10-K

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

                                      FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934 for the Fiscal Year Ended December 31, 1996

                                         or

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities 
                                 Exchange Act of 1934

                            Commission File Number 0-25812

                                     PSINET INC.
                (Exact name of Registrant as specified in its charter)
                                           
                   New York                            16-1353600
         (State or other jurisdiction of          (I.R.S. Employer
         incorporation or organization)           Identification No.)

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

                                    (703) 904-4100
                (Registrant's telephone number, including area code)

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



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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 24, 1997, based upon the closing price of the Common Stock
on the NASDAQ Stock Market for such date, was approximately $222,880,000.

The number of outstanding shares of the registrant's Common Stock as of March
24, 1997 was approximately 40,274,000 shares. 

                         DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 1996 Annual Report to Shareholders are incorporated
by reference in Part II of this Annual Report on Form 10-K and portions of the
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to April 30, 1997 and to be used in connection with the Annual Meeting of
Shareholders expected to be held on May 10, 1997 are incorporated by reference
in Part I and Part III of this Form 10-K.  Only those portions of the Annual
Report to Shareholders which are specifically incorporated by reference are
deemed filed as part of this Annual Report on Form 10-K. 

           The Index of Exhibits filed with this Report begins at page 42.
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                                     PSINET INC.
                                           
                                           
                                           
                                  TABLE OF CONTENTS
                                           
                                           
                                                                               

                                                                            Page
Part I                                                                      ----
               
  Item 1.   Business...........................................................2

  Item 2.   Properties........................................................28
  
  Item 3.   Legal Proceedings.................................................29
  
  Item 4.   Submission of Matters to a Vote of Security-Holders...............30
  
Part II

  Item 5.   Market for Registrant's Common Equity and Related Stockholder 
            Matters...........................................................31

  Item 6.   Selected Financial Data...........................................32

  Item 7.   Management's Discussion and Analysis of Financial Condition and
            Results of Operations.............................................34
               
  Item 8.   Financial Statements and Supplementary Data.......................35

  Item 9.   Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure..............................................35
Part III

  Item 10.  Directors and Executive Officers of the Registrant................36

  Item 11.  Executive Compensation............................................36

  Item 12.  Security Ownership of Certain Beneficial Owners and Management....36

  Item 13.  Certain Relationships and Related Transactions....................36

Part IV

  Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K..37


Signatures ...................................................................41

Exhibit Index ................................................................42




                                        PART I
                                           
                                           
ITEM 1. BUSINESS

        CERTAIN OF THE INFORMATION CONTAINED IN THIS FORM 10-K, INCLUDING THE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SET FORTH IN ITEM 7 OF THIS FORM 10-K, CONTAIN FORWARD-LOOKING
STATEMENTS.  ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS.  FOR A DISCUSSION OF IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
FORWARD-LOOKING STATEMENTS, CAREFULLY REVIEW THE DISCUSSION OF RISK FACTORS
CONTAINED IN THIS ITEM 1, AS WELL AS OTHER INFORMATION CONTAINED IN THIS FORM
10-K AND IN THE COMPANY'S PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC" OR "COMMISSION").

        CERTAIN TERMS USED HEREIN ARE DEFINED IN THE GLOSSARY BEGINNING ON 
PAGE 25.

INTRODUCTION

        PSINet Inc. ("PSINet" or  the "Company") is a leading provider of 
Internet access, services and products. The Company offers, throughout the 
United States and internationally, a broad spectrum of Internet access 
services to corporate customers ranging from low-cost dial-up services to 
high performance continuous access services using dedicated high-speed 
telephone circuits, intranet networking services, Web site design and hosting 
services, Electronic Commerce ("eCommerce"), training and consulting services 
and Internet access security services. As of March 14, 1997, the Company's 
network offers reliable, high-speed access to the Internet from approximately 
350 Points-of-Presence ("POPs") in the United States, Canada, Europe and 
Asia.  In addition, the Company provides its customers with customer support 
24 hours per day, seven days per week.  The Company's customer base has grown 
rapidly to approximately 19,500 corporate customers at March 14, 1997. 

        One of the Company's principal competitive strengths is its early 
design and deployment of an extensive, advanced frame relay network.  Since 
commencing operations in 1989, the Company has undertaken a program of 
developing and expanding its network.  PSINet's network, which the Company 
believes is currently one of the largest Internet access networks worldwide, 
is an advanced TCP/IP-based and ATM, ISDN and SMDS-compatible frame relay 
network. 

        The Company's objective is to be the leading full service provider of 
Internet solutions to businesses worldwide.  The key elements of the 
Company's business strategy are: (1) to provide high performance Internet 
services through a robust network; (2) to provide customer-driven, high-value 
service offerings to businesses; (3) to continue international expansion in 
support of customer needs; (4) to expand its customer base through focused 
marketing and active customer service; and (5) to accelerate growth and 
enhance service offerings through potential acquisitions, strategic alliances 
and business relationships. 


                                          2



        In 1996, the Company acted upon market pressures in the consumer 
dial-up Internet access business by altering its strategy to include 
providing wholesale access services to consumer-oriented Internet service 
providers ("ISPs") in the United States, rather than providing access 
services directly to consumers. Pursuant to network access agreements with 
these ISPs, the Company provides Internet connection services which allow 
their subscribers to connect to the Internet through PSINet's network POPs.  
The agreements require the other ISPs to pay specified fees to PSINet for 
using PSINet's network.  

        In connection with the introduction of the Company's new consumer 
wholesale strategy, the Company restructured its operations and eliminated 
certain positions relating to these services.  Additionally, the Company sold 
all of its consumer subscriber base and related support activities to a 
regional, consumer-oriented ISP.  No significant restructuring charges were 
taken as a result of this new strategy implementation.

        Additionally, to further refine the Company's focus on corporate 
Internet services, in February 1997, the Company sold its software 
subsidiary.  The Company believes that this divestiture will result in an 
improved business focus on its core corporate Internet service offerings.
  
        The Company was incorporated in New York in 1988.  The mailing 
address of the Company's principal executive offices is 510 Huntmar Park 
Drive, Herndon, Virginia 20170, its telephone number at that address in (703) 
904-4100 and its Internet address for shareholder information is 
investor-relations@psi.com. Unless the context otherwise requires, "PSINet" 
and the "Company" refer to PSINet Inc. and its subsidiaries.
               
Industry Overview

        Use of the Internet has grown rapidly since its commercialization in 
the early 1990s. Industry sources indicate that the number of Internet users 
has grown from approximately 21 million at the end of 1993 to approximately 
90 million at the end of 1996 and further project that the number will exceed 
120 million by the end of 1997. 

        The Internet also has evolved dramatically over the last several 
years as a result of several trends affecting the computer and communications 
industries. These trends include the migration by organizations from 
proprietary mainframe environments to open systems and distributed computing, 
the emergence of low-cost, high-capacity telecommunications bandwidth, the 
increasing use of personal computers in the home, the growth of commercial 
on-line services, the growth of informational, entertainment and commercial 
applications, and the increase in the number and variety of services 
available on the Internet. 

        Currently, the primary uses of the Internet include e-mail, Web 
browsing, eCommerce, file transfer, remote log-in, news, bulletin board and 
chat services and other on-line services. 

        As the volume of information available on organizations' computer 
systems has increased and the use of data communications has grown as a 
preferred means of day-to-day communications, organizations increasingly seek 
a number of geographically dispersed access points to their own networks and 
to the networks of other organizations. In the business arena, the number of 
interconnections businesses desire to establish with networks, customers, 
suppliers 


                                          3



and affiliates generally has made the development of proprietary access 
systems on a case-by-case basis costly and time consuming. As a result, 
organizations seek reliable, high-speed and cost-effective means of 
internetworking and increasingly rely on the Internet. As reliance on the 
Internet for the transmission of data, applications and electronic commerce 
continues to grow among organizations, the Company believes that these 
organizations will require reliable, geographically dispersed and 
competitively priced Internet access and services. In addition, as 
organizations seek to establish a presence on the Internet through Web sites, 
the Company believes they often seek Web design and hosting services in order 
to minimize costs and maintain the security of their corporate LANs. 
Moreover, as organizations seek to connect their LANs to the Internet, the 
Company believes that they will increasingly seek interactive connectivity 
and Internet access security solutions. 

The PSINet Strategy

        PSINet's strategy is to offer geographically dispersed, reliable, 
competitively priced, high-speed Internet access to businesses of all sizes 
with varying needs.  By offering Internet access options, and consulting and 
security services, PSINet seeks to provide comprehensive solutions to its 
customers' Internet needs.  Key elements of the Company's strategy are 
summarized below: 

   -    Provide High Performance Internet Services through a Robust Network. 
        The Company's control of its frame relay network and modems, switches
        and routing equipment enables the Company to offer highly flexible,
        reliable and high-speed services to its customers at a low cost to the
        Company. The Company believes that its network is well-suited to
        accommodate emerging interactive multimedia connectivity applications,
        which it expects will be increasingly demanded by Internet users, and
        allows the Company to provide other value-added services to its
        customers, such as the ability to prioritize bandwidth for selected
        applications. The Company reinforces the reliability and performance
        of its network through extensive testing, remote configuration and
        maintenance, and redundancy to reduce single points of failure. PSINet
        attempts to control costs by maintaining a scalable network, adopting
        cost-effective, advanced technologies, and controlling strategic
        assets, such as network hardware, while leasing competitively priced,
        commodity assets such as telecommunications bandwidth. In order to
        promote the rapid and cost-effective expansion of the network's
        geographic reach into new areas, the Company also has arrangements
        whereby its customers can access PSINet's network through already
        established communications networks allowing local access.  By
        offering access services to corporate customers including
        consumer-oriented Internet service providers, the Company seeks to
        achieve efficiencies in the utilization of its network infrastructure
        with both day and evening use. The Company plans to continue to
        develop its network by installing additional high-speed dedicated data
        lines as customer-driven network demand dictates.  The Company also
        plans to expand the capacity of existing POPs, as necessary, in order
        to allow more users to access the Company's systems through local
        telephone calls and further enhance PSINet's position as a leading
        Internet service provider. 
  
   -    Provide Customer-driven, High-value Service Offerings to Businesses. 
        PSINet offers a broad range of Internet services at a variety of 
        prices for businesses of all sizes 


                                          4



        and with varying Internet needs. The Company offers services 
        ranging from, low-cost dial-up connections to high-speed 
        continuous access. The Company offers a Web hosting service, 
        PSIWeb, which enables customers to display advertising, product 
        information, news announcements, and multimedia exhibits on the 
        Web.  Furthermore,  PSIWeb enables corporate customers to 
        electronically take orders for products and services with its 
        eCommerce option. PSINet also offers Internet access security 
        services for corporate customers which are designed to permit 
        general access to public sections of a customer's network, such 
        as Web servers, while permitting only authorized users access to 
        the private sections of the customer's network. The Company also 
        offers PSI IntraNet, a turnkey solution that enables private, 
        high-speed continuous connection of an organization's multiple 
        sites using the customer's dedicated circuits.
   
   -    Continue International Expansion in Support of Customer Needs.
        Multinational and domestic companies around the world increasingly are
        exploring ways to leverage their existing technology investments in
        the international marketplace. As the Internet gains worldwide
        acceptance, PSINet is expanding its international presence to address
        the needs of these companies. As of March 14, 1997, PSINet had more
        than one out of every three of its POPs (approximately 128 POPs)
        located outside of the United States.  In order to service corporate
        customers with international networking needs, PSINet plans to expand
        further internationally.
   
   -    Expand Customer Base Through Focused Marketing and Active Customer
        Service.  The Company has developed marketing strategies focused on
        the data communications needs of corporations using the Internet. The
        Company utilizes distinct advertising campaigns designed to increase
        brand awareness among, and to otherwise target, current and future
        corporate users of the Internet. The Company expects that it will
        continue to enhance separate distribution channels and customer
        service and support operations for its current and future customers.
        The Company has developed a sales and marketing staff to accommodate
        its expanded sales opportunities and focus.
   
   -    Accelerate Growth and Enhance Service Offerings through Acquisitions,
        Strategic Alliances and Business Relationships.  In order to expand
        its service offerings and its network, the Company seeks to form
        alliances with or acquire companies that provide products or services
        complementary to PSINet's existing business. Since its inception, the
        Company has pursued opportunities to work closely with leaders of
        related industries to develop hardware, software, services and systems
        that have been incorporated into the Company's service offerings. The
        Company actively seeks out new opportunities for developing business
        alliances that will improve PSINet's global network infrastructure and
        provide a more complete customer solution. The Company believes that,
        as the Internet service marketplace expands and matures, such
        transactions, alliances and relationships will be critical to
        maintaining a leadership position as a full service Internet access
        provider. 


                                          5



PSINet Services

        The Company offers a broad range of reliable and high-speed Internet 
access options and related services at a variety of prices designed to meet 
the needs of customers.  The Company's Internet services are designed to meet 
the requirements of commercial, educational, governmental and other 
organizations that link their computers, LANs and information servers to, or 
otherwise seek to benefit from the use of, the Internet.  Access options 
range from dial-up services to high-speed continuous access provided by 
dedicated circuits leased by the customer. The Company believes that its 
range of Internet services and price levels allow the Company to compete 
effectively in the Internet access market for corporate customers. The 
Company also offers Web site design and hosting services, intranet networking 
services, eCommerce, Internet access security services and other services.  

Internet Services for Corporate Customers.   The Company's principal Internet
access services for corporate customers are: 

   -    InterFrame.  InterFrame enables a direct, high-speed continuous
        connection of an organization's LAN to PSINet's network and the
        Internet using the customer's dedicated circuits at speeds from
        56 Kbps to 3 Mbps.  InterFrame makes use of frame relay technology to
        provide a number of features to accommodate varying levels of data
        throughput. The InterFrame service permits customers to prioritize
        bandwidth by type of application and can be tailored to a customer's
        needs by using options such as security filtering (firewalls) and
        security encryption.  Current standard monthly service charges for
        this service range from $295 to $3,795 depending on the connection
        speed and service level offered.
   
   -    InterMAN.  InterMAN provides cost-effective, high-speed, continuous
        access to PSINet's network and to other networks in the same
        metropolitan area.  In many metropolitan areas, PSINet has connected
        its network to the local SMDS and ATM Metropolitan Area Networks
        ("MANs") to provide local customers access at speeds ranging from 1.5
        Mbps to 45 Mbps.  Current standard monthly service charges for this
        service range from $1,200 to $12,000 depending on the connection speed
        of service offered. 

   -    LAN-on-Demand.  LAN-on-Demand provides low-cost, customer-initiated
        TCP/IP connectivity and access to the Internet linking customers' LANs
        to PSINet's network through high-speed dial-up connections at speeds
        from 14.4 Kbps to 128 Kbps.  LAN-Dial is an entry-level solution that
        provides access over ordinary analog phone lines, while LAN-ISDN
        offers full digital access via ISDN lines from the local phone
        company.  Current standard monthly service charges for this service
        range from $145 to $295 depending on the service level offered. 

   -    PSI IntraNet.  PSI IntraNet is a turnkey solution that enables
        private, high-speed continuous connection of an organization's
        multiple sites using the customer's dedicated circuits at speeds from
        56 Kbps to 1.5 Mbps.  Security policies regulate the flow of
        information between the customer's private intranet and the global
        Internet.   PSI IntraNet service provides full equipment configuration
        and management for the customers.  Current standard monthly charges
        range from $475 to $2,750 per site depending on the service level
        offered.


                                          6



PSINet Web Services.   The PSIWeb service is an Internet service through which
PSINet provides its customers with Web page design and hosting services.
Catering to publishers, advertisers, retailers and other corporate customers,
PSIWeb is a multimedia Web service that enables PSIWeb customers to establish
and maintain an effective, continuous presence on the Internet.

   -    PSIWeb.  PSIWeb customers are able to offer interactive multimedia
        displays of advertising, product information, news announcements and
        software on the Web. PSIWeb is available to customers using shared
        servers connected at speeds of 1.5Mbps, 10 Mbps or 45 Mbps on PSINet's
        network, thereby allowing customers to select the price and
        performance characteristics to support their specific needs.  Current
        standard monthly service charges for this service range from $99 to
        $3,099 depending on the disk storage space utilized and the speed of
        service offered. 

   -    PSIWeb WebStart.  PSINet WebStart is PSINet's turnkey solution for
        corporate customers to establish their own presence on the Web.
        PSINet's HTML developers assist the customer in designing and
        publishing a Web page that suits the customer's needs.  Charges for
        this service range from a basic charge of $750 to $1,250 depending on
        the number of Web pages developed and the development complexities.  

   -    PSIWeb eCommerce.  PSIWeb eCommerce is an integrated electronic
        commerce solution for corporate customers, utilizing CyberCash payment
        services and Mercantec's SoftCart shopping cart software. The service
        offers a solution for incorporating an on-line "virtual storefront"
        within the customer's Web site. PSINet eCommerce enables the Company's
        customers to take orders over the Internet for products and services
        24 hours a day without geographic and time zone restrictions. The
        current standard monthly service fees for PSINet eCommerce range from
        $95 to $195 in addition to the PSIWeb service fees, depending on
        services selected,  plus 1% of the value of transactions processed.

PSINet  Security Services.   Companies doing business on the Internet continue
to be serious about their security needs.  PSINet addresses the confidentiality
and security concerns of its corporate customers by offering the following
security services:

   -    SecureEnterprise.  SecureEnterprise is a managed security service for
        business customers connecting private networks to the Internet
        provided by the Company's Security Planning and Response Team
        ("SPART").  SecureEnterprise is an integrated security solution
        including security systems, security policy consulting, installation,
        and 24 hours a day , seven days per week remote monitoring, management
        and event log reporting by PSINet SPART. SPART manages and administers
        the customer's Internet security from firewall management and access
        control to management of encryption keys and security monitoring. A
        firewall router and an applications gateway firewall are installed at
        the customer's site and Access Control Cards are used for remote user
        authentication.  SecureEnterprise also includes firewall penetration
        scans to periodically evaluate and improve the integrity of the
        security implementation.  The initial set-up fee is $4,000 and the
        current standard monthly service charge for this service is $1,600.


                                          7



   -    RouteWaller.  RouteWaller is a security option for smaller corporate
        customers or branch offices and utilizes a packet filtering firewall
        router as a perimeter defense and access control cards to limit the
        inbound and outbound access by creating customized individual user
        access profiles.  RouteWaller also offers SPART  Internet security
        policy consulting, monitoring, activity reporting, administration, and
        management services.  The initial set-up fee is $195 and the current
        standard monthly service charge for this service is $250. 
                  
Value-added Services.  The Company believes that continued development of
productivity-enhancing services and products is an important strategy for PSINet
to maintain a strong competitive position in the ISP marketplace.  Recent PSINet
offerings include:

   -    PSINet InternetPaper.  This service supports distribution of documents
        over the Internet from desktop PCs to fax machines worldwide.  This
        service benefits the user by reducing transmission costs and fax
        hardware expenditures.  PSINet InternetPaper enables document delivery
        to be more efficient and allows organizations to integrate fax
        communication into their information systems infrastructure. Current
        standard monthly service charges for this service range from $50 to
        $200 depending on the frequency of use of the service. 

   -    InterFrame FasTrack.  PSINet offers an enhancement to its
        dedicated-access InterFrame service called InterFrame FasTrack. 
        Presently, new InterFrame customers have to wait for the dedicated
        circuit to be activated by the local telephone company.  This delay
        deprives the customer of access to the Internet.  Through InterFrame
        FasTrack, PSINet offers these customers LAN-on-Demand service on an
        interim basis until the dedicated circuit for their InterFrame service
        is ready. Charges for this service range from a basic charge of $390
        to $490 depending on the connection speed of service offered. 

PSINet  Consumer Wholesale Services.   The Company contracts with numerous
consumer-oriented providers of Internet access services in the United States to
provide their dial-up customers access to the Internet using PSINet's network. 
By offering access services to corporate customers, including other ISPs, the
Company seeks to achieve efficiencies in the utilization of its network
infrastructure over both daytime and evening hours.  

PSINet's Network

        As of March 14, 1997, PSINet's network comprised approximately 350 
POPs which provide customer access to the network in the United States, 
Canada, Europe and Asia.  PSINet's network infrastructure enables customers 
to access the Internet through dedicated connections or by using a modem to 
call locally and connect to the nearest PSINet POP.  Once the customer is 
connected, the traffic is routed through the network infrastructure to the 
desired Internet location, whether on PSINet's network or elsewhere on the 
Internet. The Company leases high-speed circuits to network its POPs together 
within PSINet's network. PSINet's network has the following features: 

   -    Scalable.  PSINet's flexible network architecture utilizes advanced
        ATM, ISDN and SMDS-compatible frame relay equipment which allows
        PSINet's network to scale the 


                                          8



        number of POPs and the number of users accessing a POP. In 
        addition, ATM compatibility allows PSINet's network to scale 
        bandwidth needs as more customers begin deploying ATM on their 
        LANs. 
   
   -    High-Speed, Low-Latency Network.  The Company believes that its
        network architecture, which is comprised of a TCP/IP-based routed
        infrastructure built upon a redundant switching fabric, enables the
        Company to provide reliable, high-speed connections, to offer its
        customers the ability to dedicate bandwidth by type of application and
        to accommodate applications that require low-latency (fast response
        times). 
   
   -    Fault Tolerant.  The Company's network utilizes multiple, redundant
        circuits to reduce the impact of single points of failure within the
        network, thereby enabling automatic rerouting of traffic and enhancing
        connection integrity. The Company employs frame relay based switching
        equipment which enables rerouting through the creation of permanent
        virtual circuits ("PVCs"). These switches also incorporate
        equipment-specific redundancies not achievable in traditional routing
        equipment. In addition, the Company has an uninterruptible power
        supply at each POP, limiting the impact on PSINet's network of local
        power outages. 
   
   -    Open Systems Based.  PSINet's network is based on the open systems
        internetworking protocol standard TCP/IP. As new POPs are installed,
        the Company is able to employ a variety of equipment and technologies
        without impacting network interoperability. As a result, PSINet's
        network is designed to accommodate the continued rapid adoption of
        advanced, network and communications equipment. 
   
   -    Automated and Remote Capabilities.  The Company is able to monitor the
        network remotely, perform network diagnostics and equipment
        surveillance and connect customers from its network operations center.
        Due to PSINet's network architecture, these tasks can be performed
        quickly regardless of POP location or degree of traffic congestion.
        This allows the Company to respond quickly to network problems without
        dispatching personnel and to control network management costs. 
   
   -    Congestion Control.  The Company is able to monitor network bandwidth
        capacity and establish permanent virtual circuits when necessary or,
        in extreme cases, control bandwidth allocation to users. Through its
        remote monitoring ability, the Company is able to monitor each POP's
        physical dial-up capacity utilization and thereby anticipate needed
        additions to the network before capacity constraints arise.

Acquisitions and Strategic Alliances

        As the Company expands its service offerings and its network, the 
Company anticipates that it will continue to acquire assets and businesses 
of, or enter into strategic alliances or other business relationships with, 
companies providing services complementary to PSINet's existing business. The 
Company believes that, as the Internet industry expands and matures, the 
acquisition of such businesses will be important to maintaining a leadership 
position as a full service Internet service provider. The Company has 
historically sought acquisitions and strategic alliances in order to expand 
its services and increase its international presence.  


                                          9



        In September, 1996, the Company entered into an agreement with 
Chatterjee Management Company, an affiliate of Soros Fund Management, (doing 
business as The Chatterjee Group) ("Chatterjee") pursuant to which the 
Company and an investment group led by Chatterjee would establish a joint 
venture to be known as PSINet Europe for the purpose of building an Internet 
network across Europe and providing Internet-related services in Europe.  The 
Company and Chatterjee are discussing a substantive amendment to this 
agreement which, if entered into, would likely result in a direct investment 
in PSINet by Chatterjee.  There can be no assurance that the Company and 
Chatterjee will complete this transaction. In the event the Company and 
Chatterjee are unable to complete this transaction, the Company may, among 
other things, seek other strategic partners and/or alternative sources of 
financing in connection with its international expansion or defer more rapid 
network build-out in Europe.

        From time to time, the Company reviews its strategic alliances with 
other entities to determine whether the alliances continue to be consistent 
with the Company's overall business strategies and objectives.  As a result 
of this review, the Company is in the process of negotiating changes in its 
arrangements with World Online B.V. which, if entered into, could result in a 
termination of certain of such arrangements, but is not expected to have a 
material adverse effect on the Company's business, results of operations and 
cash flows. There can be no assurance that the Company and World Online will 
effect any such changes.

See "Risk Factors - Risks Associated with Acquisitions and Strategic Alliances"
in Part I, Item 1.

Business Relationships

        Since its inception, PSINet has pursued opportunities to work closely 
with leaders of related industries to develop hardware, software, services 
and systems which have been incorporated into the Company's service offerings 
and PSINet's network. For example, the Company has worked with Ascend 
Communications, Inc. ("Ascend") and Cascade Communications Corporation 
("Cascade") to modify certain of their products to better accommodate 
Internet requirements. Other selected alliances include: 

   -    CyberCash.  PSINet has formed an alliance with CyberCash, Inc. to
        provide PSIWeb customers a payment system for processing transactions
        electronically.
   
   -    Mercantec, Inc. ("Mercantec").  PSINet has formed an alliance with
        Mercantec, Inc. to provide PSIWeb eCommerce customers Mercantec's
        SoftCart shopping cart software which offers a solution for
        incorporating an on-line "virtual storefront" within the customer's
        Web site
   
   -    Mpath Interactive ("Mpath").  PSINet also has formed an alliance with
        Mpath to bring interactive applications to the Web through PSINet's
        network. 
   
   -    XLConnect Solutions, Inc. ("XLConnect").  The Company has entered into
        a "master reseller" contract with XLConnect whereby XLConnect recruits
        and provides direct sales support to resellers of PSINet's
        connectivity services.  There are currently over 100 Value Added
        Resellers ("VAR") in the XLConnect VAR program.


                                          10



The Company actively seeks new opportunities for business alliances that will
improve PSINet's infrastructure, provide more complete customer solutions or
provide access to alternative distribution channels.  See "Risk Factors - Risks
Associated with Acquisitions and Strategic Alliances" in Part 1, Item 1.

Sales and Marketing

        PSINet attempts to reach new customers through its direct sales staff 
as well as through a variety of distribution channels, including through 
value added reseller programs with distributors for the bundling, joint 
promotion and co-marketing of products. The Company also attempts to create 
brand awareness by participating in trade shows, such as Networld, Interop, 
InterNet World and COMDEX, advertising in trade journals and special-interest 
publications, such as Communications Week, Wired and Byte, and relationships 
with industry groups and the media. The Company uses direct mailings, 
telemarketing programs, Web marketing, co-marketing agreements and joint 
promotional efforts to reach new corporate customers. The Company attempts to 
retain its customers through active and  responsive customer support as well 
as by continually offering new value-added services. 

        The Company employs a variety of sales and marketing tactics and 
programs in addition to those discussed above in order to implement its sales 
and marketing strategy. The Company's internal sales staff initiates calls to 
and handles calls from prospective customers and follows up on leads 
generated by current service promotion packages, trade shows, magazine reader 
service surveys and from proprietary database searches specific to particular 
service promotions.

        As of March 14, 1997, the Company employed approximately 177 persons 
in its sales and marketing groups. The Company's domestic sales and marketing 
operations are principally conducted from its offices in Herndon, Virginia, 
while its international affiliates conduct sales and marketing operations in 
Toronto, Canada, Tokyo, Japan and Cambridge, U.K. 

Customers

        The Company had, as of March 14, 1997, approximately 19,500 corporate 
customers. The Company's customers include businesses in the aerospace, 
finance, communications, computer data processing and related industries, 
governmental agencies and educational and research institutions as well as 
other ISPs pursuant to the Company's new consumer wholesale strategy. 

Customer Administration, Network Operations and Field Service

        A high level of continuing service and support is critical to the 
Company's objective of developing long-term relationships with customers. 
Network operations personnel continuously monitor PSINet's network 24 hours 
per day, seven days per week.  During 1996, the Company streamlined its 
customer service and support organizations by integrating a wide range of 
support functions including circuit ordering and installation, network 
integration, and customer billing into a unified team known as Customer 
Administration. Network operations can remotely service customer connections 
to PSINet's network.  Field services personnel are dispatched in the event of 
an equipment failure that cannot be serviced remotely. As of March 14, 1997, 
the Company employed approximately 239 customer support, network operations 
and field services personnel. 


                                          11



The Company's customer support services are managed from its headquarters 
offices located in Herndon, Virginia, and its network operations center located
in Troy, New York. 

Competition

        The market for data communications services, including Internet 
access services, is highly competitive. The industry has relatively 
insignificant barriers to entry and numerous entities competing for the same 
customers. PSINet expects that competition will continue to intensify. 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. PSINet's success in this market will depend 
heavily upon its ability to provide high quality Internet connectivity and 
value-added Internet services at competitive prices. 

        The Company's current and prospective competitors generally may be 
divided into the following two groups: (1) other Internet access providers, 
such as Bolt, Beranek & Newman Inc., NETCOM On-Line Communications Services, 
Inc. ("NETCOM") and other national and regional providers; and (2) 
telecommunications companies, such as AT&T Corp. ("AT&T"), MCI Communications 
Corporation ("MCI"), WorldCom, Inc. (through its mergers with MFS 
Communications Co., Inc. ("MFS") and UUNET Technologies, Inc. ("UUNET")), 
Sprint, Inc., regional Bell operating companies ("RBOCs") and various cable 
television companies.  Many of these competitors have greater market 
presence, engineering and marketing capabilities, and financial, 
technological and personnel resources than those available to PSINet. As a 
result, they may be able to develop and expand their communications and 
network infrastructures more quickly, adapt more swiftly to new or emerging 
technologies and changes in customer requirements, take advantage of 
acquisition and other opportunities more readily, and devote greater 
resources to the marketing and sale of their products than can PSINet. In 
addition, the ability of some of the Company's competitors to bundle other 
services and products with Internet access services could place PSINet at a 
marketing or competitive disadvantage.  See "Risk Factors - Competition" in 
Part 1, Item 1.

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. 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 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. See 
"Risk Factors - Dependence on Technology; Proprietary Rights" in Part 1, Item 1.


                                          12



Regulatory Matters

        The 1996 Federal telecommunications legislation imposes criminal 
liability on persons sending or displaying in a manner available to minors 
indecent material on an interactive computer service such as the Internet.  
The 1996 Federal telecommunications legislation also imposes criminal 
liability on an entity knowingly permitting facilities under its control to 
be used for such activities.  Entities solely providing access to facilities 
not under their control (including transmission, downloading, intermediate 
storage, access software and other incidental capabilities) are exempted from 
liability, as are service providers that take good faith, reasonable, 
effective and appropriate actions to restrict access by minors to the 
prohibited communications.  The constitutionality of these provisions is 
being challenged in the U.S. Supreme Court, and the interpretation and 
enforcement of them is uncertain.  This legislation may decrease demand for 
Internet access, chill the development of Internet content, or have other 
adverse effects on Internet access providers such as the Company.  In 
addition, in light of the uncertainty attached to interpretation and 
application of this law, there can be no assurance that the Company would not 
have to modify its operations to comply with the statute, including 
prohibiting users from maintaining home pages on the World Wide Web. See 
"Risk Factors - Government Regulatory Risks" in Part 1, Item 1. 

Employees

        As of March 14, 1997, the Company had approximately 515 full-time 
employees, including approximately 239 in technical and operational 
positions, 177 in sales and marketing and 99 in administration. PSINet 
believes that its relations with its employees are good. None of PSINet's 
employees are represented by a labor union or covered by a collective 
bargaining agreement and PSINet has never experienced a work stoppage. 

Executive Officers of the Company


         Name        Age                        Title
         ----        ---                        -----
William L. Schrader   45       Chairman of the Board of Directors, President
                               and Chief Executive Officer (Founder)
                      
Harold S. Wills       55       Executive Vice President, Chief Operating
                               Officer, and Director
                      
David N. Kunkel       53       Senior Vice President, General Counsel,
                               Secretary and Director
                      
Edward D. Postal      41       Vice President and Chief Financial Officer
                      
Mitchell Levinn       37       Vice President, Network Operations
                      
Mary-Ann Carolan      36       Vice President, Customer Administration
                      
Richard R.Frizalone   39       Vice President, Corporate Sales
                      
James R. Davin        40       Vice President and Chief Technical Officer
                      
Mark S. Fedor         33       Vice President, Engineering
                      
David L. Hudson       55       Vice President, Business and Product Development


                                          13



Additional information regarding the Company's Executive Officers is
incorporated by reference to "Executive Officers" in the Company's Proxy
Statement to be used in connection with its 1997 Annual Meeting of Shareholders
and to be filed with the Commission not later than 120 days after December 31,
1996.


                                          14



RISK FACTORS

    In addition to the other information in this Annual Report, the following
Risk Factors should be considered in evaluating the Company and its business. 

Limited History of Operations; Operating Deficit; Continuing Losses;
Potential Fluctuations in Operating Results

    The Company began offering its services in 1990. Although the Company has
experienced revenue growth on an annual basis with revenue increasing from $15.2
million in 1994 to $38.7 million in 1995 to $84.4 million in 1996, it has
incurred losses and experienced negative EBITDA (as defined in footnote 4 of
Part II, Item 6 "Selected Financial Data")during each of its last three fiscal
years.  The Company has incurred losses of approximately $5.3 million, $53.2
million and $55.1 million and has incurred negative EBITDA of approximately $1.5
million, $27.9 million and $28.0 million for each of the years ended December
31, 1994, 1995 and 1996, respectively.  At December 31, 1996, the Company had a
retained deficit of $116.6 million. Although the Company presently projects that
it will achieve positive EBITDA sometime during the second quarter of 1997 and
will be profitable by the first quarter of 1998 or prior thereto, there can be
no assurance that revenue growth will continue or that the Company will achieve
profitability or positive EBITDA in the future.  The Company expects to focus in
the near term on continuing to increase its corporate customer base and
expanding its consumer wholesaling strategy which will require it to continue to
incur expenses for marketing, network infrastructure, personnel and the
development of new services and software, and thereby may adversely impact cash
flow and operating performance. The Company also plans to continue to enhance
PSINet's 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 of the Company's control, including general economic
conditions, specific economic conditions in the Internet access industry, user
demand for the Internet, capital expenditures and other costs relating to the
expansion of operations, 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 sole or limited source
equipment. 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. 

Competition

    The market for data communications services, including Internet access
services, is highly competitive. The industry has relatively insignificant
barriers to entry and numerous entities competing for the same customers. PSINet
expects that competition will continue to intensify. 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. PSINet's
success in this market will depend heavily 


                                          15



upon its ability to provide high quality Internet connectivity and value-added 
Internet services at competitive prices.

    Many of the Company's competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel resources
than those available to PSINet. As a result, they may be able to develop and
expand their communications and network infrastructures more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than can PSINet.
In addition, the ability of some of the Company's competitors to bundle other
services and products with Internet access services could place PSINet at a
competitive disadvantage. 

    The 1996 Federal telecommunications legislation contains certain provisions
lifting, or establishing procedures for lifting, restrictions on RBOCs and other
companies which may permit them to engage directly in the Internet access
business and allows the RBOCs to provide electronic publishing of information
and databases.  In addition, this legislation makes it easier for national long
distance carriers such as AT&T to offer local telephone service.  The Company
cannot predict the extent to which this legislation may result in additional
competitive pressures on the Company or have a material adverse effect on the
Company's business, results of operations and financial condition.
   
    PSINet believes that competition will intensify as new competitors,
including large computer hardware, software, media and other technology and
telecommunications companies, enter the Internet services market and as existing
competitors form alliances with or acquire other companies. The 1996 mergers of
UUNET with MFS and of MFS with WorldCom, Inc., for example, may create the
potential for network expense reductions which could result in a competitive
advantage for the combined entity.  Such acquisitions, alliances and expanded
service offerings may permit the Company's competitors to devote greater
resources to the development and marketing of new competitive products and
services and the marketing of existing competitive products and services. 

    As PSINet 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. 

    As a result of industry competition, the Company expects 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 and MCI, 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 


                                          16



PSINet. 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.  PSINet 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. 

Recent Entry Into Consumer Wholesaling Business

    In response to competitive considerations in the market for individual
customers, the Company has determined to focus its efforts in this market on the
high-end business user and has altered its strategy to include the provision of
wholesale services to consumer-oriented Internet service providers in the United
States, rather than providing the consumer services directly.  There can be no
assurance that the Company's new strategy will be successful.

Risks of Growth and Expansion

    The Company had expanded its network to approximately 350 POPs as of
December 31, 1996 and plans to continue to expand the capacity of existing POPs
as customer-driven demand dictates during 1997.  The Company's rapid growth has
placed, and in the future may continue to place, a significant strain on the
Company's administrative, operational and financial resources and has increased
demands on its systems and controls.  The Company anticipates that its consumer
wholesale service, as well as other business growth, may require continued
enhancements to and expansion of its network.  Competition for qualified
personnel in the internetworking 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, 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.  As of December 31, 1996, the
Company's network comprised approximately 350 POPs.  Based upon its present
business plan, the Company believes that working capital, funds from operations,
existing credit facilities and additional borrowings which 


                                          17



the Company expects to be able to obtain when needed, will be sufficient to meet
presently anticipated working capital and capital expenditure requirements.  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
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. To date, the Company has only limited experience in
providing international Internet service. 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 to 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 additional joint
ventures or other strategic relationships with one or more third parties in
order to successfully conduct its foreign operations. 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. 

Risks Associated With Acquisitions and Strategic Alliances

    As part of its business strategy, the Company expects 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 assimilating 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 


                                          18



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, a substantial portion
of the Company's available cash could be used to consummate the acquisitions. If
the Company were to consummate one or more significant acquisitions or strategic
alliances in which the consideration consists of stock, shareholders of the
Company could suffer a significant dilution of their interests in the Company. 
See "Business - Acquisitions and Strategic Alliances" in Part 1, Item 1.  Many
of the businesses that might become attractive acquisition candidates for the
Company may have 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. 

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 internetworking 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. 

Potential Liability for Information Disseminated through Network; Pending and
Threatened Litigation

    The law relating to the liability of on-line services companies and
Internet access providers for information carried on or disseminated through
their systems is currently unsettled in the United States. Several private
lawsuits seeking to impose such liability upon on-line services companies and
Internet access providers are currently pending. In addition, recently enacted
Federal legislation prohibits and imposed liability for the transmission on the
Internet of certain types of information and content. In one case brought
against an Internet access provider, Religious Technology Center v. Netcom
On-Line Communications Services, Inc., a Federal district court ruled that under
certain circumstances Internet access providers could be held liable for
copyright infringement.  The imposition upon the Company and other Internet
access 


                                          19



providers or Web hosting sites of potential liability for information 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 capital and other resources, or to discontinue
certain product or service offerings. The increased attention focused upon
liability issues as a result of these lawsuits and legislative proposals could
impact the growth of the Internet. 

    The Company carries errors and omissions insurance with a basic policy
limitation of $2.0 million, subject to deductibles, exclusions and
self-insurance retention amounts. 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, such coverage 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 on-line services and
Internet access providers in relation to information carried or disseminated
also is undergoing a process of development in other countries. Decisions
regarding regulation and content liability may significantly affect the
development and profitability of companies offering on-line and Internet access
services, including the Company.

Risks Associated with Financing Arrangements

    The Company's financing arrangements are secured by substantially all of
the Company's assets and stock of certain subsidiaries of the Company and
require the Company to satisfy certain financial covenants and restrict the
payment of dividends.  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 Company's
shareholders 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.
 
Government Regulatory Risks

    The 1996 Federal telecommunications legislation imposes criminal liability
on persons sending or displaying in a manner available to minors indecent
material on an interactive computer service such as the Internet.  The 1996
Federal telecommunications legislation also imposes criminal liability on an
entity knowingly permitting facilities under its control to be used for such
activities.  Entities solely providing access to facilities not under their
control (including transmission, downloading, intermediate storage, access
software and other incidental capabilities) are exempted from liability, as are
service providers that take good faith, reasonable, effective and appropriate
actions to restrict access by minors to the prohibited communications.  The
constitutionality of these provisions is being challenged in the U.S. Supreme
Court, and the interpretation and enforcement of them is uncertain.  This
legislation may decrease demand for Internet access, chill the development of
Internet content, or have other adverse effects on Internet access providers
such as the Company.  In addition, in light of the uncertainty attached to
interpretation and application of this law, there can be no assurance that the
Company would 


                                          20



not have to modify its operations to comply with the statute, including 
prohibiting users from maintaining home pages on the World Wide Web.  

    The 1996 Federal telecommunications legislation also contains certain
provisions lifting, or establishing procedures for lifting, restrictions on
RBOCs and other companies that may permit them to engage directly in the
Internet access business and allows the RBOCs to provide electronic publishing
of information and databases.  Competition from these companies could have an
adverse effect on the Company's business, results of operations and financial
condition. 

   The Company provides Internet access, in part, through transmissions over
public telephone lines.  These transmissions are governed by regulatory policies
establishing charges and terms for communications.  The Company presently is
considered an enhanced services provider and, therefore, is not currently
subject to direct regulation or access charges imposed by the Federal
Communications Commission (the "FCC") or any other agency, other than
regulations applicable to businesses generally.  The Company could become
subject in the future to access charges and FCC regulation and/or regulation by
other regulatory commissions as a provider of basic telecommunications services.
The FCC recently issued a Notice of Inquiry in which it seeks comment on whether
it should distinguish between different categories of enhanced services, and
announced that it will address issues about the continued viability of its
current regulatory division between basic and enhanced services in a future
proceeding.  If the FCC determines that such a distinction is appropriate, this
could result in increased costs being imposed upon the Company.
    
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 also
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, especially if such an events
occur within a high traffic location of the network.  The Company is also
dependent upon the ability 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 property, POP
equipment and business interruption insurance with basic policy limitations of
$4.0 million, $5.0 million and $5.0 million, respectively, subject to
deductibles, exclusions and self-insurance retention amounts. Such coverage may
not be adequate or available to compensate the Company for all losses that may
occur. In addition, the Company 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. 


                                          21



New and Uncertain Market

    Substantially all of the Company's revenue to date has been, and for the
foreseeable future will be, derived from the sale of its Internet access,
services and products. The Company's success will depend upon the development
and expansion of the market for Internet access services and products and the
networks which comprise the Internet. The market for Internet services has only
recently developed and has been accompanied by increased press coverage
concerning the scope and nature of the information and services available on,
and potential uses of, the Internet. Certain critical issues presently
surrounding commercial use of the Internet, including security, reliability,
ease and cost of access, and quality of service, remain unresolved and may
adversely impact the growth of Internet use. If the Internet access market fails
to grow, grows more slowly than anticipated or becomes saturated with
competitors, the Company's business, financial condition and results of
operations would be materially adversely affected. 

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. Persistent security problems
continue to plague public and private data networks. Break-ins have reportedly
reached computers connected to the Internet at General Electric Co., Sprint and
IBM as well as the computer systems of NETCOM, Netscape and the San Diego
Supercomputer Center.   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 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 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. Moreover, the
Company 


                                          22



is 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. 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.

Risks of Technology Trends and Evolving Industry Standards

    PSINet's success will depend upon its ability to develop new products and
provide new services that meet customers' changing requirements. The market for
Internet access is characterized by rapidly changing technology, evolving
industry standards, emerging competition, changes in customer needs and frequent
new service and product 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
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.


                                          23



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. It may be possible for a third party to copy or otherwise obtain and
use PSINet'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 PSINet's proprietary technology. In addition, PSINet's
products may be licensed or otherwise utilized in foreign countries where laws
may not protect PSINet'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 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. 

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 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. 


                                          24



                                       GLOSSARY


ATM.......................Asynchronous Transfer Mode. An information transfer 
                          standard that is one of a general class of packet 
                          technologies that relay traffic by way of an 
                          address contained within the first five bytes of a 
                          standard fifty-three byte-long packet or cell. The 
                          ATM format can be used by many different 
                          information systems, including LANs, to deliver 
                          traffic at varying rates, permitting a mix of data, 
                          voice and video.
                  
Backbone..................A centralized high-speed network that connects 
                          smaller, independent networks.

Bandwidth.................The number of bits of information which can move 
                          over a communications medium in a given amount of 
                          time.

Dedicated circuits........Telecommunications lines dedicated or reserved for 
                          use by particular customers along predetermined 
                          routes.

Electronic mail or e-mail.An application that allows a user to send or 
                          receive text messages to or from any other user 
                          with an Internet address, commonly termed an e-mail 
                          address.

Firewall..................A gateway between two networks that buffers and 
                          screens all information, and prevents unauthorized 
                          traffic, passing between such networks.

Frame relay...............A data communication technology which is sometimes 
                          used to provide higher speed (above 56Kbps and less 
                          than 1.5Mbps) for Internet connections. Its usual 
                          application is in connecting work groups rather 
                          than individuals.

Graphical user interface..A means of communicating with a computer by 
                          manipulating icons and windows rather than using 
                          text commands.

Internet..................An open global network of interconnected 
                          commercial, educational and governmental computer 
                          networks which utilize a common communications 
                          protocol, TCP/IP.

Internetworking...........The process of communicating between and among 
                          networks.

ISDN......................Integrated Services Digital Network. A digital 
                          network that combines voice and digital network 
                          services through a single medium, making it 
                          possible to offer customers digital data services 
                          as well as voice services over dial-up connections.


                                          25



Kbps......................Kilobits per second. A measure of digital 
                          information transmission rates. One kilobit equals 
                          1,000 bits of digital information. Normally, 10 
                          bits are used for each alpha-numeric character.

LAN.......................Local Area Network. A data communications network 
                          designed to interconnect personal computers, 
                          workstations, minicomputers, file servers and other 
                          communications and computing devices within a 
                          localized environment.

Mbps......................Megabits per second. A measure of digital 
                          information transmission rates. One megabit equals 
                          1,000 kilobits.

Modem.....................A piece of equipment that connects a computer to an 
                          analog data transmission line (typically a 
                          telephone line).

On-line services..........Commercial information services that offer a 
                          computer user access through a modem to a specified 
                          slate of information, entertainment and 
                          communications menus.

Open systems..............A networking system which is based upon 
                          non-proprietary protocols (i.e., protocols which 
                          are in the public domain).

POPs......................Points-of-Presence.  Geographic areas within which 
                          a communications network allows local access.

Protocol..................A formal description of message formats and the 
                          rules two or more machines must follow in order to 
                          communicate.

Router....................A device that receives and transmits data packets 
                          between segments in a network or different networks.

Server....................Software that allows a computer to offer a service 
                          to another computer. Other computers contact the 
                          server program by means of matching client 
                          software. The term also refers to the computer on 
                          which server software runs.

SMDS......................Switched Multimegabit Data Service. A public 
                          packet-switching service offered by telephone 
                          companies in many major metropolitan areas.

Switching system..........A system which uses devices that rapidly open or 
                          close circuits or select the paths or circuits to 
                          be used for transmission of information.

TCP/IP....................Transmission Control Protocol/Internet Protocol. A 
                          set of open communications protocols that allow 
                          computers with different architectures and 
                          operating system software to communicate with other 
                          computers on the Internet.


                                          26



T1........................A data communications line capable of transmission 
                          speeds of 1.54 Mbps.

T3........................A data communications line capable of transmission 
                          speeds of 45 Mbps.

Windows...................A computer basic application system developed by 
                          Microsoft Corp. that provides a graphical user 
                          interface and multitasking capabilities.

World Wide Web or Web.....A network of computer servers that uses a special 
                          communications protocol to link different servers 
                          throughout the Internet and permits communication 
                          of graphics, video and sound through a rich 
                          graphical user interface.


                                          27



Item 2. PROPERTIES

    The Company's principal administrative, operational and marketing and sales
facilities total approximately 61,790 square feet and are located in an office
park in Herndon, Virginia. The Company occupies 26,286 square feet of this space
under a lease which expires in September 2003, subject to a five-year renewal
option. An additional 9,804 square feet is occupied pursuant to a lease which
expires in May 1997, subject to a three-year extension option.  Additionally,
14,200 square feet is occupied pursuant to a lease which expires in February
1999 and the remaining 11,500 square feet are occupied pursuant to a sublease
which expires in October 2003. In addition, the Company also leases
approximately 19,406 square feet of office space for its network operations
center in Troy, New York.  The Company leases regional sales and field support
offices in Santa Clara, California, El Segundo, California, Orlando, Florida
Chicago, Illinois, Cambridge, Massachusetts, New York City, Columbus, Ohio,
Dallas, Texas, Tokyo, Japan, Toronto, Ontario and Cambridge, England. The
Company leases or is otherwise provided with the right to utilize space in
various geographic locations to provide an operational facility for certain of
its POPs.  


                                          28



Item 3. LEGAL PROCEEDINGS

    From time to time, the Company has been threatened with or named as a
defendant in lawsuits and administrative claims. Certain of such lawsuits and
threatened litigation relate to relatively novel or unresolved issues of law
arising out of or relating to the developing nature of the Internet and on-line
services industries. See "Risk Factors - Potential Liability for Information
Disseminated through Network; Pending and Threatened Litigation" in Part I, Item
1.

    The Company from time to time receives communications from third parties
asserting breach of agreements, alleged infringement of patents, trademarks and
service marks of others and other claims. Although there is currently no
material litigation arising out of any alleged breach of agreement or out of any
alleged infringement of patents, trademarks or service marks, there can be no
assurance that litigation will not be commenced regarding these or other
matters. 

    The Company is not involved in any legal matters which the Company believes
would, if adversely determined, have a material adverse effect upon its business
or results of operations. There can be no assurance whether these matters will
be determined in a manner which is favorable to the Company or, if adversely
determined, whether such determination would have a material adverse effect upon
the Company's business, financial condition or results of operations. 


                                          29



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
    
    No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year ended December 31, 1996.


                                          30



                                       PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

    Prior to the initial public offering of the Company's Common Stock on
May 1, 1995, there was no established trading market for the Common Stock.  The
Company's Common Stock has been traded on the NASDAQ National Market under the
symbol "PSIX" since its initial public offering of Common Stock on May 1, 1995.
The following table sets forth for the periods indicated the high and low
closing sale prices for the Common Stock as reported during each quarterly
period in 1995 and 1996 on the NASDAQ National Market. The prices do not include
retail mark ups, mark downs or commissions. 


1995                                      High            Low
- ----                                      ----            ---
Second Quarter (from May 1, 1995)......  $15 5/8        $12 
Third Quarter..........................  $25 1/4        $15 1/4
Fourth Quarter.........................  $28 1/2        $13 3/4

1996                                      High            Low
- ----                                      ----            ---
First Quarter..........................  $22 3/8         $9 1/8
Second Quarter.........................  $18 1/2         $7 3/8
Third Quarter..........................  $12 5/8         $8 3/8
Fourth Quarter.........................  $14             $8 1/2


   The last reported sale price of the Company's Common Stock on the NASDAQ
National Market on March 14, 1997 was $8 per share. There were approximately
801 holders of record of the Common Stock as of March 14, 1997. 

DIVIDEND POLICY

    The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, under the terms of the Company's existing
credit facilities, the payment of dividends is restricted. See Note 5 of the
Notes to Consolidated Financial Statements incorporated by reference in Part II,
Item 8. 

RECENT SALES OF UNRESTRICTED SECURITIES

    On January 25, 1996, the Company issued, as a deposit in escrow, 32,368 
shares of the Company's Common Stock as additional security for the Company's 
obligation under an agreement with World Online B.V. to purchase an 
additional 10% of the outstanding Common Stock of World Online B.V.  The 
securities issued in this transaction were exempt from registration under the 
Securities Act of 1993, as amended (the "Act"), in reliance on Section 4(2) 
of the Act as a transaction by an issuer not involving any public offering.  
In such transaction, the acquirer of the shares had adequate access to 
information about the Company, and appropriate legends regarding the 
restricted nature of such securities were affixed to the certificate 
representing such securities. 

                                          31



Item 6. SELECTED FINANCIAL DATA

    The following table sets forth for the periods indicated selected
consolidated financial and operating data for the Company and should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," incorporated by reference in Part II, Item
8 and Item 7, respectively.  The statement of operations and balance sheet data
have been derived from the Company's consolidated financial statements audited
by Price Waterhouse LLP.  Consolidated balance sheets at December 31, 1995 and
1996 and the related consolidated statements of operations and of cash flows for
the three years ended December 31, 1996 and the notes thereto are incorporated
by reference in Part II, Item 8 of this Form 10-K.

                  Summary Consolidated Financial and Operating Data
                 (In thousands, except per share and operating data)




                                                              Year Ended December 31, 
                                             -------------------------------------------------------
                                                  1992      1993        1994      1995      1996
                                                  ----      ----        ----      ----      ----
                                                                         
Statement of
Operations Data:

Revenue                                       $  6,442  $  8,665    $ 15,214  $ 38,722  $ 84,351
Other income, net (1)                                -         -           -         -     5,417
Income (loss) from operations                      819    (1,885)     (4,662)  (52,617)  (55,081)
Income (loss) before income taxes and
   extraordinary item (2)                          689    (2,159)     (5,342)  (53,160)  (55,256)
Net income (loss)                                  430    (1,913)     (5,342)  (53,160)  (55,097)
Pro forma loss per share and loss per
   share (3)                                                            (.26)    (1.78)    (1.40)
Shares used in computing pro forma
loss per share and loss per share (3)                                 20,395    29,832    39,378

Other Financial Data:                               
Net cash provided by (used in) operations        1,721      (209)     (1,097)  (30,093)  (32,543)
EBITDA  (4)                                      1,752      (166)     (1,479)  (27,901)  (28,046) 



                                                                December 31,
                                             -------------------------------------------------------
                                                  1992      1993        1994      1995      1996
                                                  ----      ----        ----      ----      ----
                                                                         
Balance Sheet Data:                                 
Cash and short-term investments               $    240  $  1,865    $  3,358  $102,710  $ 57,344
Working capital                                   (680)      136      (1,554)   83,627    23,186
Property and equipment, net                      2,957     8,415      10,528    51,355    72,061
Total assets                                     4,291    13,821      17,055   201,830   177,112
Lines of credit and current portion of
long-term debt and capital lease
obligations                                        701     2,540       3,369    16,643    26,915
Long-term debt and capital lease
obligations, less current portion                  599     3,581       4,397    24,130    26,938
Redeemable common and preferred stock              773     6,725      13,617         -         -
Shareholders' equity (deficit)                   1,124    (1,427)     (8,283)  143,230    89,783



                                                               December 31,
                                             -------------------------------------------------------
                                                  1992      1993        1994      1995      1996
                                                  ----      ----        ----      ----      ----
                                                                         
End of Period
Operating Data:                                     
                                                    
Number of POPs                                      38        68          82       241       350
Number of corporate customers                    1,980     2,830       4,220     8,200    17,800



(1) Represents the consideration received, net of related asset costs and
transfer expenses relating to the sale of the Company's consumer dial-up
Internet access subscribers and related tangible and intangible assets.


                                          32



(2) For the year ended December 31, 1992, the Company recognized extraordinary
benefits of $21,000 resulting from the utilization of operating loss
carryforwards to offset income taxes.

(3) For a description of the computation of pro forma loss per share and loss
per share and shares used in computing pro forma loss per share and loss per
share, see Note 1 of the Notes to Consolidated Financial Statements.

(4) Represents earnings (loss) before depreciation and amortization, interest
income and expense, income tax expense (benefit), extraordinary items and equity
in loss of affiliate and, in 1995, intangible asset write-down.  The Company has
included information concerning EBITDA because it understands that such
information is used in the Internet services industry as one measure of an
entity's operating performance and historical ability to service debt.  EBITDA
is not determined in accordance with generally accepted accounting principles,
is not indicative of cash used by operating activities and should not be
considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles.


                                          33



Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

    The information required by Item 7 is incorporated herein by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 18-23 of the Company's 1996 Annual Report to
Shareholders filed as Exhibit 13 to this Annual Report on Form 10-K. 


                                          34



Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Consolidated Financial Statements, together with the report of Price
Waterhouse LLP dated February 7, 1997, except as to the last two paragraphs of
Note 12, which are as of February 14, 1997, appearing on pages 24 to 40 and the
quarterly results (unaudited) appearing on page 22 of the Company's 1996 Annual
Report to Shareholders are incorporated by reference and filed as Exhibit 13 to
this Form 10-K.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

    Not applicable.


                                          35



                                       PART III
                                           
Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by Item 10 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1997 Annual Meeting
of Shareholders and to be filed with the Securities and Exchange Commission (the
"Commission") not later than 120 days after December 31, 1996.

Item 11.  EXECUTIVE COMPENSATION

    The information required by Item 11 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1997 Annual Meeting
of Shareholders and to be filed with the Commission not later than 120 days
after December 31, 1996.


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND               
MANAGEMENT

    The information required by Item 12 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1997 Annual Meeting
of Shareholders and to be filed with the Commission not later than 120 days
after December 31, 1996.


Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by Item 13 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1997 Annual Meeting
of Shareholders and to be filed with the Commission not later than 120 days
after December 31, 1996.


                                          36



                                       PART IV
                                           
Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, and REPORTS ON FORM 8-K

Documents filed as a part of this report.

    1.   Financial Statements

    The following consolidated financial statements of PSINet Inc. and related
notes, together with the report thereon of Price Waterhouse LLP, the Company's
independent accountants, are set forth herein as indicated below.         
                                                                            Page
                                           
Report of Independent Accountants on Consolidated Financial Statements...... *

Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996... *

Consolidated Statements of Operations For the Three Years Ended December 
  31, 1996.................................................................. *

Consolidated Statements of Cash Flows For the Three Years Ended December 
  31, 1996.................................................................. *

Consolidated Statements of Changes in Shareholders' Equity (Deficit) 
  For the Three Years Ended December 31, 1996............................... *

Notes to Consolidated Financial Statements.................................. *

_______________________________

 * Incorporated by reference to the Company's 1996 Annual Report to 
   Shareholders.  See Part II, Item 8 of this Annual Report on Form 10-K.

No financial statements have been filed with this Form 10-K other than those
incorporated by reference in Part II, Item 8.

    2.   Financial Statement Schedules

Included in Part IV of this Form 10-K are the following:

Report of Independent Accountants on Financial Statement Schedule........... 39

Financial Statement Schedule For the Three Years Ended December 31, 1996:  

         II - Valuation Accounts and Reserves............................... 40

_______________________________

    All other schedules have been omitted either because they are not required
or applicable or because the required information is included in the
consolidated financial statements or the notes thereto referred to above.


                                          37



    3.   Exhibits

         See Index to Exhibits on page 42.

b.  Reports on Form 8-K.

    On March 3, 1997, the Company filed a Current Report on Form 8-K, dated
    February 14, 1997, relating to the sale of all of the issued and
    outstanding capital stock of its wholly-owned subsidiary InterCon Systems
    Corporation to Ascend Communications, Inc. 


                                          38



                        REPORT OF INDEPENDENT ACCOUNTANTS ON 
                             FINANCIAL STATEMENT SCHEDULE
                                           





To the Board of Directors and Shareholders of PSINet Inc.


Our audits of the consolidated financial statements referred to in our report
dated February 7, 1997, except as to the last two paragraphs of Note 12, which
are as of February 14, 1997, appearing on page 24 of the 1996 Annual Report to
Shareholders of PSINet Inc. (which report and consolidated financial statements
are incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the Financial Statement Schedule appearing on page 40 of this Form
10-K.  In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.



PRICE WATERHOUSE LLP


Washington, DC
February 7, 1997


                                          39



                    SCHEDULE II - VALUATION ACCOUNTS AND RESERVES




                                                         Additions
                                                 --------------------------
                                   Balance at    Charged to    Balances of                Balance at
                                    beginning    costs and       acquired                   end of  
                                    of period     expenses     subsidiaries   Deductions    period  
                                   ----------    ----------    ------------   ----------  ----------
                                                              (In thousands)

                                                                              
Year ended December 31,1994               
  Allowance for doubtful accounts         172          617                -         (662)        127
  Deferred tax valuation allowance        493        1,946                -            -       2,439
                                                                                               
Year ended December 31,1995                                                                    
  Allowances for doubtful accounts                                                             
      and returns                         127          724              252         (228)        875
  Deferred tax valuation allowance      2,439        8,936                -            -      11,375
                                                                                               
Year ended December 31, 1996                                                                   
  Allowances for doubtful accounts                                                             
      and returns                         875        3,130                -       (2,096)      1,909
  Deferred tax valuation allowance     11,375       20,948                -            -      32,323



                                          40



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

                                                   PSINET INC.  

Date:    March 31, 1997      By: /s/ Edward D. Postal  
                                     ---------------------
                                     Edward D. Postal
                                     Vice President and Chief Financial Officer

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


        Signature                   Title                      Date
        ---------                   -----                      ----

 /s/ William L. Schrader   Chairman, President, Chief      March 31, 1997
 -----------------------    Executive Officer and  
     William L. Schrader    Director (Principal    
                            Executive Officer)     
                            

 /s/ Harold S. Wills        Executive Vice President,      March 31, 1997
 -------------------         Chief Operating Officer
     Harold S. Wills         and Director           
                             


 /s/ David N. Kunkel        Senior Vice President,         March 31, 1997
 -------------------         General Counsel, Secretary 
     David N. Kunkel         and Director               
                             

 /s/  Edward D. Postal      Vice President and Chief       March 31, 1997
 ---------------------       Financial Officer (Principal
      Edward D. Postal       Financial and Accounting    
                             Officer)                    
                             

 /s/ William H. Baumer      Director                       March 31, 1997
 ---------------------
     William H. Baumer

 /s/ Wade Woodson           Director                       March 31, 1997
 ----------------
     Wade Woodson

 /s/ Ian P. Sharp           Director                       March 31, 1997
 ----------------
     Ian P. Sharp

 /s/ William A. Wilson      Director                       March 31, 1997
 ---------------------
     William A. Wilson 


                                          41



                                 EXHIBIT INDEX




EXHIBIT
NUMBER                DESCRIPTION OF EXHIBIT                                      LOCATION
- --------  ---------------------------------------------------  ---------------------------------------------------
                                                         
2.1       Agreement dated July 21, 1995 for the sale and       Incorporated by reference to the Company's Current
          purchase of 425,000 Ordinary Shares in the share     Report on Form 8-K dated July 21, 1995 located
          capital of EUnet GB Limited between the University   under Securities Exchange Commission File No.
          of Kent at Canterbury and the Company                0-25812 ("July 21, 1995 8-K")

2.2       Agreement dated July 21, 1995 for the sale and       Incorporated by reference to the July 21, 1995 8-K
          purchase of 75,000 Ordinary Shares in the share
          capital of EUnet GB Limited between the University
          of Kent at Canterbury and the Company

2.3       Letter dated July 21, 1995 from Furley Page          Incorporated by reference to the July 21, 1995 8-K
          Fielding & Barton to Eversheds 

2.4       Shareholder Agreement dated February 28, 1996        Incorporated by reference from Exhibit 2.8 to the
          between the Company and Hansol Telecom Co., Ltd.     Company's Annual Report on Form 10-K for the fiscal
                                                               year ended December 31, 1995 located under
                                                               Securities and Exchange Commission File No. 0-25812
                                                               ("1995 Form 10-K").

2.5       Asset Purchase Agreement dated as of June 28, 1996   Incorporated by reference from Exhibit 2 to the
          between the Company and MindSpring Enterprises,      Company's Quarterly Report on Form 10-Q for the
          Inc.                                                 quarter ended June 30, 1996 located under
                                                               Securities Exchange Commission File No. 0-25812
                                                               ("June 1996 10-Q")
2.6       Joint Venture Agreement dated as of September 19,    Incorporated by reference from Exhibit 2 to the
          1996 between the Company and Chatterjee Management   Company's Quarterly Report on Form 10-Q for the
          Company                                              quarter ended September 30, 1996 located under
                                                               Securities Exchange Commission File No. 0-25812
                                                               ("September 1996 10-Q")



                                               42






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

3.1       Certificate of Incorporation, as amended             Incorporated by reference from Exhibit 3.1 to the
                                                               Company's Registration Statement on Form S-1
                                                               declared effective on May 1, 1995 located under
                                                               Securities and Exchange Commission File No.
                                                               33-90154 ("May 1995 Registration Statement")
3.2       Certificate of Amendment of Certificate of           Incorporated by reference from Exhibit 3.1 to the
          Incorporation dated April 25, 1995                   Company's Quarterly Report on Form 10-Q for the
                                                               quarter ended June 30, 1995 located under
                                                               Securities Exchange

3.3       Certificate of Amendment of Certificate of           Incorporated by reference from Exhibit 3.2 to the
          Incorporation dated May 5, 1995                      June 1995 10-Q

3.4       Certificate of Amendment of Certificate of           Incorporated by reference from Exhibit 3.1 to the
          Incorporation dated November 11, 1995                Company's Quarterly Report on Form 10-Q for the
                                                               quarter ended September 30, 1995 located under
                                                               Securities Exchange Commission File No. 0-25812
                                                               ("September 1995 10-Q")

3.5       Amended and Restated By-laws of the Company          Incorporated by reference from Exhibit 3.5 to the
                                                               September 1995 10-Q

3.6       Certificate of Amendment of Certificate of           Incorporated by reference from Exhibit 3 to the
          Incorporation dated May 18, 1996                     June 1996 10-Q

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



                                               43






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

4.3       Articles Fourth, Fifth, Sixth, Ninth and   Incorporated by reference from Exhibit
          Tenth of the Certificate of Incorporation  4.2 to the December 1995 Registration
          of the Company, as amended (see Exhibits   Statement
          3.2, 3.3 and 3.4)

4.4       Article I of the Amended and Restated By-  Incorporated by reference from Exhibit
          laws of the Company, as amended (see       4.3 to the December 1995 Registration
          Exhibit 3.5)                               Statement

4.5       Forms of Rights Agreement, dated as of     Incorporated by reference from Exhibit 1
          May 8, 1996, between PSINet Inc. and       to the Company's Registration Statement
          First Chicago Trust Company of New York,   on Form 8-A dated June 3, 1996
          as Rights Agent, which includes as
          Exhibit A-- Certificate of Amendment;
          Exhibit B--Form of Rights Certificate;
          and Exhibit C-- Summary of Rights to
          Purchase Shares of Preferred Stock

10.1      Lease Agreement dated July 1, 1990         Incorporated by reference from Exhibit
          between the Company and Rensselaer         10.1 to the May 1995 Registration
          Polytechnic Institute, amended by Lease    Statement
          Renewal Agreement dated as of July 1,
          1993, Letter Agreement dated November 14,
          1994 and Letter Agreement dated February
          1, 1995

10.2      Lease Agreement dated February 8, 1995     Incorporated by reference from Exhibit
          between the Company and Rensselaer         10.2 to the May 1995 Registration
          Polytechnic Institute                      Statement

10.3      Amendment to Lease Agreement dated July    Incorporated by reference from Exhibit
          1, 1995 between the Company and            10.2A to the December 1995 Registration
          Rensselaer Polytechnic Institute           Statement

10.4      Lease Agreement dated as of April 30,      Incorporated by reference from Exhibit
          1993 by and between Vingarden Limited      10.3 to the May 1995 Registration
          Partnership and the Company                Statement

10.5      Lease Agreement dated April 1995 by and    Incorporated by reference from Exhibit
          between Brit Limited Partnership and the   10.3A to the December 1995 Registration
          Company                                    Statement



                                               44






                                                            
10.6      Sublease dated September 20, 1995 by and   Incorporated by reference from Exhibit
          between The Medical Sciences Research      10.3B to the December 1995 Registration
          Institute and the Company and Lease        Statement
          Agreement dated October 6, 1993 by and
          between Vingarden Associates Limited
          Partnership and The Medical Sciences
          Research Institute

10.7      Lease Agreement dated October 31, 1995     Incorporated by reference from Exhibit
          between Oakfern Properties Limited and     10.4A to the December 1995 Registration
          the Company                                Statement

10.8      Lease Agreement dated October 1994         Incorporated by reference from Exhibit
          between the Company and Cascade            10.4 to the May 1995 Registration
          Communications, Inc.                       Statement

10.9      Master Lease Agreement dated July 19,      Incorporated by reference from Exhibit
          1994 between the Company and Technology    10.5 to the May 1995 Registration
          Credit Corporation                         Statement

10.10     Lease Agreement dated as of July 9, 1993   Incorporated by reference from Exhibit
          between Applied Telecommunications         10.6 to the May 1995 Registration
          Technologies, Inc. and the Company         Statement

10.11     Lease Agreement dated as of August 27,     Incorporated by reference from Exhibit
          1993 between Applied Telecommunications    10.7A to the December 1995 Registration
          Technologies, Inc. and the Company         Statement

10.12     Lease Agreement dated as of September 29,  Incorporated by reference from Exhibit
          1993 between Applied Telecommunications    10.7B to the December 1995 Registration
          Technologies, Inc. and the Company         Statement

10.13     Lease Agreement dated as of November 8,    Incorporated by reference from Exhibit
          1993 between Applied Telecommunications    10.7C to the December 1995 Registration
          Technologies, Inc. and the Company         Statement

10.14     Lease Agreement dated as of December 8,    Incorporated by reference from Exhibit
          1993 between Applied Telecommunications    10.7D to the December 1995 Registration
          Technologies, Inc. and the Company         Statement

10.15     Lease Agreement dated as of December 31,   Incorporated by reference from Exhibit
          1993 between Applied Telecommunications    10.7E to the December 1995 Registration
          Technologies, Inc. and the Company         Statement

10.16     Lease Agreement dated as of February 10,   Incorporated by reference from Exhibit
          1994 between Applied Telecommunications    10.7F to the December 1995 Registration
          Technologies, Inc. and the Company         Statement



                                               45






                                                            
10.17     Lease Agreement dated as of March 14,      Incorporated by reference from Exhibit
          1994 between Applied Telecommunications    10.7G to the December 1995 Registration
          Technologies, Inc. and the Company         Statement

10.18     Lease Agreement dated as of June 9, 1994   Incorporated by reference from Exhibit
          between Applied Telecommunications         10.7H to the December 1995 Registration
          Technologies, Inc. and the Company         Statement

10.19     Lease Agreement dated as of September 21,  Incorporated by reference from Exhibit 10.7
          1994 between Applied Telecommunications    to the May 1995 Registration Statement
          Technologies, Inc. and the Company

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

*10.21    Executive Stock Incentive Plan of the      Incorporated by reference from Exhibit
          Company, as amended                        10.12 to the December 1995 Registration
                                                     Statement

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

*10.23    Strategic Stock Incentive Plan of the      Incorporated by reference from Exhibit 10
          Company                                    to the June 1995 10-Q

*10.24    1995 Performance Bonus Plan of the         Incorporated by reference from Exhibit
          Company                                    10.15 to the May 1995
                                                     Registration Statement

*10.25    1996 Performance Bonus Plan of the         Sequentially numbered pages
          Company

*10.26    InterCon Systems Corporation 1992          Incorporated by reference from Exhibit
          Incentive Stock Plan                       99.1 to the Company's Registration
                                                     Statement on Form S-8 which became
                                                     effective on October 18, 1995 located
                                                     under Securities Exchange Commission File
                                                     No. 33-98316 ("S-8 No. 16")

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




                                               46






                                                            
*10.28    Software Ventures Corporation 1994 Stock   Incorporated by reference from Exhibit 99
          Option Plan                                to the Company's Registration Statement
                                                     on Form S-8 which became effective on
                                                     October 18, 1995 located under Securities
                                                     Exchange Commission File No. 33-98314
                                                     ("S-8 No. 14")

*10.29    Employment Agreement dated March 10, 1993  Incorporated by reference from Exhibit
          between the Company and William L.         10.16 to the May 1995 Registration
          Schrader                                   Statement

*10.30    Employment Agreement dated February 13,    Incorporated by reference from Exhibit
          1996 between the Company and Mitchell      10.19 to the Company's Annual Report on
          Levinn                                     Form 10-K for the fiscal year ended
                                                     December 31, 1995 located under
                                                     Securities and Exchange Commission File
                                                     No. 0-25812 ("1995 Form 10-K").

*10.31    Employment Agreement dated June 21, 1995   Incorporated by reference from Exhibit
          between the Company and David N. Kunkel    10.26 to the December 1995 Registration
                                                     Statement

*10.32    Employment Agreement dated February 9,     Incorporated by reference from Exhibit
          1996 between the Company and Mary-Ann      10.42 to the 1995 Form 10-K
          Carolan

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

10.34     Non-Competition and Confidentiality        Incorporated by reference from Exhibit
          Agreement dated as of June 16, 1995        10.30 to the December 1995 Registration
          between Kurt D. Baumann and the Company    Statement

*10.35    Board Representation Agreement dated as    Incorporated by reference from Exhibit
          of October 1, 1993 between the Company     10.24 to the May 1995 Registration
          and William H. Baumer                      Statement

*10.36    Representation Agreement dated as of       Incorporated by reference from Exhibit 10.25
          October 1, 1993 between the Company and    to the May 1995 Registration Statement
          William H. Baumer

10.37     Securities Purchase Agreement dated as of  Incorporated by reference from Exhibit
          May 31, 1994 by and among the Company and  10.26 to the May 1995 Registration
          the Investors identified on Exhibit A      Statement
          thereto




                                               47






                                                            
10.38     Securities Purchase Agreement dated as of  Incorporated by reference from Exhibit
          June 17, 1994 by and among the Company     10.27 to the May 1995 Registration
          and the Investors identified on Exhibit A  Statement
          thereto

10.39     Securities Purchase Agreement dated as of  Incorporated by reference from Exhibit
          January 17, 1995 by and among the Company  10.28 to the May 1995 Registration
          and the First Purchasers and Subsequent    Statement
          Purchasers listed on Exhibit A thereto

10.40     Amended and Restated Registration Rights   Incorporated by reference from Exhibit
          Agreement dated as January 17, 1995 by     10.29 to the May 1995 Registration
          and among the Company and the several      Statement
          parties signatory thereto

10.41     Registration Rights Agreement dated as of  Incorporated by reference from Exhibit
          February 8, 1995 by and among the Company  10.30 to the May 1995 Registration
          and the several parties signatory thereto  Statement

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

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

10.44     Amended and Restated Credit Agreement      Incorporated by reference from Exhibit
          dated as of November 10, 1995 between the  10.41 to the December 1995 Registration
          Company, Software Ventures Corporation,    Statement
          InterCon Systems Corporation and Fleet
          Bank of Massachusetts, N.A. ("Fleet")

10.45     Revolving Credit Note as amended and       Incorporated by reference from Exhibit
          restated as of November 10, 1995 of the    10.41A to the December 1995 Registration
          Company payable to the order of Fleet      Statement

10.46     Amended and Restated Security Agreement    Incorporated by reference from Exhibit
          dated as of November 10, 1995 by and       10.41B to the December 1995 Registration
          between the Company and Fleet              Statement

10.47     Amended and Restated Security Agreement    Incorporated by reference from Exhibit
          dated as of November 10, 1995 by and       10.41C to the December 1995 Registration
          between PSINet Pipeline New York, Inc.     Statement
          ("Pipeline") and Fleet

10.48     Amended and Restated Guaranty Agreement    Incorporated by reference from Exhibit
          dated as of November 10, 1995 between      10.41F to the December 1995 Registration
          Pipeline and Fleet                         Statement

10.49     Pledge Agreement dated as of November 10,  Incorporated by reference from Exhibit
          1995 between the Company and Fleet         10.41I to the December 1995 Registration
                                                      Statement




                                               48






                                                            
10.50     Master Equipment Lease Agreement dated as  Incorporated by reference from Exhibit
          of June 23, 1995 between the Company and   10.1 to the September 1995 10-Q
          Forsythe/McArthur Associates, Inc.
          ("FMA")

10.51     Master Lease Line Commitment Agreement     Incorporated by reference from Exhibit 10.2
          dated as of June 23, 1995 between the      to the September 1995 10-Q
          Company and FMA

10.52     Amendment Agreement dated as of August 1,  Incorporated by reference from Exhibit
          1995 between the Company and Technology    10.8 to the September 1995 10-Q
          Credit Corporation

10.53     Master Equipment Lease Agreement No.       Incorporated by reference from Exhibit
          620-0004602-000 dated November 1995        10.44A to the December 1995 Registration
          between the Company and Siemens Credit     Statement
          Corporation

10.54     Amendment to Master Lease Agreement No.    Incorporated by reference from Exhibit
          1753 dated January 26, 1996 between the    10.77 to the 1995 Form 10-K
          Company and Technology Credit Corporation

10.55     Master Equipment Lease Agreement, dated    Incorporated by reference from Exhibit
          December 15, 1995 between the Company and  10.78 to the 1995 Form 10-K
          Financing for Science International, Inc.

10.56     Security Agreement dated as of March 20,   Incorporated by reference from Exhibit
          1996 between the Company and USL Capital   10.79 to the 1995 Form 10-K
          Corporation

10.57     Warrant to purchase 182,400 shares of the  Incorporated by reference from Exhibit
          Series B Convertible Participating         10.36 to the May 1995 Registration
          Preferred Stock, $0.1 par value per share  Statement
          (the "Series B Preferred"), of the
          Company, at an exercise price of $1.60
          per share, registered in the name of Mark
          A. Cordover and related letter dated May
          27, 1994 from Mr. Cordover to the Company

10.58     Warrant to purchase 174,274 shares of the  Incorporated by reference from Exhibit
          Series B Preferred of the Company, at an   10.37 to the May 1995 Registration
          exercise price of $1.60 per share,         Statement
          registered in the name of Applied
          Telecommunications Technologies, Inc.
          ("ATTI")

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

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




                                               49






                                                            
10.61     Letter Agreement dated July 20, 1995       Incorporated by reference to the July 21,
          between the Company and Kent Scientific    1995 8-K
          and Industrial Projects, Ltd.

10.62     Intellectual Property License Agreement    Incorporated by reference from Exhibit
          dated March 1996 between the Company and   10.93 to the 1995 Form 10-K
          Hansol Telecom Co., Ltd.

*10.63    Employment Agreement dated April 3, 1996   Incorporated by reference from Exhibit
          between the Company and Harold S. Wills    10.2 to the June 1996 10-Q

10.64     First Amendment dated as of August 13,     Incorporated by reference from Exhibit
          1996 to the Amended and Restated Credit    10.3 to the June 1996 10-Q
          Agreement between the Company and Fleet
          Bank of Massachusetts, N.A.

10.65     Convertible Note dated as of June 28,      Incorporated by reference from Exhibit
          1996 between the Company and MindSpring    10.4 to the June 1996 10-Q
          Enterprises, Inc.

10.66     Registration Rights Agreement made as of   Incorporated by reference from Exhibit
          September 19, 1996 by and between the      10.1 to the September 1996 10-Q
          Company and The Chatterjee Management
          Company

*10.67    Employment Agreement dated October 1,      Incorporated by reference from Exhibit
          1996 between the Company and Edward D.     10.2 to the September 1996 10-Q
          Postal

*10.68    Employment Agreement dated October 9,      Incorporated by reference from Exhibit
          1996 between the Company and Richard R.    10.3 to the September 1996 10-Q
          Frizalone

10.69     Master Software/Equipment Lease Agreement  Incorporated by reference from Exhibit
          dated as of September 20, 1996 between     10.4 to the September 1996 10-Q
          the Company and LPI Software Funding
          Group, Inc.

10.70     Amendment No. 1 to Asset Purchase          Incorporated by reference from Exhibit
          Agreement and Network Services Agreement   10.5 to the September 1996 10-Q
          entered into as of June 28, 1996 by and
          between the Company and MindSpring
          Enterprises, Inc.

10.71     Amendment No. 2 to Asset Purchase          Incorporated by reference from Exhibit
          Agreement entered into as of September 1,  10.8 to the September 1996 10-Q
          1996 by and between the Company and
          MindSpring Enterprises, Inc.

10.72     Pledge Agreement dated as of October 1,    Sequentially numbered pages
          1996 between the Company and Fleet

10.73     Amendment No. 1 to Pledge Agreement dated  Sequentially numbered pages
          as of November 18, 1996 between the
          Company and Fleet



                                               50






                                                            
10.74     Amendment No. 3 to Asset Purchase          Sequentially numbered pages
          Agreement and Amendment No. 1 to
          Convertible Note entered into as of
          January 24, 1997 by and between the
          Company and MindSpring Enterprises, Inc.

10.75     Amendment No. 2 to Network Services        Sequentially numbered pages
          Agreement entered into as of January 1,
          1997 by and between the Company and
          MindSpring Enterprises, Inc.

10.76     Convertible Note of MindSpring             Sequentially numbered pages
          Enterprises, Inc. in the principal amount
          of $3,078,324 due December 31, 1998

10.77     Master Lease Agreement dated as of         Sequentially numbered pages
          January 27, 1997 between Cascade
          Communications Corp. and the Company

*10.78    Employment Agreement dated February 12,    Sequentially numbered pages
          1997 between the Company and David L.
          Hudson

10.79     Second Amendment to Amended and Restated   Sequentially numbered pages
          Credit Agreement dated February 1, 1997
          between the Company, and Fleet

11.1      Calculation of Loss Per Share For The      Sequentially numbered pages
          Year Ended December 31, 1996

11.2      Calculation of Pro Forma Loss Per Share    Sequentially numbered pages
          For The Year Ended December 31, 1995
          (Unaudited)

11.3      Calculation of Pro Forma Loss Per Share    Sequentially numbered pages
          For The Year Ended December 31, 1994
          (Unaudited)

13        1996 Annual Report to Shareholders         Sequentially numbered pages

21        Subsidiaries of the Company                Sequentially numbered pages 

23        Consent of Price Waterhouse LLP            Sequentially numbered pages 

** 27     Financial Data Schedule                    Sequentially numbered pages




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

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

                                               51

EX-10.25

                                                              Exhibit 10.25
 
PSINET CORPORATE PERFORMANCE BONUS PLAN
 
The following represents a summary of the 1996 PSINet Corporate Performance
         Bonus Plan:
 
Amount: between 0 and 10% of gross PAID salary from July 1 through December 31,
         1996.
 
Eligibility: All PSINet Inc. US-based employees (not including Inside Sales,
         Outside Sales, Consumer Wholesale Sales or Corporate Technical
         Support--which have separate performance bonus plans or InterCon
         Systems Corporation employees)
 
Measurement:
 
    -  U.S. Revenue.
 
    -  Number of U.S. Corporate Customers.
 
    -  Number of U.S. Wholesale Consumer Customers.
 
    -  U.S. Retention Rate.
 
    -  Consolidated Cash, cash equivalents and short-term.

EX-10.72

                                PLEDGE AGREEMENT

      Agreement made as of this 1st day of October 1996, between PSINet Inc., a
New York corporation (hereinafter sometimes referred to as the "Pledgor"), and
Fleet National Bank, a national banking association (the "Bank"). All
capitalized terms used herein and not otherwise defined herein shall have the
meanings set forth in the Credit Agreement (as defined below).

                              W I T N E S S E T H:

      WHEREAS, the Pledgor and InterCon Systems Corporation ("InterCon")
(Pledgor and InterCon as hereinafter sometimes collectively referred to as
"Debtors") have entered into an Amended and Restated Credit Agreement dated as
of November 10, 1995 with the Bank, as amended by the First Amendment to Amended
and Restated Credit Agreement dated as of August 13, 1996 with the Bank (said
Amended and Restated Credit Agreement as amended by said First Amendment, and as
the same may be further amended, modified, supplemented or restated from time to
time, the "Credit Agreement") providing for the establishment by the Bank of a
credit facility in favor of Debtors in the maximum aggregate principal amount of
$23,500,000 (the "Loans");

      NOW, THEREFORE, to induce the Bank to make the Loans provided for by the
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is hereby agreed as follows:

      1. Pledge. As security for the due and punctual payment and performance of
the Obligations described in Section 2 below, Pledgor hereby delivers and
pledges to the Bank the securities listed in Exhibit A hereto (the "Pledged
Securities"), and Pledgor hereby grants


to the Bank a security interest in and lien on all of the Pledged Securities.
The certificates representing the Pledged Securities are accompanied by stock
powers duly executed in blank by the Pledgor as the registered owner of the
Pledged Securities. The term "Pledged Securities" as used in this Agreement
shall include, in addition to the aforesaid securities, any other securities or
collateral which may from time to time be delivered to the Bank hereunder as
security for the Obligations, together with all the proceeds of any of the
foregoing.

      2. Obligations. The Pledged Securities from time to time held hereunder
shall secure the following obligations of Debtors (herein the "Obligations"):

         (a) The prompt and complete payment when due (whether by acceleration
or otherwise) of all amounts outstanding under the Credit Agreement and all
promissory notes and L/Cs issued in connection therewith, including, without
limitation, the Term Credit Notes in the maximum aggregate original principal
amount of $18,500,000, the Revolving Credit Note in the original principal
amount of $5,000,000 and all L/Cs; 

         (b) Any and all other obligations of the Pledgor or other Debtor under
the Credit Agreement or under any other document, instrument, or agreement
executed and delivered pursuant thereto, including, without limitation, all
fees, expenses and costs thereunder; and

         (c) Any and all other liabilities and obligations of every name and
nature whatsoever of the Pledgor or other Debtor to the Bank, whether such
liabilities and obligations be direct or indirect, absolute or contingent,
secured or unsecured, now existing or hereafter arising or acquired, due or to
become due.

                                        2


      3. Representations and Warranties. The Pledgor hereby represents and
warrants to the Bank that:

         (a) The Pledgor is the legal, beneficial and record owner and has good
title to all of the Pledged Securities free and clear of all claims, mortgages,
pledges, liens, security interests and other encumbrances of every nature
whatsoever except to or in favor of the Bank hereunder;

         (b) All of the shares of Pledged Securities have been duly and validly
issued and are fully paid and non-assessable;

         (c) Except for any shares, options, warrants or other rights issued in
accordance with Section 4(b) hereof, the Pledged Securities constitute all the
issued and outstanding shares of capital stock of the issuer thereof as of the
date of this Agreement and, as of the date of this Agreement, there are no
outstanding no options, warrants or other rights to purchase or acquire any
additional shares of the capital stock of such issuer; and

         (d) The Pledgor has full corporate and other power and authority to
pledge the Pledged Securities as herein contemplated.

      4. Issues or Sales of Pledged Stock. (a) Except as permitted by Section
4(b) hereof, the Pledgor hereby covenants and agrees that,

         (i) it will not directly or indirectly sell, assign, pledge or
otherwise encumber or dispose of the Pledged Securities;

         (ii) it will not permit the issuer of any of the Pledged Securities,
directly or indirectly, to issue or sell any additional shares of capital stock
or any options, warrants or rights to acquire such shares other than to Pledgor;
and

                                       3


         (iii) in the event that the issuer of any of the Pledged Securities
issues any additional shares of its capital stock to Pledgor, Pledgor will
pledge any such shares to the Bank pursuant to this Agreement.

         (b) Notwithstanding anything herein to the contrary, PSINet Japan K.K.
may issue shares of its capital stock and options, warrants or rights to acquire
shares of its capital stock, to directors officers, employees and/or consultants
as incentive or other compensation.

      5. Voting Rights of Pledgor. Provided that there exists no Event of
Default (as hereinafter defined) and so long as the Pledgor shall be the record
owner of the Pledged Securities, the Pledgor shall be entitled, to the extent
permitted by applicable law, to exercise voting power with respect to the
Pledged Securities; provided, however, that in no event shall the Pledgor
exercise such voting power in any manner contrary to or inconsistent with the
terms hereof or with the terms of the Agreement. Upon the occurrence of an Event
of Default which is continuing, the Bank shall have those rights specified in
paragraph 7 except to the extent that such rights may be limited by the laws of
the jurisdiction of organization of the issuer of the Pledged Securities.

      6. Distribution. Upon the dissolution, winding up, liquidation or
reorganization of any corporation or other entity which issued the Pledged
Securities, whether in bankruptcy, insolvency or receivership proceedings, or
upon an assignment for the benefit of creditors or otherwise, any sum to be paid
or any property to be distributed upon or with respect to any of the Pledged
Securities shall be paid over to the Bank to be held by it as collateral
security for the Obligations; provided that any cash distribution shall be
applied to outstanding Obligations. In the event that any stock dividend shall
be declared on any of the

                                       4


Pledged Securities, or any shares of stock or fractions thereof shall be issued
pursuant to any stock split involving any of the Pledged Securities, or any
property shall be distributed upon or with respect to any of the Pledged
Securities, the shares or other property so distributed shall be delivered to
the Bank, to be held as collateral security for the Obligations.

      7. Default. If any one or more of the following events, (herein referred
to as "Events of Default") shall occur:

         (a) Default shall be made in the due performance or observance of any
provision of this Agreement and such default shall continue for a period of
fifteen (15) days following the earlier to occur if (i) Pledgor shall become
aware of any such default or (ii) notice of any such default to Pledgor by Bank;

         (b) Any of the Obligations shall have become due by demand,
acceleration, maturity or otherwise and such Obligations have not been paid in
full; or

         (c) An Event of Default (as defined in the Credit Agreement) shall have
occurred and be continuing under the Credit Agreement;

then upon the occurrence of an Event of Default, the Bank shall have, (1) full
power and authority to sell or otherwise dispose of the Pledged Securities or
any part thereof, (2) after giving written notice to the Pledgor of its
intention to exercise such right, to vote the Pledged Securities with respect to
any and all matters and to exercise all rights to payments, conversion,
exchange, subscription or otherwise with respect to the Pledged Securities, or
(3) to exercise any and all rights and remedies of a secured party under the
Uniform Commercial Code, except to the extent that the foregoing rights may be
unavailable or limited by the laws of the jurisdiction of organization of the
issuer of the Pledged Securities. 

                                       5


      To the extent permitted by applicable law with the agreement of the
Pledgor, any sale or other disposition by the Bank may be by public or private
proceedings and may be made by one or more contracts, as a unit or in parcels,
at such time and place, by such method, in such manner and on such terms as the
Bank may determine. To the extent permitted by applicable law, such sale or
other disposition may be made without advertisement or notice of any kind or to
any person. Where reasonable notification of the time or place of such sale or
other disposition is required by law, such requirement shall have been met if
such notice is telegraphed, cabled or mailed, postage prepaid, at least ten (10)
days before the time of such sale or other disposition to each person entitled
thereto at such person's address as specified in Section 16 below. To the extent
permitted by applicable law, the Bank or any other holder of the Obligations may
buy any or all of the Pledged Securities upon any public or private sale
thereof. To the extent permitted by applicable law, upon any such sale or sales,
the Pledged Securities so purchased shall be held by the purchaser absolutely
free from any claims or rights of whatsoever kind or nature, including any
equity of redemption or any similar rights, all such equity of redemption and
any similar rights being hereby expressly waived and released by the Pledgor to
the extent permitted by applicable law. In the event any consent, approval or
authorization of any governmental agency shall be necessary to effectuate any
such sale or sales, the Pledgor shall execute, and hereby agrees to cause the
issuer of any Pledged Securities to execute, as necessary, all applications or
other instruments as may be required; provided that the foregoing shall not
obligate the Pledgor to register the Pledged Securities under the Securities Act
of 1933 or under the securities laws of any other applicable jurisdiction. After
deducting all reasonable costs and expenses of collection, custody, sale or
other disposition or delivery (including legal costs and reasonable

                                       6


attorneys' fees) and all other charges due against the Pledged Securities
(including any charges of the type described in Section 10 below), the residue
of the proceeds of any such sale or other disposition shall be applied to the
payment of the Obligations in the order of priorities as is determined at the
time by the Bank, except as otherwise provided by applicable law or directed by
any court purporting to have jurisdiction thereof, and any surplus shall be
returned to the Pledgor, except as otherwise provided by law or such court. The
Pledgor shall be liable for any deficiency in payment of the Obligations,
including all costs and expenses of collection, custody, sale or other
disposition or delivery and all other charges due against the Pledged
Securities, as hereinbefore enumerated. As used in this Section 7, "applicable
law" shall include, without limitation, any applicable laws of the jurisdiction
of organization of the issuer of the Pledged Securities.

      The Pledgor recognizes that the Bank may be unable to effect a public sale
of all or a part of the Pledged Securities by reason of certain prohibitions
contained in the Securities Act of 1933 or the securities laws of any other
applicable jurisdiction, but may be compelled to resort to one or more private
sales to a restricted group of purchasers who will be obliged to agree, among
other things, to acquire such Pledged Securities for their own account for
investment and not with a view to the distribution or resale thereof. The
Pledgor agrees that private sales so made may be at a price and on other terms
less favorable to the seller than if such Pledged Securities were sold at public
sales, and that the Bank has no obligation to delay the sale of any such Pledged
Securities for the period of time necessary to permit such Pledged Securities to
be registered for public sale under the Securities Act of 1933 or the securities
laws of any other applicable jurisdiction. The Pledgor agrees that sales made
under the foregoing circumstances shall not be deemed to have been made in a
commercially

                                       7


unreasonable manner by virtue of any sale made on terms less favorable to the
seller resulting from the private nature of the sale. Subject to the foregoing,
the Bank agrees that any sale of the Pledged Securities made by the Bank shall
be made in a commercially reasonable manner. 

      8. Transfer of Pledged Stock. The Pledgor hereby irrevocably appoints the
Bank as agent to arrange for any and all transfers of the Pledged Securities as
the Bank may from time to time deem advisable to assist the Bank in obtaining
the benefit of its security interest therein after the occurrence of an Event of
Default, including, but not limited to, the transfer of the Pledged Securities
into the name of the Bank or its nominee at any time following the occurrence of
an Event of Default, the foregoing appointment being deemed a power coupled with
an interest. The right to vote the Pledged Securities is governed by Paragraph 5
of this Agreement.

      9. Payment of Taxes, Charges, Etc. The Bank, at its option, may discharge
any taxes, charges, assessments, security interests, liens or other encumbrances
upon the Pledged Securities or otherwise protect the value thereof. All such
expenditures incurred by the Bank shall become payable by the Pledgor to the
Bank upon demand, shall bear interest at the rate applicable to the Loans.

      10. Duties with Respect to Collateral. The Bank shall have no duty to the
Pledgor with respect to the Pledged Securities other than the duty to use
reasonable care in the safe custody of any Pledged Securities in its possession.
Without limiting the generality of the foregoing, the Bank, although it may do
so at its option, shall be under no obligation to the Pledgor to take any steps
necessary to preserve rights in the Pledged Securities against other parties.

                                       8


      11. Waivers. The Pledgor hereby waives demand, payment, notice of dishonor
or protest and all other notices of any kind in connection with the Obligations
except notices required by law or by this or any other agreement between the
Pledgor and the Bank. Nothing herein shall modify or limit any right of the Bank
to release, supersede, exchange or modify any other collateral security which it
may from time to time hold and the Bank may release, surrender or modify the
liability of any third party without giving notice hereunder to the Pledgor and
any such modifications, changes, renewals, releases or other actions shall in no
way affect the Pledgor's obligations hereunder.

      12. Expenses. The Pledgor agrees to pay, indemnify and hold harmless the
Bank and the nominees of the Bank from and against all costs and expenses
(including taxes, if any) arising out of or incurred in connection with any
transfer of Pledged Securities into or out of the name of the Bank's nominees
and all costs and expenses of the Bank arising out of or incurred in connection
with the exercise by the Bank of its rights hereunder; provided, however, the
Debtor shall not be responsible for expenses arising out of or incurred as a
result of willful misconduct by the Bank.

      13. Statement as to Default. The Pledgor and the Bank agree that any
written statement by an officer of the Bank asserting the occurrence of an Event
of Default as the authorization for the exercise by the Bank of its rights
hereunder shall be presumed to be true, and that any purchaser of the Pledged
Securities at a foreclosure sale shall have the right to rely on such a
statement.

      14. Modification. This Agreement may not be modified or amended without
the prior written consent of the parties hereto.

                                       9


      15. Notices. All notices shall be deemed to have been given when delivered
in person, telefaxed to the number set forth below (with receipt acknowledged)
or, if mailed, when actually received by the party to whom addressed. Such
actual receipt shall be conclusively presumed if such notice shall be mailed by
registered or certified mail, addressed to any party at its address set forth
below or at any other address notified in writing to the other parties hereto,
and if the sender shall have received back a return receipt, or if telefaxed to
the number set forth below and receipt acknowledged. 

         To the Bank:        Fleet National Bank 
                             75 State Street, 4th Floor 
                             Boston, Massachusetts 02109 
                             Attention: Thomas W. Davies, III 
                                          Vice President 
                             Fax: (617) 346-1633

         With a copy to:     H. David Henken, Esq.
                             Goodwin, Procter & Hoar
                             Exchange Place
                             Boston, Massachusetts 02109-2881
                             Fax:  (617) 523-1231

         To the Debtor:      PSINet Inc.
                             510 Huntmar Park Drive
                             Herndon, VA 22070
                             Attention: President
                                          and
                                     David N. Kunkel,
                                          General Counsel
                             Fax:  (703) 904-4200

         With a copy to:     Nixon, Hargrave, Devans & Doyle, LLP
                             437 Madison Avenue
                             New York, New York 10022
                             Attention: Richard F. Langan, Jr., Esq.
                             Fax: (212) 940-3111

         16. Rights. No course of dealing between the Pledgor and the Bank nor
any delay in exercising, on the part of the Bank any right, power or privilege
hereunder, shall operate 

                                       10


as a waiver thereof; nor shall any single or partial exercise of any rights,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
hereunder are cumulative and are in addition to, and not exclusive of, any
rights or remedies provided by law, including, without limitation, the rights
and remedies of a secured party under the Uniform Commercial Code.

      17. Waiver of Subrogation. Pledgor hereby waives and releases any right of
subrogation it may have against the Bank or the Pledged Securities by reason of
any of the actions taken by the Bank hereunder, until all Obligations have been
paid in full.

      18. Binding Effect, Etc. This Agreement and the rights and obligations of
the parties hereunder shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts, except to the extent that the laws of
the jurisdiction of organization of the issuer govern by virtue of such issuer's
organization in such other jurisdiction. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns, including any other holder or holders of any Obligations and may be
executed in two or more counterparts, each of which shall together constitute
one and the same agreement.

      19. Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision hereof.

      20. Foreign Law. Notwithstanding anything in this Agreement or the Credit
Agreement to the contrary, the Pledgor and the other Debtor make no
representation or warranty as to the validity or enforceability of this
Agreement under the laws of the jurisdiction of organization of the issuer of
the Pledged Securities.

                                       11


      IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement
as of the date first above written.

                                                 PSINET INC.

                                                 By:  /s/ David N. Kunkel
                                                    ----------------------------
                                                 Title: Sr VP & Gen Counsel

                                                 FLEET NATIONAL BANK

                                                 By:   /s/ Thomas W. Davies
                                                    ----------------------------
                                                 Title: Vice President

                                                 By:  /s/ William E. Rurode
                                                    ----------------------------
                                                 Title: Senior Vice President

                                       12


                                    EXHIBIT A

                           List of Pledged Securities

         Name of Entity Issuing                            Description of
         the Pledged Securities                          Pledged Securities
         ----------------------                          ------------------
1.    EUNet GB Limited                                   500,000 shares,
      (a corporation organized under                     (pound)1.00
       the laws of the United Kingdom)

2.    PSINet Limited                                     2,000 shares of
      (a corporation organized under                     Common Stock, without
       the Canada Business Corporations Act)             par value


                                       13

EX-10.73

                       AMENDMENT NO. 1 TO PLEDGE AGREEMENT

      This Amendment No. 1 to Pledge Agreement ("Agreement") made as of this
18th day of November 1996, between PSINet Inc., a New York corporation
(hereinafter sometimes referred to as the "Pledgor"), and Fleet National Bank, a
national banking association (the "Bank").

      WHEREAS, the Pledgor and the Bank are parties to a Pledge Agreement dated
as of October 1, 1996 (the "Pledge Agreement");

      WHEREAS, Pledgor and the Bank desire to amend the Pledge Agreement as
provided herein; 

      NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:

      1. Capitalized terms used herein, unless otherwise defined herein, shall
have the meaning ascribed thereto in the Pledge Agreement.

      2. Exhibit A to the Pledge Agreement is hereby replaced in its entirety
with Exhibit A attached hereto. 

      3. The Bank hereby acknowledges receipt of the Pledged Securities listed
in Exhibit A.

      4. Except as specifically provided herein, the Pledge Agreement remains in
effect in accordance with its terms. 

      IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.

                                              PSINET INC.

                                              By:  /s/ William L. Schrader
                                                  ------------------------------
                                              Title: Chairman, President and CEO

                                              FLEET NATIONAL BANK

                                              By:  /s/ Thomas W. Davies
                                                 -------------------------------
                                              Title: VP

                                              By: /s/ William E. Rurode
                                                  ------------------------------
                                              Title: Senior Vice President

                                       2


                                    EXHIBIT A

                           List of Pledged Securities


         Name of Entity Issuing                            Description of
         the Pledged Securities                          Pledged Securities
         ----------------------                          ------------------
1.    EUNet GB Limited                                   500,000 shares,
      (a corporation organized under                     (pound)1.00
       the laws of the United Kingdom)

2.    PSINet Limited                                     2,000 shares of
      (a corporation organized under                     Common Stock, without
       the Canada Business Corporations Act)             par value

3.    PSI Japan K.K.                                     200 shares, par value
      (a corporation organized under the laws            50,000 yen
       of Japan)

                                       3

EX-10.74

                   AMENDMENT NO. 3 TO ASSET PURCHASE AGREEMENT
                     AND AMENDMENT NO. 1 TO CONVERTIBLE NOTE

         THIS AMENDMENT NO. 3 TO ASSET PURCHASE AGREEMENT AND AMENDMENT NO. 1 TO
CONVERTIBLE NOTE (the "Amendment") is entered into as of January 24, 1997 by and
between PSINET INC. ("Seller") and MINDSPRING ENTERPRISES, INC. ("Buyer").

         WHEREAS, Seller and Buyer are parties to that certain Asset Purchase
Agreement dated June 28, 1996, as amended by Amendment No. 1 thereto dated June
28, 1996 and Amendment No. 2 thereto dated September 1, 1996 (as so amended, the
"Purchase Agreement" and such Amendment No. 2, "Amendment No. 2"); and

         WHEREAS, as required by the Purchase Agreement, Buyer issued to Seller
as of September 1, 1996 its Convertible Note due September 1, 1997 in the
original principal amount of $9,929,000 (the "Second Note"); and

         WHEREAS, Seller and Buyer desire to amend the Purchase Agreement and
the Second Note, all in accordance with and subject to the terms and conditions
hereinafter set forth; and

         WHEREAS, capitalized terms that are used but not otherwise defined
herein shall have the meanings ascribed to them in the Purchase Agreement;

         NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby agree
as follows:

         1. The first paragraph of Section 2.2 of the Purchase Agreement is
hereby amended and restated to read as follows:

         For and in consideration of the conveyances and assignments described
in Section 2.1 and in addition to the assumption of liabilities as set forth in
Section 2.4, Buyer agrees to pay to Seller, and Seller agrees to accept from
Buyer, an aggregate purchase price (the "Purchase Price") equal to Twelve
Million Nine Hundred Twenty Nine Thousand Dollars ($12,929,000).

         2. Section 2.3 of the Purchase Agreement is hereby amended and restated
to read as follows:

         (a) Buyer shall deliver to Seller at the First Closing the amount of
One Million Dollars ($1,000,000.00) in immediately available funds (the "Cash
Payment") and a fully executed copy of the First Note;


         (b) Buyer shall deliver to Seller at the Second Closing a fully
executed copy of the Second Note.

         3. The definition of "Second Note" in the Purchase Agreement is hereby
amended by deleting all of the text of such definition following the phrase
"Exhibit 2.3(b)".

         4. Exhibit 2.3(b) attached to this Amendment shall be, for all
purposes, Exhibit 2.3(b) of the Purchase Agreement. Upon execution of this
Amendment, Buyer shall re-execute the Second Note in the form attached to this
Amendment as Exhibit 2.3(b) and deliver the same to Seller, and, promptly
thereafter, Seller shall return to Buyer the original Second Note, which shall
be deemed amended and restated by such re-executed Second Note.

         5. All references to $9,929,000, whether in words or numbers, in the
Second Note and the Purchase Agreement are hereby amended, effective as of
October 22, 1996, to read $3,078,324.

         6. Buyer hereby consents to the pledge of the Second Note to Fleet Bank
of Massachusetts or any other primary institutional lender of Seller, provided
such pledge is permitted by applicable federal and state securities laws.

         7. The parties acknowledge that the First Note has been paid in full,
and that the First Note has been cancelled by Buyer.

         8. The parties acknowledge that Buyer has satisfied its obligations
under Section 3.4 of the Purchase Agreement.

         9. The definitions of "Third Note," "Fourth Note" and "Fifth Note" and
each reference thereto in the Purchase Agreement, are hereby deleted from the
Purchase Agreement.

         10. The Purchase Agreement and the Second Note are hereby ratified and
confirmed and, except as expressly modified hereby, the Purchase Agreement shall
continue unmodified and in full force and effect.

         11. This Amendment may be executed in separate counterparts, none of
which need contain the signatures of all parties, each of which shall be deemed
to be an original, and all of which taken together constitute one and the same
instrument. It shall not be necessary in making proof of this Amendment to
produce or account for more than the number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.


         IN WITNESS WHEREOF, each of the parties hereto has executed this
Amendment, or has caused this Amendment to be duly executed and delivered in its
name on its behalf, all as of the day and year first above written.

                                    BUYER

                                    MINDSPRING ENTERPRISES, INC.

                                    By:    /s/ Charles M. Brewer        (SEAL)
                                        --------------------------------
                                    Name:  Charles M. Brewer
                                    Title: Chairman & CEO

                                    SELLER

                                    PSINET INC.

                                    By:    /s/ William L. Schrader      (SEAL)
                                        --------------------------------
                                    Name:  William L. Schrader
                                    Title: President & CEO


Exhibit 2.3(b) to the Amendment Agreement (Form of Promissory Note) has been
omitted. The Company agrees to furnish this Exhibit supplementally to the
Commission upon request. There were no other Exhibits to the Amendment
Agreement.

EX-10.75

                  AMENDMENT NO. 2 TO NETWORK SERVICES AGREEMENT

         THIS AMENDMENT NO. 2 TO NETWORK SERVICES AGREEMENT (the "Amendment") is
entered into as of January 1, 1997 by and between PSINET, INC. ("PSINet") and
MINDSPRING ENTERPRISES, INC. ("MindSpring").

         WHEREAS, PSINet and MindSpring are parties to that certain Network
Services Agreement dated June 28, 1996, as amended by Amendment No. 1 thereto
dated June 28, 1996 (as so amended, the "Services Agreement" ); and

         WHEREAS, Seller and Buyer desire to amend the Services Agreement in
accordance with and subject to the terms and conditions hereinafter set forth;
and

         WHEREAS, capitalized terms that are used but not otherwise defined
herein shall have the meanings ascribed to them in the Services Agreement;

         NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby agree
as follows:

         1. A new Exhibit A-1 in the form of Exhibit A-1 attached to this
Amendment is hereby added to the Services Agreement.

         2. Section 2.1 and Section 2.3 of the Services Agreement are hereby
amended to insert the words "and Exhibit A-1, as applicable," immediately after
the words "Exhibit A."

         3. Section 3 of the Services Agreement is hereby amended to add the
following after the word "MindSpring" in subparagraph (a) thereof:

         "; provided that no such termination may become effective prior to
         October 31, 1998" and to delete the text appearing after the word
         "time" on line 2 of subparagraph (c) thereof through the end of such
         subparagraph and replace it with the following: "upon 60 days written
         notice to PSINet".

         4. The Services Agreement is hereby ratified and confirmed and, except
as expressly modified hereby, shall continue unmodified and in full force and
effect.


         5. This Amendment may be executed in separate counterparts, none of
which need contain the signatures of all parties, each of which shall be deemed
to be an original, and all of which taken together constitute one and the same
instrument. It shall not be necessary in making proof of this Amendment to
produce or account for more than the number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.

         IN WITNESS WHEREOF, each of the parties hereto has executed this
Amendment, or has caused this Amendment to be duly executed and delivered in its
name on its behalf, all as of the day and year first above written.

                                    MINDSPRING ENTERPRISES, INC.

                                    By:    /s/ Charles M. Brewer
                                           -----------------------------
                                    Name:  Charles M. Brewer
                                    Title: Chairman & CEO

                                    PSINET, INC.

                                    By:    /s/ William L. Schrader
                                           -----------------------------
                                    Name:  William L. Schrader
                                    Title: President & CEO


Exhibit A-1 to the Amendment Agreement (Discounted Pricing Terms) has been
omitted. The Company agrees to furnish this Exhibit supplementally to the
Commission upon request. There were no other Exhibits to the Amendment
Agreement.

EX-10.76

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT THE PRIOR WRITTEN CONSENT OF THE
COMPANY.

                          MINDSPRING ENTERPRISES, INC.

                                 Promissory Note

$3,078,324.00                                                October 22, 1996

      FOR VALUE RECEIVED, the undersigned, MINDSPRING ENTERPRISES, INC., a
Delaware corporation (herein called the "Company"), hereby promises to pay to
PSINET, INC., a New York corporation, or registered assigns (hereinafter called
the "Payee"), the principal sum of Three Million Seventy Eight Thousand Three
Hundred Twenty Four Dollars ($3,078,324.00) (the "Principal", which shall be
subject to increase or decrease as set forth below). All payments hereunder
shall be made in lawful money of the United States of America, and shall be
subject to the offset and deduction provisions described herein.

Payment

      The Principal shall be payable in monthly installments on the last day of
each calendar month (or, if such day is not a business day, on the next
succeeding business day) as follows: (i) beginning on January 31, 1997, through
and including June 30, 1997, principal in the amount of Fifty Thousand Dollars
($50,000) shall be payable; (ii) beginning on July 31, 1997, through and
including December 31, 1997, principal in the amount of One Hundred Thousand
Dollars ($100,000) shall be payable; (iii) beginning on January 31, 1998,
through and including June 30, 1998, principal in the amount of One Hundred
Fifty Thousand Dollars ($150,000) shall be payable; (iv) beginning on July 31,
1998, through and including November 30, 1998, principal in the amount of Two
Hundred Twenty Five Thousand Dollars ($225,000) shall be payable; and (v) on
December 31, 1998, a final principal payment in the amount of One Hundred Fifty
Three Thousand Three Hundred Twenty Four Dollars ($153,324) shall be payable.


Late Charges

      If the entire amount of any principal payment is not paid in full within
five (5) days after the date when due, the Company shall pay to the Payee a late
fee equal to two percent (2%) of the amount not paid.

Sale of Note

      This Note has not been registered under the Securities Act of 1933, as
amended (the "1933 Act") or under the securities laws of any state. This Note
may not be sold, transferred, pledged or hypothecated without the prior written
consent of the Company.

      This Note shall be registered on books of the Company that shall be kept
at its principal office for that purpose, and shall be transferable only on such
books by the registered owner hereof in person or by duly authorized attorney
upon surrender of this Note properly endorsed, and only in compliance with the
next preceding paragraph hereof.

Redemption

      The Company may redeem this Note in whole or in part at any time.

Default

      In case of the failure to pay, when due, the principal or any other sum
payable hereunder, and continuance of such failure for five (5) business days
after the date on which such principal or other sum is due (whether upon
maturity hereof, upon any installment payment date, upon any prepayment date,
upon acceleration, or otherwise), the Payee may declare this Note to be due and
payable in full.

Miscellaneous

      Upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction or mutilation of this Note, and (in case of loss, theft or
destruction) of indemnity reasonably satisfactory to it, and upon reimbursement
to the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of this Note, if mutilated, the Company will make and deliver a
new Note of like tenor in the principal amount of this Note then outstanding in
lieu of such Note. Any Note so made and delivered shall be dated as of the date
to which principal has been paid on the Note lost, stolen, destroyed or
mutilated.


                                       2


      The Company shall have the right to offset and/or deduct, from time to
time and at any time, any amounts of principal payable under this Note against
Losses (as defined in the Asset Purchase Agreement by and between the Company
and Payee, dated as of June 28, 1996 ("Purchase Agreement", which term shall
include all amendments thereto)) asserted against, resulting to, imposed upon or
incurred by the Company for which the Company has a right or claim for
indemnification pursuant to Article 10 of the Purchase Agreement.

      The Company hereby waives presentment, demand, notice, protest and other
demands and notices in connection with the delivery, acceptance or enforcement
of this Note.

      No delay or omission on the part of the Payee in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note, and a waiver, delay or omission on any one occasion shall not be
construed as a bar to or waiver of any such right on any future occasion.

      The Company hereby agrees to pay on demand all costs and expenses,
including, without limitation, reasonable attorneys' fees and legal expenses,
incurred or paid by Payee in enforcing this Note.

      The terms of this Note shall be governed by and construed in accordance
with the laws of the State of New York (but not including the choice of law
rules thereof).

      This Note shall not be valid or obligatory for any purpose until
authenticated by the execution hereof by the Chairman, President or a Vice
President of the Company and registered upon the books of the Company as
hereinabove provided.


                                       3


      IN WITNESS WHEREOF, MINDSPRING ENTERPRISES, INC., a Delaware corporation,
has caused this Note to be signed in its corporate name by its Chairman,
President or a Vice President, by authority duly given, all as of the day and
year first above written.

                                    MINDSPRING ENTERPRISES, INC.

                                    By: /s/ Charles M. Brewer
                                        --------------------------
                                    Title: Chairman & CEO


                                       4

EX-10.77

                                  MASTER LEASE

Dated as of January  27, 1997

LESSOR:

CASCADE COMMUNICATIONS CORP.
5 Carlisle Road
Westford, Massachusetts  01886-3500
Phone:   (508) 692-2600
Fax:     (508) 692-8695
Attn:    Paul Blondin
         Chief Financial Officer

LESSEE:

PSINET INC.
510 Huntmar Park Drive
Herndon, Virginia  20170                            Federal I.D. No:  161353600
Phone:  (703) 904-4100
Fax:    (703) 904-4200
Attn:   Edward D. Postal
        Chief Financial Officer


      1. DEFINITIONS AND RULES OF CONSTRUCTION. Unless the context shall
otherwise require, capitalized terms used herein, but not otherwise defined
herein, shall have the respective meanings specified in Schedule A attached
hereto and in any Lease Supplement executed and delivered by Lessor and Lessee
pursuant to Section 2(b) hereof (a "Lease Supplement"), which are hereby
incorporated herein by reference.

      2. LEASE. (a) Lessee hereby agrees to lease from the Lessor, and Lessor,
by acceptance of this Master Lease agrees to lease to Lessee, subject to Section
2A below, up to $5,000,000 in wide area network switch equipment for use in the
United States of America, pursuant to the terms hereof, in each case as
specified as a Set of Equipment pursuant to the related Lease Supplement. Lessee
agrees that it shall, pursuant to the terms hereof, comply with all of the terms
and conditions herein and in any Lease Supplement.

         (b) This Master Lease sets forth the terms and conditions that govern
the lease by Lessor to Lessee of Sets of Equipment specified on Lease
Supplements executed and delivered by Lessor and Lessee from time to time, a
form of which is attached hereto as Exhibit 1. Each Lease Supplement
incorporates by reference this Master Lease and specifies

               (i) a Primary Term of thirty-six (36) months;

              (ii) the invoice cost of the related Set of Equipment, the cost of
                   the Extended Warranty for the related Set of Equipment, any
                   other costs agreed by Lessor and Lessee to be capitalized and
                   the sales or use taxes thereon (in the aggregate, the "Total
                   Invoice Cost");

             (iii) the ten percent (10%) capitalized cost-reduction payment
                   payable by Lessee with respect to the Total Invoice Cost of
                   the related Set of Equipment (Total Invoice Cost minus such
                   ten percent, defined herein as the "Capitalized Lessor's
                   Cost");

              (iv) the amount of Basic Rent payable thereunder for each month of
                   Lessor (principal to be calculated based on 1/36th of the
                   Capitalized Lessor's Cost of the related Set of Equipment,
                   and interest on the outstanding principal balance at the rate
                   of eleven percent (11%) per annum); and

               (v) the Basic Rent Payment Dates on which Basic Rent is due.

      By the execution and delivery of any Lease Supplement, Lessee agrees to
and accepts the terms and conditions of this Master Lease. In the event of a
conflict between the provisions of a Lease Supplement and any of the provisions
of this Master Lease, the provisions of the Lease Supplement shall govern, but
only with respect to the Lease of the Set of Equipment listed on such Lease
Supplement. References to "the Lease" or "a Lease" shall mean one or more
applicable Lease Supplements, as the case may be, incorporating by reference
this Master Lease. Each Lease Supplement constitutes a separate and independent
Lease.

      2A. LEASE FACILITY. (a) Lessor's agreement to provide up to $5,000,000 in
lease financing (the "Lease Facility") shall terminate on September 30, 1997 and
shall be subject, with 


                                      -2-

respect to each draw-down under such Lease Facility pursuant to a Lease
Supplement (a "Closing"), to the conditions specified below in this Section 2A.

         (b) The obligation of Lessor to make advances under the Lease Facility
pursuant to a Lease Supplement at a Closing is subject to the satisfaction of
all of the following conditions:

               (i) Lessor shall have received (A) the Lease Supplement for the
                   Set of Equipment to be leased at such Closing and (B) all of
                   the other related Lease Documents (collectively, with the
                   foregoing, the "Closing Documents"), duly executed and
                   delivered by all parties thereto, and all actions
                   contemplated by the foregoing documents shall have been
                   accomplished to the satisfaction of Lessor and its counsel.

              (ii) All warranties and representations of Lessee in the Closing
                   Documents shall be true and accurate on the date of such
                   Closing as if then given, and there shall be no Default or
                   Event of Default under this Lease or any Closing Document.

             (iii) Lessor shall have received certificates of Lessee, dated as
                   of the Closing date, in form and content satisfactory to
                   Lessor, stating the substance of the foregoing Section
                   2A(b)(ii) and attaching such organizational documents as
                   Lessor may request.

              (iv) Lessor shall be satisfied with the results of UCC and other
                   lien searches against Lessee.

               (v) Lessor shall have received and be satisfied with insurance
                   binders or certificates of insurance coverage maintained by
                   Lessee and naming Lessor as loss payee and/or additional
                   insured.

              (vi) There shall be no material adverse change, in the good faith
                   judgment of Lessor, in Lessee's (i) financial condition as
                   reflected in the then current financial statements required
                   to be delivered by Lessee hereunder, relative to such
                   statements as were delivered by Lessee in connection with any
                   prior Closing or as of the date hereof or (ii) results of
                   operations, business conditions, prospects or properties,
                   relative to Lessee's results of operations, business
                   conditions, prospects or properties as of the date of any
                   prior Closing or as of the date hereof.

             (vii) Lessor shall have received all other documents, financial
                   statements and assurances required hereunder or that it may
                   reasonably request in connection with the transactions
                   contemplated for such Closing, and such documents shall be
                   certified, when appropriate, by the proper authorities or
                   corporate officers. All such documents and all proceedings to
                   be taken in connection with such transactions shall be
                   reasonably satisfactory in form and substance to Lessor and
                   its counsel.


                                       -3-

                (viii)   All legal matters incident to the Closing Documents
                         shall be reasonably satisfactory to Lessor's counsel,
                         and Lessor shall have received at the Closing the legal
                         opinion of counsel to Lessee (which counsel must be
                         reasonably satisfactory to Lessor), in form and
                         substance reasonably satisfactory to Lessor and its
                         counsel.

      No waiver of the above conditions precedent shall be enforceable against
Lessor unless made in writing and signed by an officer thereof.

      3. TERM AND RENT; OBLIGATIONS UNCONDITIONAL. (a) Each Set of Equipment is
leased for the Interim Term and the Primary Term, unless and until the Term of
such Lease shall sooner expire pursuant to the terms hereof. Each Interim Term
shall commence on the date of acceptance of such Set of Equipment as evidenced
by Lessee's execution and delivery of a Lease Supplement and shall expire at
midnight on the date that is one calendar day prior to the related Primary Term
Commencement Date. Each Primary Term shall commence at 12:01 a.m. and expire at
midnight on the dates set forth in the related Lease Supplement as the "Primary
Term Commencement Date" and the "Primary Term Expiration Date," respectively.

         (b) For each Lease Supplement, Lessee shall pay to Lessor or an agent
designated by Lessor or any Transferee in writing, in lawful money of the United
States, (i) as fixed rent for the related Set of Equipment during the Interim
Term, the Basic Rent Per Day multiplied by number of calendar days (full or
partial) in the Interim Term on the first Basic Rent Payment Date and (ii) as
fixed rent for the Equipment during the Primary Term, the Basic Rent Per Month
on each Basic Rent Payment Date; provided, however, that if the first Basic Rent
Payment Date is also the Primary Term Commencement Date, Lessee shall pay all
Basic Rent Per Day and the first installment of Basic Rent Per Month on the date
that the Lessee delivers the applicable Lease Supplement. All payments of Basic
Rent shall be made by wire transfer to Lessor's account as set forth in Schedule
B attached hereto, which is hereby incorporated by reference, or at such other
address or to such other Person and in such other manner as Lessor, from time to
time, may designate. Each payment of Basic Rent shall be apportioned between the
interest and the principal for the related Set of Equipment in accordance with
the economic accrual method.

         (c) Lessee shall also pay to Lessor or an agent designated by Lessor or
any Transferee in writing, in lawful money of the United States, all
Supplemental Rent. Supplemental Rent shall be paid when due or on demand if
there is no due date therefor. If Lessee shall fail to pay any Basic Rent or
Supplemental Rent, Lessor shall have the right to pay the same and shall have
all rights, powers and remedies for reimbursement from Lessee with respect
thereto as are provided herein (including, without limitation, Sections 14 and
15 hereof) or by Law in the case of non-payment of Basic Rent. Lessee shall also
pay to Lessor a Late Fee on all overdue Rent from the due date thereof until
paid. Lessee shall perform all of its obligations under this Lease at its sole
cost and expense, and shall pay all Rent when due, without further notice or
demand.

         (d) Each Lease under this Master Lease is a net lease and Lessee
acknowledges and agrees that Lessee's obligation to pay all Rent and other sums
payable under the Lease Documents, and the rights of Lessor in and to such
payments, shall be absolute and


                                       -4-

unconditional and shall not be subject to any abatement, reduction, setoff,
defense, counterclaim or recoupment due to or alleged to be due to, or by reason
of, any past, present or future claims that Lessee may have against Lessor, any
Transferee, or any Person for any reason whatsoever, except as provided in the
terms of the Extended Warranty with respect to a discrete Set of Equipment.

      4. PERSONAL PROPERTY; SECURITY INTEREST AND LIENS. (a) Lessee covenants
and agrees that the Equipment is, and shall at all times be and remain, personal
and movable property. If requested by Lessor, Lessee shall obtain prior to
delivery of any item of Equipment or at any other time reasonably requested by
Lessor, a certificate in form satisfactory to Lessor from all parties with a
real property interest in the premises where the Equipment may be located
waiving any claim with respect to the Equipment.

         (b) During the Term of any Lease and until (i) Lessee acquires the
Equipment pursuant to Section 19 hereof or (ii) Lessee returns the Equipment to
Lessor in compliance with Section 17 hereof, Lessor shall retain title to such
Equipment; provided, however, that Lessee and Lessor acknowledge that
transactions documented hereunder shall not constitute a "lease" or a "true
lease," and instead shall constitute a "lease intended as security," or
"security interest," as the case may be, under Applicable Law (including under
Section 1-201(37) of the UCC). In furtherance thereof, in order to secure the
prompt payment and performance as and when due of all of Lessee's obligations
under the Lease Documents, Lessee hereby grants to Lessor a first priority
security interest in and to (A) the Equipment leased under the Lease Documents
and all replacements, substitutions, accessions thereto and (B) proceeds (cash
and non-cash) thereof, including the proceeds of all insurance policies on the
Equipment (collectively, the "Collateral"). Lessee agrees that, with respect to
the Collateral, Lessor shall have all of the rights and remedies of a first
priority secured party under the UCC. Without the prior written consent of
Lessor, Lessee may not sell, lease or otherwise dispose of any of the
Collateral, or attempt, offer, or contract to do so, except to the extent
expressly provided herein.

         (c) At any time and from time to time, upon the written request of
Lessor, and at the sole expense of Lessee, Lessee will promptly and duly execute
and deliver such further instruments and documents and take such further action
as Lessor may reasonably request for the purpose of obtaining or preserving the
full benefits of the Lease Documents and of the rights and powers therein
granted, including, without limitation, the filing of any financing or
continuation statements under the Uniform Commercial Code in effect in any
jurisdiction with respect to the security interests and liens created hereby.
Lessee also hereby authorizes Lessor to file any such financing or continuation
statement without the signature of Lessee to the extent permitted by Applicable
Law. A carbon, photographic or other reproduction of this Lease shall be
sufficient as a financing statement for filing in any jurisdiction to the extent
permitted under Applicable Law. If any amount payable under or in connection
with any of the Collateral shall be or become evidenced by any instrument or
chattel paper, such instrument or chattel paper shall be immediately delivered
to Lessor, duly endorsed in a manner satisfactory to Lessor, to be held as
Collateral pursuant to this Master Lease.

         (d) Lessee will keep and maintain at its own cost and expense
satisfactory and complete records of the Collateral. For Lessor's further
security, Lessee hereby grants to Lessor a security interest in all of Lessee's
books and records pertaining to the Collateral, and upon the occurrence and
during the continuance of an Event of Default, Lessee shall turn over any such


                                      -5-

books and records to Lessor or to its representatives during normal business
hours at the request of Lessor; provided that Lessee may make a photocopy of
such books and records.

         (e) Lessor and its representatives shall at all times have full and
free access during normal business hours, and upon reasonable prior notice and
without unreasonable interference, to all the books of record and accounts of
Lessee pertaining to the Collateral, and Lessor or its representatives may
examine the same, take extracts therefrom and make photocopies thereof, and
Lessee agrees to render to Lessor, at Lessee's cost and expense, such clerical
and other assistance as may be reasonably requested with regard thereto. Lessor
and its representatives shall at all times also have the right during normal
business hours, and upon reasonable prior notice, to enter into and upon any
premises where any of the Collateral is located for the purpose of inspecting
the same or otherwise protecting its interests therein, excepting such customer
premises where Equipment may be located.

         (f) Lessee shall not directly or indirectly create, incur, assume or
suffer to exist any Lien on or with respect to any of the Collateral, title
thereto or any interest therein, except Permitted Liens. Lessee shall notify
Lessor immediately in writing upon receipt of notice of any Lien affecting the
Collateral in whole or in part, and shall, at its own cost and expense, defend
Lessor's title therein and Lessor's first priority security interest with
respect thereto against all Persons holding or claiming to hold such a Lien on
the Collateral; and any losses, expenses or costs suffered by Lessor as a result
thereof shall be covered by the Lessee's indemnity in Section 18 hereof.

         (g) Lessee shall not move any Collateral or permit any Collateral to be
moved from the address set forth in the related Lease Supplement without
Lessor's prior written consent; provided, however, that in no event shall any
Collateral be moved to any location outside the United States of America or to
any jurisdiction within the United States of America that has not adopted the
UCC.

         (h) Lessee will furnish to Lessor monthly statements and schedules
further identifying and describing the Collateral and such other reports in
connection with the Collateral as Lessor may reasonably request, all in
reasonable detail.

         (i) Upon payment in full by Lessee of all Rent due or to become due
hereunder and the discharge by Lessee of all of its other obligations hereunder
and under the other Lease Documents, Lessor's security interest in the
Collateral shall terminate, and Lessor agrees to comply with any reasonable
request of Lessee to effect such termination, including without limitation,
filing termination statements under the UCC. The Collateral secures only the
obligations of Lessee under the Lease Documents, and not any other obligations
of Lessee to Lessor whether now existing or hereafter created, except as Lessee
may hereafter agree in writing.

      4A. LESSOR'S APPOINTMENT AS ATTORNEY-IN-FACT. (a) Lessee hereby
irrevocably constitutes and appoints Lessor and any officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of Lessee and in the
name of Lessee or in its own name, from time to time in Lessor's discretion, for
the purpose of carrying out the terms of any Lease, to take any and all
appropriate action and to execute any and all instruments which may be necessary
or desirable 


                                      -6-

to accomplish the purposes of Sections 4(b) or 4(c) of this Master Lease, and,
without limiting the generality of the foregoing, Lessee hereby gives Lessor the
power and right, on behalf of Lessee, without notice to or assent by Lessee, to
do the following:

      (i)   to pay or discharge taxes and Liens levied or placed on or
            threatened against the Collateral, all as contemplated by Section 15
            hereof; and

     (ii)   upon the occurrence and during the continuance of any Event of
            Default, (A) to direct any party liable for any payment under any of
            the Collateral to make payment of any and all moneys due or to
            become due thereunder directly to Lessor or as Lessor shall direct;
            (B) to ask or demand for, collect, receive payment of and receipt
            for, any and all moneys, claims and other amounts due or to become
            due at any time in respect of or arising out of any Collateral; (C)
            to sign and endorse any invoices, freight or express bills, bills of
            lading, storage or warehouse receipts, drafts against debtors,
            assignments, verifications, notices and other documents in
            connection with any of the Collateral; (D) to commence and prosecute
            any suits, actions or proceedings at law or in equity in any court
            of competent jurisdiction to collect the Collateral or any thereof
            and to enforce any other right in respect of any Collateral; (E) to
            defend any suit, action or proceeding brought against Lessee with
            respect to any Collateral; (F) to settle, compromise or adjust any
            suit, action or proceeding described in clause (D) or (E) above and,
            in connection therewith, to give such discharges or releases as
            Lessor may deem appropriate; and (G) generally, to sell, transfer,
            pledge and make any agreement with respect to or otherwise deal with
            any of the Collateral as fully and completely as though Lessor were
            the absolute owner thereof for all purposes, and to do, at Lessor's
            option and Lessee's expense, at any time, or from time to time, all
            acts and things which Lessor deems necessary or appropriate to
            protect, preserve or realize upon the Collateral and Lessor's liens
            thereon and to effect the intent of the Lease Documents, all as
            fully and effectively as Lessee might do.

At the reasonable request of Lessor, Lessee shall deliver to Lessor, one or more
further documents ratifying any and all actions that said attorneys shall
lawfully take or do or cause to be taken or done by virtue hereof. This power of
attorney is a power coupled with an interest and shall be irrevocable.

         (b) Lessee also authorizes Lessor, at any time and from time to time,
to execute, in connection with the sales provided for in Section 16(b) hereof,
any endorsements, assignments or other instruments of conveyance or transfer
with respect to the Collateral.

         (c) The powers conferred on Lessor hereunder are solely to protect
Lessor's interests in the Collateral and shall not impose any duty upon it to
exercise any such powers. Lessor shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers, and neither it nor
any of its officers, directors, employees or agents shall be 


                                      -7-

liable or responsible to Lessee for any act or failure to act hereunder, except
for its own gross negligence or willful misconduct.

         (d) Lessor's sole duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the Code or otherwise, shall be to exercise reasonable care.

         (e) All authorizations and agencies herein contained with respect to
the Collateral are irrevocable and powers coupled with an interest.

      5. INSTALLATION, DEINSTALLATION, MAINTENANCE AND REPAIR. At all times
during the Term of any Lease, and except as provided in the terms of the
Extended Warranty for a Set of Equipment, Lessee shall be solely responsible, at
its own expense, for the delivery, installation, maintenance, repair, use,
possession, operation, storage, deinstallation, and shipping of the Equipment by
a party reasonably acceptable to Lessor, and shall keep the Equipment in good
repair and condition and in working order, and shall furnish any and all parts,
mechanisms and devices required to keep the Equipment in good repair and
condition and in working order, all at the expense of Lessee. Lessee shall not
make any alterations or additions to the Equipment without the prior written
consent of Lessor, which consent shall not be unreasonably withheld, conditioned
or delayed. All parts furnished and all additions made to, and all substitutions
and replacements for, the Equipment shall immediately upon the installation
thereof be deemed part of the Equipment and become the property of Lessor
subject to the terms of this Lease. Lessor shall be entitled to inspect the
Equipment at the location thereof during normal business hours.

      6. USE. Lessee shall use the Equipment in a careful and proper manner and
shall comply with and conform to all Applicable Laws and insurance and/or
maintenance requirements. Lessee shall not use the Equipment for any purpose
other than that for which it was designed.

      7. QUIET ENJOYMENT. So long as no Event of Default has occurred and is
continuing under any Lease Document and subject to the terms and conditions
hereof, Lessor warrants peaceful and quiet use and enjoyment of the Equipment by
Lessee against acts of Lessor.

      8. DISCLAIMER AND WAIVER OF WARRANTIES, LIMITATION OF LIABILITY. LESSOR'S
WARRANTY FOR ANY SET OF EQUIPMENT SHALL BE AS CONTAINED IN THE TERMS OF THE
EXTENDED WARRANTY THEREFOR, AS ATTACHED TO THE RELATED LEASE SUPPLEMENT, AND
LESSOR HAS NOT MADE, AND HEREBY DISCLAIMS, LIABILITY FOR, AND LESSEE HEREBY
WAIVES ALL RIGHTS AGAINST LESSOR RELATING TO, ANY AND ALL WARRANTIES,
GUARANTIES, REPRESENTATIONS OR OBLIGATIONS OF ANY KIND WITH RESPECT THERETO,
EITHER EXPRESS OR IMPLIED OR ARISING BY APPLICABLE LAW OR OTHERWISE, NOT
EXPRESSLY INCLUDED IN SUCH EXTENDED WARRANTY, INCLUDING (A) ANY EXPRESS OR
IMPLIED WARRANTIES, GUARANTIES, REPRESENTATIONS OR OBLIGATIONS OF, ARISING FROM
OR IN (1) MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE, (2) COURSE
OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, (3) QUALITY OF WORKMANSHIP
OR (4) TORT (WHETHER OR NOT ARISING FROM THE 


                                      -8-

ACTUAL, IMPLIED OR IMPUTED NEGLIGENCE OF LESSOR OR STRICT LIABILITY) OR UNDER
THE UCC OR OTHER APPLICABLE LAW WITH RESPECT TO THE EQUIPMENT, INCLUDING TITLE
THERETO (INCLUDING ANY WARRANTY OF GOOD OR MARKETABLE TITLE OR FREEDOM FROM
LIENS), FREEDOM FROM TRADEMARK, PATENT OR COPYRIGHT INFRINGEMENT, LATENT DEFECTS
(WHETHER OR NOT DISCOVERABLE), CONDITION, MANUFACTURE, DESIGN, SERVICING OR
COMPLIANCE WITH APPLICABLE LAW AND (B) ALL OBLIGATIONS, LIABILITY, RIGHTS AND
REMEDIES, HOWSOEVER ARISING UNDER ANY APPLICABLE LAW WITH RESPECT TO THE MATTERS
WAIVED AND DISCLAIMED, INCLUDING FOR LOSS OF USE, REVENUE OR PROFIT WITH RESPECT
TO THE EQUIPMENT, OR ANY LIABILITY OF LESSEE OR LESSOR TO ANY THIRD PARTY, OR
ANY OTHER DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (AS SUCH TERMS ARE USED IN
SECTION 2-719(3) OF THE UCC, OR OTHER APPLICABLE LAW); all such risks, as
between Lessor and Lessee, are to be borne by Lessee. The Equipment is not to be
used, and is not being acquired hereby, for use in any respect for Lessee's or
any other Person's personal or family purposes and, as such, the Equipment does
not constitute "consumer goods" as such term is defined under Applicable Law.
Lessor's agreement to enter into this Master Lease and each Lease hereunder is
in reliance upon the freedom from liability or responsibility for the matters
waived and disclaimed herein. THE PROVISIONS OF THIS SECTION 8 HAVE BEEN
NEGOTIATED BY LESSOR AND LESSEE AND, EXCEPT FOR THE EXPRESS WARRANTY MADE BY
LESSOR IN SECTION 7 HEREOF OR IN ANY EXTENDED WARRANTY WITH RESPECT TO A SET OF
EQUIPMENT, ARE INTENDED TO CONSTITUTE A COMPLETE EXCLUSION AND NEGATION OF ANY
REPRESENTATIONS, GUARANTIES, OBLIGATIONS OR WARRANTIES OF LESSOR, EXPRESS OR
IMPLIED, WITH RESPECT TO THE EQUIPMENT AND THE RIGHTS, TITLE AND INTEREST BEING
CONVEYED HEREIN WITH RESPECT THERETO THAT MAY ARISE PURSUANT TO ANY APPLICABLE
LAW NOW OR HEREAFTER IN EFFECT. (LESSEE'S INITIALS /s/EP ).

      9. REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants for the
benefit of Lessor:

         (a) Lessee is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and is
duly qualified to do business and is in good standing as a foreign corporation
in all jurisdictions in which the nature of its business or the ownership or
lease of its properties so requires and where the failure to so qualify would
have a materially adverse effect on Lessee or Lessor's interest in the
Collateral and Lessee has adequate corporate power to enter into and perform
this Master Lease, each Lease hereunder and the other transactions contemplated
by the Lease Documents.

         (b) This Master Lease and the other Lease Documents have been duly
authorized, executed and delivered by Lessee and constitute valid, legal and
binding agreements of Lessee, enforceable in accordance with their respective
terms.

         (c) The entering into and performance of this Master Lease and the
other Lease Documents by Lessee will not violate any Applicable Law or any
provision of Lessee's charter or bylaws or result in any breach of, or
constitute a default under, or result in the creation of any Lien upon any
assets of Lessee or on the Collateral pursuant to, any instrument or Applicable
Law to which Lessee is a party or by which it or its assets may be bound.


                                      -9-

         (d) There are no pending or threatened actions or proceedings to which
Lessee is a party, or otherwise affecting Lessee, before any Government
Authority, which, either individually or in the aggregate, would materially,
adversely affect the financial condition of Lessee, or the ability of Lessee to
perform its obligations under, or comply with the terms of, the Lease Documents.

         (e) Lessee is not in default under any obligation for the payment of
borrowed money, for the deferred purchase price of property or for the payment
of any rent under any lease agreement which, either individually or in the
aggregate, would materially, adversely affect the financial condition of Lessee,
or the ability of Lessee to perform its obligations under, or comply with the
terms of, the Lease Documents.

         (f) No consent, approval or other authorization of or by any
Governmental Authority is required in connection with the execution, delivery or
performance by Lessee of, or the consummation by Lessee of the transactions
contemplated by, the Lease Documents.

         (g) The financial statements of Lessee that have been provided to
Lessor have been prepared in accordance with GAAP, and fairly present Lessee's
financial condition and the results of its operations as of the date of and for
the period covered by such statements, and since the date of such statements
there has been no material adverse change in such conditions or operations.

         (h) The address of Lessee as set forth on the cover page hereof is the
chief place of business and chief executive office (which terms shall have the
meanings ascribed therefor in Article 9 of the UCC) of Lessee; and Lessee does
not conduct business under any trade, assumed or fictitious name.

         (i) With respect to the Collateral, no filing, recordation or
registration of any Financing Statement or other document or instrument was or
is necessary in order to cause Lessor to have good, valid and enforceable title
with respect thereto and, without limiting the generality of the foregoing, upon
the last to occur of (1) Lessor's delivery F.O.B. Westford, Massachusetts, of
any item of Equipment to Lessee and (2) the filing of a Financing Statement in
the State Filing Office, County Filing Office and, if applicable, the Fixture
Filing Office (naming Lessee as debtor and Lessor as secured party and
describing the Collateral), Lessor will have a valid perfected security interest
in the Collateral pursuant to the UCC and other Applicable Law to the extent
Lessor is not the owner of such Collateral.

         (k) Lessee has obtained all Permits necessary to possess and use the
Equipment in compliance with and as contemplated by the Lease Documents.

         (l) If requested by Lessor, Lessee will provide an opinion of counsel
and other supporting documents to the foregoing effect and with respect to such
other legal matters as Lessor may reasonably request.

                                      -10-

      10. COVENANTS OF LESSEE.  Lessee covenants and agrees as follows:

         (a) Lessee will, if requested by Lessor, furnish Lessor (i) within one
hundred twenty (120) days after the end of each fiscal year of Lessee, a balance
sheet of Lessee as at the end of such year, and the related statements of
operations and retained earnings and cash flows of Lessee for such fiscal year,
prepared in accordance with GAAP, all in reasonable detail and certified by
independent certified public accountants of recognized standing selected by
Lessee; (ii) within sixty (60) days after the end of each quarter of Lessee's
fiscal year a balance sheet of Lessee as at the end of such quarter, and the
related statement of operations and retained earnings and cash flows of Lessee
for such quarter, prepared in accordance with GAAP; and (iii) within thirty (30)
days after the date on which they are filed, all regular periodic reports, forms
and other filings required to be made by Lessee to the Securities and Exchange
Commission, if any.

         (b) Lessee shall provide written notice to Lessor: (i) thirty (30) days
prior to any contemplated change in the name or address of Lessee; (ii) promptly
upon the occurrence of any Default or Event of Default; (iii) promptly of the
commencement of proceedings under Federal bankruptcy laws or any other
insolvency laws (as now or hereafter in effect) involving Lessee or any Person
(other than Lessor) holding an interest in the Equipment or related property as
the debtor; (iv) promptly upon Lessee becoming aware of (1) any alleged
violation of Applicable Law, or (2) any threatened or actual suspension,
revocation or rescission of any Permit necessary for Lessee to be in compliance
with the terms hereof; and (v) promptly after any of the Equipment is moved from
the location of Lessee set forth on the respective Lease Supplement or becomes
lost, stolen, destroyed, materially damaged or worn out.

         (c) Lessee shall not attach or incorporate any Equipment to or in any
other item of equipment or any realty in such a manner that such Collateral may
be deemed to have become an accession to or a part of such other item of
equipment or realty.

         (d) Lessee shall cause each principal item of the Equipment to be
marked at all times, in a plain, distinct and legible manner, with the name of
Lessor or its designee followed by the words "Lessor and Secured Party," or
other appropriate words designated by Lessor.

      11. ASSIGNMENT AND TRANSFER. (a) WITHOUT THE PRIOR WRITTEN CONSENT OF
LESSOR, LESSEE WILL NOT ASSIGN ANY OF ITS RIGHTS NOR DELEGATE ANY OF ITS
OBLIGATIONS UNDER ANY LEASE DOCUMENT, SUBLET THE EQUIPMENT OR OTHERWISE PERMIT
THE EQUIPMENT TO BE OPERATED OR USED BY, OR TO COME INTO OR REMAIN IN THE
POSSESSION OF, ANY PERSON BUT LESSEE; provided, that Lessee may permit its
customers to possess Equipment if such customers have executed an agreement that
provides that such customers' interest in such Equipment may be subject to the
interests of Lessee's creditors; and provided, further, however that, for
purposes hereof, any merger or combination of Lessee and a third party shall be
deemed an assignment of this Lease. No assignment or sublease, whether
authorized in this Section 11 or in violation of the terms hereof, shall relieve
Lessee of its obligations hereunder and Lessee shall remain primarily liable
hereunder.

         (b) Lessor and any subsequent Transferee may transfer any or all of
their respective rights, obligations, title and/or interest in this Master Lease
or in any Lease hereunder to one or 

                                      -11-


more other Transferees. Lessor shall give prompt written notice to Lessee of
such a Transfer, including the name(s) and address(es) of the Transferee(s)
pursuant to such Transfer. Lessee hereby acknowledges and agrees that in the
event Lessor or such other Transferee has transferred its economic interest in
this Master Lease or in any Lease hereunder (i) no Transferee(s) shall be
obligated to perform any duty, covenant or condition required to be performed by
the Lessor under the terms of the Lease Documents (other than the covenant of
quiet enjoyment specified in Section 7 hereof), (ii) all notices or other
communications shall be given to, and made by, Lessor or its designee and (iii)
Lessor or such Transferee (as applicable to the particular situation) shall
remain liable as "Lessor" hereunder.

         (c) LESSEE HEREBY WAIVES AS AGAINST ANY TRANSFEREE(S) (THAT HAVE GIVEN
VALUE FOR SUCH TRANSFER) OF LESSOR, ITS SUCCESSORS AND ASSIGNS, ANY CLAIM OR
DEFENSE THAT LESSEE MAY NOW OR HEREAFTER HAVE AS AGAINST LESSOR, WHETHER FOR
BREACH OF THE LEASE DOCUMENTS, BREACH OF WARRANTY OR OTHERWISE.

      12. INSURANCE. At all times during the Term of any Lease, Lessee, at its
own expense, shall maintain insurance on each item of the Equipment against all
risks and in such amounts as Lessor shall reasonably require (but not less than
the Stipulated Loss Value of such item) with carriers acceptable to Lessor, and
shall maintain a loss payable endorsement in favor of Lessor and its successors
and assigns affording to Lessor and its successors and assigns such additional
protection as Lessor and its successors and assignees shall reasonably require
(such as a breach of Lessee's warranty clause), and Lessee shall maintain public
liability and property damage insurance with respect to each item of Equipment
in amounts reasonably satisfactory to Lessor for both personal and property
damage. Lessee shall be liable for any deductibles contained in such insurance
policies. All such insurance policies shall name Lessor and its successors and
Transferees as insureds and shall provide that all amounts payable by reason of
loss, theft or damage to the Equipment shall be payable only to Lessor or its
designees and that such policies may not be cancelled or altered without at
least 30 days' prior written notice to Lessor or its successors and Transferees.
The Lessee shall furnish the Lessor with certificates or other satisfactory
evidence of the maintenance of the insurance required hereunder.

      13. LOSS AND DAMAGE. Lessee hereby assumes and shall bear the entire risk
of loss, damage, theft or destruction, partial or complete, whether or not
insured against, of the Equipment from any and every cause whatsoever from the
date of delivery of the Equipment to Lessee. No loss, damage, theft or
destruction of the Equipment or any part thereof shall relieve Lessee of any
obligation under the respective Lease, which shall continue in full force and
effect. In the event of loss or damage of any kind to any item of Equipment,
Lessee shall promptly notify Lessor of such event and, at Lessor's option,
Lessee shall, at its own cost and expense, (i) use all reasonable efforts to
place the same in good repair, condition and working order to the satisfaction
of Lessor within 30 days of such loss or damage unless Lessor shall determine
that such item has been irreparably damaged, in which case Lessor may elect to
shorten or terminate said 30-day period, or (ii) replace such Equipment with
like equipment in good repair, condition and working order and, upon prior
written notice to Lessor, cause such replacement equipment to be delivered to
and installed at a location otherwise permitted under the Lease Documents and
give clear title thereto by appropriate instrument to Lessor, which replacement
equipment shall be subject to the terms and conditions of the Lease Documents,
including, without limitation, Section 4(b) hereof. In the event Lessee has
fully complied to 

                                      -12-


Lessor's reasonable satisfaction with the requirements of the previous sentence,
Lessor shall return to Lessee (without interest) the insurance proceeds, if any,
paid to Lessor as a result of such loss or damage under the insurance policies
required pursuant to Section 12 hereof. In the event that any item of Equipment
shall become subject to a Total Loss, Lessee shall inform the Lessor in writing
in regard thereto within thirty (30) days after such Total Loss and Lessee shall
pay to Lessor, in cash, an amount equal to the Stipulated Loss Value thereof as
the case may be; provided, however, that such amount shall be reduced if and to
the extent that Lessor or any Transferee has received proceeds from the
insurance required to be maintained by Lessee pursuant to Section 12 as a result
of such Total Loss, and Lessor agrees that if such insurance proceeds are paid
to Lessor and (A) such proceeds equal or exceed the Stipulated Loss Value
payment then due or (B) if Lessee has already paid the Stipulated Loss Value
payment then due in full, Lessor shall reimburse Lessee the amount of proceeds
thereof in excess of the Stipulated Loss Value payment then paid by Lessee or
such insurer, as the case may be. Upon Lessor's reasonable satisfaction that any
Stipulated Loss Value payment or portion thereof shall be paid by an insurer to
Lessor, Lessor shall not require Lessee to pay such amount before sixty (60)
days after such Total Loss. Where a single amount for the payment of Basic Rent
is set forth on the cover page hereof for more than one item of Equipment, and
less than all such items are subject to a Total Loss, such Basic Rent shall be
apportioned among such items in accordance with their original list prices, and
the Stipulated Loss Value shall be based on such apportioned Basic Rent. Upon
such payment of Stipulated Loss Value for any item(s) hereunder, this Lease
shall terminate with respect to such items(s) and Basic Rent shall thereafter
abate proportionately.

      14. TAXES AND FEES. (a) To the extent permitted by Law, Lessee shall file
any necessary reports and returns for, shall pay promptly when due, shall
otherwise be liable to reimburse Lessor or any Transferee (on an after-tax
basis) for, and agrees to indemnify and hold Lessor or such Transferee harmless
from, all Impositions.

         (b) If any report, return or property listing relating to any
Imposition is, by Law, required to be filed by, assessed or billed to or paid
by, Lessor, Lessee will do all things required to be done by Lessor (to the
extent permitted by Law) in connection therewith and, subject to Section 18
hereof, is hereby authorized by Lessor to act on behalf of Lessor in all
respects in relation thereto, including the contest or protest, in good faith
and by appropriate proceedings, of the validity of any Imposition, or the amount
thereof. Lessor agrees fully to cooperate with Lessee in any such contest, and
Lessee agrees promptly to indemnify Lessor for all reasonable expenses incurred
by Lessor in the course of such cooperation. An Imposition or claim therefor
shall be paid by Lessee, subject to refund proceedings, if failure to pay would
adversely affect the title or rights of Lessor in the Equipment or otherwise
under the Lease Documents. Provided that no Default or Event of Default has
occurred and is then continuing, if Lessor obtains a refund of any Imposition
that has been paid (by Lessee, or by Lessor and for which Lessor has been fully
reimbursed by Lessee), Lessor shall promptly pay to Lessee the amount of such
refund actually received. Lessee shall cause all billings of such charges to
Lessor to be made to Lessor in care of Lessee and shall, in preparing any report
or return required by Law, show the ownership of the Equipment in Lessee, and
shall send a copy of any such report or return to Lessor. If Lessee fails to pay
any such charges when due, except any Imposition being contested in good faith
and by appropriate proceedings (as above provided) for a reasonable period of
time, Lessor at its option may do so pursuant to Section 15, in which 

                                      -13-


event the amount so paid shall be payable by Lessee as Supplemental Rent as
provided in Section 15.

         (c) The provisions of this Section 14 shall not apply to any
Impositions (i) imposed as a result of any transfer or disposition by Lessor, if
such transfer or disposition was voluntary or involuntarily imposed on Lessor as
a result of an act or omission of Lessor, of all or any portion of its interest
in the Equipment pursuant to Section 11 hereof; (ii) that Lessee is contesting
in good faith, by appropriate proceedings and as otherwise permitted pursuant to
the provisions of the Lease Documents until the conclusion of such contest;
except that Lessee's right to contest any Imposition is conditioned upon the
existence of such Imposition during any such contest not causing any material
danger, as determined by Lessor in its sole discretion, of the sale, forfeiture
or loss of the Equipment; or (iii) imposed on Lessor that are based on or
measured by Lessor's gross or net income (including capital gains taxes, income
taxes collected by withholding and taxes on tax preference items), except for
(1) Lessee's obligation to pay indemnities and reimbursements on an "after-tax
basis" and (2) as otherwise expressly provided herein.

      15. LESSEE'S FAILURE TO PAY TAXES, INSURANCE, ETC. Should Lessee fail to
make any Imposition, insurance or other payment or do any act required to be
performed by Lessee as provided in the Lease Documents, Lessor shall have the
right, but not the obligation and without releasing Lessee from any obligation
under the Lease Documents, to make or do the same, and to pay, purchase, contest
or compromise any Imposition that in the judgment of Lessor appears to affect
the Collateral, and, in exercising any such rights, incur any liability and
expend whatever amounts in its reasonable discretion Lessor may deem necessary
or appropriate therefor. All sums so incurred or expended by Lessor (including
any penalty incurred as a result of Lessee's failure to perform such obligation
or make such payment) shall be without demand immediately due and payable by
Lessee and shall be payable as Supplemental Rent.

      16. DEFAULT AND REMEDIES. (a) The occurrences of any of the following
events shall constitute an Event of Default under the Lease Documents, and shall
permit Lessor to exercise the remedies provided in Section 16(b) below,
including the termination of Lessee's right to possession of the Equipment or
the Collateral:

     (i) The nonpayment when due from Lessee of (A) any installment of Basic
         Rent within ten (10) days after the due date therefor as set forth in
         the related Lease Supplement or (B) any Supplemental Rent required
         hereunder to be paid by Lessee ten (10) days after receipt of written
         notice from Lessor or any Transferee of such nonpayment;

    (ii) The failure by Lessee to perform any other term, obligation, covenant
         or condition of this Lease that is not cured within twenty (20) days
         after written notice from Lessor to Lessee of such failure;

   (iii) Lessee shall be in default under the terms of any other written
         agreement with Lessor (or any Transferee) and Lessor (or such
         Transferee) shall have declared a default and/or begun to exercise
         remedies thereunder after the expiration or waiver of any applicable
         grace period;

                                      -14-


    (iv) The subjection of any part of the Collateral to any Lien other than a
         Permitted Lien;

     (v) In the event that (A) Lessee shall (1) authorize or agree to the
         commencement of a voluntary case or other proceeding seeking
         liquidation, reorganization or other relief with respect to itself or
         its debts under any bankruptcy, insolvency, corporation, receivership
         or other similar Law now or hereafter in effect that authorizes the
         reorganization or liquidation of such party or its debt or the
         appointment of a trustee, receiver, liquidator, custodian or other
         similar official of it or any substantial part of its property, (2)
         make a general assignment for the benefit of its creditors, (3) fail
         generally or admit in writing its inability to pay its debts as they
         become due, (4) take any corporate action to authorize any of the
         foregoing or (5) have an involuntary or other proceeding commenced
         against it seeking liquidation, reorganization or other relief with
         respect to it or its debts under any bankruptcy, insolvency or other
         similar Law now or hereafter in effect, and such involuntary case or
         other proceeding shall remain undismissed and unstayed for a period
         exceeding 60 days; or (B) an order for relief pursuant to such
         applicable debtor/creditor law shall have been entered against Lessee;
         and

    (vi) If any representation or warranty made by the Lessee herein or in any
         other Lease Document, or made by the Lessee in any statement or
         certificate furnished by the Lessee in connection with the execution of
         this Master Lease or any other Lease Document or the delivery of any
         items of Equipment hereunder or thereunder or furnished by the Lessee
         pursuant hereto or thereto, proves untrue in any material respect as of
         the date of the issuance or making thereof.

         (b) Upon the happening of any of the above Events of Default, Lessor
may declare this Master Lease to be in Default. Such declaration shall be by
written notice to Lessee and shall apply to all Leases, all Equipment leased
hereunder and all Collateral. Lessee hereby authorizes Lessor at any time
thereafter to enter with or without legal process any premises where the
Collateral may be and take possession thereof. Lessee shall, without further
demand, forthwith pay to Lessor an amount that is equal to any unpaid Rent due
on or before Lessor has declared this Lease to be in Default plus, as liquidated
damages for loss of a bargain and not as a penalty, an amount equal to the
Stipulated Loss Value for the Equipment on the date the Lessor shall declare
this Lease to be in Default (in each case together with any Late Fee related
thereto). After Default, as and to the extent requested by Lessor, Lessee shall
comply with the provisions of Section 17 of this Master Lease. Lessor shall be
entitled to sell the Collateral at private or public sale within or without the
United States, in bulk or in parcels, with or without notice, without having the
Collateral present at the place of sale, with the privilege of becoming the
purchaser thereof; and Lessor shall be entitled to lease, otherwise dispose of
or keep idle all or any part of the Collateral after recovery of possession from
Lessee. The proceeds of sale, lease or other disposition, if any, shall be
applied (1) to all Lessor's costs, charges and expenses incurred in taking,
removing, holding, repairing and selling, leasing or otherwise disposing of the
Collateral (including, without limitation, reasonable attorneys' fees, costs and
disbursements); then, (2) to the extent not previously paid by Lessee, to pay
Lessor the Stipulated Loss Value for the Equipment and all other sums
then-payable by Lessee hereunder, including any unpaid Rent; then, (3) any
remaining amounts shall be paid to Lessee. Lessee shall pay any deficiency
remaining after disposition for amounts described in clauses (1) and (2) above
forthwith; and Lessee shall not be responsible for any amounts in excess of such

                                      -15-


amounts, excepting (A) any unpaid Rent due on or before Lessor declared this
Master Lease to be in Default and (B) any Supplemental Rent then or thereafter
due under the respective Lease. The exercise of any of the foregoing remedies by
Lessor shall not constitute a termination of the respective Lease unless Lessor
so notifies Lessee in writing.

         (c) Lessee agrees to reimburse Lessor on demand for any and all costs
and expenses incurred by Lessor in enforcing its rights under this Section 16 of
the Lease Documents, including without limitation, reasonable attorney's fees
and costs of repossession, storage, insuring, re-leasing and selling of all
Equipment.

         No remedy referred to in this Section 16 is intended to be exclusive,
but each shall be cumulative and in addition to any other remedy referred to
above or otherwise available to Lessor at law or in equity.

      17. SURRENDER OF EQUIPMENT. Upon the expiration or earlier termination of
the Lease with respect to any item of Equipment, Lessee shall, unless (i) Lessee
has paid Lessor in cash the Stipulated Loss Value of such Equipment pursuant to
Section 13 hereof, (ii) Lessee has acquired such Equipment pursuant to Section
19 hereof or (iii) Lessor has abandoned such Equipment pursuant to Section 19
hereof, return the same to Lessor in good repair, condition and working order,
ordinary wear and tear resulting from permitted use thereof under the terms of
such Lease alone excepted, to a location within or outside of the continental
United States specified by Lessor. Such Equipment shall be carefully crated and
shipped, freight, drayage and reassembly costs prepaid and properly insured, by
Lessee, and Lessee shall bear all risk of loss until the Equipment is delivered
to Lessor or its designee.

      18. INDEMNITY. (a) Lessee agrees to indemnify, defend, and hold harmless
each Indemnitee from and against any and all Claims against such Indemnitee
(other than such as may directly and proximately result from the gross
negligence or willful misconduct of such Indemnitee) that directly and
proximately arise on account of (i) this Master Lease or any other Lease
Documents or (ii) the Collateral, or any item or part thereof, including,
without limitation, the selection, ordering, acquisition, delivery,
installation, return, rejection, abandonment or other disposition of any item of
Equipment, the possession, maintenance, leasing, use, condition, ownership,
operation or control of any item of Equipment by whosoever owned, used or
operated during the Term of any Lease or the existence of latent and other
defects (whether or not discoverable or discovered by Lessor or Lessee).

         (b) Lessor or another Indemnitee shall give Lessee prompt notice of any
Claim or liability hereby indemnified against and Lessee shall be entitled to
control the defense thereof; provided, however that (i) Lessor or such other
Indemnitee shall have the right to approve or reject defense counsel selected by
Lessee and any settlement proposed by Lessee or its counsel which approval shall
not be unreasonably withheld, conditioned or delayed and (ii) the defense of any
Claim relating to the payment of any tax, fee, assessment or other charge upon
Lessor or any Transferee shall be controlled by Lessor; and provided, further,
however, that (A) for purpose of this Section 18(b), Lessee's general outside
counsel are satisfactory defense counsel for any Claim excepting those specified
in clause (ii) above and (B) Lessee's contest of any Claim shall be subject to
the requirement that Lessee shall (1) deliver certification by counsel
reasonably satisfactory to Lessor that there is a reasonable basis for such
contest and (B) consult with and keep Lessor apprised of the development of such
contest.

                                      -16-


         (c) Notwithstanding any other provision hereof to the contrary, Lessee
shall pay (on an after-tax basis) or otherwise discharge Claims, when and as
such Claims become due.

      19. PURCHASE AND SALE OPTIONS. (a) At any time during the Term of any
Lease, Lessee shall have the option upon at least thirty (30) days' prior
irrevocable written notice to Lessor to purchase on the date specified by Lessee
in such written notice, which date shall not be more than thirty (30) days after
the date of such notice (the "Purchase Option Date") all (but not less than all)
the Equipment from Lessor on any or multiple particular Lease Supplement(s) for
a purchase price equal to the Option Price, as specified below. Upon such
payment in full and payment of any other amounts then due hereunder (including
the costs and expenses of Lessor, if any, in connection with such purchase),
Lessor will transfer to Lessee, without recourse or warranty and on a "WHERE IS,
AS IS" basis, all of Lessor's right, title and interest in and to the Equipment
(exclusive of Software) as set forth on such Lease Supplement(s). The "Option
Price" shall equal, as of the Purchase Option Date, (i) accrued but unpaid Rent
under each and every Lease Supplement that sets forth the particular Equipment
being purchased and (ii) the balance of principal payments then due under each
and every Lease Supplement that sets forth the particular Equipment being
purchased.

         (b) At the expiration of the Primary Term, Lessee may, and upon written
notice Lessor may require Lessee to, purchase all of the Equipment from Lessor
for a sales price equal to $1.00. Upon such payment in full and payment of any
other amounts then due under the Lease Documents (including the costs and
expenses of Lessor, if any, in connection with such sale or transfer), Lessor
will transfer to Lessee, without recourse or warranty and on a "WHERE IS, AS IS"
basis, all of Lessor's right, title and interest in and to the Equipment
(exclusive of Software). If Lessee fails to pay such purchase price and such
other amounts then due under the Lease Documents, Lessor may, without prejudice
to its rights under Section 16 hereof, abandon such Equipment where such
Equipment is located without liability of any kind to Lessee.

      20. LICENSE OF SOFTWARE PRODUCTS AND FIRMWARE. (a) Subject to the
provisions of this Section 20, Lessor grants to Lessee a nonexclusive,
nontransferable license to use the object code form of the software products
delivered with the Equipment ("Software Products") solely for Lessee's internal
business purposes on or in conjunction with the Equipment with which it was
originally delivered.

         (b) Subject only to the licenses specifically granted herein, Lessor is
the sole owner of all rights, title and interest, including all copyrights,
patents, trademarks, industrial designs, trade names, trade secrets and other
intellectual property rights in the Software Products. The Software Products are
copyrighted and Lessee is only authorized to reproduce one copy of the Software
Products solely for back-up purposes. Lessee is hereby prohibited from otherwise
copying or translating, modifying or adapting the Software Products or,
incorporating in whole or any part in any other product or creating derivative
works based on all or any part of the Software Products. Lessee is not
authorized to license others to reproduce any copies of the Software Products,
except as expressly provided in this Agreement. Lessee agrees to ensure that all
copyright, trademark and other proprietary notices of Lessor affixed to or
displayed on the Software Products will not be removed or modified. Lessee shall
not decompile, disassemble or reverse engineer the Software Products or any
component thereof, except as 

                                      -17-


may be permitted by applicable law in which case Lessee must notify Lessor in
writing and Lessor may provide review and assistance.

         (c) The rights and licenses granted to Lessee with respect to any
Software Product furnished by Lessor may not be sold, licensed, sublicensed,
rented, assigned or otherwise transferred to another party without the prior
written consent of Lessor.

         (d) Upon the effective date of expiration or termination of this
Agreement by Lessor for Lessee's breach or for any other reason, the license
granted to Lessee under this Agreement shall terminate and Lessee shall
immediately discontinue use of the software and all copies and documentation
thereof and return all copies and documentation to Lessor. Notwithstanding the
foregoing, should Lessee purchase the Equipment, Lessee's license as set forth
in this Section 20 shall survive expiration or termination of this Agreement for
the life of the applicable Equipment and as long as Lessee complies with the
terms and conditions hereof.

         (e) US Government Restricted Rights. Notice - Distribution and use of
products including computer programs and any related documentation and
derivative works thereof, to and by the United States Government, are subject to
the Restricted Rights provisions of FAR 52.227-19, paragraph (c)(2) as
applicable, except for purchases by agencies of the Department of Defense (DOD).
For DOD, all products are subject to manufacturer's commercial terms and
conditions and as prescribed in DFAR 227-7202, paragraph 1 (a). Manufacturer is
Cascade Communications Corp., 5 Carlisle Road, Westford, MA 01886, USA.
Unpublished - rights reserved under the copyright laws of the United States.

      21. MISCELLANEOUS. (a) Any notice required or permitted to be given by the
provisions hereof shall be conclusively deemed to have been received by a party
hereto on the day it is delivered by hand, by reputable overnight courier or by
confirmed facsimile transmission to such party at the address as set forth on
the cover page hereof (or at such other address as such party shall specify to
the other party in writing) or, if sent by registered or certified mail, on the
third Business Day after the date on which mailed, addressed to such party at
the address set forth above, postage prepaid.

         (b) No delay or omission to exercise any right or remedy accruing to
Lessor upon any breach or default of Lessee shall impair any such right to
remedy or be construed to be a waiver of any such Event of Default, breach or
default; nor shall any waiver of any single Event of Default, breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval on
the part of Lessor of any Event of Default, breach or default under the Lease
Documents or, of any provision or condition thereof, must be in writing and
shall be effective only to the extent in such writing specifically set forth.
All remedies, either under the Lease Documents or by law or otherwise afforded
to Lessor, shall be cumulative and not exclusive.

         (c) THIS AGREEMENT MAY NOT BE TERMINATED EXCEPT AS EXPRESSLY PROVIDED
HEREIN. This Master Lease and any other Lease Document may be modified only by a
written agreement duly signed by Persons authorized to sign agreements on behalf
of Lessor and Lessee, and any variance from the terms and conditions of the
Lease Documents in any order or other notification from Lessee, written or oral,
shall be of no effect. The capitalized term "Lease" as used herein includes this
Master Lease and any supplement, subsequent schedule or exhibit or future
written amendment made in accordance herewith, and Lessee, by 

                                      -18-


its execution hereof, explicitly acknowledges and agrees with the foregoing.
LESSEE ACKNOWLEDGES THAT IT HAS READ THIS LEASE, UNDERSTANDS IT, AND AGREES TO
BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, LESSEE AGREES THAT THE LEASE
DOCUMENTS ARE THE COMPLETE AND EXCLUSIVE STATEMENT OF THE LEASE BETWEEN THE
PARTIES, WHICH SUPERSEDE ALL PROPOSALS OR PRIOR AGREEMENTS OR UNDERSTANDINGS,
ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO
THE SUBJECT MATTER THEREOF.

         (d) The Lease Documents and the covenants and agreements contained
herein shall be binding upon, and inure to the benefit of, Lessor and its
successors and assigns and Lessee and its successors and permitted assigns.

         (e) The table of contents and the headings of the sections hereof are
for convenience of reference only, are not a part of this Master Lease and shall
not be deemed to affect the meaning or construction of any of the provisions
hereof.

         (f) The Lease Documents may be executed in any number of counterparts.
However, to the extent, if any, that the Lease Documents constitute chattel
paper (as such term is defined in the Uniform Commercial Code as in effect in
any applicable jurisdiction), no security interest in the Lease Documents may be
created through the transfer of possession of any counterpart other than the
counterpart identified by marking as the "Original".

         (g) THE LEASE DOCUMENTS SHALL IN ALL RESPECTS BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. LESSOR AND
LESSEE HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE
MASSACHUSETTS STATE AND FEDERAL COURTS, FOR ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THE OVERALL TRANSACTION EVIDENCED BY THE LEASE DOCUMENTS.
LESSOR AND LESSEE HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY
SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN MASSACHUSETTS STATE
COURTS, OR TO THE EXTENT PERMITTED BY LAW, SUCH FEDERAL COURTS. LESSOR AND
LESSEE HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT THEY MAY EFFECTIVELY DO
SO, THE DEFENSE OF ANY INCONVENIENT FORUM TO THE MAINTENANCE OF ANY ACTION OR
PROCEEDING. LESSOR AND LESSEE HEREBY WAIVE ANY RIGHTS EITHER OF THEM MAY HAVE TO
A TRIAL BY JURY IN ACTIONS OR PROCEEDINGS BROUGHT IN RESPECT OF THE LEASE
DOCUMENTS.

         (h) Should any Section or any part of a Section within the Lease
Documents be rendered void, invalid or unenforceable by any court or Law for any
reason, such invalidity or unenforceability shall not void or render invalid or
unenforceable any other Section or part of a Section therein.

         (i) Notwithstanding any other provision hereof to the contrary, the
provisions of Sections 14 and 18 of this Master Lease shall survive any
expiration or termination of any Lease.

                                      -19-


      22. ADDITIONAL PROVISIONS. The schedules and exhibits attached hereto, any
riders signed by the parties hereto and attached hereto and any Lease
Supplements executed and delivered pursuant to Section 2(b) hereof are hereby
incorporated by reference.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


      IN WITNESS WHEREOF, Lessor and Lessee have caused this Master Lease to be
duly executed, all as of the date first above written.

                                     LESSOR:

                                     CASCADE COMMUNICATIONS CORP.

                                     By:    /s/ Paul Blondin
                                         --------------------------------
                                     Name:  Paul E. Blondin
                                     Title: VP, Finance &CFO

                                     LESSEE:

                                     PSINET INC.

                                     By:    /s/ E. Postal
                                         --------------------------------
                                     Name:  Edward D. Postal
                                     Title: Chief Financial Officer

                               SCHEDULE A TO LEASE

                     DEFINITIONS AND RULES OF CONSTRUCTION.

      1. DEFINITIONS. The following terms, when capitalized as below, have the
following meanings:

      "Applicable Law": any Law, domestic or foreign, that shall apply to (i)
the Lessee or its properties and operations, (ii) the operation, modification,
maintenance, ownership, leasing or use of the Equipment, or (iii) any
transaction contemplated under any Lease Document, including in each case any
environmental Law, federal or state securities Law, commercial Law (pertaining
to the rights and obligations of sellers, purchasers, debtors, secured parties,
or to any other pertinent matter), zoning, sanitation, siting or building Law,
energy, occupational safety and health practices Law or the Employee Retirement
Income Security Act of 1974, as amended, and any regulations promulgated
thereunder.

      "Basic Rent": the rental installments due from Lessee pursuant to Section
3(b) of the Lease for the Interim Term and the Primary Term in the amounts and
on the dates as provided therein and in the Lease Supplements. The principal
component of Basic Rent shall amortize an amount equal to the Capitalized
Lessor's Cost in thirty-six (36) monthly installments. The interest component of
Basic Rent shall be eleven percent (11%) per annum. Each payment shall equal the
principal component plus interest on the accrued but unpaid principal balance.

      "Basic Rent Per Day": one thirtieth (1/30th) of the Basic Rent Per Month.

      "Basic Rent Payment Date": for each Set of Equipment, as set forth in the
related Lease Supplement.

      "Basic Rent Per Month": for each Set of Equipment, as set forth in the
related Lease Supplement.

      "Business Day": any day, other than a Saturday, Sunday or legal holiday
for commercial banks under the laws of the Commonwealth of Massachusetts (or
such other jurisdictions in the United States as Lessor specifies to Lessee by
at least 30 days' prior written notice).

      "Capitalized Lessor's Cost": for each Set of Equipment, the amount
specified in the Schedule A to the related Lease Supplement under the heading
"Capitalized Lessor's Cost," and for all Equipment, the aggregate thereof.

      "Claims": With respect to any Indemnitee, all claims, judgments, good
faith settlements entered into, suits, actions, debts, obligations, damages
(whether incidental, consequential or direct), demands (for compensation,
indemnification, reimbursement or otherwise), losses, penalties, fines,
liabilities (including strict liability), charges that such Indemnitee has
incurred or is responsible for in the nature of amounts for the use or
forbearance of money, Liens, and costs (including attorneys' fees and
disbursements and other legal or non-legal expenses of the investigation or
defense of any claim, whether or not such claim is ultimately defeated, or the

                                      A-2


enforcement of the rights, remedies or indemnities provided for hereunder, or
otherwise available at law or in equity to Lessor), of whatever kind or nature,
contingent or otherwise, matured or unmatured, foreseeable or unforeseeable, by
any Person against such Indemnitee, even if any of the foregoing are groundless,
false, or fraudulent, but specifically excluding any costs or similar expenses
for the use or forbearance of use of money incurred by any Indemnitee for such
Indemnitee's financing or refinancing of its interest in any Lease or the
Equipment.

      "Code" means the United States Internal Revenue Code of 1986, as amended.

      "Collateral": as set forth in Section 4(b) of the Master Lease.

      "County Recording Office": as set forth in Schedule B to the Master Lease.

      "Default": except when inconsistent with the context of any provision
hereof, an event that, but for the lapse of time or the giving of notice or
both, would constitute an Event of Default.

      "Equipment": each and every Set of Equipment leased to Lessee by Lessor
under the Master Lease.

      "Event of Default": any event of default as specified in Section 16(a) of
the Lease.

      "Financing Statement": a Uniform Commercial Code financing statement.

      "Fixture Filing Office": as set forth in Schedule B to the Master Lease.

      "GAAP": generally accepted accounting principles, applied consistently.

      "Governmental Authority": any federal, state, county, municipal, regional
or other governmental authority, agency board, body, instrumentality or court,
in each case either domestic or foreign.

      "Imposition": any title, recordation, documentary stamp or other fees,
taxes, assessments, charges or withholdings of any nature (together with any
penalties or fines thereon) arising at any time upon or relating to the
Equipment or to the Lease Documents, or the delivery, acquisition, ownership,
use, operation, leasing or other disposition of such Equipment or upon the Rent
payable thereunder, whether the same be assessed to Lessor (or any Transferee)
or Lessee, other than taxes based on or measured by Lessor's gross or net
income.

      "Indemnitee": Lessor, any Transferee and their respective officers,
directors, partners, agents and assigns.

      "Installation Agreement": agreements used by Lessee for the provision of
services to its customers using Equipment, as such agreements may be revised
from time to time.

      "Interim Term": for each Lease Supplement, the period from the date of the
Lessee's acceptance of the related Set of Equipment, as evidenced by Lessee's
execution and delivery of such Lease Supplement, to but not including the
Primary Term Commencement Date.

                                      A-3


      "Late Fee": the fee payable by Lessee for the continued use or possession
of the Equipment by the Lessee, which is payable if the Lessee has not paid Rent
for such Equipment when due and which shall equal 1-1/2% per month, or the
highest rate permitted by law, whichever is lower, on all overdue Rent from the
due date thereof until paid.

      "Law": any law, rule, regulation, ordinance, order, code, common law,
interpretation, judgment, directive, decree, treaty, injunction, writ,
determination, Permit or similar norm or decision of any Governmental Authority.

      "Lease": the lease by and between Lessor and Lessee and relating to the
Equipment, as amended from time to time, including this Master Lease and any
exhibits, schedules, riders and Lease Supplements thereto as provided in Section
22 thereof.

      "Lease Documents": collectively, this Master Lease, the Lease
Supplement(s), and all instruments, documents, certificates and agreements
delivered pursuant thereto.

      "Lease Facility": as defined in Section 2A of the Master Lease.

      "Lease Supplement": as defined in Section 1 of the Master Lease.

      "Lien": any mortgage, pledge, lease, sublease, security interest,
attachment, charge, encumbrance or right or claim of others whatsoever
(including any conditional sale or other retention agreement).

      "Option Price"" as set forth in Section 19(a) of the Master Lease.

      "Permit": any action, approval, certificate of occupancy, consent, waiver,
exemption, variance, franchise, order, permit, authorization, right or license,
or other form of legally required permission, of or from a Governmental
Authority.

      "Permitted Lien": (a) Lessor's and Lessee's respective rights, titles and
interests in the Equipment, (b) Liens for the benefit of mechanics, materialmen,
laborers, employees or suppliers and similar Liens arising by operation of Law
and incurred by Lessee in the ordinary course of business for sums that are not
yet delinquent or are being contested in good faith by negotiations or by
appropriate proceedings that suspend the collection and enforcement thereof
(provided that the existence of such Lien while such negotiations or proceedings
are pending does not involve any substantial risk (as determined by Lessor in
its discretion) of the sale, forfeiture or loss of the Equipment or any therein,
and for which adequate reserves have been provided in accordance with GAAP), (c)
Liens arising out of any judgments or awards against Lessee that have been
adequately bonded to protect Lessor's interests or with respect to which a stay
of execution has been granted pending an appeal or a proceeding for review and
(d) Liens for Impositions not yet due and for which adequate provision for
payment has been made.

      "Person": any individual, corporation, partnership, joint venture, or
other legal entity or a Governmental Authority.

      "Primary Term": as set forth on the cover page to the applicable Lease
Supplement.

                                      A-4


      "Primary Term Commencement Date": for each Set of Equipment, as set forth
in the related Lease Supplement.

      "Primary Term Expiration Date": for each Set of Equipment, as set forth in
the related Lease Supplement.

      "Rent": collectively, the Basic Rent and the Supplemental Rent.

      "Set of Equipment": the property described in Schedule A to the related
Lease Supplement, together with all appliances, parts, instruments accessories
and furnishings that are from time to time incorporated in such Equipment, or
having been so incorporated, are later removed therefrom, unless title thereto
is expressly released by Lessor, and all replacements of, and additions,
improvements and accessions to any and all of the foregoing, and all books,
records, maintenance logs and general intangibles (including all patents,
copyrights and trade secrets) relating thereto; and, when used in the context of
Lessor's title to such Equipment (whether relating to the creation, grant,
perfection, release, priority, enforcement or application of proceeds thereof),
shall also include all other property in which Lessor is granted a security
interest under the Lease Documents.

      "State Filing Office": as set forth in Schedule B to the Master Lease.

      "Stipulated Loss Value": with respect to each item of Equipment listed in
the Schedule A to a Lease Supplement, the product of the (1)(a) Capitalized
Lessor's Cost of such item divided by (b) the Capitalized Lessor's Cost of the
Set of Equipment in which such Equipment is included, multiplied by (2) the
Option Price for such Set of Equipment, as calculated at Section 19(d) of the
Master Lease.

      "Supplemental Rent": all amounts, liabilities and obligations (other than
Basic Rent) that Lessee assumes or agrees to pay to Lessor or others under any
Lease, or under any other Lease Document, including, without limitation,
Stipulated Loss Value, the purchase price for the Equipment pursuant to Section
19 of the Master Lease and payments constituting indemnities, reimbursements,
expenses, excess use fees and other charges payable pursuant to the terms of any
Lease Document.

      "Term": the period for which Equipment is leased under any Lease,
including the Interim Term and the Primary Term.

      "Total Invoice Cost": with respect to each Set of Equipment leased
pursuant to a Lease Supplement, as specified thereon.

      "Total Loss": for any item of Equipment, the occurrence of any of the
following: (i) the actual or constructive total loss of such item of the
Equipment; or (ii) the loss, disappearance, theft or destruction of such item of
the Equipment; or (iii) damage to such item of the Equipment to such extent as
shall make repair thereof uneconomical, or shall render any item of the
Equipment permanently unfit for normal use, for any reason whatsoever; or (iv)
the condemnation, confiscation, requisition, seizure, forfeiture or other taking
of title to or use of such item of the Equipment; or (v) as a result of any Law
or other action taken by any 

                                      A-5


Governmental Authority, the use of such item of Equipment in the normal course
of Lessee's business shall have been prohibited (1) indefinitely or (2) for a
period (A) in excess of 60 days or (B) that extends beyond the then existing
Term; all of the foregoing, to the extent established to the reasonable
satisfaction of Lessor.

      "Transfer": any transfer or other agreement pursuant to which Lessor or
Transferee has transferred or agreed to pay any Person the Rent, or a portion
thereof, received from Lessee pursuant to any Lease, which obligation may be
secured by Lessor's interest in such Lease and the related Equipment.

      "Transferee": any Person to whom Lessor or any subsequent transferee
thereof has assigned any or all of its rights, obligations, title and/or
interest under the Lease Documents.

      "Uniform Commercial Code" or "UCC": the Uniform Commercial Code as in
effect in Massachusetts or in any other pertinent jurisdiction; and any
reference to an article or section thereof shall mean the corresponding article
or section (however named) of any such other applicable version of the Uniform
Commercial Code.

      2. RULES OF CONSTRUCTION. Any defined term used in the singular preceded
by "any" indicates any number of the members of the relevant class. Any Lease
Document or other agreement or instrument referred to herein means such
agreement or instrument as supplemented and amended from time to time. Any
reference to Lessor or Lessee shall include their permitted successors and
assigns. Any reference to a Law or Permit shall also mean such Law or Permit as
amended, superseded or replaced from time to time. Unless otherwise expressly
provided to the contrary in the Master Lease, all actions that Lessee takes or
is required to take under this Master Lease or any other Lease Document shall be
taken at Lessee's sole cost and expense, and all such costs and expenses borne
by Lessor shall constitute Claims and shall be covered by Sections 14 and 18 of
the Master Lease.

      3. INTEGRATION. Lessor and Lessee agree that the definitions and rules of
construction herein shall constitute an integral part of this Master Lease.


A Schedule and an Exhibit to the Master Lease have been omitted.

The omitted Schedule and Exhibit which the Company agrees to furnish
supplementally to the Commission upon request are identified below.

         Schedule:
         ---------
                  Schedule B        Miscellaneous Information List

         Exhibit:
         --------
                  Exhibit 1         Form of Lease Supplement

EX-10.78

                              [PSINet Letterhead]

February 12, 1997


Mr. David Hudson
11116 Rich Meadow Drive
Great Falls, Virginia  22066

Dear David:

This letter confirms our offer of employment by PSINet Inc. (the "Company"), and
sets forth the terms and conditions which shall govern such employment as
outlined below. This offer shall remain open until midnight on February 12,
1997.

1.    EMPLOYMENT:

a) The Company hereby offers to employ you as Vice President of Business and
Product Development reporting to the Executive Vice President and Chief
Operating Officer. This is a corporate officer position and as an officer of the
Company you must stand for election by the Board of Directors each year. You
agree to begin work on a full-time basis upon acceptance of this offer, and
remain in the employ of the Company, and, except during vacation periods and
sickness, to provide during standard business hours a minimum of forty hours per
week of management services to the Company, as determined by and under the
direction of the Executive Vice President and Chief Operating Officer. Your
employment under this agreement and its terms is meant to supersede the
obligations of the Company and InterCon Systems Corporation under your prior
arrangement with InterCon, and you shall have no rights or claims against the
Company or InterCon arising from that arrangement except as may be specifically
set forth in this letter.

b) In connection with your employment by the Company, your principal place of
employment shall be the greater Washington, D.C. area and you shall not be
required permanently to relocate to a principal place of business outside such
area during the term of your employment hereunder.

c) During your employment you will, except during vacations, periods of illness,
and other absences beyond your reasonable control, devote your best efforts,
skill and attention to the performance of your duties on behalf of the Company.


2. TERM OF EMPLOYMENT. The term of the employment shall commence on the date of
your acceptance of this offer and shall continue for a period of three years
subject to Article 5 below.

3. COMPENSATION:

a) BASE SALARY. The Company shall pay you a base salary at the rate of $163,500
per annum. Beginning on January 2, 1998, and on January 2nd of each year during
the term of this Agreement, your base salary shall be increased at a minimum by
an amount equal to 5% of your then current base salary. Your base salary shall
be subject to additional increases at the discretion of the Company's Board of
Directors. Your base salary shall be payable in such installments as the Company
regularly pays its other salaried employees, subject to such deductions and
withholdings as may be required by law or by further agreement with you.

b) PERFORMANCE BONUS. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance for the applicable
year. The performance criteria will be issued separately by the Executive Vice
President and Chief Operating Officer, at the beginning of each year, and may be
changed, with mutual fairness, from time to time as situations develop. The
performance bonus for the period ending December 31, 1997 will be a maximum of
$40,000.

c) INCENTIVE STOCK OPTIONS ORIGINALLY GRANTED JANUARY 26, 1996 AND REPRICED
APRIL 5, 1996. The option to purchase one hundred thousand (100,000) shares of
PSINet's Common Stock granted to you on April 5, 1996 (which repriced grant
cancelled and replaced your grant of January 26, 1996) (the "Repriced Options")
pursuant to the Executive Stock Incentive Plan remain in full force and effect
and continue to vest ratably, monthly as detailed in your amended employment
agreement dated August 20, 1996.

d) ADDITIONAL INCENTIVE STOCK OPTIONS IN LIEU OF INTERCON STOCK OPTIONS.
Effective upon your acceptance of this letter, and in full satisfaction of any
obligation by PSINet Inc. or InterCon Systems Corporation under your prior
employment agreement to grant you stock options in PSINet or InterCon shares,
PSINet Inc. shall grant you options to purchase sixty-four thousand five hundred
(64,500) shares of PSINet Inc.'s common stock (the "Options") pursuant to its
Executive Stock Incentive Plan. Such Options shall be evidenced by an option
agreement in such form as required by the Plan. Among other terms and provisions
prescribed by the Plan, the option agreement shall provide that (a) the exercise
price of the Options shall be the price per share of the Company's common stock
as reported by the NASDAQ Stock Market at the close of business on the date of


your acceptance of this letter, (b) the Options shall not be exerciseable after
the expiration of ten years from the date such Options are granted, and (c) the
stock shall vest ratably, monthly, over a forty-eight (48) month period,
beginning January 2, 1996 (your date of employment at InterCon), provided that
for each months' vesting purposes you continue to be employed full time by the
Company, PSINet Inc., or one of its subsidiaries during such month, and provided
that the Company's Board of Directors ratifies, no less often than annually,
that you have met the performance standards and criteria set for you for the
preceding period.

e) NEW GRANT OF INCENTIVE STOCK OPTIONS. Effective as of February 12, 1997, the
Company shall grant you options to purchase thirty-five thousand five hundred
(35,500) shares of PSINet Inc.'s Common Stock (the "New Options") pursuant to
its Executive Stock Incentive Plan. Such Options shall be evidenced by an option
agreement in such form as required by the Plan. Among other terms and provisions
prescribed by the Plan, the option agreement shall provide that (a) the exercise
price of the Options shall be the price per share of the Company's common stock
as reported by the NASDAQ Stock Market at the close of business on February 12,
1997, (b) the Options shall not be exerciseable after the expiration of ten
years from the date such Options are granted, and (c) the stock shall vest
ratably, monthly, over a forty-eight (48) month period, provided that for each
months' vesting purposes you continue to be employed full time by the Company,
PSINet Inc., or one of its subsidiaries during such month, and provided further
that you have met all of the performance conditions, prior to June 30, 1997
which will be provided to you by Executive Vice President and Chief Operating
Officer by the end of February, 1997.

      In the event of a Change of Control, as defined in Section 9 below, the
Company shall vest only those unvested stock options described in items 3(c) and
3(d) immediately.

4. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), revenue bonus plan participation, four weeks' paid
vacation, and life, health, accident and disability insurance under the
Company's plans, policies and programs available to employees in accordance with
the provisions of such plans, policies, and programs.

5.    TERMINATION:

a) Your employment with the Company may be terminated by the Company at any time
for "Cause" as defined in Section 5(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the
non-competition restrictions set forth in Section 6(a) hereof. Your employment
may also be terminated by the Company at any time without Cause provided the
Company shall have given you thirty (30) days' 


prior written notice of such termination. That written notice must state whether
the Company has elected to use the non-Competition restriction (which decision
may not be rescinded). If you are terminated without cause prior to June 30,
1997, you will be paid severance pay, plus pro-rata bonus and benefits up
through June 30, 1997, and in addition you will be paid severance pay, plus
pro-rata bonus and benefits for twenty-six (26) weeks thereafter. If you are
terminated after June 30, 1997 without cause you are entitled to severance pay,
plus pro-rata bonus and benefits for twenty-six (26) weeks thereafter. In
addition, your employment may be terminated by you at any time for any reason,
provided you shall have given the Company at least thirty (30) days' prior
written notice of such termination. By the 30th day the Company must notify you
in writing whether it has elected to use the non-Competition restriction. Such
decision may not be rescinded. Failure of the Company to so notify you shall
result in the non-Competition restriction not being in place.

b) Subject to your compliance with your obligations under Section 6 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason, and the Company has elected to use the non-Competition
restriction, you shall be entitled, for a period of twenty-four (24) months
after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 3; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such 24-month period. The Company shall make up
the difference in cash payments directly to you to the extent that applicable
law would not permit it to make such contributions.

c) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 6
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, your
voluntary resignation, or any material breach by you of this Agreement.

6. AGREEMENT NOT TO COMPETE.

a) In consideration of your employment pursuant to this Agreement and for other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, you covenant to and agree with the Company that, so long as you
are employed by the Company under this Agreement and for a period of twenty-four
(24) months following the termination of such 


employment (but only if the Company has elected to enforce the restriction), you
shall not, without the prior written consent of the Company, either for yourself
or for any other person, firm or corporation, manage, operate, control,
participate in the management, operation or control of or be employed by any
other person or entity which is engaged in providing Internet-related network or
communications services competitive with the Internet-related network or
communication services offered to customers by the Company as of the date of
termination or within six (6) months thereafter. The foregoing shall in no event
restrict you from: (i) writing or teaching, whether on behalf of for-profit, or
not-for-profit institution(s); (ii) investing (without participating in
management or operation) in the securities of any private or publicly traded
corporation or entity; or (iii) after termination of employment, becoming
employed by a hardware, software or other vendor to the Company, provided that
such vendor does not offer network or communication services that are
competitive with the Internet-related network or communications services offered
by the Company as of the date of termination of employment or within six (6)
months thereafter.

b) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 6(a). The Company
shall respond to such request within thirty (30) days after receipt. The Company
will notify you in writing if it becomes aware of any breach or threatened
breach of any of the provisions in Section 6(a), and you shall have thirty (30)
days after receipt of such notice in which to cure or prevent the breach, to the
extent that you are able to do so. You and the Company acknowledge that any
breach or threatened breach by you of any of the provisions in Section 6(a)
above cannot be remedied by the recovery of damages, and agree that in the event
of any such breach or threatened breach which is not cured with such 30-day
period, the Company may pursue injunctive relief for any such breach or
threatened breach. If a court of competent jurisdiction determines that you
breached any of such provisions, you shall not be entitled to any Termination
Payments from and after date of the breach. In such event, you shall promptly
repay any Termination Payments previously made plus interest thereon from the
date of such payment(s) at 12% per annum. If, however, the Company has suspended
making such Termination Payments and a court of competent jurisdiction finally
determines that you did not breach such provision or determines such provision
to be unenforceable as applied to your conduct, you shall be entitled to receive
any suspended Termination Payment, plus interest thereon from the date when due
at 12% per annum. The Company may elect (once) to continue paying the
Termination Payments before a final decision has been made by the court.

7. INTELLECTUAL PROPERTY Ownership of Work Product. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or 


works of authorship developed or created by you during the course of performing
the Company's work (collectively the "Work Product") shall belong exclusively to
the Company and shall, to the extent possible, be considered a work made for
hire for the Company within the meaning of Title 17 of the United States Code.
You automatically assign, and shall assign at the time of creation of the Work
Product, without any requirement of further consideration, any right, title, or
interest you may have in such Work Product, including any copyrights or other
intellectual property rights pertaining thereto. Upon request of the Company,
you shall take such further actions, including execution and delivery of
instruments of conveyance, as may be appropriate to give full and proper effect
to such assignment.

8. TRANSFERABILITY.

a) As used in this Agreement, the term "Company" shall include any successor to
all or part of the business or assets of the Company who shall assume and agree
to perform this Agreement.

This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.

b) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.

c) As used in this Agreement, "Change in Control" shall mean: (i) the
shareholders of the Company approve an agreement for the sale of all or
substantially all of the assets of the Company; or (ii) the shareholders of the
Company approve a merger or consolidation of the Company with any other
corporation (and the Company implements it), other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent more than 80% of
the combined voting power of the voting securities of the Company, or such
surviving entity, outstanding immediately after such merger or consolidation, or
(B) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as defined below)
acquires more than 30% of the combined voting power of the Company's
then-outstanding securities; or (iii) any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than (A) the Company, (B) any corporation owned, directly
or indirectly, by the Company or the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the 


Company representing 30% or more of the combined voting power of the Company's
then outstanding securities.

9. SEVERABILITY. The invalidity or unenforceability of any particular provision
of this Agreement shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provision were omitted. If a court of competent jurisdiction determines that any
particular provision of this Agreement is invalid or unenforceable, the court
shall restrict the provision so as to be enforceable. However, if the provisions
of Section 6 shall be restricted, a proportional reduction shall be made in the
payments under Section 5b.

10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of any
provision of this Agreement shall be effective unless in writing and signed by
both parties.

11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.

12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO ITS PRINCIPLES OF CONFLICTS OF LAW.

13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.


                   HUDSON EMPLOYMENT AGREEMENT SIGNATURE PAGE

      Please confirm your agreement with the forgoing by signing and returning
one copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.

Sincerely,

PSINET INC.

By:         /s/Harold S. Wills
     --------------------------------------------------------------------
     Harold S. Wills, Executive Vice President & Chief Operating Officer

Accepted and Agreed to as of        2/12        , 1997
                              ----------------      --
By:         /s/ D. L. Hudson
     --------------------------------------------------------------------
     David L. Hudson

EX-10.79

                               SECOND AMENDMENT TO
                      AMENDED AND RESTATED CREDIT AGREEMENT

         This Second Amendment to Amended and Restated Credit Agreement
("Agreement") is made as of this 7th day of February, 1997 by and between PSINet
Inc. (f/k/a Performance Systems International, Inc.), a New York corporation
("PSI"), (PSI hereinafter sometimes referred to as "Borrower" or "Borrowers")
PSINet Pipeline New York, Inc., a New York corporation ("Pipeline"), as a
guarantor, and Fleet National Bank, formerly known as Fleet National Bank of
Connecticut, successor by merger to Fleet Bank of Massachusetts, N.A.
(hereinafter referred to as the "Bank"), as lender.

         WHEREAS, as of November 30, 1994, PSI and the Bank entered into a
Credit Agreement (the "Original Credit Agreement");

         WHEREAS, as of March 24, 1995, PSI and the Bank entered into an
amendment to the Original Credit Agreement (the "First Amendment to Credit
Agreement") to (i) increase the term credit from $2,000,000 to $8,500,000, (ii)
add the then newly-acquired Pipeline as a guarantor and (iii) otherwise amend
the Original Credit Agreement, all as set forth in the First Amendment to Credit
Agreement;

         WHEREAS, as of November 10, 1995, PSI, InterCon Systems Corporation
("InterCon"), Software Ventures Corporation ("Software") and the Bank entered
into an Amended and Restated Credit Agreement (the "Amended and Restated Credit
Agreement") which amended and restated the terms of the Original Credit
Agreement as amended by the First Amendment to Credit Agreement to (i) increase
the revolving credit from $1,500,000 to $5,000,000, (ii) add Software and
InterCon as borrowers under the revolving credit (to the extent provided
therein), (iii) increase the term credit from $8,500,000 to $13,500,000 and (iv)
make certain other changes, all as set forth in the Amended and Restated Credit
Agreement;

         WHEREAS, on April 8, l996, Software merged with and into InterCon, with
InterCon as the surviving entity;

         WHEREAS, as of August 13, 1996, PSI, InterCon and the Bank entered into
an amendment to the Amended and Restated Credit Agreement (the "First Amendment
to Amended and Restated Credit Agreement") to (i) increase the term credit from
$13,500,000 to $18,500,000, (ii) extend the Term Credit Expiration Date to June
30, 1997, and (iii) make certain other changes, all as set forth in the First
Amendment to Amended and Restated Credit Agreement.

         WHEREAS, PSI desires to sell the stock of InterCon to Ascend
Communications, Inc., a Delaware corporation, pursuant to the terms of a Stock
Acquisition Agreement (the "Sale") and the Bank is willing to consent to the
Sale subject to PSI and Pipeline executing this Agreement and agreeing to be
bound by the terms hereof.

          NOW, THEREFORE, in consideration of the mutual promises contained in
this Agreement, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:

         1. The terms "Borrower" and "Borrowers" as used in the Amended and
Restated Credit Agreement, as amended by the First Amendment to Amended and
Restated Credit Agreement and this Agreement, shall, for all purposes, from and
after the date hereof have the meaning set forth in the first paragraph of this
Agreement, and if at any time there is only a single "Borrower," references to
"Borrowers" shall be deemed to refer only to such single "Borrower"; prior to
the date hereof such terms shall have the meaning ascribed to them in the
Amended and Restated Credit Agreement. All references in the Amended and
Restated Credit Agreement to "Agreement" shall from and after the date hereof
mean the Amended and Restated Credit Agreement as amended by the First Amendment
to Amended and Restated Credit Agreement and this Agreement.

         2. Sections 1.03, 2.01, 4.15, 4.22, 4.23, 4.24, 4.25 and 4.26 of the
Amended and Restated Credit Agreement as amended by the First Amendment to
Amended and Restated Credit Agreement are hereby amended, as of the effective
date of this Agreement, by deleting said Sections in their entirety and
substituting therefore the following:

         Section 1.03.  The Revolving Credit.

         (a) Terms of the Revolving Credit. Subject to the terms and conditions
hereof and provided no Event of Default, or event which with the passage of time
or the giving of notice or both would become an Event of Default, has occurred,
the Borrowers may, jointly and severally, from time to time from the date hereof
up to June 30, 1997 (the "Revolving Credit Maturity Date") borrow and reborrow
from the Bank, and the Bank shall advance funds to the Borrowers (an "Advance"
or the "Advances"); provided that

                  (A) the aggregate of all Advances outstanding at any time
         during the term of the Revolving Credit shall not exceed the lesser at
         such time (the "Availability") of (i) the Maximum Revolving Credit, or
         (ii) an amount equal to the "Borrowing Base," each as defined below;
         and

                  (B) the aggregate of all Advances outstanding at any time
         during the Revolving Credit in favor of PSI shall not exceed the lesser
         at such time (the "PSI Availability") of (i) the Maximum Revolving
         Credit or (ii) an amount equal to the PSI Borrowing Base, each as
         defined below.

         (b) Maximum Revolving Credit and Borrowing Base. The "Maximum Revolving
Credit" at any time shall equal $5,000,000 less the aggregate undrawn face
amount of all L/Cs outstanding at such time.

                                       2


         The Borrowing Base shall be equal from time to time to the sum of the
PSI Borrowing Base.

         The PSI Borrowing Base shall be equal from time to time to 75% of PSI's
Qualified Accounts less the sum of (i) 100% of the maximum outstanding liability
under any L/Cs issued pursuant to Section 1.05 of this Agreement and (ii) (A)
twenty percent (20%) of the aggregate outstanding principal amount of Term
Credit Advances made after November 10, 1995 minus (B) the amount of cash
collateral maintained by PSI at the Bank on terms satisfactory to the Bank.

         "Qualified Accounts" shall mean accounts receivable owed to a Borrower
which (a) arise from the sale of goods or the provision of services by such
Borrower (but only to the extent such goods or services have actually been
delivered or provided to the account debtor), (b) are not outstanding for more
than ninety (90) days after the original invoice date, (c) are due from an
account debtor located in the United States, (d) are subject to a perfected
first priority security interest in favor of the Bank, (e) are not represented
by a note or other negotiable instrument, (e) are not subject to any setoff,
dispute, credit, allowance or adjustment by the account debtor, and (f) have not
been deemed unsatisfactory by the Bank in the exercise of its reasonable
judgment.

         PSI shall furnish to the Bank not later than fifteen (15) days
following the end of each monthly accounting period a Borrowing Base Certificate
in the form of Exhibit 1.03(b) attached hereto, completed and signed by PSI's
chief financial officer. The Borrowing Base shown on such certificate shall be
as of the last day of said monthly accounting period. The Bank shall be under no
obligation to make any further advance if a Borrowing Base Certificate is not
delivered within the specified period.

         In calculating the Borrowing Base hereunder, there shall be excluded
from all Qualified Accounts the full amount of any deposit which an account
debtor may have paid with respect to the goods to which such account receivable
relates.

         (c) Limit on Advances Outstanding. The aggregate Advances outstanding
at any time during any monthly period shall not exceed the lesser of the
Borrowing Base or the Maximum Revolving Credit. The aggregate Advances
outstanding at any time during any monthly period in favor of PSI shall not
exceed the lesser of the PSI Borrowing Base or the Maximum Revolving Credit. If
the aggregate Advances outstanding at any time exceed the amounts set forth in
this Section 1.03(c), then the Borrowers shall forthwith pay such excess, and
the Bank may, without prior notice to the Borrowers, charge the Borrowers'
accounts with the Bank in order to effect such payment.

         (d) The Revolving Credit Note. All amounts owed by the Borrowers with
respect to Advances made by the Bank shall be evidenced by a promissory note in
the principal amount of $5,000,000 in the form attached to this Agreement as
Exhibit 1.03(d) (the "Revolving Credit Note"). The unpaid principal balance of
the Revolving Credit Note may be 

                                       3


voluntarily prepaid in whole or in part at any time without premium or penalty.
Payment of such excess on account of a Borrower may be made by a borrowing by
another Borrower, subject to the limits set forth in this Agreement.

         (e) Interest. Advances made by the Bank shall bear interest prior to
maturity or the occurrence of an Event of Default (computed on the basis of
actual number of days elapsed over a 360-day year) on the unpaid principal
balances outstanding from time to time at a rate per annum equal to the Prime
Rate plus one and one-half percent (1.5%). Interest shall be payable monthly in
arrears on the last day of each month commencing in the month in which the
Revolving Credit Note is issued. After maturity, or after the occurrence of an
Event of Default and until said Event of Default shall have been cured or waived
in writing by the Bank, amounts outstanding under the Revolving Credit Note
shall bear interest at the Prime Rate plus four and one-half percent (4.5%).

         (f) Requests for Advances. Subject to the terms and conditions
contained in this Agreement, each Advance shall be made on the Banking Day on
which the Bank receives notice from PSI, if such notice is received prior to
11:00 a.m. on such Banking Day, and otherwise on the next Banking Day. Each
request for an Advance shall be made to the Bank in writing or by telephone by a
duly authorized representative of PSI, and the Bank may rely upon any telephone
request which it believes is made by such a representative. Each Borrower agrees
and holds the Bank harmless for any action, including the making of Advances
hereunder, or loss or expense, taken or incurred by the Bank in good faith
reliance upon such telephone request. At the time of the initial request for an
Advance made under this Section 1.03, PSI shall have provided the Bank with a
Compliance Certificate (as defined in Section 4.07(a)). Each of the Borrowers
hereby agrees (i) that the Bank shall be entitled to rely upon the most recent
Compliance Certificate in the Bank's possession until it is superseded by
another certificate, and (ii) that each request for an Advance, whether by
telephone or in writing or otherwise, shall constitute a confirmation that the
representations and warranties contained in the most recent Compliance
Certificate then in the Bank's possession continue to be true and correct in all
respects.

         (g) Expiration. The Revolving Credit shall expire on the Revolving
Credit Maturity Date and all then outstanding Advances shall be due and payable
on such date together with all accrued and unpaid interest thereon and any other
amounts then due.

         Section 2.01.  Corporate Existence and Power.

         Each Borrower and Pipeline is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of New York or
Delaware and has full corporate and other power and authority to conduct its
business and own its assets as now conducted and owned. Each Borrower is duly
licensed, qualified and authorized to do business and is in good standing as a
foreign corporation in each jurisdiction where the failure to be licensed,
qualified or authorized to do business as a foreign corporation would have a
material adverse 

                                       4


effect upon its business, properties, assets, prospects, operations or
condition, financial or otherwise.

         Section 4.15.  Loans and Investments.

         Except as set forth on Schedule 4.15, neither the Borrower nor any
Subsidiary will purchase or otherwise acquire or retain any stock or obligations
of, or make any loans or advances to, or investments in, any corporation or
other entity or person, other than:

            (a) obligations of the United States of America, or any agency
thereof, maturing not more than one (1) year from the date of issue thereof, or
mutual funds comprised of the same, provided that the Bank shall acquire a
perfected first-priority security interest in such obligations simultaneously
with such purchase or acquisition;

            (b) certificates of deposit or other deposit obligations maturing
not more than one (1) year from the date of issue thereof issued by any bank
within the United States of America having total combined capital and surplus in
excess of $100,000,000;

            (c) short-term investment grade debt securities;

            (d) by PSI in wholly-owned Subsidiaries, provided that the aggregate
outstanding amount of all such amounts during this Agreement shall not exceed
$22,500,000, excluding (i) any amounts previously advanced to Pipeline, it being
understood that no future amounts shall be advanced to Pipeline without the
prior written consent of the Bank, (ii) any amounts advanced to PSINet Europe
Limited, an Irish corporation, but only to the extent of advances or investments
by The Chatterjee Group in or to PSI or its Subsidiaries for that particular
purpose, and (iii) any amounts owing to PSI by its Subsidiaries as a result of
services rendered by PSI to such Subsidiaries; and

            (e) loans, advances and guarantees to employees of the Borrower and
its Subsidiaries in an aggregate amount for all of the Borrowers and their
Subsidiaries taken together not to exceed $500,000.

         Section 4.22.  Quick Assets to Funded Debt Ratio.

         As of March 31, 1997 and thereafter, the ratio of Quick Assets to
Funded Debt shall at all times equal or exceed 1.25:1.00; provided that if
Consolidated EBITDA (as defined in Section 4.24) of the Borrowers and their
Subsidiaries in any fiscal quarter is equal to or greater than $3,750,000, the
ratio of Quick Assets to Funded Debt shall thereafter equal or exceed 1:00:1.00.

         "Quick Assets" shall mean the sum of all cash, cash equivalents,
accounts receivable, short-term investments (as defined by generally accepted
accounting principles), marketable 

                                       5


securities (as defined by generally accepted accounting principles) of the
Borrowers and their Subsidiaries on a consolidated basis.

         "Funded Debt" shall mean all indebtedness for borrowed money of the
Borrowers and their Subsidiaries, including without limitation, the Revolving
Credit, the Term Credit and Capitalized Leases.

         Section 4.23.     Tangible Net Worth.

         The Tangible Net Worth shall as of the last day of each fiscal quarter
commencing with the fiscal quarter ending June 30, 1996 equal or exceed the sum
of $67,500,000, plus (X) 80% of all positive Net Income earned during each
fiscal quarter commencing with the fiscal quarter ended September 30, 1996, plus
(Y) 50% of the net tangible proceeds received from the sale by PSI of any shares
of its capital stock during each fiscal quarter commencing with the fiscal
quarter ended September 30, 1996.

         "Tangible Net Worth" shall mean an amount determined in accordance with
generally accepted accounting principles equal to the difference between (a) the
Stockholders' Equity of the Borrowers and their Subsidiaries on a Consolidated
basis, minus (b) the total book value of all assets of the Borrowers and their
Subsidiaries on a Consolidated basis which would be treated as intangible
assets.

         "Net Income" shall mean, with respect to any period, the net income (or
net loss) of the Borrowers and their Subsidiaries on a consolidated basis, after
deduction of all expenses, taxes and other proper charges determined in
accordance with generally accepted accounting principles; provided, that any
gain or loss resulting from an investment by the Borrower and their Subsidiaries
in any Affiliate which is not a Subsidiary shall not be included for purposes of
determining Net Income, and provided further that any gain or loss resulting
from any extraordinary or non-recurring item shall not be included for purposes
of determining Net Income.

         "Stockholders' Equity" shall mean an amount determined in accordance
with generally accepted accounting principles equal to the difference between
(a) the assets of the Borrowers and their Subsidiaries on a Consolidated basis
minus (b) the liabilities of the Borrowers and their Subsidiaries on a
Consolidated basis.

         Section 4.24.     Consolidated EBITDA.

         (a) As of the last day of the fiscal quarter ended March 31, 1997, the
Borrowers shall have Consolidated EBITDA of not less than ($7,500,000).

         (b) As of the last day of the fiscal quarter ended June 30, 1997, the
Borrowers shall have Consolidated EBITDA of not less than ($3,000,000).

                                       6


         (c) As of the last day of the fiscal quarter ended September 30, 1997,
the Borrowers shall have Consolidated EBITDA of not less than $2,500,000.

         "Consolidated EBITDA" shall mean Adjusted Net Income plus to the extent
deducted in determining Adjusted Net Income, interest expense of the Borrowers
and their Subsidiaries on a consolidated basis for such period.

         "Adjusted Net Income" shall mean, with respect to any period, the total
of (a) Net Income with respect to such period, plus (b) to the extent deducted
in determining Net Income, taxes, depreciation and amortization expenses of the
Borrowers and their Subsidiaries on a consolidated basis for such period.

         Section 4.25. Leverage Ratio. The ratio of the Borrowers' and their
Subsidiaries' Total Liabilities (excluding any liabilities of the Borrowers
recorded as deferred revenue as a result of the accounting treatment by the
Borrowers of service contract revenues) on a consolidated basis to Tangible Net
Worth shall not exceed 1.25:1.00; provided that if the Consolidated EBITDA of
the Borrowers and their Subsidiaries in any fiscal quarter is equal to or
greater than $3,750,000, the ratio of Total Liabilities to Tangible Net Worth
shall thereafter not exceed 1.50:1.00.

         "Total Liabilities" shall mean all liabilities of the Borrowers and
their Subsidiaries on a consolidated basis that are treated as liabilities under
generally accepted accounting principles, including the Revolving Credit and the
Term Credit.

         Section 4.26. Debt Service Ratio. The ratio of Consolidated EBITDA to
Debt Service shall, as of the last day of each fiscal quarter commencing with
the fiscal quarter ended December 31, 1997 equal or exceed 1.00:1.00.

         "Debt Service" shall mean, with respect to any period, all payments of
principal or interest by the Borrowers and their Subsidiaries on a consolidated
basis on account of indebtedness for borrowed money including, without
limitation, payment of principal and interest on account of the Credit.

         3. Section 4.29 is hereby added to the Amended and Restated Credit
Agreement as follows:

         "Section 4.29.    Stock Acquisition Agreement Relating to InterCon.

                  The Borrowers shall deliver to the Bank executed copies of the
         Stock Acquisition Agreement and all material documents, instruments and
         agreements executed in connection therewith."

         4. The Bank hereby consents to the Sale for all purposes under the
Amended and Restated Credit Agreement, as amended. Simultaneously with the
Closing (as defined under 

                                       7


the Stock Acquisition Agreement), the Bank agrees to execute and deliver to the
Borrower all documents reasonably necessary to release its liens on the assets
of Software and InterCon and to release all obligations of InterCon and Software
to the Bank, including without limitation, all guaranties.

         5. Schedules 2.02 and 2.17 to the Amended and Restated Credit
Agreement, as amended by the First Amendment to Amended and Restated Credit
Agreement, are hereby amended as provided on Schedule I attached hereto
effective upon Closing (as defined in the Stock Acquisition Agreement).

         6. After giving effect to this Agreement, all representations and
warranties made by the Borrowers in the Amended and Restated Credit Agreement
and the Security Documents are true and correct as of the date hereof, except
for those representations which relate to a specific date which are true and
correct as of such date.

         7. The Borrowers represent, on behalf of themselves and each of their
Subsidiaries, that they have performed and complied with all covenants and
agreements required to be performed and complied with by them under the Amended
and Restated Credit Agreement as amended by the First Amendment to Amended and
Restated Credit Agreement and this Agreement and the Security Documents as
amended by the First Amendment to Amended and Restated Credit Agreement and this
Agreement except to the extent performance or compliance has been waived in
writing by the Bank.

         8. Except as amended by the First Amendment to Amended and Restated
Credit Agreement and this Agreement and any other written agreements of the
Bank, all provisions of the Amended and Restated Credit Agreement, the Security
Documents and all other documents referred to therein shall remain in full force
and effect after giving effect to this Agreement.

         9. The amendments set forth in this Agreement shall not be effective,
and the Bank shall not be obligated to amend, modify or alter the Amended and
Restated Credit Agreement unless and until all of the following conditions shall
have been fulfilled or waived by the Bank:

            (a) Closing. The Closing (as defined in the Stock Acquisition
Agreement) shall have taken place and the Borrower shall have received the
consideration provided for therein.

            (b) Fee. The Bank shall have received from the Borrowers a fee of
$50,000 in connection with this Second Amendment to Amended and Restated Credit
Agreement.

         10. This Agreement represents the entire agreement among the parties
thereto relating to the amendment to the Amended and Restated Credit Agreement
effected hereby, and supersedes all prior understandings and agreements among
the parties relating to the subject matter of this amendment to the Amended and
Restated Credit Agreement.

                                       8


         IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.

                                            PSINET INC.

                                            By:   /s/ William L. Schrader
                                                  ------------------------------
                                                  Name:  William L. Schrader
                                                  Title: President & CEO

                                            PSINET PIPELINE NEW YORK, INC.*

                                            By:   /s/ William L. Schrader
                                                  ------------------------------
                                                  Name:  William L. Schrader
                                                  Title: President & CEO

                                            FLEET NATIONAL BANK

                                            By:   /s/ Thomas W. Davies
                                                  ------------------------------
                                                  Name:  Thomas W. Davies
                                                  Title:  Vice President

*PSINet Pipeline New York, Inc. executes this Agreement for the sole purpose of
acknowledging and confirming that the Obligations under the Security Documents
shall be deemed to include any additional Obligations created by this Agreement.


                                       9

EX-11.

                                                                 Exhibit 11.1 
                                 PSINet Inc.
 
                                 
             Calculation of Loss per Share and Weighted Average
                       Shares Used in Calculation (1)
 
                                                                  YEAR ENDED
                                                               DECEMBER 31, 1996
                                                               -----------------
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of year......................        37,914,932
Weighted average shares issued during the year ended December
  31, 1996 (2,198,302 shares)................................         1,463,072
                                                               -----------------
                                                                     39,378,004 
                                                               -----------------
                                                               -----------------
Net loss.....................................................   $   (55,097,000)
                                                               -----------------
                                                               -----------------
Loss per share...............................................   $         (1.40)
                                                               -----------------
                                                               -----------------
 
(1) For a description of loss per share, see Note 1 of the Notes to the
    Consolidated Financial Statements incorporated by reference in Part II, 
    Item 8 of this Form 10-K.
 

EX-11.2

                                                                   Exhibit 11.2
 
                                      PSINet Inc.
 
                   Calculation of Pro Forma Loss per Share and Weighted 
                           Average Shares Used in Calculation (1)


                                                                                YEAR ENDED
                                                                             DECEMBER 31, 1995
                                                                             -----------------
                                                                          
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of year....................................        13,041,266
Shares from conversion of redeemable preferred stock, assuming conversion
  as of beginning of year..................................................        10,042,680
Weighted average shares issued to employees under revenue bonus plan
  (18,300 shares)..........................................................            18,021
Weighted average shares issued for the acquisition of Pipeline (2,690,218
  shares)..................................................................         2,413,723
Weighted average shares issued for the conversion of certain Pipeline
  employee stock options (98,255 shares)...................................            88,157
Weighted average shares issued in connection with initial public offering
  (4,370,000 shares).......................................................         2,828,361
Weighted average shares issued for the acquisition of InterCon (921,612
  shares)..................................................................           496,676
Weighted average shares issued for the acquisition of Software Ventures
  (762,208 shares).........................................................           357,814
Weighted average shares issued for the acquisition of EUnet (42,011
  shares)..................................................................            18,555
Weighted average shares issued in connection with public offering
  (4,000,000 shares issued by the Company).................................            66,667
Weighted average shares issued during the year ended December 31, 1995
  (1,928,382 shares).......................................................           460,947
                                                                             -----------------
                                                                                   29,832,867
                                                                             -----------------
                                                                             -----------------
Net loss...................................................................   $   (53,160,000)
                                                                             -----------------
                                                                             -----------------
Pro forma loss per share (unaudited).......................................   $         (1.78)
                                                                             -----------------
                                                                             -----------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------

 
(1) For a description of pro forma loss per share, see Note 1 of the Notes to
    the Consolidated Financial Statements incorporated by reference in Part II,
    Item 8 of this Form 10-K.
 

EX-11.3

                                                                   Exhibit 11.3
 
                                     PSINet Inc.
 
                 Calculation of Pro Forma Loss per Share and Weighted 
                       Average Shares Used in Calculation (1)
 



                                                         YEAR ENDED
                                                     DECEMBER 31, 1994
                                                     -----------------
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of      
  year............................................    12,309,283
19,803 shares issued from January 1,                 
1994 through March 7, 1994........................        14,117
712,180 shares issued from March 8, 1994             
  through December 31, 1994, subject to              
  SAB 83 using the treasury stock                    
  method..........................................       694,134
Shares from conversion of redeemable                 
  preferred stock, assuming conversion               
  as of beginning of year.........................     6,852,125
Common stock equivalents:                            
Options and warrants to purchase 649,450             
  shares of common stock granted from                
  March 8, 1994 through December 31,                 
  1994, subject to SAB 83 using the                  
  treasury stock method...........................       525,231
                                                     
                                                      20,394,890
                                                      ----------
                                                      ----------
Net loss..........................................   $(5,342,000)
                                                      -----------
                                                      -----------
Pro forma loss per share (unaudited)..............        $(0.26)
                                                      -----------
                                                      -----------
 
- -----------------------------------------------------------------
- -----------------------------------------------------------------


(1) For a description of pro forma loss per share, see Note 1 of the Notes to
    the Consolidated Financial Statements incorporated by reference in Part II, 
    Item 8 of this Form 10-K.
 

EX-13

                                   [CLIPART]

                            A new line has been drawn
                          in corporate communications.
                           The Internet has now become
                   the shortest distance between two points--
                    spanning countries as well as continents.
                          This vast network of networks
                         has emerged as a powerful tool
                     to help companies connect to customers,
                   suppliers, and employees around the world.
                        With Internet services available
                  to the great majority of the world's business
                   communities, PSINet offers the optimal path
                     to cost-effective worldwide networking
                           and enhanced productivity.

                                   [CLIPART]


About the Company

PSINet Inc. (PSINet) was the first company to offer commercial Internet services
and today operates one of the world's largest fast-packet networks. Our 350
network-access locations in the U.S., Canada, Europe, and Japan give PSINet
customers worldwide reach. PSINet's services, from dial-up and dedicated
Internet access to value-added services such as corporate intranets and
electronic commerce, provide the most complete business Internet solutions
available today.

               Selected Consolidated Financial and Operating Data
               (In thousands, except per share and operating data)



                                                                          Year Ended December 31,
                                                      --------------------------------------------------------------
Statement of Operations Data:                           1992         1993         1994         1995          1996
                                                      --------     --------     --------     ---------     ---------
                                                                                                  
Revenue                                               $  6,442     $  8,665     $ 15,214     $  38,722     $  84,352
Other income, net (1)                                     --           --           --            --           5,417
EBITDA (2)                                               1,752         (166)      (1,479)      (27,901)      (28,046)
Income (loss) before income taxes
   and extraordinary item                                  689       (2,159)      (5,342)      (53,160)      (55,256)
Net income (loss)                                          430       (1,913)      (5,342)      (53,160)      (55,097)
Pro forma loss per share (3)                                                   $   (0.26)    $   (1.78)
Loss per share (3)                                                                                         $   (1.40)
Shares used in computing
   pro forma loss per share and loss per share (3)                                20,395        29,832        39,378

End of Period Operating Data:
Number of Points-of-Presence (POPs)                         38           68           82           241           350
Number of corporate accounts                             1,980        2,830        4,220         8,200        17,800




                                                                              December 31,
                                                      --------------------------------------------------------------
Balance Sheet Data:                                     1992         1993         1994         1995          1996
                                                      --------     --------     --------     ---------     ---------
                                                                                                  
Cash and short-term investments                       $    240     $  1,865     $  3,358     $ 102,710     $  57,344
Working capital                                           (680)         136       (1,554)       83,627        23,186
Total assets                                             4,291       13,821       17,055       201,830       177,112
Lines of credit and current portion of
   long-term debt and capital lease obligations            701        2,540        3,369        16,643        26,915
Long-term debt and capital lease obligations,
   less current portion                                    599        3,581        4,397        24,130        26,938
Redeemable common and preferred stock                      773        6,725       13,617          --            --
Shareholders' equity (deficit)                           1,124       (1,427)      (8,283)      143,230        89,783


(1) Represents the consideration received, net of related asset costs and
transfer expenses relating to the sale of the Company's consumer dial-up
Internet access subscribers and related tangible and intangible assets.

(2) EBITDA represents earnings (loss) before depreciation and amortization,
interest income and expense, income tax expense (benefit), extraordinary items
and equity in loss of affiliate and, in 1995, intangible asset write-down.
EBITDA is not determined in accordance with generally accepted accounting
principles, is not indicative of cash used by operating activities and should
not be considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles.

(3) For a description of the computation of pro forma loss per share and loss
per share and shares used in computing pro forma loss per share and loss per
share, see Note 1 of the Notes to Consolidated Financial Statements included in
this Annual Report to Shareholders.


To My Fellow Shareholders

      In 1996, the Internet did more than just capture the imagination of the
global business community; it earned a central role as an indispensable business
tool. The percentage of Web sites devoted to business rose to 50 percent, while
intranets gained favor as a corporate communications tool. The Internet also
took on a growing international dimension as more companies used the Internet to
conduct business around the world.

      PSINet continues to capitalize on these opportunities in order to enhance
shareholder value through three strategic growth objectives: profitably increase
our share of the business market for Internet services; expand PSINet's
international presence; and continue to introduce high-margin, value-added
services.

      PSINet experienced solid growth in its financial results in 1996. Total
revenue and other income more than doubled, increasing 132 percent from $38.7
million in 1995 to $89.8 million in 1996. This resulted, in part, from an
increase in corporate accounts from 8,200 in 1995 to 17,800 in 1996. The net
loss for 1996 was $55.1 million or a loss of $1.40 per share, compared with a
loss of $53.2 million or a loss of $1.78 per share in 1995. The continued loss
in 1996 reflects PSINet's strategy of investing in the expansion of the PSINet
network infrastructure in order to position the Company to compete in the
Internet market domestically and internationally.

      PSINet's balance sheet was healthy at the end of 1996. Cash and short-term
investments were $57.3 million. The Company's debt obligations, used to finance
the expansion of the PSINet network, increased to a total of $51.8 million.

      Achievements beyond revenue growth, account growth, and financial position
also contributed to the excitement of 1996.

      PSINet took definitive steps to ensure we would not be distracted from our
long-standing primary commitment to business. In the second quarter, we exited
the consumer retail business by selling our consumer subscriber base and related
support activities to a regional, consumer-oriented Internet Service Provider
(ISP). Through our new Wholesale group, we carry the traffic of consumer-based
ISPs without incurring the costs of marketing, billing, and customer support for
individual subscribers. Also, in the fourth quarter, we were preparing to sell
our software subsidiary. This sale was finalized in the first quarter of 1997.

      Exiting these businesses freed PSINet to devote substantial resources to
enhance our product development, marketing, and technical support for our
corporate customers. This sharpened business focus paid off by helping PSINet
double the number of its corporate accounts in 1996, by improving the revenue
per corporate customer, and by increasing the corporate retention rate. In fact,
the corporate retention rate rose from 87 percent in 1995 to 94 percent in 1996
and remains a benchmark for the industry. During 1996, we also signed
significant new corporate customers. Today, PSINet serves more than a quarter of
the Fortune 500 companies.

      On the international front, we completely overhauled the U.K. company we
purchased in 1995, so that it is now recognized as a national leader in
commercial-quality Internet services. Our companies in Canada and Japan each
doubled in size and enjoy excellent reputations among their respective business
communities. In September, we announced PSINet Europe and took the first steps
in our plan to build a state-of-the-art pan-European Internet network over the
next four years.


                                       2
                         PSINet Inc. 1996 Annual Report


     Among the most promising elements of the Internet market today are
value-added services. PSINet has always been an industry leader in value-added
services, having pioneered Web hosting, worldwide remote access, and security
services. In 1996, we added three new services to tap this growing market: PSI
IntraNetSM, PSIWeb eCommerceSM, and PSINet InternetPaperSM.

      PSI IntraNet enables companies to build internal virtual networks using
Internet standards to allow cost-effective communications among multiple sites.
With PSIWeb eCommerce, businesses can electronically reach out to customers and
turn the Internet into a vibrant marketplace. Companies can also save time and
money by using PSINet InternetPaper to send faxes efficiently and more
cost-effectively through the Internet.

      In the months ahead, we expect that PSINet's success will be fueled not
only by the burgeoning number of companies connecting to the Internet but also
by the changing expectations of these business customers. Because more
businesses are integrating the Internet into their fundamental business
processes -- transforming the way they deal with customers, suppliers, and
employees -- companies will no longer tolerate low-quality networks and mediocre
support. I believe that businesses will migrate to high-quality, full-service,
value-added Internet providers. As the world's leading independent commercial
Internet provider, PSINet could not be better positioned.

      By carefully executing our three-part growth strategy -- increasing our
share of the business market, expanding internationally, and introducing
additional value-added services -- we intend to achieve profitability by the end
of 1997 or early 1998. Specific elements in our strategic path to profitability
include: increasing network utilization by continuing to increase the number of
business customers; maintaining our outstanding customer retention rate by
providing the highest quality of service in the industry; continuing to develop
effective marketing programs that maintain our growth rate and reduce customer
acquisition costs; and remaining focused on our core commercial Internet access
market as we carefully grow our network presence around the globe.

      As always, I thank our loyal shareholders and talented employees for your
support. With your help, and the leadership of our strengthened management team,
which has added significant expertise in operations, finance, sales, and
marketing, PSINet will continue to earn its reputation as the World's Internet
Company.

Sincerely,

/s/ William L. Schrader

William L. Schrader
Chairman, President, CEO, and Founder

[PHOTO]


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                         PSINet Inc. 1996 Annual Report


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                         PSINet Inc. 1996 Annual Report


The PSINet Network
FOUNDATION FOR THE FUTURE

      Businesses whose operations depend on the performance and availability of
their Internet applications require a well-engineered, "Internet-optimized"
network -- which precisely describes PSINet's key asset.

      Network architecture matters. The sluggishness encountered by many
computer users on the Internet is most often caused not by lack of network
capacity but by poor design and the resulting phenomenon called "packet loss."
Packet loss causes business customers to encounter poor performance for such
critical applications as e-mail, World Wide Web servers, and database access.

      In 1992, some four years ahead of the competition, PSINet designed and
built a network that minimizes packet loss and supports critical business
applications. The difference lies in the architecture of PSINet's backbone
network and the invaluable network-operations experience PSINet has gained
through years of pioneering the Internet.

      PSINet understands, though, that the ultimate value of the network is not
found in its technical building blocks but in what it enables business customers
to accomplish. After all, PSINet's well-engineered network provides corporate
users with more than just dependable e-mail, reliable customer connections to
corporate Web sites, or convenient file transfers. The network is a foundation
on which companies can build compelling competitive advantages. By offering
around-the-clock availability, the network enables them to enhance
mission-critical applications, streamline business processes, and extend their
reach to customers around the world.

INTERNET-OPTIMIZED FOR BETTER RELIABILITY

PSINet employs an elegant, multi-layered switching architecture that was
designed from the ground up to optimize Internet traffic. On the first layer,
the physical layer, PSINet leases dedicated circuits as part of a private
network reserved only for our customers' Internet traffic. On a separate
switching layer, PSINet employs an advanced data transmission technology called
frame relay, which uses high-speed, computerized switches to aid in speeding
Internet traffic through the network.

                        "We are impressed that PSINet has
                     a dedicated security group we can call
                       if we even suspect there might be a
                     problem. And the PSINet infrastructure
                       is so strong--we get clear channel
                       connections to a POP that gives us
                           very reliable performance."

                                 Michael Smith,
                          Systems & Operations Manager,
                          American Medical Management

                   American Medical Management (AMM) provides
           clinical information systems and Internet access solutions
                      to HMOS and large medical practices.


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                         PSINet Inc. 1996 Annual Report


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                                       6
                         PSINet Inc. 1996 Annual Report


      Because the switching topology of the frame relay network is separate from
that of the underlying physical network, PSINet is able to engineer a network
backbone that is simple, reliable, and Internet-friendly. The cleaner network
topology provided by frame relay switching permits PSINet to better manage
patterns of traffic and maintain high packet delivery rates. As a result,
Internet packets do not have to make as many "hops" to get to their
destinations, and packet loss is minimized.

      Network reliability also is enhanced by PSINet's use of multiple redundant
circuits throughout the network to reduce the impact of single points of
failure. Automatic rerouting of traffic sustains service to customers even in
the face of individual circuit failures.

NETWORK SCALABILITY

PSINet's multi-layered switching fabric supports scalability -- the ability to
accommodate a growing number of users without proportionate (and costly)
increases in network equipment. This ability to minimize network costs while
still serving a sharply growing number of customers is the key to keeping PSINet
services affordable and reliable.

      The network has been designed so that it can readily scale up to 2,000
Points-of-Presence (POPs) serving two million customers. PSINet has already
established significant capacity, with 350 network POPs in the U.S., Canada,
Europe, and Japan. Future network expansion will be driven by customer demand.

ENHANCED NETWORK MANAGEMENT

An Internet-optimized network design also means better network management. The
Company's 24-hour-a-day, seven-day-a-week Network Operations Center remotely
monitors the network, performs diagnostics, and checks equipment. The Network
Operations Center is also able to control traffic by remotely monitoring
bandwidth capacity and rerouting traffic when more capacity or different
topologies are needed.

BETTER PERFORMANCE, TODAY AND TOMORROW

The bottom-line benefits for end users of the industry's best-engineered network
are clear. Users experience better application performance and greater
reliability. PSINet's low-latency network is perfectly positioned to support
emerging multimedia and other interactive corporate applications. Thanks to the
flexibility of PSINet's Internet-optimized network, PSINet customers have access
to a network ideally suited to support the growing scope of their business
objectives that rely on the Internet.


  "We recently reviewed [our Internet] resources and re-validated PSINet as our
 vendor of choice [for American Airlines, The SABRE Group, and parent company
  AMR Corp.] based on the level of performance they have achieved, a high level
               of customer satisfaction and service, and pricing."

    Keith Kelly, Manager of Internet and Intranet Technology, The SABRE Group

     AMR Corp., through American Airlines and The SABRE Group, provides air
         transportation, reservation services, and IS solutions for the
                     consumer and business travel markets.


                                       7
                         PSINet Inc. 1996 Annual Report


Our Customers
FORGING LONG-TERM RELATIONSHIPS

PSINet's premier network, comprehensive suite of products and services, and
global reach attract some of the world's most selective customers. It is
PSINet's singular approach to customer service, though, that makes them want to
stay with PSINet -- year after year. With the overriding objective of meeting
and exceeding customer expectations, PSINet in 1996 made some significant
enhancements to customer service.

      During 1996, PSINet streamlined its customer service organization by
integrating a wide range of support functions into a unified team. This team
provides a single point of reference for such diverse issues as circuit ordering
and installation, network integration, customer billing, and more. With just one
call to Customer Administration, customers get quick resolution to a wide range
of service issues.

      Behind this streamlined organization stand the industry's most seasoned
Internet experts. Customers can rely on an extraordinary depth of support
personnel in a company with more than eight years of experience in
Internet-specific customer service.

      PSINet's enhanced support extends well beyond the point of customer
interface. In 1996, PSINet began to upgrade its back-office information
infrastructure, which gives us the information necessary to quickly address our
customers' needs. The continuous improvement of this infrastructure will allow
better access to customer information such as billing, account status, and other
inquiries.

[PHOTO]

      PSINet's lasting commitment to customer service is reflected in admirable
customer retention rates. In 1996, PSINet customer retention increased to 94
percent, compared to 87 percent in 1995. This retention level is unmatched in an
industry characterized by shifting customer allegiances. In 1997, PSINet will
build on this loyalty by continuing to enhance its back-office infrastructure,
train customer service personnel, and streamline incoming call handling. PSINet
recognizes that, while its quality Internet products and services may attract
customers, only highly responsive and knowledgeable customer service will keep
them as valued, long-term customers.


                  "I would recommend PSINet to anyone based on
                  their service and technical support alone. I
                  have been extremely happy with their level of
             responsiveness and their proactive technical support."

                                Nataraj Shanmugh,
                        Senior Software Manager, SkyTel

       SkyTel is a leading provider of one-way and two-way paging systems
                     for the consumer and business markets.


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                         PSINet Inc. 1996 Annual Report


The PSINet Portfolio
INNOVATION AT WORK

PSINet offers the industry's broadest range of products and services designed to
help businesses leverage the Internet for powerful competitive advantage.
Industry observers have taken notice; Network Computing magazine recognized
PSINet as the "Best Internet Access Provider" in 1996. Our portfolio of
industry-leading Internet products and services encompasses Internet access as
well as value-added services.

LAN-On-Demand
Businesses just starting out on the Internet can cost-effectively connect to the
Internet via a dial-up connection. PSINet's LAN-Dial(R) offers an entry-level
Internet solution that provides access to our backbone network via ordinary
telephone lines. Another PSINet service, LAN-ISDN, provides dial-up access
through digital ISDN lines at speeds four times those of today's commonly used
modems. 

InterRamp(R) 
Today's work force is no longer confined to four office walls. InterRamp is a
remote access service that enables mobile personnel to access their business
computing systems and resources using the Internet via any of PSINet's 350 POPs
worldwide. Wherever employees work, InterRamp offers full Internet access,
flat-rate pricing, and a special Account Management System that allows MIS
administrators to remotely control access and review usage statistics.

[PHOTO]

InterFrame(R)
Our flagship service provides companies of all sizes full-time, dedicated
Internet connections, along with the traffic- management advantages of frame
relay technology. In addition to a range of access speeds, from 56 Kbps to very
high-speed 3 Mbps, InterFrame offers comprehensive network security and a unique
ability to ensure that bandwidth is always available for priority business
applications. Value-added options such as turnkey on-site installation and
maintenance help make InterFrame the industry's most versatile and comprehensive
Internet access service.

   "We could not have achieved our current sales levels without the Internet.
              Our PSINet-run Web site and the extended market reach
         it has given us has also enabled us to reduce overhead costs."

                      Marilyn Keys, Sales Manager, KP Group
 KP Group is an international distributor of collectible toys and action 
       figures, using its Web site to promote and sell merchandise around
                                   the world.


                                       10
                         PSINet Inc. 1996 Annual Report


InterMAN(R)
In many large cities, local telecommunications companies operate metropolitan
area networks (MANs), high-speed fiber-optic networks that connect to metro-area
business districts. In many of these cities, PSINet has connected its network to
the MANS to provide local customers a high- speed Internet access service. This
service is ideal for companies needing cost-effective, high-speed access,
particularly if many of the interactions are with suppliers or customers
connected to the same MAN. InterMAN connection speeds range from 1.5 Mbps to 45
Mbps.

PSI IntraNet(R)
Combining the security and control of a private network with cost-effective
Internet-compatible connectivity, PSI IntraNet integrates an organization's
multiple sites -- even when those sites are located around the world -- with IP
connectivity ranging from 56 Kbps to 2 Mbps. PSI IntraNet offers internal
networks isolation from other Internet traffic, along with turnkey configuration
and equipment-management support.

PSINet Security Services
The growing mission-critical nature of corporate Internet traffic demands
rock-solid protection from unauthorized access. PSINet Security Services Inc.
delivers a range of managed security services backed by the expertise of our
Security Planning and Response Team. Our RouteWallersm service provides
cost-effective, managed perimeter defense with sophisticated remote user
authentication. SecureEnterprisesm is our managed service designed to protect
the enterprise with a full-featured, application-layer firewall. 

PSIWeb(R)
Web hosting and electronic commerce services provided by our subsidiary, PSINet
Publishing Corporation, permit companies to market themselves and their products
on the Internet without having to invest in servers and extra staff. Reliable
1.5 Mbps to 45 Mbps connectivity enables companies to maintain their Web sites
on servers located inside the advanced PSINet backbone. We also help customers
design and set up Web sites, provide statistics on Web-site "hits," and offer
dynamic publishing options.

PSIWeb eCommerce(sm)
Our PSIWeb eCommerce service provides the building blocks to create and manage
"Virtual Storefronts" and gives shoppers the ability to make secure purchases
using "electronic wallets." This service integrates a secure payment system to
process transactions with virtual store technology to facilitate a seamless
shopping experience.

PSINet InternetPaper(sm)
Since a significant portion of international telecommunications traffic consists
of fax transmissions, companies are looking for ways to better manage fax costs.
PSINet InternetPaper supports hard-copy distribution of electronic documents
from desktop PCs to any fax machine in the world. This service offers
centralized management of document distribution, significantly reducing
transmission costs.

Support Services
All PSINet services are backed by our customer service and support teams.
Customers have 24-hour-a-day, seven-day-a-week access to operations support from
PSINet's Network Information and Support Center, and our Customer Support Group
provides support for issues such as telecommunications, e-mail, installation, IP
connectivity, and domain name services.


                                       11
                         PSINet Inc. 1996 Annual Report


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                                       12
                         PSINet Inc. 1996 Annual Report


Global Expansion
A WORLD OF OPPORTUNITY

Highly favorable economic, technical, and regulatory developments around the
world highlight the importance of PSINet's ongoing international expansion. With
a growing presence in North America, Asia, and Europe, PSINet's goal is to
deliver to these regions a broad range of business applications, a superior
network, and responsive customer support.

THE INTERNET UNSHACKLED

The time is right for PSINet's global expansion. Until recently, relatively low
computer penetration globally, coupled with the resistance of telephone
monopolies, had inhibited the worldwide expansion of the Internet. One by one,
these hurdles are disappearing. First, the penetration of personal computers
into international workplaces is accelerating. In Europe alone the use of PCs in
the work place is expected to more than double by the year 2000.

      Regulatory barriers are also rapidly collapsing. By 1998, countries in the
European Union are slated to open their telecommunications markets to
competition, and Asian countries including Japan are becoming increasingly
deregulated. Competition is vital to the globalization of the Internet because
it spurs network infrastructure development by lowering the costs to both ISPs
and customers.

[PHOTO]

      The unshackled Internet is extending its reach into every corner of the
world. Especially promising are the opportunities in Europe and Asia. Europe,
with more than a quarter-million Internet subscribers, is adding business
subscribers at an annual rate of nearly 200 percent. Asia, which boasts more
than half the world's population and eight out of 10 of the world's
fastest-growing companies, is also seeing tremendous Internet growth.

PSINet'S GLOBAL INITIATIVE

In 1996, PSINet announced plans to
significantly expand its international presence, including an ambitious
expansion of the company's European "footprint." Over the next four years,
PSINet Europe will build an Internet backbone that will eventually be available
to three-quarters of European businesses. Adding to our current network
locations in Brussels, Frankfurt, and cities throughout the U.K., PSINet will
expand its international infrastructure and 

                        "We needed to be able to meet the
                        international market demands on a
                       24-hour basis. As we ventured into
                     this new technology, we found PSINet to
                     be very helpful in getting us started.
                         PSINet continues to support us
                         by providing on-going technical
                       guidance and information about new
                             options and services."

                         Lyn Morgan, Marketing Manager,
                              Austin International

      Austin International distributes electrical utility equipment such as
      transformers, meters, and capacitors to utility companies worldwide.


                                       13
                         PSINet Inc. 1996 Annual Report


network POPS in 1997 in key cities such as Berlin, Madrid, Milan, Munich,
Rome, and Stockholm. By establishing a significant early presence in the
emerging European market, PSINet will be well-positioned to compete.

      Beginning in 1997, when these additional network locations become
operational, European companies will have access to the same advanced network
and value-added services PSINet's current customers already enjoy. They will
receive one-stop ordering, consolidated in-currency billing, and centralized
network monitoring, all provided by a PSINet Europe operation in their home
country.

      As PSINet worked to establish these new ventures in 1996, the Company also
enjoyed significant growth in its existing subsidiaries. The overhaul of PSINet
UK's infrastructure helped PSINet win some of the world's leading high-tech and
blue-chip customers. Headquartered in Cambridge, England, PSINet UK operates 81
network POPs and offers local-call access to 100 percent of businesses in
England, Northern Ireland, Scotland, and Wales. In Canada, PSINet Limited grew
in seven months from a start-up company to Canada's third-largest corporate
Internet Service Provider, with 15 POPs available to at least 70 percent of
Canadian businesses. In Japan, where PSINet's subsidiary has operated for more
than two years, the corporate subscriber base grew steadily. With local access
available to Japan's three largest metro areas and 90 percent of all Japanese
businesses, PSINet Japan is now one of the country's top ten ISPs.

BEYOND BORDERS

PSINet has an integrated strategy to establish a global presence, and the
results are manifest. By the end of 1996, nearly one-third of PSINet's network
POPs were located outside the United States.

      The globalization of PSINet will continue as the Company's international
expansion takes shape in the months ahead. By the year 2000, about half of
PSINet's revenues and half of its corporate customers will likely come from
outside the United States. The Internet is now a world- wide phenomenon, and
PSINet is a worldwide solution.

A LINE ON THE FUTURE

The Internet is driven by business. What was once thought of by many as
primarily a technical curiosity or a personal enrichment tool is now penetrating
deeply into the fundamental, daily processes of companies. The Internet will, in
the future, be driven by business applications, and its scope will extend into
every corner of the world. It will be as indispensable to running a business as
a telephone or an accounting ledger.

      Whom should companies trust to provide access to this remarkable and
essential business tool? They should choose an Internet Service Provider that
achieves the perfect balance between visionary thinking and a practical record
of achievement -- a company with a superior network, a global presence, and a
dedication to its customers.

      That is why we say that the shortest distance between two points is an
electronic line called the Internet, and the best network on which to travel
this global path is PSINet. As the first company to introduce the Internet to
the business world, PSINet is dedicated to keeping our customers well-connected
to the future of global networking.


                                       14
                         PSINet Inc. 1996 Annual Report


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                         PSINet Inc. 1996 Annual Report

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                                       16
                         PSINet Inc. 1996 Annual Report


Financial
Review

                                                                            Page

Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................................  18

Report of Independent Accountants ..........................................  24

Consolidated Balance Sheets as of December 31, 1995 and 1996 ...............  25

Consolidated Statements of Operations for Each of the Three Years
     Ended December 31, 1996 ...............................................  26

Consolidated Statements of Changes in Shareholders'
     Equity (Deficit) for Each of the Three Years Ended December 31, 1996 ..  27

Consolidated Statements of Cash Flows for Each of the Three Years
     Ended December 31, 1996 ...............................................  28

Notes to Consolidated Financial Statements .................................  29


                                       17
                         PSINet Inc. 1996 Annual Report


Managment's Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements. This discussion includes certain
forward-looking statements. Actual results could differ materially from the
forward-looking statements as a result of a number of factors. For a discussion
of certain factors that could cause actual results to differ materially from the
forward-looking statements, see "Risk Factors" set forth in Item 1 to the
Company's Annual Report on Form 10-K and the Company's periodic reports filed
with the Securities and Exchange Commission.

The Company provides Internet access, services and products throughout the
United States and internationally. The Company offers a broad spectrum of
Internet access services to corporate customers ranging from dial-up services to
continuous access services using dedicated high-speed telephone circuits, Web
site design and hosting services, training and consulting services, Internet
access security services and client software products.

At December 31, 1996, the Company served approximately 17,800 corporate
customers including 22 consumer-oriented Internet service providers ("ISPs")
through approximately 350 network local access points called Points-of-Presence
or "POPs."

In mid-1996, the Company responded to market pressures in the consumer dial-up
Internet access business and altered its strategy to include providing wholesale
access services to consumer-oriented providers of Internet access services in
the United States, rather than providing the consumer access services directly.
Pursuant to network access agreements with other ISPs, the Company provides them
Internet connection services which allow their subscribers to connect to the
Internet through PSINet's network POPs. The agreements call for the other ISPs
to pay specified fees to PSINet for each subscriber using the PSINet network.
The Company currently does not anticipate that it will incur significant capital
expenditures in order to service its existing wholesale customers.

In connection with the introduction of its new consumer wholesale strategy, as
indicated above, the Company restructured its operations and eliminated certain
positions relating to these services. No significant restructuring charges
resulted from this new strategy.

[PHOTO]

To further refine the Company's focus on corporate Internet services, in early
1997, the Company sold its software subsidiary, InterCon Systems Corporation
("InterCon"),to Ascend Communications, Inc. ("Ascend") for $12 million in cash.
The Company also received $8.5 million in cash from Ascend as repayment of
intercompany debt owed by InterCon to the Company. Revenue and expenses of its
software subsidiary, included in the Company's consolidated statements of
operations, were $5.0 million and $21.3 million, respectively for 1995 and $4.8
million and $17.0 million, respectively for 1996.

Since the commencement of the Company's operations in 1989, the Company has
undertaken a program of developing and expanding its network. In connection with
this development and expansion, the Company has made significant investments in
telecommunications circuits and equipment. These investments generally are made
in advance of anticipated customer growth and resulting revenue. The Company
also has increased its sales and marketing, customer support, network operations
and field services commitments in anticipation of the expansion of its customer
base.

These expansion efforts have caused the Company to experience increases in
expenses from time to time, both in absolute terms and as a percentage of
revenue, in anticipation of potential future growth in the Company's customer
base. The nature and amount of these expenses may fluctuate over time as the
Company shifts its focus from expanding its network to refining and enhancing
its existing network.


                                       18
                         PSINet Inc. 1996 Annual Report


1996 as Compared to 1995

Results of Operations
Revenue. Revenue is derived from the sale of Internet access and related
services to businesses and individuals and from the sale of connectivity
software products. Revenue increased by 117.8% from approximately $38.7 million
in 1995 to approximately $84.4 million in 1996. The increase in revenue in 1996
compared to 1995 resulted principally from greater sales of Internet services to
businesses. The Company believes this increase was attributable to a number of
factors including: an increase in the number of subscribers facilitated by an
increase in the number of POPs in operation; an expansion of the Company's sales
force; and greater public awareness and acceptance of the Internet.

The Company's corporate subscriber base increased by approximately 117.1% from
approximately 8,200 corporate customers at December 31, 1995 to approximately
17,800 corporate customers including 22 consumer-oriented ISPs at December 31,
1996. The Company's network infrastructure increased from approximately 240 POPs
at December 31, 1995 to approximately 350 POPs at December 31, 1996.

Other Income, Net. Other income, net consists of the consideration received, net
of related asset costs and transfer expenses relating to the transfer of
substantially all of the Company's individual consumer subscribers and certain
related tangible and intangible assets, in connection with the implementation of
the Company's consumer wholesale strategy, during the second and third quarters
of 1996. Other income, net was approximately $5.4 million for 1996.

Data Communications and Operations. Data communications and operations expenses
consist primarily of leased long distance circuit costs, local loop costs,
expenses associated with network operations, customer support and field service
functions and software operations expenses. Data communications and operations
expenses were approximately $32.1 million (83.0% of revenue) and approximately
$70.1 million (83.1% of revenue) during 1995 and 1996, respectively. The $38.0
million increase in 1996 in data communications and operations expenses as
compared to the same period in 1995 related principally to increases in (i)
costs associated with providing dedicated circuits to the Company's InterFrame
and InterMan subscribers and (ii) circuit costs relating to the Company's new
POPs deployed in late 1995 and early 1996. The increase also was due, to a
lesser extent, to an increase in personnel costs resulting from the expansion of
the Company's network operations, customer support and field service staff
concentrated in late 1995 and early 1996. The number of network operations,
customer support and field service personnel employed by the Company at December
31, 1996 was lower than the number of such personnel employed at December 31,
1995 due to the transfer of approximately 75 employees to another ISP in
connection with the implementation of the Company's consumer wholesale strategy.
Circuit costs relating to the Company's new POPs generally are incurred by the
Company in advance of anticipated expansion in the Company's customer base.
Although the Company expects that data communications and operations expenses
will continue to increase as the Company's customer base continues to grow, it
anticipates that such expenses will decrease as a percentage of revenue.

Sales and Marketing. Sales and marketing expenses consist primarily of sales and
marketing personnel costs, advertising costs, fulfillment and distribution costs
and related occupancy costs. Sales and marketing expenses increased from
approximately $23.9 million (61.8% of revenue) during 1995 to approximately
$27.1 million (32.1% of revenue) during 1996. The $3.2 million in-crease in 1996
resulted principally from a $2.0 million increase in sales and marketing
activity relating to the Company's subsidiaries in Canada and the U.K. All
advertising and marketing costs are expensed in the period incurred. The Company
expects that, as a result of the implementation of its consumer wholesale
strategy and its continued efforts to focus on increasing its customer base, its
sales and marketing expenses will decrease as a percentage of revenue over time.

General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for executive, financial, legal, and
administrative personnel. General and administrative expenses were approximately
$10.6 million (27.3% of revenue) during 1995 and approximately $20.6 million
(24.5% of revenue) during 1996. The $10.0 million increase in 1996 principally
relates to increased general and administrative staff and activity over 1995.
The Company may from time to time adjust its general and administrative function
in response to current business developments.


                                       19
                         PSINet Inc. 1996 Annual Report


Depreciation and Amortization. Depreciation and amortization costs were
approximately $14.8 million (38.2% of revenue) during 1995 and approximately
$28.0 million (33.2% of revenue) during 1996. A significant portion of this
$13.2 million increase relates to POP expansion and existing POP equipment
upgrades as well as facility expansion required as a result of additional hiring
in sales, marketing and administration in 1995 and early 1996. Additionally, a
full year of amortization on certain intangible assets, recorded in connection
with acquisitions completed in 1995, contributed to this increase. The Company
anticipates that, based upon its present business plan for its existing
operations, its depreciation and amortization expense will not change materially
as compared to 1996 despite the decrease due to the transfer of certain tangible
and intangible assets, in connection with the implementation of the Company's
consumer wholesale strategy, in the second and third quarters of 1996 and the
sale of its software operations in the first quarter of 1997. The Company
anticipates that this decrease will be offset by increases in depreciation as
the Company continues to incur capital expenditures associated with network
infrastructure enhancements.

Interest Expense. Interest expense increased from approximately $2.0 million in
1995 to approximately $5.0 million in 1996. The increase in interest expense in
1996 was principally due to increased borrowings and capital lease obligations
incurred by the Company to finance network expansion and to fund working capital
requirements. The Company may incur increased borrowings and capital lease
obligations in the near term in connection with its network enhancements which
would impact the amount of the Company's interest expense.

Interest Income. Interest income increased from approximately $1.6 million in
1995 to approximately $3.8 million in 1996. The increase in interest income in
1996 was principally due to the investment of proceeds from the Company's public
offering in December 1995. The remaining proceeds available are currently
invested in short-term, investment grade, interest bearing securities.

Other income. Other income of approximately $2.9 million in 1996 relates to the
recognition of realized gains on equity securities which were sold by the
Company.

Net Loss. As a result of the factors discussed above, the Company's net loss was
approximately $53.2 million and $55.1 million for 1995 and 1996, respectively.

1995 Compared to 1994

Results of Operations
Revenue. Revenue during these periods was derived from the sale of Internet
access and related services to organizations and individuals and, as a result of
acquisitions of Internet software companies in 1995, from the sale of
connectivity software products. Revenue increased by 154.5% from approximately
$15.2 million in 1994 to approximately $38.7 million in 1995. Prior to the
Company's acquisitions of the Internet software companies in 1995, the Company
did not recognize any material revenue from the sale of connectivity software
products. Revenue attributable to the sale of software was $5.0 million, or
12.8% of revenue during 1995. The increase in Internet access revenue for 1995
resulted principally from greater sales of Internet services to organizations
and individuals that the Company believes were facilitated by a number of
factors including: an increase in the number of subscribers driven by an
increase during 1995 in the number of POPs in operation; an expansion of the
Company's sales force during 1995; the introduction of the Company's InterRamp
service to individuals in June 1994; the Company's acquisition of a
consumer-oriented ISP during February 1995; and greater public awareness and
acceptance of the Internet. The Company's corporate customer base increased by
94.3% from approximately 4,220 corporate customers at December 31, 1994 to
approximately 8,200 corporate customers at December 31, 1995 and its individual
subscriber base increased from approximately 4,910 individual subscribers at
December 31, 1994 to approximately 75,000 individual subscribers at December 31,
1995. The Company's network infrastructure increased from approximately 80 POPs
at December 31, 1994 to approximately 240 POPs at December 31, 1995.

Sales generated by NYSERNet, Inc. ("NYSERNet"), which historically marketed
PSINet services to educational institutions, accounted for approximately $2.1
million and $0.7 million of the Company's revenue during 1994 and 1995,
respectively. The Company terminated arrangements with NYSERNet as of December
31, 1995.

Data Communications and Operations. Data communications and operations expenses
during these periods consisted primarily of leased long distance circuit costs,
local loop costs, and expenses associated with network operations, customer
support and field service functions and software operations expenses. Data
communications and operations expenses were approximately $9.5 million (62.4% of
revenue) and approximately $32.1 million (83.0% of revenue) during 


                                       20
                         PSINet Inc. 1996 Annual Report


1994 and 1995, respectively. The $22.6 million increase for 1995 in data
communications and operations expenses as compared to 1994 related principally
to increases in (i) personnel expenses resulting from an increase in the
Company's network operations, customer support and field service staff from 68
persons at December 31, 1994 to 318 persons at December 31, 1995, (ii) expenses
associated with providing dedicated circuits to the Company's InterFrame and
InterMan subscribers and (iii) circuit costs relating to the Company's new POPs,
opened during 1995. Software operations expenses during these periods
consistedprimarily of materials, fulfillment and distribution costs and other
personnel costs related to the research and development of Internet software
applications. Software expenses, included in data communications and operations
expenses, were $2.5 million during 1995. The Company began to recognize software
expenses as a result of the Company's acquisitions of its Internet software
subsidiaries during 1995; therefore, there are no comparative numbers for 1994.

Sales and Marketing. Sales and marketing expenses during these periods consisted
primarily of sales and marketing personnel costs, advertising costs, fulfillment
and distribution costs and related occupancy costs. Sales and marketing expenses
increased from approximately $3.6 million (23.7% of revenue) during 1994 to
approximately $23.9 million (61.8% of revenue) during 1995. The $20.3 million
increase for 1995 resulted principally from the increase in the Company's sales
and marketing staff from 40 persons at December 31, 1994 to 174 persons at
December 31, 1995 and a significant increase in advertising targeted toward
corporate customers for the InterFrame and LAN On-Demand services and toward
individual customers for the InterRamp and Pipeline services.

General and Administrative. General and administrative expenses during these
periods consisted primarily of salaries and occupancy costs for executive,
financial, legal, and administrative personnel. General and administrative
expenses were approximately $3.6 million (23.7% of revenue) during 1994 and
approximately $10.6 million (27.3% of revenue) during 1995. The increase in
these costs for 1995 resulted primarily from an increase in the Company's
general and administrative staff from 44 persons at December 31, 1994 to 125
persons at December 31, 1995.

Intangible Asset Write-Down. In December 1995, a pretax charge of $9.9 million
was recorded related to the permanent impairment of certain intangible assets
which resulted from the Company's plan, adopted in the first quarter of 1996, to
merge the operations of its Internet software subsidiaries. This charge, which
had no immediate cash effect, recognized the permanent impairment in the value
of certain intangibles including tradenames, a non-compete agreement, certain
software costs and goodwill.

Depreciation and Amortization. Depreciation and amortization costs were
approximately $3.2 million (20.9% of revenue) during 1994 and approximately
$14.8 million (38.2% of revenue) during 1995. A significant portion of this
increase (approximately $7.7 million for 1995) related to the amortization of
certain intangible assets recorded in connection with acquisitions in 1995.
Additionally, POP expansion and existing POP equipment upgrades as well as
facility expansion required as a result of additional hiring in sales, marketing
and administration contributed to this increase.

Interest Expense. Interest expense increased from approximately $700,000 during
1994 to approximately $2.0 million during 1995. The increase in interest expense
for 1995 was principally due to increased borrowings and capital lease
obligations incurred by the Company to finance network expansion, related sales
and marketing, customer support, network operations and field service staff
expansion and to fund working capital requirements.

Interest Income. Interest income increased from approximately $86,000 during
1994 to approximately $1.6 million during 1995. The increase in interest income
for 1995 was principally due to the investment of proceeds from the Company's
sale of equity securities in 1995.

Net Loss. Net loss was approximately $5.3 million and $53.2 million in 1994 and
1995, respectively. These losses reflected PSINet's strategy of early investment
in expanding the PSINet network and the administrative and operational
infrastructure designed to position the Company to compete in the Internet
market domestically and internationally. The Company's net loss in 1995 included
a pretax charge of $9.9 million related to the permanent impairment of certain
intangible assets which resulted from the Company's plan, adopted in the first
quarter of 1996, to merge the operations and products of its Internet software
subsidiaries.


                                       21
                         PSINet Inc. 1996 Annual Report


Quarterly Results
The following tables set forth certain unaudited quarterly financial data, and
such data expressed as a percentage of revenue, for the eight quarters ended
December 31, 1996. In the opinion of management, the unaudited information set
forth has been prepared on the same basis as the audited information and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth herein. The operating
results for any quarter are not necessarily indicative of results for any future
period.



                                                               (In thousands, except per share amounts)
                                                                            Quarter Ended
                                     ------------------------------------------------------------------------------------------
                                                        1995                                             1996
                                     -----------------------------------------        -----------------------------------------
                                      Mar 31     June 30    Sep 30     Dec 31          Mar 31     June 30    Sep 30     Dec 31
                                     --------   --------   --------   --------        --------   --------   --------   --------
                                                                                                    
Revenue ...........................  $  5,887   $  7,703   $ 11,115   $ 14,017        $ 17,181   $ 20,219   $ 24,147   $ 22,804
Other income, net .................        --         --         --         --              --      2,400      3,017         --
                                     --------   --------   --------   --------        --------   --------   --------   --------
                                        5,887      7,703     11,115     14,017          17,181     22,619     27,164     22,804
                                   
Operating costs and expenses:      
   Data communications and         
      operations ..................     4,303      6,732      9,379     11,710          13,942     16,529     19,698     19,933
   Sales and marketing ............     1,840      3,526      7,093     11,471           7,844      7,021      6,000      6,199
   General and administrative .....     1,181      2,401      2,799      4,188           5,475      4,228      5,309      5,636
   Intangible asset write-down ....        --         --         --      9,938              --         --         --         --
   Depreciation and amortization...     1,666      2,162      4,899      6,051           6,182      7,026      8,377      6,450
                                     --------   --------   --------   --------        --------   --------   --------   --------
      Total operating costs        
      and expenses ................     8,990     14,821     24,170     43,358          33,443     34,804     39,384     38,218
                                     --------   --------   --------   --------        --------   --------   --------   --------
Loss from operations ..............    (3,103)    (7,118)   (13,055)   (29,341)        (16,262)   (12,185)   (12,220)   (15,414)
                                   
Interest expense ..................      (254)      (378)      (484)      (848)           (857)    (1,386)    (1,411)    (1,371)
Interest income ...................        89        499        549        488           1,224        943      1,179        448
Other income ......................      --         --         --         --             1,068      1,776         19       --
Equity in loss of affiliate .......       (12)       (39)       (60)       (93)           (100)      (107)      (100)      (500)
                                     --------   --------   --------   --------        --------   --------   --------   --------
                                   
Loss before income taxes ..........    (3,280)    (7,036)   (13,050)   (29,794)        (14,927)   (10,959)   (12,533)   (16,837)
Income tax (benefit) expense ......       (65)        65       --         --               (39)       (40)       (40)       (40)
                                     --------   --------   --------   --------        --------   --------   --------   --------
Net loss ..........................  $ (3,215)  $ (7,101)  $(13,050)  $(29,794)       $(14,888)  $(10,919)  $(12,493)  $(16,797)
                                     ========   ========   ========   ========        ========   ========   ========   ========
Pro forma loss per share (1) ......  $  (0.12)  $  (0.23)
                                     ========   ========
Loss per share (1) ................                        $  (0.40)  $  (0.89)       $  (0.39)  $  (0.28)  $  (0.31)  $  (0.42)
                                                           ========   ========        ========   ========   ========   ========
Shares used in computing           
   pro forma loss per share        
   and loss per share .............    26,857     30,341     32,328     33,466          38,178     39,379     39,888     40,085
                                     ========   ========   ========   ========        ========   ========   ========   ========


(1) Since there are changes in the weighted average number of shares outstanding
each quarter, the sum of the pro forma loss per share and the loss per share by
quarter may not equal the pro forma loss per share for 1995 and loss per share
for 1996.

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



                                                                                   Quarter Ended
                                                ----------------------------------------------------------------------------------
                                                                  1995                                       1996
                                                --------------------------------------      --------------------------------------
                                                Mar 31    June 30     Sep 30     Dec 31     Mar 31    June 30     Sep 30     Dec 31
                                                -----      -----      -----      -----      -----      -----      -----      -----
                                                                                                        
Revenue ....................................    100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%
Other income, net ..........................     --         --         --         --         --         11.8       12.5       --
                                                -----      -----      -----      -----      -----      -----      -----      -----
                                                100.0      100.0      100.0      100.0      100.0      111.8      112.5      100.0

Operating costs and expenses:
   Data communications and
      operations ...........................     73.1       87.4       84.4       83.5       81.1       81.7       81.6       87.4
   Sales and marketing .....................     31.2       45.8       63.8       81.8       45.7       34.7       24.8       27.2
   General and administrative ..............     20.1       31.2       25.2       29.9       31.9       20.9       22.0       24.7
   Intangible asset write-down .............     --         --         --         70.9       --         --         --         --
   Depreciation and amortization ...........     28.3       28.0       44.1       43.2       36.0       34.8       34.7       28.3
                                                -----      -----      -----      -----      -----      -----      -----      -----
      Total operating costs
      and expenses .........................    152.7      192.4      217.5      309.3      194.7      172.1      163.1      167.6
                                                -----      -----      -----      -----      -----      -----      -----      -----
Loss from operations .......................    (52.7)     (92.4)    (117.5)    (209.3)    (94.7)      (60.3)     (50.6)     (67.6)

Interest expense ...........................     (4.3)      (4.9)      (4.3)      (6.0)      (5.0)      (6.9)      (5.8)      (6.0)
Interest income ............................      1.5        6.5        4.9        3.5        7.1        4.7        4.9        2.0
Other income ...............................     --         --         --         --          6.2        8.8        0.1       --
Equity in loss of affiliate ................     (0.2)      (0.5)      (0.5)      (0.7)      (0.5)      (0.5)      (0.5)      (2.2)
                                                -----      -----      -----      -----      -----      -----      -----      -----

Loss before income taxes ...................    (55.7)     (91.3)    (117.4)    (212.5)     (86.9)     (54.2)     (51.9)     (73.8)
Income tax (benefit) expense ...............     (1.1)       0.9       --         --         (0.2)      (0.2)      (0.2)      (0.2)
                                                -----      -----      -----      -----      -----      -----      -----      -----
Net loss ...................................    (54.6)%    (92.2)%   (117.4)%   (212.5)%    (86.7)%    (54.0)%    (51.7)%    (73.6)%
                                                =====      =====      =====      =====      =====      =====      =====      =====



                                       22
                         PSINet Inc. 1996 Annual Report


The Company's quarterly operating results have fluctuated and will continue to
fluctuate from period to period depending upon factors such as the success of
the Company's efforts to expand its customer base, changes in, and the timing of
expenses relating to, the refinement and enhancement of the Company's network
and the development of new services and sales and marketing and changes in
pricing policies by the Company or its competitors.

In view of the significant historical growth of the Company's operations, the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance and that the
Company may experience significant period-to-period fluctuations in operating
results in the future. The Company expects to focus in the near term on building
and increasing its customer base, which may require it to increase its expenses
for personnel, marketing, network infrastructure and the development of new
services from time to time.

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

Cash flow used in operating activities was approximately $1.1 million, $30.1
million and $32.5 million for 1994, 1995 and 1996, respectively. Cash flow used
in operating activities can vary significantly from period to period depending
upon the timing of operating cash receipts and payments, especially accounts
receivable, prepaid expenses and other assets, and accounts payable and accrued
liabilities.

Cash flow used in investing activities for 1994, 1995 and 1996 was approximately
$1.9 million, $22.0 million and $6.9 million, respectively. The expansion of the
Company's network resulted in capital expenditures of approximately $5.0
million, $45.2 million and $38.4 million for 1994, 1995 and 1996, respectively
(which included capital expenditures financed under equipment financing
agreements aggregating approximately $2.5 million, $29.1 million and $25.6
million during such respective periods). Additionally, during 1996, the Company
invested approximately $17.2 million in equity and debt securities with original
maturities of greater than 90 days. These decreases in cash were partially
offset by $15.8 million in proceeds from the sale of equity and debt securities
and partial proceeds of $8.5 million from the transfer of substantially all of
the Company's individual subscriber accounts and related tangible and intangible
assets and rights in connection with the implementation of the Company's
consumer wholesale strategy.

Cash flow provided by financing activities for 1994 and 1995 was approximately
$4.5 million and $151.4 million, respectively, while the cash flow used in
financing activities for 1996 was approximately $10.5 million. The Company
raised approximately $146.9 million of equity, net of expenses, in 1995. During
1996, the Company made repayments aggregating $20.8 million on its financing
facilities. Additionally, during 1996, the Company received proceeds from the
issuance of approximately $8.3 million of notes payable.

As of December 31, 1996, the Company had approximately $52.7 million of cash and
cash equivalents, approximately $4.6 million of short-term investments and
marketable securities, approximately $17.3 million available under financing
facilities for the future financing of data communications equipment and other
fixed assets, and a $5.0 million working capital facility, subject to
availability under a borrowing base formula (at December 31, 1996 a maximum
availability of approximately $4.1 million) under which $2.1 million was
available as of December 31, 1996. The Company's borrowing facility with a bank
and certain of its capital lease obligations, which are secured by substantially
all of the Company's assets, require the Company to satisfy certain financial
covenants and restrict the payment of dividends.

As of December 31, 1996, the Company had commitments to certain
telecommunications vendors totaling approximately $14.5 million. The commitments
require minimum monthly usage levels of data and voice communications over the
next five years. Additionally, the Company has various agreements to lease
office space and facilities, and as of December 31, 1996, the Company was
obligated to make future minimum lease payments of approximately $14.6 million
on non-cancellable operating leases expiring in various years through 2005.

Based upon its present business plan, the Company believes that working capital,
funds from operations, existing credit facilities and additional borrowings
which the Company expects to be able to obtain when needed, will be sufficient
to meet the presently anticipated working capital and capital expenditure
requirements of its existing operations.


                                       23
                         PSINet Inc. 1996 Annual Report


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of PSINet Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of PSINet Inc. and its subsidiaries at December 31, 1995 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

Washington, D.C.
February 7, 1997, except as to the last two paragraphs of Note 12,
which are as of February 14, 1997


                                       24
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS



                                                                                                   December 31,
                                                                                           ----------------------------
                                                                                             1995               1996
                                                                                           ---------          ---------
                                                                                                  (In thousands)
                                                                                                              
Current assets:
   Cash and cash equivalents ..........................................................    $ 102,710          $  52,695
   Short-term investments and marketable securities ...................................         --                4,649
   Accounts receivable, net of allowances of $875,000 and $1,909,000 ..................        6,231             17,421
   Inventories ........................................................................        1,149                643
   Prepaid expenses ...................................................................        2,071              1,963
   Other current assets ...............................................................        4,194              4,940
                                                                                           ---------          ---------
     Total current assets .............................................................      116,355             82,311

Property and equipment, net ...........................................................       51,355             72,061
Goodwill and other intangibles, net of accumulated amortization of
    $5,862,000 and $6,492,000 .........................................................       25,398             13,589
Software costs, net of accumulated amortization of $1,966,000 and $3,286,000 ..........        6,133              3,084
Other assets and deferred charges .....................................................        2,589              6,067
                                                                                           ---------          ---------

Total assets ..........................................................................    $ 201,830          $ 177,112
                                                                                           =========          =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Lines of credit ....................................................................    $   3,012          $   2,000
   Current portion of long-term debt ..................................................       13,631             24,915
   Trade accounts payable .............................................................       10,002             19,868
   Accrued payroll and related expenses ...............................................        2,184              3,098
   Other accounts payable and accrued liabilities .....................................          654              3,632
   Deferred revenue ...................................................................        3,245              5,612
                                                                                           ---------          ---------
            Total current liabilities .................................................       32,728             59,125

Long-term debt ........................................................................       24,130             26,938
Deferred income taxes .................................................................          635                476
Other liabilities .....................................................................        1,107                790
                                                                                           ---------          ---------
            Total liabilities .........................................................       58,600             87,329
                                                                                           ---------          ---------

Commitments and contingencies (Note 9)

Shareholders' equity:
   Preferred stock, $.01 par value, 30,000,000 authorized,
            no shares issued and outstanding ..........................................         --                 --
   Common stock, $.01 par value, 100,000,000 authorized,
            38,016,204 and 40,212,790 issued ..........................................          379                402
   Capital in excess of par value .....................................................      206,035            208,000
   Retained deficit ...................................................................      (61,539)          (116,636)
   Treasury stock, 101,272 and 99,556 shares, at cost .................................       (2,054)            (2,005)
   Unrealized gain on investment ......................................................          813               --
   Cumulative foreign currency translation adjustment .................................         (404)                22
                                                                                           ---------          ---------
            Total shareholders' equity ................................................      143,230             89,783
                                                                                           ---------          ---------

Total liabilities and shareholders' equity ............................................    $ 201,830          $ 177,112
                                                                                           =========          =========


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


                                       25
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                                       Year Ended December 31,
                                                                              -----------------------------------------
                                                                                1994            1995            1996
                                                                              --------        --------        ---------
                                                                              (In thousands, except per share amounts)
                                                                                                           
Revenue .................................................................     $ 15,214        $ 38,722        $  84,351
Other income, net .......................................................         --              --              5,417
                                                                              --------        --------        ---------
                                                                                15,214          38,722           89,768

Operating costs and expenses:
        Data communications and operations ..............................        9,489          32,124           70,102
        Sales and marketing .............................................        3,599          23,930           27,064
        General and administrative ......................................        3,605          10,569           20,648
        Intangible asset write-down .....................................         --             9,938             --
        Depreciation and amortization ...................................        3,183          14,778           28,035
                                                                              --------        --------        ---------
            Total operating costs and expenses ..........................       19,876          91,339          145,849
                                                                              --------        --------        ---------

Loss from operations ....................................................       (4,662)        (52,617)         (56,081)

Interest expense ........................................................         (731)         (1,964)          (5,025)
Interest income .........................................................           86           1,625            3,794
Other income ............................................................         --              --              2,863
Equity in loss of affiliate .............................................          (35)           (204)            (807)
                                                                              --------        --------        ---------

Loss before income taxes ................................................       (5,342)        (53,160)         (55,256)
Income tax benefit ......................................................         --              --                159
                                                                              --------        --------        ---------
Net loss ................................................................     $ (5,342)       $(53,160)       $ (55,097)
                                                                              ========        ========        ========= 

Pro forma loss per share (unaudited) ....................................     $  (0.26)       $  (1.78)
                                                                              ========        ======== 

Loss per share ..........................................................                                     $   (1.40)
                                                                                                              ========= 

Shares used in computing pro forma loss per share and loss per share ....       20,395          29,832           39,378
                                                                              ========        ========        ========= 


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


                                       26
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
               CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
          EQUITY (DEFICIT) FOR THE THREE YEARS ENDED DECEMBER 31, 1996



                                                     Common
                                                      Stock
                                               -----------------     Capital in   Retained   
                                                             Par       Excess     Earnings   
                                                 Shares     Value   of Par Value  (Deficit)  
                                               ----------    ----    ---------    ---------  
                                                       (In thousands, except share data)
                                                                              
Balance, December 31, 1993 ................    11,109,808    $111    $     217    $  (1,755) 
   Accretion of redeemable common
      and convertible preferred stock .....                               (434)      (1,282) 
   Issuance of common stock to
      employees under revenue bonus plan ..        16,850                   18               
   Issuance of common stock for
      professional services ...............        11,133                   22               
   Issuance of common stock ...............        65,000       1          177               
   Foreign currency translation adjustment                                                   
   Net loss ...............................                                          (5,342) 
                                               ----------    ----    ---------    ---------  
Balance, December 31, 1994 ................    11,202,791     112         --         (8,379) 
   Accretion of redeemable common
      and convertible preferred stock .....                             (1,377)              
   Issuance of common stock to employees
       under revenue bonus plan ...........        18,300                   77               
   Issuance of common stock for acquisition
       of Pipeline ........................     2,788,473      28       11,545               
   Conversion of redeemable preferred
      stock into common stock .............    10,042,680     100       26,671               
   Expiration of redemption rights on
      redeemable common stock .............     1,838,475      18          402               
   Initial public offering, net of expenses     4,370,000      44       47,229               
   Issuance of common stock for acquisition                                                  
      of InterCon .........................       921,612       9       16,920               
   Issuance of common stock for acquisition                                                  
      of Software Ventures ................       762,208       8       14,246               
   Issuance of common stock for acquisition                                                  
      of EUnet GB .........................        42,011                  798               
   Issuance of common stock pursuant to                                             
      exercise of stock warrants ..........     1,384,863      14        2,390               
   Issuance of common stock pursuant to
      exercise of stock options ...........       493,003       5          759               
   Public offering, net of expenses .......     4,000,000      40       86,599               
   Employee stock option loan program .....                               (224)              
   Issuance of common stock in escrow for
      acquisition of World Online .........        50,516       1                            
   Unrealized gain on investment ..........                                                  
   Foreign currency translation adjustment                         
   Net loss ...............................                                         (53,160) 
                                               ----------    ----    ---------    ---------  
Balance, December 31, 1995 ................    37,914,932     379      206,035      (61,539) 
   Issuance of common stock pursuant to
      exercise of stock warrants ..........     1,362,604      14          (14)              
   Issuance of common stock pursuant to
      exercise of stock options ...........       803,330       9        1,806               
   Issuance of common stock in escrow for
      acquisition of World Online .........        32,368                                    
   Repayments under employee stock
      option loan program .................                                232               
   Interest under employee stock option
      loan program ........................                                (10)              
   Retirement of treasury stock ...........                                (49)              
   Unrealized gain on investment ..........                                                  
   Foreign currency translation adjustment                                                   
   Net loss ...............................                                         (55,097) 
                                               ----------    ----    ---------    ---------  
Balance, December 31, 1996 ................    40,113,234    $402    $ 208,000    $(116,636) 
                                               ==========    ====    =========    =========  




                                                                      Cumulative                                   
                                                                       Foreign          Total                              
                                                          Unrealized   Currency     Shareholders' 
                                               Treasury    Gain On    Translation      Equity        
                                                 Stock    Investment  Adjustment      (Deficit)          
                                                -------       ----      -----         ---------           
                                                       (In thousands, except share data)
                                                                                           
Balance, December 31, 1993 ................     $  --         $--        $ --          $ (1,427)          
   Accretion of redeemable common                                                                         
      and convertible preferred stock .....                                              (1,716)          
   Issuance of common stock to                                                                            
      employees under revenue bonus plan ..                                                  18           
   Issuance of common stock for                                                                           
      professional services ...............                                                  22           
   Issuance of common stock ...............                                                 178           
   Foreign currency translation adjustment                                (16)              (16)          
   Net loss ...............................                                              (5,342)          
                                                -------       ----      -----         ---------           
Balance, December 31, 1994 ................        --          --         (16)           (8,283)          
   Accretion of redeemable common                                                                         
      and convertible preferred stock .....                                              (1,377)          
   Issuance of common stock to employees                                                                  
       under revenue bonus plan ...........                                                  77           
   Issuance of common stock for acquisition                                                               
       of Pipeline ........................                                              11,573           
   Conversion of redeemable preferred                                                                     
      stock into common stock .............                                              26,771           
   Expiration of redemption rights on                                                                     
      redeemable common stock .............                                                 420           
   Initial public offering, net of expenses                                              47,273           
   Issuance of common stock for acquisition                                                               
      of InterCon .........................                                              16,929           
   Issuance of common stock for acquisition                                                               
      of Software Ventures ................                                              14,254           
   Issuance of common stock for acquisition                                                               
      of EUnet GB .........................                                                 798           
   Issuance of common stock pursuant to                                                                   
      exercise of stock warrants ..........      (2,005)                                    399           
   Issuance of common stock pursuant to                                                                   
      exercise of stock options ...........         (49)                                    715           
   Public offering, net of expenses .......                                              86,639           
   Employee stock option loan program .....                                                (224)          
   Issuance of common stock in escrow for                                                                 
      acquisition of World Online .........                                                   1           
   Unrealized gain on investment ..........                    813                          813           
   Foreign currency translation adjustment                               (388)             (388)          
   Net loss ...............................                                             (53,160)          
                                                -------       ----      -----         ---------           
Balance, December 31, 1995 ................      (2,054)       813       (404)          143,230           
   Issuance of common stock pursuant to                                                                   
      exercise of stock warrants ..........                                                --             
   Issuance of common stock pursuant to                                                                   
      exercise of stock options ...........                                               1,815           
   Issuance of common stock in escrow for                                                                 
      acquisition of World Online .........                                                --             
   Repayments under employee stock                                                                        
      option loan program .................                                                 232           
   Interest under employee stock option                                                                   
      loan program ........................                                                 (10)          
   Retirement of treasury stock ...........          49                                    --             
   Unrealized gain on investment ..........                   (813)                        (813)          
   Foreign currency translation adjustment                                426               426           
   Net loss ...............................                                             (55,097)          
                                                -------       ----      -----         ---------           
Balance, December 31, 1996 ................     $(2,005)      $--       $  22         $  89,783             
                                                =======       ====      =====         =========           



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


                                       27
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                                  Year Ended December 31,
                                                                                          ----------------------------------------- 
                                                                                           1994            1995             1996
                                                                                          -------        ---------        --------- 
                                                                                                       (In thousands)
                                                                                                                        
Cash flows from operating activities:
    Net loss ......................................................................       $(5,342)       $ (53,160)       $ (55,097)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
       Depreciation and amortization ..............................................         3,183           14,778           28,035
       Gain on sale of investments ................................................          --               --             (2,863)
       Gain on sale of assets to MindSpring .......................................          --               --             (5,417)
       Foreign currency translation adjustment ....................................           (16)            (388)             426
       Equity in loss of affiliate ................................................            35              204              807
       Issuance of common stock in exchange for professional services .............            22             --               --
       Issuance of common stock related to revenue bonus plan .....................            18             --               --
       Provision for allowances ...................................................           617              724            3,130
       Intangible asset write-down ................................................          --              9,938             --
       Increase in accounts receivable ............................................          (668)          (2,394)         (14,320)
       (Increase) decrease in inventories .........................................          (194)            (493)             506
       Decrease (increase) in prepaid expenses and other assets ...................           121           (5,240)            (251)
       Increase in other assets and deferred charges ..............................          (425)            (779)            (509)
       (Decrease) increase in accounts payable and accrued liabilities ............          (116)           6,028           11,119
       Increase in deferred revenue ...............................................         1,500               71            2,367
       Increase (decrease) in other liabilities ...................................           168              618             (476)
                                                                                          -------        ---------        --------- 
          Net cash used in operating activities ...................................        (1,097)         (30,093)        ($32,543)
                                                                                          -------        ---------        --------- 
Cash flows from investing activities:
    Purchases of property and equipment, net ......................................        (2,536)         (16,095)         (12,814)
    Purchases of investments ......................................................          --               --            (17,167)
    Proceeds from maturity or sale of investments .................................         1,000             --             15,769
    Proceeds from sale of assets to MindSpring ....................................          --               --              8,451
    Loan to affiliate .............................................................          --               --               (311)
    Capitalized software costs ....................................................           (39)            (435)            (816)
    Investments in subsidiaries, net of cash acquired .............................          --             (5,142)            --
    Investments in certain businesses .............................................          (362)            (286)             (69)
    Other .........................................................................          --               --                 14
                                                                                          -------        ---------        --------- 
          Net cash used in investing activities ...................................        (1,937)         (21,958)          (6,943)
                                                                                          -------        ---------        --------- 
Cash flows from financing activities:
    Net proceeds (payments) on lines of credit ....................................           500            1,159           (1,012)
    Proceeds from issuance of debt ................................................           504            8,250            8,281
    Repayments of debt ............................................................          (452)          (1,441)          (4,654)
    Principal payments under capital lease obligations ............................        (1,379)          (4,379)         (15,117)
    Proceeds from issuance of Series D redeemable preferred stock .................         5,147             --               --
    Proceeds from issuance of Series E redeemable preferred stock .................          --             12,197             --
    Proceeds from issuance of common stock ........................................           178               52             --
    Proceeds from initial public offering, net ....................................          --             47,273             --
    Proceeds from public offering, net ............................................          --             87,390             --
    Proceeds from exercise of common stock warrants ...............................          --                400             --
    Proceeds from exercise of common stock options ................................            29              502            1,815
    Proceeds from repayment of employee notes receivable ..........................          --               --                232
    Other .........................................................................          --               --                (74)
                                                                                          -------        ---------        --------- 
          Net cash provided by (used in) financing activities .....................         4,527          151,403          (10,529)
                                                                                          -------        ---------        --------- 

Net increase (decrease) in cash and cash equivalents ..............................         1,493           99,352          (50,015)
Cash and cash equivalents, beginning of year ......................................         1,865            3,358          102,710
                                                                                          -------        ---------        --------- 
Cash and cash equivalents, end of year ............................................       $ 3,358        $ 102,710        $  52,695
                                                                                          =======        =========        =========


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


                                       28
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES 

Organization and Nature of Operations--PSINet Inc. (the "Company") was organized
in October 1989. PSINet Inc. provides Internet access, services and products to
corporate customers including other Internet service providers (prior to
mid-1996, to individuals) throughout the United States and internationally. The
Company offers a broad spectrum of Internet access services to corporate
customers ranging from dial-up services to continuous access services using
dedicated high-speed telephone circuits, Web site design and hosting services,
training and consulting services, Internet access security services and client
software products.

The Company's operations are subject to certain risks and uncertainties
including, among others, actual and prospective competition by entities with
greater financial and other resources, risks associated with the development of
the Internet market, risks associated with growth and domestic and global
expansion, risks associated with acquisitions, risks associated with limited
experience in the wholesale market, technology and regulatory risks, and
dependence upon sole and limited source suppliers.

Summary of Significant Accounting Policies

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

Principles of Consolidation--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition--Revenue and related direct costs from subscriber contracts
are recognized ratably over the terms of the contracts, which are generally
three to 15 months. Cash received in advance of revenues earned is recorded as
deferred revenue. Revenue from the sale of software, including sales to
distributors, resellers and original equipment manufacturers, is recognized when
software products are shipped. Revenue from separate post-contract customer
support agreements is recognized over the contract period.

Advertising and Customer Acquisition Costs--The Company expenses all advertising
and customer acquisition costs in the period incurred.

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

Concentrations of Credit Risk--Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of cash
investments and trade receivables. The Company's cash investment policies limit
investments to short-term, investment grade instruments. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base.

Inventories--Inventories are stated at the lower of cost or market. Costs are
based on the first-in, first-out method.

Property and Equipment--Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of five
years. Leasehold improvements, including labor and overhead costs of
Point-of-Presence installations, are amortized over the shorter of the term of
the related lease or the estimated useful lives of the assets.

Equipment Under Capital Lease--The Company leases certain of its data
communications equipment and other fixed assets under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lesser of
the present value of aggregate future minimum lease payments, including
estimated bargain purchase options, or the fair value of the assets under lease.
Assets under these capital leases are depreciated over their estimated useful
lives of five years, which are generally longer than the terms of the leases.

Intangible Assets--The Company continually reviews goodwill and other intangible
assets to assess recoverability based upon undiscounted cash flow analysis.
Impairments, if any, are recognized in operating results in the period in which
a permanent diminution in value is determined.

Software Costs--In connection with certain 1995 acquisitions, the Company has
allocated a portion of the purchase price of the acquisitions to software costs.
Additionally, the Company capitalizes internal software development costs in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86.
Significant development costs incurred beyond the point of demonstrated
technological feasibility are capitalized until the product or service is
available for general release to customers. Amortization is computed on an
individual product basis and is the greater of (a) the ratio of current gross
revenues for a product to the total current and anticipated future gross
revenues for the product or (b) the straight-line method over the estimated
economic life of the product. Currently, the Company is using the estimated
economic life of up to five years for all capitalized software costs.


                                       29
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES (continued)

Other Assets and Deferred Charges--Included in other assets and deferred charges
are principally debt issue costs, an investment in World Online B.V. and notes
receivable.

The Company classifies certain of its investment holdings in equity securities
as available-for-sale and unrealized gains are included in shareholders' equity
in accordance with the provisions of SFAS No. 115, "Accounting For Certain
Investments in Debt and Equity Securities." At December 31,1995, shareholders'
equity included a credit of $813,000 related to the unrealized gain on the
securities classified as available-for-sale. These investments were sold in
1996.

The Company uses the equity method to account for its investments in entities in
which the Company has less than a majority interest but can exercise significant
influence. Under the equity method, the investment, originally recorded at cost,
is adjusted to recognize the Company's share of the affiliate's net earnings or
losses as they occur.

Income Taxes--The Company accounts for income taxes under the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and liabilities.

Foreign Currency--Gains and losses on translation of the accounts of the
Company's foreign operations where the local currency is the functional currency
are accumulated and reported as a separate component of shareholders' equity.

Pro Forma Loss per Share (Unaudited) and Loss per Share--Loss per share is
computed using the weighted average number of shares of common stock, adjusted
for the dilutive effect of common stock equivalent shares of common stock
options and warrants. Common stock equivalent shares are calculated using the
treasury stock method.

Pro forma loss per share (unaudited) is computed using the weighted average
number of shares of common stock, adjusted for the dilutive effect of common
stock equivalent shares of common stock options and warrants and assuming the
conversion of redeemable preferred and common stock as of the beginning of the
periods presented.

Fair Value of Financial Instruments--The Company discloses
the fair value of its financial instruments for which it is practicable to
estimate fair value. In cases where quoted market prices are not available for
identical or comparable financial instruments, fair values are based on
estimates using the present value of estimated cash flows or other valuation
techniques. The resulting fair values can be significantly affected by the
assumptions used, including the discount rate and estimates as to the amounts
and timing of future cash flows. In this regard, the derived fair value
estimates cannot be substantiated by comparisons to independent markets and,
therefore, the fair values may not represent actual values of the financial
instruments that could have been realized as of year end or that will be
realized in the future. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value for
financial instruments:

   Cash and cash equivalents. The carrying amount approximates fair value.

   Borrowings. The fair value of borrowings, including capital lease obligations
   and other obligations is estimated by discounting the future cash flows using
   estimated borrowing rates at which similar types of borrowing arrangements
   with the same remaining maturities could be obtained by the Company.

   Notes receivable. The fair value of notes receivable is estimated using the
   future cash flows, discounted at market interest rates.

Reclassifications in Financial Presentation--Certain prior year information has
been reclassified to conform to current year presentation.


                                       30
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 2 -- PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

                                                               December 31,
                                                          ---------------------
                                                            1995         1996
                                                          --------     --------
                                                              (In thousands)

Data communications equipment ........................    $ 18,567     $ 24,095
Purchased software ...................................       1,904        2,989
Office and other equipment ...........................       2,214        3,108
Leasehold improvements ...............................       3,112        6,313
                                                          --------     --------
                                                            25,797       36,505
Less accumulated depreciation and amortization .......      (7,201)     (12,331)
                                                          --------     --------

                                                            18,596       24,174
                                                          --------     --------

Leased data communications equipment .................      35,700       60,979
Leased office and other equipment ....................       2,390        3,241
                                                          --------     --------
                                                            38,090       64,220
Less accumulated depreciation ........................      (5,331)     (16,333)
                                                          --------     --------

                                                            32,759       47,887
                                                          --------     --------

Property and equipment, net ..........................    $ 51,355     $ 72,061
                                                          ========     ========

Total depreciation and leasehold amortization expense in 1994, 1995 and 1996 was
$2,896,000, $6,462,000, and $16,572,000, respectively.

NOTE 3 -- INTANGIBLE ASSETS

In connection with acquisitions in 1995, the Company capitalized goodwill,
software and other intangible assets of approximately $47,700,000. The Company
capitalized software development costs in accordance with SFAS No. 86 of
$39,000, $435,000 and $816,000 during 1994, 1995 and 1996, respectively. Total
amortization of these intangible assets and capitalized software development
costs was $195,000, $8,222,000 and $11,072,000 in 1994, 1995 and 1996,
respectively.

In December 1995, a pretax charge of $9.9 million was recorded related to the
permanent impairment of certain intangible assets which resulted from the
Company's plan, adopted in the first quarter of 1996, to merge the operations of
Software Ventures Corporation ("Software Ventures") with InterCon Systems
Corporation ("InterCon"). As part of the plan, the Company no longer marketed
products using the Software Ventures tradename, certain software products were
abandoned and others were supported and marketed under the InterCon tradename.
This charge, which had no immediate cash effect, recognized the permanent
impairment in the value of certain intangibles including the tradename of
Software Ventures, a non-compete agreement, certain software costs and goodwill
recorded in connection with the acquisition of Software Ventures.

Intangible assets totalling $4,702,000 relating to the Company's consumer
dial-up Internet access services were offset against the proceeds received from
the sale of the Company's individual subscriber accounts in 1996 and is included
in other income, net (See Note 14).

NOTE 4 -- LINES OF CREDIT

The Company has a secured revolving credit agreement with a bank under which the
Company may borrow up to a maximum principal amount of the lesser of $5,000,000
or 75% of qualified accounts receivable which secure the loan less 20% of
aggregate principal of certain term credit advances ($4,091,000 at December 31,
1996). This revolving line of credit agreement expires on June 30, 1997.
Interest is payable monthly in arrears at a rate of prime plus 1.5%. The
outstanding principal balance under this line of credit was $2,000,000 and the
interest rate was 9.75% at December 31, 1996.


                                       31
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 5 -- LONG-TERM DEBT

Long-term debt consisted of the following:



                                                                              December 31,
                                                                            1995       1996
                                                                          --------   --------
                                                                             (In thousands)
                                                                                    
Borrowing facility with a bank, interest at prime plus 2.5%;
   monthly principal installments of $353,000 plus interest ............  $  7,398   $  7,966
Note payable to a bank, interest at 7.75%; monthly principal
   and interest installments of $12,000 ................................       260        135
Other notes payable at interest rates ranging from 7.25% to 16.38%;
   monthly principal and interest installments of $115,000 .............       208      3,488
Capital lease obligations at interest rates ranging from 7.59% to 16.16%    29,895     40,264
                                                                          --------   --------
                                                                            37,761     51,853
Less current portion ...................................................   (13,631)   (24,915)
                                                                          --------   --------
Long-term portion ......................................................  $ 24,130   $ 26,938
                                                                          ========   ========


Under the borrowing facility with a bank, the Company can borrow up to
$18,500,000 for purchases of equipment. Borrowings under this facility are
repayable in 36 monthly installments from the dates of equipment purchases and
are secured by a lien on the equipment. Interest is payable monthly at a rate of
prime plus 2.5%; the interest rate was 10.75% at December 31, 1996. The
borrowing facility is secured by substantially all of the Company's assets. The
borrowing facility and certain capital lease obligations contain certain
provisions which, among other things, require the maintenance of certain
financial ratios and restrict the payment of dividends.

Other notes payable are secured by the property and equipment purchased with the
proceeds. Certain notes are guaranteed by an individual who serves as an officer
and director of the Company and a member of his immediate family. A lease
obligation is secured by a deposit of 25% of the funds under lease and is
maintained in a restricted cash account on deposit with the lender. The balance
of the restricted cash at December 31, 1996 of $954,000 is included in cash and
cash equivalents.

Future minimum lease payments under capital leases and annual maturities of
other long-term debt are as follows:

                                                                      Other
Year Ending                                              Capital    Long-term
December 31,                                             Leases       Debt
- ------------                                            --------     -------
                                                            (In thousands)

1997 ................................................   $ 22,178     $ 6,576
1998 ................................................     17,614       3,661
1999 ................................................      5,846       1,211
2000 ................................................       --            81
2001 ................................................       --            60
                                                        --------     -------
                                                          45,638     $11,589
                                                        --------     =======

Less amount representing interest ...................     (5,374)
                                                        --------

Present value of future minimum lease payments ......   $ 40,264
                                                        ========

During 1994, 1995 and 1996, the Company incurred capital lease obligations of
$2,473,000, $29,071,000 and $25,576,000, respectively, upon the execution of
leases for new data communications equipment and other fixed assets. The
Company's capital lease obligations are generally repayable in 36 monthly
installments from the dates of purchase.

During the years ended December 31, 1994, 1995 and 1996, cash paid for interest
was $762,000, $1,869,000 and $5,083,000, respectively.

At December 31, 1996, the aggregate unused portion under the Company's various
financing arrangements for purchases of equipment was $17,266,000.

At December 31, 1995 and 1996, the estimated fair value of the capital lease
obligations was approximately $30,109,000 and $40,730,000, respectively and
other long-term debt was approximately $7,996,000 and $12,189,000, respectively.


                                       32
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 6 -- CAPITAL STOCK AND MANDATORILY REDEEMABLE EQUITY SECURITIES

Preferred Capital Stock
During 1995, the Board of Directors was granted authority to issue up to
30,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by
shareholders.

Preferred Stock Rights Plan
On May 8, 1996, the Company's Board of Directors adopted a Shareholder Rights
Plan (the "Rights Plan") pursuant to which preferred stock purchase rights
("Rights") were granted as a dividend to shareholders of record at the rate of
one Right for each outstanding share of common stock held of record as of the
close of business on June 5, 1996. The Rights will also be attached to certain
future issuances of common stock. Subject to certain exceptions, each Right,
when exercisable, will entitle the registered holder to buy one one-thousandth
of a share of a newly created Series A Junior Participating Preferred Stock, par
value $.01 per share, of the Company (the "Series A Junior Preferred Stock") at
an exercise price of $75 per Right.

The Rights will become exercisable upon the occurrence of certain specified
events, including an announcement that a person or group of affiliated or
associated persons ("Acquiring Person") has acquired beneficial ownership of 20%
or more of the outstanding common stock. In such event, each holder of a Right
(other than Rights beneficially owned by the Acquiring Person) will thereafter
have the right, subject to certain exceptions, to receive upon exercise thereof
that number of one one-thousandths of a share of Series A Junior Preferred Stock
or, at the discretion of the Company's Board of Directors, a number of
additional shares of common stock as set forth in the Rights Plan.

For purposes of the Rights Plan, the Company's Board of Directors has designated
1,000,000 shares of Series A Junior Preferred Stock, which amount may be
increased or decreased by the Board of Directors. All Rights expire on June 5,
2006, unless the Rights are earlier redeemed or exchanged by the Company in
accordance with the Rights Plan or expire earlier upon the consummation of
certain transactions as set forth in the Rights Plan.

Mandatorily Redeemable Equity Securities
The Company entered into several securities purchase agreements with investors
in prior years. Pursuant to these agreements, the investors purchased shares of
convertible participating preferred stock for cash or in exchange for shares of
mandatorily redeemable common stock.
                              Par             Purchase            Shares
 Class                       Value              Date              Issued
 -----                       -----              ----              ------

Series A..................   $ .01              1993             2,727,000
Series B..................     .01              1993             1,105,125
Series C..................     .01              1993             1,020,000
Series D..................     .01              1994             2,000,000
Series E..................     .01              1995             3,190,555
                                                                ----------
                                                                10,042,680
                                                                ==========

Immediately prior to the completion of the Company's initial public offering on
May 8, 1995, all issued and outstanding shares of redeemable convertible
preferred stock were converted into 10,042,680 shares of common stock. In
addition, all redemption rights of the holders of redeemable common stock
(1,838,475 shares) expired upon the completion of the offering.


                                       33
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 6 -- CAPITAL STOCK AND MANDATORILY REDEEMABLE EQUITY SECURITIES (continued)

Activity with respect to redeemable convertible preferred and common stock for
the two years ended December 31, 1995 was as follows:



                                                                                        Redeemable
                                                                                        Convertible    Redeemable
                                                                                         Preferred      Common
                                                                                           Stock         Stock
                                                                                          --------        ----
                                                                                             (In thousands)
                                                                                                    
Balance, December 31, 1993 .......................................................       $  6,405        $320
   Issuance of 639,000 shares of redeemable common stock pursuant
     to exercise of stock options ................................................                         29
   Issuance of 2,000,000 shares of redeemable Series D convertible preferred stock          5,147
   Accretion of redeemable convertible preferred and common stock ................          1,666          50
                                                                                         --------        ----
Balance, December 31, 1994 .......................................................         13,218         399
   Issuance of 3,190,555 shares of redeemable Series E convertible preferred stock         12,197
   Accretion of redeemable convertible preferred and common stock ................          1,356          21
   Conversion of redeemable convertible preferred stock into common stock ........        (26,771)
   Expiration of redemption rights on redeemable common stock ....................                       (420)
                                                                                         --------        ----

Balance, December 31, 1995 .......................................................       $    --         $ --
                                                                                         ========        ====


NOTE 7 -- STOCK OPTION AND REVENUE BONUS PLANS AND STOCK WARRANTS

Executive Stock Incentive Plan
The Company's Executive Stock Incentive Plan provides for a maximum of
10,000,000 shares to be available for award there under to employees and
consultants of the Company and its subsidiaries. Awards under the plan may be in
the form of incentive stock options, non-qualified stock options, stock
appreciation rights or restricted stock awards. The purchase price of shares
covered by options cannot be less than the fair value on the date of grant. Each
option granted under the plan becomes exercisable based on a schedule determined
by the Compensation Committee at the date of grant. All options expire ten years
after the date of grant. At December 31, 1996, there were 9,802,729 shares
reserved for issuance under the plan and options with respect to 6,064,088
shares of common stock had been awarded under the plan of which options with
respect to 2,747,243 and 440,365 shares of common stock were outstanding and
exercisable, respectively.

Directors Stock Incentive Plan
The Directors Stock Incentive Plan provides for awards with respect to up to
100,000 shares in the aggregate to directors of the Company and its subsidiaries
who are not also employees or consultants of the Company and who do not serve on
the Board as a representative of a shareholder. Awards under the plan are in the
form of non-qualified stock options. The purchase price of shares covered by
options cannot be less than the fair value on the date of grant. Options granted
under the plan when a director is first elected to the Board become exercisable
quarterly over four years. Subsequent options granted under the plan become
exercisable with respect to one-half of the subject shares at each of the first
and second anniversaries of the date of grant. All options expire ten years
after the date of grant. At December 31, 1996, there were 100,000 shares
reserved for issuance under the plan of which options with respect to 20,000
shares of common stock had been awarded under the plan and options with respect
to 20,000 and 2,500 shares of common stock were outstanding and exercisable,
respectively.

Strategic Stock Incentive Plan
The Strategic Stock Incentive Plan provides for awards with respect to an
aggregate of 3,500,000 shares of the Company's common stock to employees and
consultants of the Company and its subsidiaries in connection with acquisitions,
mergers, strategic alliances and other business combinations and transactions by
the Company or its subsidiaries. Awards under the plan may be in the form of
incentive stock options, non-qualified stock options, stock appreciation rights
or restricted stock awards. The purchase price of shares covered by options
cannot be less than the fair value on the date of grant. Each option granted
under the plan becomes exercisable based on a schedule determined by the
Compensation Committee at the date of grant. All options expire ten years after
the date of grant. At December 31, 1996, there were 3,500,000 shares reserved
for issuance under the plan and options with respect to 581,449 shares of common
stock had been awarded under the plan of which options with respect to 217,600
and 60,810 shares of common stock were outstanding and exercisable,
respectively.


                                       34
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 7 -- STOCK OPTION AND REVENUE BONUS PLANS AND STOCK WARRANTS (continued)

Executive Stock Option Plan and Other Option Plans and Grants
Prior to 1994, the Company granted non-qualified stock options to its employees
as directed by the Company's Board of Directors. In March 1994, the Company
established the 1994 Executive Stock Option Plan under which it is authorized to
grant up to 1,250,000 of either incentive stock options or non-qualified stock
options to its employees. The purchase price of shares covered by options cannot
be less than the fair value on the date of grant. Options become exercisable
over one to six years following the date of grant. All options expire ten years
after the date of grant. At December 31, 1996, there were 2,095,276 shares
reserved for issuance under the plan and under ad hoc grants. Options with
respect to 2,757,376 shares of common stock had been awarded under the plan and
under ad hoc grants. Options with respect to 1,770,826 and 853,976 shares of
common stock were outstanding and exercisable, respectively.

In connection with the Company's acquisition of InterCon in June 1995, options
outstanding under each of the InterCon Systems Corporation 1992 Incentive Stock
Plan and the InterCon Systems Corporation 1994 Stock Option Plan became
exercisable (subject to original vesting schedules; generally vesting over four
years) for shares of the Company's common stock pursuant to the terms of the
plans. As of December 31, 1996, the options outstanding under the 1992 plan
consist of incentive stock options with respect to 169,569 shares of common
stock and the options outstanding under the 1994 plan consist of non-qualified
stock options with respect to 112,592 shares of common stock. At December 31,
1996, options with respect to 226,392 shares were exercisable. No additional
options in respect of shares will be granted under either plan.

In connection with the Company's acquisition of Software Ventures in July 1995,
options outstanding under the Software Ventures Corporation 1994 Stock Option
Plan became exercisable (subject to original vesting schedules; generally,
one-half vesting after one year and one-half over four years) for shares of the
Company's common stock pursuant to the terms of such plan. At December 31, 1996,
options with respect to 25 shares under the plan were outstanding and
exercisable. No additional options in respect of shares will be granted under
the plan.

Stock Option Repricing
Effective April 5, 1996, the Company's Board of Directors approved a repricing
of certain employee stock options. Accordingly, options with respect to
2,520,555 shares of the Company's common stock whose exercise price was greater
than $9.375, the closing market price of the Company's common stock on that
date, were cancelled and new options with respect to the same number of shares
were granted with an exercise price of $9.375. Other terms and conditions of the
options remained the same.

Revenue Bonus Plan
At the discretion of the Board of Directors, the Company has awarded stock and
options to its employees who elected to participate under a revenue bonus plan.
In December 1994, the Company awarded 150 shares of its common stock and options
to purchase 300 shares of its common stock to each of its employees. The stock
was issued to employees after completion of one year of service with the
Company. Options granted under the plan vest ratably over six years from the
date of grant. The purchase price of the shares cannot be less than the fair
value at the date of grant. No such awards were made in 1995 and 1996.

Accounting for Stock Issued to Employees
The Company accounts for its stock option plans under APBOpinion No. 25,
"Accounting for Stock Issued to Employees." In 1996, the Company adopted SFASNo.
123, "Accounting for Stock-Based Compensation," for disclosure purposes. Under
these provisions, no compensation expense has been recognized in the results of
operations for its stock option plans.

For disclosure purposes the fair value of each stock option granted is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for stock options granted in 1995
and 1996, respectively: no annual dividends for either year, expected volatility
of 80% and 80%, risk-free interest rate of 6.85% and 5.98% and expected life of
6.5 years and 5.0 years. The weighted-average fair value of the stock options
granted in 1995 and 1996 was $6.90 and $4.89, respectively.

Under the above model, the total value of stock options granted in 1995 and 1996
was $10.6 million and $28.6 million, respectively, which would be amortized on a
pro forma basis over the option vesting period. Had the Company determined
compensation cost for these plans in accordance with SFAS No. 123, the Company's
pro forma loss and pro forma loss per share would have been $54.8 million and
$1.84 in 1995 and $63.9 million and $1.62 in 1996. The SFAS No. 123 method of
accounting does not apply to options granted prior to January 1, 1995, and
accordingly, the resulting pro forma compensation cost may not be representative
of that to be expected in future years.


                                       35
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 7 -- STOCK OPTION AND REVENUE BONUS PLANS AND STOCK WARRANTS (continued)

Stock Warrants
The Company has issued to certain investors, a lease provider and consultants
warrants to purchase shares of the Company's common stock. Warrants issued to
certain investors and a lease provider vested immediately and vesting with
respect to warrants issued to consultants was contingent upon the performance of
services. Compensation expense recorded with respect to warrants issued to
consultants was $26,000, $199,000 and $275,000 in 1994, 1995 and 1996,
respectively. These warrants expire at various dates through 2003. At December
31, 1996, there were 425,674 shares reserved for issuance under stock warrant
agreements of which warrants with respect to 425,674 shares of common stock were
outstanding and exercisable.

Stock Option and Warrant Activity
The following table summarizes stock option and warrant activity under all plans
for the three years ended December 31, 1996:



                                        Number of Shares           Price     Weighted-Average
                                        of Common Stock           per Share   Exercise Price
                                    Options       Warrants        ---------  ----------------
                                   ---------      ---------
                                                                        
Balance, December 31, 1993 ...     2,571,500      3,740,400       $.05-$3.00    $  1.49
   Granted ...................       417,450        240,000        2.00-4.15       2.41
   Exercised .................      (639,000)          --           .05-1.10        .13
   Forfeited .................        (9,000)      (228,000)        .05-2.00       1.61
                                   ---------      ---------

Balance, December 31, 1994 ...     2,340,950      3,752,400       $.50-$4.15    $  1.72
   Granted ...................     1,559,891            833       4.15-25.25       9.16
   Assumed ...................     1,543,414           --           .01-6.13       4.18
   Exercised .................      (494,719)    (1,484,419)        .50-6.13       1.60
   Forfeited .................      (105,868)      (184,307)      2.00-25.25       4.50
                                   ---------      ---------

Balance, December 31, 1995 ...     3,843,668      2,084,507      $.01-$25.25    $  3.42
   Granted ...................     5,853,949            167       4.15-16.75      10.81
   Exercised .................      (819,256)    (1,659,000)        .01-9.38       2.36
   Forfeited .................    (1,319,951)          --         1.60-25.25       8.72
   Cancelled .................    (2,520,555)          --         9.56-25.25      13.61
                                   ---------      ---------

Balance, December 31, 1996 ...     5,037,855        425,674     $ .05-$13.50    $  6.24
                                   =========      =========     

Exercisable, December 31, 1995       973,625      2,054,507     $ .05-$13.88    $  1.44
                                   =========      =========     
Exercisable, December 31, 1994       532,400      3,528,093     $  .50-$3.00    $   .70
                                   =========      =========     


The following table summarizes information about the shares outstanding and
exercisable for options and warrants at December 31, 1996:



                                       Outstanding                                    Exercisable
                       -------------------------------------------------      -----------------------------
                                     Weighted-Average
    Range of            Number           Remaining      Weighted-Average       Number      Weighted-Average
 Exercise Prices      Outstanding    Contractual Life    Exercise Price      Exercisable    Exercise Price
 ---------------      -----------    ----------------    --------------      -----------    --------------
                                                                                    
    $.05-$3.00         1,842,043           3.78              $ 1.51           1,390,843         $ 1.39
     4.15-9.13         1,099,643           8.57                6.10             161,578           6.03
          9.38         1,855,443           8.99                9.38             386,175           9.38
    9.69-13.50           666,400           9.51               10.78              71,146          10.01
                       ---------                                              ---------
   $.05-$13.50         5,463,529           7.21              $ 6.24           2,009,742         $ 3.60
                       =========                                              =========



                                       36
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 8 -- INCOME TAXES

Deferred tax liabilities (assets) consisted of the following:

                                                             December 31,
                                                        1995             1996
                                                      --------         --------
                                                           (In thousands)       
Gross deferred tax liabilities:
   Depreciation/amortization .................        $  3,376         $  6,741
   Acquired intangibles ......................           5,065            2,377
   Other .....................................             369             --
Gross deferred tax assets:
   Net operating losses (domestic) ...........         (18,223)         (35,755)
   Net operating losses (foreign) ............            --             (3,344)
   Other .....................................          (1,327)          (1,866)
                                                      --------         --------
Net deferred tax assets ......................         (10,740)         (31,847)
   Valuation allowance .......................          11,375           32,323
                                                      --------         --------
                                                      $    635         $    476
                                                      ========         ========

The Company has provided a valuation allowance for net deferred tax assets of
its operations since realization of these benefits cannot be reasonably assured.
The net change in the valuation allowance for net deferred tax assets was an
increase of $8,936,000 in 1995 and an increase of $20,948,000 in 1996. The
changes primarily relate to loss carryforwards incurred in 1995 and 1996.

At December 31, 1996, the Company had domestic net operating loss carryforwards
of approximately $87,200,000 for income tax purposes. These net operating loss
carryforwards may be carried forward in varying amounts until 2011 and may be
limited in their use in the event of significant changes in the Company's
ownership. In addition, their use is limited to future earnings of the Company.
In addition, at December 31, 1996, the Company had net operating loss
carryforwards for tax purposes in various jurisdictions outside the United
States amounting to approximately $8,700,000 of which approximately $3,600,000
can be indefinitely carried forward under local statutes. The remaining foreign
loss carryforwards, if unused, will expire in varying amounts until 2003.

During 1996, the Company recognized a deferred tax benefit of $159,000 relating
to the reversal of certain deferred tax liabilities of one of its foreign
subsidiaries. There was no domestic or foreign income tax expense (benefit) in
1994 and 1995.

No cash was paid for income taxes in 1994, 1995 or 1996.

NOTE9 -- COMMITMENTS AND CONTINGENCIES

Commitments
Guaranteed monthly usage levels of data and voice communications with certain of
the Company's telecommunication vendors at December 31, 1996 aggregate to the
following annual amounts:

Year Ending
December 31,                                             (In thousands)
- ------------                                             

1997 ................................................       $ 5,416
1998 ................................................         4,646
1999 ................................................         2,224
2000 ................................................         1,900
2001 ................................................           360
                                                            -------
                                                            $14,546
                                                            =======


                                       37
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 9 -- COMMITMENTS AND CONTINGENCIES (continued)

The Company also leases certain of its facilities under non-cancellable
operating leases expiring in various years through 2005. The operating lease on
the office facilities includes scheduled base rent increases over the term of
the lease. The total amount of base rent is being charged to expense on the
straight-line method over the term of the lease. Total rent expense for all
operating leases amounted to $691,000, $2,077,000 and $3,601,000 in 1994, 1995
and 1996, respectively.

Future minimum lease payments under non-cancellable operating leases as of
December 31, 1996, are as follows:

Year Ending
December 31,                                                 (In thousands)
- ------------

1997 ..................................................         $ 2,477
1998 ..................................................           2,388
1999 ..................................................           2,440
2000 ..................................................           2,333
2001 ..................................................           2,217
Thereafter ............................................           2,750
                                                                -------
                                                                $14,605
                                                                =======

Contingencies
The Company is subject to certain claims and legal proceedings that arose in the
ordinary course of its business activities. Each of these matters is subject to
various uncertainties, and it is possible that some of these matters may be
decided unfavorably to the Company. Management believes that any liability that
may ultimately result from the resolution of these matters will not have a
material adverse effect on the financial condition of the Company.

NOTE 10 -- RETIREMENT SAVINGS PLAN

Under the terms of the Company's Employee Retirement Savings Plan, participants
are eligible to receive discretionary Company matching contributions each year
of 100% of the first $1,000 of employee salary deferral and 25% of amounts
thereafter up to the maximum allowable deferral under IRS regulations. All
contributions to a participant's plan account are 100% vested after two years of
service with the Company. The total contributions made by the Company under the
Plan totalled $28,000, $131,000 and $622,000 during 1994, 1995 and 1996,
respectively.

NOTE 11 -- RELATED PARTY TRANSACTIONS

In 1994, revenue of $2,086,000 was earned from NYSERNet, Inc., a former
shareholder of the Company. Accounts receivable due and revenue earned from
NYSERNet, Inc. as of and for the years ended December 31, 1995 and 1996 were not
material. No other contractual arrangement accounted for more than 10% of
revenues in any given year.

The Company is a party to two agreements with Cascade Communications Corporation
(Cascade) dated July 31, 1992 and November 3, 1994, respectively, pursuant to
which the Company leases equipment manufactured by Cascade. Amounts advanced
under these facilities bear interest at annual rates of 8.0% and prime plus
4.0%, respectively. Under the first facility, the Company leased assets
aggregating approximately $351,000 in 1992. Payments under this facility
totalled approximately $120,000 and $83,000 in 1994 and 1995, respectively.
Under the second facility, under which the Company can lease up to $5 million,
the Company leased assets aggregating approximately $178,000 and $4,822,000 in
1994 and 1995, respectively. Payments on this facility totalled approximately
$1,065,000 and $1,994,000 in 1995 and 1996, respectively. The first facility was
paid-in-full in 1995. The ending balance on the second facility was
approximately $4,206,000 and $2,649,000 as of December 31, 1995 and 1996,
respectively. A general partner of Matrix III Management Company (Matrix III) is
a director of Cascade. Matrix III is the general partner of Matrix, which at the
time of the above transaction was a principal shareholder of the Company.
Another general partner of Matrix III is a former director of the Company.
Cascade holds 10,000 shares of the Company's common stock.

On March 1, 1995, the Company's Board of Directors approved a stock option loan
program pursuant to which the Company may make loans, in the aggregate not to
exceed $2.5 million, to employees in connection with the exercise of options
granted to them. Loans will be evidenced by three-year full recourse promissory
notes which bear interest at the then applicable federal rate, secured by stock
issued upon the exercise of such options. Loans in the amount of $220,000 had
been issued under the program of which principal in the amount of $214,000 and
$1,000 and interest in the amount of $10,000 and $121 remains outstanding at
December 31, 1995 and 1996, respectively, and are included in shareholders'
equity, as a component of capital in excess of par value. In addition, the
Company loaned a former executive officer of the Company $100,000 to refinance
the principal amount of a bank loan incurred by him on October 14, 1993, to
finance a portion of the exercise price relating to his exercise on that date of
options to acquire 320,000 shares of common stock. The full payment on this
$100,000 loan was received in 1996. 


                                       38
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 12 -- ACQUISITIONS AND DISPOSITIONS

The following acquisitions have been accounted for as purchase business
combinations and accordingly, the net assets and results of their operations
have been included in the Company's financial statements since the acquisition
dates. The purchase price was allocated to the assets acquired, including
intangibles, and liabilities assumed. The excess of the purchase price over the
pair value of the net assets is being amortized over periods from three to five
years from the dates of acquisition.

PSINet Pipeline New York, Inc.
On February 7, 1995, the Company issued an aggregate of approximately 2,690,218
shares of its common stock to shareholders of PSINet Pipeline New York, Inc.
(formerly The Pipeline Network Inc.; "Pipeline"), a New York based Internet
service provider, in exchange for all of the outstanding common stock and
preferred stock of Pipeline. The fair value of the shares of the Company's
common stock exchanged and liabilities assumed was approximately $12,129,000. As
further described in Note 14, the Company transferred substantially all of its
individual subscriber accounts and related tangible and intangible assets
relating to the Company's consumer dial-up Internet access services to a third
party in the second and third quarters of 1996.

EUnet GB Limited
On July 21, 1995, the Company purchased from The University of Kent at
Canterbury all of the issued and outstanding ordinary shares of EUnet GB Limited
("EUnet GB"), an English corporation. In consideration of the purchase of the
shares of EUnet GB, the Company paid approximately $3,986,000 and issued an
aggregate of 42,011 shares of its common stock. The fair value of the shares of
the Company's common stock exchanged, together with cash of $3,986,000 and
liabilities assumed at acquisition, was approximately $7,126,000.

InterCon Systems Corporation and Software Ventures Corporation
On June 16, 1995, the Company issued an aggregate of approximately 921,612
shares of its common stock to shareholders of InterCon, a Virginia corporation,
in exchange for all of the issued and outstanding capital stock of InterCon.
InterCon develops and markets standards-based connectivity software products for
Windows and Macintosh personal computer systems. The fair value of the shares of
the Company's common stock exchanged, options granted and liabilities assumed
was approximately $19,685,000.

On July 11, 1995, in connection with the merger of Software Ventures into a
subsidiary of the Company, the shareholders of Software Ventures received an
aggregate of approximately 762,208 shares of the Company's common stock.
Software Ventures developed and supplied interactive communications software and
internetworking solutions. The fair value of the shares of the Company's common
stock exchanged, options granted and liabilities assumed was approximately
$15,834,000. In the first quarter of 1996, the Company merged the operations of
Software Ventures and InterCon into one Internet software subsidiary known as
InterCon.

Subsequent to December 31, 1996, the Company sold all of the issued and
outstanding capital stock of its wholly-owned subsidiary InterConto Ascend
Communications, Inc. ("Ascend") in exchange for $12 million in cash pursuant to
a Stock Acquisition Agreement between the Company and Ascend. In addition, in
connection with the sale, the Company received $8.5 million in cash from Ascend
as repayment of intercompany debt owed by InterCon to the Company.

The following presents the Company's unaudited pro forma consolidated income
statement data for the years ended December 31, 1995 and 1996, as if the sale of
InterCon had occurred at the beginning of the periods presented. The revenue and
net loss below are not intended to reflect the results of operations that would
actually have been obtained if the sale had occurred at the beginning of the
period presented.

                                                 Twelve Months Ended
                                       -------------------------------------
                                       December 31, 1995   December 31, 1996
                                       -----------------   -----------------
                                      (In thousands, except per share amounts)
                                                     (unaudited)
Revenue ............................        $ 33,750           $ 79,602
Net loss ...........................        $(36,839)          $(42,860)
Pro forma loss per share ...........        $  (1.23)          $  (1.09)


                                       39
                         PSINet Inc. 1996 Annual Report


                                   PSINet Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1994, 1995 AND 1996

NOTE 13 -- INVESTMENTS IN AFFILIATES AND JOINT VENTURES

World Online B.V.
In December 1995, the Company entered into a definitive agreement to acquire 20%
of the outstanding common stock of World Online B.V. ("World Online"), an
Internet service provider in the Netherlands. This investment is being accounted
for under the equity method. The Company paid for 10% of the outstanding common
stock of World Online in 1995 for cash consideration of 275,000 Dutch Guilders
(approximately $172,000 based upon an exchange rate of $1.00 : 1.602 Dutch
Guilders) and is obligated to pay for the additional 10% of the outstanding
common stock of World Online for consideration equal to $125 per paying
subscriber of the World Online service at a measurement date in December 1996
which is payable, at World Online's option, in cash (not to exceed $5,000,000)
and/or shares of PSINet common stock (based on the market price at the date of
closing).

At December 31, 1996, the Company has accrued $2,536,000 related to this
obligation which is included in other accounts payable and accrued liabilities.
In addition, this obligation is secured by a deposit of 82,884 shares of the
Company's common stock held in an escrow account. These shares are considered
issued and outstanding at December 31, 1996 and are recorded at par value. The
Company's net investment in World Online, at December 31, 1996, of $1,932,000,
is recorded in other assets and deferred charges.
In connection with the agreement, the Company has also granted to World Online a
subordinated loan facility, subject to certain conditions, pursuant to which
World Online is permitted to borrow up to 725,000 Dutch Guilders bearing
interest at the rate of 6% per annum and payable in full on December 31, 1998.
At December 31, 1996, $311,000 was outstanding under this facility which is also
included in other assets and deferred charges. Trade accounts receivable from
World Online at December 31, 1996 totaled $653,000.

Hansol Telecom
In August 1995, the Company entered into an agreement to form a joint venture
with Hansol Paper Co. Ltd.("Hansol Paper"), of Seoul, Korea for the purpose of
extending the PSINet network to provide Internet services in Korea. In March
1996, pursuant to these arrangements, the Company acquired a 10% interest in
Hansol Telecom ("Hansol"), an affiliate of Hansol Paper, for approximately $3.1
million. This investment is reflected in short-term investments and marketable
securities. Pursuant to its agreement with Hansol, the Company has the right,
for up to three years, to require Hansol Paper to purchase its Hansol shares at
the higher of market value at the date of sale or the price at which the Company
purchased its Hansol shares plus interest at the rate of prime plus 1% per annum
from the time of its purchase through the date of sale. Additionally, in March
1996, the Company licensed intellectual property to Hansol for approximately
$1.8 million.

PSINet Europe
On September 19, 1996, the Company entered into an agreement with Chatterjee
Management Company (doing business as The Chatterjee Group), a Delaware
corporation ("Chatterjee"), pursuant to which the Company and an investment
group led by Chatterjee (the "Chatterjee Investor Group") would establish a
joint venture to be known as PSINet Europe (the "Joint Venture") for the purpose
of building an Internet network across Europe and providing Internet-related
services in Europe. The Company and Chatterjee are considering certain matters
which may result in a substantive amendment to this agreement.

NOTE 14 -- AGREEMENTS WITH MINDSPRING ENTERPRISES, INC.

On June 28, 1996, the Company entered into an agreement with MindSpring
Enterprises, Inc., an Atlanta, GA based Internet access provider ("MindSpring"),
pursuant to which the Company agreed to transfer to MindSpring substantially all
of its individual subscriber accounts and related tangible and intangible assets
and rights in connection with the consumer dial-up Internet access services
operated by the Company in the United States for $12,929,000 in cash and notes
receivable. The gain from this sale of $5,417,000 has been recorded as other
income, net in the Company's consolidated statement of operations. The balance
of the note receivable from MindSpring at December 31, 1996 was $2,769,000. The
note, which bears no interest, was recorded at a discount of $309,000 with
scheduled repayments over 24 months, beginning January 1997. In connection with
the transfer, the parties also entered into a Network Services Agreement
pursuant to which the Company agreed to provide access to MindSpring's
individual subscribers through local dial-in POPs connected to the Company's
network.

At December 31, 1996, the note receivable from MindSpring approximates its
estimated fair value.


                                       40
                         PSINet Inc. 1996 Annual Report


The PSINet Group

CORPORATE
HEADQUARTERS

PSINet Inc.
510 Huntmar Park Drive
Herndon, VA 20170
Phone: (703) 904-4100
Fax: (703) 904-4200
Web:www.psi.net

PSINet also has offices
located in:
Boston, MA
Chicago, IL
Dallas, TX
El Segundo, CA
Kennesaw, GA
New York, NY
Newtown, PA
Santa Clara, CA
Tarpon Springs, FL
Troy, NY

SUBSIDIARIES

PSINet Publishing Corporation
510 Huntmar Park Drive
Herndon, VA 20170
Phone: (703) 904-4100
Fax: (703) 904-4200

PSINet Security Services Inc.
510 Huntmar Park Drive
Herndon, VA 20170
Phone: (703) 904-4100
Fax: (703) 904-4200

PSINet Japan Inc.
Plaza Mikado Bldg., 3F
2-14-5 Akasaka, Minato-ku
Tokyo 107
Japan
Phone: +81.3.5574.7171
Fax: +81.3.5574.7173
Web: www.jp.psi.net

PSINet UK Limited
Brookmount Court
Kirkwood Road
Cambridge CB4 2QH
England
Phone: +44.1223.577.577
Fax: +44.1223.577.600
Web: www.uk.psi.net

PSINet Limited
7300 Warden Avenue,
Suite 213
Markham, ON  L3R 9Z6
Canada
Phone: (905) 477-1318
Fax: (905) 477-2084
Web:www.psi.ca


                                       41
                         PSINet Inc. 1996 Annual Report







CORPORATE INFORMATION



ANNUAL MEETING                              GENERAL COUNSEL

The Annual Meeting of Shareholders will     David N. Kunkel, Esq.
be held on Saturday, May 10, 1997, at 
9:00 a.m. at the Hyatt Regency Reston,
1800 Presidents Street, Reston, VA 
20190.                                      INDEPENDENT ACCOUNTANTS

                                            Price Waterhouse LLP
INVESTOR INFORMATION                        1301 K Street NW, 800W
                                            Washington, D.C. 20005-3333
Shareholders, financial analysts, and
brokers seeking information about the 
Company's financial affairs may contact:    OUTSIDE LEGAL COUNSEL

PSINet Inc.                                 Nixon, Hargrave, Devans &
Investor Relations Department                 Doyle LLP
510 Huntmar Park Drive                      437 Madison Avenue
Herndon, VA 20170                           New York, NY 10022-7001
Voice: (703)904-4100, ext. 1245
Fax: (703) 904-8733                         FACTORS AFFECTING FORWARD-LOOKING
E-mail: investor-relations@psi.com            STATEMENTS

Form 10-K                                   Certain of the information 
                                            contained in this Annual Report,
A COPY OF THE COMPANY'S ANNUAL REPORT       including under "Management's
ON FORM 10-K FOR THE FISCAL YEAR ENDED      Discussion and Analysis of
DECEMBER 31, 1996, AS FILED WITH THE        Financial Condition and Results 
SECURITIES AND EXCHANGE COMMISSION, MAY     of Operations," contain forward-
BE OBTAINED BY SHAREHOLDERS WITHOUT         looking statements. Such forward-
CHARGE BY WRITING TO THE INVESTOR           looking statements are subject to
RELATIONS DEPARTMENT AT THE COMPANY'S       a number of factors, including
HEADQUARTERS. EXHIBITS TO THE COMPANY'S     material risks, uncertainties and
ANNUAL REPORT ON FORM 10-K WILL BE          contingencies, which could cause
SUPPLIED UPON PAYMENT OF A REASONABLE       actual results to differ materially
FEE.                                        from the forward-looking statements.

                                            For a discussion of important
                                            factors that could cause actual
                                            results to differ materially from
                                            the forward-looking statements, 
                                            please refer to Item 1 to PSINet's
                                            Annual Report on Form 10-K and 
                                            other periodic reports and documents
                                            filed with the Securities and 
                                            Exchange Commission.




                                       42





CORPORATE INFORMATION

STOCK REGISTRAR AND TRANSFER AGENT

All correspondence concerning changes of address for Shareholders or 
re-registration of shares should be directed to the following:

First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
Telephone Response Center: (201) 324-0498
Fax: (201)222-4892
E-mail: fctc@em.fcnbd.com
Web:www.fctc.com


SECURITIES

PSINet's Common Stock is traded on the Nasdaq National Market under the 
symbol: PSIX.

The Company had approximately 793 record holders of its Common Stock at 
February 28, 1997.

DIVIDEND POLICY

PSINet has never declared or paid cash dividends on its Common Stock and does 
not anticipate that any cash dividends will be paid in the foreseeable 
future. The payment of dividends is restricted under the terms of the 
Company's existing credit facilities.

PRICE RANGE OF COMMON STOCK

The Common Stock has been traded publicly since May 1, 1995, the effective 
date of the Company's initial public offering. The range of the high and low 
closing bid prices for the Common Stock for each quarterly period from May 1, 
1995, through December 31, 1996, as reported by the Nasdaq National Market, 
is presented below. Such quotations reflect interdealer prices, without 
retail mark-up, mark-down, or commission, and may not represent actual 
transactions.



                         1995               1996
                         ----               ----
                     High    Low        High     Low
                     ----    ---        ----     ---

                                    

1st Quarter           -       -        $22 3/8   $9 1/8

2nd Quarter         $15 5/8   $12      $18 1/2   $7 3/8

3rd Quarter         $25 1/4   $15 1/4  $12 5/8   $8 3/8

4th Quarter         $28 1/2   $13 3/4  $14       $8 1/2




All brands, products, and service names mentioned are trademarks or 
registered service marks of their respective owners.


                                       43
























                      Design and Production: PSINet Inc.
Photography and Digital Illustrations: Scott Nibauer, Lien/Nibauer Photo, Inc.
                      Printing: French-Bray Incorporated




EXECUTIVE OFFICERS AND 
BOARD OF DIRECTORS


William L. Schrader - Chairman of the Board of Directors, President and Chief 
Executive Officer (Founder)

Harold S. "Pete" Wills - Executive Vice President, Chief Operating Officer 
and Director 

David N. Kunkel - Senior Vice President, General Counsel, Secretary and 
Director 

Edward D. Postal - Vice President and Chief Financial Officer 

Mary-Ann Carolan - Vice President, Customer Administration 

James R. "Chuck" Davin - Vice President and Chief Technical Officer 

Mark S. Fedor - Vice President, Engineering 

Richard R. Frizalone - Vice President, Corporate Sales 

David L. Hudson - Vice President, Business and Product Development 

Mitchell Levinn - Vice President, Network Operations 

William H. Baumer - Director; Professor, Philosophy, the University of 
Buffalo, Buffalo, New York

Wade Woodson - Director; General Partner, Sigma Partners, Menlo Park, 
California 

Ian P. Sharp - Director; Founder (Retired), I.P. Sharp Associates, Toronto, 
Canada

William A. Wilson - Director; Executive Vice President and Chief Financial 
Officer, Arch Communications Group, Inc., Westborough, Massachusetts

EX-21

                                                                   Exhibit 21
 
                                SUBSIDIARIES
 
  1.   PSINet Pipeline New York, Inc. (formerly known as The Pipeline Network
       Inc.), a corporation organized under the laws of the State of New York.
 
  2.   InterCon Systems Corporation, a corporation organized under the laws of
       the State of Delaware.
 
  3.   EUnet GB Limited, a corporation organized under the laws of the United
       Kingdom.
 
  4.   PSINet U.K. Limited (formerly Performance Systems International
       Limited), a corporation organized under the laws of the United Kingdom.
                                                                              
  5.   PSINet Limited, a corporation organized under the laws of Canada.
 
  6.   PSINet Japan Inc. (PSI Japan, Kabushiki Kaisha), a corporation organized
       under the laws of Japan.
 
  7.   PSINet Pipeline USA, Inc. a corporation organized under the laws of the
       State of Delaware.
 
  8.   PSI Pipeline Holdings, Inc., a corporation organized under the laws of
       the State of Delaware.
 
  9.   PSINet Holdings, Inc., a corporation organized under the laws of the
       State of Delaware.
 
  10.  InterPak, Inc., a corporation organized under the laws of the State of
       Delaware.
 
  11.  PSINet Publishing Corporation, a corporation organized under the laws of
       the State of Delaware.
 
  12.  PSINet Security Services Inc., a corporation organized under the laws of
       the State of Delaware.
 
  13.  PSINet Pipeline U.K. Limited, a corporation organized under the laws of
       the United Kingdom.
 
  14.  PSINet Ireland Limited, a corporation organized under the laws of the
       Republic of Ireland.
 
  15.  PSINet Europe Limited, a corporation organized under the laws of the
       Republic of Ireland.
 
  16.  PSINet Europe Inc., a corporation organized under the laws of the State
       of Delaware.
 
  17.  PSINet Telecom Limited, a corporation organized under the laws of the
       State of Delaware.
 

EX-23

 

                                                                    Exhibit 23
 
                        CONSENT OF INDEPENDENT ACCOUNTANTS
 
    We hereby consent to the incorporation by reference in the registration
statements on Form S-8 (Nos. 33-98314, 33-98316, 33-98318, 33-98320, 33-99464,
33-99466, 33-99470, 333-04008) of PSINet Inc. (PSINet) of our report dated
February 7, 1997 except as to the last two paragraphs of Note 12 which are as of
February 14, 1997, which appears on page 24 of the 1996 Annual Report to
Shareholders, on PSINet's consolidated financial statements for the year ended
December 31, 1996, which is included in Exhibit 13 to this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page 39 of this Form 10-K.
 
PRICE WATERHOUSE LLP
 
March 31, 1997 
Washington, D.C.
                                        

EX-27

 


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

<MULTIPLIER> 1,000
       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
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<SECURITIES>                                     4,649
<RECEIVABLES>                                   19,330
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