<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 SEPTEMBER 30, 1997

                                      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 September 30, 1997, was 14,168,619.

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

                         PART I-FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                        <C>
Item 1.  Financial Statements:

         Condensed Balance Sheets at September 30, 1997 and
         December 31, 1996...............................................     3

         Condensed Statements of Operations for the three and
         nine month periods ended September 30, 1997 and 1996............     4

         Condensed Statements of Cash Flows for the nine month
         periods ended September 30, 1997 and 1996.......................     5

         Notes to Unaudited Condensed Financial Statements...............  6-10

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations....................................... 11-17

                           PART II-OTHER INFORMATION

Item 1.  Legal Proceedings...............................................    18

Item 2.  Changes in Securities...........................................    18

Item 3.  Defaults Upon Senior Securities.................................    18

Item 4.  Submission of Matters to a Vote of Security Holders.............    18

Item 5.  Other Information...............................................    18

Item 6.  Exhibits and Reports on Form 8-K................................ 19-23

Signatures...............................................................    24

</TABLE>


                                      -2-
<PAGE>
 
PART I-FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                        CONCENTRIC NETWORK CORPORATION

                           CONDENSED BALANCE SHEETS
                                   UNAUDITED
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,    DECEMBER 31,
                                                           1997           1996
                                                      -------------    ------------
                      ASSETS
<S>                                                  <C>             <C>
Current assets:
 Cash and cash equivalents...........................     $ 39,638       $ 17,657
 Accounts receivable, net............................        4,395          1,849
 Prepaid expenses....................................        3,978            950
 Other current assets................................        1,935            772
                                                          --------       --------
    Total current assets.............................       49,946         21,228
Property and equipment, net..........................       56,296         47,927
Other assets.........................................        3,923          1,567
                                                          --------       --------
Total assets.........................................     $110,165       $ 70,722
                                                          ========       ========

        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable....................................     $ 10,409       $ 16,723
 Accrued expenses....................................        4,581          2,877
 Current portion of capital lease obligations........       14,715         11,258
 Deferred revenue....................................        1,409          1,238
                                                          --------       --------
    Total current liabilities........................       31,114         32,096
Capital lease obligations, net of current portion....       36,629         30,551
Commitments and contingencies
Class A common stock subject to rescission...........        1,400          5,150
Stockholders' equity:
 Preferred stock.....................................           --         95,215
 Common stock........................................      178,139          1,850
Accumulated deficit..................................     (135,755)       (93,952)
Deferred compensation................................       (1,362)          (188)
                                                          --------       --------
Total stockholders' equity...........................       41,022          2,925
                                                          --------       --------
Total liabilities and stockholders' equity...........     $110,165       $ 70,722
                                                          ========       ========
</TABLE>


                            See accompanying notes.

                                      -3-
<PAGE>
 
                        CONCENTRIC NETWORK CORPORATION

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

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED    NINE MONTHS ENDED
                                                    SEPTEMBER 30,         SEPTEMBER 30,
                                                   1997      1996       1997       1996
                                                ---------  ---------  --------   ---------
<S>                                             <C>        <C>        <C>        <C>
Revenue........................................   11,824      4,193     31,792       8,215
Costs and expenses:
   Cost of revenue.............................   14,838     11,913     45,495      30,951
   Development.................................    1,313        692      3,538       1,603
   Marketing and sales.........................    6,459      4,045     17,489      11,033
   General and administrative..................    1,182        727      3,369       2,499
                                                --------   --------   --------    --------
Total costs and expenses.......................   23,792     17,377     69,891      46,086
                                                --------   --------   --------    --------
Loss from operations...........................  (11,968)   (13,184)   (38,099)    (37,871)
Other (income) expense.........................      162         --     (1,233)         --
Net interest expense...........................    2,088      1,289      4,937       2,402
                                                --------   --------   --------    --------
Net loss....................................... $(14,218)  $(14,473)  $(41,803)   $(40,273)
                                                ========   ========   ========    ========
Net loss per share:

Historical..................................... $  (1.46)  $    --    $    --     $     --
                                                ========   ========   ========    ========
Pro-forma...................................... $  (1.22)  $  (2.49)  $  (4.68)   $  (8.09)
                                                ========   ========   ========    ========
Shares used in computing net loss per share:

Historical.....................................    9,733         --         --          --
                                                ========   ========   ========    ========
Pro-forma......................................   11,651      5,820      8,939       4,980
                                                ========   ========   ========    ========
</TABLE>


                            See accompanying notes.

                                      -4-
<PAGE>
 
                        CONCENTRIC NETWORK CORPORATION

                      CONDENSED STATEMENTS OF CASH FLOWS
                                   UNAUDITED
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED
                                                                                  SEPTEMBER 30,
                                                                                -----------------
                                                                                 1997       1996
                                                                                -----------------
<S>                                                                            <C>        <C>
OPERATING ACTIVITIES
Net loss.....................................................................  $(41,803)  $(40,273)
Adjustments to reconcile net loss to net cash used in operating activities:
 Depreciation and amortization...............................................    12,389      5,084
 Amortization of deferred interest, cost of revenue and marketing and sales       
  related to issuance of warrants............................................     1,534        640
 Amortization of deferred compensation.......................................       129         --
 Loss on disposal of equipment...............................................       162         --
Changes in current assets and liabilities:
 Accounts receivable.........................................................    (2,546)      (986)
 Other current assets........................................................    (1,100)        --
 Prepaid expenses............................................................    (3,028)      (143)
 Accounts payable............................................................    (7,022)     2,284
 Accrued expenses............................................................     1,745        770
 Deferred revenue............................................................       171        720
                                                                               --------   --------
 Net cash used in operating activities.......................................   (39,369)   (31,904)

INVESTING ACTIVITIES
Additions of property and equipment..........................................    (5,065)    (3,979)
Increase in refundable deposits..............................................        --       (210)
Proceeds from sale of property and equipment.................................        18         --
                                                                               --------   --------
Net cash used in investing activities........................................    (5,047)    (4,189)

FINANCING ACTIVITIES
Proceeds from notes payable..................................................     5,000      6,300
Repayment of notes payable...................................................    (2,000)    (1,300)
Repayment of lease obligations...............................................    (8,337)    (3,890)
Proceeds from issuances of stock and warrants................................    73,951     28,152
Repurchase of common stock...................................................    (2,217)        --
                                                                               --------   --------
Net cash provided by financing activities....................................    66,397     29,262
                                                                               --------   --------
Increase (decrease) in cash and cash equivalents.............................    21,981     (6,831)
Cash and cash equivalents at beginning of period.............................    17,657     19,054
                                                                               --------   --------
Cash and cash equivalents at end of period...................................  $ 39,638   $ 12,223
                                                                               ========   ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Stock exchanged for notes payable, including accrued interest................  $  3,041   $  8,081
Capital lease obligations incurred...........................................  $ 15,873   $ 18,912
Reduction of accounts payable through capital lease obligations incurred.....  $  2,000   $     --
Issuance of warrants.........................................................  $  1,245   $  2,372

</TABLE>

                            See accompanying notes.

                                      -5-
<PAGE>
 
                        CONCENTRIC NETWORK CORPORATION

               NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION

     These unaudited condensed 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 September 30, 1997 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1997 or future operating periods.

2.  NET LOSS PER SHARE, HISTORICAL AND PRO FORMA

     Historical Net Loss Per Share

     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 Bulletins, common and common equivalent shares issued by the Company
at prices below the initial public offering price during the twelve-month period
prior to the August 1, 1997 initial public offering (the "Public Offering") (see
Note 3) have been included in the calculation as if they were outstanding for
all periods presented (using the treasury stock method and the public offering
price in calculating equivalent shares).

     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
Public Offering (using the if-converted method).

     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (FAS 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of FAS 128 on
the calculation of primary and fully diluted earnings per share is not expected
to be material.

3.  STOCKHOLDERS' EQUITY

     Effective July 30, 1997, the Company reincorporated under the laws of the
state of Delaware, at which time a one for 15 reverse stock split took effect.
Upon closing of the Public Offering, all outstanding shares of Series A, B, C,
and D convertible preferred stock were converted into Common Stock.  All share
and per share data in these financial statements have been retroactively
restated to reflect the reverse stock split.

     On August 1, 1997, the Company effected its Public Offering of Common
Stock.  The offering consisted of 4,300,000 shares of Common Stock issued to the
public at $12.00 per share. Concurrent with the closing of the Public Offering,
certain strategic investors purchased directly from the Company 1,499,236 shares
of Common Stock having an aggregate purchase price of approximately $18 million
(including the cancellation of approximately $3 million in indebtedness).  Such
shares are unregistered shares and were purchased at the Public Offering price
of $12.00 per share. 

                                      -6-
<PAGE>
 
                        CONCENTRIC NETWORK CORPORATION

               NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
                                  (CONTINUED)


In connection with the direct purchase, the Company issued
warrants to one of the strategic investors to purchase 291,667 shares of the
Company's Common Stock at $6.00 per share.  The fair value of these warrants was
accounted for as an issuance cost of the financing.  The warrants expire five
years from the date of grant. In September, the underwriters exercised an option
to purchase an additional 645,000 shares of Common Stock at the Public Offering
price of $12.00 per share to cover over-allotments in connection with the Public
Offering.

     In March 1997, the Company issued  warrants to purchase an aggregate of
184,934  shares of Common Stock for net consideration of $1,108,000.  These
warrants will expire in March 2000 and are exercisable at $20.40 per share.

     On April 18, 1997, certain preferred stockholders holding warrants to
purchase an aggregate number of 181,876 shares of Class A common stock and
66,688 shares of Series B convertible preferred stock at $11.00 per share,
exercised such warrants at a discounted price of $6.60 per share in
consideration of their early exercise. Additionally, certain preferred
stockholders exercised warrants to purchase an aggregate number of 233,660
shares of Series D convertible preferred stock at a price of $12.24, discounted
from the original price of $20.40. The Company received total consideration of
approximately $4.5 million related to the exercise of these warrants.

4.  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 1997 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.

5.  COMMON STOCK SUBJECT TO RESCISSION

     Beginning in August 1993 and continuing through May 31, 1995, the Company
sold convertible debentures aggregating $4,260,000 and issued common stock
aggregating $890,000.  Although at the time the Company believed the sale and
conversion of debentures into common stock, if applicable, was exempt from
provisions of the Securities Act of 1933 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
September 30, 1997, a number of statutes of limitations under federal and state
securities laws applicable to the shares which may have been issued without
securities laws exemptions have lapsed.  Pursuant to the Rescission Offer, the
Company offered to rescind the issuance of shares and options as to which the
applicable statute of limitations has not run.  There can be no assurances that
the Company will not otherwise be subject to additional liabilities with respect
to such issuances.  If the Rescission Offer is accepted in full, the Company
would be required to pay approximately $1.4 million plus interest thereon
totaling approximately $300,000 related to the issuance of the stock and
approximately $940,000 with respect to options.  To date, the Company has
received elections to rescind stock plus accrued interest totaling approximately
$673,000 and no elections to rescind options.  The Rescission Offer expired on
October 30, 1997 for federal statute purposes and varies at the state level, but
in any event will expire no later than November 15, 1997.

                                      -7-
<PAGE>
 
                        CONCENTRIC NETWORK CORPORATION

               NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
                                  (CONTINUED)


6.  LITIGATION

     On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC (Sattel).  Sattel's complaint alleged that the Company
was in breach of an agreement to pay for up to $4.3 million of DSS Switches from
Sattel for use in the Company's network and also sought unspecified
consequential and punitive damages. On July 11, 1997, the Company settled  the
complaint with Sattel in the amount of $4.4 million. The Company also agreed to
purchase, at the election of Sattel, up to 25% of the Company's common stock
held by Sattel on the day after the closing of the offering at the Public
Offering price. In August, 1997 the Company made cash payments to Sattel
totaling approximately $4.8 million, to satisfy its obligations pursuant to the
settlement agreement and the repurchase of common stock.

     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, 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. Concentric 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 Company has moved to dismiss the complaint against it.  The
motion is scheduled to be heard by the court on December 8, 1997.  The
plaintiffs seek unspecified compensatory damages. The Company is currently
unable to estimate a range of possible losses associated with such lawsuits.
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 this matter could have a material adverse
effect on the Company's financial condition. In addition, even if the ultimate
outcome is 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.

7.  BRIDGE LOANS

     In June 1997, the Company borrowed $3 million from a third-party in the
form of a 10% convertible secured promissory note (the Secured Note). The
Secured Note automatically converted into 253,403 shares of Common Stock upon
the closing of the Public Offering at a per share conversion price equal to the
Public Offering price of $12.00. In connection with the Secured Note, the
Company issued a warrant to purchase 63,351 shares of Common Stock at an
exercise price of $6.00 per share.  This warrant will expire five years from the
date of grant.

     In June 1997, the Company borrowed $2 million from a stockholder in the
form of a 10% unsecured promissory note (the Unsecured Note). The Unsecured Note
was repaid in August 1997.  In connection with the Unsecured Note, the Company
issued a warrant to purchase 83,333 shares of Common Stock at an exercise price
of $6.00 per share. This warrant will expire five years from the date of grant.

     The Company deemed the fair value of the warrants issued in connection with
the Secured Note and the Unsecured Note, using the Black-Scholes method, to be
approximately $930,000, of which $739,000 and $191,000 was amortized as interest
expense in the three months ended September 30, 1997 and  June 30, 1997,
respectively.
 
8.  COMMITMENT

     Effective in August 1997, the Company entered into a five-year service and
equipment agreement under which a third-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. 

                                      -8-
<PAGE>
 
                        CONCENTRIC NETWORK CORPORATION

               NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
                                  (CONTINUED)


At the election of the third party, $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.

                                      -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 Registration Statement on Form S-1 (File No. 333-27241) 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 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.

     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 $4.3 million, $22.0 million and $66.4 million for the years ended
December 31, 1994, 1995 and 1996, respectively and $41.8 million for the nine
months ended September 30, 1997.  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.

     Management believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance. The
Company may experience significant period-to-period fluctuations in operating
results depending upon factors such as the success of the Company's efforts to
expand and retain its subscriber and third party partnership base, changes in
pricing and mix of services offered by the Company or its competitors, market
acceptance of new or enhanced services offered by the Company and changes in,
and the timing of, expenses relating to development and sales and marketing.
Other factors that may contribute to variability of operating results include
the timely deployment and 

                                     -10-
<PAGE>
 
implementation of expansion of the Concentric network and new network
architectures, the Company's ability to obtain sufficient supplies of sole- or
limited-source components, user demand for network and Internet access services
and balancing of network usage over a 24-hour period. Additionally, the
Company's expense levels are relatively fixed in the short term and are based,
in part, upon the Company's estimates of growth of its business.

     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 $11.8 million for the three months
ended September 30, 1997, a $7.6 million increase over revenue of approximately
$4.2 million for the three months ended September 30, 1996.  This increased
revenue reflects growth in revenue from the Company's broadened product
offerings to its enterprise customers and through the Company's leveraged
marketing arrangements with its strategic partners, as well as continued growth
in revenue derived from Internet access customers. For the three months ended
September 30, 1997, revenue from WebTV Networks, Inc. ("WNI") accounted for
31.3% of the Company's revenue.  Revenue for the nine months ended September 30,
1997 totaled approximately $31.8 million an increase of $23.6 million over
revenue of $8.2 million for the nine month period ended September 30, 1996.  WNI
accounted for approximately 33.9% of total revenue for the nine months ended
September 30, 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."

     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 September 30, 1997 was approximately $14.8 million, an increase of $2.9
million from cost of revenue of $11.9 million in the third quarter of 1996. This
increase is attributable to the overall growth in the size of the network. As a
percentage of revenue, such costs declined to 125.5% of revenue in the three
months ended September 30, 1997 from 284.1% 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 SuperPOP network
architecture deployed in the second half of 1996. Cost of revenue for the nine
months ended September 30, 1997 totaled approximately $45.5 million compared
with $31.0 million for the nine months ended September 30, 1996.  As a
percentage of revenue, costs declined to 143.1% of revenue in the nine months
ended September 30, 1997 from 376.8% 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 Key Personnel" 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 $1.3 million and
$692,000 for the three months ended September 30, 1997 and 1996, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings and to manage the overall growth in
the network. Development expense as a percentage of revenue declined to 11.1%
for the three months ended September 30, 1997 from 16.5% in the year earlier
period as a result of the Company's increased revenue.  Development expense for
the nine month periods ending September 30, 1997 and 1996 was approximately $3.5
million and $1.6 million, respectively.  As a percent of revenue, development
expense declined to 11.1% for the nine months ended September 30, 1997 from
19.5% for the nine months ended September 30, 1996.  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 

                                     -11-
<PAGE>
 
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 $6.4
million and $4.0 million for the three months ended September 30, 1997 and 1996,
respectively.  The $2.4 million increase in 1997 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.
Additionally, the increase reflects the ramp-up of marketing efforts related to
the introduction of enterprise products and services. Marketing and sales
expense as a percentage of revenue declined to 54.6% for the three months ended
September 30, 1997 from 96.5% in the year earlier period as a result of the
Company's increased revenue. For the nine months ended September 30, 1997 and
1996, marketing and sales expense was approximately $17.5 million and $11.0
million, representing 55.0% and 134.3% 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 and Dependence on Key Personnel."

     General and Administrative.  General and administrative expense consists
primarily of personnel expense and professional fees. General and administrative
expense was approximately $1.2 million and $727,000 for the three months ended
September 30, 1997 and 1996, respectively.  For the nine months ended September
30, 1997 and 1996, general and administrative expenses were approximately $3.4
million and $2.5 million, 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 declined to 10.0% for the
three months ended September 30, 1997 from 17.3% in the year earlier period as a
result of the Company's increased revenue. For the nine months ended September
30, 1997, general and administrative expense declined to 10.6% from 30.4% for
the nine months ended September 30, 1996.  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, 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 and Dependence on Key Personnel."

     Net Interest Expense.  Net interest expense was approximately $2.1 million
and $1.3 million for the quarters ending September 30, 1997 and 1996,
respectively. The increase is primarily due to a cost of financing charge of
$739,000 in the three months ended September 30, 1997 associated with the value
of warrants issued in connection with $5.0 million of bridge loans received in
June 1997.  Additionally, the principal amount of capitalized lease obligations
increased $22.3 million from September 30, 1996 to September 30, 1997.  The
three month period ended September 30, 1996 included approximately $330,000
associated with the value of warrants issued in connection with bridge loan
financing.  Net interest expense for the nine months ended September 30, 1997
and 1996 was $4.9 million and $2.4 million, respectively.

     Other (Income) Expense.  During the nine months ended September 30, 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 Loss.  The Company's net loss declined to approximately $14.2 million
for the quarter ended September 30, 1997 as compared to approximately $14.5
million for the same quarter of 1996.  For the nine months ended September 30,
1997 the net loss totaled $41.8 million as compared to $40.3 million for the
nine months ended September 30, 1996.

                                     -12-
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings and the sale of capital stock. The Company's
principal uses of cash are to fund working capital requirements and capital
expenditures and to service its capital lease financing obligations. Net cash
used in operating activities for the nine months ended September 30, 1997 and
1996 was approximately $39.4 million and $31.9 million, respectively.  Included
in the amount for the nine months ended September 1997 is $4.4 million of cash
paid in settlement of a dispute with Sattel Communications, LLC.  Cash used in
operating 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 nine months ended September
30, 1997 and 1996 was approximately $5.0 million and $4.2 million, respectively.
Investing activities were comprised almost entirely of purchases of capital
equipment to support the growing infrastructure.

     For the nine months ended September 30, 1997 net cash of approximately
$66.4 million was generated from financing activities, of which $74.0 million,
net of issuance costs, was derived from the issuance of stocks and warrants. On
August 1, 1997, the Company effected its Public Offering of Common Stock.  The
offering consisted of 4,300,000 shares of Common Stock issued to the public at
$12.00 per share. Concurrent with the closing of the Public Offering, certain
strategic investors purchased directly from the Company 1,499,236 shares of
Common Stock having an aggregate purchase price of approximately $18 million
(including the cancellation of approximately $3 million in indebtedness) (the
"Direct Placements)."   In September the underwriters exercised an option to
purchase an additional 645,000 shares of Common Stock at the Public Offering
price of $12.00 per share to cover over-allotments in connection with the Public
Offering. Additionally, in April of 1997, the Company received proceeds of
approximately $4.5 million from the exercise of warrants and another $1.1
million as consideration for warrants issued.

     The Company also received $5.0 million in debt financing in June 1997, of
which $2.0 million was repaid and $3.0 million was converted into Common Stock,
respectively, upon closing of the Company's Public Offering.  Concurrent with
the closing of the Public Offering, the Company repurchased $2.2 million of
Common Stock from certain stockholders. The remainder of financing activities
for the nine months ended September 30, 1997 is comprised of $8.3 million used
for repayment of capital lease obligations.  For the nine months ended September
30, 1996 cash of approximately $29.3 million was generated from financing
activities. which reflects receipt of $28.2 million, net of issuance costs, for
Series D Convertible Preferred Stock.  Also reflected is a $5.0 million bridge
loan which was later converted into Series D Convertible Preferred Stock.
Repayment of capital lease obligations for the nine months ended September 30,
1996 was approximately $3.9 million.

     The net cash increase for the nine month period ended September 30, 1997
was $22.0 million as compared to a net cash decrease for the nine months ended
September 30, 1996 of $6.8 million.  At September 30, 1997, the Company had cash
and cash equivalents of approximately $39.6 million and working capital of $18.8
million.

     For the nine months ended September 30, 1997, the Company added
approximately $15.9 million of network equipment through additional capital
lease obligations under its network equipment financing arrangement, and reduced
accounts payable by $2.0 million under a sale leaseback arrangement.  The
Company expects to make additional investments in capital equipment to expand
and enhance its network, with approximately $2.0 million of anticipated
purchases of capital equipment throughout the remainder of 1997.  The foregoing
expectation with respect to additional capital investments is a forward-looking
statement that involves risks and uncertainties and the actual amount of capital
investment could vary materially as a result of a number of factors.

     The Company expects to incur additional operating losses and  will rely
primarily on the net proceeds from the Public Offering and the Direct
Placements, 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 and for the acquisition of capital equipment at least for the next 12
months. However, there can be no assurance that the Company will not require
additional financing within this time frame. The Company's forecast of 

                                     -13-
<PAGE>
 
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.

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.

     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.
In addition, a majority of the Company's senior management team have been
working together at the Company for less than two years. The Company's prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
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.

     Customer Concentration.  The Company currently derives a substantial
portion of its total revenue from a single customer. For the three and nine
months ended September 30, 1997, revenue from WebTV Networks, Inc. ("WNI")
represented approximately 31.3% and 33.9%, respectively, of the Company's
revenue. Effective November 1, 1997 the Company  and WNI amended their network
services agreement ("Amended Agreement").  The Amended Agreement provides for
new pricing, terms and conditions effective November 1, 1997.  The Amended
Agreement further allows for a re-negotiation of pricing, terms and conditions
to be completed by October 31, 1998, to be effective commencing January 1, 1999.
In the event the parties cannot agree on such pricing, terms and conditions, the
Amended Agreement can be terminated by either party anytime thereafter.  Upon
termination, a 12 month ramp-down period will begin.  In the event the parties
do agree on pricing, terms and conditions, the Amended Agreement will remain in
effect until October 1, 1999, at which time either party may terminate the
agreement upon one hundred twenty (120) days' notice. 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 or a
decline in revenue from such customers could have a material adverse effect on
the Company's business, financial condition and results of operations.

     Management of Potential Growth and Expansion and Dependence upon Key
Personnel.  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 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; (ii) hire and train additional qualified personnel; and (iii) continue
to expand and upgrade its network infrastructure.  As the Company strives 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 the Company's customer support,
sales and marketing resources. Any 

                                     -14-
<PAGE>
 
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.

     The Company's success will depend upon the continued service of members of
its senior management team and technical, marketing and sales personnel. The
Company does not have employment agreements with any of its employees, including
the senior officers. The Company's success depends upon its ability to attract
and retain additional highly qualified management, technical, sales and
marketing and customer support personnel. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect upon the Company's results of operations,
development efforts and ability to complete the expansion of its network
infrastructure.  Any such event could have a material adverse effect on the
Company's business, financial condition and results of operations.

     Risks Associated With Acquisitions.  The Company may seek to acquire assets
or businesses complementary to its operations, although no specific acquisitions
are currently in negotiation.  Any such future 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 the acquired companies, the additional financial resources that may
need to be applied to fund the operations of the acquired entity, 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 business 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 any acquisition 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 one or more
significant acquisitions in which the consideration consists of cash, a
substantial portion of the Company's available cash, including proceeds of this
offering, 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.  Many business acquisitions must be accounted for as a
purchase for financial reporting purposes.  Most of the businesses that might
become attractive acquisition candidates for the Company are likely to have
significant goodwill and intangible assets, and acquisition of these businesses,
if accounted for as a purchase, would typically result in substantial
amortization of goodwill charges to the Company.

     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. The failure of
these services to gain market acceptance in a timely manner or at all 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. Any such event
could have a material adverse effect on the Company's business, financial
condition and results of operations.  Additionally, if the Company is unable to
achieve balanced network utilization over a 24-hour period, the Concentric
network could become overburdened at certain periods during the day, which could
adversely affect the quality of service provided by the Company. Conversely, due
to the high fixed cost nature of Concentric's infrastructure, under-utilization
of the Concentric network during certain periods of the day could adversely
affect the Company's ability to provide cost-efficient services at other times.
The failure 

                                     -15-
<PAGE>
 
of the Company to achieve balanced network utilization, because of either over-
or under-utilization could have a material adverse effect on the Company's
business, financial condition and results of operations.

     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. 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.  Additionally, the Company purchases network
equipment pursuant to purchase orders placed from time to time, 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
the Company's competitors and may in the future themselves become competitors of
the Company. There can be no assurance that the Company's suppliers will not
enter into exclusive arrangements with the Company's competitors or stop selling
their products or components to the Company at commercially reasonable prices or
at all.

     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. Failure of the Company's
suppliers to adjust to meet such increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by the Company, or at all. 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.
Additionally, any failure of the Company's sole- or limited-source suppliers to
provide products or components that comply with Internet standards or that
interoperate with other products or components used by the Company in its
network infrastructure would also 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 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.

     As the Company expands its network and usage grows, increased stress will
be placed upon network hardware and traffic management systems. While the
Company's network has been designed with redundant backbone circuits to allow
traffic re-routing, there can be no assurance that the Company will not
experience failures, occurrence of natural disasters or other problems  relating
to any link in the delivery chain or even catastrophic failure of the entire
network. Any damage or failure that causes interruptions in the Company's
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.

     Despite the implementation of network security measures, the core of the
Company'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 the Company's customers and
subscribers. Furthermore, such inappropriate use of the network by third parties

                                     -16-
<PAGE>
 
could also potentially jeopardize the security of confidential information
stored in the computer systems of the Company and its customers, which may
result in liability to the Company and also may deter potential subscribers.
Although the Company intends to continue to implement industry-standard security
measures, such measures occasionally have been circumvented in the past, and
there can be no assurance that measures implemented by the Company 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 the Company's customers that
could have a material adverse effect on the Company's business, financial
condition and results of operations.

     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
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, changes in 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.

     Future Capital Needs; Uncertainty of Additional Financing.  The Company
currently anticipates that its available cash resources combined with the net
proceeds of the offering and existing lease and credit facilities, and funds
from operations will be sufficient to meet its anticipated working capital and
capital expenditure requirements for the next 12 months.  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 through the issuance of
equity securities, the percentage ownership of then current stockholders of the
Company may be reduced and such equity securities may have rights, preferences
or privileges senior to those of the holders of the Company's Common Stock.  If
additional funds are raised through the issuance of debt securities, such
securities would have certain rights, preferences and privileges senior to
holders of Common Stock and the terms of such debt could impose restrictions on
the operations of the Company.  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, results of operations and financial condition.  See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

                                     -17-
<PAGE>
 
                          PART II.  OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

     On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC (Sattel).  Sattel's complaint alleged that the Company
was in breach of an agreement to pay for up to $4.3 million of DSS Switches from
Sattel for use in the Company's network and also sought unspecified
consequential and punitive damages. On July 11, 1997, the Company settled  the
complaint with Sattel in the amount of $4.4 million. The Company also agreed to
purchase, at the election of Sattel, up to 25% of the Company's common stock
held by Sattel on the day after the closing of the offering at the initial
public offering price.  In August, 1997 the Company made cash payments to Sattel
totaling approximately $4.8 million, to satisfy its obligations pursuant to the
settlement agreement and the repurchase of common stock from Sattel.

     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, 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. Concentric 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 Company has moved to dismiss the complaint against it.  The
motion is scheduled to be heard by the court on December 8, 1997.  The
plaintiffs seek unspecified compensatory damages. The Company is currently
unable to estimate a range of possible losses associated with such lawsuits.
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 this matter could have a material adverse
effect on the Company's financial condition. In addition, even if the ultimate
outcome is 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.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

     (c) On August 5, 1997, the Company issued 127,041 shares of Common Stock
upon the exercise of a warrant to purchase Common Stock which was issued on
December 11, 1995. The Company issued and sold the Common Stock to the warrant
holder at an exercise price of $14.4375 per share pursuant to the net exercise
provisions of the warrant. The shares of Common Stock issued pursuant to
exercise of the warrant were issued in reliance on the exemption from
registration under the Securities Act of 1933, as amended, (the "Act") in
Section 4(2) of the Act. The warrant and shares of Common Stock issued pursuant
to exercise of the warrants are restricted securities.

     The Company granted options to purchase ______ shares of Common Stock on
October 29, 1997 pursuant to the Company's 1997 Stock Option Plan, at an
exercise price of $11.50 per share. The options granted by the Company were
issued in reliance on Rule 701 of the Act. The options granted and shares of
Common Stock acquired pursuant to exercise of options are registered securities.

     (d) The Company commenced the Public Offering on August 1, 1997 pursuant to
a Registration Statement on Form S-1 (File No. 333-23241) which was declared
effective by the Securities and Exchange Commission on July 31, 1997. The
Company sold an aggregate of 4,945,000 shares of Common Stock in the Public
Offering at an initial price to the public of $12.00 per share. The Public
Offering has terminated and all shares have been sold. The managing underwriters
of the Public Offering were UBS Securities LLC, Unterberg Harris and Wheat First
Butcher Singer. Aggregate proceeds from the Public Offering were $59,340,000,
which includes $7,740,000 in aggregate proceeds due to the exercise of the
underwriters' option to purchase shares to cover over-allotments.

     The Company paid underwriters' discounts and commissions of $4,153,800 and
other expenses of approximately $1,100,000 in connection with the Public
Offering. The total expenses paid by the Company in the Public Offering were
$5,253,800, and the net proceeds to the Company in the Public Offering were
$54,086,200.

     From July 31, 1997, the effective date of the Registration Statement, to
September 30, 1997, the ending date of the reporting period, the approximate
amount of net offering proceeds used were $4.9 million for the purchase of
equipment, network services and related operational expenses, $500,000 for
capital expenditures associated with expanding the Company's network and data
center operations, $8.8 million to pay certain capital lease obligations and
expenses, $3.5 million to pay license fees to certain strategic partners, $2.0
million to repay promissory notes issued to certain stockholders of the Company,
$4.8 million to settle the Sattel litigation and $2.2 million to repurchase
common stock from certain stockholders of the Company.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          Not applicable.

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

          Not applicable.

ITEM 5.   OTHER INFORMATION

          Not applicable.

                                     -18-
<PAGE>
 
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
 
          (a)    Exhibits.

           10.42+  Amendment to Virtual Private Network Services Agreement
                   between the Company and WebTV Networks, Inc., dated November
                   1, 1997.

           11.1    Statement of computation of earnings per share.

           27.1    Financial Data Schedule.
 
          -----------------
          +  Certain information in this exhibit has been omitted and filed
             separately with the Securities and Exchange Commission pursuant to
             a confidential treatment request under 17 C.F.R. (S)(S)
             200.80(b)(4), 200.83 and 230.46.


          (b)    Reports on Form 8-K.

                 No reports on Form 8-K have been filed during the quarter for
which this report is filed.

                                     -19-
<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: November 14, 1997                 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


                                     -20-