<PAGE>
 
                                                                    EXHIBIT 99.1
                                        

RISK FACTORS

  From time to time, in both written reports and in oral statements by PSINet
senior management, expectations and other statements are expressed regarding
future performance of the Company.  These forward-looking statements are
inherently uncertain and investors must recognize that events could turn out to
be different than such expectations and statements. Key factors impacting
current and future performance are discussed in the Company's Annual Report on
Form 10-K and other filings with the Securities and Exchange Commission. In
addition, the following Risk Factors as well as the other information in this
Quarterly Report should be considered in evaluating the Company and its
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.

SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT

  Upon the consummation of the Notes offering, the Company became highly
leveraged. As of March 31, 1998, after giving pro forma effect to the Notes
offering (and the application of the net proceeds therefrom) and the
acquisitions of iSTAR and Iprolink, the Company's total indebtedness would have
been approximately $701.9 million, representing 93.5% of total capitalization,
and its interest expense would have been $17.9 million (in comparison to the
Company's actual interest expense of $2.6 million for the three months ended
March 31, 1998). The Company's high level of indebtedness could have several
important effects on its future operations, which could have important
consequences to the holders of the Company's securities, including, the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on its indebtedness and, therefore,
will not be available for other purposes, (ii) covenants contained in the
Company's debt obligations will require the Company to meet certain financial
tests, and other restrictions will limit its ability to borrow additional funds
or to dispose of assets and may affect the Company's flexibility in planning
for, and reacting to, changes in its business, including possible acquisition
activities and capital expenditures, and (iii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired. The
Company's ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future operating performance
and economic, financial, competitive, regulatory and other factors affecting the
operations of the Company, many of which are beyond its control. There can be no
assurance that the Company's future operating performance will not be adversely
affected by some or all of these factors. Based upon the Company's current level
of operations, management believes that working capital from operations, from
existing credit facilities, from capital lease financings, and from proceeds of
future equity or debt financings (including, without limitation, from the Notes
offering), will be adequate to meet the Company's presently anticipated future
requirements for working capital, capital expenditures and scheduled payments of
interest on its debt (including the Notes). There can be no assurance, however,
that the Company's business will generate sufficient cash flow from operations
or that future working capital borrowings will be available in an amount
sufficient to enable the Company to service its debt (including the Notes) or to
make necessary capital expenditures. Furthermore, there can be no assurance that
the Company will be able to raise additional capital for any such refinancing in
the future.

OPERATING DEFICIT; CONTINUING LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING
RESULTS; ISTAR OPERATING LOSSES

  The Company's 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, the Company must, among other things, respond
to competitive developments, continue to attract and retain qualified persons,
and continue to upgrade its technologies and commercialize its network services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing such risks and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company has experienced revenue growth on an
annual basis with revenue increasing from $38.7 million in 1995 to $84.4 million
in 1996 to

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$121.9 million in 1997 and $44.5 million for the first three months of 1998, it
has incurred losses and experienced negative earnings before interest, taxes,
depreciation and amortization ("EBITDA") during each of such periods. The
Company has incurred net losses of $45.6 million, $55.1 million and $53.2
million and has incurred negative EBITDA of $21.2 million, $28.0 million and
$27.9 million for each of the years ended December 31, 1997, 1996 and 1995,
respectively. Additionally, the Company incurred net losses of $29.1 million and
negative EBITDA of $10.5 million for the three months ended March 31, 1998. At
March 31, 1998, the Company had an accumulated deficit of $192.5 million.
Principal among factors that adversely affected the Company's operating
performance in 1997 and the first quarter of 1998 were delivery delays for
Primary Rate Interface ("PRI") telecommunications facilities required to meet
customer demand, accelerated investment by the Company in its overseas
operations in order to respond to rapidly developing markets, and lower than
expected growth during the third quarter of 1997 in the demand for its domestic
Internet services. The Company expects to focus in the near term on continuing
to increase its business customer base and expanding its Carrier and ISP
Services business unit strategy which will require it to continue to incur
expenses for marketing, network infrastructure, personnel and the development of
new products and services. Such continued expenses may adversely impact cash
flow and operating performance. The Company also plans to continue to enhance
its network and the administrative and operational infrastructure necessary to
support its Internet access service domestically and internationally.

  The Company's 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 the Company's control, including, among others, general economic
conditions, specific economic conditions in the Internet access industry, user
demand for Internet services, capital expenditures and other costs relating to
the expansion of operations and the Company network, the introduction of new
services by the Company or its competitors, the mix of services sold and the mix
of channels through which those services are sold, pricing changes and new
product introductions by the Company and its competitors and delays in obtaining
sufficient supplies of sole or limited source equipment and telecom facilities
(i.e., PRIs). As a strategic response to a changing competitive environment, the
Company may elect from time to time to make certain pricing, service or
marketing decisions that could have a material adverse effect on the Company's
business, results of operations and cash flow.

  In February 1998, the Company acquired iSTAR, one of the leading Canadian
providers of Internet services and solutions. Prior to its acquisition by the
Company, iSTAR incurred a net loss of $39.1 million and had negative EBITDA of
$20.7 million for the twelve months ended November 30, 1997. While the Company
believes that after eliminating redundant network architecture and
administrative functions and taking other actions to integrate the operations of
iSTAR it will be able to realize significant cost savings on its Canadian
operations beginning in 1998, there can be no assurance that the Company's
integration of the operations of iSTAR will be accomplished successfully. The
inability of the Company to improve the operating performance of iSTAR's
business or to successfully integrate the operations of iSTAR could have a
material adverse effect on the Company's business, financial condition and
results of operations.

HOLDING COMPANY STRUCTURE; DEPENDENCE ON SUBSIDIARIES FOR REPAYMENT OF THE NOTES

  The Company is an operating entity which also conducts a portion of its
business through its subsidiaries and may, in the future, conduct a greater
portion of its business through its subsidiaries.  The Company's cash flow from
operations and consequent ability to service its debt, including the Notes, is,
therefore, in part, dependent (and may become more dependent) upon the earnings
of its subsidiaries and the distribution (through dividends or otherwise) of
those earnings to the Company, or upon loans, advances or other payments of
funds by those subsidiaries to the Company.  The Company's subsidiaries will
have no obligation, contingent or otherwise to make any funds available to the
Company for payment of the principal of or interest on the Notes.  The ability
of the Company's subsidiaries to make such payments will be subject to, among
other things, the availability of sufficient surplus funds, the terms of such
subsidiaries' indebtedness and applicable laws.

  Claims of creditors of the Company's subsidiaries and holders of preferred
stock, if any, of such subsidiaries will have priority as to the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, except to the extent that such subsidiaries have provided

                                       25
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guarantees of the Company's indebtedness and to the extent that loans made by
the Company to its subsidiaries are recognized as indebtedness.  Therefore, the
Notes are effectively subordinated in right of payment to all existing and
future indebtedness and other liabilities of the Company's subsidiaries,
including trade payables.  As of March 31, 1998, after giving pro forma effect
to the Notes offering (and the application of the net proceeds therefrom), the
Company's subsidiaries would have had approximately $764.9 million of total
liabilities (including trade payables and accrued liabilities).  Under the terms
of the Indenture governing the Notes, certain subsidiaries of the Company will
be restricted in their ability to incur debt in the future.  The Notes also are
effectively subordinated to any secured indebtedness of the Company because
holders of such indebtedness will have claims that are prior to the claims of
the holders of the Notes with respect to the assets securing such indebtedness
except to the extent the Notes are equally and ratably secured by such assets.

COMPETITION

  The market for Internet access and related services is highly competitive.
The industry has relatively insignificant barriers to entry and numerous
entities competing for the same customers.  The Company expects 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.
Current and prospective competitors include, in addition to other national,
regional and local ISPs, long distance and local exchange telecommunications
companies, cable television, direct broadcast satellite, wireless communications
providers, and on-line service providers.  The Company believes that the primary
competitive factors for the provision of Internet services are quality of
service, reliability, price, technical expertise, ease of use, variety of value-
added services, quality and availability of customer support, experience of the
supplier, geographic coverage and name recognition.  The Company's success in
this market will depend heavily upon its ability to provide high quality
Internet connectivity and related services at competitive prices.

  As a result of industry competition, the Company has encountered and expects
to continue to encounter pricing pressure, which in turn could result in
reductions in the average selling price of the Company's services.  For example,
certain of the Company's competitors which are telecommunications companies,
including AT&T Corporation and MCI Communications Corp., may be able to provide
customers with reduced or free communications costs in connection with their
Internet access services or offer Internet access as a standard component of
their overall service package, thereby increasing price pressure on the Company.
The Company has in the past reduced prices on certain of its Internet access
options and may continue to do so in the future.  There can be no assurance that
the Company will be able to offset the effects of any such price reductions with
an increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise.  The Company is not able presently to
predict the impact which future growth in the Internet access and on-line
services businesses will have upon competition in the industry.  Increased price
or other competition could result in erosion of the Company's market share and
could have a material adverse effect on the Company's business, financial
condition and results of operations.  There can be no assurance that the Company
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
 
  As the Company continues to expand its operations outside the United States,
it will encounter new competitors and competitive environments.  In some cases,
the Company will be forced to compete with and buy services from government
owned or subsidized telecommunications providers, some of which may enjoy a
monopoly on telecommunications services essential to the Company's business.
There can be no assurance that the Company will be able to purchase such
services at a reasonable price or at all.  In addition to the risks associated
with the Company's previously described competitors, foreign competitors may
possess a better understanding of their local markets and better working
relationships with local infrastructure providers and others.  There can be no
assurance that the Company can obtain similar levels of local knowledge, and
failure to obtain that knowledge could place the Company at a significant
competitive disadvantage.

RISKS ASSOCIATED WITH STRATEGIC ALLIANCE WITH IXC

  The Company is subject to a variety of risks relating to its transactions with
IXC and the acquisition, operation and maintenance of the bandwidth
corresponding to the PSINet IRUs. Such risks include,

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among other things, the following: (i) the risk that, if the difference between
$240 million and the fair market value of the IXC Initial Shares as of the
Determination Date or the Acceleration Date, as applicable, is significant,
satisfaction of the Contingent Payment Obligation by the Company through the
issuance of additional shares of common stock or, at the sole option of the
Company, by a payment of cash, or a combination of stock and cash, could result
in significant dilution to the Company's shareholders and in IXC's owning a
significant, or even a controlling, portion of the Company's 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 the Company and its
shareholders; (ii) the risk that financial, legal, technical and/or other
matters may adversely affect IXC's ability to perform the operation, maintenance
and other services under the IRU Purchase Agreement with respect to the
bandwidth corresponding to the PSINet IRUs, which may adversely affect the
Company's use of such bandwidth; (iii) 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, the Company's use of the bandwidth corresponding to the PSINet IRUs
may be materially adversely affected or curtailed; (iv) the risk that the
Company will not have access to sufficient additional capital and/or financing
on satisfactory terms to enable it to make the necessary capital expenditures to
take full advantage of the PSINet IRUs; (v) the risk that IXC may not continue
to have the necessary financial resources to enable it to complete, or may
otherwise elect not to complete, its contemplated buildout of its fiber optic
telecommunications system or that such buildout may be delayed or otherwise
adversely affected by presently unforeseeable legal, technical and/or other
factors; (vi) 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 the Company under
the IRU Purchase Agreement that would adversely affect the Company's use of the
bandwidth corresponding to the PSINet IRUs; (vii) the risk that IXC, as the
Company's largest shareholder and through its chairman's seat on the Company's
Board of Directors, could subject the Company to certain conflicts of interest
or could influence the Company's management in a manner that could adversely
affect the Company's business or control of the Company; and (viii) the risk
that future sales by IXC of substantial numbers of shares of the Company's
common stock could adversely affect the market price of the Company's common
stock and make it more difficult for the Company to raise funds through equity
offerings and to effect acquisitions of businesses or assets in consideration
for issuances of its common stock. There can be no assurance that the Company
will be successful in overcoming these risks or any other problems encountered
in connection with its strategic alliance with IXC.

RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND EXPANSION

  The Company had over 400 POPs as of March 31, 1998 and plans to continue to
expand the capacity of existing POPs as customer-driven demand dictates.  The
Company's rapid growth has placed, and in the future may continue to place, a
strain on the Company's administrative, operational and financial resources and
has increased demands on its systems and controls.  The Company anticipates that
its Carrier and ISP Services business unit, as well as other business growth,
may require continued enhancements to and expansion of its network.  Competition
for qualified personnel in the Internet services industry is intense and there
are a limited number of persons with the requisite knowledge of and experience
in such industry.  The process of locating, training and successfully
integrating qualified personnel into the Company's operations is often lengthy
and expensive.  There can be no assurance that the Company will be successful in
attracting, integrating and retaining such personnel.  In addition, there can be
no assurance that the Company's existing operating and financial control systems
and infrastructure will be adequate to maintain and effectively monitor future
growth.  The inability to continue to upgrade the networking systems or the
operating and financial control systems, the inability to recruit and hire
necessary personnel, the inability to successfully integrate new personnel into
the Company's operations, the inability to manage its growth effectively or the
emergence of unexpected expansion difficulties could adversely affect the
Company's business, results of operations and financial condition.

NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS

  The Company expects to continue to enhance its network in order to maintain
its competitive position and continue to meet the increasing demands for service
quality, availability and competitive pricing.  In 

                                       27
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order to take full advantage of the bandwidth 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 $95 million. In addition,
the Company expects to incur on an annual basis $1.15 million in operation and
maintenance fees with respect to the PSINet IRUs per each 1,000 equivalent route
miles of OC-48 bandwidth accepted under the IRU Purchase Agreement. Other
planned capital expenditures expected to be incurred by the Company over the
next three years include up to $35 million in connection with the Company's
anticipated buildout of its pan-European Internet network. The Company is also
obligated, under the terms of one of its 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 the Company and deployed in the
customer's network ($1.4 million was drawn at March 31, 1998). In addition, the
Company may be obligated pursuant to the Contingent Payment Obligation under the
IRU Purchase Agreement to provide IXC with additional shares of common stock
and/or cash, at the Company's sole option, in an amount equal to the difference
between $240 million and the then fair market value of the IXC Initial Shares on
the earlier of one year following delivery and acceptance of the total bandwidth
corresponding to the PSINet IRUs or February 25, 2002.

  The Company believes it will have a reasonable degree of flexibility to adjust
the amount and timing of its capital expenditures in response to the Company's
then existing financing capabilities, market conditions, competition and other
factors.  The Company believes that working capital generated from the use of
bandwidth corresponding to the PSINet IRUs, together with other working capital
from operations, from existing credit facilities, from capital lease financings,
proceeds of unsecured senior notes, and from proceeds of future equity or debt
financings (which the Company presently 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.  See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-- 
Liquidity and Capital Resources."

  The Company may seek to raise additional funds in order to take advantage of
unanticipated opportunities, more rapid international expansion or acquisitions
of complementary businesses, or to develop new products or otherwise respond to
changing business conditions or unanticipated competitive pressures.  There can
be no assurance that the Company will be able to raise such funds on favorable
terms.  In the event that the Company is unable to obtain such additional funds
on acceptable terms, the Company may determine not to enter into various
expansion opportunities.

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

  A component of the Company's strategy is its planned expansion into
international markets.  There can be no assurance that the Company will be able
to obtain the permits and operating licenses required for it 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 the Company's ability to
expand its international presence, there are certain risks inherent in doing
business on an international level, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing foreign operations, longer payment cycles, problems in
collecting accounts receivable, political instability, expropriation,
nationalization, war, insurrection and other political risks, fluctuations in
currency exchange rates, 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 the Company's international operations.  The
Company may need to enter into joint ventures or other strategic relationships
with one or more third parties in order to conduct its foreign operations
successfully.  There can be no assurance that such factors will not have an
adverse effect on the Company's future international operations and,
consequently, on the Company's business, financial condition and results of
operations.  In addition, there can be no assurance that laws or administrative
practice relating to taxation, foreign exchange or other matters of countries
within which the Company operates will not change.  Any such change could have a
material adverse effect on the Company's business, financial condition and
results of operations.

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RISKS ASSOCIATED WITH ACQUISITIONS AND STRATEGIC ALLIANCES

  As part of its business strategy, the Company expects to continue to seek to
develop strategic alliances both domestically and internationally and/or to
acquire assets and businesses principally relating to or complementary to its
current operations.  Any such future strategic alliances or acquisitions 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 the Company's ongoing business, the inability of
management to maximize the financial and strategic position of the Company by
the successful incorporation of licensed or acquired technology and rights into
the Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management.  There can be no assurance that
the Company would be successful in overcoming these risks or any other problems
encountered in connection with such strategic alliances or acquisitions.

  In addition, if the Company were to proceed with one or more significant
acquisitions in which the consideration consists of cash, such as the Company's
recently completed transaction with iSTAR, a substantial portion of the
Company's available cash could be used to consummate such acquisitions.  If the
Company were to consummate one or more significant acquisitions or strategic
alliances in which the consideration consists of stock, such as the Company's
recently completed transaction with IXC, existing  shareholders of the Company
could suffer a significant dilution of their ownership interests in the Company.
Many of the businesses that might become attractive acquisition candidates for
the Company 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 the Company's amortization expenses and the length of
time over which they are reported.  In connection with acquisitions, the Company
could incur substantial expenses, including the expenses of integrating the
business of the acquired company or the strategic alliance with the Company's
business.  Such expenses, in addition to the financial impact of such
acquisitions, could have a material adverse effect on the Company's business,
financial condition and results of operations and could cause substantial
fluctuations in the Company's quarterly and yearly operating results.
Additionally, while the Company believes that after eliminating redundant
network architecture and administrative functions and taking other actions to
integrate the operations of acquired companies it will be able to realize cost
savings, there can be no assurance that the Company's integration of acquired
companies' operations will be accomplished.  The inability of the Company to
improve the operating performance of acquired companies' business or to
successfully integrate the operations of acquired companies could have a
material adverse effect on the Company's business, financial condition and
results of operations.

DEPENDENCE ON KEY PERSONNEL

  The Company's success depends to a significant degree upon the continued
contributions of its senior management team and technical, marketing and sales
personnel.  The Company's employees may voluntarily terminate their employment
with the Company at any time.  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
Company's success also will depend on its ability to attract and retain
qualified management, marketing, technical and sales executives and personnel.
The process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategies is often lengthy.  The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on the Company's
results of operations, product development efforts and ability to expand its
network infrastructure.  There can be no assurance that the Company will be
successful in attracting and retaining such executives and personnel.  Any such
event could have a material adverse effect on the Company's business, financial
condition and results of operations.

RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS

  The Company's products and services are targeted toward users of the Internet,
which has experienced rapid growth.  The market for Internet access and related
services is relatively new and characterized by rapidly changing technology,
evolving industry standards, changes in customer needs 

                                       29
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and frequent new product and service introductions. The Company's future success
will depend, in part, on its ability to effectively use leading technologies, to
continue to develop its technical expertise, to enhance its current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. There can be no assurance that the
Company will be successful in effectively using new technologies, developing new
services or enhancing its existing services on a timely basis or that such new
technologies or enhancements will achieve market acceptance. The Company
believes that its ability to compete successfully is also dependent upon the
continued compatibility and interoperability of its services with products and
architectures offered by various vendors. There can be no assurance that the
Company will be able to effectively address the compatibility and
interoperability issues raised by technological changes or new industry
standards. In addition, there can be no assurance that services or technologies
developed by others will not render the Company's services or technology
uncompetitive or obsolete.

  In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in the
business market targeted by the Company.  Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet, and a
lack of tools to simplify Internet access and use.  In particular, numerous
published reports have indicated that a perceived lack of security of commercial
data, such as credit card numbers, has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security concerns.  Published reports have also indicated that capacity
constraints caused by growth in the use of the Internet may, unless resolved,
impede further development of the Internet to the extent that users experience
delays, transmission errors and other difficulties.  Further, the adoption of
the Internet for commerce and communications, particularly by those individuals
and enterprises that have historically relied upon alternative means of commerce
and communications, generally requires the understanding and acceptance of a new
way of conducting business and exchanging information.  In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing personnel and
infrastructure obsolete.  The failure of the market for business-related
Internet solutions to continue to develop would adversely impact the Company's
business, financial condition and results of operations.

POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK; REGULATORY
MATTERS

  The law relating to liability of ISPs for information carried on or
disseminated through their networks is currently unsettled.  A number of
lawsuits have sought to impose such liability for defamatory speech and
infringement of copyrighted materials.  In one case, a federal district court
held that an online service provider could be found liable for defamatory matter
provided through its service, on the ground that the service provider exercised
active editorial control over postings to its service.  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.  New
legislative attempts to curtail obscene or indecent communications are likely.
The imposition upon ISPs or web server hosts of potential liability for
materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.

  The Company carries 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 the Company for all liability that may be
imposed.  The imposition of liability in excess of, or the unavailability of,

                                       30
<PAGE>
 
such coverage could have a material adverse effect on the Company's business,
financial condition and results of operations.

  Although the Company's Internet operations are not currently subject to direct
regulation by the Federal Communications Commission (the "FCC") or any other
governmental agency (other than regulations applicable to businesses generally),
due to the increasingly widespread use of the Internet, it is possible that
additional laws and regulations may be adopted with respect to the Internet,
covering issues such as content, user pricing, privacy, libel, intellectual
property protection and infringement, and technology export and other controls.
The FCC is currently reviewing its regulatory position on the usage of the basic
network and communications facilities by ISPs.  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
the Company's business.  Although the FCC has decided not to allow local
telephone companies to impose per-minute access charges on ISPs, the impact of
this decision on the availability of telephone service is the subject of a
congressionally-mandated report.  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 the Company's costs of serving dial-up customers
and could have a material adverse effect on the Company's 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.

  The Company's wholly-owned subsidiary, PSINet Telecom Limited, has received a
license from the FCC to provide global facilities-based telecommunications
services, subjecting it to regulation as a non-dominant international common
carrier.  Further, the Company is also considering the financial, regulatory and
operational implications of becoming or acquiring a competitive local exchange
carrier ("CLEC") in certain selected cities.  As a result, it is also possible
that the Company could become subject to further regulation by the FCC and/or
another regulatory agency, including state and local entities, as a provider of
domestic basic telecommunications services, particularly competitive local
exchange services.
 
  The FCC exercises jurisdiction over all facilities of, and services offered
by, telecommunications common 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, many regulations may be subject to judicial review, the result of
which the Company is unable to predict.

  Generally, the FCC has chosen not to exercise its statutory power to closely
regulate the charges or practices of non-dominant carriers.  Nevertheless, the
FCC acts upon complaints against such carriers for failure to comply with
statutory obligations or with the FCC's rules, regulations and policies.  The
FCC also has the power to impose more stringent regulatory requirements on the
Company and to change its regulatory classification.  The Company believes that,
in the current regulatory environment, the FCC is unlikely to do so.
International non-dominant carriers must maintain tariffs on file with the FCC.
Regulation of CLECs occurs on both a state and federal level, to the extent
CLECs provide interstate exchange access service.  Regulatory regimes vary from
state to state, however, competing local exchange carriers are non-dominant and
are likely to be subject to a relaxed form of regulation.  Nevertheless, there
are numerous state and federal proceedings that may impose regulatory burdens on
CLECs.  The Company cannot predict the impact, if any, that future regulation or
regulatory changes may have on the Company.

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<PAGE>
 
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS

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

RISK OF SYSTEM FAILURE OR SHUTDOWN

  The success of the Company is dependent upon its ability to deliver reliable,
high-speed access to the Internet.  The Company's network, as is the case with
other networks providing similar service, is 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.  The Company is also
dependent upon the ability and willingness of its telecommunications providers
to deliver reliable, high-speed telecommunications service through their
networks.  While the Company's network has been designed with redundant circuits
among POPs to allow traffic rerouting, lab and field testing is performed before
integrating new and emerging technology into the network, and the Company
engages in capacity planning, there can be no assurance that the Company will
not experience failures or shutdowns relating to individual POPs or even
catastrophic failure of the entire network.  The Company carries business
personal property insurance at scheduled locations (which are typically staffed
by Company personnel) and at unscheduled locations (which are typically
unstaffed) with a blanket property limit of $168 million and business
interruption insurance with a blanket limit of $10 million, in each case subject
to deductibles and exclusions.  Such coverage may not be adequate or available
to compensate the Company for all losses that may occur.  In addition, the
Company generally attempts to limit its liability to customers arising out of
network failures through contractual provisions disclaiming all such liability
and, in respect of certain services, limiting liability to a usage credit based
upon the amount of time that the system was not operational.  There can be no
assurance that such limitations will be enforceable.  In any event, significant
or prolonged system failures or shutdowns could damage the reputation of the
Company and result in the loss of customers.

NETWORK SECURITY RISKS; RISKS ASSOCIATED WITH PROVIDING SECURITY SERVICES

  Despite the implementation of network security measures by the Company, such
as limiting physical and network access to its routers, its 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 the Company's 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 the Company's customers, which may 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
the Company.

  The security services offered by the Company for use in connection with its
customers' networks also cannot assure complete protection from computer
viruses, break-ins and other disruptive problems.  Although the Company attempts
to limit contractually its 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 the Company's business or
reputation or on its ability to attract and retain customers for its products.
Moreover, until more consumer reliance is placed on security technologies
available, the 

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<PAGE>
 
security and privacy concerns of existing and potential customers may inhibit
the growth of the Internet service industry and the Company's customer base and
revenues.

DEPENDENCE ON SUPPLIERS

  The Company has few long-term contracts with its suppliers.  The Company is
dependent on third party suppliers for its leased-line connections, or
bandwidth.  Certain of these suppliers are or may become competitors of the
Company, and such suppliers are not subject to any contractual restrictions upon
their ability to compete with the Company.  To the extent that these suppliers
change their pricing structures, the Company may be adversely affected.
Following the recent consummation of its transaction with IXC, the Company
anticipates that its dependence upon certain of these suppliers will be
decreased as it accepts delivery of OC-48 bandwidth under the IRU Purchase
Agreement.  Nevertheless, until the IXC fiber optic telecommunications system is
completed (and IXC is not obligated under the IRU Purchase Agreement to extend
its buildout of the IXC system beyond  6,640 unique route miles of OC-48
bandwidth) and, in certain geographic areas, even after such completion, the
Company will continue to be dependent upon such suppliers.  Moreover, any
failure or delay of IXC to deliver bandwidth under the IRU Purchase Agreement or
to provide operations, maintenance and other services with respect to such
bandwidth in a timely or adequate fashion could adversely affect the Company.
The Company is also dependent on certain third party suppliers of hardware
components.  Although the Company attempts to maintain a minimum of two vendors
for each required product, certain components used by the Company in providing
its networking services are currently acquired or available from only one
source.

  The Company has from time to time experienced delays in the receipt of certain
hardware components and telecommunications facilities, including, most recently,
delays in delivery of PRI telecommunications facilities (which connect dial-up
customers to the Company's 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 materially adversely affect
the Company.  The Company's 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 the Company's desire to maintain good
relationships with the suppliers.  As the Company's suppliers revise and upgrade
their equipment technology, the Company may encounter difficulties in
integrating the new technology into the Company's network.
 
  Certain of the vendors from whom the Company purchases telecommunications
bandwidth, including the RBOCs 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 charged by the RBOCs and other LECs to the Company, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.  Moreover, the Company is subject to the effects of other
potential regulatory actions which, if taken, could increase the cost of the
Company's telecommunications bandwidth through, for example, the imposition of
access charges.

DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS

  The Company's success and ability to compete is dependent in part upon its
technology and proprietary rights, although the Company believes that its
success is more dependent upon its technical expertise than its proprietary
rights.  The Company relies on a combination of copyright, trademark and trade
secret laws and contractual restrictions to establish and protect its
technology.  Nevertheless, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization or to develop similar technology independently, and there can be
no assurance that such measures are adequate to protect the Company's
proprietary technology.  In addition, the Company's products may be licensed or
otherwise utilized in foreign countries where laws may not protect the Company's
proprietary rights to the same extent as do laws in the United States.  It is
the Company's policy to require employees and consultants and, when obtainable,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with the Company.  There can be no assurance that the steps taken
by the Company will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent 

                                       33
<PAGE>
 
or superior to the Company's technology. The Company is also subject to the risk
of adverse claims and litigation alleging infringement of the intellectual
property rights of others. From time to time the Company has received claims of
infringement of other parties' proprietary rights. While the Company does not
believe that it has infringed the proprietary rights of other parties, there can
be no assurance that third parties will not assert infringement claims in the
future with respect to the Company's current or future products or that any such
claims will not require the Company to enter into license arrangements or result
in protracted and costly litigation, regardless of the merits of such claims. No
assurance can be given that any necessary licenses will be available or that, if
available, such licenses can be obtained on commercially reasonable terms.

YEAR 2000

  The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures.  Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk.  The Company has established procedures for evaluating and
managing the risks and costs associated with this problem and believes that its
computer systems are currently Year 2000 compliant.  However, many of the
Company's customers maintain their Internet connections on UNIX-based servers,
which may be impacted by Year 2000 complications.  The failure of the Company's
customers to ensure that their servers are Year 2000 compliant could have a
material adverse effect on the Company's customers, which in turn could have a
material adverse effect on the Company's business, results of operations and
financial condition.  See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Date Conversion.'"

POTENTIAL VOLATILITY OF STOCK PRICE

  The market price and trading volume of the Company's common stock has been and
may continue to be highly volatile. Factors such as variations in the Company's
revenue, earnings and cash flow and announcements of new service offerings,
technological innovations, strategic alliances and/or acquisitions involving
competitors of the Company or price reductions by the Company, its competitors
or providers of alternative services could cause the market price of the 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 the
common stock.

FORWARD-LOOKING STATEMENTS
 
  The statements contained in this Report that are not historical fact are
"forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may,"
"will," "should," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties.  These forward-looking statements, such as,
among others, those relating to the potential benefits to the Company resulting
from its acquisition of the OC-48 bandwidth from IXC, the revenue and
profitability levels of the Company's current operations and its operations
after integrating the operations of the companies it has recently acquired, and
other matters contained above and elsewhere in this Report regarding matters
that are not historical facts, are only predictions.  No assurance can be given
that the future results indicated, whether expressed or implied, will be
achieved.  While sometimes presented with numerical specificity, these forward-
looking statements are based upon a variety of assumptions relating to the
business of the Company, which, although presently considered reasonable by the
Company, may not be realized.  Because of the number and range of the
assumptions underlying the Company's forward-looking statements, many of which
are subject to significant uncertainties and contingencies that are beyond the
reasonable control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this Report.  These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Therefore, the actual experience of the Company and results achieved during the
period covered by any particular forward-looking statements may differ
substantially from those projected.  Consequently, the 

                                       34
<PAGE>
 
inclusion of forward-looking statements should not be regarded as a
representation by the Company or any other person that these estimates will be
realized, and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.

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