<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 June 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 - 40,401,992 shares as of August 1, 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 19.


<PAGE>

                                     PSINET INC.
                                           
                                           
                                  TABLE OF CONTENTS
                                           
                                           
                                           
                                                                            Page
PART I.  FINANCIAL INFORMATION 

  Item 1.   Financial Statements:
              
       Consolidated Balance Sheets as of December 31, 1996 and 
              June 30, 1997...................................................3

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

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

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


  Item 2.   Management's Discussion and Analysis of Financial Condition 
              and Results of Operations......................................10
    
PART II.  OTHER INFORMATION
   
    Item 4.   Submission of Matters to a Vote of Security-Holders............16

    Item 6.   Exhibits and Reports on Form 8-K...............................17

         
 Signatures..................................................................18

 Exhibit Index...............................................................19

                                       2

<PAGE>

                        PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

                                 PSINET INC.
                           CONSOLIDATED BALANCE SHEETS
                           (Thousands of U.S. Dollars)

<TABLE>

                                                     December 31, 1996    June 30, 1997
                                                     -----------------    -------------
                                                         (Audited)         (Unaudited)
<S>                                                  <C>                  <C>
                 ASSETS

Current assets:
  Cash and cash equivalents......................     $  52,695            $  48,957
  Short-term investments and marketable
    securities...................................         4,649                3,000
  Accounts receivable, net.......................        17,421               14,121
  Prepaid expenses...............................         1,963                1,955
  Other current assets...........................         5,583                4,078
                                                      ---------            ---------
    Total current assets.........................        82,311               72,111

Property and equipment, net......................        72,061               79,049
Goodwill and other intangibles, net..............        16,673                2,212
Other assets and deferred charges................         6,067                4,820
                                                      ---------            ---------
Total assets.....................................     $ 177,112            $ 158,192
                                                      ---------            ---------
                                                      ---------            ---------
         LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
  Line of credit.................................     $   2,000            $   3,000
  Current portion of long-term debt..............        24,915               27,976
  Trade accounts payable.........................        19,868               18,906
  Accrued payroll and related expenses...........         3,098                3,213
  Other accounts payable and accrued liabilities.         3,632                1,395
  Deferred revenue...............................         5,612                5,372
                                                      ---------            ---------
    Total current liabilities....................        59,125               59,862

Long-term debt...................................        26,938               27,636
Deferred income taxes............................           476                   --
Other liabilities................................           790                1,265
                                                      ---------            ---------
    Total liabilities............................        87,329               88,763
                                                      ---------            ---------
Shareholders' equity:
  Preferred stock................................            --                   --
  Common stock...................................           402                  405
  Capital in excess of par value.................       208,000              208,228
  Retained deficit...............................      (116,636)            (137,228)
  Treasury stock.................................        (2,005)              (2,005)
  Cumulative foreign currency translation
    adjustment...................................            22                   29
                                                      ---------            ---------
    Total shareholders' equity...................        89,783               69,429
                                                      ---------            ---------
Total liabilities and shareholders' equity.......     $ 177,112            $ 158,192
                                                      ---------            ---------
                                                      ---------            ---------

</TABLE>

     The accompanying notes are an integral part of these financial statements

                                       3


<PAGE>

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


<TABLE>
<CAPTION>
                                             Three Months Ended              Six Months Ended
                                                   June 30,                        June 30,
                                           -------------------------       -------------------------
<S>                                       <C>             <C>             <C>             <C>
                                             1996            1997            1996            1997
                                           ---------       ---------       ---------       ---------
                                                 (Unaudited)                     (Unaudited)


Revenue.................................   $  20,219       $  29,507       $  37,400       $  55,146
Other income, net.......................       2,400               -           2,400               -
                                           ---------       ---------       ---------       ---------
                                              22,619          29,507          39,800          55,146


Operating costs and expenses:
  Data communications and operations....      16,529          22,114          30,471          43,082
  Sales and marketing...................       7,021           5,858          14,865          11,860
  General and administrative............       4,228           6,141           9,703          11,622
  Depreciation and amortization.........       7,026           6,058          13,208          14,092
                                           ---------       ---------       ---------       ---------
    Total operating costs and expenses..      34,804          40,171          68,247          80,656

Loss from operations....................     (12,185)        (10,664)        (28,447)        (25,510)

Interest expense........................      (1,386)         (1,297)         (2,243)         (2,647)

Interest income.........................         943             670           2,167           1,445

Other income (expense)..................       1,776             (32)          2,844             (57)

Gain on sale of subsidiary..............           -               -               -           5,701

Equity in loss of affiliate.............        (107)              -            (207)              -
                                           ---------       ---------       ---------       ---------

Loss before income taxes.................    (10,959)        (11,323)        (25,886)        (21,068)

Income tax benefit.......................         40               -              79             476
                                           ---------       ---------       ---------       ---------

Net loss.................................  $ (10,919)      $ (11,323)      $ (25,807)      $ (20,592)
                                           ---------       ---------       ---------       ---------
                                           ---------       ---------       ---------       ---------

Loss per share...........................  $   (0.28)      $   (0.28)      $   (0.67)      $   (0.51)
                                           ---------       ---------       ---------       ---------
                                           ---------       ---------       ---------       ---------

Shares used in computing loss per share..     39,379          40,225          38,775          40,192
                                           ---------       ---------       ---------       ---------
                                           ---------       ---------       ---------       ---------
</TABLE>

  The accompanying notes are an integral part of these financial statements

                                       4

<PAGE>

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


<TABLE>
<CAPTION>



                                                                       Six Months Ended
                                                                           June 30,
                                                               --------------------------------
                                                                   1996                 1997   
                                                               -------------       ------------
                                                                          (Unaudited)
<S>                                                            <C>                 <C>
Net cash used by operating activities....................      $   (18,448)        $   (10,821)
                                                               -------------       ------------

Cash flows from investing activities:
     Purchases of property and equipment, net............           (2,278)             (8,794)
     Purchase of short-term investments
       and marketable securities.........................          (17,135)             (3,000)
     Net proceeds from sale of subsidiary................                -              20,353
     Proceeds from sale of investments...................            3,219               4,649
     Other, net..........................................             (677)                (61)
                                                               -------------       ------------
          Net cash (used in) provided by investing 
            activities...................................          (16,871)             13,147 
                                                               -------------       ------------


Cash flows from financing activities:
     Net (payments) proceeds on line of credit...........           (2,012)              1,000
     Proceeds from issuance of notes payable.............            6,340               5,572
     Repayments of notes payable.........................           (1,765)             (3,668)
     Principal payments under capital lease obligations..          (13,915)             (9,199)
     Other, net..........................................              497                 231 
                                                               ------------        ------------
          Net cash used in financing activities..........          (10,855)             (6,064)
                                                               ------------        ------------

Net decrease in cash and cash equivalents................          (46,174)             (3,738)
Cash and cash equivalents, beginning of year.............          102,710              52,695
                                                               ------------        ------------

Cash and cash equivalents, end of period.................      $    56,536        $     48,957
                                                               ------------        ------------
                                                               ------------        ------------

</TABLE>

  The accompanying notes are an integral part of these financial statements

                                       5


<PAGE>

                                        PSINET INC.

                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        (Unaudited)

Note l - Basis of Presentation

   These consolidated financial statements for the three and six months ended 
June 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 three months ended March 31, 1997 included 
in the Company's Form 10-Q for the quarter 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 June 30, 1997 and the results of operations and cash flows for the 
three and six month periods ended June 30, 1996 and 1997. The results of 
operations for the three and six month periods ended June 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, 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 June 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. 
                         
   In August 1995, the Company entered into an agreement to form a joint 
venture with Hansol Paper Co. Ltd. ("Hansol Paper"), of Seoul, Korea for the 
purpose of building an Internet network and providing 

                                       6

<PAGE>

                                     PSINET INC.
                         
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)

Note 3 - Short-term Investments and Marketable Securities (continued)

Internet-related services in Korea.  In March 1996, pursuant to these 
arrangements, the Company acquired a 10% interest in Hansol Telecom Co., Ltd. 
("Hansol"), an affiliate of Hansol Paper, for approximately $3.1 million.  
This investment was reflected in short-term investments and marketable 
securities at December 31, 1996.  In June 1997, the Company and Hansol Paper 
entered into an agreement in accordance with the original agreement whereby 
the shares of Hansol owned by the Company were sold for the aggregate 
proceeds of $3.1 million, which approximated the cost of the investment, and 
terminated the joint venture.
   
   Other income for the six months ended June 30, 1996 consisted of 
approximately $2.8 million of realized gains on equity securities sold by the 
Company.

Note 4 - Long-Term Debt

   During the six months ended June 30, 1997, the Company incurred capital 
lease obligations of approximately $10.9 million upon the execution of leases 
for new data communications equipment and other fixed assets.
   
   At June 30, 1997, the aggregate unused portion under the Company's various 
financing arrangements for purchases of data communications equipment and 
other fixed assets was $23.3 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 June 30, 1997).  There was 
$3.0 million advanced under this credit agreement at June 30, 1997.  Interest 
is payable monthly at an annual rate of prime plus 1.5% (9.75% at June 30, 
1997).
   
Note 5 - Sale of Subsidiary and Termination of World Online B.V. Arrangement

   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. ("Ascend") in 
exchange for $12 million in cash pursuant to a Stock Acquisition Agreement 
between the Company and Ascend.  In addition, in connection with the sale, 
the Company received $8.5 million in cash from Ascend as repayment of 
intercompany debt owed by InterCon to the Company.  The Company recognized a 
gain of approximately $5.7 million in connection with the sale of InterCon.

   In December 1995, the Company entered into a definitive agreement to 
acquire 20% of the outstanding common stock of World Online B.V. ("World 
Online"), an Internet service provider in the Netherlands.  The Company paid 
for 10% of the outstanding common stock of World Online in 1995 for cash 
consideration of 275,000 Dutch Guilders (approximately $172,000) and was 
obligated to pay for the additional 10% of the outstanding common stock of 
World Online for consideration equal to $125 per paying subscriber of the 
World Online service at a specified measurement date in cash (not to exceed 
$5,000,000) and/or shares of PSINet common stock (based on the market price 
at the date of closing).

                                       7

<PAGE>

                                     PSINET INC.
                         
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)

Note 5 - Sale of Subsidiary and Termination of World Online B.V. Arrangement
(continued)

As a part of the agreement, the Company could not compete with World Online 
in the Netherlands.  In June 1997, the Company and World Online terminated 
their relationship with no material financial impact to the Company.  The 
Company has subsequently initiated its own activities in the Netherlands.

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 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. For several months, the Company 
and Chatterjee discussed a substantive change to the structure described in 
the Joint Venture Agreement which, if entered into, would have resulted in a 
direct investment in the Company by Chatterjee.  By letter dated July 14, 
1997, Chatterjee made certain statements concerning the negotiations between 
Chatterjee and the Company, including (i) Chatterjee's conclusion that PSINet 
does not intend to proceed with the Joint Venture Agreement or the 
substantive change to the structure discussed in the Joint Venture Agreement 
(which Chatterjee claimed had been agreed upon by PSINet), and (ii) 
Chatterjee's intent to proceed based upon that conclusion. In the event the 
Company and Chatterjee do not complete this transaction (and the Company 
presently believes it is likely that the parties will not reach such an 
agreement), the Joint Venture Agreement may be abandoned or the parties may 
commence arbitration under the Joint Venture Agreement and related documents. 
 It is also possible that Chatterjee may institute other legal proceedings 
seeking 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.
   
   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. 

                                       8

<PAGE>

                                     PSINET INC.
                         
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)

Note 8 - Subsequent Event

   On July 22, 1997, the Company entered into an IRU and Stock Purchase 
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. 

   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.  In addition, 
if the fair market value of these shares is less than $240 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 
option, in an amount equal to the difference between $240 million and the 
then fair market value of such shares.  The Company has the right to 
accelerate its obligation to deliver additional stock and/or cash to IXC.  
The agreement permits PSINet to use the OC-48 bandwidth for any purpose in 
connection with the provision of Internet services, but restricts PSINet and 
its customers from using the OC-48 bandwidth to deliver private line or long 
distance telephone services to any third party. PSINet expects to draw down 
the bandwidth in OC-12 increments beginning as soon as practicable after the 
closing and continuing over the next 24 months.  The agreement is expected to 
close not later than November 25, 1997, 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.
 
                                       9

<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 three months ended March 31, 1997 included 
in the Company's Form 10-Q for the quarter then ended, 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

   The Company is a leading provider of Internet access, services and 
products. The Company offers, throughout the United States and 
internationally, a broad spectrum of Internet access services to corporate 
customers ranging from low-cost dial-up services to high performance 
continuous access services using dedicated high-speed telephone circuits, 
intranet networking services, Web site design and hosting services, 
Electronic Commerce, training and consulting services and Internet access 
security services. Pursuant to network access agreements with 
consumer-oriented 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 June 30, 1997, the Company served approximately 21,900 corporate 
customers, including 40 consumer-oriented ISPs, through more than 350 POPs.

   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 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 $1.3 million and $2.4 million, respectively, 
for the three months ended June 30, 1996, while there were no results of 
operations related to InterCon for the three months ended June 30, 1997. For 
the six months ended June 30, 1996, revenue and expenses relating to InterCon 
were $3.1 million and $5.1 million, respectively, and $0.3 million and $1.1 
million, respectively, for the six months ended June 30, 1997.  

   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, in anticipation of potential future growth in the Company's customer 
base. 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. 

                                       10

<PAGE>

Strategic Alliance with IXC Internet Services, Inc.

   On July 22, 1997, the Company entered into an IRU and Stock Purchase 
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.

   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.  In addition, 
if the fair market value of these shares is less than $240 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 
option, in an amount equal to the difference between $240 million and the 
then fair market value of such shares.  The Company has the right to 
accelerate its obligation to deliver additional stock and/or cash to IXC (the 
"Contingent Payment Obligation").  The agreement permits PSINet to use the 
OC-48 bandwidth for any purpose in connection with the provision of Internet 
services, but restricts PSINet and its customers from using the OC-48 
bandwidth to deliver private line or long distance telephone services to any 
third party. PSINet expects to draw down the bandwidth in OC-12 increments 
beginning as soon as practicable after the closing and continuing over the 
next 24 months.  The agreement is expected to close not later than November 
25, 1997, 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.

Three and Six Months Ended June 30, 1997 as Compared to the Three and Six 
Months Ended June 30, 1996

Results of Operations

    Revenue. Revenue is derived from the sale of Internet access and related 
services to businesses. Revenue increased by 45.9% from approximately $20.2 
million for the three months ended June 30, 1996 to approximately $29.5 
million for the three months ended June 30, 1997. Revenue increased by 47.5% 
from approximately $37.4 million for the six months ended June 30, 1996 to 
approximately $55.1 million for the six months ended June 30, 1997. The 
increase in revenue over the same three and six month periods in 1996 resulted 
principally from greater sales of Internet services to businesses and new 
revenue generated from wholesale network services not provided in 1996 offset 
by a decrease in consumer-oriented revenue. More specifically, 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; and greater public awareness and acceptance of the Internet.  The 
Company's corporate customer base increased by approximately 76.6% from 
approximately 12,400 corporate customers at June 30, 1996 to approximately 
21,900 corporate customers, including 40 consumer-oriented ISPs, at June 30, 
1997.  At June 30, 1997, the Company served these customers through more than 
350 POPs.

                                       11

<PAGE>

    Other Income, Net. Other income, net consists of the income, net of 
applicable expenses relating to the initial transfer to MindSpring 
Enterprises, Inc. of a portion of the Company's individual consumer 
subscribers.  Other income, net was approximately $2.4 million for the three 
and six months ended June 30, 1996.
   
    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 decreased as 
a percentage of revenue from approximately $16.5 million (81.8% of revenue) 
to approximately $22.1 million (74.9% of revenue) for the three months ended 
June 30, 1996 and 1997, respectively. Data communications and operations 
expenses have decreased as a percentage of revenue from approximately $30.5 
million (81.5% of revenue) to approximately $43.1 million (78.1% of revenue) 
for the six months ended June 30, 1996 and 1997, respectively. The $5.6 
million increase for the three months ended June 30, 1997 and the $12.6 
million increase for the six months ended June 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 new POPs deployed in early 1996 
and 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 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, the Company's unit costs for 
data communication and operations will decrease.
 
    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 decreased from 
approximately $7.0 million (34.7% of revenue) for the three months ended June 
30, 1996 to approximately $5.9 million (20.0% of revenue) for the three 
months ended June 30, 1997.  Sales and marketing expenses decreased from 
approximately $14.9 million (40.0% of revenue) for the six months ended June 
30, 1996 to approximately $11.9 million (21.5% of revenue) for the six months 
ended June 30, 1997.  The $1.1 million decrease for the three months ended 
June 30, 1997 and the $3.0 million decrease for the six months ended June 30, 
1997, as compared to the same periods in 1996, resulted principally from an 
aggregate reduction in sales and marketing expenses of approximately $2.2 
million and approximately $5.0 million for the respective periods associated 
with the implementation of the Company's wholesale network services strategy 
and the sale of InterCon. These decreased expenses were offset, in part, by 
an increase of approximately $0.3 million and approximately $1.9 million for 
the respective periods in sales and marketing expenses relating to the 
expansion of the Company's operations in Canada, Japan and the United 
Kingdom.  All advertising and marketing costs are expensed in the period 
incurred. The Company expects that as a result of the implementation of 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 time.  

    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 $4.2 million (20.9% of 
revenue) for the three months ended June 30, 1996 and approximately $6.1 
million (20.8% of revenue) for the three months ended June 30, 1997. General 
and administrative expenses were approximately $9.7 million (25.9% of 
revenue) for the six months ended June 30, 1996 and 

                                       12

<PAGE>

approximately $11.6 million (21.1% of revenue) for the six months ended June 
30, 1997.  Although the Company experienced decreased expenses relating to 
the implementation of the Company's wholesale network services strategy in 
June 1996 (approximately $0.6 million and $1.1 million for the respective 
periods) and the sale of InterCon in February 1997 (approximately $0.7 
million and $1.1 million for the respective periods), overall general and 
administrative expenses increased due to charges of approximately $2.0 
million and $3.4 million for the respective periods relating to an increase 
in the provision for doubtful accounts receivable. The provision for doubtful 
accounts increased to 6.2% of revenue in the six months ended June 30, 1997 
from 2.0% of revenue in the comparable period in 1996. This increase is a 
result of the identification of certain inactive and/or terminated accounts 
as well as an aggressive analysis of the Company's accounts receivable 
portfolio. The Company may from time to time adjust its general and 
administrative function in response to current business developments. 

    Depreciation and Amortization. Depreciation and amortization costs were 
approximately $7.0 million (34.8% of revenue) for the three months ended June 
30, 1996 and approximately $6.1 million (20.5% of revenue) for the three 
months ended June 30, 1997. Depreciation and amortization costs were 
approximately $13.2 million (35.3% of revenue) for the six months ended June 
30, 1996 and approximately $14.1 million (25.6% of revenue) for the six 
months ended June 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.  In addition, the 
Company anticipates that, upon completion of the transaction with IXC, as the 
Company accepts delivery of bandwidth from IXC, the Company's depreciation 
and amortization expenses will increase to reflect the depreciation and 
amortization of the acquisition cost of such bandwidth and related capital 
expenditures over their respective useful lives.  The Company presently 
anticipates that acquisition cost of such bandwidth will be amortized over a 
20-year period from the date of acceptance of the bandwidth.

    Interest Expense. Interest expense between periods remained fairly 
constant, decreasing from approximately $1.4 million for the three months 
ended June 30, 1996 to approximately $1.3 million for the three months ended 
June 30, 1997. Interest expense increased from approximately $2.2 million for 
the six months ended June 30, 1996 to approximately $2.6 million for the six 
months ended June 30, 1997. The approximately $0.4 million increase in 
interest expense for the six months ended June 30, 1997 as compared to the 
same 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. The Company may incur increased borrowings 
and capital lease obligations in the near term in connection with its network 
enhancements which will further impact the amount of the Company's interest 
expense. 

    Interest Income. Interest income decreased from approximately $0.9 
million for the three months ended June 30, 1996 to approximately $0.7 
million for the three months ended June 30, 1997. Interest income decreased 
from approximately $2.2 million for the six months ended June 30, 1996 to 
approximately $1.4 million for the six months ended June 30, 1997.  The $0.3 
million decrease for the three months ended June 30, 1997 and the $0.7 
million decrease for the six months ended June 30, 1997 in interest income as 
compared to the same 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 approximately $1.8 million and $2.8 million 
for the three and six months ended June 30, 1996, respectively, relates to 
the recognition of realized gains on equity securities which were sold by the 
Company.                

                                       13

<PAGE>

    Gain on sale of subsidiary.  The gain on the sale of subsidiary of 
approximately $5.7 million relates to the sale for the first quarter of 1997 
of the Company's software subsidiary, InterCon, for cash consideration of 
$12.0 million.  In connection with the sale, the Company also was paid $8.5 
million in cash as repayment of intercompany debt owed by InterCon to the 
Company.

    Net loss and loss per share. As a result of the factors discussed above, 
the Company's net loss was $10.9 million, or $0.28 per share, for the three 
months ended June 30, 1996, compared with a net loss of $11.3 million, or 
$0.28 per share, for the three months ended June 30, 1997. The Company's net 
loss was $25.8 million, or $0.67 per share, for the six months ended June 30, 
1996, compared with a net loss of $20.6 million, or $0.51 per share, for the 
six months ended June 30, 1997.

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 approximately $18.4 million 
and $10.8 million for the six months ended June 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 six months ended June 30, 
1996 was approximately $16.9 million and cash flow provided by investing 
activities for the six months ended June 30, 1997 was approximately $13.1 
million. The expansion of the Company's network resulted in capital 
expenditures of approximately $29.5 million and $19.8 million for the six 
months ended June 30, 1996 and 1997, respectively (which included capital 
expenditures financed under equipment financing agreements aggregating 
approximately $27.2 million and $10.9 million for the six months ended June 
30, 1996 and 1997, respectively). Additionally, for the six months ended June 
30, 1996, the Company invested approximately $17.1 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 approximately $10.9 million 
and $6.1 million for the six months ended June 30, 1996 and 1997, 
respectively.  For the six months ended June 30, 1996 and 1997, the Company 
made repayments aggregating $15.7 million and $12.9 million, respectively, on 
its financing facilities.  Additionally, for the six months ended June 30, 
1996 and 1997, the Company received proceeds from the issuance of notes 
payable of $6.3 million and $5.6 million, respectively.

   As of June 30, 1997, the Company had approximately $49.0 million of cash 
and cash equivalents, approximately $3.0 million of short-term investments 
and marketable securities and approximately $23.3 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 June 30, 
1997 a maximum availability of approximately $4.4 million), under which $3.0 
million was outstanding. The Company's financing arrangements, which are 
secured by substantially all of the Company's assets, require the Company to 
satisfy certain financial covenants and restrict the payment of dividends.  

                                       14

<PAGE>

    As of June 30, 1997, the Company had commitments to certain 
telecommunications vendors totaling approximately $28.9 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 June 30, 
1997, the Company was obligated to make future minimum lease payments of 
approximately $14.0 million on non-cancellable operating leases expiring in 
various years through 2005. 

    In order to take full advantage of the bandwidth 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 million.  The Company 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 such 
bandwidth, together with other working capital from operations, from existing 
credit facilities, 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.  In the event the Company has a 
Contingent Payment Obligation to IXC, it may be satisfied by the delivery of 
stock or, at the Company's option, cash or a combination thereof, and the 
Company presently believes that it has sufficient flexibility to satisfy such 
obligation.
   
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. 

                                       15

<PAGE>

                          PART II. OTHER INFORMATION

Item 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

                         
(a)  The Annual Meeting of Shareholders of the Company was held on May 10, 1997.

(c)  Proxies representing 31,138,036 shares were received (total shares 
     outstanding as of the Record Date were 40,174,039).  The matters voted upon
     at the Annual Meeting and the results of the voting as to each such matter
     are set forth below:

     (i)  The election of David N. Kunkel, William L. Schrader, Ian P. Sharp and
          William A. Wilson as directors of the Company for terms expiring in
          1999.
               
          Votes for Mr. Kunkel                    30,326,442          
          Votes withheld from Mr. Kunkel             811,594
               
          Votes for Mr. Schrader                  30,497,744
          Votes withheld from Mr. Schrader           640,292
               
          Votes for Mr. Sharp                     29,819,419
          Votes withheld from Mr. Sharp            1,318,617
               
          Votes for Mr. Wilson                    30,501,019
          Votes withheld from Mr. Wilson             637,017
               

     (ii) The ratification of the appointment by the Board of Directors of Price
          Waterhouse LLP as independent accountants of the Company for the year
          ending December 31, 1997.
               
                      Votes for                          30,511,923
                      Votes against                         528,952
                      Abstentions                            97,161
               
               
There were no broker non-votes in respect of the foregoing matters.
               

<PAGE>
                                            
Item 6.        EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

      The following Exhibits are filed herewith:

      Exhibit 2.1   IRU and Stock Purchase Agreement dated as of July 22, 1997
                    between IXC Internet Services, Inc. and PSINet Inc. *

      Exhibit 10.1  Joint Marketing and Services Agreement dated as of July 22,
                    1997 between IXC Internet Services Inc. and PSINet Inc. *

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

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

      Exhibit 99.1  Risk Factors

      *   This Exhibit has been filed in redacted form pursuant to a request for
          confidential treatment filed separately with the Commission pursuant
          to Rule 24b-2.
               
      **  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
               
        None. 

<PAGE>


                                     PSINET INC.
                                      FORM 10-Q
                                    JUNE 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.
               

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

 
<PAGE>


                                    EXHIBIT INDEX
                                           
                                           
Item 6 (a)       Exhibits:

Exhibit               Exhibit Name                                   
-------               ------------                               

 2.1  IRU and Stock Purchase Agreement dated as of July 22, 1997 
      between IXC Internet Services, Inc. and PSINet Inc.........
               
10.1  Joint Marketing and Services Agreement dated as of July 22, 1997 
      between IXC Internet Services Inc. and PSINet Inc .........

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

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

99.1  Risk Factors.....................................................