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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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                                   FORM 10-K

                FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO
          SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

  For the fiscal year ended: December 31, 1999

                                       OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

  For the transition period from         to

                        Commission file number: 0-22575

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                        CONCENTRIC NETWORK CORPORATION
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                <C>
            Delaware                                 65-0257497
  (State or other jurisdiction                    (I.R.S. Employer
of incorporation or organization)               Identification No.)
</TABLE>

                 1400 Parkmoor Avenue, San Jose, CA 95126-3429
              (Address of principal executive offices) (zip code)

                                (408) 817-2800
              Registrant's telephone number, including area code

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          Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
     <S>                  <C>
     Title of each class    Name of each exchange on which registered
     -------------------    -----------------------------------------
            None                               None
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:

                        Common Stock, $0.001 par value
                               (Title of Class)

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   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 the 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. [X]

   The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on March
27, 2000 as reported on the National Market of The Nasdaq Stock Market, was
approximately $2,227,512,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 27, 2000, registrant had
outstanding 51,593,378 shares of Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

   The Registrant has incorporated by reference into Part III of this Form 10-
K portions of its Proxy Statement for Registrant's Annual Meeting of
Stockholders.

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   The Business section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risks Related
to Concentric's Business".

                                    PART I

ITEM 1. BUSINESS

   Concentric provides tailored, value-added IP-based network services
primarily targeted to small-to-medium sized enterprises. To provide these
services, the Company utilizes its low/fixed latency, high-throughput network,
employing its advanced network architecture, data centers and the Internet.
Concentric's service offerings for enterprises include Virtual Private
Networks, high-speed Internet access and Web hosting. These services enable
enterprises to take advantage of standard Internet tools such as browsers and
high-performance servers for customized data communications within an
enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks. Among the current
distribution partners are Intuit, SBC and WebTV.

   The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed
its name to Concentric Network Corporation and reincorporated into Delaware in
1997.

   In January 2000, Concentric agreed to be acquired by NEXTLINK
Communications, Inc. ("Nextlink"), a provider of a variety of voice services
and high speed Internet access to the business market. As a combined company,
we expect to be able to offer a complete, single source communications
solution to our customers by combining our Internet business, data center and
application service provider services with the full array of products from
Nextlink's voice and data services. The transaction is subject to approval of
our stockholders and other customary closing conditions, and is expected to
close in the second quarter of 2000. The foregoing statements regarding the
pending acquisition of Concentric by Nextlink and the expectations for the
combined entity are forward looking statements subject to a number of risks
and uncertainties including the factors set forth below in "Management's
Discussion and Analysis of Financial Results--Risks Related to Concentric's
Business--The Proposed Merger Involves Risks and Uncertainties and May Not be
Completed". Also, please refer to "Management's Discussion and Analysis of
Financial Results--Overview" for a discussion of the terms of the acquisition.

Industry Background

 Development of Private Networks

   Historically, the data communications services offered by public carriers
had limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private WANs to provide network-based services, such
as transaction processing, to their customers and to coordinate operations
between employees, suppliers and business partners. Such private WANs were
frequently customized to specific applications, business practices and user
communities. As a result, these private WANs had the capability of providing
organizations and users with tailored performance and features, security,
reliability and private-label branding.

   The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners,
and the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global
in nature, the ability to access business information across the enterprise
has become a competitive necessity.

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   Despite the attractive capabilities of private networks, limitations of
many private WANs have impeded or reduced the effectiveness of their use.
These networks, which traditionally have required the use of leased telephone
lines with bandwidth dedicated solely to this purpose and the purchase of
vendor-specific networking equipment, are inherently expensive to set up,
operate and maintain. Private WANs often require the development and
maintenance of proprietary software and lack cost-effective access. These
aspects of developing, deploying and maintaining such private WANs have
conflicted with the increased focus of many businesses on their core
competencies, which has prompted the outsourcing of many non-core functions.
The Company believes that many businesses have viewed as unacceptable the
costs of maintaining a private WAN infrastructure and the risks of investing
in new technologies in the absence of a single technological standard.

 Emergence of the Internet

   The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including email, electronic file
transfers, online computing and electronic financial transactions. These
trends have led businesses increasingly to explore opportunities to provide
IP-based applications and services within their organization, and to customers
and business partners outside the enterprise.

 Need for IP-Based Private Networks

   The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
email. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet. On the
Internet, latency is frequently relatively high and variable, making it sub-
optimal for these emerging applications. Although private networks are capable
of offering lower and more stable latency levels, providers of these emerging
applications also desire a network that will offer their customers full access
to the Internet. As a result, these businesses and applications providers
require a network that combines the best features of the Internet, such as
openness, ease of access and low cost made possible by the IP standard, with
the advantages of a private network, such as high security, low/fixed latency
and customized features.

   Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. According to Infonetics Research industry analysts, the total
market for virtual private network ("VPN") products and services could reach
approximately $30 billion by the end of year 2003. The majority of the
enterprise customers are expected to outsource such services due to lack
expertise and high internal costs, outlining security as one of their biggest
concerns.

Business Strategy

   The Company's objective is to become the leading supplier of e-business
services worldwide. In order to achieve this goal, the Company is implementing
a business strategy focused on the following key principles:

     Primary Focus on Small-to-Medium Sized Enterprise Market. The Company
  focuses its sales and marketing effort under its own brand on the small-to-
  medium sized enterprise market selling DSL and web-hosting as the lead-in
  products. The Company believes that the small-to-medium sized enterprise
  market, while competitive, is under-served in general and represents a good
  opportunity for the Company. The company intends to sell additional value-
  added e-business services after the initial network service or web hosting
  sale.

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     Optimize Network Utilization. Given the fixed cost nature of
  Concentric's network infrastructure, the Company strives to increase total
  network utilization and to optimize this utilization by targeting both
  daytime business and evening-intensive consumer users to balance the
  network's usage throughout a 24-hour period. Accordingly, while the
  Company's current strategic focus is on providing e-business services to
  small-to-medium sized enterprises, the Company intends to continue
  partnering with multi-channel distributors to acquire and maintain a base
  of consumer subscribers who access the Concentric network predominantly
  during non-business hours.

     Acquire Complementary Assets, Technologies and Businesses. The Company
  is actively seeking to identify and acquire assets, technologies and
  businesses complementary to the Company's value-added enterprise network
  service strategy. Such acquisition efforts are targeted at businesses that
  offer the potential to expand the Company's revenue base, increase the
  scalability of the Company's network infrastructure and value-added service
  offerings, as well as optimize the utilization of the Company's network. As
  part of this strategy, the Company completed three acquisitions in 1998,
  one acquisition in 1999 and one acquisition in 2000. The Company acquired
  InterNex, a Tier 1 provider of network services, co-location service and
  Web-hosting facilities to enterprise customers, in February 1998. The
  Company acquired DeltaNet, a provider of network services, colocation and
  managed dedicated hosting services, in May 1998. The Company acquired
  AnaServe, a provider of shared hosting and managed dedicated hosting
  services, in August 1998. The Company acquired 9Net Avenue, a provider of
  shared hosting and managed dedicated hosting services, in October 1999 and
  the assets of Internet Technology Group, Plc, a London, U.K. based Internet
  service provider in January 2000.

     Employ Leveraged Marketing Through Strategic Partners. The Company
  actively seeks to form alliances with certain software developers and
  telecommunications service and equipment suppliers that have substantially
  greater marketing, distribution and sales resources than does the Company
  and that have a large installed customer base. These alliances facilitate
  the cost-effective acquisition of consumer and business customers and
  increase Concentric's network utilization. These marketing relationships
  are developed and enhanced through the bundling of Concentric's IP-based
  network services with the products and services offered by the strategic
  partners. These relationships may involve customized browsers, registration
  services and specialized pricing, commissions and billing programs.
  Concentric has established such strategic relationships with a number of
  companies, including WebTV, SBC, Williams, Covad, Northpoint, Intuit and
  Register.Com.

     Deploy Network Services Internationally. The Company believes that the
  competitive nature of the marketplace will increasingly require it to offer
  network services on a global basis. To date, the Company has launched the
  following initiatives to provide global solutions to its customers:

     Acquisition of Internet Technology Group. Pursuant to an agreement
  signed in September 1999, the Company has acquired Internet Technology
  Group, Plc ("ITG"). The acquisition of ITG gives the Company a local UK
  network presence and customer base as well as sales, marketing, network
  engineering and other staff local to the UK market. The Company believes
  that the local presence is important to international expansion.

     Roaming Services in Japan. The Company entered into a roaming services
  agreement in June 1997 with NTT PC, a leading provider of IP services in
  Japan. The roaming services agreement allows Concentric customers to use
  the NTT PC network to access their Internet accounts in Japan and allows
  members of the NTT PC network to access their Internet accounts in the
  United States and Canada.

     GRIC Roaming Alliance. The Company executed a roaming services agreement
  with GRIC International in October 1998. GRIC International is an alliance
  of 400 ISPs and telecommunication companies that together form a worldwide
  network of 2,700 POPs. The GRIC International alliance allows the Company's
  customers to access the Internet through these worldwide POPs while
  traveling outside of the United States.

   While the Company expects to generate a minority of its revenue from
deployment of international network services in the year 2000, the Company
believes that the ability to deliver network solutions globally will be a

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key competitive factor in its industry. The foregoing expectation is a
forward-looking statement that involves risks and uncertainties and the actual
results could vary materially as a result of a number of factors including
those set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Operating Results--
Concentric Faces Risks Associated with International Expansion."

Services

   Concentric provides Internet business solutions for small- and medium-sized
enterprises, including DSL access, Web hosting and e-commerce. The Company
also offers data center services, virtual private networks ("VPN"s), dedicated
access, and application infrastructure services for delivering applications
over the Internet or a VPN. To provide these services, the Company operates a
nationwide backbone IP network, extensive public and private Internet peering,
and data centers nationwide.

 Enterprise Solutions

   The Company has developed a set of enterprise services including VPNs,
high-speed Internet access, which includes dedicated access facilities and
digital subscriber line services, wireless access services and applications
hosting services. These services are marketed to Concentric's enterprise
customers.

   Virtual Private Network Services. Concentric's custom VPN solutions enable
its customers to deploy tailored, IP-based mission-critical business
applications for internal enterprise, business-to-business and business-to-
customer data communications on the Concentric network while also affording
high-speed access to the Internet. Concentric offers its customers a secure
network on which to communicate and access information between an
organization's geographically dispersed locations; collaborate with external
groups or individuals, including customers, suppliers, and other business
partners and use the Web to access information on the Internet and communicate
with other Web users.

   The Company's VPN solutions allow the enterprise customer to tailor the
type of access, services and information that various users of the VPN are
afforded according to the specific needs of the enterprise. Key benefits
include rapid implementation time, lower operating and maintenance costs,
minimal capital investment, higher quality of service overall and 24-hour
network and customer support. For example, starting in October 1995 the
Company created and now maintains the VPN used by Intuit customers using a
customized version of the Netscape Navigator browser bundled with Quicken for
Windows and Macintosh, Quickbooks, ProTax and TurboTax/MacInTax. The bundled
software allows a Quicken customer to click on an icon that launches Netscape,
and takes the user directly to Quicken Financial Network Website. On the Web
page Quicken customers will find useful financial advice, information from
Intuit's bank and financial institution partners, answers to commonly asked
technical questions and tips on how to tap the full potential of Intuit's
financial products.

   In addition to the custom VPNs that Concentric has developed and delivered,
the following distinct VPN products are now offered by the Company:

     Concentric CustomLink. Concentric CustomLink provides a complete,
  private-labeled dial-up VPN service for customers. In addition, CustomLink
  permits the customer to segment its users, and apply various levels of
  services, such as Web access, email, and file transfer protocol to each
  customer group. CustomLink includes dial-up network access, customized and
  customer-branded client software, and private labeled help desk services.
  The dial-up network access offerings include local access and toll-free
  access.

     Enterprise VPN. The Company's Enterprise VPN service includes security
  hardware (such as firewalls and encryptors) and software, high speed
  network access, network connectivity, customer premise routing equipment
  and customer support services. The Enterprise VPN service is targeted at
  customers seeking to create a secure, outsourced WAN for intranet and
  extranet applications. Installation support for the customer premise
  located routing and security equipment is also provided. Concentric can
  also provide management services for firewall and packet encryption
  equipment if desired by the customer.

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     Secure Remote Access. Concentric's Secure Remote Access product is an
  extension of the Enterprise VPN service offeringthat provides fully managed
  and secure remote access for the corporation's remote users or
  telecommuters. Secure Remote Access utilizes an easy-to-use web based
  interface to allow for administration of users by the customer. Secure
  Remote Access uses internationally accepted IPSEC standards in its client
  softwareand interfaces with the same security gateway used in the
  Enterprise VPN. Secure Remote Access is transport independent and may also
  be deployed over DSL lines.

     Business Dial. The company's latest dial offering provides for business
  class remote access using a variety of services. Business Dial provides a
  web based interface for user administration and can be set up to support
  value-added dial access features such as Toll free (800), IP Filtering,
  Radius Proxy, client software customization, L2TP and international
  roaming. This product is intended to meet the needs of our enterprise
  customers with varying levels of dial access requirements.

   Concentric performs around-the-clock monitoring of network performance.
Concentric also enables its customers to monitor their network through the
Company's Nethealth software. Concentric Nethealth is a Web-based network
management tool which allows a customer to monitor usage on a circuit by
circuit basis.

   Dedicated Access Facilities. In January 1997, the Company began offering
DAFs as an Internet Access product targeted at businesses that desire single
or multipoint high-speed, dedicated connections to the Internet or to
distributed locations such as regional offices, warehouses, manufacturing
facilities, or suppliers. DAF products are primarily targeted at providing
fully dedicated access to Concentric's high speed ATM backbone and the
Internet, using dedicated private line technology. The product can also be
used to provide Intranet connectivity among distributed enterprise locations
with the additional benefit of Internet access if desired by the customer. DAF
is also used as the underlying product in many of Concentric's higher end,
value add services such as EVPN and Secure Remote Access, ConcentricAIP, and
DSL Teleworker. The Company provides a full range of connectivity options,
allowing the customer to order the appropriate amount of bandwidth to meet its
networking requirements. In addition, Concentric offers its multiple DAF
customers robust Service Level Agreements that guarantee network availability,
packet loss, and latency. Furthermore, Concentric offers several different
billing plans for DAF customers that allow customers to choose to be billed on
a flat rate, or usage sensitive basis.

   Concentric's DAF offering consists of the following product lines:
FullChannel Price Protected T-1, FullChannel Usage Based T-1, FullChannel
Price Protected T3, FullChannel Usage Based T3, FlexChannel T1 (i.e.:
"fractional" T1), FlexChannel T3 (i.e.: "fractional" T3), ConcentricIMUX, and
LECFrame Relay. The speeds range from 56 Kbps up to 45 Mbps, with a
comprehensive range of speeds in between. In select markets, the Company has
also begun providing key customers much higher transit services up to OC3 (155
Mbps).

   FullChannel Usage Based T-1 and Full Channel Usage Based T3 pricing is
based on a one-time set-up fee and a pricing structure which charges customers
only for the bandwidth that they use in a given month. The customer's usage is
measured at five-minute intervals throughout the month. Concentric then bills
the customer according to the industry standard 95% peak billing utilization
model. The one time set-up fee for FullChannel T-1 service is $3,000 and the
monthly fee ranges from $1,095 to $2,695 depending on usage. The one time set-
up fee for FullChannel DS3 service is $5,000 and the monthly fee ranges from
$6,000 to $40,500 depending on usage. FullChannel T-1 and DS3 pricing is the
appropriate choice for those customers who have fluctuating and/or uncertain
bandwidth consumption patterns.

   FullChannel Price Protected T-1 gives a customer a fixed price for a full
1.5 Mbps of Internet connectivity. The one time set-up fee is $3,000 and the
monthly fee is is as low as $995. This is an economical choice for those
customers who recognize in advance that their bandwidth throughput
requirements will equal T-1 levels. FullChannel Price Protected T3 provides
customers a fixed price for a full 45Mbps of Internet connectivity.

   FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 or DS3 for a fixed monthly fee. The set up fee is the same as
for FullChannel pricing but the monthly fee ranges from $895 to $1,895 for
FlexChannel T-1 service and from $5,900 to $40,500 for FlexChannel DS3
pricing. FlexChannel T-1 and DS3 pricing is the appropriate choice for the
customers who know that their bandwidth requirements are going to be
consistently less than a full T-1 or DS3.

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   LECFrame Relay is based on various LECs' Frame Relay facilities. The
customer selects the port speed and "Committed Information Rate" of its
choice. Concentric guarantees the speed of the Committed Information Rate.
Concentric charges a one time set-up fee of $2,000 LECFrame Relay services and
monthly fees ranging from $395 to $1,195 depending on the port and CIR
combination that the customer selects.

   In October 1999, Concentric introduced its ConcentricIMUX service. This
service utilizes Inverse Multiplexing technology to "bond" multiple T1
connections together to form one discrete, logical channel. This service is
available at the following speeds: 3Mbps, 4.5Mbps, and 6Mbps. This service
provides "fractional" T3 equivalent bandwidth levels, while avoiding the
potentially large monthly expense of a T3 local loop.

   Digital Subscriber Lines. In December 1997, Concentric began offering
Internet and intranet connectivity using DSL technology. DSL and its variants
are a new dedicated access technology being deployed by telephone companies
that allow high speed digital service over regular telephone lines. To expand
its DSL service area, the Company has formed relationships with a number of
CLECs, including Covad Communications Group, Inc. and NorthPoint
Communications, Inc., as well as SBC's California subsidiary, Pacific Bell.
Concentric's DSL service offerings are currently available in the following
geographical markets: the San Francisco Bay Area, Los Angeles, Sacramento,
Orange County, San Diego, Seattle, Portland, Denver, Dallas, Houston, Miami,
Atlanta, Boston, New York, Philidelphia, Washington, D.C., Baltimore, Detroit
and Chicago. The Company's DSL service offerings include a wide range of
dedicated access speeds, from 144 Kbps to 1.5 Mbps symmetric DSL, as well as
asymmetric DSL options from 608 Kbps/128 Kbps to 1.5 Mbps/384 Kbps.

   Concentric DSL services are targeted at the small-to-medium sized business,
telecommuter and home office/residential markets. As of January 31, 2000, all
ConcentricDSL customers also get access to Concentric Gateway which provides
an online view of the customer's DSL order status as well as access to a
number of value-added services that enhance DSL service, including firewalls,
virus protection services, backup services and hosted applications.
ConcentricDSL customers' Concentric Gateway account also comes complete with a
ConcentricHost account which provides 5 domain-based e-mail accounts and Web-
hosting services.

   Pricing for ConcentricDSL service is low relative to traditional dedicated
access services, making it attractive to small-to-medium sized businesses,
while at the same time broadening the market to reach small businesses who
previously could not justify the expense of dedicated Internet service. The
"dedicated access feature" of DSL services combined with its high speed and
low flat rate pricing is also designed to appeal to the large installed base
of ISDN users.

   Pricing is based on the bandwidth of the DSL circuit, and is a flat rate
monthly fee ranging from $69 to $499 depending on the service speed.
Concentric provides complete installation services including all the customer
premise equipment necessary to provide the DSL service at fees ranging from
$99 to $725.

   Wireless Access Services. In October 1998, the Company introduced
ConcentricWireless in the San Francisco Bay Area as an alternative to
traditional access lines, particularly in areas where DSL is not yet
available. ConcentricWireless is priced competitively with ISDN and DSL
services and significantly lower than T-1 services. Concentric is currently
evaluating second generation products on an expanded basis to continue
evolution of this product line.

   Applications Hosting Services. The Company offers a range of high-
performance applications hosting services, including Concentric Server
Solutions, a suite of sophisticated high-end hosting and Web site traffic
management solutions for Internet-centric businesses, and ConcentricHost, a
suite of Web hosting, e-commerce, and streamed media services designed for
small-to-medium sized businesses. The Company's other applications hosting
services include a private-label version of ConcentricHost and a Windows NT-
based hosting solution. The high performance of the Company's applications
hosting services is enabled by Concentric's network architecture and its
combination of public and private peering arrangements.

   Together, these applications hosting services manage a company's Web-based
infrastructure and operational needs allowing customers to focus on their Web-
based content. By outsourcing its Web hosting to Concentric, an

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enterprise can increase the reliability and performance of its Web
applications and reduce its costs by taking advantage of Concentric's high
quality data centers with back-up power, multiple high bandwidth network
connections and Tier 1 Internet peering arrangements. In addition to state-of-
the-art hosting facilities, Concentric provides server management tools and
services to completely manage customers' servers for them.

   For reliable, high performance flow of traffic between customer's Web
servers and worldwide networks, Concentric has combined public peering and
private peering arrangements to provide improved performance to users.
Concentric strives to route most of its Internet bound traffic through private
peering points with other large Internet providers. In doing this, Concentric
can improve network performance by utilizing higher speed, higher performance
dedicated connections directly to its larger peering partners. This avoids
congestion which sometimes occurs at the "public" peering points. Concentric
supplements its private peering with a large number of public peering
arrangements as well. Concentric currently operates data centers in Santa
Clara, Cupertino, and Los Angeles, California, Chicago, Illinois and Secaucus,
New Jersey. Each Concentric data center is connected via multiple DS3 (45
Mbps) or OC3 (155 Mbps) high-speed links to geographically dispersed points in
its private ATM backbone as well as to key public and private Internet
exchange points. This architecture provides diversity and redundancy and high
performance to customers while minimizing user costs. See "--The Concentric
Network."

   ConcentricHost Hosting Services. The Company offers a range of high-
performance hosting services, including Dedicated Hosting Solutions, a suite
of sophisticated high-end hosting and Web site traffic management solutions
for Internet-centric businesses, and ConcentricHost shared hosting services
for Web hosting and e-commerce for small-to-medium sized businesses. The
Company's other hosting services include a private-label version of
ConcentricHost and application infrastructure hosting for Application Service
Providers. The high performance of the Company's hosting services is enabled
by Concentric's network architecture and its combination of public and private
peering arrangements.

   Together, these hosting services manage a company's applications or Web-
based infrastructure and operational needs, allowing customers to focus on
their Web-based applications and content. By outsourcing its hosting to
Concentric, an enterprise can increase the reliability and performance of its
Web applications and reduce its costs by taking advantage of Concentric's high
quality data centers with back-up power, multiple high bandwidth network
connections and Tier 1 Internet peering arrangements. In addition to state-of-
the-art hosting facilities, Concentric provides server management tools and
services to completely manage customers' servers for them.

   Dedicated Hosting Solutions. In February 1998, Concentric announced the
availability of Concentric Server Solutions, a line of Managed Servers
designed for companies who require outsourced maintenance, management,
bandwidth and housing for their Internet or extranet Web servers. Unlike
colocation services that simply provide rack space in a data center and
bandwidth, Concentric Server Solutions provide high-performance Internet
access from state-of-the-art data centers, skilled technicians and systems
administrators, maintenance programs that monitor servers 24 hours a day,
seven days a week, and scalability to address the needs of companies as their
businesses become increasingly reliant on the Web. In addition to Managed
Servers and regular colocation service, the Company has other enhanced
dedicated hosting services:

   Distributed Server Environment. In September 1998, Concentric launched the
Distributed Server Environment ("DSE") platform designed to manage distributed
applications for content, media and Web-centric businesses. These businesses
typically require high availability, fault tolerance and scalability for
distributed hosted sites. DSE offers local and global load balancing and fail-
over services. Load balancing allows for the intelligent distribution of user
requests over multiple server resources to avoid transmission congestion and
bottlenecks among Web servers.

   ConcentricAIP Services. In August 1999, the Company introduced Concentric
AIP, its application infrastructure provider, which provides independent
software vendors and application service providers with a comprehensive,
outsourced infrastructure for securely delivering applications and Web-based
services over the

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Internet or a VPN. This complete, flexible infrastructure allows independent
software vendors and application service providers to outsource the
operational infrastructure components below the application layer, thus
avoiding the costly and time intensive task of developing and deploying a
comparable infrastructure internally.

   ConcentricHost Shared Hosting. ConcentricHost Shared Hosting is a suite of
domain parking, domain e-mail, Web-hosting and e-commerce services designed to
provide comprehensive Internet solutions to small-to-medium-sized business.
ConcentricHost is designed to enable small businesses without technical staff
to take advantage of the Internet, from registering a domain name through
conducting e-commerce with real time credit card transactions on the Web, all
through a user-friendly interface. Packages, which include Web hosting,
multiple email IDs and optional dial-up Internet access range from $19.95 to
$375.95 per month depending on features such as the number of email accounts
and the amount of disk space and bandwidth provided to the customer. These
packages also offer security for e-commerce. Customers who would like to
conduct e-commerce via an online catalog with either online or off-line
transactions can subscribe to one of the ConcentricHost e-commerce plans which
range in price from $44.95 to $149.95 per month. ConcentricHost also includes
Site Builder, a feature that allows customers to build a Web site using only a
browser by taking advantage of Concentric's server-side tools. Alternatively,
ConcentricHost customers can build Web sites using popular Web authoring
software such as Microsoft FrontPage or NetObjects Fusion. Other features
include access to 24 hours a day, seven days a week toll free telephone and
email based customer support and built-in self administration tools that allow
the customer to buy more features online in real time as well as to analyze
Web activity online in near real time. The system automatically notifies
customers when they are approaching the allocation limits of their account
encouraging them to upgrade online.

   In June 1998, Concentric enhanced ConcentricHost with the introduction of
the Virtual Development Environment , which provides Web developers high level
security and performance on the ConcentricHost shared server hosting platform.
At the same time, the Virtual Development Environment offers maximum freedom
to Web developers by providing them with their own virtually dedicated
operating and file systems. These virtually dedicated systems provide Web
developers the freedom to create complex Common Gateway Interface scripts
without security and stability risks and without requiring them to be reviewed
and approved prior to installation.

   ConcentricHost is provided on Concentric's proprietary Metra platform.
Metra is a fault tolerant, load balancing cluster of UNIX servers that is
designed to provide high performance and reliability and complete real time
customer control of their own service.

   ConcentricHost Private Label. In November 1998, Concentric launched a
private label hosting solution targeted at companies looking to quickly and
cost-effectively add fully featured domain e-mail, Web hosting, and e-commerce
services to their small business portfolio. The ConcentricHost Private Label
solution is a hosted application that can be either co-branded or private
labeled that allows service providers, small business retailers, and other
resellers to leverage Concentric's proven applications hosting technology.
This approach allows customers to avoid much of the time, equipment expense,
and information services resources required to internally develop a Web
hosting service. Concentric Private Label customers include SBC, Great Plains
Software, and many others.

   Windows NT Hosting. The Company also has a line of Windows NT-based hosting
and e-commerce services targeted at small-to-medium sized businesses.
Concentric also offers Windows NT-based hosting services with its Concentric
Small Business Server Internet Suite service which includes Internet email
exchange and Internet access services designed to be used with Microsoft's
Small Business Server.

 Concentric Gateway: Applications and Services for Small Businesses

   In January 2000 Concentric launched Concentric Gateway, an online business
solution and Internet service management center. Concentric Gateway provides a
single place for Concentric customers to both access a collection of best-of-
breed online services provided by third party partners as well as to order and
manage Concentric services. Concentric Gateway's online services were
carefully selected to enable small-to-medium

                                       9
<PAGE>

sized businesses to improve their efficiency, increase their productivity and
grow their businesses through task-specific online applications. Accessible
from www.concentric.com, Concentric Gateway provides services that enable
customers to get the most out of their Web sites and DSL services, to launch
marketing campaigns and to increase their overall productivity. Concentric
Gateway is enabled by the powerful Concentric Metra platform, the industry's
first integrated platform for Internet services ordering and management.
Taking advantage of the Metra platform's unique architecture, Concentric
Gateway provides integrated service management that allows users to manage
their dial-up, Web hosting, e-commerce, and DSL services all from a single
platform.

 Residential and Small Business Dial-Up Access Services

   Concentric provides the small office/home office and residential market a
broad range of dial-up Internet access services. Concentric Dial-Up Access
Service offers individual residential and multi-user small office/home office
access accounts at speeds up to 56 Kbps across the United States and Canada
from over 450 access numbers. Consumer features include email, a 5MB personal
homepage, 24-hour customer support, online chat, and a free software package
and guide to using the Internet, along with optional Priority Queue and HTML
Consulting Queue customer support. Users can choose from local, long distance
800-number and International dial-up services and Concentric provides the user
a choice of the Netscape Navigator or Microsoft Internet Explorer browser when
they sign up.

                        Dial-Up Internet Access Pricing

<TABLE>
<CAPTION>
            Plan           Monthly Fee             Additional Time
            ----           -----------             ---------------
   <C>                     <C>         <S>
   Starter Plan...........   $ 7.95    Includes 5 hours and $1.95 per
                                       additional hour.

   6 Month Prepay.........   $17.95    No charges for additional time.
                                       Unlimited active access for a one-time
                                       upfront fee of $107.70

   Unlimited Access Plan..   $19.95    No charges for additional time.
                                       Unlimited active access for one monthly
                                       fee.

   800-number Plan........   $10.00    Includes 2 hours and $5 per additional
                                       hour.
</TABLE>

   The Company also offers consumers value-added services, including a
collection of premium products targeted to vertical segments such as the
family and small office/home office market. This includes the upselling of
discounted products and services in such areas as retail products, software,
hardware, telephony services with such partners as Amazon.com, Inc., Connected
OnLine Backup, Match.com, PeopleLink, MailCall and GRIC, Inc. Such
arrangements not only provide an additional monthly revenue stream but also
increase customer satisfaction and retention. Additional value-added products
and services being reviewed by the Company for potential introduction include
hosted applications, education research, virus protection, and fax services.

   Concentric offers small office/home office a variety of Dial-Up Access
upgrade plans with pricing ranging between $24.95 to $39.95. Features include
multiple domain or sub-domain based email(s), domain parking, up to 10MB of
Web site, using optional Concentric Site Builder or other Web authoring tool
(e.g., Microsoft Front Page), 24 hour customer support, and access to the
Concentric Gateway and its many value-added partners and services for small
businesses.

                                      10
<PAGE>

Customers

   The following is a representative list of the Company's customers during
the last 12 months, each of which accounted for more than $50,000 in revenues.

<TABLE>
   <C>                                  <S>
   3Com Corporation                     Kleiner Perkins Caufield & Byers
   Adforce                              Macromedia, Inc.
   United Guaranty Corp., an AIG Corp.  Microsoft Corporation
   Amdahl Corporation                   Netpulse Communications, Inc.
   American Greetings Corporation       Netscape Communications Corporation
   Avery Dennison Corp.                 Nortel Networks
   Bloomberg, L.P.                      NTT PC Communications, Inc.
   Church of the Brethren Benefit Trust OnCommand Corporation
   Citizens Communications, L.P.        OzeMail Interline Pty, Ltd.
   Clear Communications Ltd.            Peapod L.P.
   Corio, Inc.                          PictureTel Corporation
   Covad Communications Company         Pierce Leahy Corporation
   Cyberstar LP                         PointCast Incorporated
   Dacom America, Inc.                  Qwest Communications Corporation
   EmployOn.com                         Real Networks, Inc.
   Express Personnel Services           Redback Networks, Inc.
   First USA Corporation SBC            Communications, Inc.
   Fish King Processors, Inc.           Standard and Poor's
   Flycast Communications Corporation   Teligent, Inc.
   Furst Staffing Services              VYVX, a subsidiary of Williams
   Graybar Electric Company, Inc.       Wawa Inc.
   Gymboree Corp.                       WebTV Networks, Inc.
   Hitachi Metals America, Ltd.         Williams Communications Inc.
   Intuit Inc.                          World Savings & Loan Association
   Juno Online Services, L.P.
</TABLE>

   Revenue from WebTV accounted for 25.2% of the Company's revenue during the
year ended December 31, 1999 and 26.8% of the Company's revenue during the
year ended December 31, 1998.

Strategic Business Alliances

   The Company aggressively pursues strategic business alliances with a
variety of companies. Through these partners, the Company seeks to expand its
enterprise and consumer customer base and increase the 24-hour utilization of
the Concentric network. The following is a summary of selected strategic
relationships:

   WebTV Networks Inc. WebTV provides the world's first high-quality Internet
solution for television. In the fall of 1996, WebTV's licensees, Sony
Electronics, Inc. and Philips Electronics introduced a plug-and-play set-top
box that enables Internet browsing from a television. As part of the WebTV
service, Concentric and WebTV jointly designed and implemented a national
virtual private dial-up network solution to connect WebTV NetworkTM users to
the Internet, utilizing Concentric's network. The WebTV Internet terminal,
combined with the virtual private network, allows anyone to browse the
Internet from the comfort of their living room.

   SBC Communications Inc. In October 1998, SBC and the Company agreed to
integrate Concentric's Internet-based business data services and technology
into SBC's portfolio of data products and services for business customers.
Concentric and SBC plan to deploy a complete suite of packet-switched, IP-
based services such as VPNs, Web hosting, shared software and electronic
commerce for business customers. SBC continues to deploy private labeled
offerings from Concentric in all of the above described areas.

                                      11
<PAGE>

   As part of this relationship, SBC agreed in October 1998 to acquire
1,813,358 shares of Concentric's common stock either on the open market or
from the Company. In December 1998, SBC purchased 200,000 shares of common
stock in two open market purchases. The remaining 1,613,358 shares were
purchased from the Company in January 1999 for an aggregate purchase price of
approximately $19.5 million. We also issued SBC a warrant to purchase
1,813,358 shares of Concentric common stock at an exercise price of $10.50 per
share.

   Williams Communications Group, Inc. Concurrent with the closing of the
Company's initial public offering of common stock in August 1997, the Company
entered into a strategic relationship with Williams Communications Group,
Inc., a subsidiary of the Williams Companies, Inc. (together, "Williams") and
Williams made an equity investment in the Company of approximately $15.0
million which closed in August 1997.

   Williams provides a full range of enterprise network solutions,
communications services and advanced applications to businesses, including
equipment and services for data, voice and video, international satellite and
fiber-optic transmission services, telemarketing services, and multipoint
video- and audio-conferencing. As part of the strategic business relationship,
Williams has made available, and the Company has agreed to purchase from
Williams, a total of $21.2 million in telecommunications equipment and
services through the five year period ending in 2002. At the election of
Williams, $2.0 million of the minimum purchase commitment was paid in January
2000 by the issuance of Common Stock by the Company at the then-current fair
market value. Additionally, Williams and the Company have entered into a
reseller agreement and an agency agreement through which Williams is able to
sell the Company's products and services for an initial term of two years.

   Covad. In January 1999, the Company entered into a strategic relationship
with Covad to combine Concentric's value-added IP services with Covad's high
speed DSL local loop services. This strategic relationship allows Concentric
to resell Covad's DSL local loop services to Concentric's customers. The
companies also will co-market DSL in approximately 20 major metropolitan areas
in the United States and jointly fund product development efforts in 1999 and
2000. Additionally, Concentric invested approximately $10.0 million in Covad,
purchasing 833,334 shares of Covad's common stock. In February 2000, the
Company sold 833,334 shares of Covad common stock for total proceeds of
approximately $70.8 Million. Concentric also has a warrant to purchase 150,000
shares of Covad's common stock.

   Intuit. Intuit, a financial software and Web-based services company, is a
market leader in personal and small business financial software. Intuit views
its Websites as a key channel for communicating with its customers, and as a
vehicle to provide personal finance, investment and tax related financial
information. Concentric and Intuit partnered in October 1995 to launch
integrated Internet access to the Quicken Financial Network and the Internet.
The Internet access capability included both a virtual private network service
designed to provide Intuit customers subsidized access to select Intuit Web
sites and the ability to upgrade to full access to the Internet. Intuit has
bundled tailored versions of the Netscape Navigator browser in its fiscal year
1998 and 1999 releases and the Microsoft Explorer browser in its 1998 and 1999
releases of Quicken, TurboTax, ProTax and Quickbooks. Concentric designed and
implemented tailored registration and network access software to provide
Intuit customers with seamless, subsidized access to select Intuit Web sites.
Concentric provides an easy, Web-based upgrade process for customers desiring
full Internet access and email services. Customers are billed for network time
through Concentric's billing systems. In addition, Concentric provides
private-labeled customer service to Intuit customers with full network access
on a twenty-four hour a day, seven day a week basis. Intuit uses Concentric's
high performance network primarily to enable customers to send electronic tax
filings and software product registration.

   Northpoint.  The Company signed a co-marketing and distribution agreement
with Northpoint Communications in April 1999 whereby the Company and
Northpoint cooperate to market, through various channel and sales efforts, DSL
services which combine the Company's value added IP services and Northpoint's
DSL local loop services. The Company invested $5 Million in Northpoint in
April 1999, purchasing 277,840 shares of Class B common stock.


                                      12
<PAGE>

   Register.Com.  The Company entered into a co-marketing and distribution
agreement with Register.Com in June 1999. Register.Com, an independent domain
name registrar, granted a semi-exclusive position to the Company as a
preferred web hosting provider for the customers of Register.Com. The
agreement includes the provision for payment of a marketing placement fee by
the Company to Register.Com and the payment of certain Market Development
Funds by Register.Com to the Company. The Company agreed to use Register.Com
for substantially all of its domain name registrar needs. The Company invested
$5 Million in Register.Com in June 1999, purchasing 1,458,335 shares of Series
A Convertible Preferred Stock. Additionally, Concentric has a warrant to
purchase 291,669 shares of common stock.

The Concentric Network

   The Concentric network employs an advanced, geographically dispersed ATM,
frame relay and private leased line backbone, with SuperPOPs in 25 major
metropolitan areas plus a total of 143 secondary and tertiary POPs in other
cities, allowing local analog dial-up access to the network to users in the
U.S. and Canada. In addition, the Company can provide frame relay, fractional
T-1, T-1, fractional DS3, DS3 and OC3 access to the network. Concentric has
completed deployment 56.6 Kbps modems throughout its network. The backbone
further provides connectivity to DSL customers and between Concentric's 4
major data centers. This planned deployment is a forward looking statement and
is subject to a number of risks and uncertainties and the actual results could
differ materially as a result of a number of factors including those set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Operating Results--We Depend Upon
New and Enhanced Services" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Operating
Results--We Depend Upon Our Network Infrastructure."

   The Concentric network is managed via a centralized network control center
in St. Louis, Missouri. Two data centers (located in Chicago, Illinois and San
Jose, California) house the servers that support log on/authentication,
billing, email, Internet access, Web services and other shared network
services. The Company continues to expand its Internet connectivity strategy
by including not only private transit with Cable and Wireless, Sprint and
UUNet, but also private peering with other network providers as well as public
peering with multiple smaller Internet service providers. The Company's hybrid
private/public Internet connectivity strategy is designed to allow Concentric
to offer superior Internet connectivity performance by avoiding congestion,
sometimes referred to as packet loss, that may occur when connecting to
certain network providers at many public peering points.

   The Concentric SuperPOPs are designed to support dial-up, DSL and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.

   Dedicated access services and DSLs from customer locations in a region are
terminated in the SuperPOP as well. Typically, Fractional T-1, T-1, and DS3
circuits are terminated directly into SuperPOP router equipment or via a
channelized DS3 connected to a competitive access provider. Frame access is
terminated via aggregated LEC Frame Access circuit(s). DSL is terminated via a
multiplexed DS3 connection to a CLEC metropolitan area or regional DSL
network. Both dial-up and dedicated traffic is then aggregated by the
routers/switches in the SuperPOP and directed to the Concentric core backbone
via one or more DS3 ATM links. In the case of larger SuperPOPs the connection
may be via OC3 private leased connections.

   The Concentric network has been extended into Europe with the addition of
the ITG (CNC Europe) network. This network is connected to the Concentric US
network via STM1 connections. The pan European

                                      13
<PAGE>

network has STM1 connections between three sites in the UK, two sites in the
Netherlands, Paris, Frankfurt and Stockholm. Within the domestic UK network
multiple sites are connected using fiber facilities and utilizing an
innovative Sonet architecture to support local points of presence for direct
connections in 32 cities. The network supports large capacities of dial-up
connections, leased line Internet access and hosting facilities.

   The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard
security layer and is compatible with most types of custom security
applications. Further, security is provided at both the edge of the network
and internally based on embedded firewall and encryption techniques. The
Concentric network features colocation of network access and switching
equipment in "hardened" facilities, direct connections to carrier facilities,
a resilient backbone, dual data processing centers, and redundancy within data
centers to substantially enhance its performance.

   The Concentric Web Hosting services utilize the capacities of the four
major Concentric data centers to house customer shared and dedicated hosting
facilities. Customers can opt for unmanaged or managed oversight of their
hosting servers to meet their specific needs. The data centers are built to
hardened standards and direct connections to the Concentric core network. The
connection to the Concentric network provides direct access for Concentric's
private line customer's, dial access and DSL customers. The network connection
also provides diverse connectivity to most significant US peering points and
via Concentric's private peering connections to domestic and international
Internet users. The data centers are hardened by providing power duplication
and protection systems, fire protection systems and access security systems
and procedures. The data centers are pre-built to provide high capacity
virtual local area networks, equipment spaces and Internet access to minimize
customer start up time.

   Network managers, customer service and technical support staffs require
near real-time access to information about the performance and quality of
their networks. In traditional private networks, this information is provided
by network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access
to less information when using a public network instead of a private network.
It has been difficult for public network providers to provide their major
customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric
has developed a set of non-intrusive software tools and reporting mechanisms,
distributed to enterprise customers to allow a customer's network manager to
monitor network performance and quality and to adequately support inquiries
for help from their users. Web browsers and file transfer tools are used to
provide access to much of this information. In some cases, custom integration
of Concentric's network management and trouble tracking/reporting systems will
be provided to customers.

Sales and Marketing

   The Company focuses on marketing its services to two distinct market
segments: enterprises (primarily small-and-medium sized businesses) and
consumers. By attracting enterprise customers who use the network primarily
during the daytime, and consumer customers who use the network primarily at
night, the Company is able to utilize its network infrastructure more cost
effectively. The Company pursues these customers through a multi-tiered sales
strategy consisting of leveraged third party distribution channels, inbound
and outbound telesales, value-added resellers, original equipment
manufacturers and a direct sales force. As of December 31, 1999, the Company
employed 210 persons in sales and marketing.

   Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in
their products or services. For example, the Company's network service is
bundled with Intuit's Quicken, TurboTax and Quickbooks products, Microsoft
Office 98 and with WebTV's Internet access devices. Additionally, the Company
is one of the Internet services providers listed on the Netscape Navigator and
Microsoft Internet Explorer browser registration servers.

                                      14
<PAGE>

   Telesales. The Company employs separate telesales groups to generate
inbound leads in three market sectors. The consumer telesales group sells
Internet connectivity and shared hosting to the consumer market. The Company's
Southern California and New Jersey sales groups are focused on both shared and
dedicated hosting, electronic commerce, and DSL solutions for the small
business sector. The inside enterprise sales group, located in San Jose, CA,
offers business solutions including T-1 connectivity and dedicated hosting
products to enterprise customers. In addition, an outbound group, also located
in San Jose, CA, is dedicated to generating leads for field sales and
resellers, managing the customer installed base in the pursuit of upgrades and
contract renewals, and managing Concentric's small-to-medium sized enterprise
channel partners.

   Value-Added Resellers. The Company has established sales channels and
significant market coverage through value-added resellers without incurring
the commensurate costs of a large direct sales force. These resellers are
categorized into four groups, network integrators, colocation and shared
hosting resellers, and DSL resellers. In the enterprise market, these
companies sell both network equipment and full service network/Internet
solutions, including design, installation and maintenance. Williams
Communications Solutions is a national network integrator whose trained sales
and support professionals are compensated for selling Concentric's enterprise
connectivity, VPN and dedicated hosting solutions. Concentric solicits small-
to-medium sized enterprise shared hosting developers and resellers, and DSL
resellers through a combination of on line advertising and direct telesales,
direct mail, and partnerships with 3COM and Netopia.

   Private-Label Sales. Concentric aggressively pursues private-label
opportunities that enable national telecommunications infrastructure providers
to offer a full suite of private labeled IP-based consumer and enterprise
network services. Concentric's private-label partners, such as Qwest, Compaq
and SBC, sell Concentric's services through their large sales forces into
established customer bases.

   Direct Sales Force. The Company employs 35 field sales people located in
San Jose, Orange County, Los Angeles, Dallas, Washington, D.C., the New York
metropolitan area, Atlanta, Chicago, and Boston to sell and support complex
enterprise VPN solutions and web hosting, and to acquire, support, train and
retain channel partners. The Company's field sales force is supported by
inside sales/account managers, project and program managers and systems
engineers.

   Concentric markets its enterprise services to marketing and information
service professionals, enabling companies to take full advantage of IP-based
WAN, intranet and extranet applications. The Company uses print advertising in
targeted industry publications, end-user seminars and media spot
advertisements specifically to build awareness and acquire leads for its VARs
and its direct sales team.

   In the consumer market, the Company focuses on direct mail to targeted
audiences, establishment of customer referral programs and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented online customer retention programs, such
as a Website "home" where they can learn how to use the service, how to use
the Internet and how to find information quickly.

   The Company employs in-house public relations personnel and contracts with
an outside public relations agency to provide broad coverage in network
computer and vertical industry publications. The Company also participates in
industry trade shows with and without its strategic marketing partners and
conducts numerous seminar "road shows" for market awareness and lead
generation.

Internet Technology Group, Plc

   In January 2000 Concentric completed the purchase of Internet Technology
Group Plc ("ITG"), headquartered in London, UK. It is now known as Concentric
Network Europe, which markets products and services in the UK and The
Netherlands. The combination of the growing base of leased line and web
hosting customers and extensive dial-up operations sold through the Global
Internet and FreeNet Name brands, makes Concentric Network Europe one of the
largest carrier-independent ISPs in the UK.

                                      15
<PAGE>

   Concentric's European strategy is to provide a range of Internet and
networking services to business clients across Europe. Concentric plans to
expand further into Europe to provide services in the key Northern European
markets where it will offer sophisticated services, such as virtual private
networks, on its European infrastructure. The strategy is to use high
bandwidth transmission facilities sourced from a number of different providers
to interconnect POPs owned by Concentric in the UK and Europe. The foregoing
contains forward looking statements and Concentric's ability to provide
expanded services in key Northern European markets is subject to a number of
risks and uncertainties, including those described in "Management's Discussion
and Analysis of Financial Results--Factors Affecting Operating Results--
Concentric's Acquisition Strategy Poses Several Risks", "--Concentric Faces
Risks Associated with Internaltional Expansion" and "--Concentric Depends on
New and Uncertain Markets".

   Concentric serves the enterprise market in the UK and in the Netherlands.
Products and services are sold through a field sales team. Solutions are built
around high bandwidth, flexible Internet connections, and value added
services, as well as commercial web hosting products. By taking advantage of
the company's high quality data centers with back-up power, multiple network
connections and peering arrangements, Concentric can serve the most stringent
demands of business.

   Concentric's Business Services Group provides ISDN Internet access and web
hosting products sold through a specialized telesales group, providing small-
to-medium sized enterprise customers with the appropriate product for their
network needs. Services sold under the Global Internet brand are subscription
based and are targeted at small-to-medium sized enterprise, small office/home
office and serious consumer Internet users, differentiated through the
addition of value added services. Additional services include subscription-
free consumer Internet access services: Dial-Start and Freenetnames. The
latter offers consumers a choice of their own personalized domain name for the
email address and website. Concentric maintains a customer support center in
London offering full support for all of its products and services.

   As of January 2000, Concentric had 378 employees in the UK and the
Netherlands.

Customer Service

   The Concentric Network Customer Relations Team is dedicated to providing
seamless, world-class support to all customers. Concentric believes a high
level of customer support is critical to attract and retain small-to-medium
sized business customers and large enterprise accounts. The Company's customer
support strategy is based on the following principles:

  .  technical expertise in devising cost-effective support solutions for
     customers;

  .  rapid development and flexibility in meeting customer expectations
     through effective knowledge sharing, innovative use of resources and the
     implementation of new technologies;

  .  monitoring of customer satisfaction levels and effective account
     management.

   Concentric maintains customer support contact centers in Saginaw, Michigan
and Secaucus, New Jersey. Concentric offers several levels of customer
support; all of which are available 24 hours per day, seven days per week.
Customer support is provided for all of Concentric's products. Concentric also
offers support on a contracted basis to private-label partners.Customer
support is provided by email, telephone, Website and online chat. As of
December 31, 1999, the Company employed 268 people in customer support.

Competition

   The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the ability to attract and retain a skilled
workforce; the capacity, reliability, low latency and security of network

                                      16
<PAGE>

infrastructure; technical expertise and functionality, performance and quality
of services; customization; ease of access to and navigation of the Internet;
the pricing policies of its competitors; the variety of services; the timing
of introductions of new services by the Company and its competitors; customer
support; the Company's ability to support industry standards; and industry and
general economic trends.

   The Company's current and prospective competitors generally may be divided
into four groups. These groups and examples of key competitors in each group
are listed below:

<TABLE>
   <C>                                  <S>
   .telecommunications companies....... AT&T
                                        MCI WorldCom
                                        Sprint Qwest
                                        Level 3 Communications, Inc.
                                        the RBOCs and other LECs
                                        various cable companies
   .online service providers........... America Online, Inc.
                                        CompuServe Corporation
                                        MSN, the Microsoft Network
                                        Prodigy Communications Corporation
   .Internet service providers......... BBN Corporation, a subsidiary of GTE
                                        EarthLink Network, Inc.
                                        PSINet Inc.
                                        Verio Inc.
                                        other national and regional providers
   .Web hosting providers.............. AboveNet Communications
                                        Exodus Communications
                                        Global Center
                                        Globix
                                        Verio
</TABLE>

   Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to the Company. 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 the Company. In addition, various organizations, including
certain of those identified above, have entered into or are forming joint
ventures or consortiums to provide services similar to those of the Company.

   The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online,
Earthlink, PSINet and Verio have also obtained or expanded their Internet
access products and services as a result of acquisitions. Such acquisitions
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. In addition, the
ability of some of the Company's competitors to bundle other services and
products with VPN and consumer network services could place the Company at a
competitive disadvantage. Certain companies are also exploring the possibility
of providing high-speed data services using alternative delivery methods such
as over the cable television infrastructure, through direct broadcast
satellite technology and by wireless cable. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Operating Results--Concentric's Market Is
Extremely Competitive" For a further discussion of the competitive factors
affecting the Company.

                                      17
<PAGE>

Proprietary Rights

   The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that protective
measures have been, or will be, adequate to protect the Company's proprietary
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 operates a material portion of its business over the
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.

   Although the Company does not believe that it infringes the proprietary
rights of any third parties, we cannot assure you that third parties will not
assert such claims against the Company in the future or that such claims will
not be successful. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Operating Results--
Third Parties May Claim Concentric Infringed Their Proprietary Rights" for a
further discussion of the risks related to the Company's proprietary rights.

Employees

   As of December 31, 1999, Concentric had 776 employees and 101 independent
contractors, including 210 persons in sales and marketing, 262 persons in
network operations and development, 268 in customer support and 137 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and we cannot
assure you that the Company will be able to identify, attract, and retain such
personnel in the future. None of the Company's employees is represented by a
labor union, and management believes its employee relations are good.

                                      18
<PAGE>

                EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

Executive Officers, Directors and Senior Management

   The following table sets forth certain information as of December 31, 1999,
with respect to the executive officers and directors of the Company, as well
as certain members of its senior management.

<TABLE>
<CAPTION>
   Name                   Age                      Position
   ----                   ---                      --------
   <C>                    <C> <S>
   Henry R. Nothhaft.....     Chairman, President, Chief Executive Officer and
                           55  Director
   John K. Peters........  51 Executive Vice President, Corporate Strategy and
                               Business Development
   Michael F. Anthofer...  47 Senior Vice President and Chief Financial Officer
   Eileen A. Curtis......  51 Senior Vice President of Customer Relations
   William C. Etheredge..  53 Senior Vice President of Sales
   Mark W. Fisher........  39 Senior Vice President of Marketing
   Les Hamilton..........     Senior Vice President of Network Operations and
                           55  Engineering
   Donn Dobkin...........  38 Vice President, Engineering Products and Systems
   James L. Isaacs.......  39 Vice President of Business Development
   Randy H. Katz(1)......  44 Director
   Vinod Khosla(2).......  45 Director
   Franco Regis(1).......  43 Director
   Peter C. Waal(2)......  67 Director
</TABLE>
--------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

   Henry R. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and was appointed a Director of the Company in August 1995
and Chairman of the Board in January 1998. From 1989 to August 1994, Mr.
Nothhaft was President, Chief Executive Officer and a Director of David
Systems, Inc., a networking company. From 1983 to 1989, Mr. Nothhaft held
various positions with DSC Communications Corporation, including President of
the Business Network Systems Group, President of the Digital Switch
Corporation subsidiary, Senior Vice President of Marketing and a Corporate
Director of DSC. From 1979 to 1983, Mr. Nothhaft was Vice President of
Domestic Marketing and Vice President of Sales for GTE Telenet Communications
Corporation (now Sprint). Mr. Nothhaft has an M.B.A. in Information Systems
Technology from George Washington University and a B.S. from the U.S. Naval
Academy, and is a former officer in the U.S. Marine Corps.

   John K. Peters was named Executive Vice President and General Manager,
Network Services Applications Division in June 1995. In June 1998, Mr. Peters
became Executive Vice President and General Manager, Network Services
Application Division. Since October 1999, Mr. Peters served as Executive Vice
President, Corporate Strategy and Business Development. From 1993 to August
1995, Mr. Peters served as President of Venture Development Consulting, a
consulting firm specializing in new communications and information services.
From 1988 to 1993, Mr. Peters was Vice President and Chief Operating Officer
of Pacific Bell Information Services, Inc. Prior to that, Mr. Peters spent
three years as Vice President of Application Services for Telestream
Corporation. In 1981, Mr. Peters co-founded Integrated Office Systems, Inc., a
communications and information systems company. From 1976 to 1980, Mr. Peters
was Vice President of Advanced Network Services for GTE Telenet Communications
Corporation. Mr. Peters has an M.B.A. from Stanford Graduate School of
Business and a B.S. in Statistics from Stanford University. Mr. Peters
resigned from his position effective February 2000.

   Michael F. Anthofer joined the Company in January 1996 as Vice President
and Chief Financial Officer and became a Senior Vice President in November
1996. From January 1991 to December 1995, Mr. Anthofer served as an Executive
Vice President and Chief Financial Officer, as well as a member of the Board
of Directors, of

                                      19
<PAGE>

Shared Resource Exchange, Inc., a privately held digital switching platform
and PBX supplier. Prior to 1991, Mr. Anthofer held various executive positions
at DSC Communications Corporation including Vice President, Corporate Business
Planning, Vice President, Business Network Group and Vice President, Network
Products Group. Mr. Anthofer has an M.B.A. and a B.S. from the University of
California, Berkeley.

   Eileen A. Curtis became Customer Relations Manager in January 1995,
Director of Customer Relations in September 1995, Vice President, Customer
Relations in November 1996 and Senior Vice President of Customer Relations in
October 1999. From August 1987 to July 1993, Ms. Curtis was employed by Cox
Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has an MBA and a B.S. from Central Michigan
University.

   William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and
then Vice President Western Region for Memorex-Telex Corporation. Mr.
Etheredge has an M.B.A. from Bowling Green University and a B.A. from
Westminster College.

   Mark W. Fisher joined the Company in June 1997 as Vice President of
Corporate Marketing and was promoted to Senior Vice President and General
Manager, Network Services Division in July 1998. Since October 1999, Mr.
Fisher has served as Senior Vice President of Marketing. From July 1996 to
June 1997, Mr. Fisher was General Manager and Vice President, Marketing of
Pacific Bell Internet Services, a wholly owned subsidiary of Pacific Bell.
From June 1995 to August 1996, Mr. Fisher was Vice President, Marketing of
Pacific Bell Internet Services. From 1989 to May 1995, Mr. Fisher held various
data product marketing and data center operations positions at Pacific Bell.
Mr. Fisher has an M.B.A. from the University of California, Berkeley and a
B.S. in mechanical engineering from the U.S. Naval Academy.

   Les Hamilton joined the Company in April 1999 as Senior Vice President of
Network Operations and Engineering. From 1993 to 1999, Mr. Hamilton held
various positions at Infonet Services Corp. including Vice President of
Network Services, Director of Engineering Operations, Manager of New
Technology and Manager of Backbone Services. From 1968 to 1993, Mr. Hamilton
held various positions at TRW Information Services and British Aerospace Corp.
Mr. Hamilton holds a B.S. degree in mechanical engineering from Teesside
University in England and an Executive M.B.A. from the Peter Drucker School of
Management at Claremont University.

   Donn Dobkin joined the Company in February 1996 as Director of Financial
Planning, was promoted to Vice President of Information Systems in March 1999
and then to Vice President of Engineering Products and Systems in October
1999. From 1991 to 1996, Mr. Dobkin held various positions at Silicon
Graphics, Inc., including Division Controller and Marketing Operations
Manager. He held various positions at DSC Communications Corporation from 1987
to 1991, and at Hewlett-Packard from 1984 to 1987. Mr. Dobkin has a B.A.
degree in Business-Economics from the University of California, Santa Barbara.

   James L. Isaacs joined the Company in October 1995 as the Director of
Product Management. In March 1997, he became Vice President of Product
Management and in November 1997 he was appointed Vice President of Business
Development. From July 1988 to October 1995, Mr. Isaacs held various positions
at Apple Computer, including Group Manager Product Marketing, Apple On Line
Services Division and Business Development Manager of Apple On Line Services
Division. Mr. Isaacs has an M.B.A. from the University of California, Berkeley
and an A.B. from Stanford University.

   Randy H. Katz has been a Director of the Company since May 1999. Dr. Katz
is the Chair of the Electrical Engineering and Computer Science Department at
the University of California, Berkeley and holds the United Microelectronics
Corporation Distinguished Professorship. Dr. Katz has a B.A. degree in
computer science and mathematics from Cornell University and M.S. and Ph.D.
degrees in computer science from the University of California, Berkeley.

                                      20
<PAGE>

   Vinod Khosla has been a Director of the Company since April 1995. Mr.
Khosla has been a General Partner with the venture capital firm of Kleiner
Perkins Caufield & Byers from February 1986 to the present. Mr. Khosla was a
co-founder of Daisy Systems and the founding Chief Executive Officer of Sun
Microsystems, Inc. Mr. Khosla also serves on the boards of Asera, Corio Inc.,
Corvis Corporation, BigVine.com, Juniper Networks, Redback and QWEST
Communications. He has a B.S.E. from the Indian Institute of Technology in New
Delhi, an M.S.E. from Carnegie Mellon University, and an M.B.A. from the
Stanford Graduate School of Business.

   Franco Regis has been a Director of the Company since October 1996. Since
1997, Mr. Regis has been an Executive in the International Division of Telecom
Italia, SpA, the telephone operating company of Italy and since 1999 he has
been responsible for the European Area. From 1992 to 1997, Mr. Regis was a
Director of Planning, Budget and Control for the Business Division of Telecom
Italia. Mr. Regis has an engineering degree from the Rome State University.

   Peter C. Waal has been a Director of the Company since May 1999. Mr. Waal
is a private consultant and was most recently Vice President of Strategic
Planning and Business Development for DSC Communications Corporation. He has
held various positions with GTE Telenet Communications Corporation, Applied
Data Research, Inc., and Bell & Howell Corporation. Mr. Waal has a B.S. degree
in electrical engineering from the University of Wisconsin and is a member of
the IEEE.

 Classified Board of Directors

   The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.

 Director Compensation

   Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion. The Company
has entered into indemnification agreements with each member of the Board of
Directors and certain of its officers providing for the indemnification of
such person to the fullest extent authorized, permitted or allowed by law.

 Compensation Committee

   The Company's Board of Directors currently has a Compensation Committee
that reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers
the Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, Amended and Restated 1996 Stock Plan, 1997 Stock
Plan, 1997 Employee Stock Purchase Plan and 1999 Non-Statutory Stock Option
Plan. The Compensation Committee currently consists of Messrs. Khosla and
Waal.

 Audit Committee

   The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the external audits of the
Company, reviews and approves material accounting policy changes, monitors
internal accounting controls, recommends engagement of independent auditors,
reviews related-party transactions and performs other duties as prescribed by
the Board of Directors. The Audit Committee currently consists of Messrs. Katz
and Regis.

ITEM 2. PROPERTIES

   The Company's executive offices are located in San Jose, California, under
a lease expiring on February 1, 2006. The Company also leases network
operations facilities in Bay City, Michigan, under a lease expiring on

                                      21
<PAGE>

August 31, 2000, data centers in Chicago, Illinois, under a lease expiring on
June 30, 2008, in Santa Clara, California, under a lease expiring on May 31,
2000, in Irvine, California, under a lease expiring on June 30, 2004, in
Secaucus, New Jersey, under a lease expiring on March 1, 2006, in Hazelwood,
Missouri, under a lease expiring on March 31, 2002 and a customer support
facility in Saginaw, Michigan under a lease expiring in December 2001.

ITEM 3. LEGAL PROCEEDINGS

   Concentric has been named as a defendant in a lawsuit filed in New Jersey
state court on November 1, 1999. The complaint seeks statutory damages, treble
damages, and injunctive relief under the Telephone Consumer Protection Act of
1991 and alleges that, in or about March and June 1999, 9Net Avenue, Inc.
("9Net Avenue") transmitted unsolicited facsimiles advertising its services.
The suit has been brought as a purported class action on behalf of all
recipients of the allegedly unsolicited faxes. Concentric purchased the assets
of 9Net Avenue in October 1999 and plaintiff contends that Concentric has
succeeded to any liability 9Net Avenue incurred in connection with the alleged
faxes. Concentric intends to vigorously defend the claims against it; however,
there can be no guarantee that it will be successful or that this litigation
will not have a material adverse impact on its operations. In addition,
Concentric has received a subpoena from the New Jersey Attorney General
seeking information concerning the alleged transmission of unsolicited
facsimile advertising by 9Net Avenue and additional marketing materials
distributed by 9Net Avenue.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   Not applicable.

                                      22
<PAGE>

                                    PART II

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

   Our common stock has been traded on the Nasdaq National Market under the
symbol "CNCX" since our initial public offering on August 1, 1997. All share
and per share information presented herein has been retroactively restated to
reflect a two-for-one stock split of the Company's common stock on May 21,
1999, paid in the form of a stock dividend, to holders of record on April 30,
1999. The following table sets forth, for the periods indicated, the high and
low sale prices for our common stock as reported by the Nasdaq National
Market:

<TABLE>
<CAPTION>
                                                                   High   Low
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Fiscal Year Ended December 31, 1997:
     Third Quarter (from August 1, 1997)......................... $ 8.00 $ 5.69
     Fourth Quarter..............................................   7.50   3.94
   Fiscal Year Ended December 31, 1998:
     First Quarter............................................... $10.19 $ 4.44
     Second Quarter..............................................  15.75   9.31
     Third Quarter...............................................  20.50   7.13
     Fourth Quarter..............................................  18.63   7.25
   Fiscal Year Ending December 31, 1999:
     First Quarter............................................... $40.13 $16.38
     Second Quarter..............................................  52.25  25.06
     Third Quarter...............................................  39.75  17.88
     Fourth Quarter..............................................  34.38  17.25
   Fiscal Year Ended December 31, 2000:
     First Quarter (through March 17, 2000)...................... $57.44 $28.25
</TABLE>

   On March 17, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $53.94 per share. As of March 17, 2000, there were
approximately 2,652 holders of record and the Company estimates over 23,109
beneficial owners of the common stock.

   The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.

                                      23
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

<TABLE>
<CAPTION>
                                         Year Ended December 31,
                              -------------------------------------------------
                                1995      1996      1997      1998(1)   1999(1)
                              --------  --------  --------  --------  ---------
                                  (In thousands, except per share data)
<S>                           <C>       <C>       <C>       <C>       <C>
Consolidated Statement of
 Operations Data:
Revenue.....................  $  2,483  $ 15,648  $ 45,457  $ 82,807  $ 147,060
Cost of revenue.............    16,168    47,945    61,439    85,352    133,922
Network equipment write-
 off(2).....................       --      8,321       --        --         --
Development.................       837     2,449     4,850     7,734     10,907
Marketing and sales.........     3,899    16,609    24,622    39,793     54,288
General and administrative..     2,866     3,445     4,790    10,398     15,441
Amortization of goodwill and
 other intangible assets....       --        --        --      3,842      7,913
Acquisition-related
 charges....................       --        --        --      1,291        --
Write-off of in-process
 technology.................       --        --        --      5,200        --
                              --------  --------  --------  --------  ---------
  Total costs and expenses..    23,770    78,769    95,701   153,610    222,471
                              --------  --------  --------  --------  ---------
Loss from operations........   (21,287)  (63,121)  (50,244)  (70,803)   (75,411)
Other income (expense)......       --        --      1,233      (750)      (663)
Net interest expense........      (721)   (3,260)   (6,571)  (13,595)    (9,011)
                              --------  --------  --------  --------  ---------
Loss before extraordinary
 item.......................   (22,008)  (66,381)  (55,582)  (85,148)   (85,085)
Extraordinary gain on early
 retirement of debt.........       --        --        --      3,042        --
                              --------  --------  --------  --------  ---------
Net loss....................   (22,008)  (66,381)  (55,582)  (82,106)   (85,085)
                              --------  --------  --------  --------  ---------
Preferred stock dividends
 and accretion..............       --        --        --    (11,958)   (26,697)
                              --------  --------  --------  --------  ---------
Net loss attributable to
 common stockholders........  $(22,008) $(66,381) $(55,582) $(94,064) $(111,782)
                              ========  ========  ========  ========  =========
Net loss per share
 attributable to common
 stockholders(3) ...........            $  (6.73) $  (2.82) $  (3.23) $   (2.76)
                                        ========  ========  ========  =========
Shares used in computing net
 loss per share attributable
 to common stockholders(3)
 ...........................               9,874    19,744    29,094     40,473
                                        ========  ========  ========  =========
</TABLE>

<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                   -------------------------------------------
                                    1995    1996     1997     1998(1)   1999(1)
                                   ------- ------- -------- --------  --------
                                     (In thousands, except per share data)
<S>                                <C>     <C>     <C>      <C>       <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents .......  $19,054 $17,657 $119,959 $ 98,988  $ 25,891
Short term investments ..........      --      --       --    52,226    80,095
Restricted cash(4) ..............      --      --    52,525   36,238   144,060
Property and equipment, net .....   16,289  47,927   53,710   64,268    82,894
Total assets ....................   37,235  70,722  244,489  298,257   497,794
Notes payable and capital lease
 obligations, net of current
 portion ........................   11,047  30,551  179,172  156,455   153,416
Redeemable exchangeable preferred
 stock ..........................      --      --       --   156,105   179,521
Convertible redeemable preferred
 stock ..........................      --      --       --       --     41,339
Total stockholders' equity
 (deficit) ......................    9,763   2,925   31,918  (56,875)   62,154
</TABLE>
--------
(1) During 1998, the Company acquired InterNex, DeltaNet and AnaServe, the
    effects of which have been included in the 1998 financial results. In
    1999, the Company acquired 9Net Avenue, the effects of which have been
    included in the 1999 financial results. See Note 13 of Notes to
    Consolidated Financial Statements.

                                      24
<PAGE>

(2) See "Management's Discussion and Analysis of Financial Condition and
    Results of Operations" and Note 3 of Notes to Consolidated Financial
    Statements.

(3) Net loss per share and shares used in computing net loss per share
    attributable to common stockholders are presented on a pro forma basis for
    the years ended December 31, 1996 and 1997 and on an historical basis for
    the years ended December 31, 1998 and 1999. See Note 1 of Notes to
    Consolidated Financial Statements.

(4) Restricted cash consists of $18.8 million of funds held in escrow to pay
    interest relating to the Company's 12 3/4% Senior Notes, and $125.3
    million of funds held in escrow for the pending acquisition of Internet
    Technology Group Plc. See Note 5 of Notes to Consolidated Financial
    Statements.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

   This section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the subsection entitled "Risks Related to
Concentric's Business". The following discussion of the financial condition
and results of operations of the Company should be read in conjunction with
the Financial Statements and the Notes thereto included elsewhere in this
Report.

Overview

   The Company was founded in 1991. From 1991 to mid-1993, the Company
conducted development and network services planning activities and realized no
revenues. Initially, the Company was focused on providing consumers with
direct dial-up connectivity to bulletin board services. Online gaming and
entertainment services for consumers were commenced in July 1993 through the
utilization of a third party network infrastructure. The Company commenced
operation of its own network in late 1994. In May 1995, new management led by
Henry R. Nothhaft redefined and broadened the Company's strategy to provide a
range of Internet and tailored, value-added Internet Protocol-based network
services to consumers and businesses.

   In January 2000, Concentric agreed to be acquired by Nextlink. In this
transaction, both Nextlink and Concentric will merge into a newly-formed
company, to be renamed Nextlink Communications, Inc., which will assume all of
Concentric's and Nextlink's outstanding debt obligations. In the transaction,
each outstanding share of Nextlink's Class A common stock and Class B common
stock would be converted into one share of Class A common stock or Class B
common stock, as applicable, of the corporation surviving the merger, which
stock will be substantially identical to Nextlink's Class A and Class B common
stock. Each share of outstanding Concentric common stock will be converted
into $45 of surviving corporation Class A common stock, subject to a collar
which adjusts based upon the average NEXTLINK stock price prior to the merger.
Pursuant to the collar, between 0.650 (if the average NEXTLINK stock price
prior to the merger is $69.23 or less) and 0.495 (if the average NEXTLINK
stock price prior to the merger is $90.91 or greater) shares of surviving
corporation Class A common stock will be issued for each share of Concentric
common stock converted in the merger. The transaction is subject to approval
of our stockholders and other customary closing conditions, and is expected to
close in the second quarter of 2000.

   In connection with the anticipated merger, on March 24, 2000, Concentric
and NEXTLINK successfully completed a consent solicitation of holders of
Concentric's 12 2/3% Senior Notes due 2007 and 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010. In the consent solicitation,
holders of a majority of the outstanding principal amount of the notes and a
majority of the outstanding shares of the preferred stock consented to amend
certain covenants in the indenture governing the notes and the certificate of
designations governing the preferred stock to conform to corresponding
covenants in the indenture governing NEXTLINK's 10 1/2% Senior Notes. The
amendments will become effective upon consummation of the merger.

   The Company's revenue prior to 1996 was primarily generated from providing
Internet access to consumers. The Company provides complete Internet business
solutions for small- and medium-sized enterprises, including

                                      25
<PAGE>

DSL access, Web hosting, and e-commerce. The Company also offers data center
services, virtual private networks, dedicated access, and application
infrastructure services for delivering applications over the Internet or a
virtual private network. The Company focuses its sales and marketing effort
under its own brand on the small-to-medium enterprise market selling DSL and
web-hosting as the lead-in products. Contracts with enterprise customers
typically have a term ranging from one to three years. The Company expects
enterprise-related revenue to represent an increasing portion of total revenue
in future periods. The foregoing expectation is a forward-looking statement
that involves risks and uncertainties, and actual results could vary as a
result of a number of factors including the Company's operating results, the
results and timing of the Company's launch of new products and services,
governmental or regulatory changes, the ability of the Company to meet product
and project demands, the success of the Company's marketing efforts,
competition and acquisitions of complementary businesses, technologies or
products.

   In February 1998, the Company acquired InterNex, a provider of network
services, collocation services and Web hosting facilities to enterprise
customers. This acquisition was accounted for using the purchase method of
accounting. Accordingly, the Company's historical financial statements do not
include results of operations, financial position or cash flows of InterNex
prior to its acquisition in February 1998. In addition, as a result of the
acquisition, the Company incurred a charge of $5.2 million relating to
acquired in-process technology and recorded an aggregate of $12.6 million of
goodwill and other intangible assets, which will be amortized on a straight-
line basis over their estimated useful lives ranging from two to five years.

   In May 1998, the Company acquired DeltaNet, a provider of dial-up and
dedicated access services, Web hosting services and Web application
development and design. This transaction was accounted for as a pooling of
interests. Results of DeltaNet's operations for the period beginning April 1,
1998 through December 31, 1998 are included in the consolidated results of
operations. In addition, as a result of the acquisition, the Company has
incurred charges of approximately $1.3 million in transaction costs consisting
primarily of severance costs, redundant facilities and assets and professional
fees related to the acquisition.

   In August 1998, the Company acquired AnaServe, a provider of Web hosting
services. This acquisition was accounted for using the purchase method of
accounting. The Company's historical financial statements do not include
results of operations, financial position or cash flows of AnaServe prior to
its acquisition. As a result of the acquisition, the Company has recorded an
aggregate of $12.0 million of goodwill and other intangible assets, which will
be amortized on a straight-line basis over their useful lives ranging from one
to five years.

   In October 1999, the Company acquired 9Net Avenue, a provider of domain
parking, Web hosting, e-commerce, dedicated hosting and co-location services.
This acquisition was accounted for using the purchase method of accounting.
The Company's historical financial statements do not include results of
operations, financial position or cash flows of 9Net Avenue prior to its
acquisition in October 1999. As a result of the acquisition, the Company has
recorded an aggregate of $58.0 million of goodwill and other intangible
assets, which will be amortized on a straight-line basis over their useful
lives ranging from three to five years.

   In February 2000, the Company acquired Internet Technology Group, Plc, a
provider of Internet access and hosting services in the UK and Europe. This
transaction will result in additional charges for goodwill. The Company may
acquire other complementary products, technology and businesses. If the
Company were to incur additional charges for acquired in-process technology,
amortization of goodwill and acquisition costs with respect to any future
acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected. See "Factors Affecting
Operating Results--Concentric's Acquisition Strategy Poses Several Risks" and
"--Liquidity and Capital Resources."

   The Company has incurred net losses and experienced negative cash flow from
operations since inception and expects to continue to operate at a net loss
and experience negative cash flow at least through the remainder of 2000. The
Company's ability to achieve profitability and positive cash flow from
operations is dependent upon the Company's ability to substantially grow its
revenue base and achieve other operating efficiencies. The Company experienced
net losses attributable to common stockholders of approximately $55.6 million,

                                      26
<PAGE>

$94.1 million and $111.8 million for the years ended December 31, 1997, 1998,
and 1999, respectively. We cannot assure you that the Company will be able to
achieve or sustain revenue growth, profitability or positive cash flow on
either a quarterly or an annual basis. At December 31, 1999, the Company had
approximately $125.0 million of gross deferred tax assets comprised primarily
of net operating loss carry-forwards. The Company believes that, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of the deferred tax assets such that a
full valuation allowance has been recorded. These factors include the
Company's history of net losses since its inception and the fact that the
market in which the Company competes is intensely competitive and
characterized by rapidly changing technology. The Company believes that, based
on the current available evidence, it is more likely than not that the Company
will not generate taxable income through 2000, and possibly beyond, and
accordingly will not realize the Company's deferred tax assets through 2000,
and possibly beyond. The Company will continue to assess the realizability of
the deferred tax assets based on actual and forecasted operating results. In
addition, the utilization of net operating losses may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization. See "Factors Affecting Operating Results--Concentric Has Incurred
Net Losses and Experienced Negative Cash Flow From Operations Since Inception
and Expects to Have Continuing Operating Losses."

   The Company expects to focus in the near term on building and increasing
its revenue base, which will require it to significantly increase its expenses
for personnel, marketing, network infrastructure and the development of new
services, and may adversely impact short term operating results. As a result,
the Company believes that it will incur losses in the near term and we cannot
assure you that the Company will be profitable in the future.

   The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly, depending upon a variety of factors, including
the timely deployment and expansion of the Concentric network and new network
architectures, the incurrence of related capital costs, variability and length
of the sales cycle associated with the Company's product and service
offerings, the receipt of new value-added network services and consumer
services subscriptions and the introduction of new services by the Company and
its competitors. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by the
Company; customer retention rate; market acceptance of new and enhanced
versions of the Company's services; changes in pricing policies by the
Company's competitors; the Company's ability to obtain sufficient supplies of
sole- or limited-source components; user demand for network and Internet
access services; balancing of network usage over a 24-hour period; the ability
to manage potential growth and expansion; the ability to identify, acquire and
integrate successfully suitable acquisition candidates; and charges related to
acquisitions. In response to competitive pressures, the Company may take
certain pricing or marketing actions that could have a material adverse affect
on the Company's business. As a result, variations in the timing and amounts
of revenues could have a material adverse affect on the Company's quarterly
operating results. Due to the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. In the event that the Company's operating results in any
future period fall below the expectations of securities analysts and
investors, the trading price of the Company's common stock would likely
decline.

Results of Operations

 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.

   Revenue. Revenue totaled approximately $147.1 million for the year ended
December 31, 1999, a $64.3 million increase over revenue of approximately
$82.8 million for the year ended December 31, 1998. This increase reflects
growth in revenue from:

  .  the Company's broadened product offerings to its enterprise customers;

  .  the Company's marketing arrangements with its strategic partners; and

  .  revenues from acquired operations

                                      27
<PAGE>

   The Company expects revenue growth from Internet access customers to
flatten over time as it de-emphasizes this sector of its business. Revenue
from WebTV declined to 25.2% of the Company's net revenue for the year ended
December 31, 1999 compared to 26.8% for the year ended December 31, 1998. The
Company expects revenue from WebTV to decrease as a percentage of revenue. The
foregoing expectation is a forward looking statement that involves risks and
uncertainties and the actual results could vary materially as a result of a
number of factors including those set forth under the caption "Factors
Affecting Operating Results--The Loss of Any of Concentric's Major Customers
Could Severely Impact Its Business."

   Cost of Revenue. Cost of revenue consists primarily of personnel costs to
maintain and operate the Company's network, access charges from local exchange
carriers, backbone and Internet access costs, depreciation of network
equipment and amortization of related assets. Cost of revenue for the year
ended December 31, 1999 was approximately $133.9 million, an increase of $48.5
million from cost of revenue of $85.4 million for the year ended December 31,
1998. This increase is attributable to the overall growth in the size of the
network and costs associated with acquired operations. As a percentage of
revenue, such costs declined to 91.0% of revenue in the year ended December
31, 1999, down from 103.1% of revenue in the prior year, due to increased
network utilization associated with the Company's revenue growth and lower per
port costs of the Company's network architecture. The Company expects its cost
of revenue to continue to increase in dollar amount, while declining as a
percentage of revenue as the Company expands its customer base. The foregoing
expectation is a forward looking statement that involves risks and
uncertainties and the actual results could vary materially as a result of a
number of factors, including those set forth under the captions "Factors
Affecting Operating Results--Concentric Has Incurred Net Losses and
Experienced Negative Cash Flow From Operations Since Inception and Expects to
Have Continuing Operating Losses", "Factors Affecting Operating Results--
Concentric's Growth and Expansion May Strain Its Resources" and "Factors
Affecting Operating Results--Concentric Depends Upon New and Uncertain
Markets."

   Development Expense. Development expense consists primarily of personnel
and equipment related expenses associated with the development of products and
services of the Company. Development expense was approximately $10.9 million
and $7.7 million for the years ended December 31, 1999 and 1998, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings, to manage the overall growth in
the network and from acquired operations. Development expense as a percentage
of revenue declined to 7.4% for the year ended December 31, 1999 from 9.3% for
the year ended December 31, 1998 as a result of the Company's increased
revenue. The Company expects its development spending to continue to increase
in dollar amount, but to decline as a percentage of revenue. The foregoing
expectation is a forward looking statement that involves risks and
uncertainties and the actual results could vary materially as a result of a
number of factors, including those set forth below under the captions "Factors
Affecting Operating Results-- Concentric Has Incurred Net Losses and
Experienced Negative Cash Flow From Operations Since Inception and Expects to
Have Continuing Operating Losses" and "Factors Affecting Operating Results--
Concentric Depends Upon New and Enhanced Services."

   Marketing and Sales Expense. Marketing and sales expense consists primarily
of personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. Marketing and sales expense was approximately
$54.3 million for the year ended December 31, 1999 and $39.8 million for the
year ended December 31, 1998. The $14.5 million increase in 1999 reflects a
substantial investment in the customer support, marketing and sales
organizations necessary to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Marketing and sales expense as a percentage of revenue
declined to 36.9% for the year ended December 31, 1999 from 48.1% in the year
earlier period as a result of the Company's increased revenue. The Company
expects marketing and sales expenditures to continue to increase in dollar
amount, but to decline as a percentage of revenue. The foregoing expectation
is a forward looking statement that involves risks and uncertainties and the
actual results could vary materially as a result of a number of factors
including those set forth under the captions "Factors Affecting Operating
Results--Concentric Depends on New and Uncertain Markets" and "Factors
Affecting Operating Results--Concentric's Growth and Expansion May Strain Its
Resources."

                                      28
<PAGE>

   General and Administrative Expense. General and administrative expense
consists primarily of personnel expense and professional fees. General and
administrative expense was approximately $15.4 million for the year ended
December 31, 1999 and $10.4 million for the year ended December 31, 1998. This
higher level of expense reflects an increase in personnel and professional
fees necessary to manage the financial, legal and administrative aspects of
the business. General and administrative expense as a percentage of revenue
declined to 10.5% for the year ended December 31, 1999 from 12.6% in the prior
year as a result of the Company's increased revenue. The Company expects
general and administrative expense to increase in dollar amount, reflecting
its growth in operations, but to decline as a percentage of revenue. The
foregoing expectation is a forward looking statement that involves risks and
uncertainties and the actual results could vary materially as a result of a
number of factors including those set forth under the captions "Factors
Affecting Operating Results--Concentric Depends on New and Uncertain Markets"
and "Factors Affecting Operating Results--Concentric's Growth and Expansion
May Strain Its Resources."

   Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets was approximately $7.9 million for the
year ended December 31, 1999 and $3.8 million for the year ended December 31,
1998. The increase is primarily due to a full year of goodwill amortization
from the acquisition of AnaServe in August 1998 and goodwill amortization
associated with the acquisition of 9Net Avenue in October 1999.

   Acquisition-Related Charges. For the year ended December 31, 1998 the
Company charged to operations one-time acquisition costs of $1.3 million
related to the DeltaNet acquisition. Those costs principally related to
professional fees, reserves for redundant assets and facilities and employee
severance packages.

   Write-off of In-Process Technology. For the year ended December 31, 1998,
the Company wrote-off $5.2 million of in-process technology related to the
acquisition of InterNex. This acquisition provided technology and expertise
that the Company is using to enhance and expand the breadth of its product and
service offerings to its customers.

   Other Income (Expense). During the year ended December 31, 1999, the
Company wrote off $504,000 related to the issuance of warrants to TMI. The
remainder of other expense was primarily due to the amortization of consent
fees related to the amendment of the terms of the Company's 12 3/4% Senior
Notes due 2007 and 13 1/2% Series B Redeemable Exchangeable Preferred Stock
due 2010. During the year ended December 31, 1998, the Company recorded
$750,000 of other expense in connection with the settlement of certain
litigation with the shareholders of Diana Corporation.

   Net Interest Expense. Net interest expense was approximately $9.0 million
and $13.6 million for the years ended December 31, 1999 and 1998,
respectively. The decrease is primarily due to the early retirement of debt in
the form of capital lease obligations in March 1998 and higher levels of cash,
cash equivalents and short-term investments in 1999.

   Extraordinary Gain. For the year ended December 31, 1998, the Company
realized an extraordinary gain of $3.0 million related to the early retirement
of debt in the form of capital lease obligations.

   Preferred Stock Dividends and Accretions. Preferred stock dividends and
accretions are related to the Series A 13 1/2% Redeemable Exchangeable
Preferred Stock due 2010 ("Series A Preferred") issued in June 1998, the
Series B 13 1/2% Redeemable Exchangeable Preferred Stock due 2010 ("Series B
Preferred") issued in September 1998 in exchange for all outstanding shares of
Series A Preferred and the Series C 7% Convertible Redeemable Preferred Stock
due 2010 ("Series C Preferred") issued in June 1999. For the years ended
December 31, 1999 and 1998, the Company recorded dividends and stock
accretions of $26.7 million and $12.0 million, respectively. The increase is
due to the Series C Preferred stock dividends and accretions and a full year
of dividends and accretions of Series A Preferred and Series B Preferred in
1999.

   Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $111.8 million
for the year ended December 31, 1999 as compared to

                                      29
<PAGE>

approximately $94.1 million for the year ended December 31, 1998. For
comparative purposes, the net loss attributable to common stockholders for the
year ended December 31, 1999 included $26.7 million of dividends and
accretions related to the Series A, Series B and Series C Preferred Stock, an
increase of $14.7 million over the prior year. Additionally, amortization of
goodwill and other intangible assets increased $4.1 million due to the
acquisition of Anaserve in August 1998 and 9Net Avenue in October 1999. The
net loss attributable to common stockholders for the year ended December 31,
1998 included expenses related to financing and acquisition charges of $1.3
million resulting from the acquisition of DeltaNet and $5.2 million write-off
of in-process technology. These losses were partially offset by an
extraordinary gain of $3.0 million on early retirement of debt.

 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.

   Revenue. Revenue totaled approximately $82.8 million for the year ended
December 31, 1998, a $37.3 million increase over revenue of approximately
$45.5 million for the year ended December 31, 1997. This increase reflects
growth in revenue from:

  .  the Company's broadened product offerings to its enterprise customers;

  .  the Company's marketing arrangements with its strategic partners;

  .  continued growth in revenue derived from Internet access customers;

  .  revenue generated from network, colocation and Web hosting services
     provided by the Company's wholly-owned subsidiary, InterNex, which was
     acquired in February 1998; and

  .  revenues from DeltaNet and AnaServe which were acquired in May and
     August 1998, respectively.

   Revenue from WebTV declined to 26.8% of the Company's net revenue for the
year ended December 31, 1998 compared to 33.4% for the year ended December 31,
1997.

   Cost of Revenue. Cost of revenue consists primarily of personnel costs to
maintain and operate the Company's network, access charges from local exchange
carriers, backbone and Internet access costs, depreciation of network
equipment and amortization of related assets. Cost of revenue for the year
ended December 31, 1998 was approximately $85.4 million, an increase of $24.0
million from cost of revenue of $61.4 million for the year ended December 31,
1997. This increase is attributable to the overall growth in the size of the
network and costs associated with acquired operations. As a percentage of
revenue, such costs declined to 103.1% of revenue in the year ended December
31, 1998, down from 135.2% of revenue in the prior year, due to increased
network utilization associated with the Company's revenue growth and lower per
port costs of the Company's network architecture.

   Development Expense. Development expense consists primarily of personnel
and equipment related expenses associated with the development of products and
services of the Company. Development expense was approximately $7.7 million
and $4.9 million for the years ended December 31, 1998 and 1997, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings, to manage the overall growth in
the network and from acquired operations. Development expense as a percentage
of revenue declined to 9.3% for the year ended December 31, 1998 from 10.7%
for the year ended December 31, 1997 as a result of the Company's increased
revenue.

   Marketing and Sales Expense. Marketing and sales expense consists primarily
of personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. Marketing and sales expense was approximately
$39.8 million for the year ended December 31, 1998 and $24.6 million for the
year ended December 31, 1997. The $15.2 million increase in 1998 reflects a
substantial investment in the customer support, marketing and sales
organizations necessary to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Marketing and sales expense as a percentage of revenue
declined to 48.1% for the year ended December 31, 1998 from 54.2% in the year
earlier period as a result of the Company's increased revenue.

                                      30
<PAGE>

   General and Administrative Expense. General and administrative expense
consists primarily of personnel expense and professional fees. General and
administrative expense was approximately $10.4 million for the year ended
December 31, 1998 and $4.8 million for the year ended December 31, 1997. This
higher level of expense reflects an increase in personnel and professional
fees necessary to manage the financial, legal and administrative aspects of
the business. General and administrative expense as a percentage of revenue
increased to 12.6% for the year ended December 31, 1998 from 10.5% in the
prior year as a result of the Company's increased facilities costs and
expenses related to updating the Company's information systems.

   Amortization of Goodwill and Other Intangible Assets. For the year ended
December 31, 1998, the Company recorded amortization of goodwill and other
intangible assets of $3.8 million resulting from the acquisition of InterNex
in February 1998 and AnaServe in August 1998.

   Acquisition-Related Charges. For the year ended December 31, 1998 the
Company charged to operations one-time acquisition costs of $1.3 million
related to the DeltaNet acquisition. Those costs principally related to
professional fees, reserves for redundant assets and facilities and employee
severance packages.

   Write-off of In-Process Technology. For the year ended December 31, 1998,
the Company wrote-off $5.2 million of in-process technology related to the
acquisition of InterNex. This acquisition provided technology and expertise
that the Company is using to enhance and expand the breadth of its product and
service offerings to its customers.

   Other Income (Expense). During the year ended December 31, 1998, the
Company recorded $750,000 of other expense in connection with the settlement
of certain litigation with the shareholders of Diana Corporation. During the
year ended December 31, 1997, upon settlement of the Sattel litigation, the
Company recorded $970,000 of other income related to the reversal of
previously established reserves. Additionally, the Company recorded $425,000
of other income related to the re-negotiation of a third party services
agreement.

   Net Interest Expense. Net interest expense was approximately $13.6 million
and $6.6 million for the years ended December 31, 1998 and 1997, respectively.
The increase is primarily due to interest related to $150.0 million principal
amount of 12 3/4% Senior Notes issued in December 1997.

   Extraordinary Gain. For the year ended December 31, 1998, the Company
realized an extraordinary gain of $3.0 million related to the early retirement
of debt in the form of capital lease obligations.

   Preferred Stock Dividends and Accretions. For the year ended December 31,
1998, the Company recorded dividend and stock accretion of $12.0 million
related to the preferred stock issued in June 1998.

   Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $94.1 million
for the year ended December 31, 1998 as compared to approximately $55.6
million for the year ended December 31, 1997. For comparative purposes, the
net loss attributable to common stockholders for the year ended December 31,
1998 included expenses related to financing and acquisition charges of $1.3
million resulting from the acquisition of DeltaNet, $12.0 million of dividends
and accretion related to the preferred stock issued in June 1998, $19.9
million of interest expense and amortization of debt issuance costs related to
the 12 3/4% Senior Notes and warrants, $5.2 million write-off of in-process
technology and $3.8 million of amortization of goodwill and other intangibles
relating to the acquisitions of InterNex and AnaServe. These losses were
partially offset by an extraordinary gain of $3.0 million on early retirement
of debt.

Liquidity and Capital Resources

   To date, the Company has satisfied its cash requirements primarily through
the sale of capital stock, debt financings and capitalized lease financings.
The Company's principal uses of cash are to fund working capital requirements
and capital expenditures, to service its capital lease and debt financing
obligations, to finance and

                                      31
<PAGE>

fund acquisitions, to provide for the early retirement of debt and to finance
equity investments in strategic partners. Net cash used in operating
activities for the years ended December 31, 1999 and 1998 was approximately
$61.1 million and $46.6 million, respectively. Cash used in operating
activities in both periods was primarily affected by the net losses, caused by
increased costs related to the expansion of the Company's network, marketing
programs and organizational infrastructure.

   Net cash used in investing activities for the years ended December 31, 1999
and 1998 was approximately $238.1 million and $101.9 million, respectively.
Net cash used in investing activities for the year ended December 31, 1999
consisted primarily of approximately $41.7 million used to purchase capital
equipment to support the Company's expanded network infrastructure, restricted
cash of $124.9 million placed in escrow for the Internet Technology Group, Plc
acquisition, equity investments in strategic partners totaling $27.1 million,
$27.9 million of cash used to purchase short term investments, $16.0 million
loan to Internet Technology Group, Plc and $800,000 of cash used to acquire
9Net Avenue. For the year ended December 31, 1998, net cash used in investing
activities consisted primarily of $52.2 million used to purchase short term
investments, $23.5 million used for purchase of capital equipment to support
the Company's expanded network infrastructure and $25.1 million of cash used
to acquire InterNex and AnaServe.

   For the year ended December 31, 1999, net cash of $226.1 million was
provided from financing activities. Net proceeds from the public stock
offering in February 1999 was $119.4 million. Net proceeds from the issuance
of Series C Preferred was $50.0 million. Net proceeds from the sale of common
stock to SBC was $19.5 million. Additionally, net proceeds from other stock
issuances, including the sale of stock to stockholders exercising warrants,
was approximately $29.6 million. $5.8 million of cash was used for repayment
of capital lease obligations and restricted cash of $17.1 million was used to
pay interest on the 12 3/4% Senior Notes. For the year ended December 31, 1998
net cash of approximately $127.6 million was provided from financing
activities, primarily reflecting $144.1 million of net proceeds from the
issuance of preferred stock in June 1998 less $24.8 million used for the early
retirement of capital lease obligations, $10.2 million used for repayment of
other capital lease obligations and restricted cash of $16.3 million used to
pay interest on the 12 3/4% Senior Notes. The net cash decrease for the year
ended December 31, 1999 was $73.1 million as compared to a net cash decrease
for the year ended December 31, 1998 of $21.0 million.

   At December 31, 1999, the Company had cash and cash equivalents of
approximately $25.9 million, short term investments of $80.1 million,
restricted cash of $144.1 million and working capital of $245.6 million. The
Company expects to incur additional operating losses and will rely primarily
on its available cash resources, the net proceeds from the sale of certain
equity investments and financing available under a network equipment lease
agreement (that currently has no maximum borrowing limit) to meet its
anticipated cash needs for working capital and for the acquisition of capital
equipment through at least the end of 2000. However, we cannot assure you that
the Company will not require additional financing within this time frame. The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary materially as
a result of a number of factors, including those set forth on under the
caption "Factors Affecting Operating Results--Concentric May Need Additional
Capital in the Future and Such Additional Financing May Not Be Available." The
Company may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. We cannot assure you
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all.

   In February 2000, the Company sold all of its investment in Covad
Communications Group, Inc. and received proceeds of approximately $70.8
million.

   In March 2000, the Company used approximately $5.0 million to purchase
570,082 shares of Asia Online, Inc. Series C Preferred Stock.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
SAB 101 provides guidance on the recognition, presentation,

                                      32
<PAGE>

and disclosure of revenue in financial statements of all public registrants.
Any change in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting
principle in the quarter ending March 31, 2000. While the Company has not
fully assessed the impact of the adoption of SAB 101, it believes that
implementation of SAB 101 will not have a material adverse impact on its
existing revenue recognition policies or its reported results of operations
for fiscal 2000.

Risks Related to Concentric's Business

   As described by the following factors, the past financial performance of
Concentric should not be considered a reliable indicator of the future
performance of Concentric and investors should not use historical trends to
anticipate results or trends in future periods.

 The Proposed Merger Involves Risks and Uncertainties and May Not Be Completed

   Concentric has recently entered into an agreement with Nextlink under which
both Nextlink and Concentric will merge into a newly-formed company, to be
renamed Nextlink Communications, Inc. Details of the merger and the related
risks and uncertainties will be described in a proxy statement which will be
mailed in the future to all Concentric stockholders. The merger is subject to
a number of conditions which must be satisfied or waived before the merger can
take place, including approval by Nextlink and Concentric stockholders.
Concentric cannot assure you that the merger will occur or that the
performance of the combined company will be favorable to Concentric
stockholders, and that the pendency of the merger will not have an adverse
effect on Concentric in the interim. The factors which could affect the
success of the combined companies include, but are not limited to, the
combined company's ability to successfully market its products and services to
current and new customers in a competitive marketplace, to design and
construct fiber optic networks, install cable facilities, including switching
electronics and to develop, install and provision wireless equipment to
customers and on satisfactory terms and conditions. Additional factors which
could adversely impact the success of the combined operations include the
companies' ability to successfully integrate their operations, products and
services, and to timely obtain the regulatory and stockholder approvals that
are conditions to closing the proposed transaction.

 Concentric Has Incurred Net Losses and Experienced Negative Cash Flow From
 Operations Since Inception and Expects to Have Continuing Operating Losses

   Concentric expects to continue to operate at a net loss and experience
negative cash flow at least through 2000. Its ability to achieve profitability
and positive cash flow from operations is dependent upon its ability to
substantially grow its revenue base and achieve other operating efficiencies.
Concentric experienced net losses attributable to common stockholders of
approximately $55.6 million for the year ended December 31, 1997, $94.1
million for the year ended December 31, 1998 and $111.8 million for the year
ended December 31, 1999. On December 31, 1999, Concentric had an accumulated
deficit of approximately $357.8 million. Concentric cannot assure you that it
will be able to achieve or sustain revenue growth, profitability or positive
cash flow on either a quarterly or an annual basis. Concentric's estimates of
the periods of time in which it expects to continue to operate at a net loss,
experience negative cash flow and not generate taxable income are forward-
looking statements that involve risks and uncertainties. Actual results could
vary materially as a result of a number of factors, including those set forth
in this section.

 Concentric's Operating Results Fluctuate and Could Decline

   Concentric's operating results have fluctuated in the past and may
fluctuate significantly in the future. Concentric's operating results
fluctuate due to a variety of factors, including the following:

  .  timely deployment and expansion of its network and new network
     architectures;

  .  the incurrence of capital costs related to network expansion;

  .  variability and length of the sales cycle associated with its product
     and service offerings;

                                      33
<PAGE>

  .  the introduction of new services by Concentric and its competitors; the
     pricing and mix of services offered by Concentric;

  .  Concentric's customer retention rate;

  .  market acceptance of new and enhanced versions of Concentric's services;

  .  changes in pricing policies by Concentric's competitors;

  .  Concentric's ability to obtain sufficient supplies of sole- or limited-
     source equipment and services;

  .  user demand for network and Internet access services;

  .  balancing of network usage over a 24-hour period;

  .  the ability to manage potential growth and expansion;

  .  the ability to identify, acquire and successfully integrate suitable
     acquisition candidates; and

  .  charges related to acquisitions.

   Due to the foregoing factors, Concentric believes that period-to-period
comparisons of its operating results are not necessarily meaningful. Such
comparisons cannot be relied upon as indicators of future performance. If
Concentric's operating results in any future period fall below the
expectations of securities analysts and investors, the market price of its
securities would likely decline.

 The Loss of Any of Concentric's Major Customers Could Severely Impact Its
 Business

   Concentric currently derives a substantial portion of its total revenue
from WebTV. Revenue from WebTV accounted for approximately, 33.4% of its
revenue for the year ended December 31, 1997, 26.8% of its revenue for the
year ended December 31, 1998 and 25.2% of its revenue for the year ended
December 31, 1999. WebTV may terminate its current agreement at will after
December 31, 2002. While Concentric expects revenue from WebTV to decrease as
a percentage of revenue in future periods, Concentric believes that revenue
derived from a limited number of customers may continue to represent a
significant portion of its revenue. As a result, the loss of one or more of
Concentric's major customers could have a material adverse effect on its
business, financial condition and results of operations. In addition,
Concentric cannot assure you that revenue from customers that have accounted
for significant revenue in past periods, individually or as a group, will
continue, or will reach or exceed historical levels in any future period.

 Concentric's Growth and Expansion May Strain Its Resources

   Concentric's business and service offerings have grown rapidly since its
inception. The growth and expansion of Concentric's business and Concentric's
service offerings have placed, and are expected to continue to place, a
significant strain on Concentric's management, operational and financial
resources Concentric plans to continue to substantially expand its network in
2000 and future periods. To manage its growth, Concentric must, among other
things:

  .  continue to implement and improve its operational, financial and
     management information systems, including its billing, order management,
     provisioning, fixed assets and other financial management systems;

  .  hire, train and retain qualified personnel in a competitive labor
     market; and

  .  continue to expand and upgrade its network infrastructure.

   Concentric is currently in the process of replacing or updating its
operational, financial and management information systems. The systems being
replaced or updated include its billing, provisioning, order management and
other financial management systems. Concentric began to replace its
information systems in the fourth quarter of 1998 and these efforts continued
throughout 1999 and will continue throughout 2000. Concentric

                                      34
<PAGE>

consolidated two facilities in Southern California into one in 1999.
Management of the transition of its information systems and of the personnel
and operational equipment neccessary to manage the new facility has placed
additional strain on its resources. Concentric cannot assure you that these
transitions will be completed successfully or on a timely basis. Concentric
cannot assure you that it will be able to expand its network or add services
at the rate or according to the schedule presently planned by it.
Additionally, Concentric has completed two acquisitions recently, 9Net Avenue,
Inc. and Internet Technology Group, Plc, during the fourth quarter of 1999 and
the first quarter of 2000, respectively. The consolidation and integration of
these two recent acquisitions will place additional strain on the resources,
information systems and management of Concentric. Concentric cannot assure you
that it will be able to effectively manage its growth in operations and
personnel. Additionally, Concentric cannot assure you that it will be able to
hire, train and retain sufficient numbers of qualified personnel to meet its
requirements.

 Concentric's Expanding Customer Base Demands the Rapid Growth of its Network
 Infrastructure and Technical Support Resources.

   Concentric may in the future experience difficulties meeting the demand for
its access services and technical support. Concentric cannot assure you that
its technical support or other resources will be sufficient to facilitate its
growth. Concentric is striving to increase total network utilization and to
optimize this utilization by targeting both business and consumer users to
balance the network's usage throughout a 24-hour period. There will be
additional demands on its customer support and sales and marketing resources
as Concentric pursues this utilization strategy. If Concentric fails to manage
its growth effectively, its business, financial condition and results of
operations could be materially adversely affected.

 Concentric's Acquisition Strategy Poses Several Risks

   Concentric has completed a number of acquisitions to date, and may seek to
acquire additional assets, technologies and businesses complementary to its
operations. The completed acquisitions are and any subsequent acquisitions
would be accompanied by the risks commonly encountered in such transactions.
Such risks include, among other things:

  .  difficulties integrating the operations and personnel of acquired
     companies;

  .  the additional financial resources that may be needed to fund the
     operations of acquired companies;

  .  the potential disruption of business;

  .  management's ability to maximize its financial and strategic position by
     the incorporation of acquired technology or businesses into its service
     offerings;

  .  the difficulty of maintaining uniform standards, controls, procedures
     and policies;

  .  the potential loss of key employees of acquired companies;

  .  the impairment of relationships with employees and customers as a result
     of changes in management; and

  .  the incurrence of significant expenses in consummating acquisitions.

   Any of the above risks could prevent Concentric from realizing significant
benefits from its acquisitions. In addition, the issuance of its common stock
in acquisitions will dilute its stockholder interests in its company, while
the use of cash will deplete its cash reserves. Finally, if Concentric is
unable to account for its acquisitions under the "pooling of interests" method
of accounting, Concentric may incur significant, one-time write-offs and
amortization charges. These write-offs and charges could decrease its future
earnings or increase its future losses.

 Concentric's Future Success Depends Upon Third-Party Distribution and
 Engineering Relationships

   An important element of Concentric's strategy is to develop relationships
with leading companies to enhance its distribution and engineering efforts.
Concentric has a number of agreements which among these

                                      35
<PAGE>

include an agreement with Microsoft pursuant to which Concentric distributes
and modifies their browsers. Concentric is one of the Internet Service
Providers which Microsoft features on its Internet Referral Server program and
through which Concentric obtains primarily consumer subscribers. Concentric
also has technology supply arrangements in place for key components of its web
hosting and e-commerce platform including those with Netopia and Intershop. If
any of Concentric's key technology suppliers were to experience difficulties
or shifts within their business or decided to take different strategic
directions than what the current course of their business is, then Concentric
may be adversely impacted.

   Concentric has also entered into a strategic agreement with SBC for the
delivery of private-labeled services to its customers. Concentric relies on
this relationship for the acquisition of small-and-medium sized business
enterprise customers. Its inability to capitalize on this agreement, the
termination of or failure to renew any of these agreements or its inability to
enter into similar relationships with others could have a material adverse
effect on its business, financial condition and results of operations.

   Termination of any of these agreements or Concentric's failure to renew any
of the agreements on terms acceptable to Concentric could have a material
adverse effect on Concentric's business, financial condition and results of
operations. For example, Concentric currently is in the process of winding
down its relationship with Teligent to deliver private label services to
Teligent's customers. Concentric expects the relationship to be terminated in
2000. If Concentric does not successfully replace the Teligent relationship,
then Concentric may have difficulty attracting new small and medium sized
enterprise customers which would have a material adverse impact on its results
of operations. Concentric has an outsourcing agreement with Williams
Technology Solutions, a subsidiary of Williams Communications Group, Inc.,
that enables Concentric to use Williams employees for the operational support
of its network. Concentric's use of Williams employees and Williams
engineering expertise was integral to the development of Concentric's network
and continues to be integral to the ongoing operation of Concentric's network
operations center. Pursuant to the agreement with Williams, all of the
Williams employees currently working for Concentric will become Concentric
employees when the agreement terminates in December 2000. Concentric cannot
assure you that it will be able to hire all of the Williams employees required
to grow and manage the network.

 Concentric Depends Upon New and Uncertain Markets

   Concentric offers tailored, value-added network services for enterprises
and consumers, including Internet access. These markets are in the early
stages of development. It is difficult to predict the rate at which these the
markets will grow, if at all, because these markets are relatively new and
current and future competitors are likely to introduce competing services or
products. New or increased competition may result in market saturation.
Certain critical issues concerning commercial use of tailored, value-added
services and Internet services, remain unresolved and may impact the growth of
such services. These issues include, among others, security, reliability, ease
and cost of access, and quality of service. Concentric's business, financial
condition and results of operations would be materially adversely affected if
the markets for its services, including Internet access:

  .  fail to grow;

  .  grow more slowly than anticipated; or

  .  become saturated with competitors.

 Concentric Depends Upon Its Introduction and Acceptance of New and Enhanced
 Services

   Concentric has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises, expanded hosting and co-location services and DSL services in
limited areas. Concentric's failure to introduce new enterprise service
offerings or the failure of these services to gain market acceptance in a
timely manner or at all, or the failure to achieve significant market coverage
could have a material adverse effect on its business, financial condition and
results of operations. If Concentric introduces new or enhanced services with
reliability, quality or compatibility problems, then market acceptance of such
services could be significantly delayed or hindered. Such problems or delays
could adversely affect Concentric's ability to attract new customers and
subscribers.

                                      36
<PAGE>

 Concentric's New or Enhanced Services May Have Errors or Defects

   Concentric's services may contain undetected errors or defects when new
services or enhancements are first introduced. Concentric cannot assure you
that, despite testing by Concentric or its customers, errors will not be found
in new services or enhancements after commencement of commercial deployment.
Such errors could result in:

  .  additional development costs;

  .  loss of, or delays in, market acceptance;

  .  diversion of technical and other resources from its other development
     efforts;

  .  the loss of customers and subscribers; and

  .  damage to its reputation in the marketplace.

   Any of these consequences could have a material adverse effect on
Concentric's business, financial condition and results of operations.

 Concentric Needs to Balance Network Use to Provide Quality Service

   If Concentric does not achieve balanced network utilization over a 24-hour
period, its network could become overburdened at certain periods during the
day, which could adversely affect Concentric's quality of service. Conversely,
due to the high fixed cost nature of its infrastructure, under-utilization of
its network during certain periods of the day could adversely affect
Concentric's ability to provide cost-efficient services at other times. The
failure to achieve balanced network utilization could have a material adverse
effect on Concentric's business, financial condition and results of
operations.

 Concentric Depends Upon Its Suppliers and Has Sole- and Limited-Sources of
 Supply for Certain Products and Services

   Concentric relies on other companies to supply certain key components of
its network infrastructure. These components include critical
telecommunications services and networking equipment, which, in the quantities
and quality demanded by Concentric, are available only from sole- or limited-
sources. AT&T Corp., MCI WorldCom, Inc., PacWest Telecomm, Inc., Covad and
Williams are Concentric's primary providers of data communications facilities
and capacity. AT&T is currently the sole provider of the frame relay backbone
of Concentric's network. MCI WorldCom and Williams are currently the providers
of the ATM backbone of its network.

   Concentric is also dependent upon LECs to provide telecommunications
services to it and its customers. Concentric experiences delays from time to
time in receiving telecommunications services from these suppliers. Concentric
cannot assure you that it will be able to obtain such services on the scale
and within the time frames required by us at an affordable cost, or at all.
Any failure to obtain such services on a sufficient scale, on a timely basis
or at an affordable cost would have a material adverse effect on Concentric's
business, financial condition and results of operations.

   Concentric purchases its Nortel/Bay Networks, Cisco Systems, Netopia,
Lucent Technologies, Sun Microsystems, Cisco and other vendor equipment either
directly from the manufacturer or via systems integrators including Milgo
Solutions, Inc. and Williams. Some of these vendors are sole-source suppliers.
Concentric purchases these components pursuant to purchase orders placed from
time to time with its suppliers. Concentric does not carry significant
inventories of these components and has no guaranteed supply arrangements for
such components. Concentric's suppliers also sell products to Concentric's
competitors and may in the future themselves become Concentric's competitors.
Concentric cannot assure you that its suppliers will not enter into exclusive
arrangements with its competitors or stop selling their products or components
to Concentric at commercially reasonable prices, or at all.

                                      37
<PAGE>

 The Expansion of Concentric's Network Infrastructure Is Placing, and Will
 Continue to Place, a Significant Demand on Concentric's Suppliers.

   Some of Concentric's suppliers have limited resources and production
capacity. In addition, some of Concentric's suppliers rely on sole-or limited-
sources of supply for components included in their products. Failure of
Concentric's suppliers to meet increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by Concentric, or at all. Concentric's inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources, if required, could result in delays and increased
costs in expanding, and overburdening of, Concentric's network infrastructure.
Any such delay, increased costs or overburdening would have a material adverse
effect on Concentric's business, financial condition and results of
operations.

   Concentric also depends on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards. These products and components must also inter-
operate with products and components from other vendors. Any failure of
Concentric's suppliers to provide products or components that comply with
Internet standards or that inter-operate with other products or components
used by Concentric in its network infrastructure could have a material adverse
effect on Concentric's business, financial condition and results of
operations.

   Some of Concentric's suppliers, including the RBOCs and other LECs,
currently are subject to tariff controls and other price constraints that in
the future may be changed. In addition, regulatory proposals are pending that
may affect what the RBOCs and other LECs charge Concentric. Any such
regulatory changes could result in increased prices of products and services,
which could have a material adverse effect on Concentric's business, financial
condition and results of operations. Concentric's operations and revenue in
the UK and The Netherlands are dependent on the payment of interconnect fees
from the regulated telephone companies such as British Telecom in the UK. The
interconnect fees are based on the number of minutes of connect time that are
generated by the consumer dial up business in both of those countries. The
amount and terms of these fees is regulated by Oftel. There is no guarantee
that the amount, terms or conditions of these payments to Concentric will not
be changed in the future and any such change may have an adverse impact on
Concentric's business.

 Concentric Depends Upon Its Network Infrastructure

   Concentric's success depends upon the capacity, reliability and security of
its network infrastructure. Concentric currently derives a significant portion
of its revenue from customer subscriptions. Concentric expects that a
substantial portion of its future revenue will be derived from the provision
of tailored, value-added network services to its enterprise customers.
Concentric must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increase
and as customer requirements change.

   Concentric currently projects its network utilization will require rapid
expansion of the network capacity to avoid capacity constraints that would
adversely affect system performance. The expansion and adaptation of
Concentric's network infrastructure will require substantial financial,
operational and management resources in 2000 and future periods. Concentric
cannot assure you that it will be able to expand or adapt its network
infrastructure to meet additional demand or its customers' changing
requirements on a timely basis, at a commercially reasonable cost, or at all.
In addition, if demand for network usage were to increase faster than
projected or were to exceed Concentric's current forecasts, the network could
experience capacity constraints, which would adversely affect the performance
of the system.

   Concentric's business, financial condition and results of operations could
be materially adversely affected if, for any reason, it failed to:

  .  expand its network infrastructure on a timely basis;

  .  adapt its network infrastructure to changing customer requirements or
     evolving industry trends; or

  .  alleviate capacity constraints experienced by its network
     infrastructure.

                                      38
<PAGE>

   Currently, Concentric has transit or peering agreements with MCI WorldCom,
Sprint, UUNet, America Online, PSINet and other network providers to support
the exchange of traffic between Concentric's network and the Internet.
Concentric also has public peering arrangements with multiple smaller Internet
service providers. These public peering arrangements also support the exchange
of traffic between Concentric's network and the Internet. The failure of the
networks with which Concentric has public peering, private peering or private
transit, or the failure of any of its data centers, or any other link in the
delivery chain, or any inability to successfully integrate new network
resources into its existing infrastructure, and resulting interruption of its
operations would have a material adverse effect on Concentric's business,
financial condition and results of operations.

 Concentric's Market Is Extremely Competitive

   Concentric's market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry in this market, and
Concentric expects that competition will intensify in the future. Concentric
believes that its ability to compete successfully depends upon a number of
factors, including:

  .  market presence;

  .  the capacity, reliability, low latency and security of its network
     infrastructure;

  .  technical expertise and functionality, performance and quality of
     services; customization;

  .  ease of access to and navigation of the Internet;

  .  the pricing policies of its competitors and suppliers;

  .  the variety of services;

  .  the timing of introductions of new services by us and its competitors;

  .  customer support;

  .  the ability to support industry standards; and

  .  industry and general economic trends.

   Concentric's competitors generally may be divided into four groups:

  .  telecommunications companies,

  .  online service providers,

  .  Internet service providers and

  .  Web hosting providers.

   Many of Concentric's competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel
resources than those available to Concentric. 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 and services than can Concentric.

   In addition to the competitors discussed above, various organizations have
entered into or are forming joint ventures or consortiums to provide services
similar to those of Concentric. Concentric believes that new competitors will
enter the value-added network services market. Such new competitors could
include large computer hardware, software, media and other technology and
telecommunications companies. Certain telecommunications companies and online
services providers are currently offering or have announced plans to offer
Internet or online services or to expand their network services.

                                      39
<PAGE>

   Certain companies, including America Online, PSINet and Verio, have also
obtained or expanded their Internet access products and services as a result
of acquisitions. Such acquisitions may permit Concentric'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. In addition, the ability of some of Concentric's competitors to
bundle other services and products with virtual private network services or
Internet access services could place Concentric at a competitive disadvantage.
Certain companies are also exploring the possibility of providing or are
currently providing high-speed data services using alternative delivery
methods such as over the cable television infrastructure, through direct
broadcast satellites and over wireless cable.

   As a result of increased competition and vertical and horizontal
integration in the industry, Concentric could encounter significant pricing
pressure. This pricing pressure could result in significant reductions in the
average selling price of its services. For example, telecommunications
companies that compete with Concentric may be able to provide customers with
reduced communications costs in connection with their Internet access services
or private network services, reducing the overall cost of their solutions and
significantly increasing price pressures on Concentric. Concentric cannot
assure you that it 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.

   In addition, Concentric believes that the Internet access and online
services businesses are likely to continue to encounter consolidation in the
future. Consolidation could result in increased price and other competition in
these industries and, potentially, the virtual private networks industry.
Increased price or other competition could result in erosion of Concentric's
market share and could have a material adverse effect on Concentric's
business, financial condition and results of operations. Concentric cannot
assure you that it will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully.

 Concentric Must Keep Up With Rapid Technological Change and Evolving Industry
 Standards

   The markets for Concentric's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. Concentric's
future success will depend, in part, on its ability to:

  .  effectively use leading technologies;

  .  continue to develop its technical expertise;

  .  enhance its current networking services;

  .  develop new services that meet changing customer needs;

  .  advertise and market its services; and

  .  influence and respond to emerging industry standards and other
     technological changes.

   All this must be accomplished in a timely and cost-effective manner.
Concentric cannot assure you that it will be successful in effectively using
new technologies, developing new services or enhancing its existing services
on a timely basis.

   Concentric cannot assure you that such new technologies or enhancements
will achieve market acceptance. Concentric's pursuit of necessary
technological advances may require substantial time and expense. Concentric
cannot assure you that it will succeed in adapting its network service
business to alternate access devices and conduits as they emerge.

   Concentric 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. Although
Concentric intends to support emerging standards in the market for Internet
access, Concentric cannot assure you that industry standards will be
established. If industry standards are established, Concentric cannot

                                      40
<PAGE>

assure you that it will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. Specifically,
Concentric's services rely on the continued widespread commercial use of
TCP/IP. Alternative open protocol and proprietary protocol standards have been
or are being developed. If any of these alternative protocols become widely
adopted, there may be a reduction in the use of TCP/IP, which could render
Concentric's services obsolete and unmarketable.

   In addition, Concentric cannot assure you that services or technologies
developed by others will not render its services or technology uncompetitive
or obsolete. An integral part of Concentric's strategy is to design its
network to meet the requirements of emerging standards such as DSL (Digital
Subscriber Line). If Concentric fails, for technological or other reasons, to
develop and introduce succesive enhancements to DSL technology or other
enhanced services that are compatible with industry standards and that satisfy
customer requirements, then its business, financial condition and results of
operations would be materially adversely affected.

 Concentric Faces the Risk of Fundamental Changes in the Way Internet Access
 is Delivered

   Internet services are currently accessed primarily by computers connected
by telephone lines. Several companies have announced the development and
planned sale of cable television modems, wireless modems and satellite modems
to provide Internet access. Cable television, satellite and wireless modems
can transmit data at substantially faster speeds than the modems Concentric
and its subscribers currently use. In addition, wireless modems have the
potential to reduce the cost of network services. As the Internet becomes
accessible through these cable television, wireless and satellite modems and
by screen-based telephones, televisions or other consumer electronic devices,
or subscriber requirements change the way Internet access is provided,
Concentric will have to develop new technology or modify its existing
technology to accommodate new developments such as:

  .  Internet access through cable television, satellite and wireless modems;

  .  Internet access through screen-based telephones, televisions or other
     consumer electronic devices;

  .  or subscriber requirements that change the way Internet access is
     provided.

   Concentric's pursuit of these technological advances may require
substantial time and expense. Concentric cannot assure you that it will
succeed in adapting its Internet access business to alternate access devices
and conduits.

 Concentric's Network System Could Fail

   Network expansion and growth in usage will place increased stress upon
Concentric's network hardware and traffic management systems. Concentric's
network has been designed with redundant backbone circuits to allow traffic
re-routing. Concentric cannot assure you, however, that it will not experience
failures relating to individual network POPs or even catastrophic failure of
the entire network.

   Moreover, Concentric's operations are dependent upon its ability to protect
its network infrastructure against damage from power loss, telecommunications
failures and similar events. A significant portion of its computer equipment,
including critical equipment dedicated to its Internet access services, is
located at Concentric's facilities in Chicago, Illinois, Secaucus, New Jersey,
London, England, San Jose and Irvine, California. In addition, its modems and
routers that serve large areas of the United States are located in these
cities. Concentric's network operations center, which manages its entire
network, is in St. Louis, Missouri. Despite its precautions, a natural
disaster, such as an earthquake, or other unanticipated problem at the network
operations center, at one of its hubs (sites at which Concentric has located
routers, switches and other computer equipment that make up the backbone of
its network infrastructure) or at a number of its POPs has from time to time
in the past caused, and in the future could cause, interruptions in its
services.

   In addition, Concentric's services could be interrupted if its
telecommunications providers fail to provide the data communications capacity
in the time frame required by Concentric as a result of a natural disaster or
for some other reason. Any damage or failure that causes interruptions in its
operations could have a material adverse effect on Concentric's business,
financial condition and results of operations.

                                      41
<PAGE>

 Concentric's System May Experience Security Breaches Despite the
 Implementation of Network Security Measures; the core of Concentric's Network
 Infrastructure is Vulnerable to Computer Viruses, Break-ins and Similar
 Disruptive Problems Caused by its Customers or Internet Users

   Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to Concentric's
customers and subscribers. Furthermore, inappropriate use of the network by
third parties could also potentially jeopardize the security of confidential
information stored in Concentric's computer systems and its customer's
computer systems. Concentric may face liability and may lose potential
subscribers as a result. Although Concentric intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past. Concentric cannot assure you that its security
enclosures will not be circumvented in the future. The costs and resources
required to eliminate computer viruses and alleviate other security problems
may result in interruptions, delays or cessation of service to its customers
that could have a material adverse effect on its business, financial condition
and results of operations.

 Concentric Has Incurred Substantial Indebtedness and May Not Be Able to
 Service Its Debt

   Concentric is and will continue to have a significant amount of outstanding
indebtedness. Concentric has significant debt service requirements as a result
of this indebtedness. At December 31, 1999, its total debt (including current
portion) was $214.8 million, and stockholders' equity was $62.2 million.
Interest on such indebtedness totaled approximately $22.6 million in 1999.
Concentric also issued 150,000 shares of preferred stock in June 1998 with
dividends which accrue at the rate of 13 1/2% per year and 50,000 shares of
preferred stock in June 1999 with dividends which accrue at the rate of 7% per
year. On December 31, 1999, cumulative dividends and accretion on the
preferred stock totaled approximately $38.7 million. Dividends and accretion
will total approximately $33.4 million in 2000 and are expected to grow in
each successive year. To date, Concentric has paid such dividends in shares of
preferred stock, rather than in cash. Concentric must also redeem both
issuances of the preferred stock in 2010. As a result of these and other
features, the preferred stock is substantially equivalent to debt.

   Concentric's debt, including the preferred stock, has important
consequences for its company and its stockholders, including the following:

  .  its ability to obtain additional financing in the future, whether for
     working capital, capital expenditures, acquisitions or other purposes,
     may be impaired;

  .  a substantial portion of its cash flow from operations is dedicated to
     the payment of interest on its debt, which reduces the funds available
     to us for other purposes;

  .  its flexibility in planning for or reacting to changes in market
     conditions may be limited; and

  .  Concentric may be more vulnerable in the event of a downturn in its
     business.

   Concentric's ability to meet its debt service and preferred stock dividend
obligations will depend on its future operating performance and financial
results. This ability will be subject in part to factors beyond its control.
Although Concentric believes that its cash flow will be adequate to meet its
interest and dividend payments, Concentric cannot assure you that it will
continue to generate sufficient cash flow in the future to meet its debt
service and preferred stock requirements. If Concentric is unable to generate
cash flow in the future sufficient to cover its fixed charges and is unable to
borrow sufficient funds from other sources, then Concentric may be required
to:

  .  refinance all or a portion of its existing debt;

  .  or sell all or a portion of its assets.

   Concentric cannot assure you that a refinancing would be possible.
Concentric cannot assure you that any asset sales would be timely or that the
proceeds which Concentric could realize from such asset sales would be
sufficient to meet its debt service requirements. In addition, the terms of
its debt and preferred stock restrict its ability to sell its assets and its
use of the proceeds from any such asset sale.

                                      42
<PAGE>

 Concentric May Need Additional Capital in the Future and Such Additional
 Financing May Not Be Available

   Concentric currently anticipates that its available cash resources will be
sufficient to meet its anticipated working capital and capital expenditure
requirements through December 2000. However, Concentric cannot assure you that
such resources will be sufficient for anticipated or unanticipated working
capital and capital expenditure requirements. Concentric may need to raise
additional funds through public or private debt or equity financing in order
to:

  .  take advantage of unanticipated opportunities, including more rapid
     international expansion or acquisitions of complementary businesses or
     technologies;

  .  develop new products or services; or

  .  respond to unanticipated competitive pressures.

   Concentric may also raise additional funds through public or private debt
or equity financings if such financings become available on favorable terms.
Concentric cannot assure you that any additional financing it may need will be
available on terms favorable to Concentric, or at all. If adequate funds are
not available or are not available on acceptable terms, Concentric may not be
able to take advantage of unanticipated opportunities, develop new products or
services or otherwise respond to unanticipated competitive pressures. In such
case, its business, results of operations and financial condition could be
materially adversely affected. Concentric's forecast of the period of time
through which its financial resources will be adequate to support its
operations is a forward looking statement that involves risks and
uncertainties, and actual results could vary materially as a result of a
number of factors, including those set forth above.

 Concentric Faces Risks Associated with International Expansion

   A key component of Concentric's strategy is to expand into international
markets. The following risks are inherent in doing business on an
international level:

  .  unexpected changes in regulatory requirements;

  .  export restrictions;

  .  export controls relating to encryption technology;

  .  tariffs and other trade barriers;

  .  difficulties in staffing and managing foreign operations;

  .  longer payment cycles;

  .  problems in collecting accounts receivable;

  .  political instability;

  .  fluctuations in currency exchange rates;

  .  seasonal reductions in business activity during the summer months in
     Europe and certain other parts of the world; and

  .  potentially adverse tax consequences that could adversely impact the
     success of its international operations.

   Concentric cannot assure you that one or more of such factors will not have
a material adverse effect on its future international operations and,
consequently, on its business, financial condition and results of operations.

   Concentric's experience in developing versions of its products and
marketing and distributing its products internationally is limited and its
primary efforts in this area are through its recently completed acquisition of

                                      43
<PAGE>

Internet Technology Group PLC, an Internet network service provider in the UK
and The Netherlands. Concentric's international strategy has not developed as
rapidly as anticipated and may be further delayed if:

  .  Concentric cannot successfully develop satisfactory relationships with
     other partners;

  .  Concentric cannot successfully deploy its technology over its partners'
     infrastructure;

  .  Concentric cannot transfer its knowledge to its partners' employees; or

  .  Concentric's partners do not devote sufficient management, technological
     or marketing resources to this project.

   Concentric's business, results of operation or financial condition could be
materially adversely affected if delays in its international strategy continue
or worsen. Concentric has entered into roaming agreements with third parties
to allow its customers to access their Internet accounts from Japan and
certain other foreign countries. Concentric cannot assure you that it will be
able to successfully market, sell and deliver its products in international
markets.

 Concentric Could Face Government Regulation

   The Federal Communications Commission ("FCC") currently does not regulate
value-added network software or computer equipment related services that
transport data or IP-based voice messages over telecommunication facilities as
telecommunications services. Concentric provides value-added IP-based network
services, in part, through data transmissions over public telephone lines.
Operators of these types of value-added networks that provide access to
regulated transmission facilities only as part of a data services package are
classified for regulatory purposes as providers of "information services" and
are currently excluded from regulations that apply to "telecommunications
carriers." As such, Concentric is not currently subject to direct regulation
by the FCC or any other governmental agency, other than regulations applicable
to businesses generally.

   However, future changes in law or regulation could result in some aspects
of its current operations becoming subject to one or more forms of
telecommunication regulation by the FCC or other regulatory agencies. The FCC
currently is reviewing its regulatory positions on data transmissions over
telecommunications networks and could seek to impose some form of
telecommunications carrier regulation on the network transport and
telecommunications functions of an enhanced or information services package.
Further, the FCC could conclude that its protocol conversions, computer
processing and interaction with customer-supplied information are insufficient
to afford Concentric with the benefits of the enhanced or information service
regulatory classification. If the FCC reaches such conclusions, it may seek to
regulate some segments of its activities as telecommunications services.

   One significant example of the type of regulation some incumbent LECs would
like to have the FCC impose on IP-based services is typified by a recent
Petition for Expedited Declaratory Ruling filed by US West seeking an FCC
ruling that IP-based Telephony services provided over interchange carrier
networks not be considered information services, but telecommunications
services subject to incumbent LEC-imposed interstate access charges. While the
FCC has not taken action to date on the US West Petition, its filing indicates
that there are telecommunications carriers anxious to reclassify exempt
information services to be regulated telecommunications services.

   State public utility commissions generally have declined to regulate
enhanced or information services. Some states, however, have continued to
regulate particular aspects of enhanced services in limited circumstances,
such as where they are provided by incumbent LECs that operate
telecommunications networks. Moreover, the public service commissions of some
states continue to review potential regulation of such services. Concentric
cannot assure you that regulatory authorities of states where Concentric
provides Internet access, intranet and VPN services will not seek to regulate
aspects of these activities as telecommunications services. The prices at
which Concentric may sell its services could be affected by regulatory
changes:

  .  in the Internet connectivity market;

                                      44
<PAGE>

  .  that indirectly or directly affect telecommunications costs; or

  .  that increase the likelihood or scope of competition from the RBOCs.

   Concentric cannot predict the impact, if any, that future regulation or
regulatory changes may have on its business, and Concentric cannot assure you
that future regulation or regulatory changes will not have a material adverse
effect on its business, results of operations or financial condition.

 Concentric Depends On Its Proprietary Technology and Technological Expertise

   Concentric's success and ability to compete is dependent in part upon its
technology. In this regard, Concentric believes its success is more dependent
upon its technical expertise than its proprietary rights. Concentric relies
upon a combination of copyright, trademark and trade secret laws and
contractual restrictions to protect its proprietary technology. It may be
possible for a third party to copy or otherwise obtain and use Concentric's
products or technology without authorization or to develop similar technology
independently. Concentric cannot assure you that such measures have been, or
will be, adequate to protect its proprietary technology. Concentric's
competitors may also independently develop technologies that are substantially
equivalent or superior to Concentric's technology.

   Concentric operates a material portion of its business over the Internet.
The Internet is subject to a variety of risks. Such risks include but are not
limited to the substantial uncertainties that exist regarding the system for
assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. Concentric cannot assure you that
it will continue to be able to employ its current domain names in the future
or that the loss of rights to one or more domain names will not have a
material adverse effect on its business and results of operations.

 Third Parties May Claim Concentric Infringed Their Proprietary Rights

   Although Concentric does not believe it infringes on the proprietary rights
of any third parties, Concentric cannot assure you that third parties will not
assert such claims against Concentric in the future or that such claims will
not be successful. Concentric could incur substantial costs and diversion of
management resources to defend any claims relating to proprietary rights,
which could have a material adverse effect on its business, financial
condition and results of operations. Furthermore, parties making such claims
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief that could effectively block Concentric's ability to
license its products in the United States or abroad. Such a judgment would
have a material adverse effect on Concentric's business, financial condition
and results of operations.

   In addition, Concentric is obligated under certain agreements to indemnify
the other party for claims that Concentric infringes on the proprietary rights
of third parties. If Concentric is required to indemnify parties under these
agreements, its business, financial condition and results of operations could
be materially adversely affected. If someone asserts a claim relating to
proprietary technology or information against Concentric, Concentric may seek
licenses to such intellectual property. Concentric cannot assure you, however,
that it could obtain licenses on commercially reasonable terms, if at all. The
failure to obtain the necessary licenses or other rights could have a material
adverse effect on Concentric's business, financial condition and results of
operations.

 Concentric Could Face Liability for Information Disseminated Through Its
 Network

   The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through the facilities of their networks is continuing to evolve
and remains unsettled. In the past, at least one court has ruled that Internet
service providers could be found liable for copyright infringement as a result
of information disseminated through their networks. Such claims have been
asserted against Concentric in the past and Concentric cannot assure you that
similar claims will not be asserted in the future.

                                      45
<PAGE>

   Federal laws have been enacted, however, which, under certain
circumstances, provide Internet service providers with immunity from liability
for information that is disseminated through their networks when they are
acting as mere conduits of information. A Federal Court of Appeals has
recently held that the Telecommunications Act of 1996 creates immunity from
liability on the part of Internet service providers for libel claims arising
out of information disseminated over their services by third party content
providers. In addition, the Digital Millennium Copyright Act, which was
enacted in 1998, creates a safe-harbor from copyright infringement liability
for Internet service providers that meet certain requirements. These
requirements include certain technical measures and registering with the
Copyright Office the identity of the provider's Designated Infringement Agent
who is to receive notice of any claims of copyright infringement. Concentric
cannot assure you, however, that the Digital Millennium Copyright Act or any
other legislation will protect it from copyright infringement liability.

   The Child Online Protection Act of 1998 prohibits and imposes criminal
penalties and civil liability on anyone engaged in the business of selling or
transferring, by means of the World Wide Web, material that is harmful to
minors without restricting access to such material by persons under seventeen
years of age. Numerous states have adopted or are currently considering
similar types of legislation. The imposition upon Concentric, Internet service
providers or Web server hosts of potential liability for such materials
carried on or disseminated through Concentric's systems could require
Concentric to implement measures to reduce its exposure to such liability.
Such measures may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings. Further, the costs of
defending against any such claims and potential adverse outcomes of such
claims could have a material adverse effect on Concentric's business,
financial condition and results of operations. The Child Online Protection Act
of 1998 has been challenged by civil rights organizations in part on the
grounds that it violates the First Amendment. The United States Supreme Court
held a similar statute unconstitutional in 1997. On February 1, 1999 a United
States District Court preliminarily enjoined enforcement of the law pending
final resolution of the case.

 Concentric's Stock Price Has Been and May Continue to Be Volatile

   The trading price of Concentric's common stock has been and is likely to be
highly volatile. Concentric's stock price could be subject to wide
fluctuations in response to a variety of factors, including the following:

  .  actual or anticipated variations in quarterly operating results;

  .  announcements of technological innovations;

  .  new products or services offered by Concentric or its competitors;

  .  changes in financial estimates by securities analysts;

  .  conditions or trends in the network services market;

  .  its announcement of significant acquisitions, strategic partnerships,
     joint ventures or capital commitments;

  .  additions or departures of key personnel;

  .  sales of common stock; and

  .  other events or factors that may be beyond its control.

   In addition, the stock markets in general, and the Nasdaq National Market
and the trading activity of network services and technology companies in
particular, have experienced extreme price and volume fluctuations recently.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The trading prices of many
technology companies' stocks are at or near historical highs and these trading
prices and multiples are substantially above historical levels. These trading
prices and multiples may not be sustained. These broad market and industry
factors may materially adversely affect the market price of its common stock,
regardless of its actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation often has been instituted against that company. Litigation
like this, if instituted, could result in substantial costs and a diversion of
management's attention and resources.

                                      46
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Concentric Network Corporation

   We have audited the accompanying consolidated balance sheets of Concentric
Network Corporation as of December 31, 1998 and 1999, and the related
consolidated statements of operations, common stock subject to rescission and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule included in Item 14. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Concentric Network Corporation at December 31, 1998 and 1999, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the financial information set forth therein.

                                          /s/ Ernst & Young LLP

San Jose, California
January 21, 2000, except for Note 13,
 as to which the date is March 20, 2000

                                      47
<PAGE>

                         CONCENTRIC NETWORK CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                             December 31,
                                                          --------------------
                                                            1998       1999
                                                          ---------  ---------
<S>                                                       <C>        <C>
                         ASSETS
                         ------
Current assets:
  Cash and cash equivalents.............................. $  98,988  $  25,891
  Short term investments.................................    52,226     80,095
  Current portion of restricted cash.....................    19,125    144,060
  Accounts receivable, net of allowances of $990 in 1998
   and $1,419 in 1999....................................    13,714     29,114
  Note receivable........................................       --      16,000
  Prepaid expenses and other current assets..............     3,058     10,049
                                                          ---------  ---------
    Total current assets.................................   187,111    305,209
Property and equipment:
  Computer and telecommunications equipment..............    89,668    121,561
  Software...............................................     5,427     11,653
  Furniture and fixtures and leasehold improvements......    11,357     18,403
                                                          ---------  ---------
                                                            106,452    151,617
  Accumulated depreciation and amortization..............    42,184     68,723
                                                          ---------  ---------
                                                             64,268     82,894
Restricted cash, net of current portion..................    17,113        --
Goodwill and other intangible assets.....................    20,364     70,627
Investments..............................................       --      27,101
Other assets.............................................     9,401     11,963
                                                          ---------  ---------
    Total assets......................................... $ 298,257  $ 497,794
                                                          =========  =========
     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
     ----------------------------------------------
Current liabilities:
  Accounts payable....................................... $  26,342  $  35,750
  Accrued compensation and other employee benefits.......     2,024      3,866
  Other current liabilities..............................     4,559      5,655
  Current portion of capital lease obligations...........     6,543      6,438
  Deferred revenue.......................................     3,104      7,885
                                                          ---------  ---------
    Total current liabilities............................    42,572     59,594
Capital lease obligations, net of current portion........    10,434      6,774
Notes payable............................................   146,021    146,642
Other liabilities........................................       --       1,770
Commitments and contingencies
Redeemable exchangeable preferred stock..................   156,105    179,521
Convertible redeemable preferred stock...................       --      41,339
Stockholders' equity (deficit):
  Preferred stock, $0.001 par value; issuable in series:
    Authorized shares--10,000 in 1998 and 1999
    Issued and outstanding shares--none in 1998 and
     1999................................................       --         --
  Common stock, $0.001 par value; issuable in classes:
    Authorized shares--100,000 in 1998 and 1999
    Issued and outstanding shares--30,288 in 1998 and
     45,427 in 1999......................................   190,076    420,515
Accumulated deficit......................................  (246,055)  (357,837)
Deferred compensation....................................      (896)      (524)
                                                          ---------  ---------
  Total stockholders' equity (deficit)...................   (56,875)    62,154
                                                          ---------  ---------
    Total liabilities and stockholders' equity
     (deficit)........................................... $ 298,257  $ 497,794
                                                          =========  =========
</TABLE>

                            See accompanying notes.

                                       48
<PAGE>

                         CONCENTRIC NETWORK CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                                -----------------------------
                                                  1997      1998      1999
                                                --------  --------  ---------
<S>                                             <C>       <C>       <C>
Revenue........................................ $ 45,457  $ 82,807  $ 147,060
Costs and expenses:
  Cost of revenue..............................   61,439    85,352    133,922
  Development..................................    4,850     7,734     10,907
  Marketing and sales, including $2,600, $1,085
   and $750 to a related party for the years
   ended December 31, 1997, 1998 and 1999,
   respectively................................   24,622    39,793     54,288
  General and administrative...................    4,790    10,398     15,441
  Amortization of goodwill and other intangible
   assets......................................      --      3,842      7,913
  Acquisition-related charges..................      --      1,291        --
  Write-off of in-process technology...........      --      5,200        --
                                                --------  --------  ---------
    Total costs and expenses...................   95,701   153,610    222,471
                                                --------  --------
Loss from operations...........................  (50,244)  (70,803)   (75,411)
Other income (expense).........................    1,233      (750)      (663)
Interest income................................    1,217     9,975     13,558
Interest expense, including $6,197 and $1,272
 to related parties for the years ended
 December 31, 1997 and 1998, respectively......   (7,788)  (23,570)   (22,569)
                                                --------  --------  ---------
Loss before extraordinary item.................  (55,582)  (85,148)   (85,085)
Extraordinary gain on early retirement of
 debt..........................................      --      3,042        --
                                                --------  --------  ---------
Net loss.......................................  (55,582)  (82,106)   (85,085)
Preferred stock dividends and accretion .......      --    (11,958)   (26,697)
                                                --------  --------  ---------
Net loss attributable to common stockholders... $(55,582) $(94,064) $(111,782)
                                                ========  ========  =========
Net loss per share (pro-forma 1997, historical
 1998 and 1999)
  Loss before extraordinary item............... $  (2.82) $  (2.93) $   (2.10)
  Extraordinary gain...........................      --        .11        --
                                                --------  --------  ---------
Net loss.......................................    (2.82)    (2.82)     (2.10)
Preferred stock dividends and accretion........      --       (.41)      (.66)
                                                --------  --------  ---------
Net loss per share attributable to common
 stockholders.................................. $  (2.82) $  (3.23) $   (2.76)
                                                ========  ========  =========
Shares used in computing net loss and net loss
 attributable to common stockholders per share
 (pro-forma 1997, historical 1998 and 1999)....   19,744    29,094     40,473
                                                ========  ========  =========
</TABLE>

                            See accompanying notes.

                                       49
<PAGE>

                         CONCENTRIC NETWORK CORPORATION

       CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
                         STOCKHOLDERS' EQUITY (DEFICIT)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                     Stockholders' Equity (Deficit)
                          Common Stock   -----------------------------------------------------------
                           Subject to      Preferred                                                     Total
                           Rescission        Stock         Common Stock                              Stockholders'
                          -------------  ---------------  ----------------  Accumulated   Deferred      Equity
                          Shares Amount  Shares  Amount   Shares   Amount     Deficit   Compensation   (Deficit)
                          ------ ------  ------  -------  ------  --------  ----------- ------------ -------------
<S>                       <C>    <C>     <C>     <C>      <C>     <C>       <C>         <C>          <C>
Balance at December 31,
 1996 ..................    910  $5,150   4,901  $95,215   2,786  $  1,850   $ (93,952)   $  (188)     $  2,925
Issuance of Class A
 common stock for
 services ..............    --      --      --       --       10        17         --         --             17
Conversion of Class B
 common to Series A
 preferred stock .......    --      --        7      --      (14)      --          --         --            --
Conversion of Series A,
 B, C and D preferred to
 Class A common stock
 .......................    --      --   (5,693) (99,604) 11,386    99,604         --         --            --
Shares issued upon the
 initial public offering
 (net of issuance costs)
 .......................    --      --      --       --    9,890    52,757         --         --         52,757
Shares issued in a
 private placement......    --      --      --       --    2,492    14,950         --         --         14,950
Conversion of note to
 Class A common stock...    --      --      --       --      506     3,041         --         --          3,041
Repurchase of Class A
 common stock in
 connection with the
 initial public offering
 .......................    --      --      --       --     (370)   (2,217)        --         --         (2,217)
Shares issued subject to
 dilution ratios .......    --      --      484      --      --        --          --         --            --
Exercise of options to
 purchase stock ........    --      --      --       --      130       243         --         --            243
Exercise of warrants to
 purchase stock ........    --      --      301    3,281     618     1,201         --         --          4,482
Warrants issued to
 purchase stock ........    --      --      --     1,108     --      5,370         --         --          6,478
Deferred compensation
 resulting from grant of
 options ...............    --      --      --       --      --      1,303         --      (1,303)          --
Amortization of deferred
 compensation ..........    --      --      --       --      --        --          --         222           222
Expiration of statutes
 of limitations on
 common stock subject to
 rescission ............   (844) (4,602)    --       --      844     4,602         --         --          4,602
Repurchase of shares for
 cancellation in
 connection with
 Rescission Offer ......    (66)   (548)    --       --      --        --          --         --            --
Net loss ...............    --      --      --       --      --        --      (55,582)       --        (55,582)
                           ----  ------  ------  -------  ------  --------   ---------    -------      --------
Balance at December 31,
 1997 ..................    --   $  --      --   $   --   28,278  $182,721   $(149,534)   $(1,269)     $ 31,918
Amortization of deferred
 compensation ..........    --   $  --      --   $   --      --   $    --    $     --     $   373      $    373
Common stock issued
 under stock purchase
 plan ..................    --      --      --       --      148       781         --         --            781
Common stock issued in
 acquisition of DeltaNet
 Services, Inc. ........    --      --      --       --      452     1,147      (2,457)       --         (1,310)
Exercise of options to
 purchase common stock..    --      --      --       --    1,224     3,527         --         --          3,527
Exercise of warrants for
 no cash consideration..    --      --      --       --      186       --          --         --            --
Warrants issued to
 purchase stock.........    --      --      --       --      --      1,900         --         --          1,900
Net loss................    --      --      --       --      --        --      (82,106)       --        (82,106)
Preferred stock
 dividends and
 accretion..............    --      --      --       --      --        --      (11,958)       --        (11,958)
                           ----  ------  ------  -------  ------  --------   ---------    -------      --------
Balance at December 31,
 1998...................    --   $  --      --   $   --   30,288  $190,076   $(246,055)   $  (896)     $(56,875)
                           ====  ======  ======  =======  ======  ========   =========    =======      ========
Amortization of deferred
 compensation...........    --   $  --      --   $   --      --   $    --    $     --     $   372      $    372
Common stock issued
 under stock purchase
 plan...................    --      --      --       --      247     1,660         --         --          1,660
Common stock issued in
 the acquisition of
 9Net...................    --      --      --       --    2,482    50,001         --         --         50,001
Exercise of options to
 purchase common stock..    --      --      --       --    1,856     8,626         --         --          8,626
Warrants issued to
 purchase stock.........    --      --      --       --      --     12,444         --         --         12,444
Common stock issued in
 the secondary offering
 and sold to SBC
 Communications, Inc.
 (net of offering
 costs).................    --      --      --       --    7,274   138,509         --         --        138,509
Exercise of warrants to
 purchase common stock..    --      --      --       --    3,280    19,199         --         --         19,199
Net loss................    --      --      --       --      --        --      (85,085)       --        (85,085)
Preferred stock
 dividends and
 accretion..............    --      --      --       --      --        --      (26,697)       --        (26,697)
                           ----  ------  ------  -------  ------  --------   ---------    -------      --------
Balance at December 31,
 1999...................    --   $  --      --   $   --   45,427  $420,515   $(357,837)   $  (524)     $ 62,154
                           ====  ======  ======  =======  ======  ========   =========    =======      ========
</TABLE>

                            See accompanying notes.

                                       50
<PAGE>

                         CONCENTRIC NETWORK CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
OPERATING ACTIVITIES
 Net loss ......................................  $(55,582) $(82,106) $(85,085)
 Adjustments to reconcile net loss to net cash
  used in operating activities:
   Depreciation.................................    16,852    24,442    28,404
   Amortization of deferred interest, cost of
    revenue and marketing and sales related to
    issuance of warrants........................     1,720     1,210     1,433
   Amortization of goodwill and other intangible
    assets......................................       --      3,842     7,913
   Amortization of deferred financing costs.....       --        526       721
   Amortization of other deferred assets........       --      3,025     1,989
   Amortization of deferred compensation........       658       373       373
   Gain on early retirement of debt.............       --     (3,042)      --
   Write-off of in-process technology ..........       --      5,200       --
   Loss on disposal of equipment................       162       --        --
   Changes in current assets and liabilities:
     Prepaid expenses and other current assets
      ..........................................    (3,581)    1,009    (7,765)
     Accounts receivable........................    (2,700)   (7,140)  (16,517)
     Accounts payable...........................    (7,287)    7,408     3,495
     Accrued compensation and other employee
      benefits..................................       863      (315)    1,538
     Deferred revenue...........................       197       509     1,632
     Other current liabilities..................     2,795    (1,575)      794
                                                  --------  --------  --------
Net cash used in operating activities...........   (45,903)  (46,634)  (61,075)
INVESTING ACTIVITIES
Net change in restricted cash...................       --        --   (124,935)
Additions of property and equipment.............    (6,130)  (23,489)  (41,719)
Proceeds from sale of property and equipment....       --        --        135
Increase in refundable deposits.................       --     (1,200)      --
Decrease (increase) in note receivable..........      (370)      100   (15,830)
Net change in short term investments............       --    (52,226)  (27,869)
Net change in long term investments.............       --        --    (27,101)
Acquisition of InterNex Information Services,
 Inc., net of cash acquired.....................       --    (15,452)      --
Acquisition of AnaServe, Inc., net of cash
 acquired.......................................       --     (9,625)      --
Acquisition of 9Net Avenue Inc., net of cash
 acquired.......................................       --        --       (796)
                                                  --------  --------  --------
Net cash used in investing activities...........    (6,500) (101,892) (238,115)
FINANCING ACTIVITIES
Proceeds from notes payable.....................   155,000       --        --
Change in restricted cash.......................   (52,525)   16,287    17,113
Repayment of lease obligations to a related
 party..........................................   (10,039)   (3,079)      --
Repayment of lease obligations to a related
 party--early retirement of debt................       --    (24,750)      --
Repayment of lease obligations..................    (1,517)   (7,079)   (5,823)
Net change in notes payable.....................    (2,000)   (1,960)      326
Repurchase of common stock......................    (2,765)      --        --
Deferred financing costs........................    (5,006)     (320)   (4,021)
Proceeds from issuance of redeemable
 exchangeable preferred stock, net of issuance
 costs..........................................       --    144,148    50,000
Proceeds from issuances of stock and warrants...    73,557     4,308   168,498
                                                  --------  --------  --------
Net cash provided by financing activities.......   154,705   127,555   226,093
                                                  --------  --------  --------
Increase (decrease) in cash and cash equivalents
 ...............................................   102,302   (20,971)  (73,097)
Cash and cash equivalents at beginning of period
 ...............................................    17,657   119,959    98,988
                                                  --------  --------  --------
Cash and cash equivalents at end of period......  $119,959  $ 98,988  $ 25,891
                                                  ========  ========  ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
 AND FINANCING ACTIVITIES
Stock exchanged for notes payable, including
 accrued interest ..............................  $  3,041  $    --   $    --
Capital lease obligations incurred with a
 related party..................................     3,042     1,285       --
Capital lease obligations incurred..............       --      5,363     1,385
Reduction of accounts payable through capital
 lease obligations incurred.....................     2,000       --        --
Issuance of warrants............................     5,370     1,900    11,940
Accretion of dividends and financing costs......       --     11,958    26,697
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION
Interest paid...................................  $  5,728  $ 22,609  $ 20,998
</TABLE>

                            See accompanying notes.

                                       51
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

 The Company

   Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in 1991 and reincorporated into Delaware in 1997. The
Company operates primarily in one business segment in the United States.
Concentric provides tailored, value-added Internet Protocol (IP) based network
services for businesses and consumers. To provide these services, the Company
utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks (VPNs), dedicated access
facilities (DAFs), digital subscriber line services (DSL), remote access and
Web hosting. These services enable enterprises to take advantage of standard
Internet tools such as browsers and high-performance servers for customized
data communications within an enterprise and between an enterprise and its
suppliers, partners and customers. These services combine the cost advantages,
nationwide access and standard protocols of public networks with the
customization, high performance, reliability and security of private networks.

 Basis Of Presentation And Preparation

   The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

   All share and per share information presented herein, except as noted, and
in the Company's consolidated financial statements has been retroactively
restated to reflect a two-for-one stock split of the Company's common stock on
May 21, 1999, paid in the form of a stock dividend, to holders of record on
April 30, 1999.

 Use of Estimates

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

 Cash, Cash Equivalents and Short Term Investments

   The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Investments with maturities between three and twelve months are
considered to be short term investments. Management determines the appropriate
classification of its investments in debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date. The Company's
debt securities have been classified and accounted for as available-for-sale.
These securities are carried at fair value and unrealized gains and losses
have not been material to date. Comprehensive net loss per share is not
materially different from net loss for all years presented. Realized gains and
losses and declines in value judged to be other than temporary on available-
for-sale securities are included in interest income and have not been material
to date. Cash and cash equivalents are held primarily with three financial
institutions.

 Long Term Investments

   In January 1999 the Company purchased approximately $10.0 million of common
stock from Covad Communications Group, Inc. ("Covad") and certain Covad
stockholders at Covad's initial public offering price. In April 1999 the
Company purchased approximately $5.0 million of Class B Common Stock from
NorthPoint

                                      52
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Communications Group, Inc. ("NorthPoint"). In July 1999 the Company purchased
approximately $5.0 million of Series A Convertible Preferred Stock from
Register.com, Inc. ("Register.com"). In August 1999 the Company purchased
approximately $2.0 million of Series B Preferred Stock from Asia Online, Ltd.
("Asia Online"). In October 1999 the Company purchased approximately $5.0
million of Series C Preferred Stock from Corio, Inc. ("Corio"). Long term
investments are recorded at cost.

 Property and Equipment

   Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets as follows: computer and telecommunications equipment:
three to five years; purchased software: three to five years; furniture and
fixtures: eight to ten years; and leasehold improvements: the shorter of the
remaining term of the related leases or the estimated economic useful lives of
the improvements. Equipment under capital leases is amortized over the shorter
of the expected useful life or the related lease term (see Note 3).
Depreciation expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $16,852,000, $24,442,000 and $28,404,000 respectively.

 Revenue and Customer Receivables

   Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenue. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.

   Commissions and other obligations to strategic partners through marketing
and distribution arrangements are expensed as incurred, at the time the
associated revenue is recognized.

 Concentration of Credit Risk

   The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.

 Advertising Costs

   The Company expenses the costs of advertising as incurred except for
direct-response advertising costs meeting certain specific criteria. To date,
no direct-response advertising costs have been capitalized. Advertising
expense for the years ended December 31, 1997, 1998 and 1999 were
approximately $1,532,000, $2,737,000 and $9,854,500, respectively.

 Income Taxes

   The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" (FAS 109).

 Basic and Diluted Net Loss Per Share

   Basic and diluted net loss per share have been computed in accordance with
the Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share."

                                      53
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin No. 98 (SAB No. 98) which was issued in February
1998, common and common equivalent shares issued by the Company for nominal
consideration during any of the periods for which a statement of operations
was presented in the Company's initial public offering registration statement
have been included in the calculation of basic and diluted net loss per share
for all such periods in a manner similar to a stock split.

   Pro forma net loss per share gives effect, even if antidilutive, to common
equivalent shares from convertible preferred shares that were automatically
converted to common shares upon the closing of the Company's initial public
offering (using the as-if-converted method). The following table sets forth
the computation of basic and diluted loss per share, on a historical and pro
forma basis:

<TABLE>
<CAPTION>
                                                     Twelve Months Ended
                                                        December 31,
                                                 -----------------------------
                                                   1997      1998      1999
                                                 --------  --------  ---------
                                                  (In thousands, except per
                                                         share data)
<S>                                              <C>       <C>       <C>
Numerator:
Net loss before extraordinary item ............  $(55,582) $(85,148) $ (85,085)
Extraordinary gain on early retirement of debt
 ..............................................       --      3,042        --
                                                 --------  --------  ---------
Net loss ......................................   (55,582)  (82,106)   (85,085)
                                                 ========  ========  =========
Preferred stock dividends and accretion .......       --    (11,958)   (26,697)
                                                 --------  --------  ---------
Numerator for basic and diluted loss per share
 ..............................................  $(55,582) $(94,064) $(111,782)
                                                 ========  ========  =========
Denominator:
Denominator for basic and diluted earnings per
 share--weighted average shares (historical) ..    13,330    29,094     40,473
                                                 ========  ========  =========
Adjustments to reflect the effect of the
 assumed conversion of convertible preferred
 stock from the date of issuance ..............     6,414
                                                 ========
Denominator for basic and diluted earnings per
 share--weighted average shares (pro forma) ...    19,744
                                                 ========
Basic and diluted net loss per share
 (historical):
  Loss before extraordinary item ..............  $  (4.17) $  (2.93) $   (2.10)
                                                 --------  --------  ---------
  Extraordinary gain ..........................       --        .11        --
                                                 --------  --------  ---------
  Net loss ....................................     (4.17)    (2.82)     (2.10)
                                                 ========  ========  =========
  Preferred stock dividends and accretion .....       --       (.41)      (.66)
                                                 --------  --------  ---------
  Net loss attributable to common stockholders
   ............................................  $  (4.17) $  (3.23) $   (2.76)
                                                 ========  ========  =========
Basic and diluted net loss per share (pro
 forma) .......................................  $  (2.82)
                                                 ========
</TABLE>

 Stock-Based Compensation

   The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).

                                      54
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Long-Lived Assets

   In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," the Company continually reviews long-lived 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.

 Customer Concentrations

   The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1997, 1998 and 1999,
revenue from WebTV Networks, Inc. represented approximately 33.4%, 26.8% and
25.2%, respectively, of the Company's total revenue.

 Sole or Limited Sources of Supply

   The Company relies on other companies to supply certain key components of
their network infrastructure. These components include critical
telecommunications services and networking equipment, which, in the quantities
and quality demanded by us, are available only from sole- or limited-sources.
Four companies provide the data communications facilities and capacity for the
Company. The Company is also dependent upon local exchange carriers to provide
telecommunications services to the Company and its customers. The Company has
experienced delays from time to time in receiving telecommunications services
from these suppliers. There can be no assurance that such services on the
scale and within the time frames required by the Company at an affordable cost
will be attainable. Any failure to obtain such services on a sufficient scale,
on a timely basis and at an affordable cost would have a material adverse
effect on the business, financial condition and results of operations of the
Company.

   The Company purchases its network equipment primarily from five vendors.
Two companies also act as systems integrators. One company is the sole
supplier of the servers primarily used in the Company's network
infrastructure. The Company purchases these components pursuant to purchase
orders placed from time to time with these suppliers. The Company does not
carry significant inventories of these components and has no guaranteed supply
arrangements for such components. The Company's suppliers also sell products
to competitors and may in the future themselves become competitors. There can
be no assurance that suppliers will not enter into exclusive arrangements with
competitors or stop selling their products or components to the Company at
commercially reasonable prices, or at all.

 Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
FAS 133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. FAS 133, as recently amended, is
effective for fiscal years beginning after June 15, 2000. The Company believes
the adoption of FAS 133 will not have a material effect on the Company's
financial position or results of operations.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting
principle in the quarter ending March 31, 2000. While the Company has not
fully assessed the impact of the adoption of SAB 101, it believes that
implementation of SAB 101 will not have a material adverse impact on its
existing revenue recognition policies or its reported results of operations
for the year ending December 31, 2000.

                                      55
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2. Cash, Cash Equivalents, Short Term Investments and Restricted Cash

   The following table summarizes the Company's available-for-sale securities
at amortized cost, which approximates fair value, as of December 31, 1999 (in
thousands):

<TABLE>
   <S>                                                                  <C>
   U.S. Treasury securities ........................................... $26,113
   U.S. Corporate securities ..........................................  53,982
                                                                        -------
   Total included in short-term investments ........................... $80,095
                                                                        =======
</TABLE>

   The Company's U.S. Corporate securities include commercial paper. The
Company's cash equivalents and short term investments have generally been held
until maturity. The Company's cash and cash equivalents at December 31, 1999
consisted primarily of money market funds.

   Restricted cash at December 31, 1999 consisted of $18.8 million of funds
held in escrow to pay interest relating to the Company's 12 3/4% Senior Notes
and $125.3 million of funds held in escrow for the pending acquisition of
Internet Technology Group, Plc in February 2000.

3. Commitments

 Operating Leases

   The Company has an agreement with a related party through which such
related party makes available the premises at which the Company's POP sites
throughout the United States are located. POP sites are locations where
certain telecommunications switching and related equipment are installed. This
agreement expires in December 2000, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Costs of approximately $1,326,000, $1,267,000 and
$1,304,000 were incurred during the years ended December 31, 1997, 1998 and
1999, respectively, for these facilities. Additionally, the Company has
agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. Costs of approximately
$1,246,000 and $1,372,000 were incurred during the years ended December 31,
1998 and 1999, respectively, for these facilities. The expiration dates
associated with these agreements range from December 1999 to January 2002.

   The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expire at various dates through May 2012.
Total rent expense for all operating leases was approximately $2,418,000,
$4,743,000 and $7,967,000 for the years ended December 31, 1997, 1998 and
1999, respectively.

   Future minimum lease commitments for all noncancelable operating leases
with initial terms of one year or more consists of the following at December
31, 1999 are (in thousands):

<TABLE>
   <S>                                                                   <C>
   2000................................................................. $ 8,543
   2001.................................................................   8,408
   2002.................................................................   6,519
   2003.................................................................   5,343
   2004.................................................................   4,677
   Thereafter...........................................................   7,661
                                                                         -------
     Total.............................................................. $41,151
                                                                         =======
</TABLE>

                                      56
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Capital Leases

   In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $1,443,000,
$536,000 and $472,000 at December 31, 1997, 1998 and 1999, respectively. In
March 1998, the Company retired a portion of the capital lease obligations to
the related party. The Company paid $24,750,000 for the extinguishment of the
debt. The Company recognized an extraordinary gain of $3,042,000 in connection
with this transaction. Subsequent to March 1998, the related party sold its
stockholdings in the Company and is no longer considered a related party.

   Assets capitalized under capital leases totaled approximately $28,068,000
and $42,018,000 at December 31, 1998 and 1999, respectively, and are included
in computer and telecommunications equipment. Accumulated amortization for
assets capitalized under capital leases totaled approximately $8,356,000 and
$14,821,000 at December 31, 1998 and 1999, respectively. Amortization of
leased assets is included in depreciation and amortization expense. The
Company has granted a security interest in all equipment under capital lease
agreements. Future minimum lease payments under capital lease obligations at
December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   2000................................................................ $ 7,259
   2001................................................................   4,921
   2002................................................................   2,388
   2003................................................................     618
                                                                        -------
     Total minimum lease payments......................................  15,186
   Less amount representing interest...................................   1,974
                                                                        -------
   Present value of net minimum lease payments.........................  13,212
   Less current portion of capital leases..............................   6,438
                                                                        -------
   Long-term portion of capital leases................................. $ 6,774
                                                                        =======
</TABLE>

 Other

   The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, which expired in June 1998. The Company had
incurred expenses, through the life of the agreement, of approximately
$8,100,000 and $4,143,000 for the years ended December 31, 1997 and 1998,
respectively, related to these other services. The agreement was renewed in
August 1998 and provides for minimum payments of $6.0 million per year over
its term, expiring July 2000. The Company incurred expenses of approximately
$3,042,000 related to the new agreement for the five month period ended
December 31, 1998 and approximately $9,461,000 for the year ended December 31,
1999.

   In November 1995, the Company entered into a two-year service agreement
under which a third party provided substantially all of the network analysis
and deployment and maintenance of POP sites. In 1997, the third party was
purchased by Williams Communications Group, Inc. ("Williams"), a stockholder
of the

                                      57
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company, and the agreement was extended to December 31, 2000. The Company will
reimburse Williams for its employee compensation and direct costs for services
provided. Related party payments to Williams for these services were
approximately $1,884,000, $4,848,000 and $6,460,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. At the end of the agreement,
Williams is obligated to transfer to the Company those personnel, resources,
and facilities used to support the Company's network analysis, POP site
deployment, and maintenance.

   In August 1997, the Company entered into a five-year service and equipment
agreement under which Williams, a related party, will provide
telecommunication services and equipment. The agreement provides for minimum
payments as follows: $1.2 million in 1998, $2.5 million in 1999, $7.0 million
in 2000, $6.5 million in 2001 and $4.0 million in 2002. At the election of
Williams, $2.0 million of the minimum payments may be paid by the issuance of
common stock of the Company at the then-current fair market value. The Company
made payments of approximately $4.8 million for the year ended December 31,
1998 related to this agreement, of which approximately $4.3 million related to
the purchase of equipment from Williams. For the year ended December 31, 1999,
payments were approximately $24.9 million, of which approximately $16.5
million related to the purchase of equipment.

   In June 1999, the Company signed an agreement through which Microsoft
Corporation ("Microsoft") will provide services to certain of the Company's
customers and the Company will purchase $7.5 million worth of advertising
during the term of the three year agreement. The Company made payments of
approximately $1.6 million to Microsoft during the year ended December 31,
1999 for services related to this agreement.

4. Convertible Debentures and Notes Payable

 Notes Payable

   In December 1997, the Company issued 150,000 units (collectively, the
Units), each consisting of $1,000 principal amount of 12 3/4% Senior Notes
(the 12 3/4% Senior Notes) due 2007 and one warrant (a Warrant), each Warrant
entitling the holder thereof to purchase 12.68 shares of common stock at $5.43
per share and such Warrants expire on December 15, 2007 (see Note 7) for
aggregate cash proceeds of $150,000,000. Approximately $52,525,000 of the cash
proceeds was placed in a escrow account to fund the first six interest
payments in accordance with the Senior Note agreement which is classified as
restricted cash. As of December 31, 1999, the Company had $18,752,000
remaining in the escrow account restricted for future interest payments.

   The Warrants resulted in the right of the holders to purchase 1,902,216
shares of the Company's common stock. The Company deemed the fair value of the
warrants, using the Black-Scholes method, to be approximately $4,440,000 which
was recorded as a discount on the 12 3/4% Senior Notes. The discount is being
amortized as interest expense over the term of the 12 3/4% Senior Notes.
Amortization expense was $17,000, $444,000 and $444,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.

   The 12 3/4% Senior Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after December 15, 2002, at the
redemption rates (expressed as a percentage of the principal amount)
commencing with 106.375% on December 15, 2002 and declining to 100% on
December 15, 2005, plus accrued interest to the date of redemption. In
addition, on or prior to December 15, 2000, the Company may redeem up to 35%
of the original aggregate principal amount of the 12 3/4% Senior Notes at a
redemption price of 112.75% of the principal amount, together with accrued and
unpaid interest to the date of redemption with the net cash proceeds of one or
more public equity offerings or the sale of common stock to a strategic
investor, provided that at least 65% of the original aggregate principal
amount of the 12 3/4% Senior Notes remain outstanding.

                                      58
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In connection with the issuance of the 12 3/4% Senior Notes, the Company
incurred approximately $5,300,000 of debt issuance costs which are classified
as other assets. These costs are being amortized as interest expense over the
term of the 12 3/4% Senior Notes. Amortization expense was $526,000 and
$537,000 for the years ended December 31, 1998 and 1999, respectively.

5. Common Stock Subject to Rescission

   In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,000. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not have been available. As a result, on September 30, 1997, the Company made
rescission offers (the "Rescission Offer") to certain purchasers of these
securities who are entitled to a return of the consideration paid for their
stock or debentures. As such, these shares have been classified as common
stock subject to rescission in the accompanying financial statements.
Additionally, options issued pursuant to the Company's 1995 Stock Incentive
Plan to Employees and Consultants and non-plan options were issued in various
states for which the Company may not have had an available exemption under
state laws. Such options are potentially subject to rescission and the Company
has included them in the Rescission Offer. As of December 31, 1997, statutes
of limitations under federal and state securities laws applicable to the
shares which may have been issued without securities laws exemptions have
lapsed and the Rescission Offer had expired. Pursuant to the Rescission Offer,
the Company offered to rescind the issuance of shares and options as to which
the applicable statute of limitations had not run. There can be no assurances
that the Company will not otherwise be subject to additional liabilities with
respect to such issuances. The Company repurchased 64,846 shares of Common
Stock subject to the Rescission Offer for $548,000 and paid related interest
charges of $125,000. Based upon the above, the Company has reclassified the
remaining rescission liability and shares into stockholders' equity.

6. Stockholders' Equity

   All share and per share information presented herein, except as noted, has
been retroactively restated to reflect a two-for-one stock split of the
Company's common stock on May 21, 1999, paid in the form of a stock dividend,
to holders of record on April 30, 1999.

 Public Offering

   In February 1999 the Company effected a public offering of its common
stock. The Company issued and sold 11,322,000 shares at $11.13 for net
proceeds of approximately $119.4 million. Certain selling stockholders
exercised warrants to purchase directly from the Company 3,200,000 shares of
common stock having an aggregate purchase price of approximately $10.2
million, which shares were also registered and sold in the public offering by
such stockholders.

 SBC Financing Agreement

   In January 1999 SBC Communications Inc. purchased 1,613,358 shares of
common stock for an aggregate purchase price of approximately $19.5 million
pursuant to an agreement reached between the two companies in October 1998. In
connection with the agreement, the Company issued to SBC a warrant to purchase
an additional 1,813,358 shares. The warrant expires three years from the date
of issuance and is exercisable at $10.50 per share.

                                      59
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company deemed the fair market value of the warrant, using the Black-
Scholes method, to be $1.9 million which is being amortized as a marketing
cost over the life of the agreement. Amortization for the year ended December
31, 1999 was approximately $633,000.

 TMI Warrant

   In June 1999 the Company amended an agreement with TMI Telemedia
International, Ltd. ("TMI") and in connection with the agreement, the Company
issued a warrant to purchase 50,000 shares of its common stock. The warrant
expires in January 2001 and is exercisable at $25.1875 per share. The Company
deemed the fair market value of the warrant, using the Black-Scholes method,
to be $504,000, which was written off as other expense in June 1999.

 Redeemable Exchangeable Preferred Stock

   In June 1998, the Company completed a $150 million private placement of 13
1/2% Series A Senior Redeemable Exchangeable Preferred Stock due 2010 (Series
A Preferred). In September 1998, the Company issued 154,657 shares of its 13
1/2% Series B Senior Redeemable Exchangeable Preferred Stock due 2010
(Series B Preferred) in exchange for all outstanding shares of the Series A
Preferred pursuant to a registered exchange offer. Each share of Series B
Preferred has a liquidation preference of $1,000 per share. Dividends on the
Series B Preferred accrue at a rate of 13 1/2% per annum of the liquidation
preference thereof and are payable quarterly in arrears commencing on
September 1, 1998. Dividends are payable in cash, except that on each dividend
payment date occurring on or prior to June 1, 2003, dividends may be paid, at
the Company's option, by the issuance of additional shares of Series B
Preferred having an aggregate liquidation preference equal to the amount of
such dividends. For the years ended December 31, 1998 and 1999, the Company
issued a total of 9,865 and 22,683 shares, respectively, of Series B Preferred
Stock as payment of the quarterly dividends. Series B Preferred Stock has no
voting rights.

   The Series B Preferred is redeemable at the option of the Company, in whole
or in part, at any time on or after June 1, 2003, at redemption rates
(expressed as a percentage of the liquidation preference) commencing with
106.75% on June 1, 2003 and declining to 100% on June 1, 2008, plus
accumulated and unpaid dividends to the date of redemption. In addition, prior
to June 1, 2001, the Company may, at its option, redeem up to a maximum of 35%
of the initially issued Series B Preferred from the net proceeds of one or
more public equity offerings or the sale of common stock to a strategic
investor. The Series B Preferred is subject to mandatory redemption at its
liquidation preference, plus accumulated and unpaid dividends on June 1, 2010.

   On any scheduled dividend payment date, the Company may, at its option,
exchange in whole but not in part the then outstanding shares of Series B
Preferred for 13 1/2% Senior Subordinated Debentures due 2010 (Exchange
Debentures) with a principal amount equal to the aggregate liquidation
preference of the Preferred Stock. If the Exchange Debentures were issued,
they would mature on June 1, 2010. Interest on the Exchange Debentures would
be payable semi-annually in arrears. Interest payable on or prior to June 1,
2003 may be paid in the form of additional Exchange Debentures valued at the
principal amount thereof.

   The Company is accreting the Series B Preferred to its liquidation
preference through the due date of the Series B Preferred. The accretion for
the years ended December 31, 1998 and 1999 was approximately $11.7 million and
$22.9 million, respectively. In connection with the issuance of Series A
Preferred and Series B Preferred, the Company incurred approximately $5.9
million of issuance costs. These costs are being accreted over 12 years which
amounted to $282,000 for the year ended December 31, 1998 and $487, 900 for
the year ended December 31, 1999.

                                      60
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Convertible Redeemable Preferred Stock

   In June 1999, the Company issued 50,000 shares of Series C 7% Convertible
Redeemable Preferred Stock due 2010 ("Series C Preferred") to Microsoft
Corporation ("Microsoft") for $50 million. Each share of Series C Preferred
has a liquidation preference of $1,000 per share. Dividends on the Series C
Preferred accrue at the rate of 7% per annum of the liquidation preference
thereof and are payable quarterly in arrears commencing on September 1, 1999.
Dividends are payable in cash, except that on each dividend payment date
dividends may be paid, at the Company's option, by the issuance of additional
shares of Series C Preferred having an aggregate liquidation preference equal
to the amount of such dividends. For the year ended December 31, 1999, the
Company issued a total of 1,478 shares of Series C Preferred Stock as payment
of the quarterly dividends.

   The Series C Preferred is redeemable at the option of the Company, in whole
or in part, at any time on or after June 1, 2003 at redemption rates
commencing with 105.125% declining to 100% on June 1, 2010. The Series C
Preferred is subject to mandatory redemption at its liquidation preference,
plus accumulated and unpaid dividends on September 1, 2010. The holder of any
Series C Preferred has the right, at its option, to convert at any time any
shares of Series C Preferred into shares of common stock at the conversion
price of $39.924.

   The Company is accreting the Series C Preferred to its liquidation
preference through the due date of the Series C Preferred. The accretion for
the year ended December 31, 1999 was approximately $1.8 million.

   In conjunction with the Series C Preferred issuance, the Company issued a
warrant to Microsoft to purchase 500,000 shares of its common stock. The
warrant expires four years from the date of issuance and is exercisable at
$33.27 per share. The Company deemed the fair market value of the warrants,
using the Black-Scholes model, to be approximately $11.9 million and is
accreting this value over four years. Accretion for the year ended December
31, 1999 was approximately $1.5 million.

 Consent Agreements

   In July 1999, the Company solicited and received consents of more than a
majority of the Company's outstanding 12 3/4% Senior Notes due 2007 ("12 3/4%
Senior Notes") and the outstanding 13 1/2% Series B Redeemable Exchangeable
Preferred Stock due 2010 ("Series B Preferred"). The consents allow the
Company to increase its permitted investments under the Indenture relating to
the 12 3/4% Senior Notes and the Certificate of Designation relating to the
Series B Preferred. In August, the Company paid consent fees of approximately
$3.8 million to the holders who delivered consents prior to the expiration
date of such consents. Amortization related to the consent fees was immaterial
for the year ended December 31, 1999.

 Stock Option Plans

   1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the 1995 Plan) provided
for the granting to employees of incentive stock options and for the granting
to employees and consultants of nonstatutory stock options, stock appreciation
rights (SARs) and restricted stock awards (RSAs). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was terminated effective October 4,
1996. As of December 31, 1999, options to purchase 81,420 shares of common
stock at a weighted exercise price of $1.88 per share were outstanding under
the 1995 plan of which 74,237 options were vested.

   Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the Restated 1996 Plan) provides for the granting to
employees of incentive stock options and for the granting to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights (Rights). The Restated 1996 Plan has been terminated. As of December
31, 1999, options to purchase 864,154 shares of common stock at a weighted
average exercise price of $3.38 per share were outstanding of which 440,356
were vested.

                                      61
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Restated 1996 Plan provides that in the event of a merger of the
Company with or into another corporation, a sale of substantially all of the
Company's assets or a like transaction involving the Company, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted as
described in the preceding sentence, the Restated 1996 Plan provides the
optionee or Right holder to have the right to exercise the option or Right as
to all of the optioned stock, including shares as to which it would not
otherwise be exercisable.

   1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides
for the granting to employees of incentive stock options and for the granting
to employees, directors and consultants of nonstatutory stock options and
stock purchase rights (Rights). The 1997 Plan was approved by the Board of
Directors on June 6, 1997 and by the stockholders on June 30, 1997. An
amendment increasing the number of shares thereunder from 3,000,000 to
4,500,000 was approved by the Board of Directors on April 10, 1998, and the
Stockholders on May 20, 1998. On June 28, 1999 an amendment was approved
increasing the number of shares to 6,500,000. Unless terminated sooner, the
1997 Plan will terminate automatically in 2007. Options granted under the 1997
Plan must generally be exercised within three months of the end of optionee's
status as an employee, director or consultant of the Company, or within twelve
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's term. The exercise price of
all incentive stock options granted under the 1997 Plan must be at least equal
to the fair market value of the common stock on the date of grant. The
exercise price of nonstatutory stock options and Rights granted under the 1997
Plan is determined by the 1997 Plan's Compensation Committee, but with respect
to nonstatutory stock options intended to qualify as "performance-based
compensation," the exercise price must at least be equal to the fair market
value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of other incentive stock options granted under the
1997 Plan may not exceed ten years. A total of 6,500,000 shares of common
stock are currently reserved for issuance pursuant to the 1997 Plan. As of
December 31, 1999, options to purchase 5,511,506 shares of common stock at a
weighted average exercise price of $9.16 per share were outstanding of which
960,694 were vested, and 288,299 shares of common stock remained available for
future grants under the 1997 Plan.

   The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the 1997 Plan provides for the optionee or Right holder to
have the right to exercise the option or Right as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable.

   1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") was approved by the Board of
Directors on June 6, 1997 and by the stockholders on June 30, 1997. An
amendment increasing the number of shares by 605,876 shares was approved by
the Stockholders on May 20, 1998. A total of 1,605,876 shares of common stock
are currently reserved for issuance pursuant to the 1997 Plan. The 1997
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, consists of 24-month offering periods beginning on the first
trading day on or after February 15 and August 15 of each year, except for the
first such offering period, which commenced on August 4, 1997 and ended on
February 13, 1998. Each offering period contains four six-month purchase
periods. Employees are eligible to participate if they are customarily
employed by the Company or any designated subsidiary for at least 20 hours per
week and more than five months in any calendar year. The 1997 Purchase Plan
permits eligible employees to purchase common stock through payroll deductions
of up to 10% of an employee's compensation (excluding overtime, shift premium,
and other bonuses and incentive compensation), up to a maximum of $25,000 for
all

                                      62
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

offering periods ending within the same calendar year. No employee may
purchase more than 25,000 shares in any purchase period. The price of stock
purchased under the 1997 Purchase Plan is 85% of the lower of the fair market
value of the common stock at the beginning of the offering period or at the
end of the current purchase period. Employees may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with the Company. During the years ended December 31, 1998 and
1999, 148,284 shares and 247,007 shares were purchased at weighted average
prices of $5.27 and $6.72 per share, respectively.

   The 1997 Purchase Plan provides that, in the event of a merger of the
Company with or into another corporation or a sale of substantially all of the
Company's assets, each outstanding option shall be assumed or an equivalent
option shall be substituted for it, or the Board of Directors or its committee
shall shorten the purchase and offering periods then in progress (so that
employees' rights to purchase stock under the Plan are exercised prior to the
merger or sale of assets). The 1997 Purchase Plan will terminate in 2007.

   The Company issued options to purchase 358,600 shares of common stock in
December 1996, 80,534 shares of common stock in January 1997, 433,466 shares
of common stock in June 1997, and repriced 362,946 options in July 1997. The
Company recorded deferred compensation, for financial reporting purposes, of
approximately $188,000 in 1996 and $1,303,000 for the year ended December 31,
1997, with respect to such option grants to reflect the difference between the
exercise price and the deemed fair value for financial reporting purposes of
these shares. Amortization of this deferred compensation was $222,000,
$373,000 and $373,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. The amortization of this deferred compensation will continue
over the four year vesting period of the associated stock options.

   1999 Nonstatutory Stock Option Plan. The Company's 1999 Nonstatutory Stock
Option Plan (the "1999 Plan") provides for the granting to employees,
directors and consultants of nonstatutory stock options. The 1999 Plan was
approved by the Board of Directors in January 1999, and amended in October
1999. Unless terminated sooner, the 1999 Plan will terminate automatically in
2009. A total of 2,050,000 shares of common stock are currently reserved for
issuance pursuant to the 1999 Plan. As of December 31, 1999, options to
purchase 1,810,500 shares of common stock at a weighted average price of
$21.52 per share were outstanding, of which none were vested.

   The 1999 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options, including the exercise price, the
number of shares subject to each option, the exercisability thereof, and the
form of consideration payable upon such exercise. In addition, the
Administrator has the authority to amend, suspend or terminate the 1999 Plan,
provided that no such action may affect any share of common stock previously
issued and sold or any option previously granted under the 1999 Plan.

   Options granted under the 1999 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 1999 Plan must generally be
exercised within three months of the end of the optionee's status as an
employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. The exercise price of nonstatutory stock
options granted under the 1999 Plan is determined by the Administrator.

   The 1999 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets,
each option shall be assumed or an equivalent option substituted by the
successor corporation. If the outstanding options are not assumed or
substituted, the Administrator shall provide for the Optionee to have the
right to exercise the option as to all of the optioned stock, including shares

                                      63
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

as to which it would not otherwise be exercisable for a period of fifteen (15)
days from the date of such notice, and the option will terminate upon the
expiration of such period.

   The following table summarizes stock option activity under all of the
Plans:

<TABLE>
<CAPTION>
                                                      Number of     Price Per
                                                        Shares        Share
                                                      ----------  -------------
   <S>                                                <C>         <C>
   Balance at December 31, 1996 .....................  2,258,004  $1.88-$ 16.50
     Granted.........................................  2,944,676  $ 1.88-$ 5.63
     Exercised.......................................   (129,088) $        1.88
     Canceled........................................   (489,260) $ 1.88-$ 5.63
                                                      ----------
   Balance at December 31, 1997......................  4,584,332  $1.88-$ 15.00
                                                      ==========
     Granted.........................................  3,767,916  $4.94-$ 37.95
     Exercised....................................... (1,223,388) $1.88-$ 10.44
     Canceled........................................   (495,662) $1.88-$ 37.95
                                                      ----------
   Balance at December 31, 1998......................  6,633,198  $1.88-$ 37.95
                                                      ==========
     Granted.........................................  4,788,028  $16.75-$39.75
     Exercised....................................... (1,856,213) $1.88-$ 37.95
     Canceled........................................   (911,329) $1.88-$ 39.75
                                                      ----------
   Balance at December 31, 1999......................  8,653,684  $1.88-$ 39.75
                                                      ==========
</TABLE>

   The weighted average fair value of options granted during 1997, 1998 and
1999 was $3.88, $9.96 and $28.88 respectively.

   The following table summarizes information concerning currently outstanding
and exercisable options as of December 31, 1999:

<TABLE>
<CAPTION>
                                Options Outstanding        Options Exercisable
                          -------------------------------- --------------------
                                       Weighted
                                        Average
                                       Remaining  Weighted             Weighted
                                      Contractual Average    Number    Average
                            Number       Life     Exercise Exercisable Exercise
   Exercise Prices        Outstanding   (years)    Price   and Vested   Price
   ---------------        ----------- ----------- -------- ----------- --------
   <S>                    <C>         <C>         <C>      <C>         <C>
   $1.88.................    360,818     6.67      $ 1.88     253,836   $ 1.88
   $3.00.................    343,571     7.37      $ 3.00     172,345   $ 3.00
   $4.43-$4.65...........    322,249     7.48      $ 4.57     169,476   $ 4.58
   $4.94-$5.63...........    696,436     7.86      $ 5.53     235,728   $ 5.54
   $6.50-$16.75..........  3,411,169     8.69      $12.31     714,058   $10.30
   $17.25-$39.75.........  3,519,441     9.53      $28.68      13,304   $22.39
                           ---------                        ---------
   Total.................  8,653,684                        1,558,747
                           =========                        =========
</TABLE>

 Stock-Based Compensation

   Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and 1996 was estimated using the minimum value
method. Options granted after the Public Offering have been valued using the
Black-Scholes option pricing model. Among other things, the Black-Scholes
model

                                      64
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

considers the expected volatility of the Company's stock price, determined in
accordance with FAS 123, in arriving at an option valuation. The minimum value
method does not consider stock price volatility. Further, certain other
assumptions necessary to apply the Black-Scholes model may differ
significantly from assumptions used in calculating the value of options
granted in 1995 and 1996 under the minimum value method.

   The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                                               1997  1998  1999
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Expected volatility........................................ .250  .935  1.02
   Expected life of options in years..........................  3.3   3.5   3.5
   Risk-free interest rate....................................  6.0%  5.0%  5.5%
   Expected dividend yield.................................... 0.00% 0.00% 0.00%
</TABLE>

   For pro forma purposes, the estimated minimum value of the Company's stock-
based awards to employees is amortized over the options' vesting period. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by FAS 123, net loss and
net loss per share would have increased to the pro forma amounts indicated in
the table below (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                               ------------------------------
                                                 1997      1998       1999
                                               --------  ---------  ---------
   <S>                                         <C>       <C>        <C>
   Net loss attributable to common
    stockholders as reported.................. $(55,582) $ (94,064) $(111,782)
   Net loss attributable to common
    stockholders--pro forma................... $(56,224) $(100,030) $(140,280)
   Net loss per share attributable to common
    stockholders-- as reported................ $  (2.82) $   (3.23) $   (2.76)
   Net loss per share attributable to common
    stockholders-- pro forma.................. $  (2.85) $   (3.44) $   (3.47)
</TABLE>

7. Warrants to Purchase Common Stock

   In connection with the Company's Public Offering, all of the outstanding
warrants to purchase preferred stock were converted to warrants to purchase
common stock. The following warrants to purchase shares of the Company's
common stock were outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                                         Warrants Outstanding
                                                      --------------------------
                                                                Weighted
                                                                Average
                                                      Number of Exercise  Year
   Exercise Prices                                     Shares    Price   Expires
   ---------------                                    --------- -------- -------
   <S>                                                <C>       <C>      <C>
   $9.75............................................    369,858  $ 9.75   2000
   $10.50-$25.19....................................  1,863,358  $10.89   2001
   $3.00-$34.15.....................................    885,689  $ 3.14   2002
   $33.27...........................................    500,000  $33.27   2003
   $5.43............................................    625,605  $ 5.43   2007
                                                      ---------
                                                      4,244,510
                                                      =========
</TABLE>

   The above warrants were issued at various times over the last several years
in connection with service agreements, a capital lease agreement, several debt
and equity financings and a reseller agreement. The Company has deemed the
fair market value of such warrants, using the Black-Scholes method, to be
$822,000, $61,000, $5,700,000, $2,623,000 and $1,900,000, respectively. The
Company is amortizing the value of the warrants over

                                      65
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the term of the related agreements which range from one to ten years.
Amortization expense for the years ended December 31, 1997, 1998 and 1999 was
$1,720,000, $767,000 and $989,000, respectively. The Company has reserved the
amount of shares necessary to meet the exercise of these warrants.

8. Employee Benefit Plans

 Retirement Savings Plan

   The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $158,000, $266,000 and $373,000 to the plan during the
years ended December 31, 1997, 1998 and 1999, respectively.

9. Income Taxes

   As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $307.0 million and $177.0 million,
respectively. The net operating loss carryforwards will expire at various
dates beginning in the years 2003 through 2019, if not utilized.

   Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1998 and 1999 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                              1998      1999
                                                            --------  ---------
   <S>                                                      <C>       <C>
   Deferred tax assets:
     Net operating loss carryforwards ..................... $ 85,000  $ 118,000
     Write-off of network equipment .......................    4,000      4,000
     Other, net ...........................................    3,000      5,000
                                                            --------  ---------
   Total deferred tax assets ..............................   92,000    127,000
                                                            --------  ---------
   Deferred tax liabilities:
     Other, net ...........................................    2,000      2,000
                                                            --------  ---------
   Net deferred tax assets ................................   90,000    125,000
   Valuation allowance ....................................  (90,000)  (125,000)
                                                            --------  ---------
                                                            $    --   $     --
                                                            ========  =========
</TABLE>

   The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the currently available evidence, it is more
likely than not that the Company will not generate taxable income through
2000, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 2000 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.

   In the future, as deferred tax assets are realized, the reversal of the
valuation allowance will result in a $1.9 million credit to paid in capital
for the tax benefit associated with disqualifying dispositions of stock
options or employee stock purchase plan shares.

                                      66
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The net valuation allowance increased by approximately $35.0 million in
1999 and $32.0 million in 1998.

10. Related Party Transactions--Other

   A former officer of the Company is a majority shareholder of a vendor of
the Company. The Company incurred marketing fees to the vendor totaling
$2,600,000, $1,085,000 and $750,000 in the years ended December 31, 1997,
1998, and 1999, respectively.

11. Contingencies

   Concentric has been named as a defendant in a lawsuit filed in New Jersey
state court on November 1, 1999. The complaint seeks statutory damages, treble
damages, and injunctive relief under the Telephone Consumer Protection Act of
1991 and alleges that, in or about March and June 1999, 9Net Avenue, Inc.
("9Net Avenue") transmitted unsolicited facsimiles advertising its services.
The suit has been brought as a purported class action on behalf of all
recipients of the allegedly unsolicited faxes. Concentric purchased the assets
of 9Net Avenue in October 1999 and plaintiff contends that Concentric has
succeeded to any liability 9Net Avenue incurred in connection with the alleged
faxes. Concentric intends to vigorously defend the claims against it; however,
there can be no guarantee that it will be successful or that this litigation
will not have a material adverse impact on its operations. In addition,
Concentric has received a subpoena from the New Jersey Attorney General
seeking information concerning the alleged transmission of unsolicited
facsimile advertising by 9Net Avenue and additional marketing materials
distributed by 9Net Avenue.

12. Business Combinations

   On February 5, 1998, the Company acquired all of the outstanding stock of
InterNex Information Services, Inc. ("InterNex"). The transaction was
accounted for using the purchase method of accounting. The total purchase
price of approximately $23.9 million consisted of a $15.5 million cash payment
upon closing and the assumption of approximately $8.4 million of InterNex's
liabilities (including acquisition costs).

   A summary of the purchase price allocation is as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   Current and other assets ........................................... $ 1,348
   Computer and telecommunications equipment ..........................   4,784
   Goodwill ...........................................................   9,496
   Other intangible assets ............................................   3,080
   Write-off of in process technology .................................   5,200
                                                                        -------
     Total purchase price allocation................................... $23,908
                                                                        =======
</TABLE>

   Goodwill arising from the acquisition is being amortized on a straight-line
basis over 5 years. Other intangible assets include developed technology,
assembled workforce and customer lists and are being amortized over their
useful lives ranging from two to four years.

   In May 1998, the Company acquired Delta Internet Services, Inc.
("DeltaNet") in a transaction that was accounted for as a pooling of
interests. The Company issued approximately 226,000 shares of its common stock
to DeltaNet shareholders in exchange for all outstanding DeltaNet shares. The
Company also assumed outstanding DeltaNet options and warrants which were
converted to options and warrants to purchase approximately 98,000 and 7,000
shares, respectively, of the Company's common stock. The results of operations
of DeltaNet for the period from April 1, 1998 through December 31, 1998 and
for the entire year 1999 are included in the consolidated results of
operations. The Company's historical consolidated financial statements

                                      67
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

prior to the combination have not been restated to reflect the financial
results of DeltaNet as these results are not material. The consolidated
results of operations for the year ended December 31, 1998 include an
acquisition related charge of $1.3 million primarily related to severance
costs, reserves for redundant facilities and assets and professional fees.

   In August 1998, the Company acquired all of the outstanding stock of
AnaServe, Inc. ("AnaServe"). The transaction was accounted for using the
purchase method of accounting. The total purchase price of approximately $13.0
million consisted of a $9.6 million cash payment upon closing and the
assumption of approximately $3.4 million of AnaServe's liabilities (including
acquisition costs).

   A summary of the purchase price allocation is as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   Current and other assets ........................................... $   467
   Computer and telecommunications equipment ..........................     497
   Goodwill ...........................................................  11,630
   Other intangible assets ............................................     416
                                                                        -------
     Total purchase price allocation .................................. $13,010
                                                                        =======
</TABLE>

   Goodwill is being amortized over five years. Other intangible assets
include developed technology, assembled workforce and customer lists and are
being amortized over their useful lives ranging from one to four years.

   In October 1999, the Company acquired all of the outstanding stock of 9Net
Avenue, Inc. ("9Net Avenue"). The transaction was accounted for using the
purchase method of accounting. The total purchase price of approximately $63.8
million consisted of 2,481,542 shares of Concentric common stock valued at
$50.0 million, approximately $800,000 cash payment upon closing and the
assumption of approximately $13.0 million of 9Net Avenue's liabilities
(including acquisition costs).

   A summary of the purchase price allocation is as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   Current and other assets ........................................... $   566
   Computer and telecommunications equipment ..........................   5,171
   Goodwill ...........................................................  58,021
                                                                        -------
     Total purchase price allocation................................... $63,758
                                                                        =======
</TABLE>

   Goodwill arising from the acquisition is being amortized on a straight-line
basis over 5 years.

   The following unaudited pro forma information represents the combined
results of operations as if the acquisitions of InterNex, DeltaNet, AnaServe
and 9Net Avenue had occurred as of the beginning of the periods presented and
does not purport to be indicative of what would have occurred had the
acquisitions been made as of that date or the results which may occur in the
future.

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                 -----------------------------
                                                   1997      1998      1999
                                                 --------  --------  ---------
                                                  (In thousands, except per
                                                         share data)
   <S>                                           <C>       <C>       <C>
   Pro forma net revenues .....................  $ 61,908  $ 92,281  $ 153,737
   Pro forma net loss attributable to common
    stockholders ..............................   (74,049)  (99,640)  (121,486)
   Pro forma net loss per share attributable to
    common stockholders........................     (3.75)    (3.42)     (3.00)
</TABLE>

                                      68
<PAGE>

                        CONCENTRIC NETWORK CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The pro forma results include the historical operations of the Company and
the historical operations of the acquired businesses adjusted to reflect
certain pro forma adjustments. The pro forma results do not include the write-
off in 1998 of purchased research and development of $5.2 million since it is
considered a non-recurring adjustment.

13. Subsequent Event

 Equity Investment

   In February 2000, the Company sold all of its investment in Covad
Communications Group, Inc. for approximately $70.8 million. The Company will
record a gain on the sale of this asset of $60.8 million in the first quarter
of 2000.

   In March 2000, the Company purchased approximately $5.0 million of Series C
Preferred stock from Asia OnLine, Inc. ("Asia OnLine"). The Company will
continue to record this investment at cost as the Company does not have
significant influence over Asia OnLine.

 Merger

   In January 2000 the Company announced that it agreed to be acquired by
NEXTLINK, a provider of a variety of voice services and high speed Internet
Access to the business market. In this transaction, both NEXTLINK and
Concentric will merge into a newly-formed company, to be renamed NEXTLINK
Communications, Inc., which will assume all of Concentric's and NEXTLINK's
outstanding debt obligations. In the transaction, each outstanding share of
NEXTLINK's Class A common stock and Class B common stock would be converted
into one share of Class A common stock or Class B common stock, as applicable,
of the corporation surviving the merger, which stock will be substantially
identical to NEXTLINK's Class A and Class B common stock. In addition, each
outstanding share of Concentric's common stock would be converted into 0.495
of a share of Class A common stock of the surviving corporation, unless the
trading price of Class A common stock at the effective time is less than or
equal to $90.91, in which case each outstanding share would be converted into
$45.00 of Class A common stock of the surviving corporation (based on the
trading price of NEXTLINK's Class A common stock prior to the effective time).
If at the effective time NEXTLINK's average stock price is less than $69.23,
each outstanding share of Concentric's common stock would covert into 0.650 of
a share of Class A common stock of the surviving corporation. The transaction
is subject to approval of Concentric stockholders and other customary closing
conditions, and is expected to close in the second quarter of 2000.

 Acquisition

   In February 2000 the Company acquired Internet Technology Group, Plc, a
provider of Internet access for consumers and dedicated access and hosting for
businesses in the UK and Europe. The transaction is valued at approximately
$217.0 million, consisting of 50% cash and 50% Concentric stock.

 Stock Issuance

   In January 2000 Williams Communications Group, Inc., a stockholder of the
Company, elected to receive 70,746 shares of common stock of the Company
valued at $2.0 million in lieu of payment pursuant to an August 1997 service
and equipment agreement.

                                      69
<PAGE>

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

   Not applicable.

                                   PART III

   Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end
of the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference.

ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY

   Certain information regarding the directors and officers of the Company is
contained herein under Item 1, "Executive Officers and Directors of the
Company."

   Information regarding directors appearing under the caption "Election of
Directors--Directors and Nominees for Director" in the Proxy Statement is
hereby incorporated by reference.

   Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors--Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

   The information required by Item 11 is set forth under the caption,
"Executive Compensation" in the Company's Proxy Statement, which information
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information required by Item 12 is set forth under the caption
"Security Ownership" in the Company's Proxy Statement, which information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information required by Item 13 is set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's Proxy Statement, which information is
incorporated herein by reference.

                                      70
<PAGE>

                                    PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

   (a) 1. Financial Statements.

     See Item 8 above.

    2. Financial Statement Schedule.

     See Item 14(d) below.

    3. Exhibits.

     The following exhibits are filed with this Report:

<TABLE>
<CAPTION>
 Exhibit
 Number                               Exhibit Title
 -------                              -------------
 <C>     <S>
   3.1   Form of Amended and Restated Certificate of Incorporation of
          Registrant. (Incorporated by reference from Registrant's Registration
          Statement on Form S-1 (File No. 333-27241), as amended, declared
          effective by the Securities and Exchange Commission ("SEC") on July
          31, 1997).

   3.2   Amended and Restated Bylaws of Registrant. (Incorporated by reference
          from Registrant's Registration Statement on Form S-1 (File No. 333-
          27241), as amended, declared effective by the SEC on July 31, 1997).

   3.3   Certificate of Designation of Voting Power, Designation Preferences
          and Relative, Participating, Optional and Other Special Rights and
          Qualifications, Limitations and Restrictions of 13 1/2% Series A and
          Series B Senior Redeemable Exchangeable Preferred Stock, due 2010 of
          the Registrant. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333-27241), as amended,
          declared effective by the SEC on July 31, 1997).

   4.1   Form of $150,000,000 12 3/4% Senior Notes due 2007. (Incorporated by
          reference from Registrant's Registration Statement on Form S-4 (File
          No. 333-45055), as amended, declared effective by the SEC on March
          24, 1998).

   4.2   Form of Warrant to purchase common stock. (Incorporated by reference
          from Registrant's Registration Statement on Form S-4 (File No. 333-
          58641), as declared effective by the SEC on August 11, 1998).

  10.1   Amended and Restated Registration Rights Agreement, as amended and
          restated as of August 21, 1996, by and among the Registrant, GS
          Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
          Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
          Convertible Preferred Stock, certain listed holders of Common Stock,
          certain listed holders of Series D Convertible Preferred Stock, and
          Racal-Datacom, Inc. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333-27241), as amended,
          declared effective by the SEC on July 31, 1997).

  10.2   Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
          1995, by and among the Registrant, GS Capital Partners, L.P., and
          Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
          Zaibatsu Fund 11, as amended. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1 (File No. 333-27241),
          as amended, declared effective by the SEC on July 31, 1997).

  10.3   Form of Director and Officer Indemnification Agreement. (Incorporated
          by reference from Registrant's Registration Statement on Form S-1
          (File No. 333-27241), as amended, declared effective by the SEC on
          July 31, 1997).

  10.4   1995 Stock Incentive Plan for Employees and Consultants, as amended
          February 21, 1996. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333-27241), as amended,
          declared effective by the SEC on July 31, 1997).
</TABLE>

                                       71
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                               Exhibit Title
 -------                              -------------
 <C>     <S>
 10.5    Amended and Restated 1996 Stock Plan. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1 (File No. 333-27241),
          as amended, declared effective by the SEC on July 31, 1997).

 10.6    1997 Stock Plan. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333-27241), as amended,
          declared effective by the SEC on July 31, 1997).

 10.7    1997 Employee Stock Purchase Plan. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1 (File No. 333-27241),
          as amended, declared effective by the SEC on July 31, 1997).

 10.8*   Amended and Restated Employee Services and Staffing Agreement, dated
          June 19, 1997, between the Registrant and Critical Technologies,
          Inc., as amended on September 30, 1996, and October 23, 1996,
          including Colocation Services Agreement, dated as of November 1,
          1994, between the Registrant and Critical Technologies, Inc. and
          amendments thereto. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333-27241), as amended,
          declared effective by the SEC on July 31, 1997).

 10.9*   Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
          License and Distribution Agreement, dated March 28, 1997, between the
          Registrant and Microsoft Corporation. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1 (File No. 333-27241),
          as amended, declared effective by the SEC on July 31, 1997).

 10.10*  OEM License Agreement dated July 27, 1995, between the Registrant and
          Netscape Communications Corporation, as amended by First Amendment,
          dated January 2, 1996, Second Amendment, effective January 2, 1996,
          and Third Amendment, dated May 21, 1996. (Incorporated by reference
          from Registrant's Registration Statement on Form S-1 (File No. 333-
          27241), as amended, declared effective by the SEC on July 31, 1997).

 10.11*  "Dial up Client" Agreement, dated August 21, 1995, between the
          Registrant and Netscape Communications Corporation. (Incorporated by
          reference from Registrant's Registration Statement on Form S-1 (File
          No. 333-27241), as amended, declared effective by the SEC on July 31,
          1997).

 10.12*  "Internet Account Server" Participation Agreement, dated as of January
          14, 1997, between the Registrant and Netscape Communications
          Corporation. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333-27241), as amended,
          declared effective by the SEC on July 31, 1997).

 10.13*  Special Customer Arrangement, dated May 17, 1996, between MCI
          Telecommunications Corporation and Sattel Communications LLC, as
          amended by First Amendment, dated July 2, 1996; assigned to
          Registrant by Assignment and Novation Agreement #2, dated as of
          August 7, 1996. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333-27241), as amended,
          declared effective by the SEC on July 31, 1997).

 10.14*  Master Agreement for MCI Enhanced Services, effective November 1,
          1996, between the Registrant and MCI Telecommunications Corporation.
          (Incorporated by reference from Registrant's Registration Statement
          on Form S-1 (File No. 333-27241), as amended, declared effective by
          the SEC on July 31, 1997).

 10.15*  Amended and Restated Employee Services and Staffing Agreement.
          (Incorporated by reference from Registrant's Registration Statement
          on Form S-1 (File No. 333-27241), as amended, declared effective by
          the SEC on July 31, 1997).

 10.16*  Amendment No. 3 to Internet Access Services Agreement, dated August
          23, 1996, between the Registrant and Intuit Inc. (Incorporated by
          reference from Registrant's Registration Statement on Form S-1 (File
          No. 333-27241), as amended, declared effective by the SEC on July 31,
          1997).
</TABLE>

                                       72
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                               Exhibit Title
 -------                              -------------
 <C>     <S>
 10.17*  Contract for Services, dated June 17, 1996, by and between the
          Registrant and MFS Telephone, Inc. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1
          (File No. 333-27241), as amended, declared effective by the SEC on
          July 31, 1997).

 10.18*  AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
          date therewith. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333- 27241), as amended,
          declared effective by the SEC on July 31, 1997).

 10.19*  Master Lease Agreement Number CON01C Between Concentric Research
          Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
          as Supplemented by Letter Agreement, dated March 30, 1995, Between
          the Corporation and Racal. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1 (File No. 333-27241),
          as amended, declared effective by the SEC on July 31, 1997).

 10.20*  Lease Agreement Number CON04C between Concentric Network Corporation
          and Racal-Datacom, Inc., dated June 26, 1996. (Incorporated by
          reference from Registrant's Registration Statement on Form S-1 (File
          No. 333-27241), as amended, declared effective by the SEC on July 31,
          1997).

 10.21*  Master On-site Maintenance Plan Agreement Number CON02C Between
          Concentric Research Corporation and Racal-Datacom, Inc., dated August
          24, 1994. (Incorporated by reference from Registrant's Registration
          Statement on Form S-1 (File No. 333-27241), as amended, declared
          effective by the SEC on July 31, 1997).

 10.22   Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
          and between the Registrant and Saginaw Video Associates, d.b.a.
          Saginaw Conference Center. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1 (File No. 333-27241),
          as amended, declared effective by the SEC on July 31, 1997).

 10.23   Amended and Restated Lease Agreement, dated as of October 7, 1996,
          between the Registrant and Larry Shackley. (Incorporated by reference
          from Registrant's Registration Statement on Form S-1 (File No. 333-
          27241), as amended, declared effective by the SEC on July 31, 1997).

 10.24*  Internet Access Service Agreement, dated December 11, 1995, effective
          as of August 1, 1995, between the Registrant and Intuit, Inc., as
          amended. (Incorporated by reference from Registrant's Registration
          Statement on Form S-1 (File No. 333-27241), as amended, declared
          effective by the SEC on July 31, 1997).

 10.25*  Virtual Private Network Services, dated August 16, 1996, between the
          Registrant and WebTV Networks, Inc. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1 (File No. 333-27241),
          as amended, declared effective by the SEC on July 31, 1997).

 10.26*  Support Services Agreement, dated March 31, 1997, by and between the
          Registrant and MCI Telecommunications Corporation. (Incorporated by
          reference from Registrant's Registration Statement on Form S-1 (File
          No. 333-27241), as amended, declared effective by the SEC on July 31,
          1997).

 10.27   Note and Warrant Purchase Agreement, dated June 19, 1997, by and
          between the Registrant and Williams Communications Group, Inc.
          ("WCG"). (Incorporated by reference from Registrant's Registration
          Statement on Form S-1 (File No. 333-27241), as amended, declared
          effective by the SEC on July 31, 1997).

 10.28   Service Credits Letter Agreement, dated June 19, 1997, by and between
          the Registrant and WCG. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1
          (File No. 333- 27241), as amended, declared effective by the SEC on
          July 31, 1997).

 10.29   $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
          the Registrant and WCG. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1
          (File No. 333- 27241), as amended, declared effective by the SEC on
          July 31, 1997).
</TABLE>

                                       73
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                               Exhibit Title
 -------                              -------------
 <C>     <S>
 10.30   Agency Agreement and Distribution Agreement, dated June 19, 1997,
          between the Registrant and WCG. (Incorporated by reference from
          Registrant's Registration Statement on Form S-1
          (File No. 333-27241), as amended, declared effective by the SEC on
          July 31, 1997).

 10.31*  Co-Marketing Service Agreement, dated June 23, 1997 between the
          Registrant and Netscape Communications, Inc. ("Netscape").
          (Incorporated by reference from Registrant's Registration Statement
          on Form S-1 (File No. 333-27241), as amended, declared effective by
          the SEC on July 31, 1997).

 10.32*  Trademark License Agreement, dated June 23, 1997, between the
          Registrant and Netscape. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333- 27241), as amended,
          declared effective by the SEC on July 31, 1997).

 10.33*  Software License Order Form, dated June 23, 1997, between the
          Registrant and Netscape. (Incorporated by reference from Registrant's
          Registration Statement on Form S-1 (File No. 333- 27241), as amended,
          declared effective by the SEC on July 31, 1997).

 10.34   Note and Warrant Purchase Agreement, dated June 23, 1997, between the
          Registrant, Kleiner Perkins, Caufield & Byers VII and KPCB
          Information Science Zaibatsu Fund VII. (Incorporated by reference
          from Registrant's Registration Statement on Form S-1 (File No. 333-
          27241), as amended, declared effective by the SEC on July 31, 1997).

 10.35*  Amendment to Virtual Private Network Services Agreement between the
          Registrant and WebTV Networks, Inc., dated November 1, 1997.
          (Incorporated by reference from Registrant's Quarterly Report on Form
          10-Q for the quarter ended September 30, 1997, filed with the SEC on
          November 14, 1997).

 10.36   Registration Rights Agreement, dated as of December 18, 1997 between
          the Registrant and UBS Securities LLC, Bear Stearns & Co., Inc., and
          Wheat First Securities, Inc. (the "Initial Purchasers").
          (Incorporated by reference from Registrant's Registration Statement
          on Form S-4 (File No. 333-45055), as amended, declared effective by
          the SEC on March 24, 1998).

 10.37   Purchase Agreement, dated as of December 15, 1997 between the
          Registrant and the Initial Purchasers. (Incorporated by reference
          from Registrant's Registration Statement on Form S-4 (File No. 333-
          45055), as amended, declared effective by the SEC on March 24, 1998).

 10.38   Warrant Agreement, dated as of December 18, 1997, between the
          Registrant and Chase Manhattan Bank and Trust Company, National
          Association, as warrant agent. (Incorporated by reference from
          Registrant's Registration Statement on Form S-4 (File No. 333-45055),
          as amended, declared effective by the SEC on March 24, 1998).

 10.39   Warrant Registration Rights Agreement, dated as of December 18, 1997,
          between the Registrant and the Initial Purchasers. (Incorporated by
          reference from Registrant's Registration Statement on Form S-4 (File
          No. 333-45055), as amended, declared effective by the SEC on March
          24, 1998).

 10.40   Escrow Agreement, dated December 18, 1997, between the Registrant and
          Chase Manhattan Bank and Trust Company, National Association.
          (Incorporated by reference from Registrant's Registration Statement
          on Form S-4 (File No. 333-45055), as amended, declared effective by
          the SEC on March 24, 1998).

 10.41   Standard Industrial Lease, dated as of February 17, 1995, by and
          between Tiara Computer Systems, Inc. and InterNex Information
          Services, Inc. (Incorporated by reference from Registrant's Annual
          Report on Form 10-K for the fiscal year ended December 31, 1997).

 10.42   Standard Industrial Lease, dated as of July 25, 1996, by and between
          San Tomas Investors II and InterNex Information Service, Inc.
          (Incorporated by reference from Registrant's Annual Report on Form
          10-K for the fiscal year ended December 31, 1997).
</TABLE>

                                       74
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                               Exhibit Title
 -------                              -------------
 <C>     <S>
 10.43   Form of Warrant to purchase common stock. (Incorporated by reference
          from Registrant's Registration Statement on Form S-4 (File No. 333-
          58641), as declared effective by the SEC on August 11, 1998).

 10.44   Purchase Agreement, dated as of June 3, 1998, by and among the
          Registrant and the Initial Purchasers. (Incorporated by reference
          from Registrant's Registration Statement on Form S-4 (File No. 333-
          58641), as declared effective by the SEC on August 11, 1998).

 10.45   Registration Rights Agreement, dated as of June 8, 1998, by and among
          the Registrant and the Initial Purchasers. (Incorporated by reference
          from Registrant's Registration Statement on Form S-4 (File No. 333-
          58641), as declared effective by the SEC on August 11, 1998).

 10.46   Form of Indenture for Exchange Debentures. (Incorporated by reference
          from Registrant's Registration Statement on Form S-4 (File No. 333-
          58641), as declared effective by the SEC on August 11, 1998).

 10.47*  Carrier Agreement by and between the Registrant and MCI
          Telecommunications Corporation, dated August 12, 1998. (Incorporated
          by reference from Registrant's Quarterly Report on Form 10-Q for the
          quarter ended September 30, 1998, filed with the SEC on November 16,
          1998).

 10.48   Stock Purchase Agreement by and between the Registrant and
          Southwestern Bell Internet Services, Inc., dated October 19, 1998.
          (Incorporated by reference from Registrant's Quarterly Report on
          Form 10-Q for the quarter ended September 30, 1998, filed with the
          SEC on November 16, 1998).

 10.49*  Amendment Number Four to Virtual Private Services Agreement between
          the Registrant and WebTV, Inc., dated November 18, 1998.
          (Incorporated by reference from Registrant's Registration Statement
          on Form S-3 (File No. 333-71235) filed with the SEC on January 27,
          1999).

 10.50   Form of 1999 Non-Statutory Stock Option Plan. (Incorporated by
          reference from Registrant's Annual Report on Form 10-KA for the
          fiscal year ended December 31, 1998).

 10.51*  Definitive Agreement between SBC Operations, Inc. and the Registrant,
          dated April 1, 1999. (Incorporated by reference from Registrant's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
          filed with the SEC on August 14, 1999).

 10.52*  WebTV 2000 Pricing Term Sheet, dated June 18, 1999, between WebTV and
          the Registrant. (Incorporated by reference from Registrant's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
          filed with the SEC on August 14, 1999).

 10.53*  Agreement, dated June 18, 1999, between Microsoft Corporation and the
          Registrant. (Incorporated by reference from Registrant's Quarterly
          Report on Form 10-Q for the quarter ended June 30, 1999, filed with
          the SEC on August 14, 1999).

 10.54   Sublease agreement, dated September 1999 between the Registrant and
          Raytheon Company.

 10.55   Lease agreement, dated May 26, 1999 between the Registrant and Haseko
          Management, Inc.

 10.56   Sublease agreement, dated December 22, 1999 between the Registrant and
          Williams Communications, Inc.

 10.57   Lease agreement, dated December 15, 1999 between the Registrant and
          SSP Associates, Inc.

 21.1    List of Subsidiaries.

 23.1    Consent of Ernst & Young LLP, Independent Auditors.

 24.1+   Power of Attorney (see signature page).

 27.1    Financial Data Schedule.
</TABLE>
--------
*  Certain information in this exhibit was omitted and filed separately with
   the SEC pursuant to a confidential treatment request.

+  Previously filed.

                                       75
<PAGE>

   (b) Reports on Form 8-K.

   The Company filed a Current Report on Form 8-K dated October 22, 1999 to
report under Item 5 the acquisition of substantially all of the assets of 9Net
Avenue, Inc. for approximately $51.8 million and the assumption of
approximately $9.9 million of liabilities.

   The Company filed a Current Report on Form 8-K dated January 12, 2000 to
report under Item 5 the Agreement and Plan of Merger and Share Exchange
Agreement under which each share of Concentric stock shall be exchanged for a
fractional share of common stock of NEXTLINK Communications, Inc.

   The Company filed a Current Report on Form 8-K dated February 14, 2000 to
report under Item 2 the acquisition of all of the outstanding capital stock of
Internet Technology Group for approximately $115.4 million in cash and
4,728,130 shares of Concentric common stock.

   (c) Exhibits.

    See item 14(a)(3) above.

   (d) Financial Statement Schedules.

    Schedule II--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                  Balance  Additions   Deductions
                                    at     Charge to  Uncollectable Balance at
                                 Beginning  Costs &     Accounts      End of
Description                      of Period  Expenses   Written Off    Period
-----------                      --------- ---------- ------------- ----------
<S>                              <C>       <C>        <C>           <C>
For the period ended December
 31, 1999 ...................... $990,354  $1,021,572   $593,307    $1,418,619
For the period ended December
 31, 1998 ......................   80,049   1,455,356    545,051       990,354
For the period ended December
 31, 1997 ......................   56,000      40,000     15,951        80,049
</TABLE>

   All other schedules have been omitted because the required information is
not present in amounts sufficient to require submission of the schedule or
because the information required is included in the financial statements
including the notes thereto.

                                       76
<PAGE>

                                  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.

Date: March 29, 2000                      CONCENTRIC NETWORK CORPORATION

                                                 /s/ Henry R. Nothhaft
                                          By: _________________________________
                                                     Henry R. Nothhaft
                                               President and Chief Executive
                                                           Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESES PRESENTS, that each person whose signature
appears below constitutes and appoints Henry R. Nothhaft and Michael F.
Anthofer and each of them singly, as true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities to sign this Annual Report on
Form 10-K filed herewith and any or all amendments to said report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission granting unto said
attorneys-in-fact and agents the full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the foregoing, as to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his substitute, may lawfully do or cause to be done
by virtue hereof.

   Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----

<S>                                  <C>                           <C>
     /s/ Henry R. Nothhaft           President and Chief           March 29, 2000
____________________________________  Executive Officer
         Henry R. Nothhaft            (Principal Executive
                                      Officer), Director,
                                      Chairman of the Board

    /s/ Michael F. Anthofer          Chief Financial Officer       March 29, 2000
____________________________________  (Principal Financial and
        Michael F. Anthofer           Accounting Officer)

        /s/ Vinod Khosla             Director                      March 29, 2000
____________________________________
            Vinod Khosla

                                     Director
____________________________________
            Franco Regis

                                     Director
____________________________________
             Randy Katz

       /s/ Peter C. Waal             Director                      March 29, 2000
____________________________________
           Peter C. Waal
</TABLE>

   /s/ Henry R. Nothhaft
*By: __________________________
       Henry R. Nothhaft
           Director
        March 29, 2000

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