<PAGE>
 
================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

                                       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: 000-22575

                         CONCENTRIC NETWORK CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                               65-0257497
(STATE OR OTHER JURISDICTION OF                              (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NUMBER)
                                        
                           10590 NORTH TANTAU AVENUE
                          CUPERTINO, CALIFORNIA 95014
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (408) 342-2800
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                                        
  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
requirements for the past 90 days.

                              YES [X]      NO [ ]

  The number of issued and outstanding shares of the Registrant's Common Stock,
$0.001 par value, as of June 30, 1998, was 14,471,154.

================================================================================
<PAGE>
 
                         CONCENTRIC NETWORK CORPORATION

                          PART I-FINANCIAL INFORMATION


<TABLE>
<CAPTION>
                                                                                                                    PAGE
                                                                                                                    ----    
<S>                                                                                                                   <C>  
Item 1.       Financial Statements:
 
              Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997...................          3
 
              Condensed Consolidated Statements of Operations for the three and six month periods ended 
              June 30, 1998 and 1997.........................................................................          4
 
 
              Condensed Consolidated Statements of Cash Flows for the six month periods ended
              June 30, 1998 and 1997.........................................................................          5
 
              Notes to Unaudited Condensed Consolidated Financial Statements.................................        6-9
 
Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations..........      10-18
 
                           PART II-OTHER INFORMATION
 
Item 1.       Legal Proceedings..............................................................................         19
 
Item 2.       Changes in Securities and Use of Proceeds......................................................         19
 
Item 3.       Defaults Upon Senior Securities................................................................         19
 
Item 4.       Submission of Matters to a Vote of Security Holders............................................         19
 
Item 5.       Other Information..............................................................................         19
 
Item 6.       Exhibits and Reports on Form 8-K...............................................................         20
 
Signatures...................................................................................................         21
</TABLE>

                                      -2-
<PAGE>
 
PART I-FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         CONCENTRIC NETWORK CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                   UNAUDITED
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                           JUNE 30,          DECEMBER 31,
                                                                                             1998                1997
                                                                                           ---------         ------------ 
<S>                                                                                        <C>                 <C> 
                                      ASSETS
Current assets:
 Cash and cash equivalents........................................................          $ 191,691           $ 119,959
 Current portion of restricted cash...............................................             19,125              19,125
 Accounts receivable, net.........................................................              8,291               4,549
 Goodwill and other intangible assets.............................................              3,239                  --
 Other current assets.............................................................              5,169               5,139
                                                                                            ---------           ---------
   Total current assets...........................................................            227,515             148,772
Property and equipment, net.......................................................             58,408              53,710
Restricted cash, net of current portion...........................................             25,272              33,400
Goodwill and other intangible assets, net of current portion......................              7,987                  --
Other assets......................................................................              6,913               8,607
                                                                                            ---------           ---------
Total assets......................................................................          $ 326,095           $ 244,489
                                                                                            =========           =========
 
                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
 Accounts payable.................................................................          $  17,022           $  10,144
 Accrued compensation and other employee benefits.................................              1,906               1,577
 Other current liabilities........................................................              5,065               4,917
 Current portion of capital lease obligations.....................................              6,342              15,326
 Deferred revenue.................................................................              2,289               1,435
                                                                                            ---------           ---------
   Total current liabilities......................................................             32,624              33,399
 
Capital lease obligations, net of current portion.................................             12,442              33,595
Notes payable.....................................................................            145,799             145,577
Commitments
Redeemable exchangeable preferred stock...........................................            145,527                  --
Stockholders' equity (deficit):
 Common stock.....................................................................            184,483             182,721
 Accumulated deficit..............................................................           (193,697)           (149,534)
 Deferred compensation............................................................             (1,083)             (1,269)
                                                                                            ---------           ---------
Total stockholders' equity (deficit)..............................................            (10,927)             31,918
                                                                                            ---------           ---------
Total liabilities and stockholders' equity (deficit)..............................          $ 326,095           $ 244,489
                                                                                            =========           =========
</TABLE>
                                                                                
                            See accompanying notes.

                                      -3-
<PAGE>
 
                         CONCENTRIC NETWORK CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   UNAUDITED
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                 THREE MONTHS             SIX MONTHS
                                                                ENDED JUNE 30,          ENDED JUNE 30,
                                                             --------------------    --------------------
                                                               1998        1997        1998        1997
                                                             --------    --------    --------    --------
<S>                                                          <C>         <C>         <C>         <C>
Revenue...................................................   $ 19,662    $ 10,814    $ 36,146    $ 19,968
Costs and expenses:
 Cost of revenue..........................................     20,204      14,913      37,928      30,657
 Development..............................................      1,798       1,200       3,305       2,225
 Marketing and sales......................................      9,291       6,094      17,785      11,030
 General and administrative...............................      2,412       1,127       4,264       2,187
 Amortization of goodwill and other intangible assets.....        843          --       1,349          --
 Acquisition related charges..............................      1,291          --       1,291          --
 Write off of in-process technology.......................         --          --       5,200          --
                                                             --------    --------    --------    --------
Total costs and expenses..................................     35,839      23,334      71,122      46,099
                                                             --------    --------    --------    --------
Loss from operations......................................    (16,177)    (12,520)    (34,976)    (26,131)
Net interest expense and other............................      4,025         384       8,495       1,454
                                                             --------    --------    --------    --------
Loss before extraordinary item............................    (20,202)    (12,904)    (43,471)    (27,585)
Extraordinary gain on early retirement of debt............         --          --       3,042          --
                                                             --------    --------    --------    --------
Net loss..................................................    (20,202)    (12,904)    (40,429)    (27,585)
Preferred stock dividends and accretion...................     (1,277)         --      (1,277)         --
                                                             --------    --------    --------    --------
Net loss attributable to common stockholders..............   $(21,479)   $(12,904)   $(41,706)   $(27,585)
                                                             ========    ========    ========    ========
 
Loss per share (historical 1998, pro-forma 1997):
 Loss before extraordinary item...........................      (1.40)      (1.86)      (3.04)      (4.03)
 Extraordinary gain.......................................         --          --        0.21          --
                                                             --------    --------    --------    --------
 Net loss.................................................      (1.40)      (1.86)      (2.83)      (4.03)
 Preferred stock dividends and accretion..................      (0.09)         --       (0.09)         --
                                                             --------    --------    --------    --------
 Net loss attributable to common stockholders.............   $  (1.49)   $  (1.86)   $  (2.92)   $  (4.03)
                                                             ========    ========    ========    ========
 
Shares used in computing net loss per share:
Historical 1998, pro-forma 1997...........................     14,438       6,930      14,297       6,849
                                                             ========    ========    ========    ========
</TABLE>

                            See accompanying notes.

                                      -4-
<PAGE>
 
                         CONCENTRIC NETWORK CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   UNAUDITED
                                 (IN THOUSANDS)
                                        
<TABLE>
<CAPTION>
                                                                                                              SIX MONTHS ENDED
                                                                                                                  JUNE 30,
                                                                                                            --------------------
                                                                                                              1998        1997
                                                                                                            --------    --------
<S>                                                                                                        <C>          <C>
Operating Activities
Net loss................................................................................................    $(41,706)   $(27,585)
Adjustments to reconcile net loss to net cash used in operating activities:
 Depreciation...........................................................................................      10,980       7,961
 Amortization of deferred interest, cost of revenue and marketing and sales related to issuance
  of warrants...........................................................................................         608         593
 Amortization of goodwill and other intangible assets...................................................       1,349          --
 Amortization of deferred financing costs related to Senior Notes.......................................         258          --
 Amortization of other deferred assets..................................................................         875          --
 Amortization of deferred compensation..................................................................         186          45
 Preferred stock dividends and accretion................................................................       1,277          --
 Gain on retirement of debt.............................................................................      (3,042)         --
 Write-off of in-process technology.....................................................................       5,200          --
Changes in current assets and liabilities:
 Accounts receivable....................................................................................      (1,812)     (1,989)
 Other current assets...................................................................................         593          --
 Prepaid expenses.......................................................................................         (15)     (4,174)
 Accounts payable.......................................................................................         153       3,496
 Accrued compensation and other employee benefits.......................................................        (146)        260
 Deferred revenue.......................................................................................        (234)        211
 Other current liabilities..............................................................................        (706)      3,652
                                                                                                            --------    --------
Net cash used in operating activities...................................................................     (26,182)    (17,530)
 
INVESTING ACTIVITIES
Additions of property and equipment.....................................................................      (6,279)     (4,494)
Net change in restricted cash...........................................................................       8,128          --
Cash investment in network services business............................................................     (15,452)         --
                                                                                                            --------    --------
Net cash used in investing activities...................................................................     (13,603)     (4,494)
 
FINANCING ACTIVITIES
Proceeds from notes payable.............................................................................          --       5,000
Repayment of notes payable..............................................................................      (1,960)         --
Repayment of lease obligations to a related party.......................................................      (5,148)     (1,972)
Repayment of lease obligations to a related party-early retirement of debt..............................     (24,750)         --
Repayment of lease obligations..........................................................................      (1,297)       (803)
Proceeds from issuances of stock and warrants...........................................................         622       5,606
Proceeds from issuances of redeemable exchangeable preferred stock......................................     144,250          --
Deferred financing costs................................................................................        (200)         --
                                                                                                            --------    --------
Net cash provided by financing activities...............................................................     111,517       7,831
                                                                                                            --------    --------
Increase (decrease) in cash and cash equivalents........................................................      71,732     (14,193)
Cash and cash equivalents at beginning of period........................................................     119,959      17,657
                                                                                                            --------    --------
Cash and cash equivalents at end of period..............................................................    $191,691    $  3,464
                                                                                                            ========    ========
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred with a related party.................................................    $  5,119    $ 14,097
Capital lease obligations incurred......................................................................    $     19    $    274
Reduction of accounts payable through capital lease obligations incurred................................    $     --    $  1,726
                                                                                                           
Issuance of warrants....................................................................................                $    930
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid...........................................................................................    $ 11,924    $  1,299
</TABLE>

                            See accompanying notes.

                                      -5-
<PAGE>
 
                         CONCENTRIC NETWORK CORPORATION

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        

1.  BASIS OF PRESENTATION

     These unaudited condensed consolidated financial statements and the related
footnote information have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company's
management, the accompanying unaudited interim condensed financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods presented.
The results for the interim period ended June 30, 1998 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1998 or future operating periods.


2.  NET LOSS PER SHARE, HISTORICAL AND PRO FORMA

     Basic and Diluted Net Loss Per Share (Historical)

     In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to the FAS 128 requirements.

     Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common stock equivalent
shares from convertible preferred stock and from stock options and warrants are
not included for loss periods 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. The net loss per share calculations have been restated for all periods
presented in accordance with SAB No. 98 which replaced SAB No. 83.

     Pro Forma Net Loss Per Share

     Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from convertible
preferred stock that automatically converted upon the closing of the Company's
initial public offering (using the as-if-converted method).

                                      -6-
<PAGE>
 
                         CONCENTRIC NETWORK CORPORATION

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

     The following table sets forth the computation of basic and diluted loss
per share, on an historical and pro forma basis (in thousands except per share
amounts.)

<TABLE>
<CAPTION>
                                                                         THREE  MONTHS ENDED            SIX MONTHS ENDED
                                                                               JUNE 30,                     JUNE 30,
                                                                      -------------------------    -------------------------
                                                                          1998          1997           1998          1997
                                                                      -----------    ----------    -----------    ---------- 
<S>                                                                   <C>            <C>           <C>            <C>
NUMERATOR:
Net loss before extraordinary item.................................   $   (20,202)   $  (12,904)   $   (43,471)   $  (27,585)
Extraordinary gain on early retirement of debt.....................            --            --          3,042            --
                                                                      -----------    ----------    -----------    ----------
Net loss...........................................................       (20,202)      (12,904)       (40,429)      (27,585)
                                                                      ===========    ==========    ===========    ==========
Preferred stock dividends and accretion............................        (1,277)           --         (1,277)           --
                                                                      -----------    ----------    -----------    ----------
Numerator for basic and diluted loss per share.....................   $   (21,479)   $  (12,904)   $   (41,706)   $  (27,585)
                                                                      ===========    ==========    ===========    ==========
 
DENOMINATOR:
Denominator for basic and diluted earnings per share - weighted
                                                                       14,438,000     1,396,000     14,297,000     1,395,000
  average shares (historical)......................................   ===========    ==========    ===========    ==========
 
Adjustments to reflect the effect of the assumed conversion of
  convertible preferred stock from the date of issuance............                   5,534,000                    5,454,000
                                                                                     ==========                   ==========
Denominator for basic and diluted earnings per share - weighted
  average shares (pro forma).......................................                   6,930,000                    6,849,000
                                                                                     ==========                   ==========
 
Basic and diluted net loss per share (historical):
     Loss before extraordinary item................................   $     (1.40)   $    (9.24)   $     (3.04)   $   (19.77)
                                                                      -----------    ----------    -----------    ----------
     Extraordinary gain............................................            --            --            .21            --
                                                                      -----------    ----------    -----------    ----------
     Net loss......................................................   $     (1.40)   $    (9.24)   $     (2.83)   $   (19.77)
                                                                      ===========    ==========    ===========    ==========
     Preferred stock dividends and accretion.......................         (0.09)           --          (0.09)           --
                                                                      -----------    ----------    -----------    ----------
     Net loss attributable to common stockholders..................   $     (1.49)   $    (9.24)   $     (2.92)   $   (19.77)
                                                                      ===========    ==========    ===========    ==========
Basic and diluted net loss per share (pro forma)...................   $        --    $    (1.86)   $        --    $    (4.03)
                                                                      ===========    ==========    ===========    ==========
</TABLE>

3.  COMPREHENSIVE INCOME

     As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income" (FAS 130). Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments to be included in other comprehensive income.

4.  BUSINESS COMBINATIONS

     In February 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).

                                      -7-
<PAGE>
 
     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 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 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 three month period ended June 30, 1998 are included in the
consolidated results of operations.  The Company's historical consolidated
financial statements 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 three month period ended
June 30, 1998 include an acquisition related charge of $1.3 million primarily
related to severance costs, redundant facilities and assets and professional
fees related to the acquisition.

5.  EARLY RETIREMENT OF DEBT

     In March 1998 the Company retired a portion of debt in the form of capital
lease obligations to a related party. The Company paid $24.8 million for
extinguishment of debt.  The Company recognized an extraordinary gain of $3.0
million in connection with this transaction.

6.  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
("Preferred Stock").  Each share of Preferred Stock has a liquidation preference
of $1,000 per share.  Dividends on the Preferred Stock 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 Preferred Stock having an aggregate liquidation preference equal to
the amount of such dividends.

     The Preferred Stock 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 106.75% 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 Preferred Stock from the net proceeds of one or more public equity
offerings or the sale of common stock to a strategic investor.  The Preferred
Stock is subject to mandatory redemption at its liquidation preference, plus
accumulated and unpaid dividends on June 1, 2010.

     The Company may, at its option, exchange in whole but not in part the
then outstanding shares of Preferred Stock for 13 1/2% Exchange Debentures with
a principal amount equal to the aggregate liquidation preference of the
Preferred Stock.  The Exchange Debentures mature on June 1, 2010.  Interest on
the Exchange Debentures is 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 Preferred Stock to its liquidation preference
through the due date of the Preferred Stock.  The accretion for the quarter and
year-to-date period ended June 30, 1998 was approximately $1,237,000.  In
connection with the issuance of Preferred Stock, the Company incurred
approximately $5,750,000 of

                                      -8-
<PAGE>
 
issuance costs.  These costs are being amortized over 12 years and the expense
for the quarter and year-to-date period ended June 30, 1998 was approximately
$40,000.


7.  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"). No provision for income taxes is
expected for 1998 as the Company expects to incur a net loss for the year and
does not meet the criteria for recognizing an income tax benefit under the
provisions of FAS 109.


8.  LITIGATION

     In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation (Diana), the parent corporation of
Sattel Communications, LLC (Sattel), alleging securities fraud related to
plaintiffs' purchase of shares of Diana Common Stock in reliance upon allegedly
misleading statements made by defendants, Diana, Sattel and certain of their
respective affiliates, officers and directors. The Company was named as a
defendant in the complaint in connection with certain statements made by Diana
and officers of Diana related to Concentric's purchase of network switching
equipment from Diana's Sattel subsidiary. The plaintiffs seek unspecified
compensatory damages. A trial date has not yet been determined.

     While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in these matters could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcomes are resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations.


9.  COMMITMENTS

     In the quarter ended March 31, 1998, the Company renewed the lease on its
executive offices in Cupertino, California. The lease expires in April 2003. The
average annual rent expense over the term of the lease is approximately $1.2
million per year.

     In June 1998, the Company signed an agreement to lease space in a building
in Chicago, Illinois for a data center.  The lease expires in June 2008.  The
average annual rental expense over the term of the lease is approximately
$177,000 per year.

     In July 1998, the Company signed an agreement to lease a building in San
Jose, California, which is intended for the consolidation of all Silicon Valley
employees and data centers.  The lease commences in February 1999 and expires in
January 2006. The initial rental expense is $2.4 million per year and the
average annual rental expense over the term of the lease is approximately $2.8
million per year.

                                      -9-
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the unaudited
interim condensed financial statements and related notes thereto included in
Part 1- Item 1 of this Quarterly Report.


IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS

     This quarterly report on Form 10-Q contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Predictions of future events are
inherently uncertain. Actual events could differ materially from those predicted
in the forward looking statements due to a number of factors including but not
limited to the risks set forth in the following discussion, and in particular,
the risks discussed below under the caption "Additional Factors that Could
Affect Operating Results." Readers are also encouraged to refer to the Company's
Form 10-K for the year ended December 31, 1997 for a further discussion of the
Company's business and the risks attendant thereto.


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. On-line 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.

     The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying Virtual Private Networks and providing dedicated
network access and Web hosting services for enterprise customers. 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 Information Services, Inc.,
a California corporation and provider of network services, colocation services
and Web hosting facilities to enterprise customers ("InterNex") pursuant to a
Share Acquisition Agreement between the Company, InterNex and the sole
shareholder of InterNex. 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 has incurred charges relating to the cost of
acquired in-process technology of $5.2 million and recorded an aggregate of
$12.5 million of goodwill and other intangible assets, which will be amortized
on a straight-line basis over their useful lives ranging from two to five years
(see Note 4 of Notes to Financial Statements).

     In May 1998, the Company acquired Delta Internet Services, Inc.
("DeltaNet"), a California corporation located in Anaheim and 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 three month period ended
June 30, 1998 are included in the consolidated results of operations.  The
Company's historical consolidated financial statements prior to the combination
have not been restated to reflect the financial results of DeltaNet as these
results are not material.  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 (see Note 4 of Notes to Financial
Statements).

                                      -10-
<PAGE>
 
     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 "Liquidity and Capital
Resources" and "Additional Factors That Could Affect Operating Results--Risks
Associated with Acquisitions."

     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 1998. 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 of approximately $22.0 million, $66.4 million and $55.6 million for
the years ended December 31, 1995, 1996 and 1997, respectively and  $41.7
million for the six months ended June 30, 1998. There can be no assurance 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.

     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; general access services; 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 effect on the Company's business. As a result, variations in the timing
and amounts of revenues could have a material adverse effect 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 be materially and
adversely affected.

     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 there can be
no assurance that the Company will be profitable on a quarterly basis in the
future.


RESULTS OF OPERATIONS

     Revenue. Revenue totaled approximately $19.7 million for the three months
ended June 30, 1998, an $8.9 million increase over revenue of approximately
$10.8 million for the three months ended June 30, 1997. This increased revenue
reflects growth in revenue from the Company's broadened product offerings to its
enterprise customers, continued growth in revenue from Internet access customers
and  revenue derived from acquisitions. For the three months ended June 30,
1998, revenue from WebTV Networks, Inc. ("WNI") declined to 25.1% of the
Company's net revenue from 37.9% for the three months ended June 30, 1997.
Revenue for the six months ended June 30, 1998 was $36.1 million, an increase of
$16.1 million over revenue of $20.0 million for the six month period ended June
30, 1997.  WNI accounted for approximately 27.7% of net revenue for the six
months ended June 30, 1998 as compared to 35.5% for the comparable period in
1997.  The Company expects revenue from WNI 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 below under the caption
"Additional Factors That Could Affect Operating Results -- Customer
Concentration."

                                      -11-
<PAGE>
 
     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 three month period
ended June 30, 1998 was approximately $20.2 million, an increase of $5.3 million
from cost of revenue of $14.9 million in the second quarter of 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 102.8% of revenue in the three months ended June 30, 1998,
down from 137.9% of revenue in the year earlier period, due to increased network
utilization associated with the Company's revenue growth and lower per port
costs of the Company's network architecture. Cost of revenue for the six months
ended June 30, 1998 was approximately $37.9 million compared with $30.7 million
for the six months ended June 30, 1997. As a percentage of revenue, costs
declined to 104.9% of revenue in the six months ended June 30, 1998 from 153.5%
of revenue in the year earlier period. 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 below under the caption "Additional Factors That Could Affect
Operating Results --Limited Operating History; Continuing Operating Losses," "--
Management of Potential Growth and Expansion" and "-- Dependence Upon New and
Uncertain Markets."

     Development. 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 $1.8 million and
$1.2 million for the three months ended June 30, 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 9.1% for the three months ended June 30, 1998 from 11.1% in
the year earlier period as a result of the Company's increased revenue.
Development expense for the six month periods ending June 30, 1998 and 1997 was
approximately $3.3 million and $2.2 million, respectively.  As a percentage of
revenue, development expense declined to 9.1% for the six months ended June 30,
1998 from 11.1% for the six months ended June 30, 1997. 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 caption "Additional Factors that Could Affect Operation Results
-- Limited Operating History; Continuing Operating Losses" and "--Dependence
Upon New and Enhanced Services."

     Marketing and Sales. 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 $9.3
million and $6.1 million for the three months ended June 30, 1998 and 1997,
respectively. The $3.2 million increase in 1998 reflects a substantial
investment in the customer support, marketing and sales organizations necessary
to support the Company's expanded and acquired customer base. This increase also
reflects a growth in subscriber acquisition costs and marketing efforts related
to the introduction and expansion of enterprise products and services. Marketing
and sales expense as a percentage of revenue declined to 47.3% for the three
months ended June 30, 1998 from 56.4% in the year earlier period as a result of
the Company's increased revenue. For the six months ended June 30, 1998 and
1997, marketing and sales expense was approximately $17.8 million and $11.0
million, representing 49.2% and 55.2% of revenue, respectively.  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 "Additional Factors that Could Affect Operating Results --
Dependence on New and Uncertain Markets," "-- Management of Potential Growth and
Expansion."

     General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and administrative
expense was approximately $2.4 million and $1.1 million for the three months
ended June 30, 1998 and 1997, respectively. 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 12.3% for the
three months ended June 30, 1998 from 10.4% in the year earlier period as a
result of the Company's increased personnel expense and professional fees,
reflecting growth in operations, costs associated with being a publicly held
entity and acquisitions. For the six months ended June 30, 1998 and 1997,
general and administrative expenses were approximately $4.3 million and $2.2
million, 

                                      -12-
<PAGE>
 
respectively. General and administrative expense as a percentage of revenue
increased to 11.8% in the six months ended June 30, 1998 as compared to 11.0%
for the comparable period in 1997. The Company expects general and
administrative expense to increase in dollar amount, reflecting its growth in
operations and costs associated with being a publicly held entity. The Company
also expects general and administrative costs to increase as a percentage of
revenue due primarily to increased professional fees through the third quarter
of 1998, but to decrease as a percentage of revenue thereafter. 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 "Additional Factors that Could Affect Operating
Results -- Dependence on New and Uncertain Markets," "-- Management of Potential
Growth and Expansion."

     Amortization of Goodwill and Other Intangible Assets. During the three
month and six month periods ended June 30, 1998 the Company recorded
amortization of goodwill and other intangible assets of approximately $843,000
and $1,349,000, respectively, resulting from the acquisition of InterNex in
February 1998 (see Note 4 of Notes to Financial Statements).

     Acquisition Related Charges. In the quarter ended June 30, 1998 the Company
wrote off $1.3 million of costs incurred related to the DeltaNet acquisition
(see Note 4 of Notes to Financial Statements).

     Write-off of In-Process Technology. In the six months ended June 30, 1998
the Company wrote off $5.2 million of in-process technology related to the
InterNex acquisition (see Note 4 of Notes to Financial Statements).

     Net Interest Expense and Other. Net interest expense and other expense was
approximately $4.0 million and $384,000 for the three month periods ending June
30, 1998 and 1997, respectively. For the six months ended June 30, 1998 and
1997, net interest expense and other expense was $8.5 million and $1.5 million,
respectively.  The increase is primarily due to interest related to the $150.0
million principal amount of 12 3/4% Senior Notes issued in December 1997 (the
Senior Notes).

     Extraordinary Gain.  During the six months ended June 30, 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 (see Note 5 of Notes to
Financial Statements).

     Preferred Stock Dividends and Accretions.  During the three and six months
ended June 30, 1998, the Company recorded dividend and stock accretion costs of
$1.3 million related to the Redeemable Exchangeable Preferred Stock issued in
June 1998 (see Note 6 of Notes to Financial Statements).

     Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $21.5 million for
the three months ended June 30, 1998 as compared to approximately $12.9 million
for the same period of 1997. For the six months ended June 30, 1998 the net loss
attributable to common stockholders was $41.7 million as compared to $27.6
million for the six months ended June 30, 1997.  For comparative purposes, the
net loss attributable to common stockholders for the six month period ended June
30, 1998 included expenses related to financing and acquisitions of $1.3 million
of acquisition charges resulting from the acquisition of DeltaNet, $1.3 million
of dividends and accretion related to the Preferred Stock, $10.0 million
interest expense and amortization of debt issuance costs and warrants related to
the Senior Notes, $5.2 million write-off of in-process technology and $1.3
million of amortization of goodwill and other intangibles relating to the
acquisition of InterNex which were partially offset by an extraordinary gain of
$3.0 million on early retirement of debt. (see Notes 4, 5 and 6 of Notes to
Financial Statements).


LIQUIDITY AND CAPITAL RESOURCES

     To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings, the sale of capital stock and debt 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 fund acquisitions and to provide for the early
retirement of debt. Net cash used in operating activities for the six months
ended June 30, 1998 and 1997 was approximately $26.1 million and $17.5 million,
respectively. Cash used in operating 

                                      -13-
<PAGE>
 
activities in both periods was primarily affected by the net losses, caused by
increased costs relating to the expansion of the Company's network and
organizational infrastructure.

     Net cash used in investing activities for the six months ended June 30,
1998 and 1997 was approximately $13.6 million and $4.5 million, respectively.
Investing activities primarily consisted of release of restricted cash of $9.6
million for the interest payment due on Senior Notes in June 1998, a cash
payment of $15.5 million for the InterNex acquisition in the first quarter of
1998, and purchases of capital equipment in both periods.

     For the six months ended June 30, 1998, net cash of approximately $111.5
million was generated from financing activities, of which $144.3 million was the
net proceeds from the issuance of Redeemable Exchangeable Preferred Stock and
$24.8 million was used for the early retirement of capital lease obligations.
For the six months ended June 30, 1997, net cash provided by financing
activities was $7.8 million, principally related to the issuance of notes
payable of $5.0 million and the issuance of common and preferred stock of $5.6
million.

     The net cash increase for the six month period ended June 30, 1998 was
$71.7 million. This included net proceeds from the issuance of Redeemable
Exchangeable Preferred Stock of $144.3 million partially offset by a semi-annual
interest payment on Senior Notes of $9.6 million, a cash payment of
approximately $15.5 million associated with the acquisition of InterNex and the
related payment of $3.5 million of certain assumed liabilities and $24.8 million
used for the early retirement of debt. The net cash decrease for the six months
ended June 30, 1997 was $14.2 million. At June 30, 1998 the Company had cash and
cash equivalents of approximately $191.7 million and working capital of $194.9
million.

     The Company expects to incur additional operating losses and will rely
primarily on the net proceeds from the Senior Notes, the Redeemable Exchangeable
Preferred Stock and financing available under a network equipment lease
agreement that currently has no maximum borrowing limit. The Company believes
that such financing will be sufficient to meet its anticipated cash needs for
working capital, purchases of capital equipment and funding of acquisitions
through 1999.  However, there can be no assurance 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 number of
factors, including those set forth below under the caption "Additional Factors
That Could Affect Operating Results -- Future Capital Needs; Uncertainty of
Additional Financing." The Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms attractive to the Company, or at all.

                                      -14-
<PAGE>
 
ADDITIONAL FACTORS THAT COULD AFFECT OPERATING RESULTS

     The following factors, together with other risk factors discussed in the
"Overview" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations and other information contained elsewhere
herein, should be considered carefully in evaluating the Company and its
business.

     Substantial Indebtedness; Ability to Service Debt. The Company is and will
continue to be highly leveraged, with significant debt service requirements. The
ability of the Company to meet its debt service obligations will depend on the
future operating performance and financial results of the Company, which will be
subject in part to factors beyond the control of the Company. Although the
Company believes that its cash flow will be adequate to meet its interest
payments, there can be no assurance that the Company will continue to generate
sufficient cash flow in the future to meet its debt service requirements.

     Limited Operating History; Continuing Operating Losses. The Company was
incorporated in 1991, commenced network operations in 1994 and completed initial
deployment of its current network architecture and use of an advanced ATM
backbone network in late 1996. Accordingly, the Company has a limited operating
history upon which an evaluation of the Company and its prospects can be based.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, continue to attract, retain and motivate qualified
persons, and continue to upgrade its technologies and commercialize its network
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks and the failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.

     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 1998, although 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 of
approximately $22.0 million, $66.4 million and $55.6 million for the years ended
December 31, 1995, 1996, and 1997, respectively and approximately $41.7 million
for the six month period ended June 30, 1998.  At June 30, 1998, the Company had
an accumulated deficit of approximately $193.7 million. There can be no
assurance 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.

     Customer Concentration. The Company currently derives a substantial portion
of its total revenue from a single customer. For the six months ended June 30,
1998 and June 30, 1997, revenue from WebTV Networks, Inc. ("WNI") represented
approximately 27.7% and 35.5%, respectively, of the Company's revenue. The
Company's current agreement to provide services to WebTV is terminable at will
after October 1, 1999. While the Company expects revenue from WNI to decrease as
a percentage of revenue in future periods, the Company believes that revenue
derived from a limited number of current and future customers may continue to
represent a significant portion of its revenue. As a result, the loss of one or
more of the Company's major customers could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, there can be no assurance that revenue from customers that have
accounted for significant revenue in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
future period.

     Management of Potential Growth and Expansion. The growth and expansion of
the Company's business and its service offerings have placed, and are expected
to continue to place, a significant strain on the Company's management,
operational and financial resources. The Company has expanded and upgraded its
network to use an ATM backbone. The Company plans to continue to substantially
expand its network in the future. There can be no assurance that the Company
will be able to add services at the rate or according to the schedule presently
planned by the Company. To manage its growth, the Company must, among other
things, (i) continue to implement and improve its operational, financial and
management information systems, including its billing, accounts receivable and
payable tracking, fixed assets and other financial management systems; (ii) hire
and train additional qualified personnel; and (iii) continue to expand and
upgrade its network infrastructure. Further, demands on the Company's network
infrastructure and technical support resources have grown rapidly with the
Company's expanding customer base, and the Company may in the future experience
difficulties meeting the demand for its access services and technical support.

                                      -15-
<PAGE>
 
Any failure of the Company to manage its growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.

     Risks Associated With Acquisitions. The Company completed the InterNex
acquisition in February 1998, the DeltaNet acquisition in May 1998 and may seek
to acquire additional assets or businesses complementary to its operations. The
InterNex and DeltaNet acquisitions and any subsequent acquisitions would be
accompanied by the risks commonly encountered in acquisitions of companies. Such
risks include, among other things, the difficulty of assimilating the operations
and personnel of acquired companies, the additional financial resources that may
need to be applied to fund the operations of acquired companies, the potential
disruption of the Company's business, the inability of the Company's management
to maximize the financial and strategic position of the Company by the
incorporation of acquired technology or businesses into the Company's service
offerings, the difficulty of maintaining uniform standards, controls, procedures
and policies, the potential loss of key employees of acquired companies, and the
impairment of relationships with employees and customers as a result of changes
in management. No assurance can be given that InterNex and DeltaNet will be
successfully integrated in the Company's operations. Likewise, no assurance can
be given that any other acquisitions by the Company will or will not occur, that
if an acquisition does occur it will not materially and adversely affect the
Company or that any such acquisition will be successful in enhancing the
Company's business. If the Company proceeds with additional significant
acquisitions in which the consideration consists of cash, a substantial portion
of the Company's available cash could be used to consummate the acquisitions. If
the Company were to consummate one or more acquisitions in which the
consideration consisted of stock, stockholders of the Company could suffer
significant dilution of their interests in the Company. In addition, the
InterNex acquisition has been accounted for using the purchase method of
accounting. Because the acquisitions of companies of the type that the Company
is targeting, such as InterNex, typically involve the purchase of significant
amounts of intangible assets, acquisitions of such businesses also result in
goodwill and potentially significant amortization charges for acquired
technology.  The DeltaNet acquisition was accounted for as a pooling of
interests and the Company incurred significant expenses related to this
acquisition.  If the Company were to incur additional charges for acquired in-
process technology, amortization of goodwill and acquisition costs with respect
to future acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected.

     Dependence upon New and Uncertain Markets. The markets for tailored, value-
added network services for businesses and consumers offered by the Company,
including Internet access, are in the early stages of development. Since these
markets are relatively new and because current and future competitors are likely
to introduce competing services or products, it is difficult to predict the rate
at which the market will grow, if at all, or whether new or increased
competition will result in market saturation. Certain critical issues concerning
commercial use of tailored, value-added services and Internet services,
including security, reliability, ease and cost of access and quality of service,
remain unresolved and may impact the growth of such services. If the markets for
the services offered by the Company, including Internet access, fail to grow,
grow more slowly than anticipated, or become saturated with competitors, the
Company's business, financial condition and results of operations would be
materially adversely affected.

     Dependence upon New and Enhanced Services. The Company has recently
introduced new enterprise service offerings, including the introduction of
value-added, IP-based communication services to enterprises and a new line of
DSL services in limited areas. The failure of these services to gain market
acceptance in a timely manner, or at all, or the failure of DSL service in
particular to achieve significant market coverage, could have a material adverse
effect on the business, financial condition and results of operations of the
Company.  Introduction by the Company of new or enhanced services with
reliability, quality or compatibility problems could significantly delay or
hinder market acceptance of such services, which could adversely affect the
Company's ability to attract new customers and subscribers. The Company's
services may contain undetected errors or defects when first introduced or as
enhancements are introduced. There can be no assurance that, despite testing by
the Company or its customers, errors will not be found in new services after
commencement of commercial deployment, resulting in additional development
costs, loss of, or delays in, market acceptance, diversion of technical and
other resources from the Company's other development efforts and the loss of
credibility with the Company's customers and subscribers. Any such event could
have a material adverse effect on the Company's business, financial condition
and results of operations.

                                      -16-
<PAGE>
 
     Dependence upon Suppliers; Sole and Limited Sources of Supply. The Company
relies on other companies to supply certain key components of its network
infrastructure, including telecommunications services and networking equipment,
which, in the quantities and quality demanded by the Company, are available only
from sole or limited sources. Expansion of network infrastructures by the
Company and others is placing, and will continue to place, a significant demand
on the Company's suppliers, some of which have limited resources and production
capacity. In addition, certain of the Company's suppliers, in turn, rely on sole
or limited sources of supply of components included in their products. The
Company'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 the Company's network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company from time
to time has experienced delays in receiving telecommunications services, and
there can be no assurance that the Company will be able to obtain such services
on the scale and within the time frames required by the Company at an affordable
cost, or at all. Any failure to obtain such services on a timely basis at an
affordable cost would have a material adverse effect on the Company's business,
financial condition and results of operations.

     Dependence upon Network Infrastructure. The Company's success will depend
upon the capacity, reliability and security of its network infrastructure. The
Company currently derives a significant portion of its revenue from customer
subscriptions. The Company 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. The expansion and
adaptation of the Company's network infrastructure will require substantial
financial, operational and management resources. There can be no assurance that
the Company 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 usage of
the Concentric network were to increase faster than projected or were to exceed
the Company's current forecasts, the network could experience capacity
constraints, which would adversely affect the performance of the system. Any
failure of the Company to expand its network infrastructure on a timely basis or
adapt it to either changing customer requirements or evolving industry
standards, or capacity constraints experienced by the Concentric network for any
reason, could have a material adverse effect on the Company's business,
financial condition and results of operations. Currently, the Company has
transit agreements with MCI, Inc., Sprint, UUNet, AOL and other network
providers to support the exchange of traffic between the Concentric network and
the Internet as well as public peering arrangements with multiple smaller
internet service providers.  The Company has yet to determine if it can
successfully execute its private/public Internet connection strategy. The
failure of the networks with which Concentric has public peering, private
peering or private transit, or the failure of any of the Company's data centers,
or any other link in the delivery chain, or the inability of the Company to
successfully integrate its acquired network resources into the Company's
existing infrastructure, and resulting interruption in the Company's operations
would have a material adverse effect on the Company's business, financial
condition and results of operations.

     Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources, including existing
lease and credit facilities, and funds from operations will be sufficient to
meet its anticipated working capital and capital expenditure requirements
through 1999.  However, there can be no assurance that such resources will be
sufficient for its anticipated working capital and capital expenditure
requirements. The Company may need to raise additional funds through public or
private debt or equity financings in order to take advantage of unanticipated
opportunities, including more rapid international expansion or acquisitions of
complementary businesses or technologies, or to develop new products or
otherwise respond to unanticipated competitive pressures. The Company may also
raise additional funds through public or private debt or equity financings if
such financings become available on favorable terms. If additional funds are
raised, there can be no assurance that additional financing will be available on
terms favorable to the Company, or at all. If adequate funds are not available
or are not available on acceptable terms, the Company may not be able to take
advantage of unanticipated opportunities, develop new products or otherwise
respond to unanticipated competitive pressures. Such inability could have a
material adverse effect on the Company's business, financial condition and
results of operations. 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 above in this paragraph.

     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. Many of the

                                      -17-
<PAGE>
 
Company's current and prospective 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 and services than can the Company. Increased price or other competition
could result in erosion of the Company's market share and could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will have the financial
resources, technical expertise or marketing and support capabilities to continue
to compete successfully.

     Risks of Technological Change and Evolving Industry Standards. The markets
for the Company's services are characterized by rapidly changing technology,
evolving industry standards, changing customer needs, emerging competition and
frequent new product and service introductions. The Company's future success
will depend, in part, on its ability to effectively use leading technologies; to
continue to develop its technical expertise; to enhance its current networking
services; to develop new services that meet changing customer needs; to
advertise and market its services; and to influence and respond to emerging
industry standards and other technological changes in a timely and cost-
effective basis. There can be no assurance that the Company will be successful
in effectively using new technologies, developing new services or enhancing its
existing services on a timely basis, or that such new technologies or
enhancements will achieve market acceptance.

                                      -18-
<PAGE>
 
                          PART II.  OTHER INFORMATION
                                        

ITEM 1.  LEGAL PROCEEDINGS

      Not applicable.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

      On June 3, 1998, the Company issued 150,000 shares of its 13 1/2% Series A
Senior Redeemable Exchangeable Preferred Stock due 2010 (the "Series A Preferred
Stock").  The aggregate purchase price for the Series A Preferred Stock was
$150,000,000 and the Company paid $5,250,000 in discounts to the initial
purchasers of the Series A Preferred Stock.  The securities were offered and
sold only to "qualified institutional buyers" (as defined in Rule 144 of the
Securities Act) in reliance on the exemption from the registration requirements
of the Securities Act provided by Rule 144A.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      Not applicable.

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

      The Annual Meeting of Stockholders was held on May 20, 1998 at which the
following matters were submitted to a vote of the stockholders:

      1.  An election was held with Gordon C. Martin being elected to the Board
          of Directors as a Class I director with 9,429,441 shares voting in
          favor and 8,526 shares withheld.

          The following individuals' term of office as director continued after
          the meeting:
               Gary E. Rieschel
               Vinod Khosla
               Franco Regis
               Henry R. Nothhaft

      2.  A proposal to amend the Company's 1997 Stock Plan to increase the
          number of shares available for issuance thereunder by 750,000 shares
          to an aggregate of 2,250,000 was approved with 6,444,529 shares voting
          for, 1,514,790 shares voting against, 11,737 shares abstaining and
          1,466,911 broker non-votes.

      3.  A proposal to amend the Company's 1997 Employee Stock Purchase Plan to
          provide for an annual increase in the number of shares reserved for
          issuance thereunder equal to the lesser of (i) 400,000 shares, (ii) 2%
          of the outstanding shares of common stock of the Company or (iii) a
          number of shares determined by the Board of Directors was approved
          with 7,043,944 shares voting in favor, 915,512 shares voting against,
          11,601 shares abstaining and 1,466,910 broker non-votes.

      4.  A proposal to ratify the appointment of Ernst & Young LLP as
          independent auditors for the Company for the fiscal year ending
          December 31, 1998 was approved with 9,425,825 shares voting in favor,
          6,292 shares voting against and 5,850 shares abstaining.

ITEM 5.  OTHER INFORMATION

      Not applicable.

                                      -19-
<PAGE>
 
ITEM 6.  EXHIBITS AND REPORTS ON 8-K

      (a)      Exhibits.

      4.1***   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 Redeemable Exchangeable
               Preferred Stock, due 2010 of the Registrant.

      4.2***   Form of Series A Preferred Stock Certificate.
 
      4.3***   Form of Series B Preferred Stock Certificate.
 
      10.55    Lease between the Sobrato Group and the Company, dated May 15, 
               1998.

      10.56*** Purchase Agreement, dated as of June 3, 1998, by and among
               the Registrant and Initial Purchasers.

      10.57*** Registration Rights Agreement, dated as of June 8, 1998, by and 
               among the Registrant and the Initial Purchasers.

      10.58*** Form of Indenture for Exchange Debentures.

      27.1     Financial Data Schedule.

      (b)      Reports on Form 8-K.

               The Company filed a Current Report on Form 8-K dated June 11,
               1998, to report under Item 5 the offering to sell 150,000 shares
               of 13 1/2% Senior Redeemable Exchangeable Preferred Stock due
               2010.

-------------------------
*** Incorporated by reference from Registrant's Registration Statement on 
    Form S-4 (File No. 333-58641), as declared effective by the Securities and
    Exchange Commission ("SEC") on August 11, 1998.

                                      -20-
<PAGE>
 
                                   SIGNATURES
                                        

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



Date: August 13, 1998                CONCENTRIC NETWORK CORPORATION



                                     By  /s/ Henry R. Nothhaft
                                        ---------------------------------
                                        Henry R. Nothhaft,
                                        President, Chief Executive
                                        Officer and Director



                                     By  /s/ Michael F. Anthofer
                                        ---------------------------------
                                        Michael F. Anthofer,
                                        Senior Vice President and
                                        Chief Financial Officer

                                      -21-