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                                                                    EXHIBIT 99.1


RISK FACTORS

From time to time, in both written reports and in oral statements by our senior
management, we express expectations and other statements regarding our future
performance.  These forward-looking statements are inherently uncertain and you
must recognize that events could turn out to be different than such expectations
and statements.  We discuss key factors impacting current and future performance
in the Company's Annual Report on Form 10-K and other filings with the
Securities and Exchange Commission.  In addition, you should consider the
following Risk Factors as well as the other information in this Quarterly Report
in evaluating us and our business.  Capitalized terms used in this Exhibit 99.1
but not otherwise defined herein should have the respective meanings described
thereto in the periodic report with which this Exhibit 99.1 is filed.  Unless
the context otherwise requires, "PSINet", the "Company", "we", "our" and "us"
refer to PSINet Inc. and its subsidiaries.


RISK ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS AND OUR ABILITY TO SERVICE DEBT

We are highly leveraged and have significant debt service requirements. As of
September 30, 1998, our total indebtedness was $817.7 million, representing 103%
of total capitalization, and our interest expense for the nine months ended
September 30, 1998 was $38.2 million.

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

 .    a substantial portion of our cash flow from operations must be used to pay
     interest on our indebtedness and, therefore, will not be available for
     other business purposes;
 .    covenants contained in the agreements evidencing our debt obligations
     require us to meet certain financial tests, and other restrictions limit
     our ability to borrow additional funds or to dispose of assets and may
     affect our flexibility in planning for, and reacting to, changes in our
     business, including possible acquisition activities and capital
     expenditures; and
 .    our ability to obtain additional financing in the future for working
     capital, capital expenditures, acquisitions, general corporate purposes or
     other purposes may be impaired.

Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors.  Based
on our current level of operations, management believes that working capital
from operations, existing credit facilities, capital lease financings and
proceeds of future equity or debt financings, will be adequate to meet our
presently anticipated future requirements for working capital, capital
expenditures and scheduled payments of interest on our debt.  We cannot assure,
however, that our business will generate sufficient cash flow from operations or
that future working capital borrowings will be available in an amount sufficient
to enable us to service our debt or to make necessary capital expenditures.  In
addition, we cannot assure that we will be able to raise additional capital for
any such refinancing in the future.
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RISK ASSOCIATED WITH OUR OPERATING DEFICIT AND CONTINUING LOSSES; POTENTIAL
FLUCTUATIONS IN OPERATING RESULTS; AND OPERATING LOSSES OF CERTAIN ACQUIRED
COMPANIES

Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets.  To address these risks, we must, among other things, respond to
competitive developments, continue to attract and retain qualified persons, and
continue to upgrade our technologies and commercialize our network services
incorporating such technologies.  We cannot assure that we will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on our business, financial condition, results of operations and ability
to pay when due principal, interest and other amounts in respect of our debt.
Although we have experienced revenue growth on an annual basis with revenue
increasing from $38.7 million in 1995 to $84.4 million in 1996 to $121.9 million
in 1997 and $165.7 million for the first nine months of 1998, we have incurred
losses and experienced negative earnings before depreciation and amortization,
interest income and expense, other income (loss), income tax expense (benefit),
gain on sale of investments, equity in loss of affiliate and intangible asset
write-down and charge for acquired in-process research and development
("EBITDA") during each of such periods.  Management expects to continue to
operate at a net loss and experience negative EBITDA in the near term as we
continue our acquisition program and the expansion of our global network
operations.  We have incurred net losses available to common shareholders of
$53.2 million, $55.1 million and $46.0 million and have incurred negative EBITDA
of $27.9 million, $28.0 million and $21.2 million for each of the years ended
December 31, 1995, 1996 and 1997, respectively.  Additionally, we incurred net
losses available to common shareholders of $129.0 million and negative EBITDA of
$32.1 million, respectively, for the nine months ended September 30, 1998.  At
September 30, 1998, we had an accumulated deficit of $295.0 million.  We cannot
assure that we will be able to achieve or sustain profitability or positive
EBITDA.  Principal among factors that adversely affected our operating
performance in 1997 and the first nine months of 1998 were:

 .    delivery delays for Primary Rate Interface ("PRI") telecommunications
     facilities required to meet customer demand;
 .    accelerated investment by us in our overseas operations in order to respond
     to rapidly developing markets; and
 .    lower than expected growth during the third quarter of 1997 in the demand
     for our domestic Internet services.

We expect to focus in the near term on continuing to increase our corporate
customer base and geographic presence, and on expanding our Carrier and ISP
Services business unit strategy.  This will require us to continue to incur
expenses for marketing, network infrastructure, personnel and the development of
new products and services.  We also plan to continue to enhance our network and
the administrative and operational infrastructure necessary to support our
Internet access service domestically and internationally.  We will accomplish
this through ownership interests or capital leases wherever possible.  This
includes the acquisition of bandwidth, which must often be obtained in
anticipation of future revenue.  Such expenses may adversely impact cash flow
and operating performance.

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

 .    general economic conditions and specific economic conditions in the
     Internet access industry; 
 .    user demand for Internet services;
 .    capital expenditures and other costs relating to the expansion of
     operations our network; 
 .    the ability to identify, acquire and integrate successfully suitable
     acquisition candidates; 
 .    changes related to acquisitions;
 .    the introduction of new services by us or our competitors;
 .    the mix of services sold and the mix of channels through which those
     services are sold;
 .    pricing changes and new product introductions by us and our competitors;
 .    delays in obtaining sufficient supplies of sole or limited source equipment
     and telecom facilities (i.e., PRIs); and
 .    potential adverse regulatory developments.

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

We have recently acquired a number of Internet-related companies.  Certain of
these companies incurred net losses and had negative EBITDA prior to their
acquisition.  We believe that after eliminating redundant network architecture
and administrative functions and taking other actions to integrate the
operations of these companies we will be able to realize significant cost
savings on our consolidated operations.  However, we cannot assure that our
integration of the operations of these companies will be accomplished
successfully.  Our inability to improve the operating performance of these
businesses or to successfully integrate their operations could have a material
adverse effect on our business, financial condition and results of operations.

RISK ASSOCIATED WITH COMPANY STRUCTURE AND DEPENDENCE ON SUBSIDIARIES FOR
REPAYMENT OF DEBT

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

Our subsidiaries' creditors and holders of preferred stock, if any, of such
subsidiaries will have priority to the assets of such subsidiaries over the
claims of the Company and the holders of our indebtedness.  One exception is
that if such subsidiaries have provided guarantees of our indebtedness and if
loans made by us to our subsidiaries are recognized as indebtedness, they will
not have such priorities.  In any event, the 10% Senior Notes and the 11 1/2%
Senior Notes are effectively subordinated in right of payment to all existing
and future indebtedness and other liabilities of our subsidiaries, including
trade payables.  As of September 30, 1998, after giving pro forma effect to the
Initial Notes Offering (and the application of the net proceeds therefrom as
described in "Use of Proceeds"), the acquisitions of the Acquired Companies
and borrowings under the Credit Facility, our subsidiaries would have had
approximately $133.2 million of total liabilities (including trade payables and
accrued liabilities).  Under the terms of certain agreements evidencing our debt
obligations, certain subsidiaries of the Company are restricted in their ability
to incur debt in the future.  We had approximately $108.5 million of
indebtedness outstanding under the Credit Facility on September 30, 1998.

NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS

In order to maintain our competitive position and continue to meet the
increasing demands for service quality, availability and competitive pricing, we
expect to make significant capital expenditures. Our expected expenditures
include the following:

 .    up to $95.0 million through the end of the year 2000 to take full advantage
     of the bandwidth acquired from IXC;
 .    approximately $1.2 million per year in operation and maintenance fees per
     each 1,000 equivalent route miles of OC-48 bandwidth accepted under the IRU
     Purchase Agreement (as defined);
 .    up to $35.0 million over the next three years in connection with the
     anticipated buildout of our pan-European Internet network, including in
     connection with our recent acquisition of IRUs in transatlantic STM-1
     bandwidth connecting the United States and Europe, and for construction of
     a network operations center in Switzerland;
 .    approximately $45.0 million in connection with our acquisition of dark
     fiber optic capacity connecting and encircling the New York City and
     Washington, D.C. metropolitan areas;
 .    approximately $47.0 million in connection with our recent acquisition of
     IRUs in and long-term capital leases of transpacific DS-3 bandwidth
     connecting the United States and Japan; and
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 .    in excess of $100.0 million over 25 years in connection with our recent
     agreement with a group of leading global telecommunications companies to
     build the Japan-U.S. Cable Network.

In addition, we are also obligated, under one of our Carrier and ISP Services
agreements, to provide the ISP customer with a rental facility of up to $5.0
million for telecommunications equipment owned or leased by us and deployed in
the customer's network.  On September 30, 1998, $1.4 million of this was drawn.
Furthermore, we may be obligated under the IRU Purchase Agreement to provide IXC
with additional shares of common stock and/or cash. For the specific terms of
this obligation, see "Note 4--Strategic Alliances--Strategic Alliance with IXC
Internet Services, Inc.".  We also expect that we will require substantial
capital for acquisitions of Internet assets and businesses.

We believe that we will have a reasonable degree of flexibility to adjust the
amount and timing of these capital expenditures in response to market
conditions, competition, our then-existing financing capabilities and other
factors. We also believe that working capital generated from the use of
bandwidth, together with other working capital from operations, existing credit
facilities, capital lease financings, proceeds of this and prior offerings and
proceeds of future equity or debt financings will be sufficient to meet the
presently anticipated working capital and capital expenditure requirements of
our operations.

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

RISK ASSOCIATED WITH COMPETITION AND PRICING FLUCTUATIONS

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

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

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

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

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

The predominant on-line service providers, including America Online, CompuServe,
Microsoft Network and Prodigy, have all entered the Internet access business by
engineering their current proprietary networks to include Internet access
capabilities.  We compete to a lesser extent with these on-line service
providers.

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

As a result of the increase in the number of competitors and the vertical and
horizontal integration in the industry, we currently encounter and expect to
continue to encounter significant pricing pressure and other competition in the
future.  Advances in technology as well as changes in the marketplace and the
regulatory environment are constantly occurring, and we cannot predict the
effect that ongoing or future developments may have on us or on the pricing of
our products and services. Increased price or other competition could result in
erosion of our market share and could have a material adverse effect on our
business, financial condition and results of operations.  We cannot assure that
we will have the financial resources, technical expertise or marketing and
support capabilities to continue to compete successfully.

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

RISKS ASSOCIATED WITH ACQUISITIONS AND STRATEGIC ALLIANCES

As part of our business strategy, we expect to continue to acquire assets and
businesses principally relating to or complementary to our current operations.
We may also seek to develop strategic alliances both domestically and
internationally.  Any such future acquisitions or strategic alliances would be
accompanied by the risks commonly encountered in strategic alliances with or
acquisitions of companies.  Such risks include, among other things:

 .    the difficulty of integrating the operations and personnel of the
     companies;
 .    the potential disruption of our ongoing business;
 .    the inability of management to maximize our financial and strategic
     position by the successful incorporation of licensed or acquired technology
     and rights into our service offerings; and
 .    the inability to maintain uniform standards, controls, procedures and
     policies and the impairment of relationships with employees and customers
     as a result of changes in management.

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

Many of the businesses that might become attractive acquisition candidates for
us may have or generate significant goodwill and intangible assets, and
acquisition of these businesses, if accounted for as a purchase, would typically
result in increases in our amortization expenses and the length of time over
which they are reported.  In connection with acquisitions, we could incur
substantial expenses, including the expenses of integrating the business of the
acquired company or the strategic alliance with our business.  In this regard,
an intangible asset that frequently arises in connection with the acquisition of
a technology company is "acquired in-process research and development," which
under U.S. accounting standards, as presently in effect, must be expensed
immediately upon acquisition.  Such expenses, in addition to the financial
impact of such acquisitions, could have a material adverse effect on our
business, financial condition and results of operations and could cause
substantial fluctuations in our quarterly and yearly operating results.

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

RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND EXPANSION

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

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

 .    our inability to continue to upgrade our networking systems or our
     operating and financial control systems;
 .    our inability to recruit and hire necessary personnel or to successfully
     integrate new personnel into our operations;
 .    our inability to successfully integrate the operations of acquired
     companies or to manage our growth effectively; or
 .    our inability to adequately respond to the emergence of unexpected
     expansion difficulties.

RISKS ASSOCIATED WITH ACQUISITIONS OF BANDWIDTH AND STRATEGIC ALLIANCE WITH IXC
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We are subject to a variety of risks relating to our recent acquisitions of
fiber-based telecommunications bandwidth from IXC and various other global
network suppliers and the delivery, operation and maintenance of such bandwidth.
Such risks include, among other things, the following:

 .    the risk that financial, legal, technical and/or other matters may
     adversely affect such suppliers' ability to perform their respective
     operation, maintenance and other services relating to such bandwidth, which
     may adversely affect our use of such bandwidth;
 .    the risk that we will not have access to sufficient additional capital
     and/or financing on satisfactory terms to enable us to make the necessary
     capital expenditures to take full advantage of such bandwidth;
 .    the risk that such suppliers may not continue to have the necessary
     financial resources to enable them to complete, or may otherwise elect not
     to complete, their contemplated buildout of their respective fiber optic
     telecommunications systems; and
 .    the risk that such buildout may be delayed or otherwise adversely affected
     by presently unforeseeable legal, technical and/or other factors.

In addition, we are subject to additional risks relating specifically to our
strategic alliance with IXC.  Such risks include:

 .    the risk that, if the fair market value of the IXC Initial Shares (as
     defined) is less than $240 million on the applicable date, our payment of
     the shortfall, whether in cash, stock or a combination thereof, could
     result in significant dilution to our shareholders and in IXC's owning a
     significant, or even a controlling, portion of our outstanding common
     stock, and/or could necessitate a significant cash outlay by the Company,
     which in any such event could have a material adverse effect on us, our
     shareholders and holders of our other securities;
 .    the risk that, in the event of a material default by IXC under the IRU
     Purchase Agreement at such time as IXC is in bankruptcy, our use of the
     bandwidth acquired from IXC may be materially adversely affected or
     curtailed;
 .    the risk that, in the event of a change of control or change in management
     of IXC, IXC's successor or new management, as the case may be, may not
     share IXC's commitment to the buildout of its fiber optic
     telecommunications system or may not otherwise allocate the necessary
     human, financial, technical and other resources to satisfactorily meet its
     obligations to us under the IRU Purchase Agreement that would adversely
     affect our use of the bandwidth acquired from IXC;
 .    the risk that IXC, as our largest shareholder and through its ex-chairman's
     seat on our Board of Directors, could subject us to certain conflicts of
     interest or could influence our management in a manner that could adversely
     affect our business or control of the Company; and
 .    the risk that future sales by IXC of substantial numbers of shares of our
     common stock could adversely affect the market price of our common stock
     and make it more difficult for us to raise funds through equity offerings
     and to effect acquisitions of businesses or assets in consideration for
     issuances of our common stock.

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

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

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

 .    unexpected changes in or delays resulting from regulatory requirements,
     tariffs, customs, duties and other trade barriers;
 .    difficulties in staffing and managing foreign operations;
 .    longer payment cycles and problems in collecting accounts receivable;
<PAGE>
 
 .    political instability, expropriation, nationalization, war, insurrection
     and other political risks;
 .    fluctuations in currency exchange rates and foreign exchange controls which
     restrict or prohibit repatriation of funds;
 .    technology export and import restrictions or prohibitions;
 .    delays from customs brokers or government agencies;
 .    seasonal reductions in business activity during the summer months in Europe
     and certain other parts of the world; and
 .    potentially adverse tax consequences, which could adversely impact the
     success of our international operations.

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

In particular, we have also recently made significant investments in Japan,
which is currently experiencing a severe economic recession.  Other Asian-
Pacific countries in which we operate are also experiencing economic
difficulties and uncertainties.  These economic difficulties and uncertainties
could have a material adverse effect on our business, financial condition and
results of operations.

RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS

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

 .    continue to develop our technical expertise;
 .    enhance our current services;
 .    develop new products and services that meet changing customer needs;
 .    influence and respond to emerging industry standards and other
     technological changes on a timely and cost-effective basis;
 .    integrate technological advances into our current network; and
 .    address the compatibility and interoperability issues raised by
     technological changes or new industry standards.

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

Even if we do successfully respond to technological advances, the integration of
new technology may require substantial time and expense, and we cannot assure
that we will succeed in adapting our network infrastructure.

DEPENDENCE ON KEY PERSONNEL

Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of persons with knowledge of
and experience in the Internet service industry.  The process of locating such
personnel with the combination of skills and attributes required to carry out
our strategies is often lengthy.  Our success depends to a significant degree
upon our ability to attract and
<PAGE>
 
retain qualified management, technical, marketing and sales personnel and upon
the continued contributions of such management and personnel. Our employees may
voluntarily terminate their employment with us at any time. We cannot assure
that we will be successful in attracting and retaining qualified executives and
personnel. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could have a material adverse effect on
our business, financial condition or results of operations.

POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK

The law relating to liability of ISPs for information carried on or disseminated
through their networks is not completely settled. A number of lawsuits have
sought to impose such liability for defamatory speech and infringement of
copyrighted materials. The U.S. Supreme Court has let stand a lower court ruling
which held that an Internet Service Provider was protected from liability for
material posted on its system by a provision of the Communications Decency Act.
However, the findings in that case may not be applicable in other circumstances.
Other courts have held that online service providers and ISPs may, under certain
circumstances, be subject to damages for copying or distributing copyrighted
materials. Certain provisions of the Communications Decency Act, which imposed
criminal penalties for using an interactive computer service for transmitting
obscene or indecent communications, have been found unconstitutional by the U.S.
Supreme Court. However, on October 21, 1998, new federal legislation was enacted
that requires limitations on access to pornography and other material deemed
"harmful to minors." This legislation has been attacked in court as a
violation of the First Amendment. We are unable to predict the outcome of this
case. The imposition upon ISPs or web server hosts of potential liability for
materials carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to such liability. Such measures may
require that we spend substantial resources or discontinue certain product or
service offerings. Any of these actions could have a material adverse effect on
our business, operating results and financial condition.

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

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

REGULATORY MATTERS

Consistent with our growth and acquisition strategy, we are now engaged in, or
will soon be engaged in, activities that subject us to varying degrees of
federal, state and local regulation. The Federal Communications Commission
("FCC") exercises jurisdiction over all facilities of, and services offered by,
telecommunications carriers to the extent that they involve the provision,
origination or termination of jurisdictionally interstate or international
communications. The state regulatory commissions retain jurisdiction over the
same facilities and services to the extent they involve origination or
termination of jurisdictionally intrastate communications. In addition, as a
result of the passage of the Telecommunications Act of 1996 (the "1996 Act"),
state and federal regulators share responsibility for implementing and enforcing
the domestic pro-competitive policies of the 1996 Act. In particular, state
regulatory commissions have substantial oversight over the provision of
interconnection and non-discriminatory network access by incumbent local
exchange carriers ("ILECs"). Municipal authorities generally have some
jurisdiction over access to rights of way, franchises, zoning and other matters
of local concern.

Our Internet operations are not currently subject to direct regulation by the
FCC or any other governmental agency (other than regulations applicable to
businesses generally). However, due to the increasingly widespread use of the
Internet, it is possible that additional laws and regulations may be adopted.
Such additional laws could cover issues such as content, user pricing, privacy,
libel, intellectual 
<PAGE>
 
property protection and infringement, and technology export and other controls.
We may be subject to similar or other laws and regulations in non-U.S
jurisdictions.

Moreover, the FCC continues to review its regulatory position on the usage of
the basic network and communications facilities by ISPs.  Although in an April
1998 Report the FCC determined that ISPs should not be treated as
telecommunications carriers and therefore not regulated, it is expected that
future ISP regulatory status will continue to be uncertain. Indeed, in that
report, the FCC concluded that certain services offered over the Internet, such
as phone-to-phone IP telephony, may be functionally indistinguishable from
traditional telecommunications service offerings and their non-regulated status
may have to be re-examined.

We are unable to predict what regulations may be adopted in the future, or to
what extent existing laws and regulations may be found applicable, or the impact
such new or existing laws may have on our business. We can give no assurance
that new laws or regulations relating to Internet services, or existing laws
found to apply to them, will not have a material adverse effect on us.

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

In addition to our Internet activities, we have focused attention on acquiring
telecommunications assets and facilities, which is a regulated activity.  Our
wholly-owned subsidiary, PSINetworks Company, has received an international
Section 214 license from the FCC to provide global facilities-based
telecommunications services, subjecting it to regulation as a non-dominant
international common carrier.  In addition, our wholly-owned subsidiary, PSINet
Telecom UK Limited, has received an international facilities license from DTI
and OFTEL, the responsible telecommunications regulatory bodies in the United
Kingdom.  Generally, the FCC and OFTEL have chosen not to closely regulate the
charges or practices of non-dominant carriers, such as our subsidiaries.
Nevertheless, these regulatory agencies act upon complaints against such
carriers for failure to comply with statutory obligations or with the rules,
regulations and policies of such regulatory agencies.  These regulatory agencies
also have the power to impose more stringent regulatory requirements on us and
to change our regulatory classification.  We believe that, in the current
regulatory environment, such regulatory agencies are unlikely to do so.  As we
enter new markets, we anticipate obtaining similar licenses as required by
applicable telecommunications rules and regulations in order to acquire and
maintain telecommunications assets and facilities in such countries.

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

PSINetworks Company has also received competitive local exchange carrier
("CLEC") certification in Colorado and Texas, has applied for CLEC
certification in Virginia, California and New York, and is considering the
financial, regulatory and operational implications of becoming a CLEC in certain
other states.  As a provider of domestic basic telecommunications services,
particularly competitive local exchange services, we could become subject to
further regulation by the FCC and/or another regulatory agency, including state
and local entities.
<PAGE>
 
The 1996 Act has caused fundamental changes in the markets for local exchange
services. In particular, the 1996 Act and the FCC rules issued pursuant to it
mandate competition in local markets and require that ILECs interconnect with
CLECs. Under the provisions of the 1996 Act, the FCC and state public utility
commissions share jurisdiction over the implementation of local competition: the
FCC was required to promulgate general rules and the state commissions were
required to arbitrate and approve individual agreements. However, the FCC
interconnection rules implementing the 1996 Act were appealed and, in the case
of the "national pricing" rules, vacated. The Supreme Court has agreed to review
this lower court decision and heard oral arguments on this matter on October 13,
1998. Pending the Supreme Court's decision, state public utility commissions are
free to develop independent pricing policies for interconnection, unbundled
access, resale, and transport and termination of local telecommunications
traffic.

A critical issue for CLECs is the right to receive reciprocal compensation for
the transport and termination of Internet traffic. We believe that, under the
1996 Act and current FCC rules, CLECs are entitled to receive reciprocal
compensation from ILECs for the transport and termination of Internet traffic.
However, some ILECs have disputed payment of reciprocal compensation for
Internet traffic, arguing that ISP traffic is not local traffic. Most states
have required ILECs to pay ISPs reciprocal compensation. However, federal
regulators and some state regulators are currently considering the proper
jurisdictional classification of local calls placed to an ISP and whether ISP
calling triggers an obligation to pay reciprocal compensation. On October 30,
1998, the FCC determined that dedicated Digital Subscriber Line service is an
interstate service and properly tariffed at the interstate level. However, the
FCC specifically did not apply this decision to the question of whether local
exchange carriers are entitled to receive reciprocal compensation when they
deliver circuit-switched dial-up traffic to ISPs. It is expected that the FCC
will address this question in the near future. There can be no assurance that
any FCC decision on this matter will favor our position. An unfavorable result
may have an adverse effect on our potential future revenues as a CLEC as well as
increasing our costs for PRIs in general.

The 1996 Act was intended to increase opportunities for companies to compete in
the local exchange market.  However, we cannot give assurance that changes in
current or future regulations by the FCC and state regulatory commissions, or
other legislative or jurisdictional initiatives relating to the
telecommunications industry would not have a material adverse effect on us.

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

DEPENDENCE ON SUPPLIERS

We have few long-term contracts with our suppliers.  We are dependent on third
party suppliers for our leased-line connections or bandwidth.  Certain of these
suppliers are or may become competitors of ours, and such suppliers are not
subject to any contractual restrictions upon their ability to compete with us.
If these suppliers change their pricing structures, we may be adversely
affected.  Due to the consummation of our transaction with IXC and our recent
acquisitions of telecommunications bandwidth from other global network
providers, we anticipate that our dependence upon certain of these suppliers
will be decreased as we accept delivery of OC-48 bandwidth from IXC and
bandwidth from our other global network providers.  Nevertheless, until the
fiber optic telecommunications systems of IXC and our other global network
providers are completed (and in the case of IXC, it is not obligated under the
IRU Purchase Agreement to extend its buildout of the IXC system beyond
approximately 6,640 unique route miles of OC-48 bandwidth) and, in certain
geographic areas, even after such completion, we will continue to be dependent
upon such suppliers.  Moreover, any failure or delay of IXC or such other
network providers to deliver bandwidth to us or to provide operations,
maintenance and other services with respect to such bandwidth in a timely or
adequate fashion could adversely affect us.
<PAGE>
 
We are also dependent on certain third party suppliers of hardware components.
Although we attempt to maintain a minimum of two vendors for each required
product, certain components used by us in providing our networking services are
currently acquired or available from only one source.  We have from time to time
experienced delays in the receipt of certain hardware components and
telecommunications facilities, including delays in delivery of PRI
telecommunications facilities (which connect dial-up customers to our network).
A failure by a supplier to deliver quality products on a timely basis, or the
inability to develop alternative sources if and as required, could result in
delays which could have a material adverse effect on us.  Our remedies against
suppliers who fail to deliver products on a timely basis are limited by
contractual liability limitations contained in supply agreements and purchase
orders and, in many cases, by practical considerations relating to our desire to
maintain good relationships with the suppliers.  As our suppliers revise and
upgrade their equipment technology, we may encounter difficulties in integrating
the new technology into our network.

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

RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS

Certain of our financing arrangements are secured by substantially all of our
assets and stock of certain of our subsidiaries.  These financing arrangements
require that we satisfy certain financial covenants.  They also currently
prohibit us from paying dividends and repurchasing our capital stock without the
lender's consent.  In the event that the Company is liquidated, our secured
lenders would be entitled to foreclose upon those assets in the event of a
default under the financing arrangements.  They would also be entitled to be
repaid from the proceeds of the liquidation of those assets before the assets
would be available for distribution to the holders of our securities.  In
addition, the collateral security arrangements under our existing financing
arrangements may adversely affect our ability to obtain additional borrowings.

RISK OF SYSTEM FAILURE OR SHUTDOWN

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

We carry business personal property insurance at both scheduled locations and
unscheduled locations, with a blanket property limit of $168.0 million and
business interruption insurance with a blanket limit of $10.0 million.  Such
coverage, however, may not be adequate or available to compensate us for all
losses that may occur.  In addition, we generally attempt to limit our liability
to customers arising out of network failures by contractually disclaiming all
such liability.  In respect of certain services, we have also contractually
limited liability to a usage credit based upon the amount of time that the
system was not operational.  We cannot assure, however, that such limitations
will be enforceable.  In any event, significant or prolonged system failures or
shutdowns could damage our reputation and result in the loss of customers.

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

Security problems represent an ongoing threat to public and private data
networks.  Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center at
Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events.  Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on us.

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

RISK ASSOCIATED WITH DEPENDENCE ON TECHNOLOGY AND WITH PROPRIETARY RIGHTS

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

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

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

Additionally, if we are unable to match our network capacity to customer demand
for our services, our network could become congested during periods of peak
customer demand. Such congestion could adversely affect the quality of service
we are able to provide. Conversely, due to the high fixed cost nature of our
infrastructure, if our network is under-utilized, it could adversely affect our
ability to provide cost-efficient services. The failure of the Company to match
network capacity to demand could have a material adverse effect on our business,
financial condition or results of operations.

RISKS ASSOCIATED WITH YEAR 2000

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

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

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

We have developed, or are in the process of developing, detailed plans for
implementation and testing of any necessary modifications to our key computer
systems and equipment with embedded chips to ensure that they are Y2K compliant.
We have engaged a third party consultant to perform an assessment of our
systems, domestically and internationally.  We expect that the assessment, which
is being done in stages, will be complete by December 31, 1998.  We anticipate
that our domestic internal systems will be Y2K ready by June 30, 1999, and our
international systems will be Y2K compliant by the end of the third quarter of
1999, which is consistent with prior plans.  We believe that with these detailed
plans and completed modifications, the Y2K issue will not pose significant
operational problems for us.  However, if the modifications and conversions are
not made, or not completed in a timely fashion, the Y2K issue could have a
material impact on our operations.

Our cost of addressing Y2K issues has been minor to date, less than five percent
(5%) of our information technology budget, but this amount will increase as
substantial consultants or personnel resources are required or if operationally-
important equipment must be remediated or replaced.  The risk that Y2K issues
could present to us include, without limitation, disruption, delay or cessation
of operations, including operations that are subject to regulatory compliance.
In each case, the correction of the problem could result in substantial expense
and disruption or delay of our operations.  The total cost of Y2K assessments
and remediation is funded through cash flows generated through operations and
available from other sources and, to date, we are expensing these costs.  The
financial impact of making any required systems changes or other remediation
efforts cannot be known precisely at this time, but it is not expected to be
material to our financial position, results of operations, or cash flows.  We
have not canceled any principal information technology projects as a result of
our Y2K effort, although we have rescheduled some tasks to accommodate this
effort.

In addition, we have identified and prioritized and are communicating with
Material Third Parties to determine their Y2K status and any probable impact on
us.  We will continue to track and evaluate our long-term relationship with
Material Third Parties based on the responses we receive and on information
learned from other sources.  If any of our Material Third Parties are not Y2K
ready and their non-compliance causes a material disruption to any of their
respective businesses, our business could be materially adversely affected.
Disruptions could include, among other things: the failure of a Material 
<PAGE>
 
Third Party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to our facilities; and other interruptions in
the normal course of our operations, the nature and extent of which we cannot
foresee. We will continue to evaluate the nature of these risks, but at this
time we are unable to determine the probability that any such risk will occur,
or if it does occur, what the nature, length or other effects, if any, it may
have on us. If a significant number of Material Third Parties experience
failures in their computer systems or operations due to Y2K non-compliance, it
could affect our ability to process transactions or otherwise engage in similar
normal business activities. For example, while we expect our internal systems,
domestic and international, to be Y2K ready in stages during 1999, we and our
customers who communicate internationally will be dependent upon the Y2K-
readiness of many foreign providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, we and
our customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on the business and
revenues of us and our customers. While many of these risks are outside our
control, we have instituted a program to identify Material Third Parties and to
address any non-compliance issues.

While we believe that we are adequately addressing the Y2K issue, there can be
no assurance that our Y2K analyses will be completed on a timely basis or that
the cost and liabilities associated with the Y2K issue will not materially
adversely impact our business, prospects, revenues or financial position.  We
are uncertain as to our most reasonably likely worst case Y2K scenario and have
not yet developed a contingency plan to handle a worst case scenario.  We expect
to have a contingency plan to handle this situation by September 30, 1999.  See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."

POTENTIAL VOLATILITY OF STOCK PRICE

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

INVESTMENT COMPANY ACT

We do not propose to engage in investment activities in a manner or to an extent
which would require us to register as an investment company under the Investment
Company Act of 1940 (the "Investment Company Act").  The Investment Company
Act places restrictions on the capital structure and business activities of
companies registered thereunder.  Accordingly, we will seek to limit our holding
of "investment securities" (as defined in the Investment Company Act) to an
amount which is less than 40% of the value of our total assets as calculated
pursuant to the Investment Company Act.  The Investment Company Act permits a
company to avoid becoming subject to such Act for a period of up to one year
despite the holding of investment securities in excess of such amount if, among
other things, its Board of Directors has adopted a resolution which states that
it is not the company's intention to become an investment company.  Our Board of
Directors may adopt such a resolution with respect to the proceeds of the 11
1/2% Senior Notes offering.  Application of the provisions of the Investment
Company Act would have a material adverse effect on us.  See "Use of
Proceeds."

UNCERTAINTY OF ARBITRATION RESULTS

On November 25, 1997, Chatterjee Management Company ("Chatterjee") initiated
arbitration proceedings against us before the International Chamber of
Commerce, Court of Arbitration, in London, England, with respect to a joint
venture agreement dated as of September 19, 1996 previously entered into by
Chatterjee and us. As previously disclosed by us in various filings with the
<PAGE>
 
Commission, on September 19, 1996, we signed an agreement with Chatterjee
pursuant to which we and an investment group led by Chatterjee would establish a
joint venture for the purpose of building an Internet network across Europe and
providing Internet-related services in Europe. Such investment group was to
invest up to $41.0 million in the joint venture. No monies were invested by
Chatterjee or the investment group pursuant to the joint venture agreement nor
were any other actions undertaken to implement it. Following the signing of the
agreement, the parties acknowledged structural difficulties associated with the
joint venture as originally contemplated, which prevented implementation of it.
Instead, they sought, for several months, to negotiate a direct investment in us
by Chatterjee in lieu of the prior agreement. Those negotiations were not
successful.

In the arbitration proceeding, Chatterjee has now alleged that we breached the
joint venture agreement by repudiating our obligations under the agreement and
by breaching a covenant not to compete. In the arbitration, Chatterjee requests
an award declaring that the agreement is still valid and binding upon the
parties and that we stand in breach of the agreement, directing us to
specifically perform our obligations under the agreement or, in the alternative,
awarding Chatterjee compensatory damages in an amount not less than $25.0
million, awarding Chatterjee profits that we have earned or stand to earn in
Europe, and awarding Chatterjee the costs of arbitration, including attorneys'
fees, and interest on the award of damages. We believe that Chatterjee's claims
are without merit and intend vigorously to defend ourself in the arbitration.
The arbitration commenced on October 19, 1998 in London, England. While the
ultimate outcome of the arbitration is uncertain, we believe that we have
meritorious defenses to Chatterjee's claim and intend to continue to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on our business, financial condition and results of operations.

FORWARD-LOOKING STATEMENTS

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