ----
                                                                               (In millions of U.S. dollars)
      <S>                                                                      <C>                 <C>
      10.0% Senior notes due 2005                                                $  600.0          $  600.0
      10.5% Senior notes due 2006 (Euro 150.0)                                      150.9                --
      10.5% Senior notes due 2006                                                   600.0                --
      11.0% Senior notes due 2009 (Euro 150.0)                                      150.9                --
      11.0% Senior notes due 2009                                                 1,050.0                --
      11.5% Senior notes due 2008                                                   350.0             350.0
      Capital lease obligations at interest rates ranging from 2.7% to 17.3%        359.7             120.7
      Notes payable at interest rates ranging from 1.8% to 12.7%.                    36.0              51.0
                                                                                 --------          --------
                                                                                  3,297.5           1,121.7
      Plus unamortized premium                                                        2.7               2.9
                                                                                 --------          --------
                                                                                  3,300.2           1,124.6
      Less current portion                                                         (115.0)            (60.0)
                                                                                 --------          --------
      Long-term portion                                                          $3,185.2          $1,064.6
                                                                                 ========          ========
</TABLE>

The senior 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 senior notes semi-annually. At December 31, 1999, the Company has
deposited in an escrow account restricted cash and short-term investments of
$67.5 million to fund, when due, the next two semi-annual interest payments on
the 10% senior notes. The indentures governing the senior notes contain certain
financial and other covenants which, among other things, will restrict the
Company's ability to incur further indebtedness, maker certain payments
(including payments of dividends) and investments, and sell assets. The Company
was in compliance with these covenants at December 31, 1999.

The Company has various financing arrangements accounted for as capital leases
for the acquisition of equipment and other fixed assets. During 1999 and 1998,
the Company incurred capital lease obligations under these arrangements of
$298.6 million and $113.3 million, respectively. At December 31, 1999 and 1998,
the aggregate unused portion under these arrangements totaled $209.7 million and
$12.9 million, respectively, after designating $47.8 million and $27.9 million,
respectively, of payables for various equipment purchases which will be financed
under existing 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. The Company was in
compliance with these covenants at December 31, 1999.

In September 1998, the Company entered into a senior secured Credit Facility
(Credit Facility), to replace its then existing bank credit arrangement in the
United States. The Credit Facility had a maximum principal amount of $110.0
million and amounts drawn were payable in September 2001. The Credit Facility
was terminated effective December 31, 1999.

At December 31, 1999, future minimum lease payments under capital leases and
annual maturities of other debt are as follows:

                                                    Capital     Other
     Year Ending December 31,                       Leases       Debt
     ------------------------                       ------       ----
                                                (In millions of U.S. dollars)
                                                -----------------------------

            2000                                    $ 136.5      $    8.1
            2001                                      117.6           8.8
            2002                                       71.8           8.1
            2003                                       17.4           8.0


                                       70
<PAGE>

            2004                                       14.7           0.9
            Thereafter                                123.1       2,903.9
                                                    -------      --------
                                                      481.1      $2,937.8
                                                                 ========
  Less amount representing interest                  (121.4)
                                                    -------
  Present value of future minimum lease payments    $ 359.7
                                                    =======

At December 31, 1999 and 1998, the estimated fair value of debt, excluding
capital lease obligations, was approximately $3,012.2 million and $1,009.8
million, respectively.

NOTE 7 - Capital Stock

Preferred Stock Rights Plan

The Company's Board of Directors has adopted a Shareholder Rights Plan, as
thereafter amended (Rights Plan). Each outstanding share of the Company's common
stock has attached to it one-half of a preferred stock purchase right (a Right)
that entitles the registered holder to purchase from the Company one one-
thousandth of a share of Series A Junior Participating Preferred Stock, par
value $0.01 per share (Series A Preferred Stock), of the Company at a price of
$275.00 per one one-thousandth of a share of Series A Preferred Stock, subject
to adjustment. The Rights also attach to most future issuances of common stock.

Subject to exceptions, the Rights will generally become exercisable upon the
occurrence of the earlier of: (1) a public announcement that a person or group
of affiliated or associated persons (Acquiring Person) have acquired beneficial
ownership of 20.5% or more of the Company's outstanding Common Stock; or (2) an
announcement of, 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 20.5% or more of the outstanding shares of the
Company's 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 the Company's board
of directors, a number of additional shares of Common Stock, as set forth in the
Rights Plan. The Rights are not exercisable until the Distribution Date.

The Company's Board of Directors has designated 1,000,000 shares of preferred
stock as Series A preferred stock, which amount may be increased or decreased by
the Board of Directors.  All Rights expire on November 5, 2009, unless the
Rights are extended, 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.

Conversion of Convertible Preferred Stock

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 accrued dividends at an
annual rate of 8%. The Series B preferred stock was convertible into the
Company's common stock at $10 per share. During 1999, all 600,000 shares of the
Company's Series B preferred stock were converted into an aggregate of 6,000,000
shares of the Company's common stock in accordance with the original terms of
the Series B preferred stock.

Termination of Contingent Payment Obligation 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 (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 20,459,578 shares of common
stock of the Company (IXC Initial Shares) and a contingent payment


                                       71
<PAGE>

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. In January
1999, the Company's contingent payment obligation to IXC under the agreement was
terminated without the payment of any amounts or issuance of additional shares
of common stock to IXC when, after the close of trading on The Nasdaq Stock
Market, the fair market value of the shares of common stock originally issued to
IXC exceeded the $240 million threshold in accordance with the terms of the
agreement.

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 was recorded as a reduction to shareholders' equity
until such time as the Company accepts the bandwidth from IXC.

Issuance of Common Stock

In May 1999, the Company completed an offering of 16,000,000 shares of its
common stock at $25.25 per share for net proceeds of approximately $383.8
million after underwriting discounts and commissions and other offering
expenses.

Issuance of Convertible Series C Preferred Stock

In May 1999, the Company completed an offering of 9,200,000 shares of its 6 3/4%
Series C Cumulative Convertible Preferred Stock ("Series C preferred stock") for
net proceeds of approximately $358.1 million after underwriting discounts and
commissions and other offering expenses (excluding amounts paid by the
purchasers of the Series C preferred stock into the Series C deposit account
described below). The Series C preferred stock has a liquidation preference of
$50 per share.

At closing, the purchasers of the Series C preferred stock deposited
approximately $85.8 million into an account established with a deposit agent
("Series C deposit account"). The Series C deposit account is not an asset of
the Company. Funds in the Series C deposit account will be paid to the holders
of the Series C preferred stock each quarter in the amount of $0.84375 per share
in cash or may be used, at the Company's option, to purchase shares of common
stock at 95% of the market price of the common stock on that date for delivery
to holders of Series C preferred stock in lieu of cash payments. Holders of
Series C preferred stock received quarterly interest payments from the Series C
deposit account of approximately $7.8 million on each of August 15, 1999,
November 15, 1999 and February 15, 2000. The funds placed in the Series C
deposit account by the purchasers of the Series C preferred stock will, together
with the earnings on those funds, be sufficient to make payments, in cash or
stock, through May 15, 2002. Until the expiration of the Series C deposit
account, the Company will accrete a return to preferred shareholders each
quarter from the date of issuance at an annual rate of 6 3/4% of the liquidation
preference per share. Such amount will be recorded as a deduction from net
income to determine net income available to common shareholders. Upon the
expiration of the Series C deposit account, which is expected to occur on May
15, 2002 unless earlier terminated, the Series C preferred stock will begin to
accrue dividends at an annual rate of 6 3/4% of the liquidation preference
payable in cash or, at the Company's option, in shares of its common stock at
95% of the market price of the common stock on that date. Under certain
circumstances, the Company can elect to terminate the Series C deposit account
prior to May 15, 2002, at which time the remaining funds in the Series C deposit
account would be distributed to the Company and the Series C preferred stock
would begin to accrue dividends. At December 31, 1999, the Series C deposit
account had a balance of $72.1 million.

Each share of Series C preferred stock is convertible at any time at the option
of the holders thereof into 1.6034 shares of the Company's common stock, equal
to a conversion price of $31.18375 per share, subject to adjustment upon the
occurrence of specified events. The Series C preferred stock is redeemable, at
the Company's option, at a redemption premium of 101.929% of the liquidation
preference (plus accumulated and unpaid dividends, if any) on or after


                                       72
<PAGE>

November 15, 2000 and prior to May 15, 2002 if the trading price of the Series C
preferred stock equals or exceeds $124.74 per share for a specified trading
period. Additional payments will also be made from the Series C deposit account
or by the Company to the holders of the Series C preferred stock if the Company
redeems Series C preferred stock under the foregoing circumstances. Except in
the foregoing circumstances, the Company may not redeem the Series C preferred
stock prior to May 15, 2002. Beginning on May 15, 2002, the Company may redeem
shares of Series C preferred stock at an initial redemption premium of 103.857%
of the liquidation preference, declining to 100.00% on May 15, 2006 and
thereafter, plus in each case all accumulated and unpaid dividends to the
redemption date. The Company may effect any redemption, in whole or in part, at
its option, in cash or by delivery of shares of its common stock, or a
combination of cash and common stock (subject to applicable law), by delivering
notice to the holders of the Series C preferred stock.

In the event of a change of control of PSINet (as defined in the charter
amendment designating the Series C preferred stock), holders of Series C
preferred stock will, if the market value of the Company's common stock at such
time is less than the conversion price for the Series C preferred stock, have a
one time option to convert all of their outstanding shares of Series C preferred
stock into shares of the Company's common stock at an adjusted conversion price
equal to the greater of (1) the market value of the Company's common stock as of
the date of the change in control and (2) $19.365. In lieu of issuing shares of
common stock issuable upon conversion in the event of a change of control, the
Company may, at its option, make a cash payment equal to the market value of the
common stock otherwise issuable.

In February and March 2000, the Company exchanged 8,155,192 newly issued shares
of its common stock for an aggregate of 4,629,335 shares of its Series C
preferred stock through individually negotiated transactions with a limited
number of holders of the Series C preferred stock pursuant to incentivized
exchange offers. The premiums paid to induce the exchanges, net of cash received
from the deposit account relating to the exchanged shares, aggregated to
approximately $1.7 million, and will be recognized as a return to preferred
shareholders in the first quarter of 2000. Subsequent to the exchange, the
Company converted the exchanged Series C preferred stock into 7,422,675 shares
of its common stock.

Issuance of Convertible Series D Preferred Stock

In February 2000, the Company completed an offering of 16,500,000 shares of 7%
Series D cumulative convertible preferred stock ("Series D preferred stock") for
aggregate net proceeds of approximately $738.8 million after expenses (excluding
amounts paid by the purchasers of the Series D preferred stock into the deposit
account described below). The Series D preferred stock has a liquidation
preference of $50 per share.

At closing, the purchasers of the Series D preferred stock deposited
approximately $57.9 million into an account established with a deposit agent
("the Series D deposit account"). The Series D deposit account is not an asset
of the Company. Funds in the Series D deposit account will be paid to the
holders of the Series D preferred stock each quarter in the amount of $0.875 per
share in cash or may be used, at the Company's option, to purchase shares of
common stock at either 93% or 97% of the market price of the common stock on
that date (depending on whether the registration statement covering the shares
is effective) for delivery to holders of Series D preferred stock in lieu of
cash payments. Holders of Series D preferred stock will receive quarterly
payments from the Series D deposit account commencing May 15, 2000 and
continuing until February 15, 2001. The funds placed in the Series D deposit
account by the purchasers of the Series D preferred stock will, together with
the earnings on those funds, be sufficient to make payments, in cash or stock,
from the issue date through February 15, 2001. Until the expiration of the
Series D deposit account, the Company will accrete a return to preferred
shareholders each quarter from the date of issuance at an annual rate of 7% of
the liquidation preference per share. Such amount is recorded as a deduction
from net income to determine net income available to common shareholders. Under
certain circumstances, the Company can elect to terminate the Series D deposit
account prior to February 15, 2001, at which time the remaining funds in the
Series D deposit account would be distributed to the Company and the Series D
preferred stock would begin to accrue dividends.

Each share of Series D preferred stock is convertible at any time after February
15, 2000 at the option of the holders thereof into 0.9352 shares of the
Company's common stock, equal to a conversion price of $53.465 per share,
subject to adjustment upon the occurrence of specified events. The Series D
preferred stock is redeemable, at the Company's option, at a redemption premium
of 105.50% of the liquidation preference (plus accumulated and unpaid dividends,
if any) on or after August 15, 2001 but prior to February 15, 2003, if the
trading price of its


                                       73
<PAGE>

common stock equals or exceeds $80.20 per share for a specified trading period.
The Company will also make additional payments to the holders of the Series D
preferred stock if the Company redeems the Series D preferred stock under the
foregoing circumstances. The Company may not redeem the Series D preferred stock
prior to February 15, 2003. Beginning on February 15, 2003, the Company may
redeem shares of the Series D preferred stock at an initial redemption premium
of 104.00% of the liquidation preference, declining to 100.00% on February 15,
2007 and thereafter, plus in each case all accumulated and unpaid dividends to
the redemption date. The Company may effect any redemption, in whole or in part,
at its option, in cash, by delivery of fully paid and nonassessable shares of
its common stock or a combination of cash and common stock (subject to
applicable law), by delivering notice to the holders of the Series D preferred
stock.

In the event of a change of control of PSINet (as defined in the charter
amendment designating the Series D preferred stock), holders of Series D
preferred stock will, if the market value of the Company's common stock at such
time is less than the conversion price for the Series D preferred stock, have a
one time option to convert all of their outstanding shares of Series D preferred
stock into shares of the Company's common stock at an adjusted conversion price
equal to the greater of (1) the market value of the Company's common stock as of
the date of the change in control and (2) $28.98. In lieu of issuing shares of
common stock issuable upon conversion in the event of a change of control, the
Company may, at its option, make a cash payment equal to the market value of the
common stock otherwise issuable.

NOTE 8 - Stock Compensation and Retirement Plans

Employee Stock Purchase Plan

In  September 1999, the Board of Directors approved the 1999 Employee Stock
Purchase Plan and related 1999 International Employee Stock Purchase Plan (the
"ESPPs"). Under the ESPPs, up to 3.2 million shares of common stock have been
reserved for issuance and may be purchased by eligible employees of the Company
through payroll deductions of up to 15% of their eligible compensation. The
purchase price is equal to 85% of the lower of the fair market value on the
first or the last day of each six-month purchase period. No stock has been
issued under the ESPPs as of December 31, 1999.

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.
As of December 31, 1999, the Company had 51.2 million shares authorized and 44.9
million shares reserved for issuance under the plans.

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:

                                        1999       1998       1997
                                        ----       ----       ----
      Expected life (in years)          5.0         5.0        5.0
      Risk-free interest rate          5.56%       5.20%      6.36%
      Volatility                       90.0%       90.0%      76.0%
      Dividend yield                      0%          0%         0%

Utilizing these assumptions, the weighted-average fair value of the stock
options granted in 1999, 1998 and 1997 was $16.71, $3.55 and $2.44,
respectively.

                                       74
<PAGE>

Under the above model, the total value of stock options granted was $195.9
million in 1999, $46.0 million in 1998, and $23.6 million in 1997, 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 millions of
U.S. dollars, except per share amounts):

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                                       -----------------------
                                                                    1999        1998         1997
                                                                    ----        ----         ----
     <S>                                                         <C>         <C>           <C>
     Pro forma net loss available to common shareholders         $(476.0)    $(279.9)      $(53.1)
     Pro forma basic and diluted loss per share                  $ (3.83)    $ (2.81)      $(0.66)
</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, 1999:

<TABLE>
<CAPTION>
                                                  Number of Shares
                                                  ----------------                              Weighted-
                                                  of Common Stock                   Price        Average
                                                  ---------------                   -----        -------
                                                Options        Warrants           per Share    Exercise Price
                                                -------        --------           ---------    --------------
     <S>                                     <C>               <C>            <C>              <C>
     Balance, December 31, 1996              10,075,710         851,348       $.03 to $6.75        $ 3.12

       Granted                                9,692,600              --        2.69 to 5.63          3.68
       Exercised                               (577,058)       (402,800)        .03 to 4.07           .92
       Forfeited                             (2,519,480)             --        1.00 to 6.57          4.17
                                             ----------        --------
     Balance, December 31, 1997              16,671,772         448,548         .03 to 6.75          3.41

       Granted                               12,967,608              --        3.00 to 9.57          4.91
       Exercised                             (2,404,138)       (348,548)        .03 to 6.57          2.17
       Forfeited                             (2,342,646)             --        1.00 to 7.47          4.14
                                             ----------        --------
     Balance, December 31, 1998              24,892,596         100,000         .80 to 9.57          4.26

       Granted                               11,770,071              --      10.44 to 34.06         22.98
       Assumed                                  926,314              --        .07 to 20.25          8.96
       Exercised                             (5,219,518)             --        .80 to 24.31          3.87
       Forfeited                             (1,991,898)             --       1.00 to 30.19         10.71
                                             ----------        --------
     Balance, December 31, 1999              30,377,565         100,000      $.07 to $34.06        $11.27
                                             ==========        ========

     Exercisable, December 31, 1997           5,649,762         448,548      $ .03 to $6.75        $ 2.88
                                             ==========        ========
     Exercisable, December 31, 1998           8,323,012         100,000      $ .80 to $9.57        $ 3.64
                                             ==========        ========
     Exercisable, December 31, 1999          11,104,171         100,000      $.07 to $34.06        $ 6.64
                                             ==========        ========
</TABLE>

The following table summarizes information about the outstanding and exercisable
options and warrants at December 31, 1999:

<TABLE>
<CAPTION>
                                          Outstanding                                    Exercisable
                      ----------------------------------------------------     --------------------------------

                                            Weighted-
                                            ---------
                                             Average             Weighted-
                                             -------             ---------
                                            Remaining             Average                         Weighted-
                                            ---------             -------                         ---------
    Range of                            Contractual Life         Exercise                          Average
    --------                            ----------------         --------                          -------
Exercise Prices         Number                (Years)              Price           Number       Exercise Price
---------------         ------                -------              -----          ------        --------------
<S>                   <C>               <C>                      <C>           <C>              <C>
$  .07 to $3.81       8,153,137                 7.3               $ 3.26       4,163,008            $ 3.26
3.83 to 5.34          7,703,529                 7.4                 4.74       4,323,503              4.69
</TABLE>

                                      -75-
<PAGE>

   5.38 to 24.00     6,564,068     9.0      12.61      1,797,325     10.02
  24.31 to 34.06     8,056,831     9.4      24.54        920,335     24.44
                    ----------                        ----------

$  .07 to $34.06    30,477,565     8.3     $11.27     11,204,171    $ 6.64
                    ==========                        ==========

Retirement Savings Plan

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 $1.1 million, $0.9 million, and $0.5 million in
1999, 1998 and 1997, respectively.

NOTE 9 - Income Taxes

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

                                               Year ended December 31,
                                               -----------------------
                                           1999           1998        1997
                                           ----           ----        ----
     U.S. operations                      $(275.0)       $(134.6)    $(34.4)
     Non-U.S. operations                   (144.0)        (128.1)     (11.7)
                                          -------        -------     ------
                                          $(419.0)       $(262.7)    $(46.1)
                                          =======        =======     ======

The components of the Company's income tax benefit consist of the following (in
millions of U.S. dollars):

                                                Year ended December 31,
                                                -----------------------
                                             1999           1998       1997
                                             ----           ----       ----
     Current expense:
        U.S.                                $  --          $  --      $  --
        Non-U.S.                              2.0             --         --
                                            -----          -----      -----
                                              2.0             --         --
                                            -----          -----      -----
     Deferred benefit:
        U.S.                                   --             --         --
        Non-U.S.                             (4.8)          (0.9)      (0.5)
                                            -----          -----      -----
                                             (4.8)          (0.9)      (0.5)
                                            -----          -----      -----

     Total income tax benefit               $(2.8)         $(0.9)     $(0.5)
                                            =====          =====      =====


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

<TABLE>
<CAPTION>
                                                  December 31, 1999                        December 31, 1998
                                        -----------------------------------      --------------------------------------

                                          U.S.        Non-U.S.      Total         U.S.         Non-U.S.         Total
                                          ----        --------      -----         ----         --------         -----
<S>                                     <C>           <C>          <C>           <C>           <C>              <C>
Gross deferred tax assets:
     Net operating losses               $ 196.1        $  99.2     $ 295.3       $ 82.0          $ 63.2         $ 145.2
     Stock options                         41.3             --        41.3           --              --              --
     Arbitration accrual                     --             --          --         20.1              --            20.1
</TABLE>

                                      -76-
<PAGE>

<TABLE>
<S>                                     <C>            <C>           <C>             <C>             <C>            <C>
  Other                                     9.0           21.8          30.8            2.0            14.1            16.1
                                        -------        -------       -------         ------          ------         -------
                                          246.4          121.0         367.4          104.1            77.3           181.4
  Less:  Valuation allowance              (91.8)        (102.5)       (194.3)         (90.3)          (62.5)         (152.8)
                                        -------        -------       -------         ------          ------         -------
                                          154.6           18.5         173.1           13.8            14.8            28.6
                                        -------        -------       -------         ------          ------         -------

Gross deferred tax liabilities:
  Depreciation/amortization               (27.4)            --         (27.4)         (10.1)             --           (10.1)
  Unrealized gain on investments          (31.0)            --         (31.0)            --              --              --
  Acquired intangibles                    (91.2)         (35.2)       (126.4)          (2.5)          (20.8)          (23.3)
  Other                                    (5.0)          (1.2)         (6.2)          (1.2)           (0.2)           (1.4)
                                        -------        -------       -------         ------          ------         -------
                                         (154.6)         (36.4)       (191.0)         (13.8)          (21.0)          (34.8)
                                        -------        -------       -------         ------          ------         -------

Net deferred tax liabilities            $    --        $ (17.9)      $ (17.9)        $   --          $ (6.2)        $  (6.2)
                                        =======        =======       =======         ======          ======         =======
</TABLE>

As of December 31, 1999 and 1998, the Company had domestic net operating loss
carryforwards of approximately $579.1 million and $216.7 million, respectively,
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 2019.
Additionally, at December 31, 1999 and 1998, the Company had foreign net
operating loss carryforwards for tax purposes in various jurisdictions outside
the U.S. amounting to approximately $264.9 million and $158.6 million,
respectively. The majority of non-U.S. loss carryforwards will expire in varying
amounts in five to seven years. 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.
resulted mostly from the increase in our acquisition of entities during 1999.

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 $41.5 million and $101.7
million in 1999 and 1998, respectively. The changes primarily relate to
additional losses and intangibles acquired 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 $35.6 million at December
31, 1999. The portion of the valuation allowance for which subsequently
recognized tax benefits will increase shareholders' equity was $41.3 million at
December 31, 1999.

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>
                                                                                                 December 31,
                                                                                                 ------------
                                                                                      1999           1998          1997
                                                                                      ----           ----          ----
     <S>                                                                            <C>            <C>           <C>
     U.S. federal taxes at statutory rate                                            (34.0)%       (34.0)%       (34.0)%
     State taxes (net of federal tax effect)                                          (7.0)%        (7.0)%        (7.0)%
     Effect of foreign operations                                                     (3.0)%          1.8%          1.5%
     Change in valuation allowance affecting the provision for income taxes            31.8%         27.2%         40.7%
     In-process research and development write-off                                      8.7%         11.1%          --
     Amortization of non-deductible goodwill                                            2.8%          1.5%          0.6%
     Other                                                                              -- %        (0.9)%        (2.8)%
                                                                                    ------         -----         -----
     Effective tax benefit                                                            (0.7)%        (0.3)%        (1.0)%
                                                                                    ======         =====         =====
</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

                                      -77-
<PAGE>

operating leases expiring in various years through 2022. Total rent expense for
all operating leases amounted to $25.7 million in 1999, $12.5 million in 1998,
and $5.0 million in 1997.

At December 31, 1999, commitments to telecommunications vendors and future
minimum lease payments under non-cancelable operating leases are as follows:

<TABLE>
<CAPTION>
        Year Ended December 31,        Telecommunications      Operating Leases
        -----------------------        ------------------      ----------------
                                             (In millions of U.S. dollars)
                                             -----------------------------
        <S>                            <C>                     <C>
              2000                           $ 54.4                  $14.7
              2001                             42.3                   13.6
              2002                             27.6                   11.9
              2003                             12.4                    7.9
              2004                              7.0                    7.2
              Thereafter                       20.3                   18.8
                                             ------                  -----
                                             $164.0                  $74.1
                                             ======                  =====
</TABLE>

The Company also acquires global fiber-based and satellite 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, 1999, the Company was obligated to make
future payments under these purchase agreements that total $388.9 million, most
of which will be paid in 2000. Under its telecommunications bandwidth
agreements, the Company is also obligated to pay operations and maintenance
charges which vary by agreement in amount. In addition, if a supplier makes
delivery of certain additional fiber-based bandwidth, which is expected in 2001,
the Company will be committed to make cash payments at that time of between
$120.0 million and $180.0 million, the actual price to depend on the timing of
delivery of the additional bandwidth. The Company also expects that there will
be additional costs, such as connectivity and equipment charges, in connection
with taking full advantage of such acquired bandwidth and IRUs. Certain of this
fiber-based and satellite telecommunications bandwidth may require the
acquisition and installation of equipment necessary to access and light the
bandwidth in order to make it operational. In addition, the Company anticipates
making investments to acquire and build-out new Internet and eCommerce hosting
centers in key financial and business centers throughout the world and to
purchase other facilities. The Company currently anticipates that capital
expenditures will be approximately $1.5 billion for the year ending December 31,
2000. Additionally, in connection with the award of external and local wireless
licenses to the Company in Hong Kong, the Company has committed to invest
approximately $385.8 million to build a next generation IP network in Hong Kong.

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, 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 remaining payments at December 31, 1999
were approximately $81.7 million.

In February 2000, the Company announced the launch of PSINet Ventures, a new
corporate venture program. The program will involve a combination of cash
investments and the exchange of services for equity in certain businesses. This
program will be funded with approximately $1.0 billion, which includes the value
of current investments and the value of Internet services for future investments
as well as $100.0 million in cash. At December 31, 1999 the Company had
committed a total of $8.4 million of services under the program.

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.

                                      -78-
<PAGE>

Note 11 - Non-Recurring Arbitration Charge

On March 23, 1999, an arbitrator awarded Chatterjee Management Company
("Chatterjee") compensatory damages including interest and legal expenses from
the Company that 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. In conjunction with this, the Company recorded a charge of $49.0
million in 1998 relating to this arbitration decision and such accrual was
reflected in other accounts payable and accrued liabilities in the Company's
consolidated balance sheet at December 31, 1998 and was paid in April 1999.
After accounting for other expenses, the resolution of the previously
established accrual resulted in a non-recurring gain during 1999 in the amount
of $0.7 million.

Note 12 - Industry Segment and Geographic Reporting

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,
1999, the Company served primary markets in 27 countries, with operations
organized into five geographic operating segments - U.S./Canada, Latin America,
Europe, Asia/Pacific and India/Middle East/Africa. 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
charges for acquired in-process research and development.

Operations of the U.S./Canada segment include shared network costs and corporate
functions that 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 (in millions of U.S. dollars):

                                      -79-
<PAGE>

<TABLE>
<CAPTION>
                             U.S. /        Latin                               India/Middle
                             Canada       America    Europe   Asia/Pacific      East/Africa      Total
                             ------       -------    ------   ------------      -----------      -----
<S>                         <C>           <C>        <C>      <C>              <C>             <C>
1999
----
Revenue                     $  309.2     $  22.0  $   90.0     $  133.5        $     0         $  554.7
EBITDA                         (36.7)        1.8      (2.7)        13.4              0            (24.2)
Assets                       3,636.2        77.9     380.1        396.1            2.0          4,492.3
Capital expenditures           657.8         7.4     106.2         61.4              0            832.8

1998
----
Revenue                        183.5           *      40.0         36.1              *            259.6
EBITDA                         (33.9)          *      (6.4)        (1.8)             *            (42.1)
Assets                         900.9           *      83.8        299.5              *          1,284.2
Capital expenditures           263.1           *      17.7         22.8              *            303.6

1997
----
Revenue                        106.8           *      10.9          4.2              *            121.9
EBITDA                         (17.2)          *      (3.5)        (0.5)             *            (21.2)
Assets                         168.3           *      15.0          2.9              *            186.2
Capital expenditures            48.9           *       0.5          0.7              *             50.1
</TABLE>

* Latin America and India/Middle East/Africa are new segments in 1999.

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

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                ------------------------------------------
                                                   1999            1998            1997
                                                   ----            ----            ----
     <S>                                         <C>             <C>              <C>
     EBITDA                                      $ (24.2)        $ (42.1)         $(21.2)
     Reconciling items:
       Depreciation and amortization              (166.5)          (63.4)          (28.3)
       Charge for acquired IPR&D                   (88.7)          (70.8)             --
       Interest expense                           (193.1)          (63.9)           (5.3)
       Interest income                              54.4            19.6             3.1
       Other income, net                            (0.9)            6.9             5.8
       Non-recurring arbitration charge               --           (49.0)             --
                                                 -------         -------          ------
     Loss before income taxes                    $(419.0)        $(262.7)         $(46.1)
                                                 =======         =======          ======
</TABLE>

                                      -80-
<PAGE>

                 SCHEDULE II - VALUATION ACCOUNTS AND RESERVES
                         (in million of U.S. dollars)

<TABLE>
<CAPTION>
                                            Allowance for
                                              Doubtful          Deferred Tax Asset
                                              Accounts              Valuation
                                              --------              ---------
<S>                                         <C>                 <C>
Balance, December 31, 1996                      $ 1.9                 $ 32.3

Charged to costs and expenses                     5.4                   18.8
Balances of acquired subsidiaries                  --                     --
Deductions                                       (5.2)                    --
                                                -----                 ------

Balance, December 31, 1997                        2.1                   51.1

Charged to costs and expenses                     5.5                   69.3
Balances of acquired subsidiaries                 6.9                   32.4
Deductions                                       (2.8)                    --
                                                -----                 ------

Balance, December 31, 1998                       11.7                  152.8

Charged to costs and expenses                     7.6                  113.6
Balances of acquired subsidiaries                 3.7                    3.1
Deductions                                       (5.0)                 (75.2)
                                                -----                 ------

Balance, December 31, 1999                      $18.0                 $194.3
                                                =====                 ======
</TABLE>

                                      -81-
<PAGE>

Item 9.  Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 is incorporated by reference to our Proxy
Statement to be used in connection with our 2000 Annual Meeting of Shareholders
and to be filed with the Securities and Exchange Commission (the "Commission")
on or prior to April 28, 2000.

Item 11. Executive Compensation

The information required by Item 11 is incorporated by reference to our Proxy
Statement to be used in connection with our 2000 Annual Meeting of Shareholders
and to be filed with the Commission on or prior to April 28, 2000.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by Item 12 is incorporated by reference to our Proxy
Statement to be used in connection with our 2000 Annual Meeting of Shareholders
and to be filed with the Commission on or prior to April 28, 2000.

Item 13. Certain Relationships and Related Transactions

The information required by Item 13 is incorporated by reference to our Proxy
Statement to be used in connection with our 2000 Annual Meeting of Shareholders
and to be filed with the Commission on or prior to April 28, 2000.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

a. Documents filed as a part of this report.

        1.  Financial Statements

        See Index to Financial Statements on page 52.

        2.  Financial Statement Schedules

        See Index to Financial Statements on page 52.

        3.  Exhibits

        See Index to Exhibits included herein.

b. Reports on Form 8-K.

        On November 5, 1999, we filed a Current Report on Form 8-K relating to
certain amendments to our Shareholder Rights Agreement which increased the
applicable purchase price of the rights under the agreement to $275.00 and
extended the final expiration date of the rights to November 5, 2009.

        On November 18, 1999, we filed a Current Report on Form 8-K dated
November 17, 1999 which included as an Exhibit a press release issued by us
announcing that we would be pursuing a placement of debt securities in
accordance with Securities and Exchange Commission Rule 144A.

                                      -82-
<PAGE>

      On December 1, 1999, we filed a Current Report on Form 8-K dated November
23, 1999 relating to the closing of our acquisition of Transaction Network
Services, Inc. (TNI). The Current Report disclosed pro forma financial
information regarding TNI and also filed as exhibits amendments to our credit
agreement.

      On December 6, 1999, we filed a Current Report on Form 8-K dated November
24, 1999 relating to our closing of our offering of $600,000,000 aggregate
principal amount of our 10 1/2% senior notes due 2006 and our Euro 150,000,000
aggregate principal amount of our 10 1/2 % senior notes due 2006.

                                      -83-
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: March 21, 2000

                              PSINET INC.

                              By: /s/ William L. Schrader
                                 ------------------------------------
                                    William L. Schrader, Chairman and
                                    Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                   Name                                           Title                                  Date
                   ----                                           -----                                  ----
     <S>                                             <C>                                             <C>
     /s/ William L. Schrader                         Chairman, Chief Executive Officer and           March 21, 2000
     ----------------------------------------        Director (Principal Executive Officer)
               William L. Schrader

     /s/ Harold S. Wills                               President, Chief Operating Officer            March 21, 2000
     ----------------------------------------                     and Director
                 Harold S. Wills

     /s/ David N. Kunkel                               Executive Vice President, General             March 21, 2000
     ----------------------------------------                 Counsel and Director
                 David N. Kunkel

     /s/ Michael J. Malesardi                         Senior Vice President and Controller           March 21, 2000
     ----------------------------------------         (Co-Principal Financial Officer and
               Michael J. Malesardi                     Principal Accounting Officer)


     /s/ Lawrence S. Winkler                          Senior Vice President and Treasurer            March 21, 2000
     ----------------------------------------           (Co-Principal Financial Officer)
               Lawrence S. Winkler

     /s/ William H. Baumer                                          Director                         March 21, 2000
     ----------------------------------------
                William H. Baumer

                                                                    Director                         March 21, 2000
     ----------------------------------------
                   Ian P. Sharp

     /s/ Ralph J. Swett                                             Director                         March 21, 2000
     ----------------------------------------
                   Ralph J. Swett
</TABLE>

                                      -84-
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
 2.1          Agreement and Plan of Merger, dated August 22,        Incorporated by reference from Exhibit 2.1 to
              1999, among PSINet, PSINet Shelf I Inc. and           PSINet's Current Report on Form 8-K dated
              Transaction Network Services, Inc.                    August 24, 1999 located under Securities and
                                                                    Exchange Commission File No. 0-25812

 2.2          Amendment No. 1, dated October 14, 1999, to           Incorporated by reference from Annex 1 to
              Agreement and Plan of Merger dated August 22, 1999,   Amendment No. 1 to PSINet's Registration
              among PSINet, PSINet Shelf I Inc. and Transaction     Statement on Form S-4 filed on October 19, 1999
              Network Services, Inc.                                located under Securities and Exchange
                                                                    Commission File No. 333-88325.

 3.1          Restated Certificate of Incorporation dated           Incorporated by reference from Exhibit 3.1 to
              November 9, 1999                                      PSINet's Current Report on Form 8-K dated
                                                                    November 23, 1999, located under Securities and
                                                                    Exchange Commission File No. 0-25812 ("November
                                                                    23, 1999 8-K")

 3.2          Certificate of Correction of Restated Certificate     Incorporated by reference from Exhibit 3.1 to
              of Incorporation dated as of December 2, 1999         PSINet's Current Report on Form 8-K dated
                                                                    November 24, 1999, located under Securities and
                                                                    Exchange Commission File No. 0-25812 ("November
                                                                    24, 1999 8-K")

 3.3          Certificate of Amendment of Certificate of            Incorporated by reference from Exhibit 3.3 to
              Incorporation dated as of January 31, 2000            PSINet's Registration Statement on Form S-4
                                                                    filed on February 9, 2000 located under
                                                                    Securities and Exchange Commission File No.
                                                                    333-96459

 3.4          Amended and Restated By-laws of PSINet                Filed herewith

 4.1          Form of 10% Senior Notes due 2005                     Incorporated by reference from Exhibit 4.1 to
                                                                    PSINet's Current Report on Form 8-K dated April
                                                                    22, 1998 located under Securities and Exchange
                                                                    Commission File No. 0-25812 ("April 22, 1998
                                                                    8-K")

 4.2          Indenture dated as of April 13, 1998 between PSINet   Incorporated by reference from Exhibit 4.2 to
              and Wilmington Trust Company, as Trustee              the April 22, 1998 8-K

 4.3          Form of 11 1/2% Senior Notes due 2008                 Incorporated by reference from PSINet's
                                                                    Registration Statement on Form S-4 declared
                                                                    effective on February 16, 1999 located under
                                                                    Securities and Exchange Commission File No.
                                                                    333-68385

 4.4          Indenture dated as of November 3, 1998 between        Incorporated by reference from Exhibit 4.1 to
              PSINet and Wilmington Trust Company, as trustee       the November 10, 1998 8-K
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
 4.5          First Supplemental Indenture dated as of November     Incorporated by reference from Exhibit 4.1 to
              12, 1998 between PSINet and Wilmington Trust          PSINet's Quarterly Report on Form 10-Q for the
              Company, as trustee                                   quarter ended September 30, 1998 located under
                                                                    Securities and Exchange Commission File No.
                                                                    0-25812 ("September 1998 10-Q")

 4.6          Form of unregistered Dollar-denominated               Incorporated by reference from Exhibit 4.6 to
              11% Senior Notes due 2009                             PSINet's Registration Statement on Form S-4
                                                                    filed on August 6, 1999 located under
                                                                    Securities and Exchange Commission File No.
                                                                    333-84721 ("August 1999 Registration Statement")


 4.7          Form of unregistered Euro-denominated                 Incorporated by Reference from Exhibit 4.7 to
              11% Senior Notes due 2009                             August 1999 Registration Statement


 4.8          Form of registered 11% Senior Notes due 2009          Incorporated by Reference from Exhibit 4.8 to
                                                                    August 1999 Registration Statement

 4.9          Indenture dated as of July 23, 1999 between PSINet    Incorporated by Reference from Exhibit 4.9 to
              and Wilmington Trust Company, as Trustee              August 1999 Registration Statement

 4.10         Form of Common Stock Certificate                      Incorporated by reference from Exhibit 4.1 to
                                                                    the May 1995 Registration Statement

 4.11         Form of Common Stock Certificate (name change)        Incorporated by reference from Exhibit 4.1A to
                                                                    PSINet's Registration Statement on Form S-1
                                                                    declared effective on December 14, 1995 located
                                                                    under Securities and Exchange Commission File
                                                                    No. 33-99610 ("December 1995 Registration
                                                                    Statement")

 4.12         Form of 6 3/4% Series C Cumulative Convertible        Incorporated by reference from Exhibit 4.1 to
              Preferred Stock Certificate                           the May 7, 1999 8-K

 4.13         Article Fourth of the Restated Certificate            See Exhibit 3.1
              Incorporation of PSINet, as amended

 4.14         Article I of the Amended and Restated By-laws of      See Exhibit 3.9
              PSINet, as amended

 4.15         Form of Rights Agreement, dated as of May 8, 1996,    Incorporated by reference from Exhibit 1 to
              between PSINet and First Chicago Trust Company of     PSINet's Registration Statement on Form 8-A
              New York, as Rights Agent, which includes as          dated June 3, 1996 located under Securities and
              Exhibit A - Certificate of Amendment; Exhibit B -     Exchange Commission File No. 0-25812
              Form of Rights Certificate; and Exhibit C - Summary
              of Rights to Purchase Shares of Preferred Stock

 4.16         Amendment No. 1, dated as of July 21, 1997, to        Incorporated by reference from Exhibit 4.1.1 to
              Rights Agreement, dated as of May 8, 1996, between    PSINet's Current Report on Form 8-K dated
              PSINet and First Chicago Trust Company of New York,   August 1, 1997 located under Securities and
              as Rights Agent.                                      Exchange Commission File No. 0-25812
</TABLE>

                                      -2-
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
 4.17         Amendment No. 2, dated as of July 31, 1997, to        Incorporated by reference from Exhibit 4.1.2 to
              Rights Agreement, dated as of May 8, 1996, between    PSINet's Current Report on Form 8-K dated
              PSINet and First Chicago Trust Company of New York,   August 20, 1997 located under Securities and
              as Rights Agent.                                      Exchange Commission File No. 0-25812

 4.18         Amendment No. 3, dated as of November 5, 1999, to     Incorporated by reference from Exhibit 4 to
              Rights Agreement, dated as of May 8, 1996, between    PSINet's Registration Statement on Form 8/A
              PSINet and First Chicago Trust Company of New York    filed on November 5, 1999

 4.19         Deposit Agreement dated as of May 4, 1999 between     Incorporated by reference from Exhibit 4.2 to
              PSINet and Wilmington Trust Company, as deposit       the May 7, 1999 8-K
              agent

 4.20         Form of unregistered Dollar-denominated 10 1/2%       Incorporated by reference from Exhibit 4.2 to
              Senior Notes due 2006                                 PSINet's November 24 1999 8-K

 4.21         Form of unregistered Euro-denominated 10 1/2%         Incorporated by reference from Exhibit 4.3 to
              Senior Notes due 2006                                 PSINet's November 24, 1999 8-K

 4.22         Form of registered 10 1/2% Senior Notes due 2006      Incorporated by reference from Exhibit 4.4 to
                                                                    PSINet's Current Report on Form 8-K dated
                                                                    February 1, 2000 located under Securities and
                                                                    Exchange Commission File No. 0-25812 ("February
                                                                    1, 2000 8-K")

 4.23         Indenture dated as of December 2, 1999 between        Incorporated by reference from Exhibit 4.1 to
              PSINet and Wilmington Trust Company, as Trustee       the November 24, 1999 8-K

 4.24         Form of 7% Series D Cumulative Convertible            Incorporated by reference from Exhibit 4.3 to
              Preferred Stock                                       the February 1, 2000 8-K

 4.25         Deposit Agreement dated as of February 1, 2000        Incorporated by reference from Exhibit 4.1 to
              between PSINet and Wilmington Trust Company, as       the February 1, 2000 8-K
              deposit agent

 4.26         First Amendment to Deposit Agreement dated as of      Incorporated by reference from Exhibit 4.2 to
              February 7, 2000, between PSINet and Wilmington       the February 1, 2000 8-K
              Trust Company, as deposit agent

10.1*         Executive Stock Option Plan of                        Incorporated by reference from Exhibit 10.10 to
              PSINet                                                the May 1995 Registration Statement


10.2*         Executive Stock Incentive Plan of PSINet, as amended  Filed herewith


10.3*         Directors Stock Incentive Plan of PSINet, as amended  Incorporated by reference from Exhibit 10.13 to
                                                                    the December 1995 Registration Statement

10.4*         Strategic Stock Incentive Plan of PSINet, as amended  Filed herewith


10.5*         1996 Performance Bonus Plan of PSINet                 Incorporated by reference from Exhibit 10.25 to
                                                                    the 1996 Form 10- K
</TABLE>

                                      -3-
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
10.6*         InterCon Systems Corporation 1992 Incentive Stock     Incorporated by reference from Exhibit 99.1 to
              Plan                                                  PSINet's Registration Statement on Form S-8
                                                                    which became effective on October 18, 1995
                                                                    located under Securities  Exchange Commission
                                                                    File No. 33-98316 ("S-8 No. 16")

10.7*         InterCon Systems Corporation 1994 Stock Option Plan   Incorporated by reference from Exhibit 99.2 to
                                                                    the S-8 No. 16

10.8*         Software Ventures Corporation 1994 Stock Option Plan  Incorporated by reference from Exhibit 99 to
                                                                    PSINet's Registration Statement on Form S-8
                                                                    which became effective on October 18, 1995
                                                                    located under Securities and Exchange
                                                                    Commission File No. 33-98314
10.9          1999 Employee Stock Purchase Plan                     Incorporated by reference from Exhibit 4-1 to
                                                                    PSINet's Registration Statement on Form S-8
                                                                    filed on September 29, 1999 located under
                                                                    Securities and Exchange Commission File No.
                                                                    333-88029 ("September 1999 S-8")

10.10         1999 International Employee Stock Purchase Plan       Incorporated by reference from Exhibit 4-1(a)
                                                                    to the September 1999 S-8

10.11*        Employment Agreement dated July 1, 1997 between       Incorporated by reference from Exhibit 10.5 to
              PSINet and Michael Malesardi                          the September 1997 10-Q

10.12*        Employment Agreement dated August 4, 1997 between     Incorporated by reference from Exhibit 10.7 to
              PSINet and Harry Hobbs                                the September 1997 10-Q

10.13*        Employment Agreement dated January 18, 1998 between   Incorporated by reference from Exhibit 10.53 to
              PSINet and Kathleen B. Horne                          the 1997 Form 10-K

10.14*        Employment Agreement dated February 16, 1998          Incorporated by reference from Exhibit 10.54 to
              between PSINet and John Muleta                        the 1997 Form 10-K

10.15*        Employment Agreement dated October 16, 1998, 1996     Incorporated by reference from Exhibit 10.57 to
              between PSINet and Harold S. Wills                    the 1998 Form 10-K

10.16*        Employment Agreement dated October 16, 1998 between   Incorporated by reference from Exhibit 10.58 to
              PSINet and Edward D. Postal                           the 1998 Form 10-K

10.17         Employment Agreement dated October 16, 1998 between   Incorporated by reference from Exhibit 10.59 to
              PSINet and David N. Kunkel                            the 1998 Form 10-K

10.18         Employee Agreement dated as of October 1, 1999        Incorporated by reference from Exhibit 10.1 to
              between PSINet and William L. Schrader                PSINet's Quarterly Report on Form 10-Q for the
                                                                    quarter ended September 30, 1999 located under
                                                                    Securities and Exchange Commission File No.
                                                                    0-25812 ("September 1999 10-Q")
</TABLE>

                                      -4-
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
10.19         Amendment to Employment Agreement dated as of         Incorporated by reference from Exhibit 10.2 to
              October 1, 1999 between PSINet and Harold S. Wills    PSINet's September 1999 10-Q

10.20         Amendment to Employment Agreement dated as of         Incorporated by reference from Exhibit 10.3 to
              October 1, 1999 between PSINet and Edward D. Postal   PSINet's September 1999 10-Q"

10.21         Form of Indemnification Agreement                     Incorporated by reference from Exhibit 10.21 to
                                                                    the May 1995 Registration Statement

10.22         Registration Rights Agreement dated as of June 16,    Incorporated by reference from Exhibit 10.39 to
              1995 among PSINet and Stockholders of InterCon        the December 1995 Registration Statement
              Systems Corporation

10.23         Registration Rights Agreement dated as of July 11,    Incorporated by reference from Exhibit  10.40
              1995 among PSINet and Stockholders of Software        to the December 1995 Registration Statement
              Ventures Corporation

10.24         Registration Rights Agreement dated as of February    Incorporated by reference from Exhibit 10.62 to
              25, 1998 between PSINet and IXC Internet Services,    the 1997 Form 10-K
              Inc.

10.25         Warrant to purchase up to 25,000 shares of the        Incorporated by reference from Exhibit 10.39 to
              Series B Preferred of PSINet, at an exercise price    the May 1995 Registration Statement
              of $1.60 per share, registered in the name of
              William H. Baumer

10.26         Warrant to purchase up to 25,000 shares of the        Incorporated by reference from Exhibit 10.40 to
              Series B Preferred of PSINet, at an exercise price    the May 1995 Registration Statement
              of $1.60 per share, registered in the name of
              William H. Baumer

10.27         Stock Acquisition Agreement, dated as of February     Incorporated by reference from Exhibit 2 to
              1, 1997, between Ascend Communications, Inc. and      PSINet's Current Report on Form 8-K dated
              PSINet with respect to all outstanding capital        February 14, 1997 located under Securities and
              stock of InterCon Systems Corporation, a Delaware     Exchange Commission File No. 0-25812
              corporation and a wholly-owned subsidiary of PSINet

10.28         Asset Purchase Agreement dated as of June 28, 1996    Incorporated by reference from Exhibit 2 to the
              between PSINet and MindSpring Enterprises, Inc.       June 1996 10-Q

</TABLE>


                                      -5-
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
10.29         Amendment No. 2 to Network Services Agreement         Incorporated by reference from Exhibit 10.75 to
              entered in as of January 1, 1997 by and between       the 1996 Form 10-K
              PSINet and MindSpring Enterprises, Inc.

10.30         IRU and Stock Purchase Agreement dated as of July     Incorporated by reference from Exhibit 2.1 to
              22, 1997 between IXC Internet Services, Inc. and      the June 1997 10-Q
              PSINet

10.31         First Amendment to IRU and Stock Purchase Agreement   Incorporated by reference from Exhibit A to
              dated as of July 22, 1997 between IXC Internet        PSINet's December 1997 Proxy Statement
              Services, Inc. and PSINet

10.32         Second Amendment to IRU and Stock Purchase            Incorporated by reference from Exhibit A to the
              Agreement dated as of July 22, 1997 between IXC       December 1997 Proxy Statement
              Internet Services, Inc. and PSINet

10.33         Joint Marketing and Services Agreement dated as of    Incorporated by reference from Exhibit 10.1 to
              July 22,  1997 between IXC Internet Services, Inc.    PSINet's Quarterly Report on Form 10-Q for the
              and PSINet                                            quarter ended June 30, 1997 located under
                                                                    Securities and Exchange Commission File no.
                                                                    0-25812

10.34         Security Agreement and Assignment dated as of         Incorporated by reference from Exhibit 10.95 to
              February 25, 1998 between PSINet and IXC Internet     the 1997 Form 10-K
              Services, Inc.

10.35         Collocation and Interconnection Agreement between     Incorporated by reference from Exhibit 10.96 to
              PSINet and IXC Internet Services, Inc.                the 1997 Form 10-K

10.36         Escrow Agreement, dated as of  April 13, 1998,        Incorporated by reference from Exhibit 10.2 to
              among Wilmington Trust Company (as escrow agent and   the April 22, 1998 8-K
              trustee) and PSINet.

10.37         Registration Rights Agreement dated as of April 13,   Incorporated by reference from Exhibit 10.1 to
              1998 among PSINet and Donaldson, Lufkin & Jenrette    the April 22, 1998 8-K
              Securities Corporation, Merrill Lynch, Pierce,
              Fenner & Smith Incorporated, and Chase Securities,
              Inc.

10.38         Registration Rights Agreement dated as of November    Incorporated by reference from Exhibit 10.1 to
              3, 1998 among PSINet and Donaldson, Lufkin and        the November 10, 1998 8-K
              Jenrette Securities Corporation, Chase Securities,
              Inc. and Morgan Stanley & Co. Incorporated
</TABLE>


                                      -6-
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
10.39         Employment Agreement dated June 17, 1998 between      Incorporated by reference from Exhibit 10.1 to
              PSINet and William A. Opet                            PSINet's Quarterly Report on Form 10-Q for the
                                                                    quarter ended June 30, 1998 located under
                                                                    Securities and Exchange Commission File No.
                                                                    0-25812 ("June 1998 10-Q")

10.40         Employment Agreement dated September 1, 1998          Incorporated by reference from Exhibit 10.8 to
              between PSINet and Chi H. Kwan                        the September 1998 10-Q

10.41         Employment Agreement dated October 12, 1998 between   Incorporated by reference from Exhibit 10.2 to
              PSINet and Geoffrey E. Axton                          the September 1998 10-Q

10.42         Employment Agreement dated October 14, 1998 between   Incorporated by reference from Exhibit 10.4 to
              PSINet and Edward Arnold Davis                        the September 1998 10-Q

10.43         Registration Rights Agreement, dated as of November   Incorporated by reference from Exhibit 4.3 to
              13, 1998, among PSINet and Donaldson Lufkin &         the September 1998 10-Q
              Jenrette Securities Corporation, Chase Securities
              Inc. and Morgan Stanley & Co. Incorporated

10.44         Amendment to Employment Agreement dated October 1,    Incorporated by reference from Exhibit 10.6 to
              1998 between PSINet and Harry Hobbs                   the September 1998 10-Q

10.45         Employment Agreement dated November 12, 1998          Incorporated by reference from Exhibit 10.10 to
              between PSINet and Lawrence Winkler                   the September 1998 10-Q

10.46         Employment Agreement dated May 24, 1999 between       Incorporated by reference from Exhibit 10.100
              PSINet and James F. Cragg                             to PSINet's August 1999 Registration Statement

10.47         Employment Agreement dated May 24, 1999 between       Incorporated by reference from Exhibit 10.101
              PSINet and Philippe J. Kuperman                       to PSINet's August 1999 Registration Statement

10.48         Master Lease Agreement between PSINet and             Incorporated by reference from Exhibit 10.11 to
              Technology Credit Corporation No. 1788 dated June     the September 1998 10-Q
              20, 1998

10.49         Master Lease Agreement between PSINet and             Incorporated by reference from Exhibit 10.12 to
              Technology Credit Corporation No. 1789 dated June     the September 1998 10-Q
              20, 1998

10.50         Master Loan and Security Agreement No. 3963 between   Incorporated by reference from Exhibit 10.13 to
              PSINet and Charter Financial Inc. dated September     the September 1998 10-Q
              28, 1998

10.51         Lease Agreement dated July 8, 1998 between            Incorporated by reference from Exhibit 10.2 to
              Ballymore Properties Limited and Cordoba Holdings     the April 27, 1999 8-K
              Limited and Thomas Charles Cembrinck
</TABLE>

                                      -7-
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION                                           LOCATION
------        -----------                                           --------
<S>           <C>                                                   <C>
 10.52        Registration Rights Agreement, dated as of July 23,   Incorporated by reference from Exhibit 10.107
              1999, among PSINet and Donaldson Lufkin & Jenrette    to the August 1999 Registration Statement
              International, Bear Stearns International Limited
              and Chase Manhattan International Limited

 10.53        Registration Rights Agreement, dated as of December   Incorporated by reference from Exhibit 10.1 to
              2, 1999, among PSINet and Donaldson Luftkin &         PSINet's November 24, 1999 8-K
              Jenrette International, Bear Stearns International
              Limited, Merrill Lynch International and Morgan
              Stanley & Co. International Limited

 10.54        Registration Rights Agreement, dated as of February   Incorporated by reference from Exhibit 10.1 to
              1, 2000, among PSINet and Donaldson Lufkin &          the February 1, 2000 8-K
              Jenrette Securities Corporation, Merrill Lynch &
              Co., Merrill Lynch, Pierce, Fenner & Smith
              Incorporated, Morgan Stanley & Co. Inc., Bear
              Stearns & Co. Inc., BancBoston Robertson Stephens
              and Chase Securities Inc.

 10.55        Amendment No. 1 to Registration Rights Agreement      Incorporated by reference from Exhibit 10.2 to
              dated February 7, 2000 to Registration Rights         the February 1, 2000 8-K
              Agreement dated as of February 1, 2000 among
              Donaldson, Lufkin & Jenrette Securities
              Corporation, Merrill Lynch & Co., Merrill Lynch,
              Pierce, Fenner & Smith Incorporated, Morgan Stanley
              & Co., Inc., Bear, Stearns & Co. Inc., BankBoston
              Robertson Stephens and Chase Securities Inc.

 12           Computation of Ratio of Earnings to Combined Fixed    Filed herewith
              Charges and Preferred Stock Dividends

 21           Significant subsidiaries of PSINet                    Filed herewith

 23           Consent of PricewaterhouseCoopers LLP                 Filed herewith

 27**         Financial Data Schedule                               Filed herewith
 </TABLE>

_________________________________
*  Indicates a management contract or compensatory plan or arrangement required
   to be filed as an Exhibit pursuant to Item 14(a)(3).

** Not deemed filed for purposes of Section 11 of the Securities Act of 1933,
   Section 18 of the Securities Exchange Act of 1934 and Section 323 of the
   Trust Indenture Act of 1939 or otherwise subject to the liabilities of such
   sections and not deemed part of any registration statement to which such
   exhibit relates.

                                      -8-