<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, 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)

<TABLE>
<S>                                                <C>
            DELAWARE                                     65-0257497
(STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NUMBER)
</TABLE>
                                        
                           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, 1998, was 14,895,831.

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

                          PART I-FINANCIAL INFORMATION


<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                              --------
 
<S>                                                                                                           <C>
Item 1.      Financial Statements:
 
             Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997..............         3
 
             Condensed Consolidated Statements of Operations for the three and nine month periods ended
             September 30, 1998 and 1997....................................................................         4
 
             Condensed Consolidated Statements of Cash Flows for the nine month periods ended
             September 30, 1998 and 1997....................................................................         5
 
             Notes to Unaudited Condensed Consolidated Financial Statements.................................      6-10
 
Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations..........     11-20
 
PART II-OTHER INFORMATION
 
Item 1.      Legal Proceedings..............................................................................        21
 
Item 2.      Changes in Securities and Use of Proceeds......................................................        21
 
Item 3.      Defaults Upon Senior Securities................................................................        21
 
Item 4.      Submission of Matters to a Vote of Security Holders............................................        21
 
Item 5.      Other Information..............................................................................        21
 
Item 6.      Exhibits and Reports on Form 8-K...............................................................        22
 
Signatures..................................................................................................        23
</TABLE>

                                      -2-
<PAGE>
 
PART I-FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         CONCENTRIC NETWORK CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                   UNAUDITED
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,      DECEMBER 31,
                                                                                            1998               1997
                                                                                        -------------      ------------
 
                                      ASSETS
Current assets:
<S>                                                                                     <C>                <C>
 Cash and cash equivalents........................................................         $ 152,110          $ 119,959
 Short term investments...........................................................            17,251                 --
 Current portion of restricted cash...............................................            19,125             19,125
 Accounts receivable, net.........................................................            10,253              4,549
 Goodwill and other intangible assets.............................................             5,565                 --
 Other current assets.............................................................             5,611              5,139
                                                                                           ---------          ---------
   Total current assets...........................................................           209,915            148,772
Property and equipment, net.......................................................            58,014             53,710
Restricted cash, net of current portion...........................................            26,087             33,400
Goodwill and other intangible assets, net of current portion......................            16,190                 --
Other assets......................................................................             5,365              8,607
                                                                                           ---------          ---------
Total assets......................................................................         $ 315,571          $ 244,489
                                                                                           =========          =========
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
 Accounts payable.................................................................         $  21,157          $  10,144
 Accrued compensation and other employee benefits.................................             1,548              1,577
 Other current liabilities........................................................             9,750              4,917
 Current portion of capital lease obligations.....................................             6,961             15,326
 Deferred revenue.................................................................             2,770              1,435
                                                                                           ---------          ---------
   Total current liabilities......................................................            42,186             33,399
 
Capital lease obligations, net of current portion.................................            11,204             33,595
Notes payable.....................................................................           145,910            145,577
Commitments
Redeemable exchangeable preferred stock...........................................           150,806                 --
Stockholders' equity (deficit):
 Common stock.....................................................................           186,389            182,721
 Accumulated deficit..............................................................          (219,934)          (149,534)
 Deferred compensation............................................................              (990)            (1,269)
                                                                                           ---------          ---------
Total stockholders' equity (deficit)..............................................           (34,535)            31,918
                                                                                           ---------          ---------
Total liabilities and stockholders' equity (deficit)..............................         $ 315,571          $ 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                         NINE MONTHS
                                                                     ENDED SEPTEMBER 30,                 ENDED SEPTEMBER 30,
                                                                  --------------------------          -------------------------
                                                                     1998             1997             1998             1997
                                                                  --------          --------         --------         --------
 
<S>                                                         <C>               <C>              <C>              <C>
Revenue...................................................         $ 21,579         $ 11,824         $ 57,725         $ 31,792
Costs and expenses:
 Cost of revenue..........................................           22,906           14,838           60,834           45,495
 Development..............................................            2,100            1,313            5,405            3,538
 Marketing and sales......................................           11,494            6,459           29,279           17,489
 General and administrative...............................            2,547            1,182            6,811            3,369
 Amortization of goodwill and other intangible assets.....            1,100               --            2,449               --
 Acquisition related charges..............................               --               --            1,291               --
 Write off of in-process technology.......................               --               --            5,200               --
                                                                   --------         --------         --------         --------
Total costs and expenses..................................           40,147           23,792          111,269           69,891
                                                                   --------         --------         --------         --------
Loss from operations......................................          (18,568)         (11,968)         (53,544)         (38,099)
Net interest expense and other............................            2,390            2,250           10,885            3,704
                                                                   --------         --------         --------         --------
Loss before extraordinary item............................          (20,958)         (14,218)         (64,429)         (41,803)
Extraordinary gain on early retirement of debt............               --               --            3,042               --
                                                                   --------         --------         --------         --------
Net loss..................................................          (20,958)         (14,218)         (61,387)         (41,803)
Preferred stock dividends and accretion...................           (5,279)              --           (6,556)              --
                                                                   --------         --------         --------         --------
Net loss attributable to common stockholders..............         $(26,237)        $(14,218)        $(67,943)        $(41,803)
                                                                   ========         ========         ========         ========
 
Loss per share (historical 1998, pro-forma 1997):
 Loss before extraordinary item...........................         $  (1.43)        $  (1.22)        $  (4.47)        $  (4.95)
 Extraordinary gain.......................................               --               --             0.21               --
                                                                   --------         --------         --------         --------
 Net loss.................................................            (1.43)           (1.22)           (4.26)           (4.95)
 Preferred stock dividends and accretion..................            (0.36)              --            (0.45)              --
                                                                   --------         --------         --------         --------
 Net loss attributable to common stockholders.............         $  (1.79)        $  (1.22)        $  (4.71)        $  (4.95)
                                                                   ========         ========         ========         ========
 
Shares used in computing net loss per share:
Historical 1998, pro-forma 1997...........................           14,694           11,651           14,429            8,450
                                                                   ========         ========         ========         ========
</TABLE>
                                                                                

                            See accompanying notes.

                                      -4-
<PAGE>
 
                         CONCENTRIC NETWORK CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   UNAUDITED
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                                           NINE MONTHS ENDED
                                                                                                             SEPTEMBER 30,
                                                                                                          -------------------
                                                                                                            1998       1997
                                                                                                          --------   --------
<S>                                                                                                       <C>        <C>
OPERATING ACTIVITIES
Net loss................................................................................................  $(67,943)  $(41,803)
Adjustments to reconcile net loss to net cash used in operating activities:
 Depreciation...........................................................................................    17,618     12,389
 Amortization of deferred interest, cost of revenue and marketing and sales related to issuance                912      1,534
  of warrants...........................................................................................
 Amortization of goodwill and other intangible assets...................................................     2,450         --
 Amortization of deferred financing costs related to Senior Notes.......................................       392         --
 Amortization of other deferred assets..................................................................     2,538         --
 Amortization of deferred compensation..................................................................       280        129
 Preferred stock dividends and accretion................................................................     6,556         --
 Loss on disposal of equipment..........................................................................        --        162
 Gain on retirement of debt.............................................................................    (3,042)        --
 Write-off of in-process technology.....................................................................     5,200         --
Changes in current assets and liabilities:
 Accounts receivable....................................................................................    (3,679)    (2,546)
 Other current assets...................................................................................       629     (1,100)
 Prepaid expenses.......................................................................................      (333)    (3,028)
 Accounts payable.......................................................................................     2,222     (7,022)
 Accrued compensation and other employee benefits.......................................................      (791)       305
 Deferred revenue.......................................................................................       175        171
 Other current liabilities..............................................................................     3,616      1,440
                                                                                                          --------   --------
Net cash used in operating activities...................................................................   (33,200)   (39,369)
 
INVESTING ACTIVITIES
Additions of property and equipment.....................................................................   (11,288)    (5,065)
Net change in restricted cash...........................................................................     7,313         --
Increase in short term investments......................................................................   (17,251)        --
Proceeds from sale of property and equipment............................................................        --         18
Cash investment in network services businesses..........................................................   (25,077)        --
                                                                                                          --------   --------
Net cash used in investing activities...................................................................   (46,303)    (5,047)
 
FINANCING ACTIVITIES
Proceeds from notes payable.............................................................................        --      5,000
Repayment of notes payable..............................................................................    (1,960)    (2,000)
Repayment of lease obligations to a related party.......................................................    (3,079)    (7,092)
Repayment of lease obligations to a related party-early retirement of debt..............................   (24,750)        --
Repayment of lease obligations..........................................................................    (5,015)    (1,245)
Proceeds from issuances of stock and warrants...........................................................     2,528     73,951
Repurchase of common stock..............................................................................        --     (2,217)
Proceeds from issuances of redeemable exchangeable preferred stock......................................   144,250         --
Deferred financing costs................................................................................      (320)        --
                                                                                                          --------   --------
Net cash provided by financing activities...............................................................   111,654     66,397
                                                                                                          --------   --------
Increase in cash and cash equivalents...................................................................    32,151     21,981
Cash and cash equivalents at beginning of period........................................................   119,959     17,657
                                                                                                          --------   --------
Cash and cash equivalents at end of period..............................................................  $152,110   $ 39,638
                                                                                                          ========   ========
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Stock exchanged for notes payable, including accrued interest...........................................  $     --   $  3,041
Capital lease obligations incurred with a related party.................................................  $  1,285   $ 15,873
Capital lease obligations incurred......................................................................  $  4,485   $     -- 
Reduction of accounts payable through capital lease obligations incurred................................  $     --   $  2,000
Issuance of warrants....................................................................................  $     --   $  1,245
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid...........................................................................................  $ 12,499   $  3,885
</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 September 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          NINE MONTHS ENDED
                                                                           SEPTEMBER 30,               SEPTEMBER 30,
                                                                     -------------------------   ------------------------
                                                                         1998          1997          1998         1997
                                                                     -----------   -----------   -----------   ----------
<S>                                                                  <C>           <C>           <C>           <C>
NUMERATOR:
Net loss before extraordinary item.................................  $   (20,958)  $   (14,218)  $   (64,429)  $  (41,803)
Extraordinary gain on early retirement of debt.....................           --            --         3,042           --
                                                                     -----------   -----------   -----------   ----------
Net loss...........................................................      (20,958)      (14,218)      (61,387)     (41,803)
                                                                     ===========   ===========   ===========   ==========
Preferred stock dividends and accretion............................       (5,279)           --        (6,556)          --
                                                                     -----------   -----------   -----------   ----------
Numerator for basic and diluted loss per share.....................  $   (26,237)  $   (14,218)  $   (67,943)  $  (41,803)
                                                                     ===========   ===========   ===========   ==========
 
DENOMINATOR:
Denominator for basic and diluted earnings per share - weighted
  average shares (historical)......................................   14,694,000     9,733,000    14,429,000    4,174,000
                                                                     ===========   ===========   ===========   ==========
                                                                                 
 
Adjustments to reflect the effect of the assumed conversion of
  convertible preferred stock from the date of issuance............                  1,918,000                  4,276,000
                                                                                   ===========                 ==========
Denominator for basic and diluted earnings per share - weighted
  average shares (pro forma).......................................                 11,651,000                  8,450,000
                                                                                   ===========                 ==========
 
Basic and diluted net loss per share (historical):
     Loss before extraordinary item................................  $     (1.43)  $     (1.46)  $     (4.47)  $   (10.02)
                                                                     -----------   -----------   -----------   ----------
     Extraordinary gain............................................           --            --          0.21           --
                                                                     -----------   -----------   -----------   ----------
     Net loss......................................................  $     (1.43)  $     (1.46)  $     (4.26)  $   (10.02)
                                                                     ===========   ===========   ===========   ==========
     Preferred stock dividends and accretion.......................        (0.36)           --         (0.45)          --
                                                                     -----------   -----------   -----------   ----------
     Net loss attributable to common stockholders..................  $     (1.79)  $     (1.46)  $     (4.71)  $   (10.02)
                                                                     ===========   ===========   ===========   ==========
Basic and diluted net loss per share (pro forma)...................  $        --   $     (1.22)  $        --   $    (4.95)
                                                                     ===========   ===========   ===========   ==========
</TABLE>

3.  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).

     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>
                                                                                
     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-
<PAGE>
 
7,000 shares, respectively, of the Company's common stock. The results of
operations of DeltaNet for the six month period ended September 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 nine month period ended
September 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.

     In August 1998, the Company acquired all of the outstanding stock of
AnaServe, Inc. ("AnaServe").  The transaction was accounted for using the
purchase method of accounting.  The total purchase price of approximately $13.0
million consisted of a $9.9 million cash payment upon closing and the assumption
of approximately $3.1 million of AnaServe's liabilities (including acquisition
costs).

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

<TABLE>
<S>                                                            <C>
Current and other assets...................................... $   467
Computer and telecommunications equipment.....................     497
Goodwill......................................................  11,630
Other intangible assets.......................................     416
                                                               -------
   Total purchase price allocation............................ $13,010
                                                               =======
</TABLE>
                                                                                
     Goodwill is being amortized over five years. Other intangible assets
include developed technology, assembled workforce, customer lists and employee
retention costs and are being amortized over their useful lives ranging from
one to four years.

4.  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.

5.  REDEEMABLE EXCHANGEABLE PREFERRED STOCK

     In June 1998 the Company completed a $150 million private placement of 13
1/2% Series A Senior Redeemable Exchangeable Preferred Stock due 2010 ("Series A
Preferred"). In September 1998, the Company issued 4,657 shares of Series A
Preferred, in lieu of cash, with an aggregate liquidation preference of
$4,657,000 as payment of the required quarterly dividends.  In September 1998
the Company issued 154,657 shares of its 13 1/2% Series B Senior Redeemable
Exchangeable Preferred Stock due 2010 ("Series B Preferred") in exchange for all
outstanding shares of the Series A Preferred pursuant to a registered exchange
offer.  Each share of Series B Preferred has a liquidation preference of $1,000
per share.  Dividends on the Series B Preferred accrue at a rate of 13 1/2% per
annum of the liquidation preference thereof and are payable quarterly in arrears
commencing on September 1, 1998.  Dividends are payable in cash, except that on
each dividend payment date occurring on or prior to June 1, 2003, dividends may
be paid, at the Company's option, by the issuance of additional shares of Series
B Preferred having an aggregate liquidation preference equal to the amount of
such dividends.

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

     The Company may, at its option, exchange in whole but not in part the then
outstanding shares of Series B Preferred for 13 1/2% 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 

                                      -8-
<PAGE>
 
semi-annually in arrears. Interest payable on or prior to June 1, 2003 may be
paid in the form of additional Exchange Debentures valued at the principal
amount thereof.

     The Company is accreting the Series B Preferred to its liquidation
preference through the due date of the Series B Preferred.  The accretion for
the three month and nine month periods ended September 30, 1998 was
approximately $5,279,000 and $6,556,000, respectively.  In connection with the
issuance of Series A Preferred, the Company incurred approximately $5,750,000 of
issuance costs.  These costs are being amortized over 12 years and the expense
for the three and nine month periods ended September 30, 1998 was approximately
$120,000 and $160,000.

6.  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.

7.  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.

8.  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 November 1998 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.

     In August 1998, the Company signed a service agreement with MCI for the
usage of certain interstate, intrastate and international common carriage
services.  The agreement provides for minimum payments to MCI of $6,000,000 per
year over its term, expiring  July 2000.

      Strategic Relationship with SBC. Pursuant to a Memorandum of Understanding
executed as of October 19, 1998, the Company set forth plans for a strategic
business arrangement with SBC Communications, Inc. ("SBC") to 

                                      -9-
<PAGE>
 
integrate Concentric's Internet-based business data services and technology into
SBC's "Online Office" portfolio of data products and services for business
customers. "Online Office" is targeted at medium and small businesses to provide
local area network equipment, installation and network management services and
network-hosted business applications, including desktop office applications, e-
mail, calendaring and e-commerce.

      In connection with this arrangement, SBC will acquire 906,679 shares of
Concentric common stock at a price of $24.15 per share, or on the open market.
The Company will also issue a warrant to SBC to purchase an additional 906,679
shares.  The warrant will expire three years from the date of issuance and will
be exercisable at $21 per share.  The Company is currently assessing the fair
value of the above warrant and will amortize the value over the three year 
life of the warrant.

                                      -10-
<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."

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.,
("InterNex") a California corporation and provider of network services,
colocation services and Web hosting facilities to enterprise customers 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 during the first nine
months of 1998, which will be amortized on a straight-line basis over their
useful lives ranging from two to five years (see Note 3 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 six month period ended
September 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 3 of Notes to Financial
Statements).

                                      -11-
<PAGE>
 
     In August 1998, the Company acquired AnaServe, Inc. ("AnaServe"), a
provider of Web hosting services located in Newport Beach, California.  This
acquisition was accounted for using the purchase method of accounting.  The
Company's historical financial statements do not include results of operations,
financial position or cash flows of AnaServe prior to its acquisition.  As a
result of the acquisition, the Company has recorded an aggregate of $12.0
million of goodwill and other intangible assets, which will be amortized on a
straight-line basis over their useful lives ranging from one to five years (see
Note 3 of Notes to Financial Statements).

     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  $67.9
million for the nine months ended September 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; the ability to manage potential growth and
expansion; 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 $21.6 million for the three months
ended September 30, 1998, a $9.8 million increase over revenue of approximately
$11.8 million for the three months ended September 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 September 30, 1998, revenue from WebTV Networks, Inc. ("WNI") declined to
25.9% of the Company's net revenue from 31.3% for the three months ended
September 30, 1997. Revenue for the nine months ended September 30, 1998 was
$57.7 million, an increase of $25.9 million over revenue of $31.8 million for
the nine 

                                      -12-
<PAGE>
 
month period ended September 30, 1997. WNI accounted for approximately 27.0% of
net revenue for the nine months ended September 30, 1998 as compared to 33.9%
for the comparable period in 1997. The Company expects revenue from WNI to
increase in dollar amount and as a percentage of revenue through 1998. Over the
long term, the Company expects revenue from WNI to increase in dollar amount and
to decrease as a percentage of revenue. The foregoing expectations regarding
revenues from WNI are forward looking statements 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, 1998 was approximately $22.9 million, an increase of $8.1
million from cost of revenue of $14.8 million in the third 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 106.1% of revenue in the three months ended September 30,
1998, down from 125.5% 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 nine
months ended September 30, 1998 was approximately $60.8 million compared with
$45.5 million for the nine months ended September 30, 1997.  As a percentage of
revenue, costs declined to 105.4% of revenue in the nine months ended September
30, 1998 from 143.1% 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 $2.1 million and
$1.3 million for the three months ended September 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 9.7% for the three months ended September 30,
1998 from 11.1% in the year earlier period as a result of the Company's
increased revenue.  Development expense for the nine month periods ending
September 30, 1998 and 1997 was approximately $5.4 million and $3.5 million,
respectively.  As a percentage of revenue, development expense declined to 9.4%
for the nine months ended September 30, 1998 from 11.1% for the nine months
ended September 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 $11.5
million and $6.5 million for the three months ended September 30, 1998 and 1997,
respectively. The $5.0 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 53.3% for the three
months ended September 30, 1998 from 54.6% in the year earlier period as a
result of the Company's increased revenue. For the nine months ended September
30, 1998 and 1997, marketing and sales expense was approximately $29.3 million
and $17.5 million, representing 50.7% and 55.0% 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,"and"-- Management of
Potential Growth and Expansion."

                                      -13-
<PAGE>
 
     General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and administrative
expense was approximately $2.5 million and $1.2 million for the three months
ended September 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 11.8% for the
three months ended September 30, 1998 from 10.0% 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 nine months ended September 30, 1998 and 1997,
general and administrative expenses were approximately $6.8 million and $3.4
million, respectively.  General and administrative expense as a percentage of
revenue increased to 11.8% in the nine months ended September 30, 1998 as
compared to 10.6% for the comparable period in 1997.  The Company expects
general and administrative expense to continue to increase in dollar amount, but
to decrease as a percentage of revenue. The foregoing expectation is a forward
looking statement that involves risks and uncertainties and the actual results
could vary materially as a result of a number of factors including those set
forth under "Additional Factors that Could Affect Operating Results --
Dependence on New and Uncertain Markets" and "-- Management of Potential Growth
and Expansion."

     Amortization of Goodwill and Other Intangible Assets. During the three
month and nine month periods ended September 30, 1998 the Company recorded
amortization of goodwill and other intangible assets of approximately $1.1
million and $2.4 million, respectively, resulting from the acquisition of
InterNex in February 1998 and AnaServe in August 1998 (see Note 3 of Notes to
Financial Statements).

     Acquisition Related Charges. In the nine months ended September 30, 1998
the Company wrote off $1.3 million of costs incurred related to the DeltaNet
acquisition (see Note 3 of Notes to Financial Statements).

     Write-off of In-Process Technology. In the nine months ended September 30,
1998 the Company wrote off $5.2 million of in-process technology related to the
InterNex acquisition (see Note 3 of Notes to Financial Statements).

     Net Interest Expense and Other. Net interest expense and other expense was
approximately $2.4 million and $2.3 million for the three month periods ending
September 30, 1998 and 1997, respectively. For the nine months ended September
30, 1998 and 1997, net interest expense and other expense was $10.9 million and
$3.7 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 nine months ended September 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 4 of Notes
to Financial Statements).

     Preferred Stock Dividends and Accretions.  During the three and nine months
ended September 30, 1998, the Company recorded dividend and stock accretion
costs of $5.3 million and $6.6 million, respectively, related to the Redeemable
Exchangeable Preferred Stock issued in June 1998 (see Note 5 of Notes to
Financial Statements).

     Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $26.2 million for
the three months ended September 30, 1998 as compared to approximately $14.2
million for the same period of 1997. For the nine months ended September 30,
1998 the net loss attributable to common stockholders was $67.9 million as
compared to $41.8 million for the nine months ended September 30, 1997.  For
comparative purposes, the net loss attributable to common stockholders for the
nine month period ended September 30, 1998 included expenses related to
financing and acquisitions of $1.3 million of acquisition charges resulting from
the acquisition of DeltaNet, $6.6 million of dividends and accretion related to
the Preferred Stock, $14.5 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 $2.4 million of amortization of goodwill and other
intangibles relating to the acquisitions of InterNex and AnaServe which were
partially offset by an extraordinary gain of $3.0 million on early retirement of
debt. (see Notes 3, 4 and 5 of Notes to Financial Statements).

                                      -14-
<PAGE>
 
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 nine months
ended September 30, 1998 and 1997 was approximately $33.2 million and $39.4
million, respectively. 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, 1998 and 1997 was approximately $46.3 million and $5.0 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,
$17.3 million used to purchase short term investments during the third quarter
of 1998, cash payments of $15.5 million for the InterNex acquisition and $9.9
million for the AnaServe acquisition in 1998, and purchases of capital equipment
in both periods.

     For the nine months ended September 30, 1998, net cash of approximately
$111.7 million was generated from financing activities, of which $144.3 million
was the net proceeds from the issuance of Redeemable Exchangeable Preferred
Stock, $24.8 million was used for the early retirement of capital lease
obligations and $8.1 million was used for repayment of other capital lease
obligations. For the nine months ended September 30, 1997, net cash provided by
financing activities was $66.4 million, principally related to the issuance of
notes payable of $5.0 million and the issuance of common and preferred stock of
$74.0 million.

     The net cash increase for the nine month periods ended September 30, 1998
and 1997 was $32.2 million and $22.0 million, respectively.  At September 30,
1998 the Company had cash and cash equivalents of $152.1 million, short term
investments of  $17.3 million and working capital of $167.7 million.

     The Company expects to incur additional operating losses and will rely
primarily on the net proceeds from the Senior Notes and the Redeemable
Exchangeable Preferred Stock to finance its operations. The Company believes
that such capital resources 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
a 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.

IMPACT OF  THE YEAR 2000 ISSUE

     Many installed computer systems and software products are coded to accept
only two digit entries in the date code field.  Beginning in the year 2000,
these code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century or earlier dates.  As a result, in less than one
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements.  The Company is
currently in the process of  reviewing its products and services, as well as its
internal management information systems in order to identify and modify those
products, services and systems that are not year 2000 compliant.

     Based on the Company's assessment to date, the Company has determined that
its internally developed software, including much of its operational, financial
and management information systems software, uses either a full century or year
date or uses a binary representation that is an offset from the year 1970.  Both
of these methods are year 2000 compliant.  The Company's operational, financial
and management information systems software which have not been internally
developed have been certified as year 2000 compliant by the third party vendors
who have supplied the software.  The equipment and software that runs the
Company's data centers are supplied by Microsoft Corporation ("Microsoft"), Bay
Networks ("Bay") and Sun Microsystems, Inc. ("Sun").  The Company has
implemented software 

                                      -15-
<PAGE>
 
patches supplied by Microsoft so that the Microsoft software in these data
centers no longer contains any material year 2000 deficiencies. The Company
expects to implement similar patches for the software supplied by Sun by the end
of 1998 and to replace the Bay equipment and software by the end of March 1999
with versions which do not contain any material year 2000 deficiencies. The
Company expects such modifications will be made on a timely basis and does not
believe that the cost of such modifications will have a material effect on the
Company's operating results. Additionally, the Company is continuing to assess
the year 2000 compliance of its products and services. To date, most newly
introduced products and services of the Company do not contain material year
2000 deficiencies, however some of the Company's customers are running earlier
product versions that are not year 2000 compliant. The Company has been
encouraging such customers to migrate to current product versions. The Company
estimates that capital costs associated with the upgrade and conversion of its
existing products, services and systems relating to the year 2000 issue will be
less than $250,000. The Company does not separately track internal costs
incurred to assess and remedy deficiencies related to the year 2000 problem,
however, such costs are principally the payroll costs for its information
systems group.

     The Company's expectation that it will be able to upgrade its products,
services and systems to address the year 2000 issue and its expectation
regarding the costs associated with these upgrades are forward-looking
statements subject to a number of risks and uncertainties.  Actual results may
vary materially as a result of a number of factors.  There can be no assurance
that the Company will be able to timely and successfully modify such products,
services and systems to comply with year 2000 requirements.   Any failure to do
so could have a material adverse effect on the Company's operating results.  The
Company's products, services and systems operate in complex network environments
and directly and indirectly interact with a number of other hardware and
software systems.  The Company faces risks to the extent that suppliers of
products, services and systems purchased by the Company and others with whom the
Company transacts business on a worldwide basis, including those which form
significant portions of the Company's network and may be sole or limited source
suppliers, do not have business systems or products that comply with year 2000
requirements.  Furthermore, despite testing by the Company and its vendors, the
Company's products, services and systems may contain undetected errors or
defects associated with year 2000 date functions.   In the event any material
errors or defects are not detected and fixed or third parties cannot timely
provide the Company with products, services or systems that meet the year 2000
requirements, the Company's operating results could be materially adversely
affected.  Known or unknown errors or defects that affect the operation of the
Company's  products, services or systems could result in delay or loss of
revenue, interruption of network services, cancellation of customer contracts,
diversion of development resources, damage to the Company's reputation, and
litigation costs.  There can be no assurance that these or other factors
relating to year 2000 compliance issues will not have a material adverse effect
on the Company's business, operating results or financial condition.  See
"Additional Factors that Could Affect Operating Results -- Dependence Upon
Suppliers; Sole and Limited Sources of Supply," "-- Dependence Upon Network
Infrastructure" and "-- Management of Potential Growth and Expansion."

                                      -16-
<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 1999, 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 $67.9 million
for the nine month period ended September 30, 1998.  At September 30, 1998, the
Company had an accumulated deficit of approximately $219.9 million. The 
foregoing expectation regarding negative cash flow is a forward-looking
statement and 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 nine months ended September
30, 1998 and September 30, 1997, revenue from WebTV Networks, Inc. ("WNI")
represented approximately 27.0% and 33.9%, 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 after 1998, 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.  Currently, the Company is in the process of replacing
and updating its operational, financial and management information systems,
including its billing, accounts receivable and payable tracking, fixed assets
and other financial management systems. Additionally, the Company will be
consolidating its Silicon Valley operations in a new, larger facility over the
course of the fourth quarter of 1998 and the first two quarters of 1999.
Management of the transition of the personnel and the operational equipment to
the new facility is expected to place additional strain on the 

                                      -17-
<PAGE>
 
Company's resources. 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. 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. Any failure of the Company to manage its growth
effectively, including the timely and effective replacement and updating of
its information systems and the pending consolidation of its Silicon Valley
facilities, could have a material adverse effect on the Company's business,
financial condition and results of operations.

     Risks Associated With Acquisitions. The Company has completed three
acquisitions to date and may seek to acquire additional assets or businesses
complementary to its operations. The completed 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 the acquired companies 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 and AnaServe acquisitions
have 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 and AnaServe, 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 

                                      -18-
<PAGE>
 
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.

     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.

                                      -19-
<PAGE>
 
     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, 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.

                                      -20-
<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 Series A
Preferred.  The aggregate purchase price for the Series A Preferred was
$150,000,000 and the Company paid $5,250,000 in discounts to the initial
purchasers of the Series A Preferred.  The securities were offered and sold only
to "qualified institutional buyers" (as defined in Rule 144A of the Securities
Act) in reliance on the exemption from the registration requirements of the
Securities Act provided by Rule 144A.  On September 1, 1998 the Company issued
an additional 4,657 shares of Series A Preferred as payment of the quarterly
dividend required by the Company's Certificate of Designation relating to its
Preferred Stock. On September 9, 1998, the Company issued 154,657 shares, with a
liquidation preference of $1,000 per share, of its Series B Preferred in
exchange for all outstanding shares of the Series A Preferred pursuant to an
exchange offer registered with the Securities and Exchange Commission on Form S-
4 pursuant to the Securities Act of 1933, as amended.

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

         Strategic Relationship with SBC. Pursuant to a Memorandum of
Understanding executed as of October 19, 1998, the Company set forth plans for a
strategic business arrangement with SBC Communications, Inc. ("SBC") to
integrate Concentric's Internet-based business data services and technology into
SBC's "Online Office" portfolio of data products and services for business
customers. "Online Office" is targeted at medium and small businesses to provide
local area network equipment, installation and network management services and
network-hosted business applications, including desktop office applications, e-
mail, calendaring and e-commerce.

         In connection with this arrangement, SBC will acquire 906,679 shares of
Concentric common stock at a price of $24.15 per share, or on the open market.
The Company will also issue a warrant to SBC to purchase an additional 906,679
shares.  The warrant expires three years from the date of issuance and is
exercisable at $21 per share. The Company is currently assessing the fair 
value of the above warrant and will amortize the value over the three year 
life of the warrant.

         The foregoing description regarding the proposed relationship between
SBC and Concentric and the services they plan to develop and deploy, including
Online Office, are forward-looking statements that are subject to a number of
risks and uncertainties. Actual results may differ materially from those set
forth in such statements as a result of a number of factors including, but not
limited to, the ability of the parties to negotiate, execute and deliver further
agreements setting forth the terms of the relationship and related transactions,
compliance with all regulatory requirements, the progress and timing of
development and launch of the planned new IP services, the costs and timing to
promote such services, consumer acceptance and use of the new services, and the
increasingly competitive nature of the IP services market. See also "Additional
Factors that Could Affect Operating Results -- Dependence on New and Uncertain
Markets" and "-- Dependence on New and Enhanced Services."

         Deadline for Receipt of Stockholder Proposals for 1999 Annual Meeting.
Last year's proxy statement for the Company's 1998 Annual Meeting of
Stockholders set forth the deadline and procedure for submitting stockholder
proposals to be included in the proxy statement for the Company's 1999 Annual
Meeting of Stockholders.  If a 

                                      -21-
<PAGE>
 
stockholder intends to submit a proposal at the Company's 1999 Annual Meeting of
Stockholders which is not submitted in time to be eligible for inclusion in the
proxy statement relating to that meeting, the stockholder must give notice to
the Company not less than 60 days nor more than 90 days prior to the meeting in
accordance with the requirements set forth in the Securities Exchange Act of
1934, as amended, and the Company's bylaws. If such a stockholder fails to
comply with the foregoing notice provisions, the proposal may not be brought
before the meeting.


ITEM 6.  EXHIBITS AND REPORTS ON 8-K

         (a)  Exhibits
 
         *10.59  Carrier Agreement by and between the Company and MCI
Telecommunications Corporation, dated August 12, 1998.

         10.60   Stock Purchase Agreement by and between Concentric Network
Corporation and Southwestern Bell Internet Services, Inc., dated October 19,
1998.

         27.1    Financial Data Schedule.

         (b)     Reports on Form 8-K.

                 None.
         ____________

         *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.

                                      -22-
<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 16, 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

                                      -23-