<PAGE>
------------------------------------------------------------------------------
------------------------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                        
                                    FORM 10-Q
                                        
                                        
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
          Act of 1934 for the Quarterly Period Ended September 30, 1997
                                        
                                       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)  
                                        
                                 Not Applicable
             (Former name, former address and former fiscal year, 
                    if changed since last report date)
                                        
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    
                                                      ---     ---

     Common Stock, $.01 par value - 40,434,933 shares as of October 31, 1997
   (Indicate the number of shares outstanding of each of the issuer's classes
                of common stock, as of the latest practicable date)

                    The Index of Exhibits appears on page 24.

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

<PAGE>

                                   PSINET INC.
                                        

                                TABLE OF CONTENTS
                                        
                                        

PART I.  FINANCIAL INFORMATION

  Item 1.   Financial Statements:

            Consolidated Balance Sheets as of December 31, 1996 and 
              September 30, 1997 . . . . . . . . . . . . . . . . . . . . .   3

            Consolidated Statements of Operations for the three and 
              nine months ended September 30, 1996 and 
              September 30, 1997 . . . . . . . . . . . . . . . . . . . . .   4

            Consolidated Statements of Cash Flows for the nine months
            ended September 30, 1996 and September 30, 1997. . . . . . . .   5

            Notes to Consolidated Financial Statements . . . . . . . . . .   6


  Item 2.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations. . . . . . . . . . . . . . . . . .  11
    
PART II.  OTHER INFORMATION

  Item 2.   Changes in Securities and Use of Proceeds. . . . . . . . . . .  19

  Item 6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .  21

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23

Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
<PAGE>
    PART I. FINANCIAL INFORMATION 
    Item 1. FINANCIAL STATEMENTS
 
                                  PSINET INC.
                           CONSOLIDATED BALANCE SHEETS
                           (Thousands of U.S. Dollars)
 
<TABLE>
<CAPTION>


                                                                             DECEMBER 31, 1996  SEPTEMBER 30, 1997
                                ASSETS                                            (AUDITED)         (UNAUDITED)
                                                                             -----------------  ------------------
<S>                                                                          <C>                <C>
Current assets:
  Cash and cash equivalents..................................................   $    52,695        $     40,510
  Short-term investments and marketable securities...........................         4,649               3,000
  Accounts receivable, net...................................................        17,421              13,004
  Notes receivable...........................................................           747               5,098
  Prepaid expenses...........................................................         1,963               2,597
  Other current assets.......................................................         4,836               2,408
                                                                                -----------        ------------
    Total current assets.....................................................        82,311              66,617
                                                                                -----------        ------------
                                                                                -----------        ------------

Property and equipment, net................................................          72,061              82,145
Goodwill and other intangibles, net........................................          16,673               2,066
Other assets and deferred charges..........................................           6,067               3,207
                                                                                -----------        ------------
Total assets...............................................................     $   177,112        $    154,035
                                                                                -----------        ------------
                                                                                -----------        ------------

                   LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Line of credit.............................................................   $     2,000        $      3,000
  Current portion of long-term debt..........................................        24,915              32,860
  Trade accounts payable.....................................................        19,868              21,723
  Accrued payroll and related expenses.......................................         3,098               3,323
  Other accounts payable and accrued liabilities.............................         3,632               2,341
  Deferred revenue...........................................................         5,612               5,398
                                                                                -----------        ------------
    Total current liabilities................................................        59,125              68,645

Long-term debt.............................................................          26,938              25,335
Deferred income taxes......................................................             476                  --
Other liabilities..........................................................             790               1,238
                                                                                -----------        ------------
    Total liabilities......................................................          87,329              95,218
                                                                                -----------        ------------

Shareholders' equity:
  Preferred stock............................................................            --                  --
  Common stock...............................................................           402                 405
  Capital in excess of par value.............................................       208,000             208,406
  Retained deficit...........................................................      (116,636)           (147,901)
  Treasury stock.............................................................        (2,005)             (2,005)
  Cumulative foreign currency translation adjustment.........................            22                 (88)
                                                                                -----------        ------------
    Total shareholders' equity...............................................        89,783              58,817
                                                                                -----------        ------------

Total liabilities and shareholders' equity.................................     $   177,112        $    154,035
                                                                                -----------        ------------
                                                                                -----------        ------------

</TABLE>

      THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

 
                                                PSINET INC. 
                                  CONSOLIDATED STATEMENTS OF OPERATIONS 
                     (Thousands of U.S. Dollars, Except Per Share Amounts)

<TABLE>
<CAPTION>


                                                                      THREE MONTHS ENDED      NINE MONTHS ENDED
                                                                        SEPTEMBER 30,           SEPTEMBER 30,
                                                                    ----------------------  ----------------------
                                                                       1996        1997        1996        1997
                                                                    ----------  ----------  ----------  ----------
                                                                          (UNAUDITED)            (UNAUDITED)
<S>                                                                 <C>         <C>         <C>         <C>

Revenue...........................................................  $   24,147  $   32,001  $   61,547  $   87,147
Other income, net.................................................       3,017      --           5,417      --
                                                                    ----------  ----------  ----------  ----------
                                                                        27,164      32,001      66,964      87,147
Operating costs and expenses:
  Data communications and operations..............................      19,698      23,765      50,169      66,847
  Sales and marketing.............................................       6,000       6,210      20,865      18,070
  General and administrative......................................       5,309       5,354      15,012      16,976
  Depreciation and amortization...................................       8,377       6,557      21,585      20,648
                                                                    ----------  ----------  ----------  ----------
    Total operating costs and expenses............................      39,384      41,886     107,631     122,541

Loss from operations..............................................     (12,220)     (9,885)    (40,667)    (35,394)

Interest expense..................................................      (1,411)     (1,516)     (3,654)     (4,162)
Interest income...................................................       1,179         550       3,346       1,995
Other income (expense)............................................          19         177       2,863         119
Gain on sale of subsidiary........................................      --          --          --           5,701
Equity in loss of affiliate.......................................        (100)     --            (307)     --
                                                                    ----------  ----------  ----------  ----------

Loss before income taxes..........................................     (12,533)    (10,674)    (38,419)    (31,741)
Income tax benefit................................................          40      --             119         476
                                                                    ----------  ----------  ----------  ----------

Net loss..........................................................  $  (12,493) $  (10,674) $  (38,300) $  (31,265)
                                                                    ----------  ----------  ----------  ----------
                                                                    ----------  ----------  ----------  ----------

Loss per share....................................................  $    (0.31) $    (0.26) $    (0.98) $    (0.78)
                                                                    ----------  ----------  ----------  ----------
                                                                    ----------  ----------  ----------  ----------

Shares used in computing loss per share...........................      39,888      40,407      39,143      40,264
                                                                    ----------  ----------  ----------  ----------
                                                                    ----------  ----------  ----------  ----------

</TABLE>

     THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<PAGE>

 
                                                    PSINET INC. 
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS 
                                          (Thousands of U.S. Dollars)

<TABLE>
<CAPTION>



                                                                                              NINE MONTHS ENDED
                                                                                                SEPTEMBER 30,
                                                                                            ----------------------
                                                                                               1996        1997
                                                                                            ----------  ----------
                                                                                                 (UNAUDITED)
<S>                                                                                         <C>         <C>

Net cash used in operating activities.....................................................  $  (28,391) $  (13,009)
                                                                                            ----------  ----------

Cash flows from investing activities:
  Purchases of property and equipment, net................................................        (508)     (9,120)
  Purchase of short-term investments and marketable securities............................     (14,621)     (3,000)
  Net proceeds from sale of subsidiary....................................................      --          20,353
  Proceeds from sale of investments.......................................................       3,219       4,649
  Other, net..............................................................................        (610)        148
                                                                                            ----------  ----------
    Net cash (used in) provided by investing activities...................................     (12,520)     13,030
                                                                                            ----------  ----------

Cash flows from financing activities:
  Net (payments) proceeds on line of credit...............................................      (1,012)      1,000
  Proceeds from issuance of notes payable.................................................       6,848       5,988
  Repayments of notes payable.............................................................      (3,368)     (5,290)
  Principal payments under capital lease obligations......................................     (20,172)    (14,313)
  Other, net..............................................................................       1,605         409
                                                                                            ----------  ----------
    Net cash used in financing activities.................................................     (16,099)    (12,206)
                                                                                            ----------  ----------

Net decrease in cash and cash equivalents.................................................     (57,010)    (12,185)
Cash and cash equivalents, beginning of year..............................................     102,710      52,695
                                                                                            ----------  ----------

Cash and cash equivalents, end of period..................................................  $   45,700  $   40,510
                                                                                            ----------  ----------
                                                                                            ----------  ----------

</TABLE>
 
     THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>


                                   PSINET INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note l - Basis of Presentation

   These consolidated financial statements for the three and nine months 
ended September 30, 1997 and the related footnote information are unaudited 
and have been prepared on a basis substantially consistent with the audited 
consolidated financial statements of PSINet Inc. and subsidiaries 
(collectively, "PSINet" or the "Company") as of December 31, 1996 
incorporated by reference in the Company's Annual Report on Form 10-K as 
filed with the Securities and Exchange Commission (the "Annual Report"). 
These financial statements should be read in conjunction with the audited 
consolidated financial statements and the related notes to consolidated 
financial statements of the Company as of December 31, 1996 incorporated by 
reference in the Company's Annual Report and the unaudited quarterly 
consolidated financial statements and related notes to consolidated financial 
statements of the Company for the periods ended March 31, 1997 and June 30, 
1997 included in the Company's Form 10-Q for the quarters then ended, as 
filed with the Securities and Exchange Commission.  In the opinion of 
management, the accompanying unaudited financial statements contain all 
adjustments (consisting of normal recurring adjustments) which management 
considers necessary to present fairly the consolidated financial position of 
the Company at September 30, 1997 and the results of operations and cash 
flows for the three and nine month periods ended September 30, 1996 and 1997. 
The results of operations for the three and nine month periods ended 
September 30, 1997 may not be indicative of the results expected for any 
succeeding quarter or for the entire year ending December 31, 1997.

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

Note 2 - Loss per Share
   
   Loss per share is computed using the weighted average number of shares
of common stock that were outstanding during the periods presented,
adjusted for the dilutive effect of common stock equivalent shares of
common stock options and warrants.  Common stock equivalent shares are
calculated using the treasury stock method.
   
   Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share" (EPS), which is effective for the Company's December 31, 1997
financial statements, requires disclosure of Basic EPS and Diluted EPS. 
Basic EPS excludes the dilutive effect of common stock equivalents. 
Diluted EPS reflects the potential dilution that could occur if common
stock equivalents or other contracts to issue common stock were exercised
or converted into common stock.  The Company anticipates that the adoption
of SFAS No. 128 will not have a material effect on the Company's loss per
share data.

Note 3 - Short-Term Investments and Marketable Securities
   
   At September 30, 1997, short-term investments and marketable securities
consisted of debt securities classified as held-to-maturity with original
maturities of greater than 90 days. 
   
   Other income for the nine months ended September 30, 1996 consisted of
$2.8 million of realized gains on equity securities sold by the Company.


                                        6
<PAGE>

                                   PSINET INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 4 - Long-Term Debt

   During the nine months ended September 30, 1997, the Company incurred
capital lease obligations of $20.0 million upon the execution of leases for
new data communications equipment and other fixed assets.  At September 30,
1997, the aggregate unused portion under the Company's various financing
arrangements for purchases of data communications equipment and other fixed
assets was $26.4 million. 
   
   Additionally, the Company has a secured revolving credit agreement with
a bank under which the Company may borrow up to a maximum principal amount
of the lesser of $5.0 million or 75% of qualified accounts receivable which
secure the loan, less 20% of the aggregate principal amount of certain term
credit advances (approximately $4.4 million at September 30, 1997).  There
was $3.0 million advanced under this credit agreement at September 30,
1997.  Interest is payable monthly at an annual rate of prime plus 1.5%
(10% at September 30, 1997).
   
Note 5 - Sale of Subsidiary

   Effective as of February 1, 1997, the Company sold all of the issued and
outstanding capital stock of its wholly-owned subsidiary, InterCon Systems
Corporation ("InterCon"), to Ascend Communications, Inc.  The Company
recognized a gain of $5.7 million in connection with the sale of InterCon.

Note 6 - Agreements with Chatterjee Management Company
   
   On September 19, 1996, the Company entered into a Joint Venture Agreement 
(the "Joint Venture Agreement") with Chatterjee Management Company (doing 
business as The Chatterjee Group), a Delaware corporation ("Chatterjee"), 
pursuant to which the Company and an investment group led by Chatterjee (the 
"Chatterjee Investor Group") would establish a joint venture for the purpose 
of building an Internet network across Europe and providing Internet-related 
services in Europe and such investment group would invest up to $41.0 million 
in the joint venture.  No monies were invested by Chatterjee or the 
Chatterjee Investment Group pursuant to the Joint Venture Agreement nor were 
any other actions undertaken to implement it.  The Company nevertheless has 
continued to proceed on its own to provide Internet-related services in the 
European market.  While the parties sought, for a period of time, to 
negotiate a direct investment in the Company by Chatterjee, those 
negotiations were not successful.  As a result, the Company believes that it 
is likely that Chatterjee may seek to commence arbitration or other 
adversarial proceedings against the Company under the Joint Venture Agreement 
and related documents (seeking, among other things, to enforce the Joint 
Venture Agreement) or otherwise.  In any such event, the Company would 
vigorously defend such action.

Note 7 - Recently Issued Accounting Pronouncements

   In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997.  The Statement establishes standards for reporting and
displaying comprehensive income, as defined, and its components.  The
Company plans to adopt the Statement's disclosure requirements in 1998.



                                        7
<PAGE>

                                   PSINET INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 7 - Recently Issued Accounting Pronouncements (continued)
   
   In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for fiscal
years beginning after December 15, 1997.  The Statement establishes
standards for the way companies report information about operating segments
in annual and interim financial statements.  Generally, the Statement
requires financial information to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.  The Company plans to adopt the Statement's
disclosure requirements in 1998.
    
Note 8 - Agreements with IXC Internet Services, Inc.

   On July 22, 1997, the Company entered into an IRU and Stock Purchase
Agreement, as amended on October 1, 1997, with IXC Internet Services, Inc.
("IXC"), an indirect subsidiary of IXC Communications, Inc., to acquire a
20-year noncancellable indefeasible right of use ("IRU") in up to 10,000
equivalent route miles of fiber-based OC-48 network bandwidth across the
IXC fiber optic telecommunication network within the United States in
exchange for an approximately 20 percent (post-issuance) common stock
interest in the Company. The Company also signed a long-term joint
marketing and services agreement with IXC. Under the marketing and services
agreement, the Company will be selling its Internet access and value-added
services through IXC.   The non-exclusive marketing and services agreement
provides for IXC and its resellers to be able to offer all of the Company's
Internet services with long distance and other telephone services to IXC
customers throughout the United States. 

   In connection with this transaction, IXC will receive common stock at
closing equal to approximately 20 percent of the issued and outstanding
shares of the Company, after giving effect to the IXC issuance (the
"Initial Shares").  In addition, if the fair market value of the Initial
Shares is less than $240.0 million at the earlier of one year following
delivery and acceptance of the total bandwidth or the fourth anniversary of
the closing of the transaction, the Company has agreed to provide IXC with
additional stock and/or cash, at the Company's sole option, in an amount
equal to the difference between $240.0 million and the then fair market
value of such shares (the "Contingent Payment Obligation").  The Company
has the right to accelerate its Contingent Payment Obligation to deliver
additional stock and/or cash to IXC at any date after the closing of this
transaction.  In addition, the right of IXC to receive the Contingent
Payment Obligation will terminate on such date as the Initial Shares value,
as defined, is equal to or greater than $240.0 million.  The agreement
permits PSINet to use the OC-48 bandwidth for any purpose in connection
with the provision of Internet services and for non-Internet
telecommunications transport at a rate of DS-3 or less, but restricts
PSINet and its customers from using the OC-48 bandwidth to deliver private
line or long distance telephone services (based on non-Internet telephone
switching technologies) to any third party. The agreement contemplates that
the total amount of OC-48 bandwidth will be delivered to the Company in
specified minimum increments every six months during the two year period
following the closing of this transaction. In addition, after the closing
of this transaction, the Company expects to incur on an annual basis
approximately $1.15 million in operation and maintenance fees with respect
to the IRU to be acquired from IXC per each 1,000 route miles of OC-48
bandwidth accepted under the purchase agreement with IXC.  The transaction
with IXC is expected to close prior to March 31, 1998, subject to approval
by the Company's shareholders and other closing conditions.  In addition,
the Company's Board of Directors has approved certain modifications to the
Company's Preferred Stock Purchase Rights Plan in connection with this
transaction.

                                        8

<PAGE>

                                   PSINET INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 9 - Nonmonetary Exchange Transaction

   The Company exchanges capacity on its network for capacity on the
network of another Internet service provider.

   The Company records such exchange agreement at the fair value of either
the services provided or received, whichever is more readily determinable. 
For the nine months ended September 30, 1997, the Company recognized $1.2
million of revenue and data communications and operations expense relating
to such an exchange.

Note 10 - Wholesale Financing Arrangements

   The Company is obligated, under the terms of one of its wholesale
network services agreements, to provide the wholesale customer with a
rental facility of up to $5.0 million for telecommunications equipment
owned or leased by the Company and deployed in the customer's network.  As
of September 30, 1997, the Company had provided $1.4 million of equipment
to the wholesale customer under three year operating leases.  Additionally,
under the terms of the agreement, the customer may defer payments until
July 31, 1998 on payables of up to $5.0 million for wholesale network
services provided by the Company until July 31, 1998.  At September 30,
1997, $3.2 million under this agreement is reflected as current notes
receivable.

Note 11 - Subsequent Events

Private Placement

   On November 10, 1997, the Company completed a private placement of
600,000 shares of its Series B 8% Convertible Preferred Stock ("Series B
Preferred Stock") for proceeds of $30.0 million, before expenses.  Each
share of Series B Preferred Stock has a par value of $.01 per share and a
stated value of $50.00 per share.  The Series B Preferred Stock will accrue
dividends at an annual rate of 8%, payable quarterly, in cash or the
Company's Series B Preferred Stock, at the Company's option.

   The Series B Preferred Stock is convertible into the Company's common 
stock at $10 per share during the first year.  In certain circumstances, the 
conversion price may be reset at the end of each year based on the Company's 
stock price.  The Company also has the right to call the Series B Preferred 
Stock for redemption under certain circumstances and commencing on the third 
anniversary of original issuance.  The Company is subject to certain 
restrictions on the redemption, purchase or acquisition of, and the payment 
of dividends on, common stock while the Series B Preferred Stock is 
outstanding.  The holders were granted certain registration rights in 
connection with the transaction.

   Proceeds of the issuance are invested in short-term, investment grade,
interest bearing securities.  The proceeds will be used for general
corporate purposes and acquisition support.


                                        9
<PAGE>


                                   PSINET INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 11 - Subsequent Events (continued)

iSTAR internet inc. Acquisition

   On November 10, 1997, the Company announced the execution of a
definitive agreement for the acquisition of all of the outstanding common
stock of iSTAR internet inc. ("iSTAR"), a Canadian Internet solutions
company providing advanced Internet services for businesses, institutions
and individuals for US$0.86 (C$1.206) per share or approximately US$25.0
million payable in shares of a new series of the Company's preferred stock. 
The transaction is expected to be completed within 60 to 90 days and is
subject to certain closing conditions including government, regulatory, and
third party approvals.

   Under the terms of the agreement, iSTAR shareholders will receive
non-voting, 8% cumulative convertible preferred stock of the Company.  Up
to one-third of the convertible preferred stock of each holder will be
convertible on or after each of April 1, 1998, July 1, 1998 and January 1,
1999, at the ten-day weighted average price of the Company's common stock
prevailing at the time of conversion, subject to certain limitations.  Any
remaining convertible preferred stock outstanding at the end of three
years, if not converted, will be subject to optional redemption by the
Company.  The Company also has the right to call the convertible preferred
stock for redemption at any time following six months from the date of
issuance.  Prior to the closing of the transaction, the Company is
obligated to provide iSTAR approximately US$3.6 million in short-term
financing.

                                       10
<PAGE>

Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS
                 
The following discussion should be read in conjunction with the
accompanying unaudited consolidated financial statements and associated
notes thereto and the audited consolidated financial statements, the notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company as of December 31, 1996 incorporated
by reference to the Company's Annual Report on Form 10-K, and the unaudited
quarterly consolidated financial statements and related notes to
consolidated financial statements of the Company for the periods ended
March 31, 1997 and June 30, 1997 included in the Company's Form 10-Q for
such periods, as filed with the Securities and Exchange Commission.  This
discussion includes certain forward-looking statements.  Actual results
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,
see "Risk Factors" set forth in Exhibit 99.1 filed herewith and the
Company's other filings with the Securities and Exchange Commission.

General

   PSINet is a leading provider of turn-key corporate Internet and intranet
access, managed security services, electronic commerce solutions, Web
hosting services and Wholesale Network Services throughout the United
States and internationally. PSINet manages a fast-packet network that
provides high speed Internet access ranging from dedicated high-speed
circuits to ISDN to high-speed modem dial-up.  Pursuant to wholesale
network services agreements with other Internet service providers ("ISPs"),
the Company also provides Internet connection services which allow the
subscribers of the ISPs to connect to the Internet through PSINet's network
local access points called Points-of-Presence or "POPs" for specified fees
payable by the ISPs.  At September 30, 1997, the Company served
approximately 23,000 corporate customers and 41 ISPs through more than 350
POPs.

   Since the commencement of the Company's operations in 1989, the Company
has undertaken a program of developing and expanding its network. In
connection with this development and expansion, the Company has made
significant investments in telecommunications circuits and equipment. These
investments generally are made in advance of anticipated customer growth
and resulting revenue. The Company also has increased its sales and
marketing, customer support, network operations and field services
commitments in anticipation of the expansion of its customer base.  These
expansion efforts have caused the Company to experience fluctuations in
expenses from time to time, both in absolute terms and as a percentage of
revenue.  The nature and amount of these expenses may continue to fluctuate
over time as the Company shifts its focus from expanding its network to
refining and enhancing its existing network.
   
Strategic Alliance with IXC Internet Services, Inc.

   On July 22, 1997, the Company entered into an IRU and Stock Purchase
Agreement, as amended on October 1, 1997 (the "IRU Agreement"), with IXC
Internet Services, Inc. ("IXC"), an indirect subsidiary of IXC
Communications, Inc., to acquire a 20-year noncancellable indefeasible
right of use ("IRU") in up to 10,000 equivalent route miles of fiber-based
OC-48 network bandwidth across the IXC fiber optic telecommunication
network within the United States in exchange for an approximately 20
percent (post-issuance) common stock interest in the Company. The Company
also signed a long-term marketing agreement with IXC. Under the marketing
agreement, the Company will be selling its Internet access and value-added
services through IXC. The non-exclusive marketing agreement provides for
IXC and its resellers to be able to offer all of the Company's Internet
services with long distance and other telephone services to IXC customers
throughout the United States.

                                       11
<PAGE>


   In connection with this transaction, IXC will receive common stock at
closing equal to approximately 20 percent of the issued and outstanding
shares of the Company, after giving effect to the IXC issuance (the
"Initial Shares").  In addition, if the fair market value of the Initial
Shares is less than $240.0 million at the earlier of one year following
delivery and acceptance of the total bandwidth or the fourth anniversary of
the closing of the transaction, the Company has agreed to provide IXC with
additional stock and/or cash, at the Company's sole option, in an amount
equal to the difference between $240.0 million and the then fair market
value of such shares (the "Contingent Payment Obligation").  The Company
has the right to accelerate its Contingent Payment Obligation to deliver
additional stock and/or cash to IXC at any date after the closing of this
transaction.  In addition, the right of IXC to receive the Contingent
Payment Obligation will terminate on such date the Initial Shares value, as
defined, is equal to or greater than $240.0 million.  The agreement permits
PSINet to use the OC-48 bandwidth for any purpose in connection with the
provision of Internet services and for non-Internet telecommunications
transport at a rate of DS-3 or less, but restricts PSINet and its customers
from using the OC-48 bandwidth to deliver private line or long distance
telephone services (based on non-Internet telephone switching technologies)
to any third party. The agreement contemplates that the total amount of
OC-48 bandwidth will be delivered to the Company in specified minimum
increments every six months during the two year period following the
closing of this transaction. In addition, after the closing of this
transaction, the Company expects to incur on an annual basis approximately
$1.15 million in operation and maintenance fees with respect to the IRUs to
be acquired from IXC per each 1,000 route miles of OC-48 bandwidth accepted
under the IRU Agreement.  The transaction is expected to close prior to
March 31, 1998, subject to approval by the Company's shareholders and other
closing conditions.  In addition, the Company's Board of Directors has
approved certain modifications to the Company's Preferred Stock Purchase
Rights Plan in connection with this transaction.

Issuance of Preferred Stock

   On November 10, 1997, the Company completed a private placement of
600,000 shares of its Series B 8% Convertible Preferred Stock ("Series B
Preferred Stock") for proceeds of $30.0 million, before expenses.  Each
share of Series B Preferred Stock has a par value of $.01 per share and a
stated value of $50.00 per share. The Series B Preferred Stock will accrue
dividends at an annual rate of 8%, payable quarterly, in cash or the
Company's Series B Preferred Stock, at the Company's option.

   The Series B Preferred Stock is convertible into the Company's common 
stock at $10 per share during the first year.  In certain circumstances, the 
conversion price may be reset at the end of each year based on the Company's 
stock price.  The Company also has the right to call the Series B Preferred 
Stock for redemption under certain circumstances and commencing on the third 
anniversary of original issuance. The Company is subject to certain 
restrictions on the redemption, purchase or acquisition of, and the payment 
of dividends on, common stock while the Series B Preferred Stock is 
outstanding.  The holders were granted certain registration rights in 
connection with the transaction.

Sale of Software Operations

   To further refine the Company's focus on corporate Internet services, in
February 1997, the Company sold its software subsidiary, InterCon Systems
Corporation ("InterCon"), to Ascend Communications, Inc. ("Ascend") for
cash consideration of $12.0 million.  The Company also was paid $8.5
million in cash by Ascend as repayment of intercompany debt owed by
InterCon to the Company.  Revenue and expenses of InterCon included in the
Company's consolidated statements of operations were $1.1 million and $3.6
million, respectively, for the three months ended September 30, 1996, while
there were no results of operations related to InterCon for the three
months ended September 30, 1997. For the nine months ended September 30,
1996, revenue and expenses relating to InterCon were $4.2 million and $8.7 

                                       12
<PAGE>


million, respectively, and $0.3 million and $1.1 million, respectively, for
the nine months ended September 30, 1997.  

International Operations

   The Company's revenue from international operations  increased from $1.9
million (7.9% of consolidated revenue) for the three months ended September
30, 1996 to $5.1 million (16.0% of consolidated revenue) for the three
months ended September 30, 1997. Revenue increased from $4.5 million (7.3%
of consolidated revenue) for the nine months ended September 30, 1996 to
$11.6 million (13.4% of consolidated revenue) for the nine months ended
September 30, 1997.

   As part of the Company's continuing strategy to offer Internet-based 
business communication solutions globally, on October 30, 1997,  the Company 
acquired CalvaCom SA, an Internet service provider in France for 
approximately $3.1 million in cash. Additionally, on November 10, 1997, the 
Company announced the execution of a definitive agreement for the acquisition 
of all of the outstanding common stock of iSTAR internet inc. ("iSTAR"), a 
Canadian Internet solutions company providing advanced Internet services for 
businesses, institutions and individuals for US$0.86 (C$1.206) per share or 
approximately US$25.0 million payable in shares of a new series of the 
Company's convertible preferred stock.  The transaction is expected to be 
completed within 60 to 90 days and is subject to certain closing conditions 
including shareholder, government, regulatory, and third party approvals. 
These acquisitions will be accounted for as purchase business combinations, 
and accordingly, the purchase price will be allocated to net tangible assets 
acquired with the excess allocated to intangible assets which will be 
amortized over the estimated economic life of the intangible assets from the 
date of acquisition.

Three and Nine Months Ended September 30, 1997 as Compared to the Three and
Nine Months Ended September 30, 1996

Results of Operations

    Revenue. Revenue is derived from the sale of Internet access and related 
services to businesses. Revenue increased by 32.5% from $24.1 million for the 
three months ended September 30, 1996 to $32.0 million for the three months 
ended September 30, 1997. Revenue increased by 41.6% from $61.5 million for 
the nine months ended September 30, 1996 to $87.1 million for the nine months 
ended September 30, 1997. The increase in revenue over the comparable three 
and nine month periods in 1996 resulted principally from greater sales of 
Internet services to businesses and new revenue generated from wholesale 
network services not provided until late 1996, offset by a decrease in 
consumer-oriented revenue and software revenue. The Company believes the 
greater revenue was attributable to a number of factors including an increase 
in the number of customers facilitated by an increase in the Company's 
network capability; an expansion of the Company's sales force; greater public 
awareness and acceptance of the Internet and increased international revenue. 
 The Company's corporate customer base increased by 52.3% from approximately 
15,100 corporate customers at September 30, 1996 to approximately 23,000 
corporate customers and 41 ISPs at September 30, 1997.  At September 30, 
1997, the Company served these customers through more than 350 POPs.

    Other Income, Net. Other income, net, consists of the consideration
received, net of related asset costs and transfer expenses relating to the
transfer of substantially all of the Company's individual consumer
subscribers and certain related tangible and intangible assets during the
second and third quarters of 1996.  Other income, net was $3.0 million and
$5.4 million for the three and nine months ended September 30, 1996,
respectively.
   
                                       13
<PAGE>


    Data Communications and Operations. Data communications and operations
expenses consist primarily of leased long distance circuit costs, local
loop costs and expenses associated with network operations, customer
support and field service. Data communications and operations expenses have
increased, (although decreased as a percentage of revenue) from $19.7
million (81.6% of revenue) to $23.8 million (74.3% of revenue) for the
three months ended September 30, 1996 and 1997, respectively. Data
communications and operations expenses for the nine months ended September
30, 1996 and 1997, respectively have also increased (although decreased as
a percentage of revenue) from $50.2 million (81.5% of revenue) to $66.8
million (76.7% of revenue). The $4.1 million increase for the three months
ended September 30, 1997 and the $16.6 million increase for the nine months
ended September 30, 1997 in data communications and operations expenses as
compared to the same periods in 1996 related principally to increases in
(i) costs associated with providing dedicated circuits to the Company's
InterFrame and InterMan customers and (ii) circuit costs relating to the
Company's network infrastructure enhancements.  Circuit costs relating to
the Company's new and expanded POPs generally are incurred by the Company
in advance of anticipated growth in the Company's customer base.  Although
the Company expects that data communications and operations expenses will
continue to increase as the Company's customer base continues to grow, it
anticipates that such expenses will continue to decrease as a percentage of
revenue. In addition, the Company anticipates that costs for data
communications and operations per equivalent route mile will decrease upon
completion of the transaction with IXC, as the Company accepts delivery of
bandwidth from IXC and, in connection therewith, terminates leased circuit
arrangements with IXC as well as other telecommunications carriers. 
 
    Sales and Marketing. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, advertising costs, distribution costs
and related occupancy costs. Sales and marketing expenses remained fairly
constant, increasing from $6.0 million (24.9% of revenue) for the three
months ended September 30, 1996 to $6.2 million (19.4% of revenue) for the
three months ended September 30, 1997. Sales and marketing expenses
decreased from $20.9 million (33.9% of revenue) for the nine months ended
September 30, 1996 to $18.1 million (20.7% of revenue) for the nine months
ended September 30, 1997.  The $2.8 million decrease for the nine months
ended September 30, 1997, as compared to the same period in 1996, resulted
principally from an aggregate reduction in sales and marketing expenses of 
$6.5 million associated with the a change in the Company's wholesale
network services strategy and the sale of InterCon.  These decreased
expenses were offset, in part, by an increase of $3.2 million in sales and
marketing expenses relating to the expansion of the Company's operations in
Canada, Japan and Europe.  All advertising and marketing costs are expensed
in the period incurred. The Company expects that, as a result of continued
emphasis on its wholesale network services strategy and its continued
efforts to focus on increasing its corporate customer base, its sales and
marketing expenses will continue to grow in amount but continue to decrease
as a percentage of revenue over the long-term.  

    General and Administrative. General and administrative expenses consist 
primarily of salaries and occupancy costs for executive, financial, legal and 
administrative personnel and provision for uncollectible accounts receivable. 
General and administrative expenses were approximately $5.3 million (22.0% of 
revenue) for the three months ended September 30, 1996 and $5.4 million 
(16.7% of revenue) for the three months ended September 30, 1997. General and 
administrative expenses were $15.0 million (24.4% of revenue) for the nine 
months ended September 30, 1996 and $17.0 million (19.5% of revenue) for the 
nine months ended September 30, 1997.  Although the Company experienced 
decreased expenses relating to the change in the Company's wholesale network 
services strategy in the second and third quarters of 1996 (a decrease of 
$0.6 million and $1.6 million for the respective three and nine month 
periods) and the sale of InterCon in February 1997 (a decrease of $0.7 
million and $1.7 million for the respective three and nine month periods), 
overall general and administrative expenses increased due to increases in the 
provision for doubtful accounts receivable of $0.4 million and $3.8 million 
for the respective three and nine month periods.  This increase resulted from 
the identification of certain inactive and/or terminated accounts as well as 
an on-going analysis of the Company's accounts receivable 

                                       14
<PAGE>

portfolio.  The Company may from time to time adjust its general and
administrative function in response to current business developments.

    The Company expects to have approximately $3.0 million to $5.0 million in 
additional fourth quarter expenditures to support initiatives related to 
customer support, marketing, systems and dial-up connectivity, which will 
impact general and administrative expenses as well as other components of 
operating costs and expenses.

    Depreciation and Amortization. Depreciation and amortization costs were 
$8.4 million (34.7% of revenue) for the three months ended September 30, 1996 
and $6.6 million (20.5% of revenue) for the three months ended September 30, 
1997. Depreciation and amortization costs were $21.6 million (35.1% of 
revenue) for the nine months ended September 30, 1996 and $20.6 million 
(23.7% of revenue) for the nine months ended September 30, 1997. Based upon 
its present business plan for its existing operations, the net effect of the 
decreases in depreciation and amortization due to the transfer of certain 
tangible and intangible assets in connection with the implementation of the 
Company's wholesale network services strategy in the second and third 
quarters of 1996 and the sale of its software operations in the first quarter 
of 1997 and increases due to anticipated capital expenditures associated with 
network infrastructure enhancements, the Company anticipates no material 
changes in the level of depreciation and amortization when compared to 1996.  
However, the Company anticipates that, upon consummation of the transactions 
contemplated with IXC, as the Company accepts delivery of bandwidth from IXC, 
and the consummation of the recent acquisitions, the Company's depreciation 
and amortization expenses will increase significantly.

    Interest Expense. Interest expense between periods remained fairly 
constant, increasing from $1.4 million for the three months ended September 
30, 1996 to $1.5 million for the three months ended September 30, 1997. 
Interest expense increased from $3.7 million for the nine months ended 
September 30, 1996 to $4.2 million for the nine months ended September 30, 
1997. The $0.5 million increase in interest expense for the nine months ended 
September 30, 1997 over the comparable period in 1996 was principally due to 
increased borrowings and capital lease obligations incurred by the Company to 
finance network expansion and to fund working capital requirements. As the 
Company continues its international expansion of its network and positions 
itself to take advantage of the IXC transaction, the Company expects to incur 
increased borrowings and capital lease obligations in the near term which 
will further impact the amount of the Company's interest expense. 

    Interest Income. Interest income decreased from $1.2 million for the 
three months ended September 30, 1996 to $0.6 million for the three months 
ended September 30, 1997. Interest income decreased from $3.3 million for the 
nine months ended September 30, 1996 to $2.0 million for the nine months 
ended September 30, 1997.  The $0.6 million decrease for the three months 
ended September 30, 1997 and the $1.3 million decrease for the nine months 
ended September 30, 1997 in interest income as compared to the comparable 
period in 1996 was principally due to a decrease in the amount of proceeds 
remaining from the Company's public offerings in 1995. All remaining proceeds 
are currently invested in short-term, investment grade, interest bearing 
securities.  

    Other income. Other income of $2.9 million for the nine months ended 
September 30, 1996 relates to the recognition of realized gains on equity 
securities that were sold by the Company.

    Gain on sale of subsidiary.  The gain on the sale of subsidiary of $5.7 
million relates to the sale in the first quarter of 1997 of the Company's 
software subsidiary, InterCon.

   Net loss and loss per share. As a result of the factors discussed above,
the Company's net loss was $12.5 million, or $0.31 per share, for the three
months ended September 30, 1996, compared with a net loss of $10.7 million,
or $0.26 per share, for the three months ended September 30, 1997. The
Company's 


                                       15
<PAGE>

net loss was $38.3 million, or $0.98 per share, for the nine months ended
September 30, 1996, compared with a net loss of $31.3 million, or $0.78 per
share, for the nine months ended September 30, 1997.  Dividends payable
with respect to Series B Preferred Stock and other new series of preferred
stock that may be issued in connection with the iSTAR acquisition will
impact the loss per share computation.

   In its Annual Report on Form 10-K for the fiscal year ended December 31,
1996, the Company reported that it would achieve positive earnings before
interest, taxes, depreciation and amortization ("EBITDA")  sometime during
the second quarter of 1997 and would be profitable by the first quarter of
1998 or prior thereto.  The Company has achieved breakeven EBITDA in
certain months of the second and third quarters of 1997, but as a result of
several factors that arose subsequent to the date of the Company's filing
of its Form 10-K for fiscal 1996, the Company was unable to meet certain of
its prior objectives.  Principal among these factors adversely affecting
the Company's operating performance were delivery delays for Primary Rate
Interface ("PRI") telecommunications facilities required to meet customer
demand, accelerated investment by the Company in its overseas operations in
order to respond to rapidly developing markets, and lower than expected
growth during the third quarter in the demand for its domestic Internet
services.
   
Liquidity and Capital Resources

   The Company historically has satisfied its cash requirements through
cash from operations, through borrowings and capital lease financings from
financial institutions and other third parties and through the issuance of
equity securities. 

   Cash flow used in operating activities was $28.4 million and $13.0
million for the nine months ended September 30, 1996 and 1997,
respectively. Cash flow used in operating activities can vary significantly
from period to period depending upon the timing of operating cash receipts
and payments, especially accounts receivable, prepaid expenses and other
assets, and accounts payable and accrued liabilities. 

   Cash flow used in investing activities for the nine months ended
September 30, 1996 was $12.5 million and cash flow provided by investing
activities for the nine months ended September 30, 1997 was $13.0 million.
The expansion of the Company's network resulted in capital expenditures of
$30.9 million and $29.1 million for the nine months ended September 30,
1996 and 1997, respectively (which included capital expenditures financed
under equipment financing agreements aggregating $30.4 million and $20.0
million for the respective periods).  Additionally, for the nine months
ended September 30, 1996, the Company invested $14.6 million in equity and
debt securities with original maturities of greater than 90 days and
received $3.2 million from the sale of certain equity investments held by
the Company.  In February 1997, the Company sold its software subsidiary,
InterCon, for cash consideration of $12.0 million.  The Company also was
paid $8.5 million as repayment of intercompany debt owed by InterCon to the
Company.

   Cash flow used in financing activities was $16.1 million and $12.2
million for the nine months ended September 30, 1996 and 1997,
respectively.  During these periods the Company made repayments aggregating
$23.5 million and $19.6 million, respectively, on its financing facilities
and received proceeds from the issuance of notes payable of $6.8 million
and $6.0 million, respectively.


   As of September 30, 1997, the Company had $40.5 million of cash and cash
equivalents and $3.0 million of short-term investments and marketable
securities.  The Company also had $26.4 million available under financing
facilities for the future financing of data communications equipment and
other fixed assets, and a $5.0 million working capital facility, subject to
availability under a borrowing base formula (at September 30, 1997 a
maximum availability of $4.4 million), under which $3.0 million was
outstanding. 

                                       16
<PAGE>


   The Company's financing arrangements, which are secured by substantially 
all of the Company's assets, require the Company to satisfy certain financial 
covenants such as those relating to liquidity, tangible net worth, EBITDA, 
leverage and debt service and prohibit the payment of dividends and the 
repurchase of capital stock of the Company without, in each case, the 
lender's consent. Additionally, on November 10, 1997, the Company completed a 
private placement of 600,000 shares of its Series B Convertible Preferred 
Stock for proceeds of $30.0 million, before expenses. 

    As of September 30, 1997, the Company had commitments to certain
telecommunications vendors totaling $29.1 million.  The commitments require
minimum monthly usage levels of data and voice communications over the next
five years.  Additionally, the Company has various agreements to lease
office space and facilities and, as of September 30, 1997, the Company was
obligated to make future minimum lease payments of $13.1 million on
non-cancellable operating leases expiring in various years through 2005. 

   In order to take full advantage of the IRUs being acquired from IXC, in
addition to other planned capital expenditures, the Company expects to
incur capital expenditures through the end of the year 2000 of up to
approximately $95.0 million.  In addition, after the closing of the IXC
transactions, the Company expects to incur on an annual basis approximately
$1.15 million in operation and maintenance fees with respect to the IRUs
per each 1,000 route miles of OC-48 bandwidth accepted under the Purchase
Agreement with IXC.  Other planned capital expenditures expected to be
incurred by the Company over the next four years include up to $35.0
million in connection with the Company's anticipated buildout of its
pan-European Internet network. 
   
   The Company is also obligated, under the terms of one of its Wholesale
Network Services Agreements, to provide the wholesale customer with a
rental facility of up to $5.0 million for telecommunications equipment
($1.4 million drawn at September 30, 1997) for deployment in the customer's
network.  In addition, the Company may be obligated in accordance with the
Contingent Payment Obligation under the Purchase Agreement with IXC to
provide IXC with additional stock and/or cash, at the Company's option, in
an amount equal to the difference between $240.0 million and the then fair
market value of such shares on the earlier of one year following delivery
and acceptance of the total bandwidth to be acquired from IXC or the fourth
anniversary of the closing of the transaction.  The Company has the right
to accelerate its Contingent Payment Obligation to deliver additional stock
and/or cash to IXC at any date after the closing of the transaction.  
   
   The Company presently believes it will have a reasonable degree of
flexibility to adjust the amount and timing of such capital expenditures in
response to the Company's then existing financing capabilities, market
conditions, competition and other factors.  Accordingly, the Company
believes that working capital generated from the use of bandwidth
corresponding to the IRUs to be acquired from IXC, together with other
working capital from operations, from existing credit facilities, from
capital lease financings, and from proceeds of future equity or debt
financings (which the Company expects to be able to obtain when needed),
will be sufficient to meet the presently anticipated working capital and
capital expenditure requirements of its operations. There can be no
assurance, however, that the Company will have access to sufficient
additional capital and/or financing on satisfactory terms to enable it to
meet its capital expenditure and working capital requirements.  In the
event the Contingent Obligation to IXC becomes payable, it may be satisfied
by the Company, at the Company's sole option, by the delivery of additional
shares of Common Stock or cash or a combination thereof, and the Company
presently believes that, in such circumstances, it would have sufficient
flexibility to satisfy the Contingent Obligation.  There can be no
assurance, however, that satisfaction of the Contingent Obligation will not
have a material adverse effect on the Company and its shareholders.

                                       17
<PAGE>

Recent Accounting Pronouncements

   In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," (EPS) which is effective for the Company's December 31, 1997
financial statements.  The Company anticipates that  the adoption of SFAS
No. 128 will not have a material effect on the Company's reported loss per
share data.

   In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15,
1997.  The Statement establishes standards for reporting and displaying
comprehensive income, as defined, and its components.  The Company plans to
adopt the Statement's disclosure requirements in 1998.

   In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for fiscal
years beginning after December 15, 1997.  The Statement establishes
standards for the way companies report information about operating segments
in annual and interim financial statements.  Generally, the Statement
requires financial information to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.  The Company plans to adopt the Statement's
disclosure requirements in 1998.

                                       18
<PAGE>

PART II. OTHER INFORMATION

Item 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)   On November 10, 1997, the Company completed a private placement of 
600,000 shares of its Series B Convertible Preferred Stock ("Series B 
Preferred Stock") for proceeds of $30.0 million, before expenses.  Each share 
of Series B Preferred Stock has a par value of $.01 per share and a stated 
value of $50.00 per share. The Series B Preferred Stock will accrue dividends 
at an annual rate of 8%, payable quarterly, in cash or the Company's Series B 
Preferred Stock, at the Company's option.

    The conversion price for each share of Series B Preferred Stock is equal 
to 125% of the five day average market price of the Company's common stock as 
of the original issue date. The initial conversion price for each share of 
Series B Preferred Stock is $10.  The conversion price will reset each year 
on the anniversary date of the original issuance to the lower of i) the 
existing conversion price, or ii) the 30 day average market price of the 
Company's common stock on the anniversary date. On the third anniversary date 
of the original issuance, the conversion price will be reset to 95% of the 30 
day average market price of the Company's common stock on the third 
anniversary date if the 30 day average market price is lower than the then 
existing conversion price. In no event may the Company issue more than 
8,086,580 shares of common stock upon conversion of Series B Preferred Stock 
and in no event may the Company issue more than an aggregate of 11.9776 
shares of common stock upon conversion of each share of Series B Preferred 
Stock.  The holders were granted demand and piggyback registration rights as 
part of the transaction.  The Company has the right to call the Series B 
Preferred Stock for redemption at the end of three years and under certain 
other circumstances.

    Reference is made to the Certificate of Amendment to the Company's 
Certificate of Incorporation which sets forth the designations, rights, 
preferences, privileges, limitations and restrictions of the Series B 
Preferred Stock for a more complete description of the Series B Preferred 
Stock, a copy of which is filed herewith as Exhibits 3.1 and 4.1 and 
incorporated herein by reference.

(b)  The Certificate of Incorporation pursuant to which the Series B 
Preferred Stock was issued provides that so long as any Series B Preferred 
Stock shall remain outstanding, except for any payment which may be made in 
connection with the IXC transaction, neither the Company nor any subsidiary 
shall (i) redeem, purchase or otherwise acquire directly or indirectly any 
common stock or other junior securities, (ii) directly or indirectly pay or 
declare any dividend or make any distribution (other than certain dividends 
or distributions or a dividend or distribution on securities issuable 
pursuant to any rights pursuant to the Rights Agreement dated as of May 8, 
1996 between the Company and First Chicago Trust Company of New York, as the 
same may be amended from time to time (the "Rights Agreement")) upon, nor 
shall any distribution (other than certain dividends or distributions or a 
distribution on securities issuable pursuant to any rights pursuant to the 
Rights Agreement) be made in respect of, any common stock or other junior 
securities, or (iii) set aside any funds for or apply any funds to the 
purchase, redemption or acquisition (through a sinking fund or otherwise) of 
any common stock or other junior securities (other than pursuant to the 
Rights Agreement).  Notwithstanding the foregoing, during such period, the 
Company may redeem, purchase or otherwise acquire and set aside funds for and 
apply funds to the purchase, redemption or acquisition of common stock or 
other junior securities (a) for up to an aggregate amount not to exceed, at 
any point in time the sum of: (i) $10 million plus (ii) an amount equal to 
100% of the aggregate net cash proceeds received by the Company after the 
date hereof from the issuance of common stock or other junior securities or 
debt securities that have been converted into common stock or other junior 
securities plus (iii) an amount equal to 50% of the Company's cumulative 
consolidated positive earnings before interest, taxes, depreciation and 
amortization as 

                                       19
<PAGE>

reported by the Company in respect of each fiscal quarter of the Company 
commencing with the fiscal quarter ending December 31, 1997 or (b) pursuant 
to the right of first offer granted pursuant to the IRU Agreement, provided 
that immediately after giving effect to any such redemption, purchase, other 
acquisition or setting aside of funds for application to the purchase, 
redemption or other acquisition pursuant to such right of first offer, the 
Company's consolidated shareholders' equity shall not be less than $20 
million.

    In addition, the Certificate of Amendment provides that, except as 
otherwise provided in the Certificate of Amendment and as otherwise required 
by law, the Series B Preferred Stock shall have no voting rights. However, so 
long as any shares of Series B Preferred Stock are outstanding, the Company 
will not, without the requisite approval of the holders of the Series B 
Preferred Stock then outstanding, (a) take any of the actions described in 
Section 7 of Article Fourth of the Certificate of Amendment, or (b) enter 
into any agreement or arrangement with respect to any other action which 
requires the approval  of the holders of the Series B Preferred Stock then 
outstanding, unless conditioned upon receipt of the requisite approval of the 
holders of the Series B Preferred Stock.  Section 7 of Article Fourth of the 
Certificate of Amendment provides that, so long as shares of Series B 
Preferred Stock are outstanding, except as otherwise provided in the 
Certificate of Amendment or by applicable law, the Company shall not, without 
first obtaining the approval of the holders of at least two-thirds of the 
then outstanding shares of Series B Preferred Stock: (a) alter or change the 
rights, preferences or privileges of the Series B Preferred Stock so as to 
affect adversely the Series B Preferred Stock as a class, provided, however, 
that neither the designation, creation or issuance of junior stock or parity 
stock nor the IXC transaction shall be deemed to affect adversely the Series 
B Preferred Stock as a class; (b) create any new class or series of capital 
stock having a preference over the Series B Preferred Stock as to redemption, 
the payment of dividends or distribution of assets upon a liquidation event 
or any other liquidation, dissolution or winding up of the Company; (c) 
increase the authorized number of shares of Series B Preferred Stock; or (d) 
issue any additional shares of Series B Preferred Stock other than in payment 
of dividends thereon.

    Reference is made to the Certificate of Amendment to the Company's 
Certificate of Incorporation which sets forth the designations, rights, 
preferences, privileges, limitations and restrictions of the Series B 
Preferred Stock for a more complete description of the Series B Preferred 
Stock, a copy of which is filed herewith as Exhibits 3.1 and 4.1 and 
incorporated herein by reference.

(c)   The issuance of Series B Preferred Stock and underlying common stock 
was exempt from registration under the Securities Act of 1993, as amended 
(the "Act"), in reliance on Section 4(2) of the Act as a transaction by an 
issuer not involving any public offering and Regulation D thereunder.  In 
such transaction, the purchasers of the shares were accredited investors 
within the meaning of Securities and Exchange Commission Rule 501 and had 
access to information about the Company, and appropriate legends regarding 
the restricted nature of such securities were affixed to the certificates 
representing such securities.

                                       20
<PAGE>

Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

          The following Exhibits are filed herewith:

          Exhibit 2.1    iSTAR Agreement dated as of November 10, 1997
                         between iSTAR Internet Inc. and PSINet Inc.  

          Exhibit 3.1    Certificate of Amendment of Certificate of
                         Incorporation dated as of November 10, 1997  

          Exhibit 4.1    Certificate of Amendment of Certificate of
                         Incorporation dated as of November 10, 1997  

          Exhibit 10.1   Amendment No. 1 to Deed of 460 Spring Park
                         Technology Center dated as of June 12, 1997
                         between JBG/Spring Park Limited Partnership
                         and PSINet Inc.     

          Exhibit 10.2   Sublease Agreement dated as of June 2, 1997
                         between LUCAS INDUSTRIES, INC. and PSINet
                         Inc. and Office Lease Agreement between 3B
                         Limited Partnership and Lucas Industries Inc.
                         dated as of September 12, 1989
             
          Exhibit 10.3   Master Equipment/Software Rental Agreement
                         dated as of September 11, 1997 between PSINet
                         and Earthlink Network, Inc. and Change Order
                         Amendment Master Equipment dated as of
                         September 22, 1997 

          Exhibit 10.4   Equipment lease dated as of June 30, 1997
                         between Royal Bank of Canada and PSINet
                         Limited

          Exhibit 10.5   Employment Agreement dated July 1, 1997
                         between the Company and Michael Malesardi     

          Exhibit 10.6   Employment Agreement dated August 2, 1997,
                         1997 between the Company and Tony Aveta 

           Exhibit 10.7  Employment Agreement dated August 4, 1997
                         between the Company and Harry Hobbs     

           Exhibit 10.8  First Amendment dated as of September, 10,
                         1997 to the Amended and Restated Credit
                         Agreement between the Company and FleetBank
                         of Massachusetts, N.A.

           Exhibit 10.9  Stock Purchase Agreement dated as of November 11, 
                         1997 between PSINet Inc. and the purchasers of 
                         Series B 8% Convertible Preferred Stock     

           Exhibit 10.10 Registration Rights Agreement dated as of
                         November 11, 1997 between PSINet Inc. and the
                         purchasers of Series B 8% Convertible
                         Preferred Stock     

                                       21
<PAGE>

           Exhibit 11.1  Calculation of Loss per Share and Weighted
                         Average Shares Used in Calculation for the
                         Three Months Ended September 30, 1997

           Exhibit 11.2  Calculation of Loss per Share and Weighted
                         Average Shares Used in Calculation for the
                         Nine Months Ended September 30, 1997
             
           Exhibit 27    Financial Data Schedule **

           Exhibit 99.1  Risk Factors

           **     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.

(b)  Reports on Form 8-K
             
     On August 1, 1997, the Company filed a Current Report on Form
     8-K, dated July 31, 1997 relating to its entering into the
     IRU and Stock Purchase Agreement  dated as of July 22, 1997
     with IXC Internet Services, Inc. ("IXC") and a Joint
     Marketing and Services Agreement dated as of July 22, 1997
     with IXC.
             
     On August 21, 1997, the Company filed a Current Report on
     Form 8-K, dated August 20, 1997, relating to an amendment to
     the Company's Shareholder Rights Plan in connection with the
     IRU and Stock Purchase Agreement dated as of July 22, 1997
     between the Company and IXC.

                                       22
<PAGE>

                                   PSINET INC.
                                    FORM 10-Q
                               SEPTEMBER 30, 1997
                                        
                                   SIGNATURES 
                                        
                                        
    Pursuant to the requirements 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.

                                        PSINet Inc.
                                        

November 14, 1997                       By:  /s/ William L. Schrader
-----------------                            ------------------------------
     Date                                    William L. Schrader
                                             Chairman, President, Chief
                                             Executive Officer and Director
                                             
November 14, 1997                       By:  /s/ Edward D. Postal
-----------------                            ------------------------------
     Date                                    Edward D. Postal
                                             Senior Vice President and 
                                             Chief Financial Officer
                                             (Principal Financial Officer)






                                       23

<PAGE>


                                  EXHIBIT INDEX

Item 6 (a)    Exhibits:

Exhibit                 Exhibit Name                         Location
-------                 ------------                         --------

 2.1   iSTAR Agreement dated as of November 10, 1997 
       between iSTAR Internet Inc. and PSINet Inc.. . . .  Sequentially numbered

 3.1   Certificate of Amendment of Certificate 
       of Incorporation dated as of November 10, 1997 . .  Sequentially numbered

 4.1   Certificate of Amendment of Certificate of 
       Incorporation dated as of November 10, 1997. . . .  Incorporated by 
                                                             reference from 
                                                             Exhibit 3.1

 10.1  Amendment No. 1 to Deed of 460 Spring Park 
       Technology Center dated as of June 12, 1997 
       between JBG/Spring Park Limited Partnership 
       and PSINet Inc.. . . . . . . . . . . . . . . . . .  Sequentially numbered

 10.2  Sublease Agreement dated as of June 2, 1997 
       between LUCAS INDUSTRIES, INC. and PSINet Inc.
       and Office Lease Agreement between 3B Limited 
       Partnership and Lucas Industries Inc. dated 
       as of September 12, 1989. . . . . . . . . . . . . . Sequentially numbered

 10.3  Master Equipment/Software Rental Agreement 
       dated as of September 11, 1997 between PSINet 
       and Earthlink Network, Inc. and Change Order 
       Amendment Master Equipment dated as of 
       September 22 , 1997. . . . . . . . . . . . . . . .  Sequentially numbered

 10.4  Equipment lease dated as of June 30, 1997 
       between Royal Bank of Canada and PSINet 
       Limited. . . . . . . . . . . . . . . . . . . . . .  Sequentially numbered

 10.5  Employment Agreement dated July 1, 1997 between 
       the Company and Michael Malesardi. . . . . . . . .  Sequentially numbered

 10.6  Employment Agreement dated August 2, 1997, 
       1997 between the Company and Tony Aveta. . . . . .  Sequentially numbered

 10.7  Employment Agreement dated August 4, 1997 
       between the Company and Harry Hobbs. . . . . . . .  Sequentially numbered

 10.8  First Amendment dated as of September, 10,1997 
       to the Amended and Restated Credit Agreement 
       between the Company and Fleet Bank of 
       Massachusetts, N.A. . . . . . . . . . . . . . . . . Sequentially numbered

 10.9  Stock Purchase Agreement dated as of 
       November 11, 1997 between PSINet Inc. and the 
       purchasers of Series B 8% Convertible Preferred 
       Stock. . . . . . . . . . . . . . . . . . . . . . .  Sequentially numbered

 10.10 Registration Rights Agreement dated as of 
       November 11, 1997 between PSINet Inc. and the
       purchasers of Series B 8% Convertible Preferred 
       Stock.. . . . . . . . . . . . . . . . . . . . . .   Sequentially numbered

                                       24
<PAGE>


Item 6 (a)    Exhibits:

Exhibit                           Exhibit Name                  Location
-------                           ------------                  --------

 11.1  Calculation of Loss per Share and Weighted 
       Average  Shares Used in Calculation for the 
       Three Months Ended September 30, 1997. . . . . . .  Sequentially numbered

 11.2  Calculation of Loss per Share and Weighted 
       Average Shares Used in Calculation for the 
       Nine Months Ended September 30, 1997. . . . . . .   Sequentially numbered
          
 27    Financial Data Schedule . . . . . . . . . . . . .   Sequentially numbered

 99.1  Risk Factors. . . . . . . . . . . . . . . . . . .   Sequentially numbered














                                       25